...a few days ago when I was writing about the latest Tesco profits warning I left you with a cliff hanger and promised a post about what I did with the proceeds when I sold Tesco at 364 pence back in April 2013. Unfortunately I was unable to follow through with the blockbuster release I had planned due to production delays. Today I'm pleased to be able to bring you the main feature as promised. So without further delay the stock I bought was Cineworld (CINE) a 287 pence, which I have mentioned in passing as a result in the these previous posts.
So why did I buy it over Tesco. I seem to remember that Tesco had its first trading wobble just before then and had since recovered and Neil Woodford had swapped his stake with Warren Buffet. So being concerned about the deteriorating fundamentals at Tesco I chose Cineworld which seemed to be progressing more steadily and I felt I was swapping one consumer related stock with a 30% market share for another. Now while food is a less discretionary purchase, I felt that Cineworld's market share probably benefited from more local monopolies as you don't tend to get multiplex cinemas clustering together in the same way as supermarkets do these days. In addition a night out at the Cinema still seemed to be a cheap night out for people in difficult times, although I must admit the last time I went I was shocked at the price of a ticket as I tend to prefer watching films at home.
Luckily for me it all turned out well and Cineworld also transformed itself into an international / emerging markets play when it did the deal with Cinema City earlier this year. This also enabled me to add a third to my holding via the accompanying rights issue at 230 pence. It struggled somewhat after this, but has more recently put on a good show and given me a happy Hollywood ending.
This prompted me to ditch the pop corn and head for the exit as I felt it was now starting to look expensive on 18x this years earnings with a sub 3% yield. I also worry that cinemas might ultimately suffer the same fate as music and book retailers and get killed by the internet. This is especially so as most of the film output these days seems to be aimed at the younger generation who also seem to be the digital generation. Thus as streaming services get more prevalent and mobiles get more powerful and faster maybe more people will stay at home and watch on their various devices for a fraction of the cost of turning out to the cinema for the family to watch an over hyped film?
Of course I may well be wrong as I'm sure they probably said the same when TV and VCR's came along but Cinema's still seem to be going strong and people will probably want a night out still. So Cineworld may well go onto greater things, but as they say on Dragon's Den "I'm out" in the 394 pence and looking around for a sequel, just hope it can be as enjoyable as this picture (see graph below).
If you would be interested in knowing what that turns out to be and have not already done so, then head over to the portfolio section and put your name down for the mailing list for news on the portfolio service I am hoping to launch at some point in the the New Year.
Finally don't forget that you can see the latest Advent Calendar window for today with a film related theme at the end of this post after the graph.
We have had a few updates on stocks I have mentioned in the past so in brief:
Updates today from three stocks I have written up in the past - see the categories list to the right of the blog for links to these.
In pole position on the grid we have an acquisition of Duncton Group from Provident Financial Group (PFG) and a small placing of £120 million of new stock to finance it. The Moneybarn operational brand that comes with it was founded in 1992, provides car finance to non-standard customers in the UK, operating mainly through brokers with additional distribution sourced through independent car dealers and from its website directly to customers. The business offers secured car loans, predominantly through conditional sale agreements and with the car typically used for necessities such as travelling to work rather than for luxury or discretionary purposes.
Provident Financial said in its announcement about the acquisition:
"The acquisition of Moneybarn broadens the product offering to the group's target customer base and creates a third leg of earnings that complements the organic growth opportunities available to the group. Moneybarn's origination has been muted recently, given funding constraints, and this leaves scope for growth going forward. The board believes that the business is highly scalable, given the strength of broker relationships and market leading credit decisioning, combined with the strength of the group's balance sheet. Potential opportunities for synergies with the group's existing businesses, including enhancements to underwriting and collections capabilities, the development of a business-to-consumer proposition and leveraging the Vanquis Bank customer base, will be evaluated post-acquisition."
They also mentioned that it will be immediately accretive to underlying earnings just on the basis of refinancing the £144.8 million of debt that comes with it. The price of seems reasonable at around 6x the stated pro forma EBITA of £20.3 million.
Overall seems like a sensible addition to their range of products at a reasonable price which enhances earnings immediately and provides scope for further synergies from enhanced underwriting, collections and cross selling to opportunities to existing customers.
Meanwhile Micro Focus (MCRO) have announced an in line interim management statement and a proposed return of value to shareholders of 60 pence per share, totalling approximately £84m ($140m) in cash. This is equivalent to around 7% of the recent share price of 864 pence - nice. The shares will undergo a consolidation when this is paid and shareholders will be able to choose whether to receive it as income or capital. This is in addition to the 3%+yield from the regular dividends that they are also expected to pay this year. On the outlook they said:
"Management's outlook remains unchanged from that given in the preliminary results for the year ended 30 April 2014 issued on 19 June 2014. We believe we have a strong operational and financial model that can continue to provide strong returns to shareholders. The model requires low single digit revenue growth in the medium-term and we remain confident that this can be delivered.
If the exchange rates experienced in the year to date were to continue for the remainder of the year, the comparative revenues for the year ended 30 April 2014 would increase from the reported $433.1m to $435.2m on a constant currency basis."
Finally today we have had interim results from Cineworld (CINE) - which seem to be fairly steady as they go about integrating after the merger with Cinema City. The figures are therefore a bit messy but they seem to have outperformed a fairly subdued cinema market in the period which was hit by the World Cup and a slower release schedule as a result. They have also suggested that synergies are now expected to be £5m of which £2m has already been achieved, although that doesn't seem that bigger deal in the context of an £800 million+ market cap.
They edged up the dividend by 2.7% to 3.8p on a rights adjusted basis and they are expecting a strong second half release schedule so they seem OK if a little dull on a P/E of 14x and a yield of 3.4% but they do have some more growth opportunities in less developed markets now.
BT announced their final results which came in slightly light at the earnings level 25.7 pence versus 26.3 pence (F), although the dividend was slightly better up 15% to 10.9 pence versus 10.7 pence (F). They also committed to 10 to 15% dividend increases in the next two years as well. So their investment in fibre and TV seems to be paying off and it looks reasonable value on around 14x and a 3% yield.
Meanwhile in the utility space we had a very detailed Interim Management Statement (IMS) from (CNA) today. This contained a profits warning as they guided for a decline in earnings this year to 22 to 23 pence versus the consensus of 25.5 pence, so a downgrade of around 12%. However, given the ongoing review into the energy market I suspect they were never going to report bumper profits this year and they flag the retail margin at 4% being below average. They did however say they remained committed to real dividend growth albeit recognising that with a reduction in year-on-year adjusted earnings per share, the payout ratio will increase above historic levels in the short term. The shares are off on the back of this and seem likely to languish given this update and the on going investigation into the industry and the election next year, but the 5%+ yield may help to provide some support for now.
While at the pictures a more positive story was presented by Cineworld (CINE) announced a first update since its merger with Cinema City and this seems to have boosted the growth rates as the Eastern European operation acquired are in less mature markets. Box Office revenues were up 8.6% and admissions by 6.8%. The increased revenues reflected price increases of 4.8% demonstrating some pricing power. Retail spending and advertising also showed some encouraging increases. All in all a good start, but they acknowledge that the World Cup will likely have a negative effect on them this year. Consequently as the shares have had a nice bounce from recent lows they seem to be having an intermission today after this update around the middle of their recent trading range. This seems reasonable given the rating of around 15x and just over a 3% yield.
Finally, the Morrisons (MRW) horror story continues with a brief IMS which saw total sales ex fuel down by 4.2% and LFL by 7.1% in the 13 weeks to May 4th. Despite this they said "Whilst the trading environment remains challenging, our financial outlook for the full year of underlying profit before tax in the range of £325m - £375m, remains unchanged." They also talked about their recent price cuts, store revamps, on line roll out and new convenience store openings. However, they acknowledged it was too early to discern the full effects of the price cuts when they said:
"The plans we set out at our results in March are on track. The reaction of our customers to the 1,200 "I'm Cheaper" price cuts we announced last week has been very positive. Although it will take time for their full impact to be felt, we are confident that these meaningful and permanent reductions in our prices will enable our clear points of difference to resonate strongly with consumers."
Consequently the shares are "cheaper" again today in Market Street and they also went ex the final dividend of 9.2 pence this week. The jury is still out on whether their initiatives will work, so I'll give them the benefit of the doubt for now. Seems their marketing department is not helping either (click picture above for full details if you haven't heard about it). However, it looks like the trap door is opening up on the value trap here and it may be a case of death by 1200 cuts, although in investing the first cut is often the cheapest! So maybe I'll live to regret not cutting this one sooner, despite the apparent value. But now I'm off to my local store to use one of their money off vouchers that came through my door and get 6 pence off my fuel as every little helps! Update it was much busier than usual.
I mentioned in a previous post how to research short sellers, directors dealings and keep up with RNS announcements. As a result of the service I suggested for tracking directors dealings I was able to pick up the fact that the new CEO and COO of Cineworld (CINE) both picked up nearly £150,000 worth of stock. This seems encouraging given how the shares have moved recently and it is usually positive when senior directors buy in. This one is still cum a 6.4 pence final dividend for a 2% or so yield on that alone while trading on around 14 to 15x earnings with a full year yield of about 3.5%.
From the same report recently I also picked up that there had been a number of senior directors at Interserve (IRV) who had been seeling. However, director sales are less instructive as there are often other reasons involved and in this case they had all cashed in some options and sold. Nevertheless not a great sign although the shares still look relatively cheap on around 11x this years expected earnings with a 3.5% yield.
You can read a full list of recent significant director deals here and sign up for a free e-mail alert there for yourself if you want.