Balfour Beatty - "Dr. Quinn, Medicine Man"

Balfour Beatty: Leo Quinn arrived back at Balfour Beatty in January, having left as a sprog, so these annual results to 31^st December 2014 are only the very early stages of the corporate recovery. Quinn did a very good job of sorting out QinetiQ, but seemed to run out of steam once the ‘corporate doctor’ phase was over. The recent dull performance of QinetiQ suggests that he left a group with little forward momentum, although many would point out that the tough defence-spending environment was an unavoidable external factor. Anyway, now he is wielding a set of scalpels at Balfour Beatty. In 2014 revenues only slipped 2% at constant exchange rates, to £8.44bn, but the underlying operational loss was £58m, against a profit of £131m in 2013. However, a sea of red ink one-offs lead to a pre-tax loss of £304m on continuing operations against a £49m loss last time. A further £118m provision against UK construction losses has been taken, on top of a previous £70m. Quinn’s inheritance is a book of business taken on with poor risk assessment and too skinny margins. Working through this will take at least another couple of years and that faint rattling noise could well be more skeletons trying to fall out of the cupboards. The rest of the group is a mixed bag, but it is the UK that dominates. Whilst Hong Kong revenues grew at a clip, there was £15m of losses from the Middle East. The investments division profits increased from £102m to £127m, with the portfolio value reaching £1.3bn against £766m last time. In part this is due to an increased directors’ valuation sparked by John Laing’s cheeky bid approach last year. Post the disposal of Parsons, the balance sheet has cash of £219m, with the pension fund deficit down £306m to £128m, helped by a good asset performance (and the Trustees have allowed a less onerous catch up payment schedule). The final dividend has been passed with a stated intention to declare a final this time next year on the back of a two year plan to improve ‘cash in’ by £200m and ‘cost out’ by £100m.

So all this is right up Quinn’s street and what happens beyond is of no immediate concern. Surgery first, physiotherapy second is a good game plan. The market cap of £1.65bn is not much more than the £219m cash and £1.3bn investment portfolio. So the UK construction side is pretty much in for free (which may still be optimistic?). Forecasts for this year are a bit disparate, but 8p-10p should cover it. The share price reacted well to Quinn’s plan, moving up to 238p, but at the 9p mid point for eps that is a PE of 26.5x, with flimsy dividend support. A PE of 15x would demand eps of almost 16p, which seems unlikely before FY2017. So I can’t see much P&L driven upside from here and little interest for dividend fans, but it still looks like there is a break up story and that is where the value release could lie. (Neil Cumming^, 26^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

Anglo Pacific - a seductive 8% yielder

Anglo Pacific: After the recent equity raise, we now have the annual results to 31^st December 2014. This is a case of looking back on a horrible time, but looking forward to more optimistic times. Apart from low commodity prices in 2014, Anglo Pacific was hit by low royalties from Kestrel (coking coal), where Rio Tinto, as operator, was mining mainly outside Anglo’s land.  This year (and beyond) Rio are moving back onto Anglo’s land and have agreed to give Anglo more forecast information on future mining plans. Anglo has also managed to diversify its portfolio, increasing it to six producing royalties, as against three a year ago. This total includes the new long-life Narrabri (thermal coal) royalty, recently bought for $65m. None of this hides the fact that life has been grim. The loss for the year was £47.6m, slightly worse than the £42.5m last time, but these were after hefty impairment charges of £31.5m and £34.6m respectively. The cash balance at year-end was down to £8.8m from £15.7m. A final dividend of 4p, makes a total of 8.45p, still substantial, but down on last year’s 10.2p.

Moving forward the dividend policy is set out to be progressive, based on 65% of adjusted earnings, with a medium term annual minimum of 8p. Whilst the words ‘medium term’ raises a slight worry about this year, I may be just worrying too much. However, on current forecasts an 8p dividend in 2015 would be uncovered again. Looking out to 2016, a possible 11.5p of eps would almost cover the 8p at a 65% payout. All this is very subject to commodity prices, but a recent recovery in coal settlement prices offers hope. Eighteen months into the job Julian Treger has wrought some significant changes for the better. It is flagged that they would like to acquire an interest in the copper market. He has rather nailed his colours to the mast over that yield, which, at the possible nadir of the commodity markets, is a very seductive income stream. (Neil Cumming^, 25^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

Pennon - in OFWAT's good books

Pennon: After the dividend disappointments at Severn Trent and United Utilities, it is a pleasant relief to see Pennon extending their existing dividend policy of RPI+4% into the full 2015-20 K6 period. They are upbeat on the prospects for South West Water to exceed their assumed return on equity over this period, having beaten the targets for K% (2005-10). They even seem to have managed to claw back in K6 the lost revenue from the 2014/15 price freeze. These all seem to be benefits from having got into OFWAT’s good books for good behaviour. Over at the Viridor waste business, the recession post the banking crisis was a very tough period for a business focussed on landfill. The parallel trend for less landfill (encouraged by higher landfill taxes) and more recycling also hurt. The company is saying now that the strategic re-positioning of Viridor into an ERF (Energy, Recycling & Resources) business is at an inflection point and that EBITDA is set to move ahead this year. This is despite poor recycled material prices caused by low commodity prices. The pipeline of new contracts and business mean that further progress is envisaged too, with ERF forecast to contribute £100m to EBITDA by 2016/17.

This is all positive news, but the rub is that the valuation looks fairly rich to me. Consensus eps for the year to 31^st March 2015 looks like 37.5p, being a chunky PE of 22.5x at 845p, with high single digit growth thereafter. The dividend could just break 32p, which is a yield of 3.8%, (with that RPI+4% growth trajectory beyond). This all looks enough for now. The wild card is corporate activity. The group has been eyed up in the past, most notably in the recent past by the Abu Dhabi Investment Authority. Only this month Jonson Cox (the OFWAT Chairman) signalled that he was now more open to the idea of corporate activity of various kinds in the sector. The last official Asset Value of Pennon was £5.0bn against a current Enterprise Value of some £6.2bn, whilst the Regulatory Capital Value of South West Water is probably just over £3bn and not far short of the £3.4bn market capitalisation of Pennon as a whole (an apples and pears comparison but interesting all the same). It is all a bit ‘finger in the air’ but a corporate buyer probably could still justify paying a decent premium to the current share price. Whether it is worth hanging on for that I am not sure, the choice is yours. (Neil Cumming^, 23^rd 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

Budget 2015 - The joy of Equity Income investing

Budget 2015: I am not a qualified IFA, so none of the following can be taken as advice. I would also remind you that I may have got some fine detail wrong, so make sure you get proper advice if that is what you need. Overall though, what a great fiscal framework we have for an equity income investor. As Chancellor, George Osborne has made some radical fiscal changes to the environment for the personal saver. In normal times these would help anyone investing in a wide variety of income producing assets, but we do not live in normal times. An effect of Quantitative Easing and its like, is that high grade bond yields are derisory. Low bond yields have made the individual annuity an unattractive product and led to the recent, unprecedented, relaxation in personal pension fund rules. Property and equities seem to be the only major asset classes left that offer a realistic prospect of real returns at an acceptable level of risk.

As an equity investor there are two mainstream, tax efficient, ways to save, being pensions and ISAs. There are also equity vehicles such as EIS and VCT, but they do carry extra risks for the rewards and will not be suitable for many. Whilst annual pension contribution limits and reliefs have been repeatedly trimmed, for most people they will not find this a practical problem. The annual lifetime limit has also been cut, with the new level to be £1m, but most people can only dream of being affected such a problem. Start young enough though and you may just be surprised. Then, thanks to George, your pension pot can be accessed in a variety of ways, without using old style annuities, and you have the possibility of leaving your pension pot in your will, without a penal tax rate being applied. Likewise ISAs have been made more flexible, with the main distinctions between cash and stock ISAs abolished. The annual contribution limit having been raised to £15,240 for the coming tax year means that a visible pot can be accumulated quite quickly. In future it seems that you will also be able to dip in and out of the cash element within each tax year, adding greater flexibility to what used to be a near one-way valve. When you die, the ISA wrapper can be passed on, so avoiding moving the pot into the taxable space. The final carrot is that, in the taxable space, the first £1,000 of investment income on cash will be tax-free for basic rate taxpayers. Even if you pay tax at 40% you will still get a £500 allowance.

For most people, structuring your savings in a tax efficient manner has become an awful lot easier to do. Within that, the tried and trusted studies on the effects of re-investing dividends, from equity investments, have become more powerful thanks to the ability through various vehicles to take more investment income tax free. So the fiscal framework is very supportive. The difficult bit, as ever, is choosing the right equities or collective schemes to invest in. (Neil Cumming^, 19^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

Cape - Joe 90 and the Caped Crusader

Cape: CEO Joe Oatley rescued Cape from a near death experience when he arrived in 2012. He now finds himself running a services group focussed on the energy and mineral sectors, just when the industry is in a vicious bear phase. So it is to his credit that these annual results to 31^st December 2014 show such solid progress. Continuing revenue is up 3.5% to almost £700m, whilst order intake is up 22% to leave the order book 15% up at £746m. Adjusted pre-tax profits were £45.3m, sharply up on £35.1m, to leave eps at 29.9p, up 28.3%. The annual dividend was held at 14p and is now twice covered. Adjusted net debt was up from £60.2m to £101.0m, due to acquisitions, and higher working capital as revenues built, with cash conversion dropping from 151% to 65%. Net debt at this level is 2x EBITA, which is not overly demanding in a recovery phase. In such a bear market it is reassuring to see that the more resilient maintenance revenue stream is now 70% of total revenues, helped by the £36.6m Motherwell Bridge acquisition last year. A further help is the lack of exposure to North American shale, whilst key areas such as Saudi Arabia are still active.

Looking forward, the group acknowledges the uncertainties in the oil and gas construction market in particular. So they are shooting for a similar 2015 outcome to 2014, but with the second half being more uncertain than the first half. So if they reach 29p (a small reduction on 2014’s 29.9p) then, at today’s perky 235p share price, that is a PE of 8.1x and a same again 14p dividend is a 6% yield. This seems undemanding and only a little more improvement in sentiment would be needed for a 10x PE to be justified for a 290p share price (when the yield would still be 4.8%). This is clearly not a stock without risks, but the rewards are there for the more adventurous income hunter. (Neil Cumming^, 18^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