Final results from Computacenter (CCC) today the £1bn information technology and infrastructure services company. These look fine on the face of it with the earnings slightly ahead of forecasts, although they are somewhat confused by disposals and subsequent share consolidations last year. Probably as a result of this effect the dividend looked to be a little light of forecasts. I'm not unduly worried by that as the cash generation here remains good and they are back up to record levels of cash on the balance sheet despite returning significant sums to shareholders during the year.
Savills (SVS) - Results look strong, as expected, given the property background last year. Thus eps came in at 63.2p versus 60.8p (F) and the dividend total for the year was 26p up 13% from 23p last year and versus 25.1p (F). Commenting on the results, Jeremy Helsby, Group Chief Executive, said:
"Overall in 2015, Savills delivered a record performance across the Group. Our US expansion programme continued well and our Asia Pacific business showed resilience in the face of changeable markets. In the UK the strength of our position in the commercial market offset market weakness in the residential sector. The Continental European business continued to build profitability and Savills Investment Management substantially enhanced its position with the acquisition of SEB Asset Management AG.
We have made a good start to 2016 with a solid pipeline of business carried over from last year in many markets, although the impact of global macro-economic and political concerns on real estate markets worldwide is uncertain. At this stage, we retain a cautious view on some Asian markets, particularly the Tier 2 Chinese cities, and we expect the UK residential and commercial investment markets to be subdued, for the former, as Stamp Duty reforms take effect and, more generally, in the run up to the EU referendum in June. However, the strength of our enlarged US operation, the increased size of our Investment Management, Property Management and Consultancy businesses and the breadth of our UK business together with further improvement in Continental Europe, all bode well for the future of your Company. Accordingly, the Board's expectations for the year as a whole remain unchanged."
The shares have come off sharply with the market correction this year and are looking oversold. They therefore now seem quite cheaply rated compared to their history trading on around 10x with a 4%+ yield for the current year. Thus given the unchanged outlook statement above and a CIS of 95, they seem like a strong hold to me.
Sprue Aegis (SPRP) - out out an update on a supply agreement. As a result of this they said that their operating profits would come in at £8.3m for this year which they say is slightly below market expectations. Looking at the forecasts it seems like it will lead to a 10% downgrade to earnings to me. The shares are off by that amount this morning so probably all in the price now in what looks like being a consolidation year for them. I do however note the recent weakness in the £ v the € as a result of the BREXIT debate which, if sustained, could help to boost their earnings. I note also that there is something about sharing the swings on the US$ with their supply partner more equally. The downgrades will no doubt reduce the current CIS of 97.
32Red (TTR) had their full year results which look like a miss on the adjusted earnings 6.97p v 8.7p (F) although dividend was better than expected at 2.8p v 2.5p (F) and they have already previously announced a 3p special dividend. I note also that the adjusted earnings also exclude all the bad stuff as follows from the statement: Adjusted Earnings Per Share is calculated on Underlying Earnings adding back exceptional items, share option costs, amortisation and losses from the Italian business and uses the weighted average number of ordinary shares for diluted earnings as calculated in note 6 to these accounts. Actual diluted eps including all the bad stuff was er 1.14p which would put it on an astronomical 136x at the current 155p. However taking the adjusted numbers and increased dividend puts it on an expensive looking 22.2x with a 1.8% yield. Thus it will need to produce the strong growth which is currently forecast, but given the miss on earnings today it will be interesting to see if we see any down grades on the back of these figures, which if we do, will not be helpful given the current rating. For now it remains a high scoring stock with a CIS of 98, despite a value score of only 14, so again if we do see downgrades I would expect the Score to fall.
Finally not one that is in the CIS Portfolio but I note in passing that Cineworld (CINE) had blow out results which were not only ahead of this years forecasts but also those for 2016 too. So unlike Restaurant Group yesterday, no sign of a slow down there, although I they did benefit from the steady stream of Blockbuster last year which is not expected to be fully repeated this year. CIS currently 72, but may improve on the back of these numbers and if it leads to upgrades.
We have had full year 2015 results from Restaurant Group (RTN) today, which shouldn't have come as much of a surprise to the market as they updated on trading earlier in the year. At that time you may re-call that the shares took a big hit as they were cautioned about trading at the end of last year and on current trading in the New Year. Despite this though they have now actually reported strong looking numbers which are actually ahead of where estimates were before the most recent downgrades - which is a bit weird. For example the eps had come down from around 33.6p to 33.2p but they have now actually reported 33.8p of eps, while the dividend was up by 13%, which they say is in line with their 2x cover policy, to 17.4p v 17.1p forecast so another beat there too.
So it is a bit surprising to see the shares off another 15% or so at the time of writing again this morning on the back of this, but as ever the devil is in the detail. The problem seems to be that they continue to highlight weak consumer demand and particularly reduced foot fall in retail parks as on line shopping becomes increasingly popular. I have to say this does seem a bit strange given the generally improving consumer real income and generally positive retail spending data that we have been seeing - see graph below for example, although as a consumer facing business I guess they should know.
Of more concern seems to be their admission that increased competition seems to be impacting on them and as a result they are flagging current trading in the year to date being up by 6% in the first 10 weeks but with negative like for like sales of 1.5%. They go onto say that in the current environment consistent like-for-like sales increases are likely to be difficult to generate. This is a significant change from what the business has delivered in recent years and may well therefore lead to more downgrades for this year and perhaps helps to explain the fall in the shares this morning.
Nevertheless it has not suddenly become a bad business, it is just that it is not likely to be growing so quickly on a like for like basis as the competition seems to have caught up and consumers have become more cautious and perhaps become bored with of some of their offerings may be? So looking at the growth they opened a net 34 sites this year, after closing 10 where leases came up and they did not want to renew. This took them from 472 sites to 506 sites, an increase of 7.2%. Meanwhile in 2015 they reported LFL's of +1.5% and revenues up by 7.9% in total.
In terms of new openings they seem to have done gross and are planning the following opening for the coming year:
Frankie & Benny's 261 units (Mass market) - opened 14 last year & same again this year.
Chiquito 86 units (younger end) - opened 9 & same again this year - trading well.
Coast to Coast 21 units (more upmarket F&B?) opened 8 & expect to open 5 to 7.
Pubs 54 units (Older end / Grey £) opened 3 target 5 to 7 in 2016 in Midlands.
Concessions 61 units (Airports etc.) opened 7, 2 to 4 planned for 2016 benefit from increasing passenger traffic.
All of the brands described above have substantial roll out scalability in the UK. They are confident that they can expand the Group to 850+ restaurants, all financed out of internally generated cash flow. From their current 506 sites this would seem to offer potential for another 8 to 9 years of roll out growth if they carry on at the current rate.
As they have clearly demonstrated in the past the Company has the financial and operational capability to deliver this scale of roll out successfully while maintaining consistently high levels of return. Further more the Group's financial strength and disciplined focus on return on investment and cash flow means that they have the financial capacity to deliver on their long-term growth objectives. This financial strength also means that they can continue to invest in maintaining their existing sites and infrastructure to a high standard and at the same time pay a growing level of dividend.
Thus it seems like they plan to open another 38 to 40 sites this year which would be another 7% or so increase if you assume another few closures, but current and possible further negative LFL's this year seem likely to trim the growth in revenue overall. As I mentioned earlier they say this is currently running at 6%, so lets assume 5% revenue growth overall for the full year to be conservative. That would suggest £719m of sales for the full year which is about 4% below the current £749m forecast. Assuming that flows straight through to the bottom line would take eps for 2016 down to around 35p. although hopefully that might prove a conservative figure. With the 2 time cover policy they flagged in the statement might mean a flatish dividend of 17.5p or perhaps up by 4% or so if they increase it in line with the growth in earnings. All in all that's not too bad but potentially a big step down from the 14% or so that they have grown the dividend at over the last 5 to 6 years.
Summary & Conclusion
So another slightly underwhelming update from Restaurant Group, despite reporting good numbers, which the new CEO seems to be making a habit of. Nevertheless the outlook for their growth in LFL terms does seem to have deteriorated and it looks like the growth rate may step down from mid teens to mid single digits. Given the two steps down that we have seen in the share price this quarter, perhaps the market has now digested this? Taking my hopefully conservative 35p forecast (but let's see where the estimates settle in the days ahead) at the current price around 450p this puts them on 12.85x with a historic yield of 3.9% which may be flat or could maybe grow by 4% to 5% if my forecast proves too pessimistic. Which seems fine, but not that exciting given the diminished growth outlook.
I wrote recently about the latest UK Timing indicators and a seemingly good recession indicator based on tracking US unemployment data which seems to work on the basis of if the US catches a cold then the rest of the world does too. This included a copy of the latest Credit Suisse Year Book, so if you missed this post, which you can read at the link above, I think the Year Book is worth reading too if you have time this weekend.
In a timely fashion we had the US Non-farm payrolls yesterday which basically is the civilian unemployment rate mentioned in the post above.
This showed the unemployment rate steady at 4.9% despite slightly stronger than expected numbers for the payrolls being reported on the month.
This therefore remains 0.3% below the 12 month moving average for this data, which is positive, as it only signals a recession when it cut up through the moving average. Thus although the timing indicators for the UK market remain negative, this indicator suggest we should not be too worried as a US recession does not appear to be on the immediate horizon. In addition we have now seen a decent rally in the UK market which has taken it back up to and possibly through the first resistance levels and commodity prices like copper and oil have also been showing some signs of strength too suggesting that for now at least the worst of the commodity / growth panic may be over?
To back this up there was, as usual, a useful post over at Adviser Perspectives looking at various measures of The Civilian Labour Force, Unemployment Claims and the Business Cycle. In this they concluded by saying: "If history is a guide, the current ratios of weekly claims to the labour force contradict the minority view that the US is bordering on recession. Instead, the ratios suggests that even a near-term recession would be many months in the future."
Taking a contrary view and not hedging his bets at was this brief piece and interview with legendary investor Jim Rogers who incredibly predicts a 100% probability of a US recession this year! To my mind though he has broken the first rule of forecasting by giving a fixed date or time period. I suspect we will have another recession before too long, but most indicators still seem fine, apart from perhaps the weakness in stock markets, which can be a leading indicator as they tend to look ahead 9 to 12 months. As ever you pay your money
and take your choice and time will tell. So in the meantime, like markets in February, price movements and commentators continue to paint a confusing picture against a fluid back ground. So if your portfolio is giving you sleepless nights here is some music which apparently might help you sleep. Have a great Weekend whatever you are up to - even if it is catching up on your sleep!
February proved to be a difficult month for investors generally and also the Compound Income Scores Portfolio as it ended the month with a negative total return of -1.66% which compared to a total return on the FTSE All share of +0.8% for an underperformance of 2.46% on the month. This leaves it 1.76% behind the index in 2016 to date but still ahead by 17.92% since inception last April as it has produced a +11.3% total return versus -6.62% for the All Share.
It is perhaps not surprising to see the portfolio giving back some of its outperformance, as it had benefited from exposure to smaller and mid sized companies and limited exposure to FTSE stocks and the commodity names in particular. Therefore as some of these latter stocks led the recovery in the market towards the end of February and small companies lagged somewhat this helps to explain some of the recent trend.
In addition at the individual stock level the largest fallers, with double digit losses on the month were: RM (RM.), Savills (SVS) and Paypoint (PAY) which all responded negatively to trading updates. On a more positive tack the biggest risers on the month were XL Media (XLM), which was added to the portfolio last month on the back of a risk reduction trade in 32Red which continued its exponential rise this month and EMIS which bounced back from a prior negative reaction to its full year figures.
Overall after a tricky start to the year for the market and the portfolio, although it looks reasonably well placed overall with a forecast PE and yield of 13.25x and 3.61% respectively while the dividends are forecast to grow on average by 13.1% which seems fine to me. Meanwhile it remains heavily exposed to consumer cyclicals, industrials and financial sectors which seems appropriate if the current economic picture remains the same, but could leave it exposed if we are in fact sliding towards recession, which I don't think we are. So the portfolio will remain positioned like that in any event until the next quarterly re-screening due at the end of March and the first anniversary since the launch of the portfolio.