....while HSBC is approaching it's 2009 lows. Looks like it will be a busier week for news flow and it will be interesting to see if last weeks rally fails at the 6000 to 6100 resistance level. Today we have had disappointing and flat looking results from HSBC which they described as broadly satisfactory, but which did included a small 2% increase in the dividend from 50c to 51c for the year.
In approving the dividend increase, the Board noted that prospective dividend growth remained dependent upon the long-term overall profitability of the Group and delivering further release of less efficiently deployed capital. Actions to address these points were core elements of the Investor Update that they provided last June and which they expanded on in the statement.
No doubt we will gets lots of column centimetres on this one but it does look good value with a PE of 6.5x with an 8% yield and a price to book value of around 0.6 to 0.7x which seems fair given the 7.2% return on shareholders equity that they reported in these figures. Thus with the shares down by 4% or so to around 430p on the back of these drab looking numbers this morning they are closing in on their 2009 lows around 400p and as such might be interesting for a brave contrarian value investors down here, but the Compound Income Score is only 18 and Stockopedia only ranks it at 45 which both suggest caution and that there might be better opportunities elsewhere. Talking of which we have also had
final results from XP Power (XPP) the £280m market cap power supply solutions business which I have written up in the past. These came in ahead of recently downgraded forecasts as it seems they had a strong Q4. Therefore earnings came in at 104.3p v 98.8p and 106p currently forecast for this year. On the dividend this came in at 66p v 64.9p forecast and 68.9p for the coming year.
In the statement they said: "While early 2016 has seen economic headwinds strengthen in some of our markets, we consider that the Group remains well positioned, with good momentum established as our design pipeline continues to grow and a healthy order book. We are encouraged by the progress made by the Group during 2015 and look forward to another successful year in 2016.”
So this suggests that the current forecasts could be upgraded but should at least be maintained. So taking the current forecast for this year and this mornings 3% higher price of 1524p this leaves them on a fairish looking PE of 14.4x with a prospective yield of 4.5% which seems fine to me and it scores 90 on the Compound Income Scores and coincidentally the Stockopedia StockRank too.
What a first week to the New Year in stock markets with Chinese shares being suspended limit down a couple of time this week which has spooked markets around the world. Today after they removed the trading halts the Chinese market actually managed to close up - go figure. So it seems like we will have a more positive end to the week, but I did hear an interview with Neil Woodford on the BBC Today programme talking bearishly on the outlook for China, so we may not be out of the woods just yet. To cap it off there is quite a lot of news today so lets dive right in.
First up in relation to the Compound Income Scores (CIS) portfolio re-screening I did at the start of the year. Worth noting that Next (NXT) have now started to buy back more shares as their share price dipped below their indicated buy back price on the back of their trading update. So this should help to support the price going forward in the short term but if the price remains below their threshold and they continue to buy back stock with their surplus cash then there may not then be any special dividend this year. Time will tell on that, but worth bearing in mind if you are attracted by the high headline yield which includes specials. Meanwhile in this weeks market volatility I also note that the two purchases of Easyjet (EZJ) and Zytronic (ZYT) that I made for the portfolio are now available at knocked down prices. So if you have done your research and like the look of those then you can pick them up at better prices now than I did when I added them to the CIS Portfolio.
Talking of the CIS Portfolio we have also had an interesting announcement today from Photo-Me (PHTM) which was included in the original portfolio and therefore still held in the Annually rebalanced version which I am running to see if screening quarterly has added value. It exited the quarterly screened portfolio quite early on as its score deteriorated on the back of some earnings downgrades and still only scores 64. In today's update they have however flagged positive trading in their Japanese operations ahead of the introduction of a new ID card in January, with turnover up by 90% in November and December. They say that if this is continued in the rest of their financial year then all things being equal they would expect to to report results materially ahead of current market expectations. Now I understand that companies usually have to put these kind of statements out if they come to realise that their profits are going to be at least 10% or so away from consensus in either direction. So we should probably expect at least 10% upgrades and possibly more if the trend is continued for the rest of their financial year. The shares are up nearly 9% so they have probably factored most of it in but I guess it could be better than that, although it is hard to get a handle on it as I can't find what proportion of the Asia and ROW division is in Japan, but at the full year they had added 1,000 machines there and said that Japan was the largest territory by far by reference to size of the machines estate and revenue. I did some very rough back of the envelope calculations and if it was say two thirds of that division then this could lead to an extra £11m of operating profit from Japan which could lead to upgrades approaching 30%, but I must stress that is very much a guestimate without knowing the actual proportion they have in Japan and if the recent trend will continue or not.
Meanwhile in a strange coincidence the stock which replaced Photo-Me in the portfolio, Paypoint (PAY) has announced the sale of part of its planned disposal with the sale of its Online Payment businesses comprising PayPoint.net and Metacharge to Capita, for a consideration of £14 million satisfied in cash at completion today. This leaves the sale of the Mobile Payments business to be competed in due course and we won't therefore know if the proceeds come up to their downwardly revised expectations until then. This is another one which is now on offer at a cheaper price than I paid for it in the portfolio, although it still has its attractions as it still scores 92. So maybe another opportunity there perhaps if you like the look of that one?
Finally we have had an update from another high scoring stock which I have mentioned in the past and which I own as part of a broadly diversified income portfolio, namely XPP Power (XPP), which announced its Q4 trading was in line with expectations. This has driven revenue growth of 8% in FY15 (4% in constant currency). This was helped by a recovery in orders from the US, and overall Q4 order intake was strong, providing positive momentum going into FY16. The recently acquired EMCO business is also said to be trading well and the company has already identified cross-selling opportunities. They also announced a further dividend and suggested that the full year dividend would be up by at least 7% to 65p for the full year which is in line with forecasts. This one also scores well with a CIS of 86 and reasonable looking rating of around 14x with a 4.5% yield.
Phew there you go, oh yes and I've updated the Scores today too as usual. So time now for a well earned coffee break - cheers see you back here next week, have a great weekend and be careful out there whatever you are up to in the market or elsewhere.
Probably because most are trying to get their announcements out before they head to the beach in August. Note to self must take most of August off because I can!
However before I do I note in passing an unsurprising profits warning from Merlin Entertainment (MERL) blamed on the after effects of the unfortunate accident at Alton Towers earlier this year. Not one I hold having stagged it when it floated and it looks richly valued to me with downgrades to come, not a great attraction for me.
Talking of richly valued I note that Reckitt Benkiser (RB) also announced H1 results in which they upgraded their guidance for the year which is welcome given they are on nearly 25x. They also cut their dividend as expected post the demerger of Indivor (INDV) & even factoring in the dividend from them shareholders if they still hold both will have seen a reduction in their overall dividend.
Of more interest to me as a holder was the half year report from XPP - which looked a little lack lustre at first glance. However they explain in the commentary that the fall in margins was due to start up costs for power converter manufacturing at their Vietnamese facility. They say more of their revenues (67.2%) is now coming from their own designs & within that ultra-high efficiency “Green XP Power” products now accounting for 21% up from 17%. They also acquired a 51% share in a Korean power converter company which brings them sales and engineering capability in an important manufacturing centre for industrial electronics.
The outlook commentary from the chairman was positive as it alluded to strong order book and backlog together with the developments above and a strong balance sheet giving him confidence that they should be able to continue to grow revenues in the second half of 2015 as designs won in 2014 and prior years enter their production phase. Thus with the earnings estimates having drifted back so far this year it seems they should be able to hit the modest 5% or so growth that is forecast. Perhaps as a sign of their confidence I note that they have increased the interim dividend by a useful 8% which is ahead of the current forecast of a 6% increase for the full year.
Therefore based on current forecasts the shares at around 1600p look like a fair value hold to me on around 15x with a 4% yield as they are nearer the top of their trading range over the last couple of years which has been between 1775p & 1300p. So I wouldn't suggest rushing out to buy them just now, but might be worth a look a bit lower down around 1500p and the 200 day moving average, if they should drift off again as they do sometimes. However I note it has a Compound Income Score of 94 and a Stockopedia StockRank of 94 too so it scores well according to The robots.
...which is XP Power, a stock I have written up a few times in the past year. They remain in the top decile of the Compound Income Scores with a score of 96. The results were in line to slightly ahead of expectations with earnings and dividends coming in at 101p (+6%) and 61p (+11%) versus forecasts of 100p and 60p. This was on the back of order intake which was up by 6%, in constant currencies, to a new record and they now design 66% of their products themselves. Their operating margins also increased from 23% to 24.2%, and they generated cash such that they had £1.3m net cash versus £3.5m of debt at the previous year end.
On the outlook the chairman said: "While the global economic outlook again looks mixed in the year ahead, we believe we can grow our revenues as the new designs won in 2014 and prior years enter production. We also plan to invest in additional sales and engineering resources in North America during 2015 to help drive further growth. We enter 2015 with a strong balance sheet having closed 2014 in a debt free position. This places us in an excellent position to make bolt on acquisitions to further broaden our product offering and engineering capabilities."
Summary & Conclusion:
Another good set of numbers and steady delivery from this one which has under performed in share price terms over the last 12 months as it has de-rated from a fullish rating back then and as smaller companies in general have struggled.
This has left it looking reasonable value on around 14x P/E but the dividend yield of 3.8% based on this years dividend just announced and a decent earnings yield of 8.5% gives it a value score of 84 in the Compound Income Scores, which remember mostly excludes zero yields and is based on those two metrics.
As a result I'm happy to run with this one on value and yield grounds as they seem to be making good progress having invested in the business. They also seem confident about the future and their strong balance sheet gives them scope to invest or acquire for further growth, although of course nothing is guaranteed. Brokers seem to be forecasting some growth for the coming year of around 5%, so hopefully we'll see a continuation of their growth trend, albeit probably at a slower rate than in the last 5 years when they have achieved 20%+ growth in earnings and dividends.
....for you today as we have had trading updates from XP Power (XPP) who provide the power and The Restaurant Group who can do a breakfast for you. So firing up the grill for RTN first we see:
Which is all very positive but the nasty surprise is when you get the bill as the shares are certainly not cheap. If we take current forecasts for next year of around 34 pence earnings and a 17 pence dividend which at this mornings price of around 680 pence leaves it on 20x with 2.5% yield. This is close to the rating it reached earlier last year when it went above 700 pence and hit my 2 & 20 sell trigger. Having suggested getting back into them in June 2014 at around 580 pence, they have served up a satisfying near 20% total return since then.
So on balance while I like the group and the quality of their operations I am starting to struggle again with the valuation. The previous high is close too (see chart below) which may either act as resistance or be bullish depending if they can get up to an through it. However, with the gap on the chart from the November update now having closed, the rich valuation and with the shares close to over bought and only offering an in line update today I think they may struggle from here. So I'm going to look to ask for the bill. Now for the switch to the power part of this note, see below the chart for comments on XP Power if that sparks any interest for you.
In case you are not familiar with this £275 million company here is how it describes itself:
XP designs and manufactures power controllers, the essential hardware component in every piece of electrical equipment that converts the power from the electricity grid into the right form for the equipment to function. XP typically designs in power control solutions into the end products of major blue chip OEMs, with a focus on the industrial (circa 45% of sales), healthcare (circa 30% sales) and technology (circa 25% of sales) sectors.
Once designed into a program, XP has a revenue annuity over the life cycle of the customer's product which is typically 5 to 7 years depending on the industry sector. XP has invested in research and development and its own manufacturing facility in China, to develop a range of tailored products based on its own intellectual property that provide its customers with significantly improved functionality and efficiency.
Headquartered in Singapore and listed on the Main Market of the London Stock Exchange since 2000, XP serves a global blue chip customer base from 29 locations in Europe, North America and Asia.
Their update today confirmed that revenues were up by 5% or flat after currency effects which is in line with forecasts, although these currency moves tend to boost their gross margins. They said that their North American business has shown strong momentum whereas trading conditions in Europe (unsurprisingly) remain subdued. Despite the mixed global economic conditions that prevailed in the year they achieved record order intake in 2014 and enter 2015 with a strong order backlog.
They also said that good factory loading at their Chinese facility should help to boost gross margins despite start up costs on their Vietnamese facility. This all helped them to generate cash and move into a small cash position from a small net debt position. On the back of this they confirmed that their 4th quarterly dividend would be not less than 21 pence to give 60 pence for the full year, up by just over 9% from 55 pence last year and this is also in line with forecasts.
Summary & Conclusion
Another steady if unexciting update from XP which at least suggests they will hit current forecasts of around 100 pence and 60 pence for earnings and dividends respectively. These are currently both forecast to grow by around 7% in the coming year which, with the shares at 1445 pence, would put them on a reasonable looking 13.5x with a 4.4% yield.
The quality seems good on this one (ROCE: 32.9% & 24.4% operating margin Source: Stockopedia) and they seem to deliver in a fairly steady fashion, although nothing is guaranteed. With the shares, in common with other smaller companies, having drifted back since the spring of last year when they got quite fully rated they have been languishing either side of 1400 pence for the last few months and the momentum is therefore not that great, if you look at that.
They are good quality and offer reasonable if not outstanding value down here so I'm happy to hold and wouldn't put you off buying if you are prepared to be patient as it seems to be a stock that moves in fits and starts sometime moving up dramatically and then drifting off as it has done more recently, maybe reflecting the limited volumes that get traded and small caps being in favour and then falling out of favour perhaps? (See chart). Still you pay your money and take your choice as I always say.
Finally Restaurant Group's American diners got me thinking...puts me in mind of an old comedy series from my youth - see the video and hear the tune at the end of this post as it's Friday already - Hey - Happy Days!