Dividend Power

Tuesday, 8 September 2015

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)

Thursday, 3 September 2015

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)

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)

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)