...from a stock which features in the Mechanical Compound Income Scores (MCIS) portfolio. The stock concerned is Finsbury Foods (FIF) the £110m Aim listed UK manufacturer of cake and bread bakery goods supplying a broad range of blue chip customers within both the Grocery retail and 'out of home eating' food service sectors including major multiples and leading food service providers.
In their full year pre close trading update today they said that the board is pleased to report that, following the positive half year trading performance, strong trading has continued in the second half and the Group will outperform its current EBITDA and profit expectations.
The suggested turnover of £256.2m seems to be in line with forecasts and included 6% organic growth in the cake division plus a boost from some acquisitions they made during the year. So presumably they must have boosted their margins to beat the profit expectations and they alluded to this as they suggested cost savings from the acquisition had come through quicker than expected and this was further complemented by capital expenditure, depreciation, debt and associated financing costs all being lower than previously forecast.
Earnings were forecast at 6.61p for this year, so if we assume a 5% or so beat then they may come in with say 7p for this year while the dividend is forecast to rise strongly to 2.5p for a yield of just under 3%. Looking ahead to next year and assuming the beat today leads to some small upgrades then we could be looking at say 9p of earnings and a 3p dividend for the year to June 2016. At this mornings price of 92p this would put it on a reasonable looking rating of around 10x with a 3.33% yield.
Looking at the chart (see end of this post) the shares seem to regularly trade sideways for a few months before having big moves presumably leading up to and around news flow such as today's update. They have then tended to move in 10p or so steps which suggests to me after today that they could may be move up from the recent 80 to 90p to say 100p. This would leave put it on about 11x with a 3% yield, which seems achievable as its highest rating in recent years has been 12 to 13x and the yield has tended to be lower. So with the forthcoming final dividend it would seem that there could be about 10% return from this one in the short term if my 100p target is achieved.
Summary & Conclusion
As mentioned at the beginning of this post this is one that features in the MCIS Portfolio based on its score. I have to admit it is one of those that I have dismissed myself as it is a lowish quality manufacturer (low margins and ROCE) selling to strong customers (food retailers). However, their strategy of diversifying the business via acquisitions seems to be paying off and seems to be sensible in terms or reducing dependence on food retailers where they are nevertheless a No.2 supplier with a 19% market share. The balance sheet seems OK based on numbers presented by Stockopedia with interest cover of 169x and a Piotroski score of 6, but I note the Z Score is only just over 2 so it will be worth checking the debt levels when the results are announced given the acquisitions this year and the capital expenditure that they are flagging for the coming year.
So it will be interesting to see how this one develops given the MCIS portfolio's position and my personal aversion to it, but then that was why I started the portfolio to see if a more mechanical approach would be better in over coming human biases as has been suggested by many research documents where models were found to mostly outperform experts - even when they had access to the models! See links above for further reading if you don't believe me. Must go and have a look at those Scores again tout suite or enjoy some toot sweets if you prefer.