A busy day for announcements today and catching up from yesterday, Aberdeen Asset Management (ADN) had a trading update which showed the expected outflow of assets. This however was perhaps not as bad as feared and reflects their efforts to diversify into what they describe as solutions (alternative assets and hedge funds etc.) is now 43% of the business. They seem to accept that things will, unsurprisingly, remain tough for them given market volatility, their emerging markets exposure and performance issues, but they did flag cost cutting plans to offset the effects of these. Thus this one may be interesting as a contrarian play if you were bullish on the market recovering in the short term from here as it now trades on around 10x PE with an 8%+ yield, although the Scores tend to favour the likes of Jupiter Asset Management (JUP) & Schroders (SDRC) given their better trading.
Meanwhile yesterday RPS Group (RPS) flagged that it's full year results will be within the range of forecasts despite the big downturn, as expected, in their oil related businesses. They did however take a non cash write down on that side of the business, but more seriously they also saw a write off for bad debts of up to £7m which hit the shares hard yesterday. So again another one that is struggling against difficult market conditions, but again it might be worth a look again once the dust has settled given their efforts to diversify the business via on going acquisitions which is what they have tended to do over the years. Whether they can maintain their record of 15% dividend increases remains to be seen.
Today we had a trading update from Matchtec (MTEC) - which was a bit difficult to interpret because of last years Networkers acquisition and while some of the like for like numbers looked mixed year on year, they did say that they are trading in line with expectations. There also seemed to be an improvement in most lines against h2 last year so it seems like a steady improvement is on track as is the integration of the acquisition and a couple of former Networkers executives are due to leave later in the year as this process completes. They continue to look good value on around 10x with a 4.65% yield, but the shares themselves continue to lack momentum and it doesn't seem like there is enough in this announcement to get them going. So a strong hold, but without a catalyst for a re-rating in the short term continued patience will probably be required.
Paypoint (PAY) - also had a trading update today via a downbeat interim management statement. I say down beat as they are again flagging the effects of the mild winter on energy top ups going through their system, extra costs for their Parcel+ JV and the delay in and lower proceeds from their on line business disposal. So it seems like a year of consolidation for this one in terms of the business with earnings now forecast to be slightly down year on year. This has had a knock on effect on the share price, which continues to languish and is down again this morning on the back of this statement. Thus, despite appearing to be a quality business, they seem to be continuing to de-rate as they seem to be struggling to demonstrate growth in the short term. It may however be getting more interesting as on current forecasts for next year it is coming down to less than 13x (still not bargain basement) but with a growing 5%+ yield, but again patience will be required on this one and probably worth waiting to see if there are more downgrades again after this update.
Renishaw (RSW) - another Compound Income Scores portfolio stock reported half year results. These are also difficult interpret, but this time because of a boom that they experienced in the Far East last year. Consequently headline profits are down sharply, but adjusting for last years boom they say that underlying figures are, in the main, ahead on a like for like basis. The bottom line was that on the outlook they reiterated their profits guidance of £85 to £105m that they had set out back in October last year and that they remain confident about the outlook for this year and the future. I note however, that they left the interim dividend unchanged, although they did this last year before increasing the final. I guess they may do the same this year but forecasts are for only around 1.5% growth in the dividend on the back of earnings falling back so I guess it could also be flat at the full year too.
I have to admit I was pleasantly surprised that the result were OK and the outlook maintained as given their operational gearing and all the talk of economies slowing in China and elsewhere I feared that they might have come out with poor results and reduced guidance. The shares are nevertheless off this morning, having bounced ahead of the announcement as this appears to be another quality stock under going a de-rating which has thus far brought it down to a still not cheap 15 to 17x depending on which year you look at and a not too generous but reasonable yield of 2.7 to 2.9%. So again a quality hold for the longer term I would say, but given the rating and the possibility of an economic slowdown being in the offing, there may ultimately be better buying opportunities for this one along the way.
Finally SSE the energy utility business which is in the news today for finally cutting it's gas prices from March, also announced an IMS. The main point of interest in this was that they confirmed their intention to raise their dividend this year and beyond by at least the rise in RPI, which is nice but may not be that much this year given low inflation. It is quite good though on a starting yield of 6% and although the cover is pretty thin that is probably more acceptable on a utility business.
Phew that's it for today, off to prepare for a podcast with Justin Waite at Sharepickers tomorrow. I will try and put something up about the stock I'll be talking about and a link to the podcast tomorrow afternoon once it goes live, if I have time. Otherwise look out for a month end update on the CIS portfolio and the market timing indicators over the weekend or early next week.
...as I guess financial reporting is more efficient these days and lots of companies are getting their figures out before the holiday month of August. So many to go though and other things to do meant I didn't have time to write up any yesterday.
In passing I note that a few companies which feature in the Mechanical Compound Income Scores Portfolio have had updates recently. If that is of interest to you the names concerned have included Jupiter Fund Management (JUP), Renishaw (RSW), and ITV which all seemed fine. While Schroders (SDR) have reported today increased in flows of £8.8bn a 21% increase in their dividend.
Otherwise in recent days we have had some big yielding blue chips like Glaxo SmithKline (GSK) and Royal Dutch Shell (RDSA & RDSB) have had results updates and confirmed their plans to maintain their dividends and hence their current 6%+ yields. While expensive consumer stocks like Reckitt Benkiser (RB) and Diageo (DGE) have had mixed updates with Reckitt's raising guidance but cutting the dividend post their demerger of the pharmaceutical arm. While Diageo had a small miss on their earnings but raised their dividend by a better than forecast 9% reflecting their confidence in the outlook for 2016.
Finally in brief amongst many others too numerous to mention today we have had interim results from RPS Group (RPS) which I wrote up in the past and got into when it was sub 200p when the news flow on their oil & gas (O & G) operations was better than expected. However I traded this one out for a decent total return earlier this year when the O & G news unsurprisingly started to deteriorate.
In today's numbers the O & G division and effects of currency translation to a lesser extent have led to around a 7% fall in their earnings in H1, although they did increase the dividend by their "normal" 15%. Despite this they flag that the division, after some judicious cost cutting, has remained profitable with double digit margins. They also highlight the success of their diversification efforts via their "normal" add on acquisitions and suggest they have plans for more after completing a refinancing and extension to their debt facilities. Their net debt was actually slightly down by £0.5m over the period to £72.7m (gearing of around 20%) despite the spend on acquisitions in the period and reflects their strong cash flow, albeit bolstered by a big positive swing in working capital (debtors & creditors).
Looking at last years H1 / H2 split it looks to me, given the fall in the earnings today, that there could be a risk of perhaps 5% downgrades today, unless the acquisitions are expected to offset this in H2 perhaps? This could take earnings down to say 20p which together with the "normal" +15% dividend of about 9.75p would leave it at this mornings 215p (-2.3%) on a reasonable looking 10.75x with a 4.5% yield 2x covered. Thus it looks like it is worth holding / revisiting if you think they can continue to manage the decline in their O & G division and offset this with diversifying acquisitions as they have done recently.
On the chart if you were to do a school boy trend line from the February low that would come in around these levels. But if that fails to hold then the 180p to 200p range might be a good area of support for a purchase / repurchase where it would then be on around 10x with a 5% yield.
...as I guess Companies want to get their announcements out ahead of the latest Bank Holiday weekend. Of note for the virtual Mechanical Compound Income Scores Portfolio there were updates from Character Group (CCT), Howden Joinery (HWDN) and Schroders (SDR & SDRC) which all seemed OK.
Meanwhile back in the real world we also had updates from Berendsen (BRSN) which also seemed fine on an underlying basis but continued to be hit by currency translation as they had previously flagged and as I highlighted recently when I reduced my position. In today's update they suggested on a reported basis, profit before tax for the quarter was lower than last year, again as a result of currency translation. This compares to some modest growth that is currently forecast so they have some work to do in the rest of the year to make this up or they may well see more downgrades. The market seems to be taking this on board now as the share are off 5% or so today and down by over 100p or more than 10% from where I sold them.
Finally from me today we also had a slightly disappointing trading update plus another acquisition from RPS Group (RPS). I say disappointing because having been more reassuring on the oil and gas sector back in February with the final results they now say that this market stabilisation proved to be "fragile". On the back of this they said the following:
"As a result our Energy business has had a slower than expected start to the year, although we have recently seen an encouraging increase in our asset valuation workload, related to transactions and financing. Our clients' E&P budgets for 2015 remain substantial and the cost of executing their projects has reduced significantly. We still anticipate an increased level of activity will develop during the course of the year once specific project costs and plans have been defined. We will also benefit from actions taken recently to reduce our cost base."
So a disappointing turnaround there, but I guess not wholly surprising or were the management being too optimistic back in February? They now also leave themselves anticipating increased levels of activity which could fail to develop if they prove to have been too optimistic again. However against that they do flag that National Oil Comapnies to which they are more exposed have been less effected than international players. They have also taken action to reduce the cost base and they have made several add on acquisitions, as they have tended to do over the years, to grow their business in other areas. These together should also help to offset some of the potential short fall in the oil & gas sector.
Talking of acquisitions they also announced today that they are acquiring the entire share capital of Metier for a maximum total consideration of NOK267 million (£22.3 million), all payable in cash. Consideration paid to the vendors at completion was NOK166.8 million (£14.0 million). Subject to certain operational conditions being met, two further sums of NOK49.2 million (£4.1 million) and NOK50.6 million (£4.2 million) will be paid to the vendors on the first and second anniversaries of the transaction respectively.
Metier Holding AS ("Metier"), a Norwegian based consultancy providing project management and training services, which operates across Norway from its headquarters in Oslo. The company, which employs approximately 160 staff, was founded in 1976 and works primarily on projects associated with delivering public and private sector infrastructure. In the year to 31 December 2014, Metier had revenues of NOK390 million (£32.6 million), and profit before tax of NOK35.3 million (£3.0 million), after adjustment for non-recurring items. Net assets at 31 December 2014 were NOK45.1 million (£3.8 million). Gross assets at 31 December 2014 were NOK159.1 million (£13.3 million). So it seems like the full price including earn outs will be about 7.4x the current PBT which seems a fair price. The Company says it will be earnings enhancing in the current year which is understandable when you are paying with cash / debt.
The shares have responded negatively to the announcement and are off by around 7% at the time of writing, leaving them in the middle of their recent price range. I guess it is understandable that the shares have fallen today given the turnaround in the commentary on the oil and gas sector. It does however leave them on sub 10x again and with a yield approaching 4.5% on the back of the expected 15% dividend growth which should provide some support.
However, it will be worth watching to see where the earnings forecasts go after today's update and the effects of the acquisition are factored in. Having taken some profits on this one recently in the 240's I'm inclined to run the rest for now but I continue to worry about the effects of the oil & gas sector problems on their business.
..including RPS which I have mentioned recently who have come out with their final results for the year to 31 December 2014. After the recent positive trading update these still managed to pleasantly surprise with the adjusted eps of 22.04p coming in slightly ahead (3.5%) of the consensus of 21.3p probably helped by the tax charge being a few points lower than last year. Meanwhile the dividend was increased by their normal 15% which was therefore in line with forecasts at 8.47p.
This was achieved despite the factors outside their control such as the strength of sterling, the rapid fall in the oil price and unrest in the Middle East.
They also made £58 million of investment committed to acquisitions, further increasing the strength of their international platform and they recently completed their first acquisition of 2015, BNE in North America. They say these will enhance performance in 2015 and that they anticipate further transactions during the coming year supported by what they describe as their strong balance sheet, which saw year end net bank borrowings at £73.2m and facility headroom of £87m at the year end against their market cap. of just over £500m. They say their facility with Lloyds runs out next year and that the Board intends to refinance the Lloyds facility during the course of the next few months, which is likely to involve an additional bank providing part of their total facilities.
On the back of this they said "We believe our positioning and business model should deliver a successful outcome and further growth in the current year." While on the key energy part of their business they said:
"Recent market conditions have been unusually volatile. As a result, clients are likely, in the short term, to continue focusing on cost management; we are, therefore, reducing our cost base and concentrating on those parts of the market and projects likely to receive investment. There are, however, already some signs of stabilisation. With the global economy set to grow substantially in coming years, we are well positioned in what continues to be an attractive, long term market."
Summary & Conclusion
So looking forward RPS seems to be on around 10x P/E with a 4% yield and offers a reasonable earnings yield of around 8.4%, before any changes on the back of today's figures. So with that caveat and with that dividend yield reflecting a further 15% growth, the rating should still leave scope for upside if they can continue to deliver, so it looks like a strong hold.
Meanwhile we had final results from another support services stock - Interserve (IRV) which also reported better than forecast numbers. The turnover was stronger than expected at £2913m v £2711m forecast, eps came in at 58.8p (+23%) v 55.8p forecast and the dividend came in at 23p (+7%) v 22.8p forecast. They mentioned that they had grown this by 5% per annum over the last 10 years which might be useful information for longer term forecasting. They also flagged £4.1 billion of new business won in 2014 and a record future workload of £8.1 billion, up 26 per cent which provides quite a bit of visibility for the future.
Chief Executive Adrian Ringrose commented:
"2014 was a landmark year for the business in which we advanced our strategy and delivered 35 per cent operating profit growth including strong organic growth despite continuing challenging conditions in a number of our markets. We made two strategic acquisitions (Initial Facilities and the Employment & Skills Group), each of which deepened our presence in core outsourcing markets.
Our focus on providing high quality services to both new and existing clients resulted in strong work winning during the year, with our future workload rising 26 per cent to a record £8.1 billion.
Looking to the future, we are encouraged by the growth potential of the business. Our attractive positioning in our core markets and our ability to identify, invest in and deliver on attractive project and corporate opportunities is a powerful differentiator."
Summary & Conclusion
A busy year for Interserve with a potentially transformational deal to buy Initial which may help to boost underlying organic growth for the next year or so as it is integrated. I note that Interserve only scores in the 50's on the Compound Income Scores being dragged down by poor scores for dividend cover and financial security. The low cover scores is driven by poor cash flow cover & I note the cash flow / conversion looked weak in these numbers too. While the financial security score is dragged down by a low Piotroski score of 2 which is not good and I note that Stockopedia also have them down with a borderline Altman -Z Score of 1.79 (this measure bankruptcy risk), although interest cover seems fine at 11x. So a mixed picture on some of the financial and security aspects as far as the dividend and balance sheet are concerned, but probably reflecting the gearing up they did to buy Initial and an investment phase they say they have been through. This hopefully will be reduced in the years ahead and should return their cash conversion back towards the 100% which they normally target and thereby reduce the debt.
So with that caveat the shares look quite cheap on a P/E of around 9x and a forecast yield for the coming year of 4,3% while the current earnings yield of around 11% based on these latest numbers and a 4% operating margin. With forecast dividend growth of around 6% for the current year and their longer term 5% growth rate mentioned in the statement it seems they could offer a reasonable 9 to 10% total shareholder return (TSR) in the medium term ex of any re-rating or de-rating so again a strong hold I would suggest.
Finally a quick mention for British American Tobacco (BATS) who also reported finals today. I'll not dwell on the detail as it is all a bit of a drag, but I note the dividend was up by a better than forecast 4% in total which they say is in line with their intention to grow dividends in real terms. Earnings were down which meant the cover reduced and this is the main area of weakness in BATS CI score, otherwise it scores overall in the 70's - so a reasonable income stock as you would expect.
With the current 4% yield and trend dividend growth that seems to have slowed to 4 or 5% in recent years this one should also provide a reasonable TSR of around 9 to 10% if you don't mind investing in tobacco.
Talking of which I have been reading this week the excellent Credit Suisse - Global Investment Returns Year book 2015.
This features an interesting piece on Sectors and how they have changed in terms of their weightings as fashions and technology have come and gone. Tobacco featured throughout and had in fact been one of the best performing sectors over the century or more of returns that they cover - who would have thought it hey?
So I attach a copy of this for you below, as I'm kind like that, for some further reading and homework on Discount Rates and Equity Risk Premium as I planning a post based on those and an enhancement to the Compound Income Scores so see you back here soon.