...from a stock which features in the Mechanical Compound Income Scores (MCIS) portfolio. The stock concerned is Finsbury Foods (FIF) the £110m Aim listed UK manufacturer of cake and bread bakery goods supplying a broad range of blue chip customers within both the Grocery retail and 'out of home eating' food service sectors including major multiples and leading food service providers.
In their full year pre close trading update today they said that the board is pleased to report that, following the positive half year trading performance, strong trading has continued in the second half and the Group will outperform its current EBITDA and profit expectations.
The suggested turnover of £256.2m seems to be in line with forecasts and included 6% organic growth in the cake division plus a boost from some acquisitions they made during the year. So presumably they must have boosted their margins to beat the profit expectations and they alluded to this as they suggested cost savings from the acquisition had come through quicker than expected and this was further complemented by capital expenditure, depreciation, debt and associated financing costs all being lower than previously forecast.
Earnings were forecast at 6.61p for this year, so if we assume a 5% or so beat then they may come in with say 7p for this year while the dividend is forecast to rise strongly to 2.5p for a yield of just under 3%. Looking ahead to next year and assuming the beat today leads to some small upgrades then we could be looking at say 9p of earnings and a 3p dividend for the year to June 2016. At this mornings price of 92p this would put it on a reasonable looking rating of around 10x with a 3.33% yield.
Looking at the chart (see end of this post) the shares seem to regularly trade sideways for a few months before having big moves presumably leading up to and around news flow such as today's update. They have then tended to move in 10p or so steps which suggests to me after today that they could may be move up from the recent 80 to 90p to say 100p. This would leave put it on about 11x with a 3% yield, which seems achievable as its highest rating in recent years has been 12 to 13x and the yield has tended to be lower. So with the forthcoming final dividend it would seem that there could be about 10% return from this one in the short term if my 100p target is achieved.
Summary & Conclusion
As mentioned at the beginning of this post this is one that features in the MCIS Portfolio based on its score. I have to admit it is one of those that I have dismissed myself as it is a lowish quality manufacturer (low margins and ROCE) selling to strong customers (food retailers). However, their strategy of diversifying the business via acquisitions seems to be paying off and seems to be sensible in terms or reducing dependence on food retailers where they are nevertheless a No.2 supplier with a 19% market share. The balance sheet seems OK based on numbers presented by Stockopedia with interest cover of 169x and a Piotroski score of 6, but I note the Z Score is only just over 2 so it will be worth checking the debt levels when the results are announced given the acquisitions this year and the capital expenditure that they are flagging for the coming year.
So it will be interesting to see how this one develops given the MCIS portfolio's position and my personal aversion to it, but then that was why I started the portfolio to see if a more mechanical approach would be better in over coming human biases as has been suggested by many research documents where models were found to mostly outperform experts - even when they had access to the models! See links above for further reading if you don't believe me. Must go and have a look at those Scores again tout suite or enjoy some toot sweets if you prefer.
No not General Election policies but Company results in brief. First fags represented by Imperial Tobacco (IMT) which has announced interim results to 31 March 2015. The highlight for me is the delivery of the promised 10% dividend growth which is the main attraction of this one in addition to the current yield of 4.5% from this years expected dividend of 140.5p.
Otherwise it does not score so well on cover, operational quality (margins and ROCE) or estimate revisions.
Pensions come from Legal & General (LGEN) plus funds, annuities and other savings and other financial products. They saw continued strong growth and in contrast to Aberdeen yesterday, strong in flows to their asset management division. I continue to like this one and it has come back by around 10% from recent peaks and therefore now offers an expected dividend yield of just over 5% based on the forecast dividend for the year of 13.1p which represents growth of 16%.
On the food front we have had poor results, as expected, from Sainsbury's (SBRY) which included a slightly smaller than forecast reduction of 23.7% in the dividend based on their 2x cover policy. On this basis a further reduction in the dividend is therefore expected for next year too. On this basis and given the on going dividend cuts and the competitive nature of the industry with the main players being squeezed by the discounters, I continue to steer clear of this sector.
Finally on the food front I mention in passing Finsbury Foods (FIF) the AIM listed £100m market cap firm which is evolving into one of the largest speciality bakery groups in the UK. It is also one of the stocks that made it into the Mechanical CIS Portfolio which launched recently. They seem to be on a roll at the moment with their latest acquisition to follow on from the Fletchers acquisition they did late last year. The latest one is something called Just Desserts which they have bought from the receivers which sounds like a good idea, although may be concerning that it went bust in the first place?
Any way they say this is part of the escalation of Finsbury's entry into the food service cake channel and in particular the high growth national coffee shop segment. This is in line with their channel diversification strategy, indicated at the recent acquisition of Fletcher's in 2014. So it seems like a sensible add on which also brings some more diversification by product and customer and helps to reduce their dependence on the main food retailers a little.
The shares appear to offer value with a sub 10x PE and a well covered yield of just over 3%, however they don't seem to be the highest quality business in the world operationally. I note also that they only recently reintroduced dividends, although they have been and are forecast to grow rapidly. In addition they have had a poor recent earnings revision trend which is something else I do not like to see and this has brought the score down on this one recently from top decile to 69 currently. So a bit of a mixed bag and it will be interesting to see if this latest acquisition can turn the estimate revisions around but it is hard to tell because they provide little in the way of financial detail on the deal.
Finally as we look forward (?) to the election and all the hours of TV coverage do look out for Charlie Brooker's Election Wipe tonight and Paxman on Channel 4 with David Mitchell the comedian for an alternative take on it on election night.
if you are really bored, as I touched on Finsbury Foods today you could always check out the new series on the BBC called Inside the Factory: How Our Favourite Foods Are Made in which they looked at appropriately Bread last night and with Chocolate featuring tonight.