Further to my trading suggestion last week. Interserve have announced final results today. Turnover looked light at £2192.6 million +12% v £2339 million (F) but they do have good revenue visibility with a record future workload of £6.4 billion and 75% of this year consensus revenue already secured. There was £2.5 billion of new business won in the year, including work with the BBC, University of Sussex, HMRC, The Royal Navy, Ministry of Defence, DWP, Magnox, Jaguar Land Rover, the Lusail Tower in Qatar and the Emirates Engine Maintenance Centre in Dubai.
Earnings came in at 47.7 pence +5.3% v 46.1 pence (F), dividend 21.5 pence +4.9% v 21.3 pence (F) with a 14.7p final (2.5% yield on final at 600 pence), so headline numbers look fine at first glance. They have moved to a small debt position of £38.6 million v £25.8 million cash last year. In their statement Chief Executive Adrian Ringrose said:
"In our UK Support Services business we delivered our medium term objective of finishing the year with margins of five per cent. Our Construction division remained resilient and Equipment Services delivered strong results, while continuing to expand into new markets."
The other surprise with these figures and the main talking point is the proposed acquisition of Initial Facilities for a cash consideration of £250 million funded by debt and an equity placing of 9.99 per cent of issued share capital. Initial Facilities comprises the facilities services businesses of the Rentokil Initial plc group with operations in the UK, Ireland and Spain, with the UK and Ireland representing 92.2 per cent of revenue in the year ended 31 December 2013. It provides a comprehensive range of facilities services from specialist single services, including cleaning, catering, security, mechanical and electrical building maintenance, energy management and statutory compliance, to fully integrated TFM. Initial Facilities has a strong record in serving a broad customer base within the private sector, incorporating services to many professional service businesses, national retailers, transport operators and a variety of industrial businesses, including the London Underground which currently represents approximately £50 million of revenue per annum. Initial Facilities has over 22,000 employees in the UK and Ireland and approximately 3,000 in Spain. For the year ended 31 December 2013, Initial Facilities reported an operating profit of £8.8 million, a profit before taxation of £8.4 million and gross assets of £229.6 million. So the price looks quite high in relation to the operating profits with an EBIT/EV Yield of 3.5%, but not far off the gross assets being acquired. However, they say it will be earnings enhancing and there should be synergies which they quantify at £5 million for the enlarged group.
Extracts from what they had to say about the acquisition are:
"The combination will position Interserve as one of the largest providers (top three by turnover) of facilities management services in the UK and drive future growth, the acquisition is expected to be significantly earnings enhancing in the first full year. We have confidence in the continued growth potential of the business, which is reflected by our proposed acquisition of Initial Facilities. The acquisition of such a complementary business allows us to deliver further against our growth strategy.The breadth and fit of the services we will now be able to offer, added to the advantages of increased scale and potential synergies, will create a compelling proposition, leaving us well placed for future growth. We look forward to bringing the enhanced capabilities of the enlarged Group to a wider addressable market of both new and existing customers, whilst providing more opportunity for our expanded employee base."
The placing looks like it will raise around £70 to £75 million depending what level it is done at. This will part fund the £250 million cost of the Initial acquisition with the balance being funded through new and existing debt facilities. The Placing is not conditional upon completion of the Acquisition. In the event that the Acquisition does not complete, Interserve will retain the net proceeds of the Placing for potential investment opportunities and general corporate purposes. Slightly annoying that this will give the shorts an easy opportunity to close their positions at an advantageous price, make me wonder if the price action was driven by a leak of this deal?
Any way this looks like a good deal as it furthers their strategy of moving away from a reliance on low margin volatile construction towards more stable and predictable service and facilities management type work. This is explained in the following extract from the announcement today:
· Strengthened market position: The enhanced support services activities that will result from the Acquisition will position Interserve as one of the largest providers (top three by revenue) of support services activities in the UK. This will enhance Interserve's ability to offer its customers a range of services from Total Facilities Management ("TFM") on a national basis to more specialist single services either on a local or national basis. Nonetheless, the Company as enlarged by the acquisition of Initial Facilities (the "Enlarged Group") will have a market share of below five per cent, hence providing significant opportunity for further revenue growth within the £70 billion UK facilities management market, of which £42 billion was outsourced in the UK in 2012 (Source: Credo, 2013).
· Greater breadth of services and capabilities: Initial Facilities possesses additional capability in its fire and water related maintenance services as well as a more defined energy management proposition which would be available to the whole customer base of the Enlarged Group. Enhancing the portfolio of services will enable the Enlarged Group to self-deliver certain services that are currently subcontracted and also broaden the customer proposition.
· Greater breadth of customers: Initial Facilities, with its greater proportion of contracts in the private sector, complements the current prominent position that Interserve has within the public sector. The Board believes that approximately 85 per cent. of Initial Facilities is generated from the private sector, with the public sector representing the 15 per cent. The outsourced market for facilities services in the private sector is currently estimated to be nearly twice that of the public sector (£25.2bn vs £13.7bn, source: Credo, 2013) and Interserve's experience and credentials within this sector create a significant opportunity for the Enlarged Group.
The Enlarged Group's Support Services Activities would have a pro forma split of turnover of 48 per cent public sector and 52 per cent private sector. This balanced portfolio, coupled with the smaller average size of contracts within the private sector will help ensure that the Enlarged Group will not be overly exposed to any one sector or customer contract.
· Synergy opportunities: The additional scale that comes with acquiring Initial Facilities will provide the Enlarged Group with further opportunity to leverage operational efficiencies as well as providing cost saving opportunities within areas such as corporate support and operational management functions. The board of Interserve also believes that the Enlarged Group will have the ability to access revenue opportunities which are not otherwise currently available to either Interserve or Initial Facilities.
· Additional management capability: Both Interserve and Initial Facilities have an excellent reputation in the marketplace. A broader pool of management talent will be a significant asset to the Enlarged Group as it continues to develop over time.
Conclusion & Summary
Overall a good set of numbers slightly ahead of forecasts on a cursory inspection. The acquisition, while unexpected seems to be a good one which they say will lead to earnings enhancement - will have to wait and see where the earning move to but should be some upgrades to come then. The shares have responded well this morning and hit 600 pence first thing - so happy to keep on running with this one given the relatively low rating and upgrades to come and potential for a re-rating.
...but were too afraid to ask. Behavioural Finance (BF) is also known as behavioural economics. There are a couple of sites I have found dedicated to it, one is mentioned in the next paragraph and this one has a thorough book list relating to the subject. Of those featured on the list I have read books by Ariely, Belsky, Galbraith, Haugen, Kahneman, Malkiel, Montier, Shiller, Taleb & Thaler. I have therefore updated my reading list accordingly, certainly some interesting stuff on there worth checking out. There was also a good Horizon programme this weak featuring Daniel Kahneman the Nobel prize winning author of many good books on Behavioural Finance including the highly recommended Thinking Fast & Slow. You can watch the Horizon programme on the BBC I-Player here until the 5th March 2014.
To start there is an introduction to BF here but of more relevance to investors a short document about the Psychology of Successful Investing. It is a bit of a block of text so if you don't want to read it all then skip to the last page for the lessons to be drawn from it. Otherwise if you do read it you can note down the behavioural finance terms it refers to and look them up on the website it came from dedicated to BF. This also helped me to discover another Google service I didn't know existed called Google Scholar which you can use to search for research and other document on subjects you are interested in. Talking of which another research document - Which Investment Behaviours Really Matter for Individual Investors? by Joachim Weber et al. is even longer and more technical so extracts from this are as follows (my emphasis):
"The mean short-term investment skill in our sample is negative, which is in line with other
research on individual investors’ abilities (e.g., Meyer et al., 2012). It may therefore
be that better-diversified investors simply diversify away their lack of skill. As hard
as it is to always be right, it should also be hard to always be wrong. Less-diversified
investors then suffer more from the mistakes they make and realize lower returns than
their better-diversified counterparts without needing to be substantially less skilled."
"We investigate the multivariate relation between ten different measures of investment
behaviour and portfolio performance. Only for two of the ten measures scrutinized,
namely under-diversification and lottery-stock-preference, we find statistically significant
and economically large negative effects on performance. Reducing these behaviours by one
standard deviation relative to the sample mean would allow investors to improve their
annual returns by 3% for lottery-stock preference and 1% for under-diversification. Eliminating
these behaviours entirely would yield improvements of 4% for under-diversification
and 3% for lottery-stock preference."
See the full research document for full details. Finally see the latest CS Yearbook for 2014 which is just out and page 31 in particular for a piece on a behavioural take on Investor returns. It also has a topical piece on how Emerging markets have compared with developed markets in the long term. They also revisit their previous finding that historic high growth economies have given poor investment returns going forward.
I wrote this one up back in January 2014 at the time of their post close trading update. So there should not have been too many surprises on the menu today. However having said that, for starters I notice that the results have still managed to come in ahead of consensus despite them flagging better than expected results a month ago. I guess this is a classic case of the behavioural bias of under reaction and why earnings revisions often trend in one direction. This is because analysts are often slow to adjust to new information and often too cautious in making changes to their estimates and therefore tend to move their numbers in a series of small steps.
Now for the main course the actual results saw revenues in line at £580m (+9% with +3.5% LFL), EPS 28p (+16%) v 27p forecast, and full year dividend 14p (+19%) v 13.3p forecast. Within this the operating margin increased by 0.4% to 12.9% which equals the highest levels they achieved in 2008. They opened 35 new sites during the year, they sold 43 million meals, created over 1,000 jobs and they are targeting 36 to 43 new sites in the coming year. For a sweet finish they say that current trading in the eight weeks to 23rd Feruary 2014 saw revenues up by 10% and LFL still running at +3.5%. The Chief Executive sadly is stepping down this year although he will be retained as a consultant. He sounded reasonably positive on the outlook and made the following valid points:
"With the UK economy showing improvement, employment levels rising and inflation falling there are good prospects for an improvement in household finances. This bodes well for our sector and all of our team will be working determinedly to deliver another year of profitable progress. The Restaurant Group is in great shape and I am confident that it will continue to prosper."
Now however as we leave the restaurant we get a blast of cold air in the face when we look at the valuation on this one. Now it is a good company which is well managed and has delivered excellent results in recent years. While it was on offer at a reasonable price under 300p in the first half of 2012 when I bought it, I cannot say the same now it is trading at around 650p, close to its all time highs. Now given they have beaten the numbers today I'll have to have a stab at projecting this years numbers to get a handle on the valuation. Given they are still running at similar sales and LFL rates so far and plan a similar or slightly greater number of new openings I'll simply assume a similar growth rate for this year to last year. Thus If I simplistically add 16% to the eps and the same to dividends assuming a maintained 2x cover I get 32.5 pence of earnings and a 16.25 pence dividend. At 650 pence this leaves them on 20x PE and a yield of 2.5% which is a pretty full rating. Indeed I'd have to say both from an investment and a dining perspective that you would probably find better value in a Greene King (GNK), Marstons (MARS) or Wetherspoons (JDW) pub. However this one is growing more quickly and has much less debt and arguably nicer restaurants, so as ever you pay your money and take your choice.
In conclusion, I couldn't tell you to chase them up here, but as a shareholder I would encourage you to try one of their restaurants! Personally, I'm going to have to digest these results and consider the outlook, rating and growth to decide if I'll stay put for more helpings or ask the waiter for the bill. Certainly I wouldn't normally consider buying a stock on 20x PE and the 2.5% yield is toward the bottom end of the range I normally consider. So that's a subject (selling disciplines) I should probably come back to another day. So do keep coming here for an investment digest from me and don't forget you can sign up for free e-mail updates of my posts in the box to the right if you want. As as teaser, as I mentioned behavioural biases at the beginning of this post, I have a post all about behavioural economics planned for tomorrow.
I introduced this one in a post on the 15th January 2014 when they were trading around the 1700p mark. They have reported their final results today which are slightly ahead of forecasts at the Turnover £1078.1+10% v £1074(F), adjusted eps 112p +11.6% v 111.2p(F) and dividend level 85p +10% v 84.4p(F).
The Vanquis Bank was the strongest feature with profits there rising by 59.5% as credit standards have remained tight and the business continues to generate strong customer growth (+22.2%) and margins through developing the under-served non-standard credit card market. Good progress is also being made in their repositioning of the home credit business as a leaner, better-quality, more modern, high-returns business whilst the Satsuma online instalment lending product has apparently made an encouraging start following its launch in November 2013.
As expected they invested £7.6m into starting up a credit card business in Poland and expect a similar run rate of losses in the coming half year. This continues their history of building business (such as Vanquis Bank) on the back of the cash flows from the Consumer Credit Division (CCD). Talking of which the profits on that side of the business were down by £20.4m or around 16.6% as customer numbers and receivables declined and impairments increased. However the repositioning of the home credit business as a leaner, better-quality, more modern, high returns business is progressing well. In particular, the development and roll-out of the smart phone and tablet apps that support the step-change in productivity and compliance across the agent and branch network is apparently fully on track and expected to be substantially completed in 2014. The credit quality of the receivables book is also improving through a combination of tighter credit standards and early benefits from the standardisation of collections and arrears processes. The first phase of the cost reduction programme implemented in July 2013 delivered savings of £10m in the second half of the year. The second phase was successfully completed in December 2013, taking the total headcount reduction in 2013 to 520 or 17% of the workforce, and securing further savings of £26m in 2014. So the reshaping and shrinking of this cash cow part of the business continues.
Meanwhile they say the early results following the launch of Satsuma, CCD's online direct repayment loan product, are encouraging and fully confirm the potential of a business capable of delivering the group's target returns. The capability is being built to support a faster roll-out from late 2014. So sounds like they are ramping up the growth there after a successful start and continuing their overall strategy for CCD which involves updating the home credit business and focussing on returns as opposed to growth whilst investing in broadening the customer and product proposition through Satsuma in the online instalment lending segment of the non-standard market.
On the finances while this one remains geared to the tune of 3x that is nothing like as scary as the 20 to 40x the banks used at the peak in 2008 and compares to a banking covenant of 5x. They are also funded through to their expected peak requirements in 2017 and have recently renegotiated their facilities at a lower all in rate.
In conclusion it seems like an in line set of results as expected and a continuation of the strategy to grow the Vanquis Bank in the UK and Poland on the back of cash generated by a more efficient CCD home collected credit division. The shares are up by about 10% since I last wrote on them in a sideways market. This leaves them on a P/E of around 15x 2014 earnings and around a 5% yield with growth of both these metrics expected to be up by around 13 to 14%. So a 4.5% historic yield (2.9% on the final dividend) with forecast growth of 14% still seem good to me so happy to hold this one.
Main event today is that Vodafone has confirmed that the share consolidation is effective and commencement of trading in consolidated shares began today. This means that the big dividend of 102p (30p cash and 72p in Verizon shares) will be winging their way towards my accounts. We get 6 new Shares for every 11 held which mean the share price should stay roughly the same, although it seems to be up by around 4% at the time of writing.The number of shares held goes down so the value of the holding will decline to reflect the return of value via the dividend and Verizon shares.
Otherwise another of my holdings XPP has announced some Final results today which seem to be slightly ahead of what was expected with Sales £101.5 (+8%) v £100.3(F), EPS 95.1p (+17%) v 92.4p(F) and the dividend 55p (+10%) v 54.6p(F). They also paid debt down from £10.6m to £3.5m. On the dividend they say:
"Our continued strong financial performance, strong cash flows and confidence in the Group's long term prospects have enabled us to consistently increase dividends. In line with our progressive dividend policy, a final dividend of 19 pence per share for the fourth quarter of 2013 is proposed. This dividend will be payable to members on the register on 14 March 2014 and will be paid on 10 April 2014. When combined with the interim dividends for the previous quarters, the final proposed dividend results in a total dividend of 55 pence per share for the year (2012: 50 pence); an increase of 10%. The compound average growth rate of our dividend has been 21% over the last 5 years and 16% over the last 10 years."
XP Power designs and manufactures power controllers, the essential hardware component in every piece of electrical equipment that converts power from the electricity grid into the right form for equipment to function. XP Power 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 Power 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 Power 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. Head quartered in Singapore and listed on the Main Market of the London Stock Exchange since 2000, XP Power serves a global blue chip customer base from 27 locations in Europe, North America and Asia. On their strategic progress they say:
"XP Power has a long-established strategy of targeting blue chip customers with strong leadership positions in their respective markets, and whose insistence on vetting their suppliers' design and manufacturing facilities acts as a significant barrier to entry to many of the Group's potential competitors. Our state-of-the-art factories in China and Vietnam are dramatically enhancing the Group's ability to secure preferred supplier status with these larger customers and increase the proportion of revenues which come from our higher margin, own-designed products. This strategy remained successful in 2013 and we believe that it will continue to underpin the Group's progress in the current financial year."
Otherwise the Chairman commenting on the Results and Outlook said:
"2013 has been another year of progress where we have again demonstrated the successful execution of our well-established strategy of moving up the value chain into design and manufacture. We have delivered a solid set of results and encouragingly, have again out-paced our competitors and taken market share. XP Power's customers supply capital equipment to numerous markets across the globe. The macro-economic outlook for these customers has shown gradual improvement in the second half of 2013, which gives us confidence for further growth in 2014 and beyond. If this improvement is sustained we would expect to grow revenues again in 2014. "
The shares have done well since I bought them under £10 towards the end of 2012. Consequently they look less good value now trading on around 17x and a 3.3% yield which is covered about 1.7x. Given the financial metrics like ROCE of 29.1%, low debt, the outlook statement and the track record of this one I am happy to run with it as a winner for now. See their website for more background.