Dividend Power

Monday, 17 August 2015

Bovis Homes Group - happy days for house building

Bovis Homes Group (BVS.L): These are great times for house builders. There is a structural shortage of housing and the population is growing. Mortgage rates are very low (albeit on the turn). Prices are rising, but affordability is holding good. The Government loves you and wants you to succeed. NIMBYs and the green belt are being sidelined/threatened. The need to include social housing in many new developments has been watered down to a minimal level. There may be build and land cost pressures, but these are nothing against all these positives. You can see all this in the Bovis interims to 30^th June 2015, with record completions (1,525 v 1,487) and an average sale price up 10% to £264,200 (partly due to mix). Analysts are worried that this year is more second half biased than usual, but after the hiatus of the May election that shouldn’t be too surprising. It is already difficult to recall just how fevered the fears of a Miliband/Sturgeon regime were. Anyway, in these numbers, revenue grew 9%, pre-tax profits at £53.8m were also up 9%, eps were up 11% at 32.1p and the dividend was up 14% at 13.7p. The consented land bank added around a net one thousand plots in a year and is now 19,081 (so over five current year’s production), with a further 23,287 strategic plots. All this has been achieved with net debt rising from £45.3m to a still very modest £58.8m. Their aim is to grow to production steadily to reach a range of 5,000 to 6,000 per annum and then hold those levels. The group is spreading out from the south-east, but is still heavily weighted towards that area, which as we all know, is the hot-house of the imbalanced UK economy.

In a very early blog, in August last year, I was positive on Bovis at 840p, but worried about how much further they could travel (with the General Election hurdle still to be negotiated). The shares might be down today, but at 1150p have clearly been a good investment. Consensus forecasts for FY2015 are for eps of 100p, which is a modest PE of 11.5x. The company has forecast the dividend at 40p (so well covered at 2.5x), for a yield of 3.5%, whilst FY2016 should see double-digit growth in eps and dividend. Further out, the board is targeting a 33% payout ratio, with any surplus capital being used to fund “additional dividend payments”. We all know that the UK housing market is cyclical, but we seem to be in a very long and strong cycle at the moment. Rising mortgage rates may be the biggest cloud on the horizon just now, but on these share valuations I find it difficult to conclude anything other than Bovis being a strong hold, despite the 35% plus share price rise over the last year. (Neil Cumming^,17^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

Thursday, 13 August 2015

G4S - accountants still at work

G4S (GFS.L): No one would say that the recovery at G4S is the finished article yet, but there are signs that Ashley Almanza is making solid progress. Mind you, their rag tag army of employees (£9 per hour, no expenses) at this year’s Wimbledon, still needed to go to charm school and get uniforms that fitted. In this week’s interims, to 30^th June 2015, continuing revenue (at constant currency) was up 2.8% at £3,285m, with good growth in their increasingly important emerging markets and North America, alongside modest growth in Europe, offsetting a modest fall in the UK. Not a great result but revenue is still going in the right direction. The profit before interest, tax and amortisation, rose 4.9% to £193m, although £5m of the £9m improvement came from cutting corporate costs. Eps were 6.1p, up from 5.6p on the back of which the interim dividend has been raised by an encouraging 5% to 3.59p, after five years on hold. Net debt was flat at £1,677m (2014: £1,680m), with net debt to EBITDA edging down from 3.1x to a still hefty 3.0x. A caveat to all this, is that these numbers are after stripping out currency effects, discontinued businesses, businesses identified for disposal and restructuring costs. These included £8m on an asset and liability review, £9m on legacy contracts, and £16m on re-structuring. There was also a £9m charge comprising £21m of goodwill impairment offset by £12m of disposal gains. The effect of all this accountancy can be seen in the unadjusted eps of 2.3p, down 54%. There is more work to be done on execution though, with 16 businesses having been sold since 2013, but 30 more are for the chop. Looking back and clearing up the past is one thing, but the group has also won new contracts worth £1.4bn (£680m annualized) alongside a pipeline increment of £2.2bn and a 90% retention rate on existing business. Overall the group comments that momentum has been building through the first half.

Consensus eps for this year are at 15p, rising to 17p next year. At a soggy share price of 261p that is a PE of 17.4x dropping to 15.4x. Meanwhile the 5% interim dividend increase points to an annual of 9.7p for a yield of 3.7%. A similar 5% rise in 2016 would take the yield to 3.9%. Back in March, with the shares at 285p, I felt that there was no rush to invest. The shares are a bit cheaper now and progress has been made, so they are better value, but I don’t see why income investors need rush into the stock until more momentum has been built up and the clean up is nearer completion. (Neil Cumming^,13^th August 2015)

Wednesday, 12 August 2015

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)

Tuesday, 11 August 2015

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)

Monday, 10 August 2015

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)