...as I guess Companies want to get their announcements out ahead of the latest Bank Holiday weekend. Of note for the virtual Mechanical Compound Income Scores Portfolio there were updates from Character Group (CCT), Howden Joinery (HWDN) and Schroders (SDR & SDRC) which all seemed OK.
Meanwhile back in the real world we also had updates from Berendsen (BRSN) which also seemed fine on an underlying basis but continued to be hit by currency translation as they had previously flagged and as I highlighted recently when I reduced my position. In today's update they suggested on a reported basis, profit before tax for the quarter was lower than last year, again as a result of currency translation. This compares to some modest growth that is currently forecast so they have some work to do in the rest of the year to make this up or they may well see more downgrades. The market seems to be taking this on board now as the share are off 5% or so today and down by over 100p or more than 10% from where I sold them.
Finally from me today we also had a slightly disappointing trading update plus another acquisition from RPS Group (RPS). I say disappointing because having been more reassuring on the oil and gas sector back in February with the final results they now say that this market stabilisation proved to be "fragile". On the back of this they said the following:
"As a result our Energy business has had a slower than expected start to the year, although we have recently seen an encouraging increase in our asset valuation workload, related to transactions and financing. Our clients' E&P budgets for 2015 remain substantial and the cost of executing their projects has reduced significantly. We still anticipate an increased level of activity will develop during the course of the year once specific project costs and plans have been defined. We will also benefit from actions taken recently to reduce our cost base."
So a disappointing turnaround there, but I guess not wholly surprising or were the management being too optimistic back in February? They now also leave themselves anticipating increased levels of activity which could fail to develop if they prove to have been too optimistic again. However against that they do flag that National Oil Comapnies to which they are more exposed have been less effected than international players. They have also taken action to reduce the cost base and they have made several add on acquisitions, as they have tended to do over the years, to grow their business in other areas. These together should also help to offset some of the potential short fall in the oil & gas sector.
Talking of acquisitions they also announced today that they are acquiring the entire share capital of Metier for a maximum total consideration of NOK267 million (£22.3 million), all payable in cash. Consideration paid to the vendors at completion was NOK166.8 million (£14.0 million). Subject to certain operational conditions being met, two further sums of NOK49.2 million (£4.1 million) and NOK50.6 million (£4.2 million) will be paid to the vendors on the first and second anniversaries of the transaction respectively.
Metier Holding AS ("Metier"), a Norwegian based consultancy providing project management and training services, which operates across Norway from its headquarters in Oslo. The company, which employs approximately 160 staff, was founded in 1976 and works primarily on projects associated with delivering public and private sector infrastructure. In the year to 31 December 2014, Metier had revenues of NOK390 million (£32.6 million), and profit before tax of NOK35.3 million (£3.0 million), after adjustment for non-recurring items. Net assets at 31 December 2014 were NOK45.1 million (£3.8 million). Gross assets at 31 December 2014 were NOK159.1 million (£13.3 million). So it seems like the full price including earn outs will be about 7.4x the current PBT which seems a fair price. The Company says it will be earnings enhancing in the current year which is understandable when you are paying with cash / debt.
The shares have responded negatively to the announcement and are off by around 7% at the time of writing, leaving them in the middle of their recent price range. I guess it is understandable that the shares have fallen today given the turnaround in the commentary on the oil and gas sector. It does however leave them on sub 10x again and with a yield approaching 4.5% on the back of the expected 15% dividend growth which should provide some support.
However, it will be worth watching to see where the earnings forecasts go after today's update and the effects of the acquisition are factored in. Having taken some profits on this one recently in the 240's I'm inclined to run the rest for now but I continue to worry about the effects of the oil & gas sector problems on their business.
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.
A brief in line update from this laundry and textile services company. They say their turnover is up 3% underlying with improved margins and strong cash flow as usual. However after the effects of currencies their reported turnover is expected to be down 3% in the period although they say that reported operating profits are expected to be flat in the period thanks to the margin improvement. Not a lot to add but the Company said :
"The Board continues to expect to achieve a year of good underlying progress in line with its previous expectations."
You can read the full statement by clicking the highlighted link above.
This leaves the shares looking fairly valued on around 15x with a yield of just over 3% so not too much to get excited about either in the business or with the share price, although having said that Mr. Market has marked them up by 2% or so first thing. You can read my previous pieces on it here, which give more background details, a previous half year update and why boring can nevertheless be brilliant for your portfolio (see chart below) .
However, it is worth remembering come the next recession that this one does have some cyclicality given its exposure to hotels (via linen services) and manufacturers (via work wear) which meant it did give back a lot of its gains in the last down turn in 2008.
This is one I have mentioned in passing in an earlier posting back in April entitled If greed is good then boring is... which featured Berendsen (BRSN) as one of the boring stock examples. They have today reported an update statement before entering its close period for the half year ending 30 June 2014 and prior to its half year results announcement, which will be issued on 29 August 2014.
In this they report that they are trading in line with expectations with a 3% rise in underlying revenues overall and in their core business at constant exchange rates. However, in common with many UK businesses with overseas operations, they have been hit by the rise in Sterling this year. This means that their actual reported revenues will be down by 1% in the period as a result. They do however talk about improved margins in their growth businesses and some improvement in their more mature cash cow businesses like work wear and flat linen (sheets and towels) in the UK from new business. In linen overseas they flag revenue gains from contract wins but lower profits due to lower pricing and start up losses for new operations. They suggest their interest costs were down thanks to strong cash flow and that their reported pre tax profits were ahead over the first five months. So it sounds like steady as she goes and the Company said in closing:
"Whilst our reported results will be influenced by the impact of currency translation, on an underlying basis, we have made good progress for the first half of the year in line with management's expectations, and the Board continues to expect to achieve further good progress for the year as a whole."
They seem fairly valued having come back recently with other mid cap stocks so at 983 pence they are on around 14 to 15x earnings with a well covered 3% yield which is expected to grow by around 7% per annum. Nothing in this statement to get upset or excited about either way but then that is what you would expect from a staid stock like this. But as I said before boring can sometimes be brilliant - see chart below and the link to my earlier post for more details and the file below to download a fact sheet on them.
brilliant!? Three brief updates today from seemingly boring stocks:
1) Berendsen (BRSN)- which with its subsidiaries is engaged in the laundering and maintenance of textiles. The Company provides service solutions to source, clean and maintain the textiles that the customers need to keep their businesses running.
2) Computacenter (CCC)- The IT service provider which I wrote up after its results last month.
3) Unilever - (ULVR) well everyone knows what they do, don't they?
Please note also that the chart above is a price chart and does not include the fairly decent dividends / yields paid by these Companies over the last five years.
Taking Berendsen first as this has been a longer term holding for me and one I have traded successfully over the years. It used to be called Davis Service Group and has generally stuck to what it knows which is textile rental, dust mats, wash rooms and work wear (uniforms) etc. It supplies these services to hotels, hospitals and other businesses so it tends to be a fairly steady business but with some economic sensitivity from the hotel, catering and industrial uniform side of things.
Any way their update today saw trading in the first three months of the year in line with management's expectations. Underlying revenue for the Group, at constant exchange rates, was up 3% compared to the equivalent period last year and in their Core Growth businesses, revenue increased 4%. Reported revenue for the Group, including the impact of currency translation, was similar to last year. Their margins increased again in their core business and this meant their operating profits were also up here. While in their ex growth bits or what they describe as manage for value businesses (cash cows),
as expected revenue was similar to last year here, but profits were lower as a result of the contract re-pricing in the second half of last year and start-up costs on a number of significant new contracts.
Cash flow remained strong and the group expects to deliver further growth this year. Given the rise in the shares over the last few years (see chart above) they are not such good value as they were, but in the context of the current market and with their strong forecast eps growth and dividend growth trending at around 7%, 2x covered by earnings they seem OK if not outstanding value on around 16.7x earnings with a yield of 2.9% forecast for this year with the shares at 1044p.
Next I'll briefly pick up on Unilever which I mentioned in my post earlier this week when I returned from my Easter break. This was because Diageo had flagged the effects of weak emerging market currencies and some weakness in consumer demand in some of those markets. Well Unilever talked about underlying sales growth of 3.6% overall and 6.6% in Emerging markets and pricing being up by 1.6% but overall turnover fell by 6.3% after an 8.9% currency hit - so the same effect there. However they talked about positive results in Home Care and Personal Care and a strong start to the year in Refreshment. Their food business declined which they blamed on the timing of Easter. The market does not seem to like the results as the stock is off 1.3% this morning in a market that is up 0.5%. Given it is on around 19x and struggling to grow I guess the price reaction is not that surprising for an expensive defensive stock. However as far as I'm concerned the most interesting bit in the announcement was that the quarterly dividend was up by 6% to 28.5 cents or 23.3 pence. This is around about the 7% growth that is forecast by analysts which puts it on a 3.5% yield for the current year at the current 2600 share pence price. So as a result I'll probably retain my small holding for the yield as part of a broader diversified income portfolio.
Finally - briefly, you'll be pleased to hear Computacenter can be summarised as UK business strong, Germany stable and France still struggling and providing a drag on performance with an exceptional restructuring charge of between £7 million and £9 million. They still have cash on the balance sheet and cash generation remains strong. If you want a more detailed review of the business then please click though (at the link above) to my write up from last month - it still seems OK having drifted back after the results as I expected to leave it on around 13x with a 3% yield @ around 650 pence. I'll leave it there and well done if you got this far - but as I said at the beginning boring can be brilliant!