...as well as News, Media, Education, Care & Parcels. In this case it is Connect Group (CNCT) which is the former Smiths News business which I have written about in the past. Last time I wrote they had delivered a "broadly in line" up date and I feared this might lead to a few downgrades - which it did, although not to any great extent.
Today they have announced Interim Results for the six months ended 28 February 2015 which they say leaves them on track to meet full year expectations. Comparisons are somewhat clouded by the acquisition of Tuffnells the odd sized parcel distribution business and the associated rights issue. Hence they flag the adjusted figures and 7 associated notes.
The Chief Executive said: "The Group has made an encouraging start to the year, making strategic progress across all divisions and successfully completing the major acquisition of Tuffnells. Tuffnells represents a significant step in our growth strategy and we are delighted with its initial performance. We have also been investing across the rest of the Group to position us for sustainable growth and are pleased with the progress we are making."
On their preferred underlying basis Revenues and Operating profits were up by 1.2% and 3.3% respectively but earnings (eps) were down by 5.5% on the prior year, as was expected, by the phasing of Tuffnells post-acquisition profits and associated rights issue shares. On the dividend they increased this by an adjusted 3.6% reflecting their continued confidence in the Group's strong cash generation and future prospects. Talking of cash generation they continued to generate strong free cash flow in the period, delivering £16.0m up £4.1m or 34% on the prior year.
Despite this the balance sheet became more leveraged as a result of the acquisition. Closing net debt at the end of the period was £157.9m versus £93.0m at August 2014 and £105.0m at February 2014. Debt at the end of the first half year is usually higher than the year end position given the weighting of free cash generation in the second half and higher dividend payment in the first half of the year. They therefore seem confident of paying some of this down in the second half and beyond due to the strong cash flow. On this and coverage etc. they said:
"Net debt: EBITDA at the end of February 2015 was 1.94x versus 1.4x at August 2014 and 1.6x at February 2014. This remains comfortably within our main covenant ratio of 2.75x and we remain committed to continue to pay down this debt towards our historic leverage ratio."
Aside from that the balance sheet looks pretty weak with negative net assets which is a hangover from their demerger from W H Smiths, but given the nature of the business and the cash flow this is probably OK but will put some off.
Summary & Conclusion.
An in line set of results although difficult to interpret because of the deal and rights issue late last year. However, with the resultant fall in earnings and the 3.6% rise in the dividend being shy of the full year forecast growth 4.9% to 9.17p, this leaves them a lot to do in the second half. As a result I think there could be a further small drift downwards in the forecasts which I don't normally like to see.
Having said that though they do still look cheap, if not great quality operationally and financially. Thus the 8x P/E and 6%+ yield, which is reasonably well covered by earnings and cash flow, should provide some support. There does not however seem enough in these figures to get the market excited or spark a re-rating. Indeed looking at the chart (below) they continue to look a bit soggy and range bound but they are now close to being over sold in the short term. So I wouldn't put you off if you are tempted to buy them for the yield down here - just don't expect much else from them in the short term.
I continue to note the gap on the chart just below 130p so I would continue to watch them to see if they get down there, perhaps in a market shake out, as a better entry point for a trade which might also then offer the chance of a capital gain too. If it does get down there though one would have to check the reasons as I have highlighted in the past that buying into these declining businesses can be dangerous. So on that bomb shell I'll leave you but as ever do your own research.