...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.
Lots of updates and items of news relevant to stocks that I follow today so I'll try and keep it brief in the main.
· a good strategic fit with the Connect Group's existing core competencies in time sensitive specialist distribution;
· a business with a strong track record, well positioned for further growth, and able to build upon its leading position in a market with sustainable growth characteristics;
· in line with the Group's ambition over the medium term to derive at least 50 per cent. of profits from outside of newspaper and magazine wholesaling;
· adds value to the organic revenue growth opportunities for the Enlarged Group, in particular via provision of a national distribution network;
· the opportunity to achieve pre-tax cost synergies across the Enlarged Group of £2.0 million per annum within three years and the potential to generate revenue synergies from shared infrastructure;
· creates significant value for shareholders:
o EPS accretive in year 1 and substantially accretive by year 3
o Post tax ROIC above cost of capital in year 1 (9%)
· in addition, the strong cash generation of Tuffnells supports the Group's progressive dividend policy.
I would say it seems like a reasonable deal which moves them to 38% of profits from outside their news distribution business on a pro forma basis and well on the way to their goal of 50%, plus it adds onto their other recently announced distribution business. The rights issue may also help to make the balance sheet look more healthy (depending on the assets it brings versus the price paid) and provide more distributable reserves to help maintain their progressive dividend policy.
However on the dividend they are unusually paying it on the rights shares too and as a result adjusting the final payment due next year. They explain this as follows:
Connect paid dividends per Ordinary Share of 9.3 pence and 8.6 pence for the years ended 31 August 2013 and 31 August 2012, respectively. The proposed final dividend of 6.6 pence per Ordinary Share for the year ended 31 August 2014 announced on 15 October 2014 in Connect's Preliminary Results Announcement will be adjusted to reflect the impact of the Rights Issue in connection with the Acquisition. The proposed final dividend will be adjusted to 6.0 pence per Ordinary Share to reflect the bonus element associated with the Rights Issue and both Existing Ordinary Shares and New Ordinary Shares will be entitled to receive this dividend.The proposed final adjusted dividend of 6.0 pence per Ordinary Share is subject to approval by Shareholders at the Annual General Meeting on 4 February 2015 and, if approved, will be paid on 6 February 2015 to Shareholders on the register of members of at close of business on 9 January 2015.
Following the Acquisition, Connect intends to maintain its existing progressive dividend policy, having regard to the availability of distributable reserves and cash, and taking into account the Enlarged Group's working capital and investment requirements.
Seems like a reasonable deal which furthers their strategy and should boost their earnings down the line and potentially bolster the balance sheet too so all in all seems sensible. But in contrast to Essentra I'm a bit surprised they are issuing equity at such cheap levels. So if you didn't get in before I suspect the usual fall on the back of it going ex rights and in the run up to the payment may give you an opportunity to get in at levels around 150 pence again and may even close the gap on the chart in the low 140's - something to watch out for I would say.
Finally, if you have made it this far and having spoken earlier about a hospital pass, as a reward to you if you are reading this on the web I offer a video of Top 5 Rugby Tackles gone wrong at the end of this post.
Just a brief update today on the back of Morrison's (MRW) trading update and the announcement of UBM's rights issue which they had flagged up previously.
Taking Morrison's first the sales continue to decline but the rate seems to be slowing and the comparatives get easier in Q4. They say they are still in line with their plan announced earlier in the year and have tightened their forecast for this years pre tax profits to £335 to £365 million. So some reassurance there and Mr Market seems to have been pleasantly surprised (not as bad as feared presumably) as the shares have bounced today along with the rest of the sector. I see also that Netto's return to the UK via a JV with Sainsbury's has launched today and their offers of Prosecco at £5.50 and Lego at £3 seem somewhat eclectic.
Looks like a relief / bear closing rally in the short term - not sure I'd be brave / clever enough to call the bottom of the food retail sector here ahead of the crucial Christmas trading period. Anecdotally I notice that we have been shopping more at Morrison's than Tesco's recently so their improved offering seems to be gaining some traction in our household at least.
Meanwhile UBM have announced a heavy 4 for 5 fully underwritten rights issue at 287 pence. All in line with their planned US acquisition although I do worry about that a bit given the record of UK companies going into the US and making a hash of it - think Tesco most recently and Sainsbury's before them to name just two. In the statement they also say that the dividend will be adjusted to take account of the extra shares being issued (around 44%) and they will target 2x cover going forward. So I reckon based on an ex-rights price calculated today this will mean it may end up on around a 3.6% yield with limited growth in short term while cover is built - so may be not that attractive at these levels, but might get more interesting if it falls heavily over the rights period, but probably no rush as you might also want to wait and see how thing pan out for them in the US first.
This first set of result since they reset their business model back in March this year bear the scars of that. The financial highlights from their statement are as follows:
· Total turnover down 4.9% to £8.5bn (2013/14: £8.9bn)
· Like-for-like sales (ex-fuel/ex-VAT) down 7.4% (2013/14: down 1.6%)
· Underlying profit before tax(1) down 51% to £181m (2013/14: £371m(2))
· Underlying earnings per share(1) down 52% to 5.74p (2013/14: 11.92p(2))
· Profit before tax £239m (2013/14: £344m)
· Interim dividend up 5.0% to 4.03p (2013/14: 3.84p)
· Net debt reduced by £209m to £2,608m (FY 2013/14: £2,817m)
· 2014/15 underlying profit before tax guidance confirmed at £325-£375m
They also highlighted strong cash flow helped by working capital movements and property disposals, while debt was reduced and some new funding arrangements put in place. They acknowledge that it is still early into their three year plan which aims to generate £2 billion of cash and £1 billion of cost savings. A new Chairman elect, Andrew Higginson is due to arrive in October and they are also due to launch a Morrisons card too (loyalty presumably). They also reiterated their full year profits forecasts and a commitment to an increased dividend as reflected in the 5% increase posted with these figures and a commitment to full year dividend of 13.65 pence for a yield of 7.5%. However they acknowledged that LFL sales had yet to improve but anticipated that these would improve toward the end of the second half. Dalton Philips, Chief Executive, also said:
"We are six months into the three-year plan that we set out in March and, although it is early days, I am encouraged by the progress we have made. There is an enormous amount of change and modernisation flowing through our core business, much of it enabled by new systems. Price investment, in-store improvements, and better products were all key components of the work undertaken in the first half, and the Morrisons card launches soon. Our new growth channels - online and convenience - are progressing well, and our cost-savings and cash flow plans are both on track to achieve our ambitious three-year targets.
Although it is too early to see the benefits of the three-year plan in the sales line, Morrisons is getting back on the front foot, and implementing change and innovation at real pace throughout the business. We are meeting the challenges of structural change with decisive action and are on track to become a more distinctive value retailer for the next generation of grocery retail."
Summary & Conclusion
The plan seems to be on track so far, but it is probably too early to say whether it will succeed in the medium term. With a new Chief Executive at Tesco and them seeming likely to invest in price as well the possibility of an on going price war continues to hang over the sector and may negate Morrison's shift in pricing. As it stands the value case remains in Morrisons with the yield and asset backing from their properties. However, the sustainability of the dividend and doubts about the value of the properties in the medium term will continue to dog them as the sector remains in turmoil and the competitor responses are awaited and as such it could equally be a value trap, so as ever you pay your money and take your choice.
Further to my post last week about the food retailers I have seen a couple of articles talking about the cut backs in their planned store openings and land banks etc. The above graphic comes from one of these at the Daily Mail and it is quite a good article on this and other background to the competitive situation in the sector. You can click on the above image to read more if that is of interest to you.