Quite an interesting and tricky month for the screening with four potential sale candidates coming up based on their Scores. VP the plant hire group again fell into this category, but as I kept it in last time awaiting their results, I am going to do that again this month as these are due this week on the 5th June. The shares have had a good run into this week and the prior update was of the in line variety. So it seems unlikely that there should be any surprises unless they have deliberately kept expectations low so they can pleasantly surprise, perhaps. Lets hope they don't disappoint and leave me regretting my decision to await the results rather than selling before, which might have been the lower risk option. Other than that with the acquisition of Brandon Hire late last year it will also be worth watching out for an update on how the integration is going there for any problems or increase in the expected synergies & cost savings.
Another sale candidate that I decided to give the benefit of the doubt to was Hays Group (HAS) the staffing company which had a positive trading update and looks set for a strong year which ends this month. The main reason the score has fallen is due to no changes to the forecasts in the short term and a decline in the cover ratio as they are expected to pay a much larger dividend via the payment of a special dividend. Thus with the year end approaching I thought I'd await the year end up date & see if that leads to upgrades and an improvement in the Score again and the possibility of hanging on to collect the final and special dividends too. Alternatively I could have switched into the better scoring and similar company Robert Walters, but this was not much cheaper so I dismissed that idea to keep the trading costs down, which is one of the few costs that an investor can control.
The remaining two sales candidates which I let go through were Headlam Group (HEAD) & Jarvis Group (JIM). Of these I had given Headlam the benefit of the doubt previously and indeed topped it up last month. But having taken the final dividend their score has deteriorated again after their trading update this month led to downgrades. While it remains lowly valued and they seem to be taking action to manage the business against a difficult background, they acknowledge that achieving their targets will depend on a customary stronger second half & no continuation of recent weaker trends, which leaves them open to the risk of having to warn on profits later in the year. Equally it may all pan out as they hope and the shares might then re-rate on the back of relief over there being no profit warning, but as ever we'll have to wait and see on that.
As for Jarvis Group the score has deteriorated here after their somewhat cautious statement that accompanied their bumper full year figures. Thus the expected growth looks pretty lack lustre and there is no dividend growth forecast. Thus although it is probably fine for the long term it doesn't seem to offer that greater value on around 15x earnings. In addition the CIS portfolio has a lot of exposure to financials any way, with two fund management companies, so out it goes, but personally I'll probably continue to hold it myself for the long term as part of a more broadly diversified portfolio.
In terms of the replacement candidates a few interesting ideas came up including Phoenix Spree Deutschland (PSDL) which is a property fund that is now specializing in Berlin property. While I toyed with the idea, it seemed a bit too off piste for what I'm trying to demonstrate with the CISP but I might treat myself to a few for a bit more diversification. Aside from that Howden Joinery (HWDN) came up again as a potential re-entrant to the portfolio. But having sold Headlam on around 10x I was reluctant to replace it with another similarly exposed consumer cyclical on 15x, although it may be better quality. Meanwhile Henry Boot (BOOT) also came up as another that could have re-entered the portfolio. But since the portfolio has a housebuilder (Bellway) and plant hire via VP I decided to give that a miss too.
In addition I could have picked Abcam (ABC), Renishaw (RSW), Patisserie Holdings (CAKE), Advanced Medical Solutions (AMS) & even Fevertree Drinks (FEVR) but I overlooked these due to my value bias. It does highlight the fact that the Compound Income Scores are not just for yield stocks, but can highlight attractive, quality growth stocks too - hmm perhaps I should rename them the Compounding Scores? Or maybe as I have suggested in the past perhaps I should run an unconstrained portfolio based on the Scores, but of course if you subscribe to them yourself you're able to do that if you want.
Any way in the end I decided on a couple of cheaper alternatives in Renew Holdings (RNWH) which may not be the highest quality outfit, but the nature of their business (essential maintenance in the main) should provide a bit of stability. In addition they have seen some upgrades post their recent interims and made a reasonable looking acquisition too. This bolsters their exposure to railway maintenance and is expected to be materially earnings enhancing with the return on investment also expected to comfortably exceed their cost of capital. So on this basis I think there could be more upgrades to come and a possibility that the share which have sold off this year, could may be return toward their previous highs around 480p, perhaps.
Finally the other stock I settled on was Forterra (FORT) a brick making company, which trades quite cheaply, but looks to be trading well given the on going push to build houses and shortage of bricks which is leading them to invest in more capacity funded from their cash flow. Obviously not without its risk if the housing market or economy should suddenly go into reverse, but for now it seem fine so into the portfolio it goes. It does also add to the housing and construction exposure on top of Bellway & VP. The portfolio will also pick up the final dividend of 6.4p which goes XD on 14th June for an immediate yield of 2% which will help recover the cost of these trades.
So after those changes that leaves the CISP on a forward PE of around 14.5x with a forecast yield of 3.25% on the back of expected dividend growth of 13.2% which all seems OK to me. Don't forget if you'd like to Score your portfolio or get more ideas like these on a regular basis then check out the Scores link here or at the main menu at the top of the site or in the three bars if you are on a mobile.
... results today from Jarvis Investment Management (JIM) the small (£60m Market Cap.) stock broking outfit. The results were excellent, as expected, with the headlines of a 22% increase in profits and earnings together with a 34% increase in the dividend, although the Chairman's statement rather managed to snatch defeat from the jaws of victory. This was quite downbeat in tone given the increased regulatory requirements that their industry is facing. He said that considerable time and resources have been, and continue to be, spent preparing and satisfying the requirements of MIFID II and GDPR (General Data Protection Regulation). He went onto say:
"That these all come at a commercial cost for the firms' required to implement and enforce them. In the latter half of the year, and going forward, we will be incurring higher costs on software, data feeds and higher staff numbers to ensure policies are correctly implemented and monitored."
He then went onto talk about the growth the business has seen over the last few years and how it has now represents the maturing of Jarvis from small company beginnings. He finished off by saying:
"With that in mind I am urging investors to be realistic about near term results. As highlighted above our cost base has increased, so revenues will need to increase at a higher rate to maintain the growth of the past. That is not to say it cannot be done, especially if interest rates increase."
So he seems to be trying to dampen expectations after such a stellar year and suggesting that some growth will be required just to cover the extra costs and I guess if it doesn't materialise this year then the profits could even go backwards given the higher cost base.
It is however worth bearing in mind his comment about interest rates as they can and do earn quite a bit from cash on deposit with them and you never know the B of E might one day raise base rates from their emergency level of 0.5% given the inflation & employment situation.
So a bit disappointing to say the least and to see the shares off first thing, but probably not surprising given the statement, although the initial fall seemed a bit over done to me. We will have to wait and see where the forecasts come out given these figures probably beat expectation but the statement has probably tempered the potential for any upgrades or could even lead to downgrades. This should be clearer by the time of the next monthly re-screening of the CISP so will have to see how it looks then once the dust has settled.
Jarvis (JIM) has announced a Q1 dividend of 5p per share , which is up by 17.9% on last year.
I would expect they have continued to trade well in light of this and if anything the recent volatility may have meant they saw more trading activity too. This plus their previous positive updates leads me to suspect they will beat market forecasts for this year as these do not seem to have been updated. Just talking next years numbers as currently forecast leaves it on a reasonable looking 16x with a yield of likely over 4% as they have come back recently with the market.
There was also a trading update from Bellway (BWY) a long standing member of the CISP. This was for their first half which appears to suggest revenue growth in excess of 13%, which is roughly in line with rates of growth factored into current forecasts for the year as a whole. This came from a combination of 6.3% higher completions and increased selling prices of 7.8%, while they say the outlook is still positive despite the rise in interest rates in November. They also say they expect margins just above 22% for H1 and at that level for the full year if the market conditions remain the same.
In this positive trading environment, they say "interest from customers remains high, with website traffic and visitors to sales outlets both ahead of last year. Reservations have followed their usual seasonal trend, with the quieter, albeit positive, summer period followed by an increase in activity over the autumn months. The Group has taken 178 reservations per week (2017 – 166), an increase of 7.2% compared to the same period last year and the cancellation rate, a barometer of customer confidence, remains low at under 11% (2017 – under 12%)."
So overall sounds like a steady as she goes kind of update which probably won't lead to many changes in forecasts. The shares, as ever, look excellent value on around 8x with a 4% yield having come back £3 or so from their 12 month high recently which has left them looking a bit oversold.