I say blue moon because apparently tonight is going to be a blue moon. This is commonly used to represent something which is not seen that often. Apparently in astronomy this relates to the second moon in a month (as per tonight) or the third of four full moons in a season, but don't worry the moon will not actually be blue.
Another saying is in for a penny in for a pound which apparently means if you are owed a penny you might as well be owed a pound. What is he going on about I expect you are wondering already. Well today's idea may be a rare opportunity to buy into a contrarian opportunity for both a short term trade and also for the long term as it is I would say a quality play. However it is not that rare, like a blue moon seemingly, as shareholders in this one have suffered several bad moons recently and in terms of the short term trading opportunity I think you could go in for 9.27 pennies of dividend and be in for a pound of upside.
So what is it I hear you cry. Well it is one of those many companies that reported yesterday so it may have got lost in the rush to the beach by corporate CEO's. Talking of CEO's this one, Rolls Royce (RR), has a new CEO - Warren East who interestingly was the former CEO of ARM Holdings. At least he comes from a technology background although clearly the technology on offer here is at the other end of the scale to that offered by ARM.
Any way I suspect the recent resetting of expectations carried out by the Company was probably done in conjunction with and with him prior to his start date. although I understand he will obviously be reviewing things further before he reports back by the end of the year. But nevertheless given they have had about three profits warnings in the last year I would hope that most of the bad news is now out of the way and that expectations have reached a floor.
Some indication of this came in the update yesterday when Mr East set out their current expectations for this year. In this he suggested they would make £1,325m - £1,475m Pre Tax profits and eps of 55 - 62p. Now obviously they have disappointed several times before so these are not guaranteed, but as least the market is already sceptical because current consensus is for 53.6p of earnings, so there could even be scope for upgrades if they can hit their targets this time.
The other encouraging thing was that the interim dividend was increased by 3% to the 9.27p mentioned above and this compares to consensus forecasts of a flat dividend so again it looks as though expectations had now go perhaps too pessimistic suggesting there could be an opportunity for a turn around in sentiment if they can start to deliver on their expectations.
The other aspects I like about this one apart from the technology they have and the R & D they do is the five year order book that they have plus the big market position they are carving out in the new wide body airliner market. The benefits of this will all be long term and the profits are going to be more back end loaded as they are changing the way the account for the new engines and the resulting spares business. Before this was all bundled and spread over the life which brought forward earning recognition from spares and maintenance, so that is also worth bearing in mind.
Looking at the valuation it is not actually in bargain basement bin, but given the nature of this one I don't think it is likely to get there any time soon. However, it is on a fairish looking 15x or so with a 3%+ yield which is around 2x covered. So OK but not outstanding, but I think this could be a good entry point for a longer term recovery and growth going forwards. They have for example grown their dividend by 9% per annum over the last five years and I see no reason why they should not be able to do something similar going forward given the order book and assuming the short term head winds can be over come.
So what about the short term opportunity? Well I mentioned already you can get the interim dividend of 9.27p (worth 1.24%) and looking at the chart this is where the pound comes in. As we saw earlier in the year when I suggested trading this one on a previous profits warning, this one has been quite volatile but also good at closing its gaps on the chart. The latest warning recently opened up another gap on the chart at just above 850p so at the current price of 750p this to me suggests that there could be 100p (13%) or more of upside too in the short term. I'm also encouraged by the fact that the sentiment is on the floor (see comments about forecasts above) and the shares are heavily oversold. In addition I note the positive divergence on the RSI recently with the stock making new lows but the RSI failing to confirm. This is usually a sign that downside momentum is slowing or is exhausted and after three of four goes like that it is often the pre-cursor to a rally.
So there you go this could be a blue moon opportunity to buy into this one, although like blue moons we have had a couple of those this year already with this one, but in this case I think it could be a case of a Bad Moon Rising. What's that you do believe that's a song? Oh go on then have some CCR at the end as well as RR - hope you enjoy them both!
Given it is the last trading day of the month today I have decided to do the weekly update of the Scores after the close so they should be updated by tomorrow morning. This will allow me to have month end data and prices to update the Mechanical Scores Portfolio, so look out for an update on that next week.
So today I have decided to write up one of the stocks which made it into the Mechanical Portfolio although my first inclination and probably yours will be huh. But on further investigation and reflection I have actually come to like the idea of this one.
I chose the above cryptic title as It features a long standing executive who could be considered to be the Arsène Wenger of the corporate world in the UK. For non football fans (or Soccer if you are in the US) Mr Wenger has, since 1996, been the manager of Arsenal football club who play in the English Premier League. In this case I say this executive is similar in so far as he is French and he has been involved with this Company since 1994 with mixed results too. Strangely he also looks remarkably similar to Mr Wenger - I wonder could they be related?
Any way joking aside if you are not familiar with Mr Crasnianski you can read more about him by clicking his image above.
The company he has been involved with is Photo-Me (PHTM) which is why I said at the start you would probably go huh?
So having dealt with the Gunners and the French bit this is where the revolution bit comes in. No not another bit of gratuitous music (oh go on then here's some Beatles). No it is their new business Revolution which is a 24/7 outdoor self-service launderette. What's that another eh - I know but bear with me.
These automated launderette's are equipped with 8kg and 18kg washing machines, built-in hypoallergenic washing liquid pump and a vented dryer. Not only is this machine outdoor and available 24/7 but also very economic: £4 for 8kg wash, £8 for 18kg wash and only from £1 for a dry. You can use the 8kg machine for regular loads or choose instead the 18kg machine to wash all your weekly laundry at once or heavy loads such as duvets, throws, curtains and pillows. Apparently it can also text you with a notification that your washing is nearly finished so you can get back to collect it.
You can see Mr. Crasnianski in an interview below and hear him talking about the business which I got from what looks like a useful resources called Proactive Investors and Stock Tube. As an investor I like to hear him talking about a one year pay back on these as well as their company having no debt or debtors as their customers all pay up front!
In addition the Chairman in last years annual report pointed out the following:
"It is also part of our strategy to be financially independent
as far as we can be and to concentrate on increasing
our returns to shareholders. Our cash flow strength has
therefore enabled us to finance from our own resources
the development and deployment of Revolution, the
expansion of our photo booth estate as well as substantially
increasing dividend payments over the last three years.
We aim to continue to do this."
Furthermore in addition to the 500 or so laundry units they had at the last year end (April 2014) they are targeting having 2000 by the end of this calendar year (2015). On this in their report and accounts they said:
"As with photo booths, the machines are very cash generative and to date, the average EBIT margin on a laundry unit has
exceeded 50%. The achievement of the roll out targets in the short and medium term therefore represents an opportunity for a very significant increase in Group profitability and returns to shareholders."
So this looks like an interesting new concept that they are roiling out to utilise the cash flow from the rest of their business. This seems to be on a more stable footing now as the photo labs part has been run down due to digital technology, but it seems that there remains a demand for Photo booths for passports and a new ID card planned in Japan which he talks about in the interview.
In terms of the shares they do look a bit expensive on the basic PE of around 18x for the year to April 2016, but this would come down to around 16x if you adjust for the 12% or so of the market cap that they have in cash. It also means that their earnings yield looks more reasonable at around 7 to 8% and they are expected to yield over 4% next year too having committed to raising this years dividend by 30%. In addition to this they have paid special dividends in the last couple of years of 3p and 2p so if they cannot find acquisitions or decent investments for their cash then they have said they will consider more specials too.
However, I note in an interview with the CFO (a French lady Françoise Coutaz-Replan) that they are also currently trialling automated car washes at a few European supermarkets to see if they are viable as they do require more in the way of capital expenditure than the revolutions. So I guess if these stack up in terms of ROCE then it sounds like that could be another more substantive use of their cash flow and cash balance maybe. I also note that having lowered their manufacturing costs that they are trying to leverage the Photo Booth estate with some Phiippe Starck designer booths, which are higher margin, printable 3D figurines and expansion in China and other emerging markets with photo booths facilitated by their new lower manufacturing costs.
So I like the balance sheet, the business characteristics, high margins of 20% and ROCE of 33% and the fact that they have found a new venture to grow and invest their cash flow into which seems to be making even higher returns which together with generous dividends appeals to me. Added to which Mr Crasnianski knows the business well and still holds over 21% so his interests should be aligned with other shareholders, hence the shareholder friendly dividend approach.
Why mention it now? Well as I say it comes up on the CIS with a Score of 95 and in fact made it into the Mechanical Portfolio, which is what prompted me to look at it more closely despite my initial scepticism. In addition they have final results coming up in the next few weeks which could act as a catalyst for the shares if they deliver a compelling update on the roll out of the revolution and may be progress on car washes or another special dividend instead?
This might then afford a decent trading opportunity if they can break out of their recent sideways trading range to the upside which might suggest a 160p to 180p short term target perhaps? On the downside I see that it dived to 120p with the market in October, so in similar circumstances or if the results disappoint then I suggest it could have a similar degree of downside which would then take it down to a fairer / more attractive looking ex cash multiple of around 14x. So may be not one to rush out and buy but perhaps one to put on your watch list and see how the next figures come out in the wash - Vive le revolution!
..or Hill & Smith Holdings (even their name is dull) knock it out of the park unlike England's cricketers in the World Cup!
Yes final results from HILS today and they were well ahead of forecasts for the year to December 2014 and even came in close to this years forecasts of 46.1p of earnings and 18.3p dividend as they reported 45p (+11%) and 18p (+12.5% not the 16% stated in their bullet points in the results) respectively for this year.
Hill & Smith is a £466m market cap.international group with leading positions in the manufacture and supply of infrastructure products and galvanizing services to global markets and is well known for crash barriers and is a beneficiary of the current governments road investment strategy. They acknowledge this and say they are in the sweet spot of this and as a result they are making capital investments at 2.4 x depreciation, to capitalise on specific growth opportunities in UK roads and also in US galvanizing.
The balance sheet is geared but with Net debt reduced to 1.5 x EBITDA and a key financing facility extended to 2019 on more favourable terms apparently. This was achieved thanks to what they describe as record results, despite some currency headwinds and saw margins up by 0.8% to 10.8%. Despite this the Chief Executive was his usual cautious self when on the outlook he said:
"Trading conditions in many of our end markets continued to improve throughout the second half which, together with the implementation of strategic initiatives to increase returns, delivered strong year on year profit growth. Overall, although some markets remain challenging, 2015 is again expected to be a year of good growth."
Summary & Conclusion
It might be dull and the management are often cautious / realistic but nevertheless it has produced steady dividend growth over the last few years. This has seen the dividend rise by 80% from 10 pence in 2008 for a compound growth rate of 10.3% per annum over that period. The current 18 pence dividend leaves it on a yield of around 3% based on this mornings price of around 610 pence.
Meanwhile on the earnings front the P/E is a fairish looking 13.6x (2014) and it has a decent looking current earnings yield (EBIT/EV) of 8.75% which suggests it might be better value than it appears. There should also be some upgrades on the back of today's earnings surprise which is something else I like to see. Prior to today's numbers is had a Compound Income Score of 81 (100 is best) so I would probably expect this to improve once these numbers and presumably some upgrades are included.
Technically, as you can see from the chart below the shares are approaching their recent 12 month and all time high which may put some off, but can also be positive ultimately as it tends to put new buyers off, despite the positive news, which then ultimately gets reflected in the share price. So it is a tempting one to buy on that basis, but it might be worth waiting to see if it relapses perhaps after the gap up today and once we have a better feel for where this years numbers are likely to settle.
Finally as a reward for getting this far see the video at the end which seems appropriate to Hill & Smith - its Car Crash Compilation 2015 March - Accidents of the Week #47 - enjoy?
...we have had final results from Clarkson (CKN) which is a £600 million market cap. United Kingdom-based provider of integrated shipping services group which operates from offices in 20 countries on six continents.
The results seem to be ahead a the earnings level coming in at 134.2p v 127p consensus forecast according to Stockopedia. The dividend was however slightly shy at 60p for the year v a 61p forecast form the same source, although it was up by a reasonable 7% and is well covered by earnings and cash flow. Encouragingly this was slightly ahead of the 6% or so that they have achieved over the last 5 years and the Company points out that they have increased their dividend consecutively, as part of their progressive policy, for the last 12 years.
The other main feature of the year was their acquisition of of RS Platou ASA (Platou) a leading international broker and investment bank, focused on the offshore and shipping markets which completed in February this year. This is covered in detail in today's announcement in which they said it:
"not only brings together two great teams, but transforms the strength and depth of our offering and further enhances the best in class service we deliver to our global clients. The board firmly believes this is a unique opportunity to combine two leading businesses, led by proven and experienced management teams, to create a 'best in class' fully integrated offer across shipping and offshore, broking and banking. The businesses are highly complementary with little overlap and we expect to generate significant opportunities for organic revenue and margin growth, creating shareholder value over the medium-term."
They do however acknowledge that they face extremely challenging conditions in some markets but they seem confident that they should benefit from their leading positions and extra services they can offer to clients as a result of the acquisition. The Mr market seem to like it as he has marked the shares up by 4 to 5% this morning.
Summary & Conclusion
A slightly difficult one to get your head around given the difficult background to some of the markets that they serve. However, there are several attractive aspects like a market leading position, strong balance sheet (net cash of £92.3m), a well covered and steadily growing dividend and potential benefits to come from what seems like a good acquisition.
The shares trade on around 12 to 13x 2015 forecast earnings and sport a yield of 3.6% at a share price of 2100 pence, if they achieve the currently forecast 73 pence dividend for 2015. At this share price they also have a current earnings yield of 6.7% which is about average and It scores in the top decile of the Compound Income Scores with a score of 94.
So it seems like a well managed business operating in a slightly difficult market which can be cyclical. Despite this they have been able to and seem confident in growing the dividend going forward. The rating seems about average and may be fair enough, so it probably looks like a strong hold rather than a raging buy.
However they do seem to have found some support at the 1900p level since the end of last year (see chart below) and there is also a gap at around 2400p which might be a good technical mid range target in the medium term perhaps, which would put it on 15x and a 3% yield for this year. Talking of which I also note that in the last 12 months the PE range based on this years forecasts has been roughly 12 to 17.5x and the yield 2.65% to 4%, so I guess there could be some upside to the rating on that basis as the acquisition beds down and if the Baltic Dry Index were to recover from its recent long term lows as this is seen as a key indicator for shipping and global trade. But I'll leave you to decide for yourself if you want to get on board this one or not.