Dividend Power

Thursday, 4 December 2014

SSP Group - from baguettes to caviar

SSP Group: Talk about a name that gives you no clue what they do! Well, they provide food and drink here and abroad (operating in 29 countries) at travel hubs such as airports, motorway service areas and railway stations, under around 300 names (often franchised in or out) including Millie’s Cookies, Burger King, M&S Simply Food and Upper Crust. The extra interest is that Kate Swann left her very successful tenure at WH Smith’s in order to take SSP on, so she must see repeat potential in it. The group is not a pure newbie and can trace its roots back over 60 years through ownership by Compass Group, through to its origins within the Scandinavian airline business SAS. SSP floated earlier this year and are one of the rarities that have seen a rising share price amid the glut of over hyped issues. These results are for the year to 30^th September 2014, showing flat revenues due to sterling strength (but +4.0% on constant currencies), with operating profits up 12.3% to £88.5m (but +20.8% on constant currencies). The operating margin improved 50bps to 4.8%, “reflect[ing] good early progress” in running the business and implies that there is more to come. Post the float net debt of £371.1m is a manageable 2.3x EBITDA, with good cash generation of £51.5m helping too. Having only floated in July there is no dividend, but FY2015 will be a full year’s worth.

Given the exposure to currency risk, the economic sensitivity of travel and the ever-present threat of security and/or health risks for travellers, short term forecasting must be prone to volatility. However, leisure and business travel looks set to grow steadily (mid single digits p.a.?), even in a world concerned about carbon footprints. Passengers are spending longer at airports (as security needs stretch out check-in procedures) and service areas/railway stations are making more effort to capture discretionary spend. In a highly fragmented market, there is plenty of scope for growth, with many travel outlets offering very indifferent value for money to travellers.

Having floated at 210p, the shares are now at 280p. Consensus forecasts for FY2015 are for 12.8p of eps, but that seems to cover a wide spectrum as analysts tweak their models. At this level the PE is 21.9x, whilst a two times dividend cover would generate 6.4p for a yield of 2.3%. These are not cheap metrics, but I feel that they are probably over-cautious or just plain mean. SSP is a stock to put on the radar screen for now, whilst waiting for upgrades and/or any price weakness. (Neil Cumming^,4^th December 2014)

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, 3 December 2014

McColl's Retail Group - more "Fairytale of Brentwood" than New York

McColl’s Retail Group: I wrote favourably on this stock in August with the shares at 200p. Since then, they haven’t done anything wrong, but remain one of the forgotten class of 2014 flotations. The shares have been weak and have struggled to form a base between 175p and 180p. They have released a trading update for the year to 30^th November 2014, which also includes a 14 week update. They are saying that annual sales are up 4.2% with the fourth quarter growth is faster at +5%, whilst the equivalent annual LFL number is -1.0%, with a fourth quarter LFL of +0.7%. The standard phrase used is that “we expect the 2014 results to be broadly in line with expectations”. Although that wording always leaves the feeling that it has been a struggle to get there, it is good to know that 2014 is pretty much in the bag.

The sales growth reflects new store openings and acquisitions, with plenty more work to be done on product range, services (including Post Office counters) and portfolio tweaking. The overall thrust is to increase the proportion of more profitable convenience stores. Of the overall store portfolio of 1,315 outlets, 799 are now convenience stores. The stated aim is to reach 1000 by the end of 2016.

The stock has, at a market capitalisation of £185m, limited broker coverage and is all too easy to ignore. But it is worth at least a look. Following this statement, consensus remains at about 17p of eps for September 2014, which is, at 175p, a PE of just 10.3x. Pencilling in 18p (not even a 6% growth rate) for the current year to September 2015 is a PE of 9.7x. With a strong balance sheet (net debt to EBITDA <1x) and good cash generation, the expectation is for a dividend that year of just under 11p, for a yield of 6.2%. McColl’s is unlikely to revolutionise retailing (buying milk in my local store confirms this) but on these valuations it looks overly unloved. (Neil Cumming^,3^rd December 2014)

Tuesday, 2 December 2014

Aberdeen Asset Management - cashed up and married to a Widow

Aberdeen Asset Management: Aberdeen continues to advance, with the latest step being this year’s debt and equity funded £606.6m acquisition of the SWIP investment arm. This move resulted in AUM jumping 62% to £324.4bn, although this masks underlying significant redemptions from ‘Old Aberdeen’ and ongoing client defections at SWIP. In these results to 30^th September 2014, net revenue was up 4% at £1.12bn, with underlying PBT up 2% at £490.3m. Underlying eps were a slight beat, but were down 4% to 31.1p, whilst the total dividend has been increased by 12.5% to 18p. So, this dividend is almost twice covered (1.7x) by earnings and backed by a cash pile (including c£400m regulatory capital) that grew from £426.6m to £653.9m. Sentiment on emerging markets has worsened as QE tapering in the US developed. For Aberdeen their Asian bias has been a hindrance. SWIP will help even out this imbalance, but will fuzz Aberdeen’s specialist image. This is reflected in the average management fee falling to 41.8 bps, with the second half (so with SWIP fully included) showing a rate of 36.9bps. The outlook is one of those that can be characterises as cautiously optimistic.

It looks like FY2015 forecasts are settling at 35p and a bit, being growth of 12.5% and putting the shares on 13.2x at 460p. If cover is held at 1.7x, this gives a dividend of 20.6p for a yield of 4.5%. It is not unreasonable to look at similar growth in FY2016 and FY2017 as underlying growth is blended with efficiencies and cost savings at SWIP. Before the SWIP deal the company’s management had been guiding that acquisition led growth was over and that organic progress was favoured. The temptation provided by the SWIP opportunity was too great, but shareholders must be hoping that the dust will now be allowed to settle for at least the 18 months suggested by management. So, whilst capital returns were not mentioned in this release, the assumption must still be that shareholders can expect more cash returns given the strong balance sheet and cash generation. The multiples are no longer compelling but equally are not stretched. Unless you have the glums about equities and emerging markets, then for dividend growth investors, Aberdeen Asst Management still looks like it meets the requirements. (Neil Cumming^,2^nd December 2014)

Friday, 28 November 2014

Marston's - The ties that bind...or not?

Marston’s: Amid the industry uncertainty post the tied pub Parliamentary vote last week, we have Marston’s 52-week results to 4^th October 2014. The move towards food led destination pubs and new build continues. They opened 27 new build pubs in FY 2014, (to pass the 100 mark), with a similar number (25+) likely in each of FY2015 and FY2016. They are also expanding in lodging with 700 rooms now available. Of the 1689 strong chain now, 75% of profits come from their managed or franchise style pubs. They believe that this franchise model will not be caught up in the ‘market rent only’ net.

In brewing their leading portfolio of brands (Pedigree, Brakspear, Banks etc….) continues to perform well and they are expanding in the growing craft beer market. Underlying group revenue was up 1%, but pre-tax profits fell 3.6% to £83m due to disposals of older wet led pubs and a shorter trading period (last year being a 53 week year for them). Underlying eps were 11.7p, slightly down on 12.0p last time. The final dividend was up 4.9% making a 1.7x covered 6.7p for the year, an increase of 5.0%. Looking forward their policy is to be progressive, whilst holding medium term cover around 2x. This is supported by a balance sheet where net debt to EBITDA is on a downward trend at 5.4x, with a 5.0x medium term target in sight. They comment that trading in the current financial year has started well.

At 140p, consensus eps of around 13.0p for September 2015 puts Marston’s on 10.8x, with a dividend circling 7p producing a yield of 5.0%. They seem to spend their time in the shadow of Greene King, but are correspondingly lower rated. Growth may not be stellar, but for a high yield play with dividend growth Marston’s holds its own. (Neil Cumming^,28^th November 2014)

Thursday, 27 November 2014

Thomas Cook Group - Ms Green, your bags have been packed.

Thomas Cook Group: When Harriet Green arrived at Thomas Cook, it was on its knees. Now, after just over two years, she is on her way, saying that her turnaround task is complete. This all seems at odds with her recent pronouncements that the turnaround was more like a six-year job. Indeed, it seems that all at the company (and its advisers), bar the board, had her booked in to present these results. The consolation is that a well-regarded travel specialist, Peter Frankhauser, landed at Thomas Cook last year with a widely-held expectation that he would be CEO one day. That day just seems to have arrived very early.

So what of these annual results to end September 2014? There has been major progress, although some self-imposed KPI targets proved elusive. Through the disposal of unwanted business, revenue shrank from £9.3bn to £8.6bn, although there was an underlying LFL change of -£180m due to Ebola, Egypt and sundry geopolitical scares. But more progress on the major cost cutting exercises (amid a sea of exceptionals) led to underlying EBIT moving up from £263m to £323m and underlying eps from 5p to 11.3p. Net debt came down from £421m to £326m. So whilst 2014 showed good progress, the sting in the tail was that 2015 growth will be “more measured” at a “more moderate pace”. Net debt is forecast to come down significantly to “between £100m and £150m”. As well as cost reduction, the migration to the web inches forward with 38% on-line last year up from 36%, but shy of a targeted 40% plus. There is clearly much further to go on this.

Looking at the year to September 2015 let’s work with a modest progression to earnings of 12.5p. There is a wide margin of error around this, but at 120p would be a PE of only 9.6x. There is no dividend, but with debt tumbling and a healthy EBIT line, the balance sheet stress is melting away. So, a dividend in FY2015 is possible and would widen the pool of potential institutional investors. The suspiciously blood like stain on the boardroom carpet aside, this looks like a higher risk nap choice for income investors with patience. (Neil Cumming^,27^th November 2014)

Wednesday, 26 November 2014

Mitchells & Butler - Minority Report

Mitchells & Butlers: In general, UK pubs have enjoyed decent trading conditions over the last 18 months or so. A company boasting brands including All Bar One, Harvester, Nicholson’s, O’Neill’s and Browns should therefore be in good shape. But Mitchells & Butlers seems sluggish and has baggage. According to the last report and accounts, Joe Lewis, the Bahamas based businessman owns 26.7%, whilst Irish entrepreneurs JP McManus and John Magnier control 22.4%, as well as being linked to Derrick Smith whose Smoothfield Holding owns 3.9%. None of these parties appear willing, or able, to break a stalemate that must be holding back the group’s strategic development. Other investors are in the minority. A new CEO, Alistair Darby, arrived from Marston’s in October 2012, with a good c.v., as part of an operational turn around, but no apparent mandate from the big shareholders to do anything bold.

So far the operational improvement has been patchy. These full year numbers, to 27^th September 2014, show revenues up 4%, but LFL sales growth of only 0.6%. With operating margins down 50bps, operating profit was up just 1.0%. By re-allocating the pension deficit interest charge into underlying profit, pre-tax profits were £172m against an adjusted £171m. Eps of 32.6p were up 1.2% and again there is no dividend. During the period they spent £258m buying 173, mostly freehold, pubs from Orchid Group. Expansion and refurbishment sent capex up to £162m from £128m, leaving net debt up £199m to £1.96bn; being 4.5x EBITDA. The pension scheme triennial valuation as at 31^st March 2013 showed a £572m shortfall, up from £400m three years earlier. The annual contribution has now been set at £45m against £40m previously. The company has agreed that any future dividends will only be paid out of ‘cashflow after bond amortisation’. In this period, net cashflow after bond amortisation was (£257m), but Orchid did cost £258m, so net net was about zero. In the previous year £29m was generated on this measure.

Despite declaring that the current year has started well, we appear to be some way away from the moment when the group can see recurring cash generation large enough to support the resumption of a sustainable dividend. This ‘gold at the end of the rainbow’ syndrome is very disappointing. At 370p, the shares are on a modest 10.0x (weakening) consensus eps of 37p to September 2015, although EV/EBITDA is a far fuller looking valuation of 8.5x (including the pension deficit). There is value locked into this situation, but good investment returns may rest on reading the mood of the big shareholders as much as the analysts’ forecasts. (Neil Cumming^,26^th November 2014)

Tuesday, 25 November 2014

Babcock International - On Her Majesty's Service

Babcock International: They just seem to be able to keep cranking out good numbers in a way that Serco and G4S can only dream about. In last week’s interims to 30^th September 2014, they reported revenues and operating profit up an underlying 10%, with adjusted eps up 11%. On the back of 115% cash conversion the dividend was raised by 10%, with net debt to EBITDA at a post acquisition mini-peak of 2.3x. The £1.8bn Avincis acquisition seems to be bedding in well and helped add £2bn of the £5n increase in the order book, to £18.5bn. This means that 94% of next year’s targeted revenue is booked and 59% for the year after. Beyond this firm order book is a further £13.5bn in the bid pipeline, in what are described as ‘buoyant’ markets. Of this pipeline 81% is described as ‘new bids’ with only 10% being rebids and extensions.

They have earned the trust of Government and are now deeply embedded in areas of defence and nuclear, from which it would be difficult to dislodge them. At a time when other outsourcers have proved unreliable (albeit in different disciplines), the contrast with Babcock’s delivery record is stark. Avincis has been a decent bite to digest involving debt issuance and a £1.08bn rights issue and the balance sheet is not quite at peak fitness, but it is getting back there. Babcock has been showing the others how to do it for many years now and the rating reflects this. For the year to March 2015 consensus eps are about 67.5p, a PE of 17.6x at 1185p. A nearly three times covered dividend of 22.8p would be a yield of 1.9%. So the stock is not cheap, but holders are happy and those not on board will be waiting for their chance. (Neil Cumming^,25^th November 2014)