It is a dull day here in the UK today, both weather wise - not at all like summer and news flow wise. Fittingly perhaps, we have had a trading update from what is looking like a dull stock - AMEC Foster Wheeler (AMFW) which I have written on in the past. I did rather cool to it towards the end of last year as the rapid decline in the oil price seemed likely to hit their business as their customers delayed or cancelled projects on the back of this.
Indeed in today's update they are flagging that they expect their revenues and margins to be lower on the back of contract delays and pricing pressure. Against this they say that some currency pressures could ease and that they still expect £40m of cost savings from the Foster Wheeler deal last year with these rising to £85m by 2017, although at a cost of £50m this year.
They also say that they expect this years profits to be weighted towards the second half. This is something that I don't generally like to see as it means that the first half figures will likely be dull and the market may react badly when they actually see them. It also leaves them as a hostage to fortune if things don't pick up as they are hope and expect. Then they leave themselves unavoidably open to having to further downgrade forecasts or issue a profits warning which is never usually that well received.
Summary & Conclusion
As I say a dull looking update for a dull day which may lead to some more down grades to earnings on this one which has been the trend in the year to date. There is also the risk of more downgrades / a profits warning in the second half so overall not an encouraging picture which is why I cooled to this one and exited my position last year.
It does look reasonable value though on conventional metrics with a PE for this year (on current forecasts) of 11.4x and an attractive yield of 4.7%. However, I note that the coverage of the dividend is lowish and it is not expected to grow much this year if at all. The balance sheet also has some debt post the deal, which makes enterprise based valuations look less attractive with the earnings yield for example coming in at less than 5%. Thus I cannot suggest it is a buy given the outlook and the Compound Income Score of 41, but I guess if you hold it you could hang on and be patient as it is possible that patience might bring some rewards if the managements expectations can be met in the second half despite the outlook - but as ever you should do your own research, pay your money and take your choice. Cheers roll on summer, although at least the bad weather today might mean England can scrape a draw in the Cricket today so as they say every cloud has a silver lining - howzat over and out.
First up apologies for no post yesterday I just couldn't raise the enthusiasm to write about Legal & General's (LGEN) IMS, Greene King's (GNK) acquisition of Spirit or Imperial Tobacco's (IMT) results on the day. However having said that I suppose the 10% increase in the dividend and same rate of increase again for next year from Imperial Tobacco is good. Plus the shares have responded well despite the thin cover and high debt to approach all time highs. So it seems fair enough on around 13x
with a 5% yield for the year to September 2015. I guess people who follow 12 month highs and breakouts might get excited, but it looks a bit over extended and nearly over bought in the short term so I personally wouldn't chase it up here. However, maybe one for the watch list to see if it does come back in the next couple of months to allow you to pick it up on better terms and collect the 89.3 pence final which goes xd on 14 January 2015 and offers a yield of over 3% on its own at the current price.
As for today I couldn't see much to get excited about although Schroder Real Estate (SREI) produced an impressive rise in their NAV although they still trade at a premium to this but do offer a gross yield of around 4% if getting exposure to commercial property is of interest to you.
Alternatively their was an update from Value and Income Investment Trust (VIN) which describes itself as investing in higher yielding, less fashionable areas of the UK commercial property and equity markets, particularly in medium and smaller sized companies. VIT aims for long term real growth in dividends and capital values without undue risk and offers a mix of 71% UK mid and small cap stocks, 27% UK property and 2% cash. They increased the dividend by just under 5% and offer a net yield of 3.3%. Given the unusual mix of assets it does tend to trade on a discount which is currently around 15% or 7 to 8% if you factor in the debt at fair value - so a way of getting some commercial property exposure plus mid and small caps at a discount. However, I guess you could get the same kind of exposure / discount by buying a pure small or mid cap trusts together with a property trust - so as ever I guess you pay your money and take your choice or not as the case may be.
Finally as I'm boring myself now just to flag AMEC which I have written up in the past, has announced that it is hoping to close the Foster Wheeler acquisition in the near future. I mention it because as I suspected the price has been weak into this, partly because of the weak oil price and I suspect also on technical grounds related to the deal. For example I note there are just under 7% short positions outstanding which I suspect will be arbitragers who are playing the usual time value discount in the bid terms. So once it completes and this unwinds I would hope we might see some recovery in the price. Talking of which this has strayed into my previously suggested buying range of between 950 pence and 1000 pence where it comes on around 11x next years earnings with a 4.5% 2x covered yield and it still cum the 14.8 pence interim until 26 November which is worth 1.5% at 980 pence.
AMEC the consulatancy, engineering and project mangement services company which I got into and wrote up earlier in the year has today announced its interim results. It is another of those that did OK initially but has since drifted back with the market which might offering up another buying opportunity in the weeks ahead. I had originally suggested trying to pick it up under 1050 pence so with the shares closing yesterday at about 1089 pence lets look at the results to see if the buy case still holds good.
First half revenues and EBITA profits on an underlying basis were up by 4% and 5% respectively and they suggest that margins were stable. They did go onto say though, given the mix of business they do expect margins to be down slightly for the year as a whole. In addition, like many UK companies they were hit by the strength of Sterling such that on a reported basis revenues of £1858 million and EBITA of £152 million were down 7% and 4% respectively. The eps figure came in at 19.8 pence which meant that both this and the revenue and EBITA figures were slightly below the concensus figures published on the website. They also say that actual exchange rates year to date, and forecast average North American exchange rates for the remainder of 2014, continue to be less favourable than 2013. This currently translates into a year on year impact on revenues of circa £250 million, and for EBITA of circa £25 million for the full year. Tbhey also say that as in 2013, profits and cash flow generation will be second-half weighted.
On a more positive note they stated that the order book was up by 16% to £4.2 billion (on an underlying basis) which is about equaly to this years expected turnover. While the interim dividend was rasied by 10% to 14.8 pence which is slightly faster than the 8% or so growth that is suggested by full year divdend forcasts of 45.4 pence.
The other significant factor with this one is the acquisition of Foster Wheeler which continues to make good progress, with integration planning apparently well underway and completion now expected early in the fourth quarter, and be double-digit earnings enhancing in the first 12 months after completion. The combination of Foster Wheeler and AMEC is expected to create sustainable value for shareholders for the long term, with ROIC expected to exceed the cost of capital in the second twelve months' period after completion. At 30 June 2014 AMEC had net cash of £28 million and post the acquisition of Foster Wheeler AMEC they say they will retain a strong balance sheet. This is mostly becasue they are issuing shares as part of the consideration for the acquisition such that the new shares issued will represent 23% of the emlarged share capital.
Summary & Conclusion
So a mixed set of numbers from AMEC which slightly missed the concensus and they are talking about second half weighting to profits and cash flow which can be a concern. However the shares look reasonable value on a P/E of aropund 12.5% and dividend yield in excess of 4% based on this years forecasts. Having said that I'm not sure there is enough in these numbers to get the market excited and indeed some may even be underwhelmed by the results. Thus i wouldn't suggest rushing out and buying it, although I'm happy to hold for the longer term potential. But I would suggest you put it on your watch list to see if you can pick it up closer to 950 to 1000 pence as this has been the bottom end of their trading range and might therefore provide some support for the share price on a technical basis. While a rating of more like 11x & 4.5%+ at those kind of levels would I suggest also be a very attractive entry point. While today's numbers may not justify the shares falling that far, I suspect we could see a flow back of shares form the US in Q4 when the Foster Wheeler acquisition completes and this could throw up the further buying opportunity I am looking for.