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In brief we have had an update from Intermediate Capital Group (ICP) - which I have held and written up in the past. The last time I wrote I felt they were probably fairly fully valued at around 590p. Since then they have fallen back a bit with the market, so does today's update change the view? Not really although to be fair they saw very strong inflows into existing funds, but did warn that Q2 would slow as they launch new funds which take longer to gain traction with investors compared to those with a longer track record. They also suggested that the current Eurozone uncertainty could have some impact on their business and the weak euro may trim some of the interest income, although fee income is hedged.
So overall a reasonable update which has seen the shares up by 2% or so today to 578p. It seems it should support the shares, but probably not enough to send it through resistance from the recent price highs around 600p. However if they continue to progress as the year goes on and the European situation calms down then they could progress more in the medium term. Otherwise late yesterday we had an announcement from Microfocus (MCRO) about an accelerated book build for a placing of 20m shares from Wizard as the lock up post the recent deal ended. This was done at 1350p and leaves them with a stake of around 30%. This suggests they think these shares are now up with events perhaps and obviously there could be more placings to come in due course. So on that basis this one may well also be capped around here for now I suspect given that and the 16x PE and 2.5% yield.
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A couple of results announcements today from decent income stocks today in the shape of Intermediate Capital Group (ICP) The mezzanine finance and fund provider and Pennon Group (PNN) the water utility and waste group. Click the highlighted names if you want to read the full announcements. Longer term readers may recall that ICP is one I recommended and bought almost exactly a year ago when it was around 400p with a target of 500p. I reviewed it again in January this year when it hit my target and debated whether I should stay or go and take the money and run.
In the end I top sliced my holding and continued with it and based on today's figures I'm glad that I did. They seem to be firing on all cylinders at the moment reporting record assets and new funds being raised at record rates, credit standards being maintained and impairments down on last year and below their target 2.5%. Added to which Europe seems to be recovering (although they are more global and diversified these days) and investors are still hungry for yield products and markets remain buoyant for exits. So I guess you could say it doesn't get much better than this? On the back of this they are planning to return £300m (about 13 to 14% of the market cap) via a special dividend which is on top of the £100m share buy back which they did in the last year. In addition to this they are raising the final dividend and as a result, the full year dividend, by just under 5%. This is all designed to re-gear their balance sheet to 0.8-1.2x from 0.5 currently and raise their return on equity to over 13% from the current 11%, although I hope they are not gearing up at the wrong time. The shares have responded with a further 5%+ rise to around 590p at pixel time and this leaves them on a yield of about 3.9% based on 2016's forecast dividend of 23.2p (+5%) which would still leave it towards the bottom end of its yield range in recent years, suggesting it may be up with events up here. In addition banking / financials are often valued on a price to book based on their ROE with 10% often roughly suggesting a 1x price to book. In this case if we take their suggested 13% ROE and factor in perhaps a prospective 10% rise in today's book value of 402p to give say 442p this would also leave them on a fairish looking 1.33x book value. So a strong hold for me up here on that basis, but worth watching markets, bond yields, credit spreads and defaults for signs of continued good times or trouble which might hit this one quite hard. Meanwhile in the more mundane world of water and waste Pennon Group have also reported a near 5% increase in their dividend and they are committed to growing this by RPI +4% until 2020. So by way of comparison with ICP based on their 2016 forecast dividend of 34p (+5.76%) this also leaves them on a prospective yield of around 3.9% at the flat pixel time price of 877p. So there you go a couple of stocks yielding 3.9% on the basis of forecast dividend growth of around 5% albeit that they have differing levels of operational and financial risk. So as ever you can pay your money and take your choice or not as the case may be, but they both seem reasonable to me and certainly more likely to protect against the ravages of inflation (which I discussed yesterday) than a cash deposit. If you are bullish of markets I guess you might prefer ICP or if you are more cautious you would probably go for Pennon but if you wanted to hedge your bets and get a bit of diversification you could buy both, just a suggestion not a recommendation. We have had an update today from Intermediate Capital Group (ICP) which describes itself as a specialist asset manager providing subordinated structured lending, private debt, leveraged credit and minority equity, managing €14.9bn of assets in third party funds and proprietary capital. This is one I suggested in May 2014 as looking like an attractive, over sold trading idea. You can read updates and the original note here or via the Categories menu to the right of the blog. So with the shares closing in on my suggested 500 pence target level and with the update today it seems like a good time to revisit the shares. In terms of the update the highlights from the statement were as follows:
Summary & Conclusion ICP seems to be continuing to perform well in terms of its funds and their ability to attract new investors, although it seems that realisations will be lower in the second half. This is a mixed blessing insofar as it means fewer windfall gains but does make it easier for them to grow their book of business in total. This is a key focus for them as they seek to re-gear their balance sheet and increase their return on equity. Allied to this they continue to buy back shares as part of their planned £100 million share buy back programme. They have done £69 million and expect to complete the programme by the end of their financial year to 31st March 2015 so this should continue to support the share price. Talking of which as you can see from the graph at the end, the shares have struggled since May but have done well since the low in the market in October 2014 when the Japanese central bank came out with their latest surprise QE move. This also suggests to me that they may also be seen as a potential beneficiary from the trickle down from the recently announced Euro QE. This is especially so as Europe makes up a fair chunk of their portfolio so it seems their business and investments could continue to prosper against that background. So with the recent move in the share price having just about achieved my target price and left them looking over bought in the short term, although this recent move has also been supported by some earnings upgrades in recent months too. Technically 500 pence also seems like a potentially strong resistance level from previous peaks in 2013, although I note the all time highs were nearer 750 pence back in the boom days of 2007. They are however currently trading above their 20, 50 and 200 day moving averages which suggests they are in a bullish trend at the moment, but worth watching the 20 day for any signs of a downturn. On the fundamentals, if we assume say around 34 pence of earnings for this year plus a forecast 22 pence dividend, this leaves them on nearly 15x and a decent 4.4% yield for the year to 31st March 2015. Looking ahead to next year with growth forecast these metrics could move to a fair looking 13.2x and 4.8%. On the CI Score it comes in around 71 reflecting value, growth and quality scores but the financial security is low reflecting their gearing and relatively low interest cover, but that's the nature of their business but worth bearing in mind given the difficulties they saw in 2008. Thus on balance if you bought it for a trade I wouldn't put you off booking your 25 to 30% profits here and moving onto the next idea, especially if you are nervous about financial markets at this juncture. However as an investor if you are more relaxed about the outlook for markets and think they might progress from here then this one may be worth holding onto as it is a likely beneficiary of that trend and this could lead to a re-rating and break out of the share price, plus more dividends to come. Still as I always say you pay your money and take your choice but hopefully you did choose to make some money on this one and I'll leave it up to you if should stay or you should go now or take the money and run - I do believe those are some cool tunes...  We have had a few updates on stocks I have mentioned in the past so in brief:
 Click to enlarge After my 20%+ gains earlier in the year on Investec, I thought I would try another trade in the financials sector. I'm staying in the I's with Intermediate Capital Group (ICP) which announced final results earlier this week. You can read them for yourself at the link above and they didn't look too bad to me - certainly not to justify a 10% fall in the share price. Looks like a big clumsy seller has been in operation. The only negative I could find was a bearish note from Numis, who have a 363 pence price target, which I saw mentioned on Ticker Report, although I note others are more bullish and have price targets beginning with a 5.
Any way this one may not be to everyone's taste as it is slightly esoteric is so far as it is a specialist asset manager providing mezzanine finance, private debt, leveraged credit and minority equity to mid market corporates in Europe, Asia and the US and to real estate in the UK. Some of their balance sheet is invested alongside their funds and also provide seed capital when they are launching new products. Aside from income from managing the funds they also make irregular capital gains on their own investments as and when they make successful disposals of their largely private equity / venture capital style investments. These tend to be lumpy and have been strong in the last year given the favourable market conditions. Given the nature of their investments they do however also have to make provisions and take write downs when things don't go as planned. The disposals can also reduce their assets that they have under management and they therefore then need to work hard to replace these which is the situation at the moment. The earnings from the asset management and other recurring fees or what they describe as "core" earnings generally underpin the dividend with the capital gains being a big swing factor for earnings over and above that. Talking of dividends that is the other main attraction with this one. They declared a final of 14.4 pence which alone yields 3.6% at 400 pence and is due to go XD on 11th June 2014. This made 21 pence for the year up 5% and a similar increase expected for this year taking the dividend to 22 pence or so for a yield of 5.5% and the P/E is around 11 to 12x, so reasonable value I would argue. They suggest their balance sheet is strong with unutilised cash and debt facilities of approximately £678m. They have also launched a £100 million share buy back programme, which they commenced the day after the results. On the balance sheet they said the following: "We consider it important that the Group maintains a strong balance sheet position with a consistent access to the debt markets. Accordingly, considerations such as maintaining a strong and stable credit rating and the financial covenants to lenders are factored into the Board's assessment of the Group's capital structure. We also understand the value that shareholders place on regular and sustainable dividend payments and we remain committed to a dividend policy linked to cash core income. In addition to this, we perform an ongoing assessment of the Group's capital requirements with reference to the above factors over a three year horizon and should there be any capital surplus to requirements, we will look to return capital to shareholders at the appropriate time." This is interesting because I feel I should point out that this one had to have a rights issue and cut its dividend in 2009 and dividends have yet to recover to those levels, although it had a strong track record of dividend growth prior to that. So hopefully they have learned from that experience and will manage the balance sheet and dividends more carefully going forward, although to be fair 2008 / 2009 were pretty exceptional times. The share buy back might clear out the sellers and help to support the shares at around their current 12 month lows just under 400 pence. On the upside the top of the trading range in the last 12 months has been around 500 pence, so if it were to make it back up there in the next year or so then that would offer a potential total return of 25 to 30% - depending on how many dividend are collected along the way. |
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