Quick update on my post on Connect Group (CNCT) yesterday. I see it has achieved my first price objective already today as it has hit 170p, so + 10% in a couple of days Any way that does reflect a purchase at the offer price with the bid only being 167.5p, so more like 8% or less if you allowed for the spread too when buying + stamp & commission etc. Still not too bad, if only I'd bought some!
So it will be interesting to see if the 170p level acts as resistance again or if it can break out on this occasion and progress towards my next target of 200p.
...which is usually a good thing. The stock concerned is one that I have written up in the past called Connect Group (CNCT) which was formerly Smiths News, the newspaper distribution business which was spun out of W.H.Smiths. In brief their results today were ahead of forecasts in terms of turnover £1875.1m v £1859m, while eps was 19.7p v 18p forecast for this year and 18.7p for the year to August 2016, so they seem to have also beaten next years forecasts this year. On the dividend front they also pleasantly surprised with 9.2p v 9p forecast.
The beat seems to have been driven by cost savings in the News division and a useful first time contribution from last years major acquisition of Tuffnells which delivers odd shaped or outsized parcels. This benefited from more new business and margin improvements on the back of increased prices. Meanwhile their click & connect Pass My Parcel delivery service signed up 3,000 stores and is looking to double this number over the next couple of years with a further £2-3m of investment as a result. The News and Media division saw turnover and profits decline which they claim would have been up if it had not been for a boost from last years World Cup sales - which seems odd but that's what they say. The books division did however progress profits under new management as margins increased on lower sales and they saw a strong h2.
The balance sheet is pretty weak in terms of assets on this one which may put some off. It is also more leveraged now after the acquisition last year. On this they say debt should be at a peak at 1.9x adjusted EBITDA which is OK but leaves little margin for error. However having said that as this one is fairly cash generative, then you should expect this to reduce going forward assuming they don't make any more acquisitions.
Summary & Conclusion
So a good set of numbers and means that upgrades are likely on this one as they have beaten next years number and I hear that one broker, W.H. Ireland, is upgrading their higher than consensus number of 19.3p to 19.7p, although that only matches what they reported this year so may well prove to be conservative. Indeed it is often the case that you get a series of upgrades as analysts tend to be too cautious in changing their numbers on the back of new information.
Any way taking that number for now to be conservative and assuming they edge the dividend up again in a progressive fashion to say 9.5p, at this mornings price of around 155p (+5%) would leave them on around 7.9x with a 6.1% yield, which is cheap, but then this is a lowish quality business which is leveraged and trying to offset by diversification a decline in its core business which is not always a recipe for success. It is also quite a similar rating to another business operating in a similar fashion called DX Group which came to the market recently via VC's.
So clearly the market is also pretty sceptical about these businesses, but therein maybe lies the opportunity if you are prepared to take the risk. The broker mentioned above has a 200p price target on the back of their upgraded numbers which would equate to more like 10x and a 4.75% yield, which doesn't seem outside the realms of possibility as the highs and lows for PE and yield on this one have been 10x+ and a bit below 5%. While on the chart I see the shares were at those kind of levels as recently as January 2014, but have struggled to get much above 170p in the last 12 months.
On that basis I would probably pencil in a short term target of 170p for a 10% capital return before resistance potentially kicks in. Beyond that if it can break above that level and out of it recent trading range then that could suggest a 200p - 210p medium term target for a 30%+ return. That may though require the patience of a saint, but at least you would be getting paid 6% or so while you waited. It scores reasonably well on the Compound Income Scores at 72 although I note the financial security score is weak which I mentioned above.
I have traded it successfully in the past, but I'm not sure I can raise the enthusiasm for it myself at this stage as I'm not that desperate for income and I prefer to target better quality stocks, but as I always say you pay your money and take your choice and this one seems fine if you should choose to buy it, but obviously do your own research as no guarantees etc.
Finally I've been experimenting with a larger font in the last few blog posts, any thoughts positive or negative on that - I assume it's easier to read or is it bad on phones as it means more scrolling? Any feed back would be gratefully received, thanks.
..as despite EU leaders trying to tell Greek voters that a No vote would be a No to the Euro here we are again with another last chance to do a deal by this weekend, although supposedly they have a plan B which allows for a Grexit. I guess we'll have to wait and see again. Or it could be Georgehog day as we have another budget today from George Osborne.
Meanwhile in the UK stock market all the on going concerns over Greece forced the FTSE down into the support zone between 6200 and 6400 that I suggested recently. We also had an in line update from Interserve (IRV) who saw a slow down in construction in the UK but did flag some big orders they have won recently. There was a slightly better than expected updated from Connect (CNCT) bolstered by their acquisition last year. Both look good value but weak finances somewhat detract from the bull case and may help to explain the low ratings.
The other more interesting announcement yesterday came from S&U (SUS) who revealed an unsolicited approach for their home credit business from the new business Non-Standard Finance which was set up by the former Chairman of Provident Financial and back by Woodford Asset management among others. This is quite a big move for S&U as this has been the core of their business for years and their plan is to reinvest some of the proceeds into their more recently established and rapidly growing car finance business. The other effect will be to leave them with cash on the balance sheet and once they have worked out their capital requirements and investment plans they say they will consider a return of capital to shareholders after consulting with them.
This was quite well received with the share up a few percentage points in a soggy market yesterday. However, they did suggest that it will dilute their earning in the second half so it will be interesting to see if it can sustain a re-rating on the back of this given the higher growth and returns that they get from the car finance business. I just hope they are not going nap on it just as the latest UK consumer debt fuelled boom gets back into top gear again and car sales hit record highs.
...as well as News, Media, Education, Care & Parcels. In this case it is Connect Group (CNCT) which is the former Smiths News business which I have written about in the past. Last time I wrote they had delivered a "broadly in line" up date and I feared this might lead to a few downgrades - which it did, although not to any great extent.
Today they have announced Interim Results for the six months ended 28 February 2015 which they say leaves them on track to meet full year expectations. Comparisons are somewhat clouded by the acquisition of Tuffnells the odd sized parcel distribution business and the associated rights issue. Hence they flag the adjusted figures and 7 associated notes.
The Chief Executive said: "The Group has made an encouraging start to the year, making strategic progress across all divisions and successfully completing the major acquisition of Tuffnells. Tuffnells represents a significant step in our growth strategy and we are delighted with its initial performance. We have also been investing across the rest of the Group to position us for sustainable growth and are pleased with the progress we are making."
On their preferred underlying basis Revenues and Operating profits were up by 1.2% and 3.3% respectively but earnings (eps) were down by 5.5% on the prior year, as was expected, by the phasing of Tuffnells post-acquisition profits and associated rights issue shares. On the dividend they increased this by an adjusted 3.6% reflecting their continued confidence in the Group's strong cash generation and future prospects. Talking of cash generation they continued to generate strong free cash flow in the period, delivering £16.0m up £4.1m or 34% on the prior year.
Despite this the balance sheet became more leveraged as a result of the acquisition. Closing net debt at the end of the period was £157.9m versus £93.0m at August 2014 and £105.0m at February 2014. Debt at the end of the first half year is usually higher than the year end position given the weighting of free cash generation in the second half and higher dividend payment in the first half of the year. They therefore seem confident of paying some of this down in the second half and beyond due to the strong cash flow. On this and coverage etc. they said:
"Net debt: EBITDA at the end of February 2015 was 1.94x versus 1.4x at August 2014 and 1.6x at February 2014. This remains comfortably within our main covenant ratio of 2.75x and we remain committed to continue to pay down this debt towards our historic leverage ratio."
Aside from that the balance sheet looks pretty weak with negative net assets which is a hangover from their demerger from W H Smiths, but given the nature of the business and the cash flow this is probably OK but will put some off.
Summary & Conclusion.
An in line set of results although difficult to interpret because of the deal and rights issue late last year. However, with the resultant fall in earnings and the 3.6% rise in the dividend being shy of the full year forecast growth 4.9% to 9.17p, this leaves them a lot to do in the second half. As a result I think there could be a further small drift downwards in the forecasts which I don't normally like to see.
Having said that though they do still look cheap, if not great quality operationally and financially. Thus the 8x P/E and 6%+ yield, which is reasonably well covered by earnings and cash flow, should provide some support. There does not however seem enough in these figures to get the market excited or spark a re-rating. Indeed looking at the chart (below) they continue to look a bit soggy and range bound but they are now close to being over sold in the short term. So I wouldn't put you off if you are tempted to buy them for the yield down here - just don't expect much else from them in the short term.
I continue to note the gap on the chart just below 130p so I would continue to watch them to see if they get down there, perhaps in a market shake out, as a better entry point for a trade which might also then offer the chance of a capital gain too. If it does get down there though one would have to check the reasons as I have highlighted in the past that buying into these declining businesses can be dangerous. So on that bomb shell I'll leave you but as ever do your own research.
...amongst other things today. As there are lots of announcements I'll try and keep it brief. First up on the topic of money is a year end trading update from a stock I covered last year called Provident Financial (PFG) who describe themselves on their website as providing simple, manageable financial services for people whose needs are not always met on the high street. When I first wrote it up / bought it back in January 2014 it was offering a yield of 5% with 10% expected dividend growth.
Today they have updated on the year to 31st December 2014 and the unfortunately named Peter Crook commented:
"I am pleased that the group is expected to report 2014 results in line with market expectations. Vanquis Bank and CCD have both traded well through the final quarter of the year and Moneybarn has made a very good start under the group's ownership. Our funding position remains strong."
Within this they saw continued growth on the Vanquis Bank / credit card side as they manage the consumer side for cash while also modernising it and cutting costs. Against that they have started an on line lending operation called Satsuma and invested £10 million in a new credit card operation in Poland and bought a car finance business (Moneybarn), so quite a busy year.
Thus one would expect that they should hit current forecasts of around 130 pence of earnings and 98 pence or so of dividend, although I guess they could be tempted to round that up to 100 pence if they are feeling flush. This would actually represent 15%+ dividend growth compared to the 10% which was expected at the start of the year. This reflects steady upgrades to earnings through the year which is something I look for in my scoring system. A similar rate of growth (15%) is now also expected for the current year ending 31st December 2015 which after a 50% rise in the share price in the last year, leaves it on a fullish looking rating of around 17x with a still useful 4.5% yield as the shares have been re-rated somewhat. This leaves them just in the second quintile of my scores, so I wouldn't chase them up here, perhaps one to consider on weakness if you are not in it, but otherwise I'm happy to hold for now for the yield and the on going growth as the management continue to reshape the business.
Next up is newspapers as Connect (CNCT) the distribution group has also announced a trading update today at the 19 week stage. This is one I wrote up last year as a value idea and I traded it successfully. In their statement they said they had traded "broadly in line with management expectations". I am never that keen on seeing this phrase as I always take it to mean slightly below what we had hoped before but not dramatically so. The divisions including newspaper and books were all a bit mixed and total group revenue fell by 1.5% over the year.
They did an acquisition towards the end of last year as they continue to try and use the cash flow from the declining newspaper distribution business to diversify the business. It look good value on around 8x with a 6% yield for the current year to August 2015, although given the broadly in line comment I guess their could be some small downgrades. In addition the momentum is terrible on this one as you can see from the chart below and there is a gap to potentially close around 130 pence which, if they get down there, might leave them over sold and make a good entry point for a trade.
I say trade, which is not my main modus operandi, but I use it here because although it is cheap it can be dangerous to invest in businesses facing serious decline in their core business. in deed it puts me in mind of HMV and how they got into staging concerts to diversify into a related business and started selling all sorts of stuff in their stores. As we know that did not end well, although here they do have quite a few contracts extending out for 5 years for newspaper distribution which gives some reassurance for now.
it seems good value, top decile for value and overall on my scores, but oversold with poor price momentum and not without its risks as they try to manage the decline and diversify. So the success or otherwise of the diversification will need watching closely and could be the key to unlocking a re-rating.