Well a busy day for company announcements today so I'll keep it brief. First up of course is the post close update from Restaurant Group (RTN) which I flagged up yesterday. The figures themselves which show total sales growth of 7.9% and LFL of 1.5% show a slight slow down from their last update at 45 weeks and suggest that Christmas maybe wasn't so strong for them and as a result of this they suggested that they expect their figures to be in the middle of the current range of market expectations.
So probably what could be described as an in line update, however they are also flagging in the statement a slow down in consumer demand as the year went on and talking cautiously on the outlook on the back of things like potential BREXIT vote, the living wage and global uncertainty all being mentioned. As a result they say are more cautious than previously on the outlook for 2016 and are talking about openings being broadly in line with this years 44 new sites, which probably means a few less. They finished up by saying:
"TRG has an excellent portfolio of businesses with strong market positions. The Company's move towards a more balanced portfolio is paying dividends and we have a proven track record established over many years of delivering strong financial returns and excellent cash flows, even through more difficult trading periods. Therefore, notwithstanding some of the uncertainties described above, we are confident that TRG is well positioned to deliver further profitable progress in 2016 and subsequent years.
Thus on balance it looks like a bit of a slowing in their growth is likely this year, but they still seem confident of making progress nevertheless, as they have done in the past. The market seems to have taken this very badly first thing and marked the shares down by around 14% to 550p at the time of writing. I have to say I am surprised by this and it seems like a bit of an over reaction to me in the short term. If we take the current forecasts for 2016 which show double digits eps growth and trim this to say 7% that might suggest something like 35.7p of earnings and a similar rise in the dividend could give something like 18.2p which at 550p would put it on 15.4x with a 3.3% yield which seems reasonable to me. However, I guess it might be best to see where the estimates actually move to to get a better handle on the valuation and see if the market wants to de-rate it some more.
Meanwhile Jupiter Fund Management (JUP), which is held in the Compound Income Scores Portfolio and which came close to be sold at the year end re-screening has announced a trading update and funds under management (FUM). These totalled £35.7bn at the year end having seen decent inflows of £0.5bn in Q4 and £2.1bn over the year. On this they said this reflected their strategy to diversify by product, client type and geography, all supported by strong investment performance. Across the whole of 2015, these combined to deliver organic mutual fund flow growth of eight per cent. and to increase total AUM by 12 per cent, despite broadly flat markets. So looks like they should be able to report the strong expected results, but in current markets fund management companies may not be top of everyone's buy lists, although this one looks reasonable value too with PE of around 15x and a yield of 5.5%+. May be one for brave contrarians who think the sell off in the market is over done?
That's it for today off to plough through all the other statements and watch the carnage in the markets at the moment, be careful out there as it seems even in line statements and note of caution can be treated savagely.
If you enjoyed last years Mr. Markets Alternative Christmas Present and you wanted to hang up your stocking on that one. Then here's another quick suggestion for you.
The stock concerned is an old favourite of mine Restaurant Group (RTN) which I exited early last year as I felt the rating had got extended. Since then they have generally traded sideways before coming off by around 100p or nearly 14% to their current 635p or so (see chart at the end). They have been quite volatile recently, probably with the market, despite their in line trading update in November.
So why look at it now? Well like Alternative Networks, we have a news event which may act as a catalyst, in this case their post close trading update. While this may well just confirm their previous in line guidance I think there's a chance they could surprise and beat downgraded numbers given the mild weather we have had and the big cinema releases over the Christmas period. This may have encouraged more shoppers and cinema goers (where a lot of their sites are based) to dine out more, especially with the falling petrol prices and wage rises leading to rising consumer incomes.
Obviously no guarantees on that of course, but the share price doesn't seem to be factoring in anything too positive down here where it is looking over sold. While on the fundamentals for the longer term it looks better value if not an outright bargain at around 17x with a 3% yield on the coming years numbers. I also note that the Compound Income Score had risen back up to 93 as of last Friday - hmm tasty, bon appetite?
I chose the title for today's blog as it relates to 32Red (TTR) the on line gaming company which is held in the Compound Income Scores portfolio and has been a stunning success since it was put into the portfolio on 1st October 2015 at 74p. Now regular readers may recall that I set this portfolio up to test the efficacy of the scores and also to test a more mechanical or automatic process against my own decisions and to overcome typical behavioural biases. Fighting these biases at the year end I resisted the temptation to implement some sales on valuation grounds to facilitate the running of winners and also given the fact that there were potentially quite a large number of trades on the scores themselves.
32 Red was therefore retained in the portfolio, despite starting to look somewhat expensive on some metrics, after it had risen to 117p at the year end. So yesterday I was sorely tempted to trade the shares for the portfolio as it hit 148p bid and therefore achieved a doubling in the share price since purchase in just over three months. This meant that it had grown to be over 9% of the portfolio which seems like a rather outsized position for such a small and relatively expensive stock. I say expensive as at that level it trades on over 33x historic earnings and dividend yield of just 1.6%. This does however drop on the back of strong forecast growth for the year to 31st December 2015 to a still full looking 22.8x and a yield of 1.8% and it also has an earnings yield of less than 5% so certainly expensive and in sell territory as far as my own book is concerned. However their broker Numis, who make the only forecasts out there, see their earnings progressing from this years 6.5p to 10.5p in 2016 and 13.2p in 2017 with the dividend seen rising from 2.6p to 2.9p followed by 3.2p. I note Numis had a price target of 160p and that the all time high was just above 170p way back in 2006 so I guess these levels could provide some technical resistance if it should carry on rising from here. If we accept the current year forecast for now and assume that they meet them, this would bring the rating (at 148p) down to a more reasonable 14x and bring the yield up to a just about acceptable 2% in my book. I also note that the directors hold fairly large stakes in this one and consequently the free float is only around 50%, which might help to explain the volatile share price. Obviously given the high historic rating, the strong forecast growth and the illiquid nature of the shares any disappointment or surprise on this front could lead to a sharp move in the price.
Thus having resisted the natural human urge to book profits early on this winner at the turn of the year, I now find myself sorely tempted to do the same again just 12 days later with the shares up another 31p or 26.5% and with the share price looking over bought again and the chart looking like it has gone exponential (see chart at the end). I therefore thought about halving this one and recycling the profits into rebalancing the portfolio by adding to the losers and now lower weighted stocks, Renishaw (RSW) 1777p, Schroders (SDR) 2648p and Utilitywise (UTW) 177p or a new holding of high scoring Qinetiq (QQ.) at 255p. However as this is supposed to be a largely mechanical quarterly process, interfering like this would go completely against that philosophy and also go against the old adage of running your winners and cutting your losers, although if I had added another name that might have helped with diversification.
So for now 32Red remains in the portfolio, but it will again be interesting to see how this pans out. However, it does highlight the fact that so far I have not articulated any risk / portfolio controls in terms of maximum position size etc. So with that in mind I shall hereby declare an upside limit of 10% for an individual stock which ordinarily would allow for the doubling of a share if the rest of the portfolio remained unchanged. Thus if this one or any other stock should cross that threshold then I reserve the right to do an intra quarter re-balancing.
We have unsurprisingly had strong updates from housing and property related stocks recently, with Taylor Wimpey (TW) reporting today being the latest house builder to report strong trading.
Meanwhile we have also seen a trading update from Savills (SVS) the global estate agents, facilities management and property investment manager which has been in the Compound Income Scores portfolio since inception in April last year. In the update they said that the Group experienced a strong finish to the year with the completion of some significant commercial transactions in several of their businesses around the world. In addition they also flagged a stronger than expected year for their investment management operation on the back of some disposals occurring sooner than expected.
As a result they said that they expect underlying results for the year to 31 December 2015 will be ahead of their previous expectations, so this may lead to some upgrades to this years numbers in the short term. However they sounded a note of caution about the current year on the back of heightened uncertainty over global economic prospects and rising interest rates. Consequently they said that they expect a tempering of the strong transaction volumes seen recently in certain markets, but nevertheless they felt that market fundamentals remain sound. Accordingly they retained their original expectations for 2016 suggesting no changes to forecasts for next year despite the strong performance this year.
The shares are up modestly by around 1.5% today at pixel time and by just over 5% from the price last April when they were purchased for the portfolio. They now trade on 14x with a 3% yield for the year just ended which falls to around 13x with a 3.3% yield on the back of forecast dividend growth of 11%. This seems fair enough and they currently score 81 on the Compound Income Scores which therefore leaves them close to the automatic sell zone between 75 and 80, but we'll have to see where they sit when it comes to the next quarterly review due at the end of March. On the chart the shares had come back toward their lows of last Spring recently, while on the upside, moving averages and price peaks between 900p and just shy of 1000p look like they may provide some resistance. So like the update not too much to get excited or worried about either way for now, hold.
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.