Volatility as measured by the VIX index or the "Fear index" is a good gauge of how worried or fearful investors are. When times are good and markets are rising steadily, this tends to be low. This has been around mid decade in recent times with lows just above 10 in the mid nineties the 2000's and recently. When things start to deteriorate this index tends to rise and volatility tend to peak as markets fall and fear rises as seen in 2008-9 and the early 2000's. As Warren Buffet says be greedy when others are fearful and be fearful when others greedy - which they are probably being right now. Meanwhile see below the graph for another holiday reading suggestion appropriately called the Fear Index.
With another rainy Bank Holiday due in the UK this Weekend, I thought I would recommend another book to you. This one is a work of fiction and it is a thriller about Hedge Funds, artificial intelligence, markets and murder. It is not hot off the presses as it was out a couple of years ago, so if you missed it back then you can now pick it up quite cheap, so as ever I try to bring you value! Any way I found it enjoyable and I read it quickly so I would certainly recommend it.
The Fear Index as you can see is a book by Robert Harris. You can visit his website by clicking the highlighted text to learn more about it or click the image for other buying options on Amazon - used from 1 pence apparently, although more like £1.68 with postage charges. Remember other book shops are available and it may even be at your local library which is worth supporting before your Council closes it down.
Enjoy, and be fearful out there.
After my 20%+ gains earlier in the year on Investec, I thought I would try another trade in the financials sector. I'm staying in the I's with Intermediate Capital Group (ICP) which announced final results earlier this week. You can read them for yourself at the link above and they didn't look too bad to me - certainly not to justify a 10% fall in the share price. Looks like a big clumsy seller has been in operation. The only negative I could find was a bearish note from Numis, who have a 363 pence price target, which I saw mentioned on Ticker Report, although I note others are more bullish and have price targets beginning with a 5.
Any way this one may not be to everyone's taste as it is slightly esoteric is so far as it is a specialist asset manager providing mezzanine finance, private debt, leveraged credit and minority equity to mid market corporates in Europe, Asia and the US and to real estate in the UK. Some of their balance sheet is invested alongside their funds and also provide seed capital when they are launching new products. Aside from income from managing the funds they also make irregular capital gains on their own investments as and when they make successful disposals of their largely private equity / venture capital style investments. These tend to be lumpy and have been strong in the last year given the favourable market conditions. Given the nature of their investments they do however also have to make provisions and take write downs when things don't go as planned. The disposals can also reduce their assets that they have under management and they therefore then need to work hard to replace these which is the situation at the moment.
The earnings from the asset management and other recurring fees or what they describe as "core" earnings generally underpin the dividend with the capital gains being a big swing factor for earnings over and above that. Talking of dividends that is the other main attraction with this one. They declared a final of 14.4 pence which alone yields 3.6% at 400 pence and is due to go XD on 11th June 2014. This made 21 pence for the year up 5% and a similar increase expected for this year taking the dividend to 22 pence or so for a yield of 5.5% and the P/E is around 11 to 12x, so reasonable value I would argue.
They suggest their balance sheet is strong with unutilised cash and debt facilities of approximately £678m. They have also launched a £100 million share buy back programme, which they commenced the day after the results. On the balance sheet they said the following:
"We consider it important that the Group maintains a strong balance sheet position with a consistent access to the debt markets. Accordingly, considerations such as maintaining a strong and stable credit rating and the financial covenants to lenders are factored into the Board's assessment of the Group's capital structure.
We also understand the value that shareholders place on regular and sustainable dividend payments and we remain committed to a dividend policy linked to cash core income. In addition to this, we perform an ongoing assessment of the Group's capital requirements with reference to the above factors over a three year horizon and should there be any capital surplus to requirements, we will look to return capital to shareholders at the appropriate time."
This is interesting because I feel I should point out that this one had to have a rights issue and cut its dividend in 2009 and dividends have yet to recover to those levels, although it had a strong track record of dividend growth prior to that. So hopefully they have learned from that experience and will manage the balance sheet and dividends more carefully going forward, although to be fair 2008 / 2009 were pretty exceptional times.
The share buy back might clear out the sellers and help to support the shares at around their current 12 month lows just under 400 pence. On the upside the top of the trading range in the last 12 months has been around 500 pence, so if it were to make it back up there in the next year or so then that would offer a potential total return of 25 to 30% - depending on how many dividend are collected along the way.
As is often the way we seem to have more announcements today as it is Thursday - I've never worked out why Thursday is such a popular day to announce.
Firstly we had an IMS from Amlin (AML) the high yielding (5.9% (F) for 2014) Lloyds Corporate Insurance vehicle. This was very detailed which you can read in full at the IMS link above. The highlights were premiums being up by about 5% with an increased retention rate of 88.2% but they did flag that premium rates were softening and these fell by 2.3 % overall versus a small increase 12 months ago. Within some lines they claimed that they had seen smaller falls than the market thanks to their specialist businesses securing preferential signings and having access to business which is not available in the open market and, on some business, better pricing. Earnings are forecast to be down for this year, so probably no surprise here and that is the nature of the insurance cycle.
Next was Electrocomponents (ECM) which I wrote up earlier in the year when they did a Pre Close Update so I won't dwell too much on the figures here which seem to be roughly in line with expectations with sales growth of just 2.1%, profits up by 7.4%, earnings by 9.4% and the dividend disappointingly flat at 11.75 pence versus a small increase to 11.9 pence which had been forecast. However, this is perhaps not so surprising when it is only covered 1.4x by earnings. Indeed they have apparently previous stated that over time as earnings increase, the Board intends to pursue a progressive dividend policy whilst increasing headline earnings dividend cover towards two times. Their new year has started in a similar fashion but they make reference to currency head winds and making progress towards their medium term targets. These seem to be for "through the cycle" targets of Sales growth of 5 to 8%, operating margins 9-11% and ROCE of 20 to 30%. Their sales are obviously quite light compared to their target, while margins at 8.3% should have some scope to expand to offset the sluggish sales and they are just hitting their ROCE range which is good. Still looks a bit expensive on 16 to 17x given the sluggish growth and Mr Market seems to agree as it has been marked down 5% first thing.
Meanwhile IG Group (IGG) have announced a brief pre close update in which they flag a quiet end to the year so sales will be light but that they are likely to meet expectation on earnings and cash flow thanks to their cost cutting initiatives. The shares have drifted back to the middle of their recent range so should be OK on the back of this given the rating of 14x and around a 4% yield seems fair but i guess it could drift back towards the bottom of its recent trading range at around 550p.
Finally Investec (INVP) - which I wrote up earlier in the year and traded successfully reported their final results today. I'll not dwell on them as I'm out and they are at the top of their trading range of the last few years. However, as they are not that expensive I guess they could still progress further, but will need markets and the rand to behave themselves. So if you want to learn more then see the highlighted links above.
I have written in the past about how corporate restructuring's which lead to subsidiaries being de-merged can lead to good value opportunities. Today I thought I would touch on the opportunities afforded when Companies suffer a mishap. In these cases it is important to determine the cause, extent and likely cost of the mishap and try and decide if it will be a short term one off or something more lasting and damaging to the business and its reputation and prospects. You can then compare this to the price reaction to see if there is a value opportunity as a result.
A good example of a bad mishap which was actually self inflicted by the management and which had long lasting effects was when Gerald Ratner in a speech described one of his own products as "crap" - see a brief video and a more recent interview for more details if you are not familiar with this case. Obviously you would want to avoid a Company with this type of mishap!
A more recent example where the mishap was smaller, less damaging and ultimately not as costly was back in 2012 when Britvic (BVIC) had to recall some of their Fruit Shoot drinks due to a choking risk for children from a small part on the top. While this was potentially very damaging, it was handled very swiftly and dealt with well by the company and they were very up front about the costs. This type of recall is quite common in the food and drinks industry and the direct costs were fairly easy to calculate. Obviously the longer lasting damage to the product and the company were an unknown at the time and hence the market marked the share down quite heavily as you can see in the chart above. This afforded a great opportunity to pick up the shares and enjoy the recovery as the recall did not do any lasting damage.
The shares recovery was also helped along by their subsequent attempt to merge with A.G. Barr which failed due to monopoly considerations. However, the Company has continued to prosper since then and indeed reported some more good interim numbers today. In these they saw revenues up 4.7% with 3.9% from underlying growth and 0.8% from pricing. Margins increased by 0.6% to 9% helped by on going cost saving initiatives which are expected to deliver £30 million per annum by 2016. This led to earnings growth of 16.9% which is around the rate of growth that seems to be forecast for the full year. So probably no change to forecasts I guess as they have been rising gently recently and their indicated range for EBIT this year of £148 - £155 million seems to be reflected in consensus forecasts already. The dividend was increased by a useful 13% on last year, reflecting they say confidence in future prospects. Adjusted net debt fell to £479.4 million which compares to a market cap. of £1.8 billion and represents 2.6x EBITDA down from 2.9x all of which seems OK given the fairly steady nature of this one.
Overall, this one continues to deliver steady progress and has some good operating metrics. However the value is not as good as it was when the mishap happened and it seems fairly fully priced on approaching 17x and around a 3% yield so more of a hold than a strong buy I would say, although Mr. Market seems to be excited today as he has marked it up by 5% first thing on the back of this announcement, cheers.
While AstraZeneca, Vodafone & M & S will be making all the headlines, today we have also had news from a stock I have written about several times before, namely S & U plc (SUS). This was their IMS for the period from 1st February to 19th May 2014 ahead of their AGM today. This showed further growth of 49% in receivables versus the prior year at the Advantage motor finance side.This was helped by a growing band of introducer's and brokers and they say margins have been maintained and debt quality is at its best ever. The Home Credit side was described as very promising as sales and collections exceeded expectations as they took advantage of consolidation in the industry. They opened three new branches and customer numbers were up by 6,000 and they also touched on regulation and the recent finance raised from M & G.
Talking of finance, debt has increased on the back of the growth in the business with gearing indicated at 58% which they say leaves adequate headroom plus they say they are continuing to pursue a deposit taking licence. All in all it looks like a strong start to the year and a good basis for further strong 20%+ earnings growth this year, similar to that reported in the last three years. Thus it still seems reasonable value on 14x or so this years earnings with a 3%+ yield. As a result of this growth and the rating I notice that it qualifies for the JIm Slater Zulu screen (low PEG) on Stockopedia which you can check out and get a two week free trial for here if that is of interest and you are not already a subscriber.