What a first week to the New Year in stock markets with Chinese shares being suspended limit down a couple of time this week which has spooked markets around the world. Today after they removed the trading halts the Chinese market actually managed to close up - go figure. So it seems like we will have a more positive end to the week, but I did hear an interview with Neil Woodford on the BBC Today programme talking bearishly on the outlook for China, so we may not be out of the woods just yet. To cap it off there is quite a lot of news today so lets dive right in.
First up in relation to the Compound Income Scores (CIS) portfolio re-screening I did at the start of the year. Worth noting that Next (NXT) have now started to buy back more shares as their share price dipped below their indicated buy back price on the back of their trading update. So this should help to support the price going forward in the short term but if the price remains below their threshold and they continue to buy back stock with their surplus cash then there may not then be any special dividend this year. Time will tell on that, but worth bearing in mind if you are attracted by the high headline yield which includes specials. Meanwhile in this weeks market volatility I also note that the two purchases of Easyjet (EZJ) and Zytronic (ZYT) that I made for the portfolio are now available at knocked down prices. So if you have done your research and like the look of those then you can pick them up at better prices now than I did when I added them to the CIS Portfolio.
Talking of the CIS Portfolio we have also had an interesting announcement today from Photo-Me (PHTM) which was included in the original portfolio and therefore still held in the Annually rebalanced version which I am running to see if screening quarterly has added value. It exited the quarterly screened portfolio quite early on as its score deteriorated on the back of some earnings downgrades and still only scores 64. In today's update they have however flagged positive trading in their Japanese operations ahead of the introduction of a new ID card in January, with turnover up by 90% in November and December. They say that if this is continued in the rest of their financial year then all things being equal they would expect to to report results materially ahead of current market expectations. Now I understand that companies usually have to put these kind of statements out if they come to realise that their profits are going to be at least 10% or so away from consensus in either direction. So we should probably expect at least 10% upgrades and possibly more if the trend is continued for the rest of their financial year. The shares are up nearly 9% so they have probably factored most of it in but I guess it could be better than that, although it is hard to get a handle on it as I can't find what proportion of the Asia and ROW division is in Japan, but at the full year they had added 1,000 machines there and said that Japan was the largest territory by far by reference to size of the machines estate and revenue. I did some very rough back of the envelope calculations and if it was say two thirds of that division then this could lead to an extra £11m of operating profit from Japan which could lead to upgrades approaching 30%, but I must stress that is very much a guestimate without knowing the actual proportion they have in Japan and if the recent trend will continue or not.
Meanwhile in a strange coincidence the stock which replaced Photo-Me in the portfolio, Paypoint (PAY) has announced the sale of part of its planned disposal with the sale of its Online Payment businesses comprising PayPoint.net and Metacharge to Capita, for a consideration of £14 million satisfied in cash at completion today. This leaves the sale of the Mobile Payments business to be competed in due course and we won't therefore know if the proceeds come up to their downwardly revised expectations until then. This is another one which is now on offer at a cheaper price than I paid for it in the portfolio, although it still has its attractions as it still scores 92. So maybe another opportunity there perhaps if you like the look of that one?
Finally we have had an update from another high scoring stock which I have mentioned in the past and which I own as part of a broadly diversified income portfolio, namely XPP Power (XPP), which announced its Q4 trading was in line with expectations. This has driven revenue growth of 8% in FY15 (4% in constant currency). This was helped by a recovery in orders from the US, and overall Q4 order intake was strong, providing positive momentum going into FY16. The recently acquired EMCO business is also said to be trading well and the company has already identified cross-selling opportunities. They also announced a further dividend and suggested that the full year dividend would be up by at least 7% to 65p for the full year which is in line with forecasts. This one also scores well with a CIS of 86 and reasonable looking rating of around 14x with a 4.5% yield.
Phew there you go, oh yes and I've updated the Scores today too as usual. So time now for a well earned coffee break - cheers see you back here next week, have a great weekend and be careful out there whatever you are up to in the market or elsewhere.
A quick note today to catch up on what was out yesterday and today's news. Stocks which featured that I have covered in the past included Micro Focus (MCRO), Photo Me (PHTM),
S & U (SUS) and Sprue Aegis (SPRP). While today we have had announcements from Bellway (BWY) and Polar Capital (POLR)..
As regular readers will know and as I mentioned yesterday, I started this April what I called the Mechanical Compound Income Scores Portfolio. If you are a new or recent reader - welcome and see this link for the original post about the portfolio and the thinking behind it.
In that post I mentioned that I was thinking about using a minimum Compound Income Score of 60 or 75 for a stock to remain in the portfolio and I also said I might look at making it a top decile portfolio. However at this quarters first re-screening I note that if I used 90 as the threshold then this would have led to potentially 6 sales, which if repeated in following quarters would lead to over 100% turnover in the year. As costs can eat away at your returns I have decided to not go down the costly top decile route.
Using 75 as the threshold threw up a more reasonable 2 potential sales (Plus500 and Photo-Me) so I have decided to go with that as my threshold for now. I wrote Photo-Me up recently but it seems that there have been some big downgrades post the results which have lowered its score to 71 and left it on just over 20x which is a valuation threshold I use as a trigger to look at a potential sale. However I note that the dividend forecasts seem to have gone up reflecting the likely special dividend this year and the valuation is not as rich if you factor in the cash. I still therefore think it is an interesting situation worth watching, but as this is meant to be a mechanical process without too much human intervention it has to go for a loss of 5.2%.
Plus500 was the main disaster for the portfolio as they confessed to problems with the regulator regarding their signing up of clients. This unsurprisingly led to downgrades and a forecast cut in the dividend this year which dropped the score to 74 just below the 75 threshold. However, given that they have since been bid for by Playtech in what now looks like pretty much a done deal I have decided to retain it and wait for the 400p cash bid to complete. This will save the cost of selling, plus the discount the shares are trading at to the terms of the bid, which together should give a return of around 3.75% over selling today. it should also act as a cash proxy which may also be useful in the current volatile market, provided of course that the bid does not fail or get withdrawn for some reason.
With the proceeds of the Photo-Me sale I have selected Paypoint (PAY) which is the highest scoring stock after the screens have been applied which is not already held in the portfolio. Coincidentally I wrote this one up recently after their results which you can read here if you are interested. So I added a 5% holding in this one which leaves around 1% cash plus the quasi cash of 2.7% in Plus. I'll look to utilize this cash and hopefully the proceeds from the Plus bid at the next quarterly re-screening. Thus for this quarter the portfolio will only have about 96% market exposure which of course may or may not be a good thing.
..as we have news of yet another round of talks scheduled in the Greek debt crisis as the latest proposals could not be signed off. I guess this one may run down to the wire again before an agreement, perhaps. However, even if they do reach an agreement more repayments and similar problems will no doubt be along again before too long unless we finally have a Grexit this time around.
Meanwhile in a busier day for announcements in the UK stock markets we have had in line final results from Photo-Me (PHTM) which I wrote up recently. They increased the dividend by 30% as promised and this was despite currency headwinds from the strength of Sterling against the Euro and the Yen. The underlying strength of the cash generation from the business helped to fund the dividend and capital expenditure together which totalled £40 million.
Despite these outflows they still ended the year with net cash only down slightly at £60.7m versus £63.1m last year. On the back of this they outlined a new dividend policy for the next three years where they say they intend to increase the dividend by 10% per annum and any net cash on the balance sheet at 30 April 2016 (and the following two years) in excess of £50m will be available to shareholders as a special dividend in line with the new policy.
This is driven by the continued investment in rolling out Photo booths in new territories and continued investment in their Revolution Laundry product. On these, in addition to their plans for having 2000 of these by the end of this year they say they hope to have 6,000 units in operation in Europe by 2020 and that they are also looking for opportunities in Asia and the USA. They also say they are still trialling a car wash concept, which would have some overlap in terms of location as the stand-alone Revolution laundry units and use the same network of engineers. Results from those first units are encouraging and they will report further on its plans for this concept in 2016, based on progressively scaled-up trials. If these are successful I assume this would impact on their cash requirements as they are higher cost than the laundry units, which would then reduce the likelihood of special dividends but could boost medium term growth.
On the outlook they say "...the Group's Treasury function keeps FX under continual review, although the continued strengthening of sterling against the euro and the yen, which may have an adverse effect in the coming year, remains a challenge. Importantly, however, the operational performance of the business remains very good. Subject to the risks and uncertainties detailed in the Strategic Report, the Board anticipates another year of strong underlying progress."
Summary & Conclusion
In line numbers and a suggested dividend increase of 10% may disappoint the market as forecasts seemed to suggest a further near 30% increase in the dividend for the coming year to 6.3p. Using the 10% forecast this would suggest around 5.4p which would put it on around a 4% yield which may though provide some support. However, of course it is possible that if the cash remains around current level and they decide not to roll out the Car washes, then there could be a circa £10m special dividend next year, which would equate to about 2.6p per share which would then exceed the current forecast. So a bit of a curates egg as you might get a lower pay out if they have found another profitable avenue for investment, or a higher pay out if they don't.
Otherwise the PE looks quite full at around 17.8x, but if you adjust for the cash then it looks fairer at around 16x. So overall another set of good numbers from this one and a further roll out of photo booths and the new laundry product and potentially car washes to drive future growth, but I'm not sure there is enough in all of this to push the shares dramatically higher in the short term, but they could be interesting in the medium term if they can deliver on their plan, so definitely one to watch given the financial metrics on this one.
Last week I was bemoaning the lack of news and quite frankly this week wasn't much better. However, there has been the never ending story of the inevitable (?) Greek default which is no doubt is a woeful situation for all the Greek citizens to endure. They do seem to be a bit confused though as they seem to be protesting about the austerity and cuts demanded by the Europeans but at the same time they want to stay in the Euro.
Any way it seems that the rest of the world is not too worried and as the FT says: "Despite the acrimony between Athens and its international creditors, many investors still believe a deal will be struck — because both sides have too much to lose. In 2012, many lost money underestimating historical and geopolitical forces binding the eurozone. Such optimism is particularly strong among US investors, according to one European banker. “They see Greece and they don’t see Greece — they expect something mysterious will sort it out."
This sentiment was apparent in the US this week as stocks, including those on Nasdaq hit record highs this week as the Fed was seen as reassuring about the likely pace of rate rises when and if they start and Fitbit the latest tech stock which offers wearable technology went to a 50% premium on its debut. I guess you could read this two ways wither it shows the US market is still bullish and leading the way or it is getting overheated as tech IPOs go to crazy premiums much like 1999.
So endeth the week with no resolution to the Greek tragedy and another meeting with EU leaders scheduled for Monday. I guess they are hoping to bang some heads together over the weekend and come up with another fudge to keep the Euro on the rails and pretend that Greece can keep making its payments on its debts even though it clearly cannot afford to do so.
As for next week I note we have results on Thursday 25th from Photo-Me (PHTM) which features in the Compound Income Scores Portfolio and which I wrote up recently here. I note that the shares have continued to languish around the 140p level and the results could prompt a move either way depending on how they are received, but if they are well received then I maybe they could test the 150p resistance level perhaps?