Mitchells & Butlers - plus ca change

Mitchells & Butlers (MAB.L): Well, all my optimism that M&B was on a path back to institutional status has evaporated. Alongside a dreary trading update, the CEO, Alistair Darby, has pulled his last pint. He is being replaced by Phil Urban, who joined as COO in January and has worked previously with the Chairman. It seems that Darby was not dynamic enough for the group’s major shareholders, with significant sales growth proving elusive. I thought he was actually making a decent fist of a sprawling business hampered by a large pension deficit and a very lumpy shareholder register.

In this pre-close update (for the 50 weeks to 12^th September) LFL sales were up 1.0%, with food up 2.1% and drink down 0.3%, with a sharp deceleration (probably worse than the industry average) having been seen in the last seven (damp and cool) weeks. Their bottom line is that “results for the year to 26^th September [will] show growth [but will] be at the bottom end..…of current market expectations”. Current FY2015 consensus is for eps of 34.8p, so perhaps we should shoot low for 33p, just above last year’s 32.4p. At the depressed share price of 317p, that is a PE of just 9.7x. However, hopes of an imminent return to the dividend list have probably been dashed. I had been looking to a nominal interim for FY2016, but that too looks less likely. The mood in the M&B boardroom won’t have been lightened by the hot breath of Greene King who are poised to overtake them in terms of size post the Spirit deal. Reading the runes at this company is made more difficult by the near 27% held by a Joe Lewis vehicle whilst the Magnier/MacManus vehicle Elpida has just gone up through the 23% barrier.

So I am retreating to saying that the stock is not at present worth the agro for income hunters. However, we all know the risk is that the major shareholders somehow brew up a value creating deal, but that has been the case for many years. Being the outsider at someone else’s corporate party is never easy. (Neil Cumming^, 29^th September 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

AA - changing the engine oil

AA (AA..L): As a mature, well known brand it should be expected that the AA pays a dividend. In these interims, to 31^st July 2015, it has done just that, but this hasn’t pleased everyone. The nub of the debate is whether, in a period of corporate re-generation, cashflow should be used to pay down debt further, before paying shareholders. The AA came to market in 2014 with a full load of debt but in July of this year they completed a re-financing of debt. This saved £45m p.a. of interest but only cut net debt (including a chunky pension deficit) to trading EBITDA from 6.9x to a still chunky 6.7x. At the time the company said that they would now be able to pay dividends totaling £50m in FY2016, so a tad more than the interest savings. They have now tweaked this up to £55m, or 9p per share, of which 3.5p has been declared as an interim. This optimism is backed by 111.8% cash conversion in the period, as working capital was squeezed hard.

However, a quick look under the bonnet has some worried that the AA spark plugs might be a bit damp. Interim revenue fell 1.4% and trading EBITDA fell 5.9% to £199.2m, with adjusted eps down 29.3% at 8.2p. In a post private equity ownership catch-up, the IT systems (with SIX customer databases) are being over-hauled and money is being spent on halting the decline in individual members, whilst the insurance and financial services offerings are being re-booted. The benefits of all this “will not begin [to be seen] until the latter half of the 2017 financial year”. They do then lob in the caveat that investors need to consider the hits from the 58% Insurance Premium Tax hike this November and EU regulation on holiday pay.

The shares have been stuck in the slow lane of late, having fallen back by almost a third in six months, to 287p. On consensus eps of 21.3p for FY2016, the PE is 13.5x and the yield is 3.1%, with accelerating growth expected in FY2017. If the management deliver on their business plans then the current valuation is a good entry point, but the worry is that if they hit any speed bumps then the debt pile and the dividend expectations will stall the engine. There is just something about all this that is making me wary. (Neil Cumming^, 28^th September  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

Morrison Wm. Supermarkets - better a shopper than a shareholder be

Morrison Wm. Supermarkets (MRW.L): Time to see how life is after the fruit’n’veg de-misters, with these interim results, to 2^nd August. As a preface, yesterday saw confirmation that 140 M local convenience stores are being sold for £25m, triggering a loss on disposal of £30m and a contingent lease obligation of £20m. It was announced today that a further 11 supermarkets are to be closed, on top of the 23 announced in March. In the interims, LFL sales (ex-fuel and VAT) were down 2.7%, but on an uptick as the Q2 figure was -2.4%. Turnover was down 5.1%, with pre-tax profits before all the bad bits down 34.7% at £141m. After re-structuring charges the pre-tax profit was down 35.4% at £117m, (of which £96m was property profits offset by £87m of exceptionals), with eps down 35.0% at 3.73p. As previously flagged the full year dividend should be not less than 5p (down 63.4%), with the interim set at 1.5p. A focus on squeezing working capital and selling property helped net debt to come down from £2.34bn to £2.086bn over the six months. The drive to woo back customers continues, but that means that large chunks of cost savings have to be re-cycled into price cuts, not profits, (as seen in operating profit margin falling from 2.67% to 2.0% year-on-year). There is also the concern as to when capex cuts start to result in a backlog of required work to build up. Capex falling from £257m last year to just £139m looks pretty fierce to me. Apart from wooing back customers the broad ambition is confirmed as “to generate £1bn of cost savings and £2bn of free cashflow in the three years to 2016/17”. After this year’s 5p dividend, they are non-committal saying that they will tell us “as appropriate”.

Aldi and Lidl continue to grow, whilst the other majors are not taking all the blows lying down and it is too early for Morrison’s to feel remotely comfortable. There is still much to do before they can declare ‘business as usual’. They have done plenty to help secure the balance sheet and boost cashflow, but the P&L is another matter. They reckon that the second half will be more profitable than the first, but consensus eps for FY2016 of 10.15p look a bit toppy to me. If the analysts are right, then at 170p the shares are on 16.2x, with a 2.9% yield. Back in March, I felt that there was little rush with the stock at 203p, so a share price 16% lower is worth a quick look. Right, done that. If previous margins could be regained then the multiple might look like a recovery rating. However, lower profitability is the new ‘norm’ and so the shares still do not look compelling at these valuations. The lack of medium term clarity on a dividend policy only adds more doubt for income lovers. I still see little reason to get involved just yet. (Neil Cumming^, 10^th September 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

Barratt Developments - Lawrie would be proud

Barratt Developments (BDEV.L): More evidence, this time from Barratts, about how great it is to be a house builder right now. In these finals, to 30^th June 2015, revenue was up 19%, driven by a 10.8% rise in completions to 16,447. Operating margins expanded by 230bps to 15.3%, helping pre-tax profits to rise 44.8% to £565.5m with eps up 45.8% at 45.5p. The return on capital employed rose 440bps to 23.9%, with good cash generation helping net cash rise to £186.5m from £73.1m a year ago. This is after committing £957m for 16,956 plots to be added to their land bank. The ordinary dividend is 15.1p, up 46.6%, but the cash bonanza means that there is also a (pre-announced) 10p special, making a total of 25.1p. They comment that the current year has started strongly, with reservations up 14.7% and forward sales up 32.2%.

It might just be worth noting that the group is sporting a new Chairman and CFO, with the new CEO being the old CFO. That is quite a lot of boardroom shuffling in short order and investors will hope that nothing is dropped in the handover. The group’s aim is to hit a 20% gross margin and a 25% ROCE by FY2017 and they appear well on course to do this. They have a detailed cash return plan in place, running for another two years, to FY 2017. In FY 2016 they plan a return of 30.2p, split 17.6p ordinary and 12.6p capital return. Then, in FY2017, they plan 36.9p, being 19.3p ordinary and 17.6p capital return. They state that the ordinary dividend calculations are driven off Reuters consensus eps of 52.7p for FY2016 and 57.9p for FY2017, with a three times dividend cover applied.

The risks are shared by most house builders, especially interest rate rises and inflation (land, materials and labour). However the pent up demand for new houses means that these risks are not immediate threats. Even if UK interest rates rose, it would only be modestly and would be very slow. The main cloud is just that the shares have roughly doubled in price in two years. Yet, at 641p, on the consensus numbers the PE is still only 12.2x dropping to 11.1x, The all-in yield is 4.7% in FY2016 and 5.8% in FY2017, although the ordinary yield is a more mundane (but well covered at three times) 2.7% rising to 3.0%. This all looks pretty good value, although there may be better value to be had in other more niche house builders (such as Berkeley Group). (Neil Cumming^, 9^th September 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

Ashmore Group - needing a market inflection

Ashmore (ASHM.L): The amber lights are just starting to flash for dividend lovers invested in Ashmore. In these final results, to 30^th June 2015, the final dividend was tweaked up, by 0.1p to 12.1p. After a 0.1p rise in the interim, this means that the total dividend is up 1.2% at 16.65p. However, it is now thinly covered, with diluted eps only up 4% (at 19.3p) thanks to 1.4p of FX translation gains. At constant currency, eps of 17.9p would be down 3.8% on last year’s 18.6p. Further up the P&L, EBITDA was down 9.4% at £176.7m, with margins holding at 67%, but period end AUM tumbled from $75bn to $58.9bn. So, trying to be positive, at least the redemptions had a beneficial effect on the overall margin mix. Pre-tax profits rose 6% to £181.3m thanks to performance fees, FX and operating cost control. The nearing of a US interest rate rise and turmoil in Chinese capital markets has made this the most challenging of times for the group.  Of the $16.1bn drop in AUM, the biggest factors were $9.5bn of net outflows and $6.0bn from negative performance. A total of $9bn came out of the three largest themes, being $4.9bn from Blended Debt, $2.1bn from Local Currency and $2bn from External Debt.

In raising the dividend the Board cites “the increase in profits” and the “strong and liquid balance sheet”. The dividend policy remains “to pay a progressive ordinary dividend over time” but including plenty of caveats “such as prospects for the Group’s earnings, demands on the Group’s financial resources, and the markets in which the Group operates.” 

Looking ahead the timeline for US interest rate increases remains changeable and the outlook for China and other emerging markets is foggy. It is difficult to see how AUM net outflows can be turned positive just yet and the board also notes that of the £13.3m of performance fees (up from £3.1m in FY2014), was almost all generated by funds ahead of August 2014 year-ends, but that August 2015 saw “no material performance fees” generated by those same funds. It feels to me like consensus eps for FY2016 of 18.2p look vulnerable. The shares have bounced today, to 260p, and on those consensus numbers the flaky PE is 14.3x. A further titchy dividend increase to 16.85p would point to a yield of 6.5%. At this stage, a strong balance sheet means that the FY2016 dividend is affordable, but unless trading improves is such a high yield sensible or necessary? The eventual fate of the dividend may/must also be influenced by the needs and wishes of CEO and c40% shareholder, Mark Coombs. Last time I wrote on the stock, in July, the shares tempted me at 286p. That temptation remains, but my conviction levels are lower. (Neil Cumming^, 8^th September 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

Berkeley Group - Best in Class

Berkeley Group (BKG.L): The London residential property market is driven by two big forces. One force is the flow of foreign buyers, that may ebb and flow, but shows no sign of stopping. Whilst you and I may feel that London prices are daft, that is not how it seems to someone wanting prime property in a safe environment bound by excellent legal and fiscal rules. The other force is the steady growth of the London population, which is past 8m and headed for 10m. The outcome of the remarkable recent refugee/migrant events in Europe is unknown. However, significant net immigration will continue and London will remain an economic magnet for many. Their economic power may not be great at first, but they will underpin the ‘cheaper’ end of the property market through rentals, thus helping to prop up the valuations of bread and butter properties. Berkeley Group operates at the upper end of the London residential building market and most people would agree that it is the best in the business. Today’s AGM statement is reassuring, with transaction levels and cash due on forward sales steady, in the wake of what was a good General Election outcome for them. They continue to expect to generate £2bn of aggregate earnings over the three years to April 2018. The balance sheet remains very strong, with the group expecting to be ungeared even after the £122.9m dividend (90p per share) due to be paid on 17^th September.

The group is very explicit on their dividend policy. That imminent 90p dividend means that the first 434p milestone on the route to £13 in total by 2021 has been reached. The next 433p is due by September 2018 and the final 433p by 2021. The guidance is that the next milestone will be achieved through “regular equal dividends over the period”. There is also the vague possibility that any surplus capital generated may come back through enhanced dividend payments. For now though, let’s stick with 433p over three years being 144.3p per year (so down on the 180p in each of FY2014 and FY2015). On consensus eps of 245p the PE at 3450p is 14.1x and the yield is 4.2%. I have to say that these dividend flows are a succession of quasi specials, so they do not quite fit my usual aim of identifying growing dividends driven by growing operational earnings and cash generation. That said, Berkeley Group is unique and even after a 40%-odd share price rise in the last year, this is still the best in class at what it does. You may want to finesse an entry price, but the attractions of the stock are still very alluring. (Neil Cumming^, 8^th September  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

Go-Ahead Group - not quite full steam ahead

Go-Ahead Group (GOG.L): The £100m bus operating profit target has been pushed back from 2015/16 to 2016/17, with falling passenger numbers and London infrastructure project (e.g. Crossrail and cycle lanes) inspired traffic jams cited. In generaI, I doubt that the Tory government will see much political mileage in propping up bus services, although elected mayors “up North” may feel differently. Their support may though come at the price of greater involvement as seen in the North-East. In rail the new GTR franchise has had a “challenging start”, with “operational issues” and the Thameslink project causing headaches. These two negatives have sent the share price down and rather overshadow what look to be expectation beating annual results, to 30^th June 2015. Revenue was up 19%, with operating margins down 20bps to 3.6%, leaving operating profits up 11.1% at £114.7m. Pre-tax profits before all the bad bits rose 11.7% to £96.6m, with adjusted eps up 1.5% at 150.8p and the full year dividend has been raised 6.5% to 90.0p. As they say: “excluding the non-cash impact of IAS 19 (revised), dividend cover was 2.02x (2014: 2.04x)”. Adjusted net debt to EBITDA is a very manageable 1.3x, below their target range of 1.5x-2.5x.

Looking forward they are bidding for the Northern and TransPennine Express franchises and have been short-listed for London Overground. Whether they win any is the usual lottery….sorry, rigorous selection process. In the bus division, lower fuel prices will help, but will be off-set by substitution as people are tempted back into their cars. They are now fully hedged on fuel purchases out to 2018, with the 2014 achieved hedge of 50.5p a litre dropping to 35p in 2018. The dividend policy remains as follows: “to maintain dividend cover of approximately two times adjusted earnings, on a pre IAS 19 (revised) basis”. Consensus forecasts for the year to 30^th June 2016 are for eps of 195p, which is a PE of 12.3x at today’s red-ink price of 2390p. Once the IAS19 adjustments are backed out of next year’s numbers and given the strong balance sheet, the board may well decide to go for that symbolic 100p dividend level. At 100p there is a nice but unspectacular prospective yield of 4.2%. All this seems reasonable value. However, but with many political and regulatory uncertainties in the background, I would be happy to wait a while before hopping on board this one. (Neil Cumming^, 3^rd September 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