Provident Financial plc, the leading UK non-standard lender, has issued the following update on trading for the financial year ended 31 December 2013, ahead of its preliminary results for the year which will be announced on 25 February 2014.
In this they reported that they expected to report figures for the full year in line with market expectations which they take to mean £197m pre exceptional pre tax profit. This is thanks to continued strong growth from their Vanquis Bank (credit cards in the main). While the Consumer Credit Division (CCD) continues to see weak demand and they continue to rationalise, modernise and shrink it ("focussing on returns" they say), while investing in the bank side (Satsuma on line weekly loans launched) and a credit card in Poland (around £8m cost incurred for 2013). On the funding while they have debts of around £1bn they suggest they have headroom in their facilities of £235m which they say is sufficient to fund them through to their 2016 peak.
You might want to read the full announcment and check out their website for the investment case and download an interesting recent presentation about how they are moving towards being more of a bank and modernizing and improving the CCD side.
On balance this is a stock I like based on its history of delivering Shareholder value under John Van Kuffeler, CEO in 1991 and Chairman since 1997. I do however note that he is about to be replaced by a lady accountant and former investment banker (a similar CV to Van Kuffeler's). PFG did really well in the 1990's, has struggled a bit in the 2000's and since de-merging its international side (International Personal Finance, IPF), which it grew from scratch by reinvesting cash flow from CCD in the UK. It has performed a bit better recently and seems to be in the process of growing another decent sized business on the back of the CCD cash flow again. While this type of business is not to every ones taste, I think they do provide a useful service to the lower end of the market. They are now also filling a gap left by the banks post their problems and are a possible beneficiary of any regulatory clamp down on pay day lenders.
The P/E is around average at 13 to 14 x but the yield is the main attraction with this one coming in at about 5% for this year and forecast to grow by 10% or more next year. The cover is thinner than I like normally but is in line with their distribution policy so I'm prepared to accept it but obviously means the growth may not materialise if they run into difficulties, but I note they did maintain the dividend into and through the credit crunch in 2008/9.
IG Group the world-leading provider of contracts for difference (CFDs), financial spread betting, and the UK's largest foreign exchange provider, today reported their first half results.
On the face of it they look like a strong set of numbers with revenues up 8%, PBT up 17% and diluted eps up 22%. Against that though it was a disappointment to me to see the dividend was unchanged at 5.75p. The reason for this becomes clearer as you dig into the detail which shows that these results were produced against a set of easy comparatives from last year and H2 has a much tougher set of comparatives.
So for the full year they now only hope for modest growth due to the comparatives and on going long term investments in the business such as attempting to open an office in Switzerland, launching a stock broking offering to new and existing clients and continuing to develop their mobile app functionality. They have also been focussing more on their most active and profitable clients which has some short term effects but makes sense in the long run.
Thus the bottom line seems to be that this year seems to be a bit of a transition and there is a risk that profits for the year could even be down if H2 turns out to be weak, but equally if we get another bout of market volatility in the next few months may be they will be OK? Again it is a stock that has done well and now stands on 16 x this years expected earnings and a 3.78% yield based on their target payout ratio of 60% so not especially cheap and with a risk that they could disappoint at the final stage which might give a better entry opportunity for the long term. Thus probably not worth chasing given the valuation and current trading outlook (and some brokers may downgrade as precaution), but I'll probably give it the benefit of the doubt for now and hold it as a well managed group investing for the future.
There is a webcast of the results meeting available at their corporate website. Their trading website ig.com including their market insights, has now been made available to non clients.
After a ending last week with a cinema tip we start this week with a trip to the pub as Greene King have announced an interim management statement today. This looks fine in my view with headlines being: retail like for like up 5% in the last 6 weeks and 3.8% year to date, average EBITDA per pub in Pub Partners up 5.6% and strong growth in Brewing & Brands; core own-brewed volume up 5.8%.
Finally, in the outlook statement the Company said "Overall, our expectations for profit, cash flow and our balance sheet are unchanged and we remain confident that we will continue to provide growth in earnings and dividends, and improving returns, to our shareholders."
Which is what this one is all about really as they say "the board’s policy of maintaining a minimum dividend cover of two times underlying earnings, while continuing to invest for future growth, and maintains our long-term track record of annual dividend growth."
I bought this one back in May 2009 during their rights issue at the time and achieved an average in price of around 444 pence so at the time it would have been on a prospective rating of around 9 x and a 5% net yield. Having held it patiently since then I have seen the dividend rise from 21 pence to a likely 28.4 pence forecast for this year which would represent a compound growth of 6.26% per annum over 5 years and a 6.4% yield this year on my original purchase price. They have achieved similar rates of growth for a lot longer than that too.
Since then the shares, like the market, have risen and been re-rated to stand on a prospective 13.7 x and 3.39% yield for the year to April 2015 according to Stockopedia. This seems reasonable without being outstandingly cheap, so having doubled my money in 5 years or so and having enjoyed a total return of around 20% per annum including the dividends I am happy to hold for more of the same. However, given the re-rating since I bought them I would not expect such strong returns in the next 5 years, unless it get re-rated even further, which I am not forecasting. Assuming it can at least maintain its current rating then it looks like total returns of around 9 to 10% per annum should be on the cards (circa 3% yield + 6 to 7% growth). Of course things could cut up rough and valuations come back down again, but I am prepared to run that risk with this one.
Finally, you should be aware of the financial risks in this one as they geared up in the 90's and the 2000's as that was the fashion back then with the likes of Enterprise Inns and the financial engineering which was rampant at the time. From their 2013 report and accounts they observe the following:
"Financial credit metrics remain strong. Fixed charge cover has improved to 2.7x from 2.6x and interest cover has also improved to 2.9x from 2.7x. Annualised net debt to EBITDA has reduced to 4.7x and will continue to improve as we maximise the annual EBITDA returns from the underlying business and our investments in new sites. Our securitised vehicle had a FCF debt service cover ratio of 1.5x at the year end, giving 29% headroom."
While on the Pension front they said:
"At the year end, there was an IAS 19 pension deficit of £63.8m, which compares to £67.3m at the previous year end. The movement is primarily driven by the exceptional gain following the closure of the scheme to future accrual.
Total cash contributions in the period were £10.1m for both past and current service."
So you have to be comfortable with the level of debt in this one. Though it is a more leveraged balance sheet than I normally like, since most of it is secured on or backed by property assets and it is a fairly steady business, I am prepared to live with it in this case but as ever you pay your money and take your choice - cheers.
After a starter of European Small Caps. and a main course of The Restaurant Group earlier this week, today I finish the week with a write up on another of my holdings, Cineworld Group. They have today announced an 8 for 24 Rights Issue @ 230p and an intention to acquire Cinema City International. You can read more details at the link above.
My take on it is that it looks like a good deal which at a stroke gives them a new CEO to replace the existing founder who is retiring and gives them a new international dimension in Eastern Europe and Israel. They talk about it being earnings enhancing in the full year 2014 and substantially thereafter and it meeting their cost of capital by 2016. They also mention £2 million of synergies from cost savings in the first year.
This seems sensible to give them international diversification in line with their competitors and since they have nearly 30% of the UK market I guess growth opportunities in this country are now somewhat limited. The market seems to like it as the share are up around 8% at the time of writing. I am happy to stay in my seat for this one and hope it continues to be a long term thriller rather than a horror story. Only nagging doubt longer term is whether film streaming in the home might damage cinema attendance in the long run, but I presumably they said that when television was invented. I guess it remains a cheap (?) night out and a bit of an escape for people in these difficult times.
Finally, if you are looking for a night out and film to go and see (at a Cineworld hopefully) the latest film (released 17/1/14 in the UK) from Martin Scorsese - The Wolf of Wall Street, starring Leonardo De Caprio, looks like it should be amusing, if a little long at 180 minutes. You can see the trailer here - enjoy.
Bought this one back in mid October 2013 after booking a 40% total return on Animalcare Group.This was done via a limit order after it drifted back post a positive trading update at the start of that month. It had come up on my screens and offered a decent yield, with the company stating later in their final results that they were going to grow it by 10% in 2014. It also had cash on the balance sheet of £17 million or so which was around 10% of the market capitalisation at the time which effectively lowers the valuation placed on the underlying business. They said they were looking for acquisition to utilize this cash.
Today they have announced an acquisition of Intercept IT Ltd for £12.95 million which they expect to be earnings enhancing in the first 12 months and beyond - not surprising given you get so little on your cash these days! At first glance it looks a high price, but they mention £5 million of contacted but unrecognised revenue, which if you factor that in makes the likely EV / sales versus the indicated margin look more reasonable. They also talk about "cost synergies" and this acquisition broadening their range so all seems sensible enough.
Again another one that has been re-rated quite nicely so not so cheap now on a headline prospective PE of 18.5x before any upgrades from this acquisition. The yield is still however a satisfactory 3.2% growing by at least 10% although it is only covered 1.7x by earnings, but the cash flow is strong. On balance another I'm happy to hold for now, but may not be worth chasing at the moment.