Legal and General (LGEN) and other life insurance related stocks have been under the weather since the shock announcement in the recent UK budget about reform of the annuities market for individuals. L & G put out an informative RNS post the budget which suggested they were well placed for the new arrangements. Within this they felt the new rules and general under provision would lead to greater pension savings going forward. LGIM, as a leader in pension fund management with £450bn of assets under management, and Cofunds, as a market-leading savings platform with £64bn AUA, are well-positioned to benefit from increased savings rates. They are also well place to serve and benefit from this further with their comprehensive suite of individual retirement solutions including protection, draw down, DC funds, Unit Trusts and ISAs. Finally they pointed out that Legal & General's Retirement Solutions business is broad-based, with £21.1bn out of a total of £34.4bn annuity assets derived from corporate transactions, which are outside the scope of the new regulations. Their cash guidance of Operating Cash of £290m (2013: £260m) for Legal & General Retirement given at Preliminary Results on 5th March for 2014 remains unchanged.
In addition last week we had a botched announcement from the new regulator the FCA about an investigation into closed life funds dating back to the 1970's. This will not be another compensation bonanza because of sales practices but could lead to some costs if exit charges are reduced or quashed. However, I do not think Legal & General are as exposed to these policies as others like Resolution and Phoenix.This announcement was handled incredibly badly by the FCA creating a disorderly market in the insurers share, which begs the question who regulates the regulators? In a badly timed announcement today they have apparently just raised their annual funding requirement by an inflation busting 3.3% to an incredible £446.4 million. This comes after there were calls over the weekend for the head of the FCA, Martin Wheatley, to resign after the botched announcement on Friday. You couldn't make it up - I guess next we might hear he had stepped down with a bonus and a big pay off.
Any way, nevertheless Legal & General and the others have all put out reassuring statements and the FCA have suggested subsequently that the review may not be a far reaching as first suggested so a relief rally is currently underway. The effects of all of this can be seen in the graph below:
which shows the damage done to the Legal & General share price on the back of all this. Thus the shares are bouncing around their 200 day moving average and coming of an over sold situation on the RSI which has shown some positive divergence - a buy indicator normally. So technically it looks a tempting time to buy, but what about the fundamentals?
I would argue they look good too, especially on the yield front which is usually the main attraction with insurers.
Dividends here have been on a strongly rising trend +18% per annum over the last five years with 12 to 14% growth forecast for the next two years. Thus they are on a forecast yield of 5.2% for this year based on a 10.7 pence dividend forecast and a 207 pence share price. The yield range it traded on in 2013 was 3.4% to 5.2% so the yield is now at the top of its recent range. In addition to this they are still cum the final 6.9 pence dividend for a further 3.3% yield, xd 23rd April, paid 4th June 2014. So you could get an 8.5% yield over the next 14 month or so plus or minus whatever the share price might do over that period. So looks like this could be an interesting entry point / chance to add to holdings, although if there was more volatility and it were to get as over sold as it got over bought and fell 40 pence or so below its 200 day moving average, then 170 pence looks like a longer term support area. It would yield over 6% there so I'm not sure it will get there, but I think I'll set up an alert just in case.
Finally. please note I have added a Feedback section (see navigation tab above) which contains six simple questions for you to help influence what you see on here. I am also considering a new service so it would be great to get your feed back on that too.
When I wrote this one up recently I mentioned something called the GPSoC Framework agreement which was due to be agreed by the end of this month as this seemed quite important to them. They announced in an RNS yesterday that commercial terms of Lot 1 of the expanded English GP Systems of Choice (GPSoC) Framework had been successfully finalised.
Lot 1 covers the centrally funded GP Clinical IT system functionality, support and hosting essential for a modern paper-light practice and already in use by a large majority of practices.The initial procurement contract runs for around two years to December 2016 and is expected to be extended a further two years thereafter. On the effect of this they said:
"The Board of EMIS Group confirms that it considers the outcome of the Lot 1 negotiations to be positive and in line with management's expectations. The revised Framework offers opportunities for EMIS Group to benefit from a degree of additional funding in exchange for expanded and enhanced capabilities and increased usage ("more for more") and EMIS Group expects no material effect on profits in the current financial year to 31 December 2014, with the benefit starting to flow in 2015."
So good that they got the work and should help to underpin this years forecasts with further benefits to come in 2015. They may also get some more work from Lots 2 and 3 which are to be decided later in the year which they discuss in the full announcement at the link above if you are interested. Encouraging news so happy to run with it and will have to see if there is any further price reaction to this in the next few weeks once the news is digested.
When you go to the supermarket for your weekly shopping (even if you are a Waitrose shopper) you do I assume try and keep your costs down by following the offers like buy one get one free (BOGOF) or stocking up on steak and Chianti if it is on offer. It is an old axiom in the stock market that you should also buy low and sell high. Easy to say not so easy to do.
Thus if you do want to try and do it I would suggest you check out Morrisons (MRW) which has been in the news recently for all the wrong reasons and as a result I think it is now offering value and it is certainly low in share price terms. In a way this is a continuation of my recent housing and property theme. As I suggest this one it is a BOGOF because it is trading at around or even at a discount to the likely value of it properties. So you get a property portfolio (albeit of food retail related premises) with a profitable supermarket and food manufacturing operation attached, which is expected to make about £450 to 500 million in pre exceptional profits for this year after their recently announced investment in prices. This compares with many property companies currently trading at a premium to their asset values. Indeed one of my other holdings Schroders Real Estate Investment Trust (SREI) is having a C share issue at a small premium and this pays an uncovered yield of just under 5%.
Morrisons have promised a 13.65 pence dividend for this year which will give a 6.5% yield at a the current price of 210p. Now this may not grow much more in the years after that as cover is rebuilt, but the cash flow and ROCE are expected to improve as they seek to deliver £1 billion of self help measures over three years from cost cutting, working capital and reduced capital expenditure, so hopefully it'll get paid while investors wait for a turn around. They are also talking about disposing of £1 billion of property too and the return of surplus capital as appropriate. Now I know you'll have lots of objections as to why this is the wrong time to do this and how it will get worse, which it might, but therein lies the opportunity.
Personally, I think Morrisons can succeed by offering better deals and with its own meat and bakery products as a point of differentiation, they did after all avoid the horse meat scandal. It may also actually benefit from playing catch up in IT, loyalty schemes, local stores and home delivery. The clincher for me was the recent cluster of director buying which is usually a good predictor of future out performance and interesting that it has occurred at this time in what seems like such a dire situation. I was also encouraged to read today that the chief executive, Dalton Phillips has turned down his £374,000 cash and shares bonus for last year (probably in embarrassment) although I'm not quite sure how he even qualified for one given the results last year, guess he must have done some things right, must take a closer look at their incentive scheme.
Still I understand if you vehemently disagree with this suggestion and indeed I could well be wrong if a full scale price war develops, then the customers will be the big winners! However, so far it seems the oligopoly is holding together so far. But just to show I have considered the counter arguments here is a negative piece from Money Week which suggest avoiding the sector and that Morrisons could have to write its property down further and cut its dividend. All of which could come to pass and this one could turn out to be a value trap. I guess it would be safer to wait for evidence of a turn around in operational performance, but by then the shares would probably be a lot higher. So you pay your money and you take your choice, I chose to buy a few and take the 6.5% yield on offer for now (plus the 4.3% from the 9.16 pence final, XD 7th May 2014, Paid 11th June 2014) and take the risk that it is a value trap. If nothing else at least it should pay me more than 10.8% in the next 14 months or so.
After the recent focus on house builders I thought I would share a more steady property play which offers a healthy yield. This one is called Primary Health Properties (PHP) and as its name suggests it is a UK Real Estate Investment Trust (“REIT”) and the leading investor in modern primary healthcare premises. The objective of the Group is to generate increased rental income and capital growth through investment in primary health property in the UK leased principally to GPs, NHS organisations and other associated healthcare users.
I like this one because its properties are 99.7% let and have a 16 years weighted average lease length and the largely essential nature of the tenants with 92% of revenue government backed, unlike many here today gone tomorrow shop or restaurant tenants. I also like the yield which is currently 5.58% based on last years 19 pence dividend and a 340 pence share price. The dividend is also expected to rise modestly to 19.5 pence this year, as it has done for the last 17 years. This growth is supported by the upward only rent reviews and index linked rents in many cases, although it is not currently covered by earnings they are working towards this.
It is all about the yield with this one although you have the asset backing too, but the shares have tended to trade a bit above the conventional asset valuation which has not grown that quickly due to share issuance. Thus the share price has been pretty dull so as I say this one is mostly held for the indexed linked type yield it offers - it certainly beats Gilts, Indexed Linked Bonds and cash in the bank in my view.
That's all I have to say on this one, but if you would like a more in depth review of its prospects you can download below a recent sponsored research note from Edison which covers the recent results and the path to a covered dividend.
Continuing the recent housing and property theme that I have been exploring. Yesterday we had results from Kingfisher (KGF) - Europe's leading home improvement retail group and the third largest in the world, with 1,124 stores in nine countries in Europe and Asia. Its main retail brands are B&Q, Castorama, Brico Dépôt and Screwfix. They also operate the Koçtaş brand, a 50% joint venture in Turkey with the Koç Group. B&Q is a strong brand with the market leading position in the attractive UK home improvement market. Despite a very challenging housing and economic backdrop for the last six years, during which its market declined around 12%, Kingfisher UK & Ireland delivered broadly flat sales and achieved profit growth of 50% by exploiting the UK trade market opportunity, delivering a number of self-help initiatives whilst continuing to invest in B&Q's stores and infrastructure.
This one therefore seemed like a good way to play the nascent housing recovery in the UK that was starting to appear, although the UK is only around 40% of turnover. France, which has seen even harder economic times, is around 40% of sales but does make margins closer to 9% versus 5% in the UK. Contributions from other overseas territories are fairly negligible except for Poland which is around 10% of turnover and makes 11% operating margins. Perhaps because all the Polish builders are over here they have to do their own DIY there?
Any way I bought it early this year as I had reduced my successful N.Brown (BWNG) holdings and wanted to diversify my retail holdings. I had Identified on the chart and valuation grounds that around 350 to 360 pence was a reasonable entry point and I targeted this since last summer. Thus when a price alert was triggered with the shares having come back from over 400 pence I was happy to put some in my trolley.
So to the results saw turnover come in slightly ahead of forecasts at £1125 million +5.2% in total (+0.7% LFL in constant currencies) v £1107 million forecast. Earnings were slightly ahead of forecast at 23.4 pence +4.9% v 22.9 pence (F), while the dividend was slightly behind forecasts of 10.1 pence at 9.9 pence +4.7%, although they did talk about a multi-year programme of additional capital returns to shareholders, starting with around £200 million during the financial year 2014/15. They say that the timing and mechanism for this capital return will be kept under review to ensure we maximise value creation for our shareholders and that updates will be given with interim and full year results. This was probably prompted by the fact that their net cash rose to £238 million. It does however have a Pension deficit of around £100m which could be counted as debt and netted off against this cash. In addition, like most retailers, the Group's overall leverage is more significant when including capitalised lease debt that in accordance with accounting standards does not appear on the balance sheet. The ratio of the Group's lease adjusted net debt (capitalising leases at 8 times annual rent) to EBITDAR is 2.3 times as at the year end. At this level they claim the Group has financial flexibility whilst retaining an efficient cost of capital.
I like their capital disciplines as evidenced by the proposed return of £200 million capital this year and their concept of Kingfisher Economic Profit (KEP) as a main measure of return on capital. It is used in their capital investment process, to assess performance and drive returns in strategic plans. KEP is derived from the concept of Economic Value Added representing earnings after a charge for the annual cost of capital employed in the business. Earnings are defined as adjusted post-tax profit, excluding interest, property lease costs and exceptional items. A charge is then deducted by applying the weighted average cost of capital (WACC) to capital employed. For the purposes of consistency both WACC and capital employed are lease adjusted. Leases are capitalised based on an estimate of their long-term property yields. In order to focus on controllable factors both WACC and long term property yields are based on those in place when KEP was introduced.
Going forward, they continues to aim to move towards a medium term annual dividend cover of around 2.5 times. At this level, the Board believes the dividend will continue to be prudently covered by earnings and free cash flow and remain consistent with the capital needs of the business. So given cover is around 2.4x this year dividends should grow roughly in line with earnings from here. With double digits growth being forecast and recovering housing and construction markets I'll probably run with this one for now given a fair looking 15x PE or so and despite the relatively low prospective yield of about 2.6% after the 5%+ rise in the share price on the back of the results.
Meanwhile today to confirm the strong trend in ugly boxes - no sorry new house building from the second half of last year we have had first half results to 31st January 2014 from the national house builder Bellway (BWY). These read pretty well and demonstrate the benefits from the recovering demand for new houses. From the statement the Operational highlights were:
§ 3,245 homes sold (2013 - 2,597) - up 25.0%
§ Average selling price increased to £212,071 (2013 - £187,426) - up 13.1%
§ 2 new divisions opened with effect from 1 August 2013
§ £240 million spent on land with net investment in land holdings increasing to £1,026.8 million (31 July 2013 - £907.3 million)
§ Total owned and controlled land bank increased to 34,057 plots (31 July 2013 - 32,991 plots)
§ Low net bank debt of only £16.4 million provides Bellway with significant balance sheet capacity for further land investment
§ Forward order book at 9 March 2014 significantly ahead at £829.5 million (10 March 2013 - £507.4 million) - up 63.5%.
Commenting on the results, Chairman, John Watson, said:
"Bellway has made significant progress in the six months ended 31 January 2014, with a 74.9% rise in earnings per share to 66.3p and a 660 bps increase in return on capital employed to 17.1%. These substantial improvements have been driven by growth in volume, average selling price and operating margin.
"The Group's operational and balance sheet capacity for volume growth has allowed Bellway to respond positively to strong consumer demand. The resulting growth in earnings, together with a strong focus on increasing return on capital employed, has allowed the Group to enhance the total return to shareholders through growth in the net asset value, together with the payment of a regular and progressive dividend.
"Given the extent of earnings growth in the period, I am pleased to announce a 77.8% increase in the interim dividend to 16.0p per ordinary share (2013 - 9.0p).
"The Board expects to maintain a full year dividend cover of around 3 times, thereby ensuring a sustainable balance between further capital growth and certainty of return to shareholders.
This leaves this one on 12 month forward numbers of around 10x with a 3% yield which seems fair enough so happy to stay with this one too for now as it has improving metrics and momentum and is another one to play the government backed sub prime warp / house building boom again - so much for re-balancing the economy.