In passing given that the All Share and other UK Indices all put in positive performance in May the Simple Monthly timing indicators for all these remain in Hold / Bullish territory. The main broader indices such as the FTSE100, FTSE350 & All Share are 4.7%, 5.7% and 5.8% above their 10 month simple moving averages. While the Mid Cap and Small Cap indices are 11.7% and 7.7% above theirs reflecting continued out performance by Mid Cap names and a more recent return to form by Small Cap.
The Mechanical Compound Income Scores Portfolio has also been updated to reflect month end prices and scores. This shows another month of outperformance for the portfolio which produced a total return of 3.4% which compared to the 2.1% return from the All Share. This will have been aided by the fact that the portfolio is only 10% or so exposed to FTSE stocks and heavily overweight in Mid Cap and AIM names which as a group put in a better performance last month. Please remember this is a Mechanical approach selecting from top scoring stocks in the Compound Income Scores and it will be re-screened on a quarterly basis, so always do your own research before buying any of the stocks that feature in the portfolio or indeed the Scores.
Within the portfolio the star performer last month was Utilitywise (UTW) which ended the month up by 25% with its recovery perhaps aided by the election result and Woodford Asset management increasing their stake. At least as I confessed recently, I did "scalp" 20% for myself in this one too as someone on twitter put it. Otherwise the housing and property related stocks in the portfolio also did well on the back of the Tory election victory which was seen as a positive for the housing market in the UK. Thus Bellway (BWY) and Savills (SVS) were both up 17% or so while Howden Joinery (HWDN) joined the celebration being up by just under 10%. Finally talking of celebrations Finsbury Foods which bakes birthday cakes amongst other things also saw a 10% rise as they announced another acquisition from receivers recently.
On the downside the shocker was of course PLUS500 (PLUS) which was a topic of much discussion this month having ended it down by 50% thanks to something of a rebound towards the end of the month after their AGM update and rebuttal of the bear case on their accounting. Otherwise A.G Barr (BAG), the maker of Irn Bru, was down 2% after a cautious update at their AGM, while trading updates and an AGM statement from Renishaw and Alliance Pharma saw both of them off by around 4%.
Coming up next week will be updates from WH Smiths and Bellway plus results from Photo-Me later in June.
Summary & Conclusion
So another positive month overall for markets and another month of outperformance for the Mechanical Compound Income Scores Portfolio, although it is early days and with such a focussed list of names skewed heavily to Mid and Small Cap no doubt it will have poorer months in the future. However at least the 20 names showed some of the benefits of diversification as despite PLUS500 falling by 50% the rest of the portfolio was able to more than make up for this.
Having said that though I am able to say that it is now Machine 1 Man 1 as my own portfolio put in a better performance this month, but still early days so it will be interesting to see how it pans out over the longer term. Talking of longer term and Man versus Machine I was interested to read that Arnie is going to be back in T5 when a new sequel, or maybe even a prequel with all the time travelling, lands at cinemas in July. So on that note Hasta La Vista readers - I'll be back - next week.
Given it is the last trading day of the month today I have decided to do the weekly update of the Scores after the close so they should be updated by tomorrow morning. This will allow me to have month end data and prices to update the Mechanical Scores Portfolio, so look out for an update on that next week.
So today I have decided to write up one of the stocks which made it into the Mechanical Portfolio although my first inclination and probably yours will be huh. But on further investigation and reflection I have actually come to like the idea of this one.
I chose the above cryptic title as It features a long standing executive who could be considered to be the Arsène Wenger of the corporate world in the UK. For non football fans (or Soccer if you are in the US) Mr Wenger has, since 1996, been the manager of Arsenal football club who play in the English Premier League. In this case I say this executive is similar in so far as he is French and he has been involved with this Company since 1994 with mixed results too. Strangely he also looks remarkably similar to Mr Wenger - I wonder could they be related?
Any way joking aside if you are not familiar with Mr Crasnianski you can read more about him by clicking his image above.
The company he has been involved with is Photo-Me (PHTM) which is why I said at the start you would probably go huh?
So having dealt with the Gunners and the French bit this is where the revolution bit comes in. No not another bit of gratuitous music (oh go on then here's some Beatles). No it is their new business Revolution which is a 24/7 outdoor self-service launderette. What's that another eh - I know but bear with me.
These automated launderette's are equipped with 8kg and 18kg washing machines, built-in hypoallergenic washing liquid pump and a vented dryer. Not only is this machine outdoor and available 24/7 but also very economic: £4 for 8kg wash, £8 for 18kg wash and only from £1 for a dry. You can use the 8kg machine for regular loads or choose instead the 18kg machine to wash all your weekly laundry at once or heavy loads such as duvets, throws, curtains and pillows. Apparently it can also text you with a notification that your washing is nearly finished so you can get back to collect it.
You can see Mr. Crasnianski in an interview below and hear him talking about the business which I got from what looks like a useful resources called Proactive Investors and Stock Tube. As an investor I like to hear him talking about a one year pay back on these as well as their company having no debt or debtors as their customers all pay up front!
In addition the Chairman in last years annual report pointed out the following:
"It is also part of our strategy to be financially independent
as far as we can be and to concentrate on increasing
our returns to shareholders. Our cash flow strength has
therefore enabled us to finance from our own resources
the development and deployment of Revolution, the
expansion of our photo booth estate as well as substantially
increasing dividend payments over the last three years.
We aim to continue to do this."
Furthermore in addition to the 500 or so laundry units they had at the last year end (April 2014) they are targeting having 2000 by the end of this calendar year (2015). On this in their report and accounts they said:
"As with photo booths, the machines are very cash generative and to date, the average EBIT margin on a laundry unit has
exceeded 50%. The achievement of the roll out targets in the short and medium term therefore represents an opportunity for a very significant increase in Group profitability and returns to shareholders."
So this looks like an interesting new concept that they are roiling out to utilise the cash flow from the rest of their business. This seems to be on a more stable footing now as the photo labs part has been run down due to digital technology, but it seems that there remains a demand for Photo booths for passports and a new ID card planned in Japan which he talks about in the interview.
In terms of the shares they do look a bit expensive on the basic PE of around 18x for the year to April 2016, but this would come down to around 16x if you adjust for the 12% or so of the market cap that they have in cash. It also means that their earnings yield looks more reasonable at around 7 to 8% and they are expected to yield over 4% next year too having committed to raising this years dividend by 30%. In addition to this they have paid special dividends in the last couple of years of 3p and 2p so if they cannot find acquisitions or decent investments for their cash then they have said they will consider more specials too.
However, I note in an interview with the CFO (a French lady Françoise Coutaz-Replan) that they are also currently trialling automated car washes at a few European supermarkets to see if they are viable as they do require more in the way of capital expenditure than the revolutions. So I guess if these stack up in terms of ROCE then it sounds like that could be another more substantive use of their cash flow and cash balance maybe. I also note that having lowered their manufacturing costs that they are trying to leverage the Photo Booth estate with some Phiippe Starck designer booths, which are higher margin, printable 3D figurines and expansion in China and other emerging markets with photo booths facilitated by their new lower manufacturing costs.
So I like the balance sheet, the business characteristics, high margins of 20% and ROCE of 33% and the fact that they have found a new venture to grow and invest their cash flow into which seems to be making even higher returns which together with generous dividends appeals to me. Added to which Mr Crasnianski knows the business well and still holds over 21% so his interests should be aligned with other shareholders, hence the shareholder friendly dividend approach.
Why mention it now? Well as I say it comes up on the CIS with a Score of 95 and in fact made it into the Mechanical Portfolio, which is what prompted me to look at it more closely despite my initial scepticism. In addition they have final results coming up in the next few weeks which could act as a catalyst for the shares if they deliver a compelling update on the roll out of the revolution and may be progress on car washes or another special dividend instead?
This might then afford a decent trading opportunity if they can break out of their recent sideways trading range to the upside which might suggest a 160p to 180p short term target perhaps? On the downside I see that it dived to 120p with the market in October, so in similar circumstances or if the results disappoint then I suggest it could have a similar degree of downside which would then take it down to a fairer / more attractive looking ex cash multiple of around 14x. So may be not one to rush out and buy but perhaps one to put on your watch list and see how the next figures come out in the wash - Vive le revolution!
Or quality (and growth) at a reasonable price as we say in the investment world. This relates to the figures today from PayPoint (PAY) which I first wrote it up about a year ago when I felt it was looking too expensive to consider a purchase.
As you can see from the chart the shares have been poor performers over the last year or so in price terms despite continued steady delivery of earnings and profits. As a result we'll see later that this means the shares have de-rated. Technically the shares seem to have been building a base between 800p and 900p and the shorter term moving averages show some signs of turning up, although it will be key to see if they can get above the falling 200 day and turn that positive.
I expalined last year that this is a leading specialist payments company, processing consumer payments across a wide variety of markets through its retail networks, internet and mobile phone channels. It also offers something called Collect+ which is for consumers to collect parcels from shops to tap into the whole internet shopping / click and collect trend. You will probably seen their signs and terminals in your local convenience store.
So how do they look now after the final results they have reported today. In these they reported continued growth of 8.3% in their net revenues and beat earnings and dividend expectations with 57.4p v 56.2p and 38.5p v 38p respectively with 9.1% growth in both numbers year on year. They also reported higher cash on the balance sheet coming in with £43.9m and this is net of cash in the parking and on line payments business which they say they are planning to sell.
The cash gives me some reassurance on the finances although some are concerned by the low book value on this one. I am not unduly worried by that because this is essentially a service business based on its network, software and physical terminals. Thus the valuation is driven by and supported by the earnings and cash flow thrown off by these rather than the value of the assets.
I find it interesting that they are planning to sell the parking and on line payments business as they say:
"The mobile and online market has attracted a substantial amount of new investment, particularly last year. This investment has changed the competitive landscape, bringing pressure for both faster development and larger scale to support lower margins. The need for greater pace and scale has increased the execution risk and extended the timetable for returns for PayPoint. Positioned against the opportunities centred around our retail proposition, the board believes that there are likely better owners for these businesses and as a consequence has decided to sell the parking and online payment processing companies to realise their value."
Other Tweeps (term for people who Tweet apparently, Twits would be too derogatory I guess) are very keen on OPAY which operates in the on line payments space but trades more expensively than PAY and does not pay a dividend. Given my focus on income I therefore tend to prefer to look at PAY as a play on this area, but to be fair to the other Tweeps OPAY has certainly performed much better than PAY over the last few years, but the question is what will the future hold?
Well looking at the valuation of PAY post these results I think it is now looking reasonable while offering good quality given its high operating margins and returns on capital employed. Indeed Stockopedia gives it a 96 on quality and 82 overall while it gets 92 on the Compound income Scores. Given the beat today I would expect to see some upgrades to next years numbers of around 5% if they can continue this years growth trend so we might see something like 62.5p and say a 42p dividend. At the pixel time price of 912p this morning (+3.8%) this would put them on 14.6x with a decent 4.6% yield. If you adjust for the cash the PE would be nearer 13.5x so a fair kind of level I would say if not an outright bargain, but given the operating metrics and steady past delivery of dividends, that's why I say it now represents quality and growth at a reasonable price.
I'm sure others may well be more excited about OPAY but as I always say you pay your money and take your choice, I chose to pay my money by finishing accumulating my holding in PAY yesterday ahead of these numbers. It will be interesting to see what they get for the parking and mobile payments business, hopefully they will get a fancy price and maybe pay their shareholders some more money via a special dividend perhaps? This will help me to pay my bills and puts me in mind of a funny old song from my youth which seem appropriate to this post...
In brief we have had a couple of AGM updates from stocks that feature in the Mechanical Compound Income Portfolio. See the Portfolio tab and scroll about half way down for more details of this if you are not familiar with it.
The first statement was from Alliance Pharma (APH) who reported some reasonable revenue growth overall and from a recently acquired product, which is something they tend to do on a regular basis. The also flag that they have financing available to look at more of these.
The shares have had a reasonable run after trading sideways for years and perhaps, if they can get the earnings moving ahead, then maybe they could sustain a breakout. This might allow a move up to say 50p which would leave it on a more full looking rating of 14 to 15x. However as you can see from the chart below they are looking over bought in the short term with some negative divergence on the RSI suggesting a loss of momentum in the short term. So personally I'm wouldn't be chasing this one up here, but it might be worth revisiting on a pull back below 40p to fill a gap on the chart which I guess could be facilitated by them going ex the final dividend next month.
Meanwhile the other topical stock PLUS500 (PLUS), that features in the same portfolio, has also had an AGM statement out this morning. As I'm sure there will be lots of commentary on this one I'll not cover the detail. However I note that they are talking about Q2 revenues being down and being hit by $4m in the last two weeks due to the regulatory issues. They also flag marketing costs being "appreciably" higher and a "conservative" estimate of £2m of extra costs for the remediation work. I also note that they now say that this is likely to take "approximately" a month rather than the days or a week or two that some had hoped. So all in all I would expect to see some downgrades coming through on the back of this.
They have also partially backed down on a controversial salary increase for directors saying that if it is approved none of them will take the raise until this situation is resolved. They also refuted a number of the allegations surrounding their accounting.
Thus a fairly full response from the company to clarify the situation which may help to reassure and further the recovery in the share price that was seen yesterday. I guess time will tell how serious this set back turns out to be and it may prove to have been a great buying opportunity. However, personally I am not prepared to buy into this one but I will see how it looks when I come to do the quarterly review for the Mechanical Compound Income Portfolio at the end of June.
...after the excitement at the end of last week with PLUS500. Today we have had a couple of trading updates from Cineworld (CINE) and Micro focus (MCRO).
Cineworld saw pretty good growth across the board in both the UK and emerging markets in which it operates. They also opened a few new cinemas with lots of screens in the UK and overseas with 16 planned for the rest of the year split evenly between the UK and overseas. This together with what looks like a more attractive film schedule for this year means they are probably well set to deliver decent growth again. However, the rating anticipates this to a certain extent with the shares standing on over 18x with a sub 3% yield and an earnings yield of less than 5%. So overall not cheap, but looks like it should continue to grow well against an improving consumer background so I guess it could continue to show some good price momentum despite the rating. However having been bored by the Marvel Avengers Assemble film on TV last night I still remain somewhat bemused by the attraction of all these comic book films but each to their own.
On Micro focus today we have had a new piece of management speak. In the past I have pointed to managements saying they are trading "broadly in line" which is code for slightly behind. In today's statement they say: "At the Interim results presentation in December 2014, management provided guidance of combined pro-forma full year* revenues of c. $1,330 million and combined pro-forma full year* Underlying Adjusted EBITDA** of c. $500 million, based on the exchange rates then prevailing. The Board is pleased to reconfirm that the Group expects to report revenues and Underlying Adjusted EBITDA comfortably in line with this guidance on a constant currency basis."
So I take "comfortably in line" to mean were confident of meeting or slightly beating expectations but don't want to upgrade them at the moment. On this basis I assume the forecasts will be fine but with scope for upgrades especially if the integration of last years acquisition goes better than expected as is sometimes the case. They may need this as these are also looking more fully valued now on around 16.5x with a 2.5% yield and an earnings yield of close to 3% so probably a hold up here. Hmm comfortably in line - puts me in mind of a song appropriate for post bank holiday blues...