Dividend Power

Thursday, 27 August 2015

STV Group - still an attractive share to own

STV Group (STVG.L): The corporate recovery at STV continues, with progress on many fronts. On the face of it though, these interims, to 30^th June 2015, look dull, with revenue down 2% adjusted pre-tax profit down 5% at £8.0m and adjusted eps down 10% at 16.8p. However, in a further sign of ongoing balance sheet repair, net debt came down from £40.1m a year ago to £35.0m and the interim dividend was hiked 50% to 3p. The guidance is that net debt should be less than 1x EBITDA by year-end and the total dividend will be 10p, up 25% year on year. Going back to the turnover line, whilst digital revenues grew by 30%, to £2.8m, other revenue was hit as last year was a FIFA World Cup year and there was a hiatus in Government spend over the General Election period this year. However, the second half will benefit from the Rugby World Cup. (I will leave it to others to tell me if Scotland will progress very far!) There have also been costs involved in establishing local broadcasting, such as CityTV in Glasgow, but these start up losses are close to being eliminated. In the production arm revenues fell with deliveries bunched in the second half. Today a partnership has been announced with GroupM Entertainment to develop new programmes, starting with a fly on the wall documentary pilot on sports teams, called “Dressing Room”. I reckon that the pixellating software and bleeper could be working overtime on that one. The pension fund remains an issue, albeit now manageable, with a £7.8m planned payment being made in this period, although there is little further concrete news ahead of next year’s triennial valuation.

The group has in place a long list of KPI targets, most of which it says it to course to meet by the deadline of end-2016. With these numbers being in line with expectations, consensus eps for 2015 of 40.5p should be met. At 455p that is a modest PE of 11.2x, with the forecast dividend of 10p being a yield of 2.2%. Consensus then looks at eps growth of almost 10% to 44.3p in 2016, with a 20% dividend hike to 12p. On those forecasts the dividend cover is still 3.7x, with balance sheet strength improving all the time. It strikes me that, with a fair wind, investors can expect to see further smart growth in cash returns over the next few years. I would also point out the news that UTV is considering selling its TV assets, with press reports suggesting that ITV are the suitors. So, even when production is seen as more valuable than broadcast in the digital age, there is still demand for those broadcast capabilities. Having been positive on the shares almost a year ago at 375p, all the above means that I would suggest holding on to the stock at today’s 455p. (Neil Cumming^,27^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

Wednesday, 26 August 2015

Carillion - good value, but still not that tempting

Carillion (CLLN.L): This is a stock where the combination of support services and construction leaves investors uneasy. That said, the group seems to be chugging ahead quite nicely at the moment. In these interims, to 30^th June 2015, new contracts helped revenue jump 21%, with underlying operational profits up 16% at £112.5m. Operating margins fell 40bps to 5.1%, reflecting in part transient new business strain and ongoing construction margin erosion. Pre-tax profits were up 11% at £84.5m, but these were bolstered by disposal proceeds. Underlying eps were up 8% at 15.9p and the interim dividend, as has been the case since 2011, was nudged up by 0.1p, being a 2% rise to 5.7p. There have been times in the past when cash conversion at Carillion has been weak, but in these numbers it was 101% (albeit down on 127% a year ago). Net debt rose to £199.6m from £177.3m six months ago, with business acquisition costs cited as one reason, although average net debt was up some £35m at £486.5m, (with a hefty £356m pension liability on the balance sheet). The order book fell £1.5bn to £17.1bn over the six months, with new orders collapsing from £3.2bn a year ago to £1.0bn, reflecting the usual hiatus over a General Election period. All the same, the pipeline of opportunities edged up from £39.2bn to £40.5bn over the period.

Looking ahead, whilst the UK election hiatus should have passed and Government business should pick up. Whilst they seem to be doing well in the Middle East, the economic strain of weak oil markets is something to keep an eye on. Revenue visibility for 2015 is now right up at 96%, so the group expects to meet forecasts for the year, with analysts expecting modest growth in 2016. Despite a good first half, consensus for 2015 is actually for a small drop in eps to 33.2p, but at 322p, that is a PE of 9.7x. The recent pattern has been for the total dividend to go up 0.25p, pointing to 18p for a 5.6% yield. This all looks cheap, but the business may not be that resilient to external buffeting and the balance sheet (with that pension deficit) will not reassure all. Normally the low valuation would tempt me, and progress has been made. Yet I saw little rush at 362p when I wrote on the stock back in March and not enough has changed. At the moment weak stock markets mean that there are other tastier fish to fry and investing in Carillion can still wait for another day. (Neil Cumming^,26^th August 2015)

Cape - Captain Oatley is on course

Cape (CIU.L): We are in strange times, when abnormally high yields are becoming more common, especially in the case of stocks exposed to the natural resources markets. In the case of BHP Billiton it can only be achieved by slashing at costs and capex, whilst hoping for a turn in the cycle. However, at the previously troubled Cape, the dividend looks to be a lot better grounded. The well-regarded Joe Oatley is captaining his little £275m tub through some huge rough seas, with some notable success. Whilst resource stocks react to low commodity prices by battening down the hatches, they still have to look after and protect what they have. As a supplier of “critical industrial services”, Cape is still needed and wanted, as shown by recent deals with ExxonMobil and BP. These interim results to 5^th July 2015, benefitted from an extra week’s trading, with ongoing revenue up 13.2%, although a 30bps margin drop to 6.9% left adjusted pre-tax profits up 5% at £21.2m. A higher tax rate resulted in eps nudging ahead 1.6% to 13.0p, covering the maintained 4.5p dividend nearly three times. Net debt was barely changed from a year ago, at £131.3m, despite the acquisition of Redhall Engineering. Across the regions, MENA performed well on margin expansion, although within Asia, Australia was tough and in pan-Europe the UK was weak.

Visibility for the business is picking up with order intake of £399m, as against £317m in the same period last year. The total order book is now £800m, having been £746m six months ago and £643m a year ago. As such the board reckons that the second half will be in line with expectations. Further out 2016 is still uncertain (no surprise given the commodity market backdrop), but I would point out that the strengthening order book is encouraging. Consensus eps forecasts, for 2015, should hold around 27p, so even after today’s bounce to 229p, that is a PE of just 8.5x. A maintained dividend of 14.0p is a yield of 6.1%. Despite the wretched state of commodity markets, there is a good chance that consensus forecasts for 2016 of ‘same again’ can be met. So Cape is in self-help mode, selling at very cheap valuations, with a stonking yield. I know that the shares fail the dividend growth criteria just now, but I would be on board all the same, which is pretty much the same conclusion as in March when the shares were 235p. (Neil Cumming^,26^th August 2015)

Monday, 24 August 2015

Amlin - Limited excitement, but an attractive yield

AML (AML.L): What a day to wheel out results, with markets in turmoil. Still, corporate life goes on and here are Amlin’s interim results, to 30^th June 2015. These have been distorted by a change in how they account “for the seasonality of catastrophe earned premium, [which] will unwind in the second half.” This suppressed net earned premium and increased the combine ratio by 2%. So as stated in the announcement, the return on capital employed was 14.8% annualized, in line with the group’s 15% across the cycle target. Gross written premium was up 6.2%, but there was an average rate decrease of 4.0% and net earned premium decreased by 7.5%. The combined ratio was 91%, up from 87% this time last year, due to the transient higher expense ratio on those reduced net premiums. The investment return was 2.2%, nicely up on the 1.3% reported 12 months ago, helped by increased returns from equities and property. Reserve releases, on the back of benign claims, were up from £40.1m to £48.3m. So, pre-tax profits were down 3.5% at £143.3m, eps were down 2.9% at 26.5p and the interim dividend was raised by 3.7% to 8.4p. The net tangible assets came in at 284.4p, down 1.1% on a year ago.

Looking ahead, the group says that it is on course to meet Solvency II requirements, in an industry where rapidly changing markets are awash with capital. All this makes for a challenging environment for Amlin, but they are adapting (e.g. by writing multi-year business) and are confident of continued success. In the second half they do not expect investment returns to be repeated, but that accounting change will unwind. Consensus eps for FY2015 are 41.2p, so at today’s 488p (down 12p in a soggy market), the PE is 11.8x. A 4% rise in the full year dividend would take the total to 28p, for a juicy yield of 5.7%. (I am assuming that last year’s rarity of a special dividend is not repeated.) The price to net tangible assets is 1.7x. Back in March, I felt that the shares, at 507p, were worth it in order to scoop the final and special dividends totaling 33.9p. So having paid out the dividends and out-paced the FTSE All Share since then, there does not seem much excitement left. Yet, that yield is difficult to ignore and further stock market turmoil may well give rise to a chance to get involved again. (Neil Cumming^,24^th August 2015)

Thursday, 20 August 2015

Phoenix Group - a flaming good yield

Phoenix Group (PHNX.L): Thought: ‘tis better a shareholder be, than a policyholder be. There is money to be made out of closed life books and Phoenix is good at squeezing the cash juice out. Whether the policyholders rail against being trapped in low return products is another issue, with the FCA thematic review on the issue due before year-end. At least from the consumers’ point of view the new pension freedoms give them some increased clout (with Phoenix working with Just Retirement to provide customer choice). In this period Phoenix only wrote £208m of annuities against ££284m in the same period last year, but expects resilience in the remaining vesting business due to the popularity of their guaranteed annuity products.

In these interims, to 30^th June 2015, Phoenix generated an in-line £110m of cash, albeit this was down on the same period last year, when it was £332m. However, they are on track to meet their target of £200m-£250m for the year and a cumulative £2.8bn over the period 2014-19. This year is seen as a transition year as they prepare for Solvency II, implying that cash generation can recover in future years. Of the £2.8bn cash target, they have raised £1.1bn to date. So a further £100m say this year leaves £1.6bn for 2016-19, an average of £533.33m per annum. To put all those cash numbers into context, the annual dividend cost is very manageable at around £121m. The group MCEV held steady at £2.6bn, with the IGD surplus climbing from £1.2bn at year-end to £1.6bn. The dividend has been held at 26.7p, as they “demonstrate [their] commitment to a stable and sustainable dividend”. The group says that it is on course for meeting the new Solvency II rules and that the two remaining UK operating companies have achieved Insurers investment grade credit ratings at Fitch. This will take a useful 50bps off their current 312.5bps bank debt interest margin. Their ambition remains to build further on their position as the UK’s largest zombie book consolidator.

Normally the lack of dividend growth would dull my interest, but in this case the payment does seem sustainable, at the very least, and the group has a growth path to follow. The main risks would appear to be if the FCA fires a sidewinder or their Solvency II plans are rebuffed and more capital than planned is locked within the group. Assuming a maintained full year dividend of 53.4p, there is a 6.1% yield of at today’s 878p. The shares have been good performers since 2012, but they still look to be a hold and on any set back, that yield could become compelling. (Neil Cumming^,20^th August 2015)

Wednesday, 19 August 2015

Glencore - anyone want a white furry cat?

Glencore (GLEN.L): Ivan Glasenberg’s plan A seemed to be set along the lines of global domination: ‘get a quote, buy Xstrata, along with white furry cat and black leather chair’. He is now beavering away on a less glamorous Plan B: ‘cut capex, trim sails, maintain credit rating, weather commodity price storm’. In the past, Glencore would have weathered cyclical downturns behind closed doors but now the drama is to be played out in the full glare of the quoted stage. These interims, to 30^th June 2015, show the scale of the challenge. Adjusted EBITDA was down 29% to $4.6bn, with eps down 53% at 7c. The dividend has been held at 6c, but with no clues about the second half. The trimming of the sails has resulted in current capital employed falling from $21.3bn to $17.2bn, capex cut from $4.0bn to $3.2bn and net debt trimmed a tad from $30.5bn to $29.6bn, (as working capital has been released). Ivan has been quoted as saying that $27bn of debt is now the next aim. Whilst debt has been controlled, the fall in profits has seen net debt to EBITDA climb from 2.4x to 2.7x, but the group takes comfort from $10.5bn of committed available liquidity at the period end. The EBITDA is split out between Marketing at $1.2bn and Industrial at $3.4bn. They are shooting for full year Marketing EBITDA of $2.5bn-$2.6bn, which leaves a lot to do in the second half in such terrible markets. The path for Industrial EBITDA in the second half is left unguided. Industrial capex is forecast to slow further with a figure of $6bn for 2015 forecast against previous guidance of $6.5bn-$6.8bn, whilst in 2016 a further step down to $5bn is forecast.

Adjusted eps last year were 33c, so 15c may well be the ballpark for this year. At £:$1.56, that is 9.6p. The share price has been smashed, having more than halved over a year and at today’s grim 161p is a PE of 16.8x. If the full year dividend is held at (what would be an uncovered) 18c, then that is 11.54p for a yield of 7.2%. This is where dividend investors roll the dice. If the storm starts to pass, then they may well get that dividend yield and feel chuffed as the share price bounces back. However, right now commodity markets seem completely shot and emerging market currencies and economies are stressed. If the economic outlook at the time of the finals is no better, then paying a large dividend whilst, presumably, cutting back further on capex could seem foolhardy. No doubt there would also be pressure from lenders and credit agencies for the equity holders to share some dividend pain, in return for holding onto the BBB credit rating. Unless you think commodity markets will get much worse, I would not bail out at such a low share price. However, staying put is with the full knowledge that the dividend risk is now high, in my view. (Neil Cumming^,19^th August 2015)

Tuesday, 18 August 2015

John Menzies - still a work in progress

John Menzies (MNZS.L): Back in March, I thought that the shares looked cheap at 387p on the reduced earnings and rebased (downwards) dividend. However, I was concerned that underlying trading was still lacking forward visibility leading to my taking a ‘wait and see’ approach. The market had no such qualms, with the share price breaching the 500p mark in July, before settling back to 475p today. So what progress can be seen in today’s interims, to 30^th June 2015? On a constant currency basis, turnover is up 2.1% year on year, whilst underlying pre-tax profits have fallen 17.9% to £17.0m. As the geographic profile of profits changes, so the tax charge has gone up from 27% to 32%. This has played its part in suppressing underlying eps of 18.8p, against 24.7p in the first half of 2014. As flagged in the March rebasing, the dividend is 5.0p against 8.1p. Whilst aviation turnover is up 8%, operating profits fell 29% to £9.4m, reflecting restructuring costs and contract churn. The recent loss of contracts in Spain will lead to further (non-cash) write-downs. Distribution performed well, with operating profits nudged up from £12.0m to £12.2m. This was despite the secular decline of print and losing the boost of 2014 being a World Cup ‘sticker album’ year. The recent acquisition of AJG Parcels is a next step towards growing their position in the e-commerce parcels market. The balance sheet continues to be in decent nick, with net debt of £120.8m, only up £7.4m despite the recent upheavals, in part reflecting good cash conversion of profits.

Clearly the re-booting of the group is not yet finished and both their aviation and distribution markets continue to be very competitive. The strategy is set on winning more large-scale hub and base aviation contracts, whilst also broadening the activities of distribution further into fulfillment and parcels. Overall, they forecast 2015 is to be second half weighted, although they do flag that recent weakening in currencies such as the Euro, Australian dollar and Czech koruna are a headwind. Consensus eps forecasts are for 46.5p, giving a PE of 10.2x, taking their guidance that the interim dividend of 5p is about 30% of the annual, a yield of 3.5%. These valuations do not look expensive, but the quality of the earnings is holding the share price back. There are signs here that the new management is making progress, but I would still only suggest clambering on board if you have a higher risk appetite. (Neil Cumming^,18^th August 2015)