Quick note to let you know that the Compound Income Scores have been updated to allow for some research over the weekend. If you are not familiar with them you can read all about them and sign up to access them for free here or in the Scores tab at the top of the Website. Now for today's post - watch this space.
...as well as News, Media, Education, Care & Parcels. In this case it is Connect Group (CNCT) which is the former Smiths News business which I have written about in the past. Last time I wrote they had delivered a "broadly in line" up date and I feared this might lead to a few downgrades - which it did, although not to any great extent.
Today they have announced Interim Results for the six months ended 28 February 2015 which they say leaves them on track to meet full year expectations. Comparisons are somewhat clouded by the acquisition of Tuffnells the odd sized parcel distribution business and the associated rights issue. Hence they flag the adjusted figures and 7 associated notes.
The Chief Executive said: "The Group has made an encouraging start to the year, making strategic progress across all divisions and successfully completing the major acquisition of Tuffnells. Tuffnells represents a significant step in our growth strategy and we are delighted with its initial performance. We have also been investing across the rest of the Group to position us for sustainable growth and are pleased with the progress we are making."
On their preferred underlying basis Revenues and Operating profits were up by 1.2% and 3.3% respectively but earnings (eps) were down by 5.5% on the prior year, as was expected, by the phasing of Tuffnells post-acquisition profits and associated rights issue shares. On the dividend they increased this by an adjusted 3.6% reflecting their continued confidence in the Group's strong cash generation and future prospects. Talking of cash generation they continued to generate strong free cash flow in the period, delivering £16.0m up £4.1m or 34% on the prior year.
Despite this the balance sheet became more leveraged as a result of the acquisition. Closing net debt at the end of the period was £157.9m versus £93.0m at August 2014 and £105.0m at February 2014. Debt at the end of the first half year is usually higher than the year end position given the weighting of free cash generation in the second half and higher dividend payment in the first half of the year. They therefore seem confident of paying some of this down in the second half and beyond due to the strong cash flow. On this and coverage etc. they said:
"Net debt: EBITDA at the end of February 2015 was 1.94x versus 1.4x at August 2014 and 1.6x at February 2014. This remains comfortably within our main covenant ratio of 2.75x and we remain committed to continue to pay down this debt towards our historic leverage ratio."
Aside from that the balance sheet looks pretty weak with negative net assets which is a hangover from their demerger from W H Smiths, but given the nature of the business and the cash flow this is probably OK but will put some off.
Summary & Conclusion.
An in line set of results although difficult to interpret because of the deal and rights issue late last year. However, with the resultant fall in earnings and the 3.6% rise in the dividend being shy of the full year forecast growth 4.9% to 9.17p, this leaves them a lot to do in the second half. As a result I think there could be a further small drift downwards in the forecasts which I don't normally like to see.
Having said that though they do still look cheap, if not great quality operationally and financially. Thus the 8x P/E and 6%+ yield, which is reasonably well covered by earnings and cash flow, should provide some support. There does not however seem enough in these figures to get the market excited or spark a re-rating. Indeed looking at the chart (below) they continue to look a bit soggy and range bound but they are now close to being over sold in the short term. So I wouldn't put you off if you are tempted to buy them for the yield down here - just don't expect much else from them in the short term.
I continue to note the gap on the chart just below 130p so I would continue to watch them to see if they get down there, perhaps in a market shake out, as a better entry point for a trade which might also then offer the chance of a capital gain too. If it does get down there though one would have to check the reasons as I have highlighted in the past that buying into these declining businesses can be dangerous. So on that bomb shell I'll leave you but as ever do your own research.
Topically we have had results from the £156m AIM listed Utilitywise (UTW). I say topically because as it has been a top scoring stock on the CIS for a while it made it into the Mechanical CIS Portfolio which I launched yesterday. However, personally I have not been able to bring myself to buy it despite the apparent value and growth on offer. So it will be interesting to watch this as a case study (and there are several others in the CIS Portfolio) to see if the Machine triumphs by not being prone to human biases.
In their announcement today they describe themselves as a leading independent utility cost management consultancy based in North Tyneside. The Group has established trading relationships with a number of major UK energy suppliers and provides services to its customers designed to assist them in achieving better value out of their energy contracts, reduced energy consumption and lower carbon footprint. Businesses large and small rely on Utilitywise for their energy management needs. Clients range in size from high street shops to multinationals with thousands of sites and cover the whole of the UK. In total, Utilitywise has over 23,000 customers.
So why haven't I bought it? Well I can't quite put my finger on it but there just seems something about the valuation and the price action in recent months. In particular the big fall from over 300p to around 200p and the subsequent volatile trading between 200p and about 230p, so the 12 month price momentum is poor albeit that it is now looking somewhat over sold. Now of course this may well prove to have been a great opportunity that I have missed.
My other reasons for being wary of it are the move to a new Head Office and a big ramp up in staff numbers as they seek to further their growth, although I guess you could argue that is fair enough. But it does require them to add lots of new clients without any slip ups or miss selling scandals, but so far they seem to be achieving this. Then there are all the issues surrounding energy prices, regulation and politics which quite frankly you never quite know where you are with any of that. In addition others in the past have also questioned some of their accounting policies and after the recent revelations at Telecom Plus (TEP) I guess this is something that needs scrutinizing.
However, having said that the results today seem to be pretty good on the face of it with more strong growth reported and a 55% increase in the interim dividend which is above the 37% growth forecast for the full year and in line with the rise last year. So I guess there could be some upgrades perhaps.
In addition to this they have also spent £10 million on the acquisition of t-mac technologies which they say has strong growth prospects in a very fragmented market and broadens the groups service offering into energy monitoring and control.
They also claim it will deepen the group's client relationships and enhance overall growth prospects.
The other positive aspect of this one is that some of the directors have reasonable stakes and have been buying this year while Woodford Asset Management also hold around 21% of the shares.
Summary & Conclusion
The strong looking results have been well received by the market and the shares are currently up by around 6% to 220p at pixel time. So 1-0 to the machine at the moment, but this one has been volatile like this recently so it will be interesting to see if it can maintain the rise and break out of its recent range or if it soon relapses again. I'm not a technical analyst but I guess if it can sustain a break above 230p then the 200 day at 260p and the 280p level from Q4 last year could be potential targets.
Just looking at the numbers before any changes on the back of today's figures it trades on 12.5x to July 2015 and perhaps 9x for the year to July 2016 if the strong forecast growth is delivered. The yield is also forecast to rise to 2.5% and 3.6% at the same dates. So an intriguing one which appears to offer strong growth and a reasonable price. I think I'll continue to watch it from the sidelines for now and see how the Mechanical portfolio does with it and if you are tempted then please do your own research.
Regular readers will know that I recently launched the Compound Income Scores (CIS) which I believe are a good way of identifying potentially attractive shares which may be worthy of further research. However, while the thinking behind them is backed up by academic research and years of practical experience, I have not been able to back test them to prove how effective they are.
So partly for my own purposes, but also to provide a portfolio for the site, I have decided to launch a "mechanical" portfolio based on stocks which score highly on the CIS. I say mechanical because I am going to allow it to be driven by the Scores without too much input from myself, other than applying the screening criteria and making sure it is not over exposed to expensive stocks or one sector. This way we will be able to see how a portfolio based on high CIS scores performs and for my own purposes I'll be able to see how it compares against my own portfolio.
As explained in the introduction the portfolio will be based on top scoring CIS stocks selected from the top decile initially.
Arguably if I was trying to purely measure the Scores I should just pick the top stocks without qualifications or any screening but since I want it to reflect what I normally do, the main screening criteria applied over and above being in the top decile are as follows:
To try and make it realistic for what reader might be doing I have assumed a starting capital of £30,240 which represents two years ISA allowances for the tax years 2014/15 and 2015/16. This is then allocated across top decile CIS stocks, after the above filters have been applied, in equal weights across 20 holdings to get a reasonable balance between diversification and position size / costs.
On costs I have factored in commission of £5 per trade and stamp duty of 0.5% where applicable (Nil for AIM stocks) with all the initial purchases made at closing prices on the 2nd April 2015 as I did it over the Easter Weekend.
Again in the interests of time and costs I have decided for now to try re-screening on a quarterly basis as buying costs for the whole portfolio came out at 0.66% split equally between stamp and commission. So 100% turnover would therefore cost 1% of the portfolio. I'm thinking at this stage that I might keep existing stocks down to a CI Score of 60 or perhaps 75, but I'll have to see how it goes and balance the turnover with the portfolio exposure to the Scores. Alternatively I might be able to do it based on only holding top decile - I guess I'll have to wait and see how this live experiment goes and what sort of turnover it might entail.
As another test of the Scores and with an eye on costs and time constraints I'll also maintain a list of the initial holdings and review these on an annual basis to see how effective the Scores are doing it that way and how the turnover and performance pans out that way in comparison with the quarterly version.
Summary & Conclusion
The CIS Portfolio is designed as a test of the effectiveness of the Compound Income Scores and as I have been promising for a while to do a portfolio on the site, this provides one. It is also something for me to compare my own performance against to see if I should be following the Scores more closely in my portfolios. While this may be not what I originally had in mind, I think it should prove useful for me and hopefully for readers too.
It will be interesting to see how this live experiment goes, although in the short term it may well be volatile, but I believe that over time it should do well. The rational for making it mechanical is based on the experience of The Little Book That Beat the Market - by Joel Greenblatt. He had a quantitative system which seemed to perform well, although in a volatile fashion. However, he found that when investors used it they failed to get the same returns as the model due to them picking and choosing and thereby excluding some of the big winners which on the face of it seemed unpalatable.
In the meantime I may comment on some of the stocks that feature but I probably won't comment on the whole list all the time apart from perhaps monthly updates and certainly when I do the quarterly re-screening around the end of each quarter going forward from here.
For now you can see the portfolio and transactions by clicking here or in a sub heading under the Portfolio tab at the top of the site. You might also be able to use this file as a template for your own portfolio and get the Scores for your portfolio too if that is something that interests you.
Finally I would stress that this is a "Mechanical" Portfolio purely selected from high scoring stocks on the Compound Income Scores. While I believe these should identify potentially attractive stocks, please note that I have not carried out any further due diligence on the stocks. So if you are attracted to any of the names you should certainly do your own research.
I have written in the past how "boring" stocks can be brilliant. Today we have had an update from one of the boring stocks I featured and I have a sell rational for another. So if your not put off by the boring bit here goes.
First up we had Q1 results from Unilever (ULVR) today - it doesn't get much more boring than that does it? They summarised it as a good start to 2015 helped by currencies which gave them a 10.6% boos to their turnover. Aside from that they reported underlying sales growth of 2.8% which included 1.9% gain from price increases.
Within the underlying sales growth was a 5.4% gain in emerging market sales which is one of the reasons I like this one as they seek to sell more of their consumer products to the developing consumer markets in the emerging market economies.
So enough on that already as I'm sure you can find all the detail on the results elsewhere. However in terms of valuation this is now getting quite rich on this one given the share price performance as you can see in the graph below. The rating
has got quite rich on this one with a PE in excess of 20x, although the earnings yield is around 6.5% and the dividend yield is still around 3% and 1.5x covered by earnings and forecast to grow at around 7% for the next two years. This all leaves it looking around average with a 53 Score on the Compound Income Scores. So getting a bit twitchy about the valuation up here and the recent earnings revision trend has been poor, so will be worth watching to see if this update can turn that around, so just about a hold for me given the quality, yield and expected growth.
However on a similar track I have reduced recently another of my boring stocks which has also enjoyed a decent re-rating and share price performance. Again this was one of the boring is brilliant stocks I featured call Berendsen (BRSN).
So why have I decided to reduce this one? Well in this case it comes down to a combination of valuation 18x and 2.8% yield, poor estimate revisions, the Compound Income Score of 39, likely negative currency translation effects from their large operations in Europe and director selling (click link to see details). This latter point was the catalyst for me to reduce my holding while the going is good as this one has in the past been vulnerable in an economic downturn (see previous update for more on this), although I accept I'm probably way too early on that front. I just feel on the current valuation and growth prospects it is up with events and I can probably find better value elsewhere.