Dividend Power

Monday, 9 March 2015

Thomas Cook - Tommy has a new girlfriend

Thomas Cook: So, the old ‘un has a new girlfriend after over 170 years of romantic twists and turns. The newbie is a twenty-something year old Chinese conglomerate, Fosun. They are taking a 5% stake in Thomas Cook at a cost of £91.8m, (which works out at 125.59p per share) and are looking to buy more shares in the open market to take the stake to 10%. As well as offering stronger financial backing, the deal opens the door to deepening existing relationships with Fosun’s recently acquired ClubMed business, an acceleration of the rollout of Thomas Cook’s Concept Hotel brand and the chance to better access the Chinese tourism market. It sounds as if existing shareholders pushed back on a proposal for the entire 10% stake to be via new shares, due to the dilutive effect.

The shares rocketed up on Friday’s news, settling today around 145p. Whilst Fosun build their stake, I guess the shares will be underpinned around here. At this level a possible 12.5p of earnings this year (to 30^th September 2015) is a PE of 11.6x, with maybe 15.5p in FY2016 being 9.4x a year out. These are using pre-deal forecasts with the group implying some eps enhancement in FY2015 and then further benefits in FY2016, which some seem think too over-ambitious a timeline. Anyway, with debt coming down and the balance sheet stabilising a return to the dividend list looks likely this year, albeit a token amount. However, a conservative three times cover in FY2016, leads to a possible 5.2p dividend that year for a yield of 3.6%. This looks ahead of consensus, so I might be getting carried away, but the potential is there. Longer term, the question is whether Fosun will want full ownership. Due to EU rules, Thomas Cook would have to get rid of their airline business on a non-European takeover, but that may suit them anyway. So the real question is how long investors might have to wait. It may be a while, but with Thomas Cook on the mend and a new girlfriend on its arm, patience should be rewarded. (Neil Cumming^,9^th March 2015)

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

Thursday, 5 March 2015

Aviva - Walking in a Wilson Wonderland

Aviva: You have to give credit to Mark Wilson for re-invigorating the Aviva share price, since he joined a couple of years ago. If there is a criticism it seems to be that he has been driven by financial imperatives rather than business logic. The acquisition of Friends Life seems to be more about accessing cash rather than the long-term attractions (or not) of a mainly ‘zombie’ closed book. The prize for Aviva is £225m of cost synergies and access to £600m of annual cash flow. So in these annual results to 31^st December 2014 operating profits were up 6% at £2.2bn, with operating eps up 10% at 47.0p. At holding company level excess cash flow was up 65% to £692m, on course for reaching the 2016 target of £800m. The inter-company loan balance, which was so exercising the regulator when Wilson arrived, fell sharply from £4.1bn to £2.8bn. Whilst many wondered what Wilson’s Asian experience could add to the party, he seems to have got the non-UK territories to accelerate. So we have 22% of the £1bn of ‘Value of New Business’ coming from Poland, Turkey and Asia last year. All this good work drops through to a 30% dividend increase, for an 18.1p total, up 20.7%. This is a very nice increase, but still well shy of 2011’s 26p, which was then cut in 2012. The IFRS NAV was 340p, up 26%.

So, with the shares up 5% at 560p, where do they go next? In the outlook statement, Wilson says that they have “further to travel than the distance we have come”. To be trite, the shares were about 255p at the bottom in 2012, so having risen £3, another £3 minimum should get them to 850p in another couple of year’s time. Simples Mr. Wilson! (Sorry, wrong company.) For now though they are at 1.65x book, a prospective PE of 11.2x (on maybe 50p of eps this year). A dividend of 21p (+16%) would be a yield of 3.75% and on track for the target of two times cover. So, as a financial exercise this seems to have further to go. Buying after such a strong run sticks in the gullet, but I can’t see many bears getting rich on this stock just yet. (Neil Cumming^,5^th March 2015)

Wednesday, 4 March 2015

Carillion - cheap for a reason?

Carillion: Carillion divides opinion, being a mixture of services and contracting. The former is well established and is based around support services in facilities, road, rail and energy in the UK, Canada and the Middle East. In addition the group is a significant player in the ‘PFI’ market. On the contracting side the geographic footprint is similar, but the quality of earnings is far lower. In these pretty much in-line annual results to 31st December 2014 the first thing that leaps out is the operating cash flow conversion at 119%, up from 75%. This has played its part in driving net borrowing down to £177.3m from £215.2m, even after £38.5m of acquisitions. That debt level does benefit from cash held against construction projects, but is undemanding when measured against operating profits of £216.9m, up 1% on last time on a flat 5.6% margin. This hides an improvement in Middle East and support services margins being offset by lower construction margins. Underlying pre-tax profits were down 1% at £172.9m, with eps down 3% at 33.7p. This drop is attributed to planned lower PPP investment sales. The dividend was nudged up 1% to 17.75p, with cover almost at two times.

Looking forward the order book stands at £18.6bn, up from £18.0bn, with the year seeing £5.1bn of new business added against £4.9bn last year. So with revenue last year flat at £4.1bn, the hopper is being more than refilled. Further out is a opportunities pipeline of £39.2bn, with a £1.5bn six year framework deal with SCAPE announced today. In the outlook the group is relatively upbeat, citing improving macroeconomics in their key territories. However UK construction margins continue to drift, a process seen as continuing into 2016. The shares have got a bit stuck of late on the mid 300p area. Eps growth of 5% this year would be eps of 35.4p, which could see an 18.0p dividend. That would be, at 362p, a PE of 10.2x and a near 5.0% yield. These don't look demanding valuations, but the construction element of the business is likely to remain a brake on investor confidence. The yield is attractive, but better growth and better total returns may be available elsewhere in the sector, so Carillion may stay on the subs bench. (Neil Cumming^,4^th March 2015)

Tuesday, 3 March 2015

McColl's Retail Group - Read all about it!

McColl’s Retail Group: So, we have forward progress, but not as fast or smooth as hoped, hence the shares being down markedly at 150p. These are maiden final results, covering the 53 weeks to 30th November 2014, and including some pre-IPO weeks. As well as that wrinkle, they have been adjusted to 52 weeks to aid comparatives. So we have revenue up 6.1% (with LFLs at 0.7%), EBITDA up 9.0% at £37.3m and headline pre-tax profits up nearly three-fold from £4.4m to £12.6m. Net debt is down at £25.7m from £60.5m. Pro-forma eps are 16.9p with a total dividend, covering 9 months, of 8.5p. The drive to enlarge the convenience store estate through conversion and acquisition continues. At the period end they had 799 convenience stores (including 60 bought in the year and 45 newsagents converted) and 516 newsagents. They continue also to upgrade the convenience stores to a premium format, now covering 489 stores, and to add post office facilities, which are currently in 451 sites. By the end of 2016 they plan to have over 1000 convenience stores.

So, that's all good then, although the second half did show slowing momentum. The sting in the tail is the comment on current trading. In the first 13 weeks of the current year, LFL sales are running at -1.2%, with total revenue at 3.8%. So both those metrics are about two percentage points behind the just reported figures and are worse than the recent 6 week update. The group claims some seasonality and tough comparatives, but the market has heard that kind of excuse too often over the centuries to cut that much slack. A worrying downward trend in LFLs is emerging. Given the backdrop of supermarket wars on and off High Street it seems prudent to put FY2015 down as ‘likely to be tough’. However, a small increase in sales, cost control and the full benefit of the stronger balance sheet, should still see pre-tax profits make progress. Modest progress from a pre-exceptional £17.9m to £20.0m, could produce eps of 15p, leaving the shares, at 150p on a PE of 10x. Allowing for a full year, the dividend could reach 10p, although on an underlying basis that is almost no growth. But it is still a yield of 6.6%. Net debt to EBITDA is heading below 1x, even after allowing for the store investment programme. This all reassures that a progressive dividend policy is realistic. So even in a tough trading environment, there is still a self-help story to follow here. The share price has been a misery since float and today there is no respite, but it is far too early to give up on the stock yet. (Neil Cumming^,3^rd March2015)

Monday, 2 March 2015

Amlin - pregnant with dividends...for now

Amlin: Special dividends can be difficult to value, as by their nature they can be transient. However, it gets easier when there is a good yield, with the special dividend acting as the cherry on top. In Amlin's annual results to 31st December 2014, net written premium was up 8.1% at £2.3bn. The combined ratio deteriorated a bit from last year's 'peak' 86% to a still healthy 89%. Despite low bond yields, their exposure to property and equities saw a 2.7% return on investments, albeit down on the previous year's 3.6%. Pre-tax profits were £258.7m, down from £325.7m, with competition in reinsurance from new participants being an added headwind. Reserve releases were also lower. The net tangible assets came in at 304.1p per share, up 5.3% from last year's 288.7p. The return on equity was down from 19.8% to 14.1%, but still consistent with their across the cycle 15% target. On the back of these results the annual dividend was raised 3.8% to 27p, but there is also a relative rarity for Amlin in the form of the first special dividend since 2006, it being 15p. So at 507p, the underlying yield is 5.3%, but the all in 2014 yield is 8.3%.

Looking ahead the company notes that annual rate renewals are 3.6% down, with catastrophe rates down 8.3%. Given competitive markets they do not see much growth at present, but that does ease their capital requirements in the short run. In general the outlook is seen as 'more challenging', with rate softening hurting. The weightings to property and equities are being tweaked up, which should protect the investment income line. All in you are looking at a company where the eps line is cyclical in part and is past its current peak, whilst the shares trade at about 1.7x net tangible assets. The underlying dividend of 27p may nudge to 28p for a prospective yield of 5.5% and there is no mention, at least that I have seen, about another special dividend this year. So for pure yield the stock has attractions whilst pregnant with the special, but otherwise, after a great run in recent years, the shares feel well up with events as the cliche goes. (Neil Cumming^,2^nd March 2015)