Dividend Power

Tuesday, 16 December 2014

Domino Printing - if only they delivered pizzas

Domino Printing: Somewhat of a fallen angel this one, after an earlier disastrous foray into the US through TEN Media and significant profit downgrades earlier this year, due mainly to Far Eastern pricing pressures. But with these finals to October 2014, some stability appears to be returning. Revenue was up 4%, (9% on constant exchange rates), whilst underlying pre-profits rose 9% to £57.6m. The underlying eps of 40.01p were up 13% and supported a 5% annual dividend increase to a, nearly twice covered, 22.74p. Net operating cashflow was a healthy £65.8m, helping net cash balances up to £40.1m.

However, their guidance is that customers are still being cautious. Coupled with significant ongoing R&D costs, the company is predicting that profits in FY2015 will be broadly flat on FY2014. (On R&D they spent £18.2m against £19.5m in FY2013, but they indicate that FY2015 will see this reduction ‘reverse’, being the further headwind for the P&L.) Longer term though, the market for high quality digital printing should still enjoy further structural growth. The statement notes that as well as new equipment sales Domino are placing more emphasis on nailing down the steadier after-sales revenue streams, which is sensible. However, the more uncertain outlook for global economic growth, as winners and losers emerge from the current oil price rout, does not help forecasting accuracy right now. So the guidance for flattish profits might mean allowing for a slight dip in eps to say 39.5p in FY2014. With the shares at 642p that is a PE of 16.3x. With cash on the balance sheet a further small dip in cover could allow the dividend to go up, say, 3% to 23.42p for a yield of 3.6%. These are not bargain basement levels, when the resumption of eps growth is still unclear. The question remains whether Domino can regain its form and reclaim a seat at the top table. For now there is no obvious rush to invest. (Neil Cumming^,16^th December 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower

Monday, 15 December 2014

Carpetright - a good start for the world of Wilf

Carpetright: Dear old Phil Harris has had a long and successful business career. He now goes by the moniker of Baron Harris of Peckham and an even greater honour is to be a Director of Arsenal Football Club. More problematic is his legacy at Carpetright, which has suffered over recent years from changes in consumer taste, especially the rise of wood and ‘wood’ floor coverings. Phil has tried to let go of the reins but it never seems to have quite happened......until now? He retired as Chairman (finally) in October and the latest Chief Executive, appointed in May 2014, is Wilf Walsh, an unknown in the world of carpets. These interims to 25^th October 2014 are relatively cheery, with sales up 2.6% reflecting macro-economic trends with UK recovery diluted by European weakness (and the effects of Euro weakness). Operating profit moved from £4.1m to £7.4m as European losses were eliminated and UK operational gearing has kicked in despite sharpening the price offer, leading to basic earnings per share of 7.6p against 2.6p. There is again no dividend, the last one having been in 2011, but net cash was £3.2m against net debt of £14.3m a year ago.

Analysts are now being guided towards the top end of expectations, with Wilf Walsh setting out his vision of brand renewal and ‘value heritage’. The UK estate has been trimmed and almost two thirds of shops have been renovated, whilst in Europe better business practices, cost cutting and cash management have led to early wins. These are early days and there have been other false dawns. It may be that the trough for carpets in interior design has passed and people will still want to see carpets in shops, so internet competition is less of a threat. The top end of expectations is about £11m giving about 12.5p of earnings. The shares have jumped over 10% today, to 350p to produce a PE of 28x....true recovery land. The dividend will be re-visited at the finals, but say a 2p notional would be a 0.6% yield. These look very full valuations, but it might be worth keeping a beady eye on how Wilf fares in case a sustainable recovery momentum builds up. (Neil Cumming^,15^th December 2014)

Thursday, 11 December 2014

P Z Cussons - Kate Moss plus Goodluck Jonathan

P Z Cussons: Forget the old bar of Imperial Leather soap that Granny used to cherish, Kate Moss is their more recent inspiration. What is not to like about a health and beauty consumer goods company that now derives over 40% of revenue from Africa? It’s main trading territory there has a population of c175m and a high birth rate. Thanks to natural resources it is a rich nation, with a growing middle class, albeit there is still much inequality. Elsewhere in developed markets, major brand names include Carex, Charles Worthington, St Tropez and Venus. The answer to my earlier question, in a word, is Nigeria. Whilst blessed with an exciting future, Nigeria is currently facing renewed internal strife ahead of Presidential elections early next year, with religious tensions and unrest rising. The collapse in the oil price has badly affected their currency and the budget. Whilst now officially Ebola free, regional cross-border trade has been adversely affected.

This has been reflected in a trading statement for the half year to 30^th November 2014, with Europe and Asia on track for increased profits, but Africa (mainly Nigeria) down. Overall operating profits are down 4% as a result. Last year (to 31^st May 2014) eps were 17.9p, so a 5% set back, (which seems plausible) would leave them at 17p for the year to 31^st May 2015. The shares have been weak of late and at 309p (against a 12 month high of 403p) the forward PE is 18.2x. Given the good long-term prospects the dividend is likely to go up, with say a 5% rise taking the total to 8.15p for a yield of 2.6%. Given the massive opportunity that is Africa, PZ Cussons is a stock that has exciting long-term prospects. Just now though, despite the weak shares, the valuation seems full enough given all the uncertainties in Nigeria. (Neil Cumming^,11^th December 2014)

Wednesday, 10 December 2014

Carillion - trying to forget Balfour Beatty

Carillion: This support services stock is not everyone’s cup of tea, due in large part to the contracting element of the business and the distorting effect that can have on cash conversion. The seemingly mis-guided acquisition of energy efficiency firm EAGA in 2011 lost them a few fans too. The rash tilt at Balfour Beatty this year was one that shareholders must be glad failed, but again called into question management’s judgement. Of its sort though, Carillion is one of the best and by luck or judgement has so far stepped around the banana skins better than many. In the pre-close statement, for the year to 31^st December 2014, they confirm that earnings are in line with expectations and that the “medium-term outlook remains positive”. Looking ahead, the order book, having been £18bn at the last year end, is expected to be a healthy £18.5bn plus at year end, with a high 85% of expected revenue already booked for 2015. The pipeline of opportunities has expanded from £37.5bn to “over £39bn”. Underlying net debt is trending down, although this is being affected at the headline level by acquisition costs. Average net debt for 2014 is expected to be around £460m, down £30m on last year. In this statement they go to some effort to reassure that they are being picky and choosy about work, with an expectation that, despite various pressures, they can maintain operating margins around last year’s levels.

Last year eps were 34.7p and if they can repeat that then at 340p the shares are on 9.8x. Eps are in a valley, having been over 40p in 2011 and 2012, but despite dividend cover dipping below 2x, the interim was raised by 1.8%. This implies a full year total of 17.8p for a yield of 5.2%. These valuations seem fair enough for a group with their mix of businesses, but post the Balfour Beatty escapade and with the shares towards the top end of their trading range, there is no rush to buy. (Neil Cumming^,10^th December 2014)

Tuesday, 9 December 2014

Tesco - spilt milk in aisle 17

Tesco: So Tesco’s have dropped another pallet of baked beans, to a resounding crashing noise. The statement is full of fine words and intentions but the bottom line is a stark warning that group trading profit for FY 2015 will not now exceed £1.4bn. This is against £3.3bn last year (FY 2014) and already sharply reduced latest expectations of £1.8bn to £2.2bn. When they refer to new policies and procedures for their commercial income activities, I would assume that the P&L is now being made more transparent, but that means the entire toolbox (both good and bad) of profit smoothing has been junked. The recent hooha at Premier Foods over their recent over-bearing supplier contracts only adds to the momentum towards greater contract clarity and fairness throughout the supply chain. Reference is also made by Tesco “to invest in and improve our customer offer”, which must imply more price cuts and a further margin squeeze. But investors are not yet able to look to brighter days ahead. On 8^th January, Tesco will provide more details about improving the “competitiveness of the UK customer offer and to strengthen the balance sheet”. The former probably means yet more margin pressure and the latter a mix of cost cutting, capex constraints, further dividend pressure and maybe even fresh equity.

All this woe means that forecasts are more uncertain than ever. For what it is worth, if the operating profit reaches £1.4bn (but that is tops), it would be down 57%. If eps followed the same path they would be 13.5p-ish. At 170p that is a PE of 12.6x, with a very cloudy dividend outlook. If these were trough earnings then you could look to the stock as a recovery play. Sadly though, the 13.5p still feels flaky and the best course of action could well be to wait for the 8^th January. Remember also that, with Tesco’s sharpening the price offer, the likes of Sainsbury’s, Asda and Morrison’s profit line should be feeling the pain as well. Meantime, the special offers in various supermarkets over the next 15 days could be the real excitement (Neil Cumming^,9^th December 2014)

Monday, 8 December 2014

Sage Group - The forecast is for increasing Cloud cover

Sage Group: The ubiquitous accounting software house has released results for the year to 30^th September 2014. That aside the world is changing fast around them as the old model of selling ‘physical’ software is replaced by cloud-based subscription services. In these numbers organic revenue was up 4.9%, but within that recurring revenue was up 7% and software (and related) services were down 0.5%. This reflects the structural shift described above. On the back of margins moving up 40bps to 27.5%, eps came out 8.2% ahead at 22.69p. The nearly twice-covered dividend of 12.12p was up 7.1%. Cash conversion remained good at 107%, albeit a tickle down on last time’s 112%. Their guidance is that they are on course to deliver 6% organic revenue growth in 2015 and a 28% operating profit margin. The visibility on this is helped by the fact that 73% of group revenue is recurring, up from 71% last year.

The shift to subscription revenues supports the view that Sage’s earnings now have more visibility and are therefore worth a higher valuation. International expansion continues to offer the opportunity of further long term growth. It is worth noting that the group has changed CEO (Stephen Kelly; ex-Micro Focus and HMG), FD (Steve Hare; ex-Apax, Invensys and Spectris) and two non-execs, all in the last 12 months. This scale of change must add one notch to any investment risk assessment, despite the good pedigree of the new recruits. The shares have spiked 10% on these numbers and at 445p, FY2015 eps of, say, 25p, is a full-ish looking 17.8x, for around 10% p.a. growth. A near twice covered dividend of 13p would be a yield of 2.9%. These are not cheap metrics, but the improving quality of the earnings provides some justification. Maybe not one for today, but Sage is well worth keeping an eye on. (Neil Cumming^,8thDecember 2014)

Friday, 5 December 2014

Greene King - That's the Spirit

Greene King: These interims are for the 24 weeks to 19^th October 2014. Since then the company has launched its recommended bid for Spirit Pub Group, which is still on course for completion early next year. In these numbers, revenue is up 3.3%, although retail LFLs were only up 0.8%. PTP were down 3.5% to £82.6m and eps down 1.6% at 29.9p, due mainly to the dilutive effect of the £75.6m disposal of 275 unwanted pubs in the period. The group states that, adjusting for the disposal, eps would have been up 5.3%. This is all part of the drive to reduce the tenanted and leased estate further, from the current 864 to around 750 pubs. The strategic shift is to managed pubs leading on food. In the face of the proposed changes to the law on the beer tie, this is sensible. Much has already been achieved with, at the moment, 76% of group revenue from retail, of which 43% is food. Reflecting the underlying eps growth, the well-covered interim dividend was put up 4.6% to 7.95p. The group adds that after 30 weeks, retail sales were up 0.8%, but the 12 week number was +1.5% and Christmas bookings were up 7.2%, with the South trading better than the North.

Analyst forecasts at present are ex-Spirit and so of reduced use, but at 755p, 63p of FY 2015 eps would mean that the shares are on a PE of about 12x with a yield, on say a 29.5p dividend, of 3.9%. If the Spirit deal goes through, Greene King expects to achieve at least £30m of cost savings and efficiencies (for scale: last year profits were £102.3m). As Spirit is a mainly paper deal there could be a technical overhang post completion, but the soggy Greene King share price is already anticipating some of that selling. Chief Executive Rooney Anand has a good track record, so all the signs are that Spirit should be a good deal and Greene King shares look interesting at these levels. (Neil Cumming^,5^th December 2014)