Ladbrokes - plenty of big fences to get over

Ladbrokes (LAD.L): Much has happened since I last wrote on the stock in April. The fact that the dividend was cut, as I suggested, has been overtaken by the July news of the proposed merger with the privately owned Coral Group. The need for action was clear with Ladbrokes’s interims, to 30^th June 2015, showing revenue up 1.3%, but pre-tax profits down 43.9% at £24.7m and basic eps down 44.2% at 2.4p. Much of the fall was due to the new point of consumption tax and changes to machine gaming duty. There was also £78.9m of exceptionals as the UK retail chain faced on-going surgery and Ireland was placed into Examinership. The interim dividend was slashed by 76.7% to just 1p.

The Coral deal is in the early stages of the regulatory steeplechase, but there was also a new strategic plan announced for Ladbrokes. This plan (with a £20m annual cost to profits) focuses on marketing as a lever of growth and sets out various aims to be achieved by 2017. These can be summarized as getting the UK retail chain back to the 2014 base line and growing on-line and Down Under. They also want to widen the “recreational” customer base, for which I would read ‘new mug-punters required’. Net debt to EBITDA was seen as hitting 2.5-3.0x this year before returning to “c1.5-2x in the medium term”. The new dividend policy set out a base of 3p for FY2015 with cover set at 2x underlying eps. Lazy looking consensus forecasts for FY2015 seem to have worked back from the 3p dividend to (a rather optimistic?) 6p of eps for a PE of 18.2x at 109p and a yield of 2.8%.

The merger with Coral would lead to significant cost synergies of at least £65m, by year 2, on combined EBITDA of £392m, whilst increasing exposure to Europe. Ladbrokes holders would get 51.75% of the enlarged share base, with Jim Mullen staying on as CEO of the enlarged group. Initially net debt to EBITDA would be c3x, before falling below 2.5x in 12-18 months of completion. Ladbrokes’s new dividend policy would roll forward, but with no increases from 3p until cover goes above 2x.

It remains to be seen how much horse-trading the regulators will need, but there is no sign of an end to the pariah status that politicians seem to have imposed on the betting industry. Shutting over-lapping outlets, on often moribund secondary UK high streets, will no doubt attract even more political venom. Both the strategic plan and the merger look like defensive moves, with growth still likely to prove elusive in a competitive industry. The timescales involved and the current valuations mean that I think it is still a stock for income investors to avoid for now. That said, the stallions at Playtech are moving to a declarable stake by taking shares in the recent placing (going to 9.7%) and agreeing to take more shares for payments to be triggered upon completion of the merger deal. They are serious players and will keep the whip ready, encouraging Jim Mullen to do his best. (Neil Cumming^, 12^th August 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

Hargreaves Services - only for the bravest investor

Hargreaves Services (HSP.L): When I wrote on Hargreaves in July, I commented that it was only for the bravest. So, with miner’s helmet on and Davy lamp at the ready, it is eyes down for the finals to 31^st May 2015. After a year of chopping off and reducing various activities, these numbers focus on the continuing businesses, so excluding lots of the bad bits. The cost of the ‘simplification programme’ in the year is put at £9.3m. On the continuing basis, revenue was £662.2m, down 23.8%, with underlying pre-tax profits down 26.9% at £40.3m. Underlying diluted eps were down 24.8% at 93.9p, with the group moving to a higher payout ratio, resulting in the full year dividend being up 17.6% at 30p. As guided at the trading update, net debt has ended the year at just £1m, down from £68.8m a year ago. They guide that debt will increase now, as they build up their coal stocks by £16m-£18m, before again declining with further cash generation being forecast, “under normal conditions”, for the year as a whole. They do point out that this year’s profits will not be protected by the hedges and forward sales which helped in FY2015. Against the backdrop of low import coal volumes and prolonged low coal prices, they are looking to expand in renewable energy, biomass and materials handling. Coal may have few friends at the moment, but green energy has been nudged down the political agenda, so the strategic shift is not a certain success in my view.

Despite all the operational problems, the group is bullish on the dividend and has kept share buybacks on its radar. This year’s dividend was a 31.9% payout ratio and they want to progress to a 40% rate, “subject to continually assessing our forward cash and earnings profile”. Quite what that means for the payout in FY2016, when consensus eps are just 43p, I’m not sure. Given their tone on cash generation, I will assume a flat dividend of 30p. The shares have bounced nearly 10% today, to 348p. That is a forward PE of 8.1x depressed earnings and a yield of 8.6%. The market capitalisation is £108m, with little debt, for which you get a company with revenues of, using a wide range, £550m-£650m. This still looks cheap if you are super brave. The risk is that if coal markets stay this bad (or even get worse) then this set of results may end up being seen as a moment when the board played on, despite a hole beneath the water line. (Neil Cumming^, 11^th August 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

esure Group - no, I'm not sure

esure Group (ESUR.L): The share price tells you that the market didn’t like today’s interims, to 30^th June 2015. The premiums written may have gone up 5.8% to £275.5m, but a deteriorating claims experience resulted in a worse than expected combined operating ratio of 95.8%. A year ago the COR was 90.9%, with most of the hit being blamed on prior year accident reserves coming down from 19.0% to 14.9%. Gocompare was brought into full ownership during the period, but a 25.2% profit increase was down to cost control, with revenue only up a tickle at £59.6m against £59.1m. As part of their ambition for Gocompare to double EBITDA over five years, they seem happy with the return of Gio Compario to their ad campaign. I can only hope that Sue Barker is still feeling vengeful. Anyway, this all dropped through to a pre-tax profit figure of £46.5m, down 21.3% and underlying eps of 9.0p, down 20.4%. As the dividend payout ratio is stated as being 70% of underlying eps then the interim should be 6.3p. Not so, with the interim dividend cut by 17.6% from 5.1p to 4.2p, split between a 3.0p (FY2014: 3.6p) normal and a 1.2p (FY2014: 1.5p) special dividend. Perhaps my confusion is that they also aim for a one third, two thirds split between interim and final?

The industry is seeing rate increases for car policies, with esure stating that they are getting better than industry average rises through. This is a process that they will persist with, against a backdrop of continuing claims deterioration. For the full year they are guiding to a COR of 96-97% (assuming normal weather), so absolutely no improvement on the first half is envisaged. Indeed they comment that their small-ish home insurance book has benefited from benign weather so far this year and what goes around does tend to come around. It still bothers me that there is £51m of additional (and profitable) service revenue in these numbers, including £14.3m for the honour of you paying monthly premiums and £10.4m for pushing the send button on your policy document e-mail. The politicians are circling these issues and one day may sort the mess out.

Anyway, extrapolating the 20% fall in profits, points to full year eps of around 15.5p. Using the 70% payout ratio, including the interim special dividend, leads to an annual dividend of 10.9p. Mind you their one third two thirds split between interim and final (note 6 in the release) points to a total dividend of 12.6p (4.2p *3), which doesn’t look right. Stripping out the special from the ‘thirds’ calculation points to a total of (3.0 +1.5 +6 = 10.5p), which looks plausible. The shares have done well this year, but on the sharply lower share price today of 240p that is a PE of 16x and a yield of 4.5% (using 10.9p). After taking the cold towel away, that yield is still a temptation, but with a tough second half ahead and no progressive dividend policy, there is no rush to invest in this stock. (Neil Cumming^, 10^th August 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

Standard Chartered - no rush for income investors

Standard Chartered (STAN.L): When I wrote on this stock, last October, the shares were 1000p and it was clear that Peter Sands was under pressure. The loss of momentum at the group was worrying and there seemed no rush to invest. Since then there has been a near total clear out of the board, with American career banker Bill Winters installed as the new CEO. In this week’s interim results, to 30^th June 2015, he pulled few punches, with the regime of Peter Sands being openly criticized, in particular for being over-expansive, (“bigger doesn’t necessarily mean better”). The previous regime’s legacy of regulatory stink bombs is not helping the mood music either. The strategy now is to simplify and de-risk the group, both through leaner, simpler management structures and fewer business strands. Year on year operating income was down 8% to $8.5bn, but pre-tax profits were down by 44% to $1.8bn, reflecting increased loan impairments. The shrinkage of the business is seen in risk-weighted assets coming down 5% to $326bn. The net tangible asset value is 1586c, down 3.7% on 1647c a year ago. As a result normalized eps fell 50% to 48.7c and the return on equity came down to 5.4% from 10.4%, but management succeeded in pushing core tier 1 equity up to 11.5% from 10.7%. This is inside their target range of 11-12% and they are on track to save $400m in costs and shrink RWAs by $25-30bn before year-end. In the midst of such pain the dividend has suffered too, with a 50% cut being unveiled. In a full year this will keep an extra $1bn or so in their coffers. The question of domicile is also mentioned, with the hint being that George Osborne has done enough to tilt the odds firmly back in favour of staying in the UK.

Normally all this might seem like a new boy’s kitchen sink, but it seems that it might only be a hand basin, with no promises that there won’t be further hits. (“I have not yet completed my review of the book”). The question of whether fresh equity will be needed has been left open and any such issue might further impact the reduced dividend. (“The decision to rebase the dividend reflects our current profile and not the outcome of the ongoing strategic and structural changes”). The long-term prize of being a major player in expanding Asian economies is still there to be taken, but these are gloomy days. The shares might be trading a bit below their TNAV of about 1016p (1586c @£:$1.56), but this may flake further as Bill Winters shines his torch into more dark corners. The shares rallied on the management changes but, at 930p, the shares have come down about 10% in the last three months as Bill Winters has spread a chill amongst followers. With the possibility that this hand basin will be followed by another (or worse?) in February, there is still no rush for income investors to clamber on board. (Neil Cumming^, 7^th August 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

Legal & General - Nigel is still making plans

Legal & General (LGEN.L): The Nigel Wilson designed Legal & General just keeps sailing on. It has always been about cash generation driving dividend growth in this new model. So it is no surprise that today’s interims, to 30^th June 2015, lead off with the bullet point that net cash generation is up 11% to £629m. Operating profit is up 18% to £750m, whilst adjusted eps are up 15% to 9.79p. On the back of this there has been another big dividend increase, with the interim up 19% to 3.45p. Operational progress is on several fronts.  On the asset side, AUM is up 12% to £714.6bn and external net flows up 62% to £13.8bn. On the life side, annuity assets are up 13% to £43.4bn, although the lumpy bulk purchase annuity premiums fell back from £3,135m to £1,146m, whilst UK protection premiums were up 4% at 774m. The newer direct investments line was up 35% to £6.2bn. The tidying up process continues with the exit from venture capital, closure of the with-profits-fund, whilst exiting Ireland, Egypt and the Gulf, with France and Germany on the block.

Their strategy going forward is based on five identified trends, as follows. They are addressing ageing demographics through Liability Driven Investment solutions, such as bulk annuities.   As asset markets globalise, L&G are growing in the US and Asia. UK pension and welfare reform is leading to an increased need for self-provision and measures such as auto-enrollment are increasing participation. The challenge is to keep pace with the rule changes, as seen in the collapse of the individual annuity market and now the consultation on the whole area of pension tax relief. The two final trends are to adapt to the increasing use by customers of technology and to take advantage of the bank’s loss of risk appetite to increase direct investments. All these trends look to be multi-year and the group has built up good momentum in recent years. For what its worth, consensus eps for 2015 are heading to 19p, for a PE of 14.1x at 268p. More significantly, the interim dividend is pointing to a total of 13.5p for the year, being a yield of 5.0%. As with Standard Life, the shares have been a bit dull this year, being off their highs of 296p, which were reached in late March, before the election and the latest bunch of Osborne thought bombs. Back at 268p, backed by a 5% yield and positive long-term market trends, the shares look attractive at these levels. (Neil Cumming^, 5^th August 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

Standard Life - successfully riding the market changes

Standard Life (SL..L): The most eye-catching thing in today’s interims, to 30^th June 2015, is that 95% of income is now fee-based. As the traditional annuity market implodes this hasn’t come a moment too soon. The acquisition of Ignis last year has completed the shift from old-style Scottish Life office to modern asset manager and investment solutions provider. This even extends to the internal appointment of ex-stockbroker Keith Skeoch as the new CEO, after David Nish’s slightly unexpected retirement. In these numbers fee based revenue jumped 17%, whilst AUM were £302.1bn, against £296.6bn at year-end and a year ago’s (pre-Ignis) £223.9bn.  Net inflows were £3.4bn, although adjusted net inflows into their fee-based offers were £6.4bn. Ignis did lose a £1.7bn mandate, but this was low margin. In the UK workplace pensions and wrap platform take-up both performed well, whilst their Europe, India and China exposures all saw positive inflows. Operating profit was up 6% to £290m, with the operating expense ratio trimmed by 5bps to 42bps of AUM. Dropping down to the bottom line, profit after tax was £69m, a drop from £196m in the first half of last year, mainly due to one-off charges in Hong Kong and Singapore as well as a UK defined benefit staff pension fund charge and Ignis integration costs. The capital position after a busy year remains strong with the IGD surplus at £2.6bn against £2.9bn. Re-iterating their progressive dividend policy the board has set the interim dividend at 6.02p, a useful 7.5% uplift.

With the shares at 440p, eps consensus of 25.2p for this year is a PE of 17.5x. After the rise in the interim dividend a similar hike at the final would mean a total around 18.3p, for a yield of 4.2%. As Ignis beds in and they drive out £50m of cost by 2017, analysts have slightly stronger growth penciled in for 2016. Given all the changes in the UK savings market along with their overseas exposure, Standard Life look set for a period of sustained steady growth. The next wave of proposed changes to UK pensions may well cause more market-place turbulence, but will not change the need for financial provision in an aging population. When I last wrote on the shares in September last year, I was positive on them at 415p, despite the impending uncertainty of the Scottish independence referendum. They might be above that level now, but that political risk has abated and they are well off their top for the year of 505p. I think that many long-term income growth investors will see this as a decent opportunity to clamber on board. (Neil Cumming^, 4^th August 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

HSBC - Rio 2016 is off their calendar

HSBC (HSBA.L): Today’s interim results are another staging post on the way to returning to their Asian roots. The days of being the World’s Local Bank are but an ad-man’s reminiscences. Mind you, the Birmingham taxidermist must still have been surprised when they asked for their Midland Bank griffin back. For the six months, adjusted pre-tax profits are up 2% at $13.0bn against $12.7bn, with eps at 48c, slightly down from 50c. The dividend for the quarter was again 10c, keeping the halfway score for the year at an unchanged 20c, more than twice covered by earnings. It looks like the control of costs is still an issue with operating expenses up 7%, whilst revenue was only up 4%, although they quote their cost efficiency measure as having improved from 58.6% to 58.2%. The balance sheet strength continues to build gently with CET1 capital at 11.6%, up from 11.1%. But all these are snapshot numbers as the group continues its rebalancing. The drive to reduce Risk Weighted Assets by 25% continues with a $50bn reduction, focused on Global Banking & Markets, although $30bn was redeployed elsewhere. In a similar vein their Brazilian business is being sold off for $5.2bn (didn’t they want a board meeting during the Olympics?), whilst Turkey has met its cranberry sauce. Total RWAs came down from $1,220bn to $1,193bn in this period.

  

The pivot back to Asia looks like the right strategy, but the timing is challenging at the macro level, as China wrestles with slowing economic growth and a soufflé of a stock market, whilst emerging market economies in general face the impending challenge of rising US dollar interest rates. At the same time the reputational damage from their various regulatory skirmishes (e.g. Switzerland and Mexico) continues to feature all too often in the press, thus hampering efforts to re-boot growth. Whether the pivot will lead to HSBC re-domiciling away from the UK remains to be seen, but George Osborne’s latest tweaks to the banking levy may be enough to postpone the packing crates. For whatever a bank’s PE is worth as a metric, consensus eps of 53.2p for this year leaves the PE at 10.9x with the shares trading at 580p. The dividend might not be growing and it has currency risk, as it is declared in dollars, but an unchanged 50c for the year would be about 32p, for a yield of 5.5%. There are lots of reasons to dismiss HSBC as a mere lumbering beast, but that yield and the long term attractions of their target markets, mean that the shares should be considered for all long term income portfolios. (Neil Cumming^, 3^rd August 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