First up apologies for no post yesterday I just couldn't raise the enthusiasm to write about Legal & General's (LGEN) IMS, Greene King's (GNK) acquisition of Spirit or Imperial Tobacco's (IMT) results on the day. However having said that I suppose the 10% increase in the dividend and same rate of increase again for next year from Imperial Tobacco is good. Plus the shares have responded well despite the thin cover and high debt to approach all time highs. So it seems fair enough on around 13x
with a 5% yield for the year to September 2015. I guess people who follow 12 month highs and breakouts might get excited, but it looks a bit over extended and nearly over bought in the short term so I personally wouldn't chase it up here. However, maybe one for the watch list to see if it does come back in the next couple of months to allow you to pick it up on better terms and collect the 89.3 pence final which goes xd on 14 January 2015 and offers a yield of over 3% on its own at the current price.
As for today I couldn't see much to get excited about although Schroder Real Estate (SREI) produced an impressive rise in their NAV although they still trade at a premium to this but do offer a gross yield of around 4% if getting exposure to commercial property is of interest to you.
Alternatively their was an update from Value and Income Investment Trust (VIN) which describes itself as investing in higher yielding, less fashionable areas of the UK commercial property and equity markets, particularly in medium and smaller sized companies. VIT aims for long term real growth in dividends and capital values without undue risk and offers a mix of 71% UK mid and small cap stocks, 27% UK property and 2% cash. They increased the dividend by just under 5% and offer a net yield of 3.3%. Given the unusual mix of assets it does tend to trade on a discount which is currently around 15% or 7 to 8% if you factor in the debt at fair value - so a way of getting some commercial property exposure plus mid and small caps at a discount. However, I guess you could get the same kind of exposure / discount by buying a pure small or mid cap trusts together with a property trust - so as ever I guess you pay your money and take your choice or not as the case may be.
Finally as I'm boring myself now just to flag AMEC which I have written up in the past, has announced that it is hoping to close the Foster Wheeler acquisition in the near future. I mention it because as I suspected the price has been weak into this, partly because of the weak oil price and I suspect also on technical grounds related to the deal. For example I note there are just under 7% short positions outstanding which I suspect will be arbitragers who are playing the usual time value discount in the bid terms. So once it completes and this unwinds I would hope we might see some recovery in the price. Talking of which this has strayed into my previously suggested buying range of between 950 pence and 1000 pence where it comes on around 11x next years earnings with a 4.5% 2x covered yield and it still cum the 14.8 pence interim until 26 November which is worth 1.5% at 980 pence.
A brief update from Greene King (GNK) the brewer, pub and restaurant operator in which they reported a very modest 0.4% rise in their retail like for likes in the first 18 weeks of their current financial year. They blamed this on tough comparatives form an excellent summer last year ( I thought this years was better weather wise) and a poor performance by England in the World Cup plus on going consumer caution.
However their other businesses traded well: Pub Partners total LFL net income was up 3.7% after 16 weeks, while in Brewing & Brands, own-brewed volume was up 6.2% after 18 weeks, driven by strong growth from Old Speckled Hen, the UK's no.1 premium ale brand. They say they expect the momentum in these business to be maintained and for retail to see a stronger second half helped further by some new openings which are more weighted towards the second half this year.
So overall a steady as she goes type of statement with not too much to get worked up about either way, although the retail side seems a bit flat so far this year. After recent upgrades the shares stand on around 13x and a 3.6% yield which seems fair enough.
Meanwhile Kingfisher (KGF) the UK & European DIY and building materials retailer has reported Interims which also saw fairly lack lustre like for like sales growth of 1.8% or 0.9% in total. On the back of this their profits and earnings were unchanged while they edged up the dividend by 1%. They did however flag a £12m profit hit from currencies and without this profits would have been up by 3.3%. They also incurred development costs of £11m in new markets for them in Portugal, Germany & Romania. France was pretty flat as the French economy continues to struggle while the UK was the star with LFL's up 4.4% and profits up by 17.7% benefiting from initiatives to re-energise B&Q and better demand for trade products as housing construction and activity improved.
Overall a reasonable outcome after the disappointing Q2 update they put out earlier in the year as their French operations stabilized somewhat towards the end of the period. This continues to offset the recovery in the UK as does their investment in new markets. This leaves a fairly flat outlook for the year but with their return of capital programme / share buy backs likely to support the shares, the recent fall in the share price leaves them looking reasonable value on around 13x with a 3.7% yield backed up by a solid balance sheet so a strong hold I would suggest.
However, despite the above, Greene King which I wrote up earlier in this year, announced a pre close trading update today in which they saw continued strong trading momentum. So it seems things may have improved a little in 2013 and into this year. In the statement the CEO also mentions their Leisure Tracker Report which you can *download it from here if you are interested in seeing how you compare. For example the average household in the UK spent nearly £75 ($126 / €92) on eating out and £40 ($67 / €49 ) on drinking out in March 2014. This also highlights some other interesting trends in how consumers are choosing to spend their money.
Otherwise the business highlights from the statement were:
· Retail like-for-like (LFL) sales up 4.1% and up 4.8% in the last 16 weeks
· 22nd consecutive quarter of LFL sales growth
· Food LFL sales up 5.0% and room LFL sales up 6.8%
· Average EBITDA per pub in Pub Partners up 5.0%
· Core brand own-brewed volumes (OBV) up 4.6%
· Expect to meet market expectations for the full year
They said they expect to meet the market's full year expectations for profit, cash flow and the balance sheet, with further improvement in ROCE and a further reduction in leverage. Meanwhile the chief executive, Rooney Anand, on the outlook said:
"Looking ahead, we see the UK's economic outlook improving. Throughout the downturn wage growth lagged inflation but this quarter has seen that change for the first time since the recession began, which bodes well for the future. Customers, though, are still spending carefully, as highlighted by our most recent Leisure Spend Tracker report*. Hence we remain cautiously optimistic for the forthcoming financial year."
So he seems encouraged by the recent signs of improvement in the economy and I guess they could be a beneficiary from the World Cup and extended opening times on England's match days that has been allowed, but I'm not expecting us to be in it for very long! Greene King (GNK) seems a like a solid hold as part of a diversified income portfolio on around 13 to 14x P/E with a yield in excess of 3% and trend growth of around 7% expected.
After a ending last week with a cinema tip we start this week with a trip to the pub as Greene King have announced an interim management statement today. This looks fine in my view with headlines being: retail like for like up 5% in the last 6 weeks and 3.8% year to date, average EBITDA per pub in Pub Partners up 5.6% and strong growth in Brewing & Brands; core own-brewed volume up 5.8%.
Finally, in the outlook statement the Company said "Overall, our expectations for profit, cash flow and our balance sheet are unchanged and we remain confident that we will continue to provide growth in earnings and dividends, and improving returns, to our shareholders."
Which is what this one is all about really as they say "the board’s policy of maintaining a minimum dividend cover of two times underlying earnings, while continuing to invest for future growth, and maintains our long-term track record of annual dividend growth."
I bought this one back in May 2009 during their rights issue at the time and achieved an average in price of around 444 pence so at the time it would have been on a prospective rating of around 9 x and a 5% net yield. Having held it patiently since then I have seen the dividend rise from 21 pence to a likely 28.4 pence forecast for this year which would represent a compound growth of 6.26% per annum over 5 years and a 6.4% yield this year on my original purchase price. They have achieved similar rates of growth for a lot longer than that too.
Since then the shares, like the market, have risen and been re-rated to stand on a prospective 13.7 x and 3.39% yield for the year to April 2015 according to Stockopedia. This seems reasonable without being outstandingly cheap, so having doubled my money in 5 years or so and having enjoyed a total return of around 20% per annum including the dividends I am happy to hold for more of the same. However, given the re-rating since I bought them I would not expect such strong returns in the next 5 years, unless it get re-rated even further, which I am not forecasting. Assuming it can at least maintain its current rating then it looks like total returns of around 9 to 10% per annum should be on the cards (circa 3% yield + 6 to 7% growth). Of course things could cut up rough and valuations come back down again, but I am prepared to run that risk with this one.
Finally, you should be aware of the financial risks in this one as they geared up in the 90's and the 2000's as that was the fashion back then with the likes of Enterprise Inns and the financial engineering which was rampant at the time. From their 2013 report and accounts they observe the following:
"Financial credit metrics remain strong. Fixed charge cover has improved to 2.7x from 2.6x and interest cover has also improved to 2.9x from 2.7x. Annualised net debt to EBITDA has reduced to 4.7x and will continue to improve as we maximise the annual EBITDA returns from the underlying business and our investments in new sites. Our securitised vehicle had a FCF debt service cover ratio of 1.5x at the year end, giving 29% headroom."
While on the Pension front they said:
"At the year end, there was an IAS 19 pension deficit of £63.8m, which compares to £67.3m at the previous year end. The movement is primarily driven by the exceptional gain following the closure of the scheme to future accrual.
Total cash contributions in the period were £10.1m for both past and current service."
So you have to be comfortable with the level of debt in this one. Though it is a more leveraged balance sheet than I normally like, since most of it is secured on or backed by property assets and it is a fairly steady business, I am prepared to live with it in this case but as ever you pay your money and take your choice - cheers.