Savills (SVS) - Results look strong, as expected, given the property background last year. Thus eps came in at 63.2p versus 60.8p (F) and the dividend total for the year was 26p up 13% from 23p last year and versus 25.1p (F). Commenting on the results, Jeremy Helsby, Group Chief Executive, said:
"Overall in 2015, Savills delivered a record performance across the Group. Our US expansion programme continued well and our Asia Pacific business showed resilience in the face of changeable markets. In the UK the strength of our position in the commercial market offset market weakness in the residential sector. The Continental European business continued to build profitability and Savills Investment Management substantially enhanced its position with the acquisition of SEB Asset Management AG.
We have made a good start to 2016 with a solid pipeline of business carried over from last year in many markets, although the impact of global macro-economic and political concerns on real estate markets worldwide is uncertain. At this stage, we retain a cautious view on some Asian markets, particularly the Tier 2 Chinese cities, and we expect the UK residential and commercial investment markets to be subdued, for the former, as Stamp Duty reforms take effect and, more generally, in the run up to the EU referendum in June. However, the strength of our enlarged US operation, the increased size of our Investment Management, Property Management and Consultancy businesses and the breadth of our UK business together with further improvement in Continental Europe, all bode well for the future of your Company. Accordingly, the Board's expectations for the year as a whole remain unchanged."
The shares have come off sharply with the market correction this year and are looking oversold. They therefore now seem quite cheaply rated compared to their history trading on around 10x with a 4%+ yield for the current year. Thus given the unchanged outlook statement above and a CIS of 95, they seem like a strong hold to me.
Sprue Aegis (SPRP) - out out an update on a supply agreement. As a result of this they said that their operating profits would come in at £8.3m for this year which they say is slightly below market expectations. Looking at the forecasts it seems like it will lead to a 10% downgrade to earnings to me. The shares are off by that amount this morning so probably all in the price now in what looks like being a consolidation year for them. I do however note the recent weakness in the £ v the € as a result of the BREXIT debate which, if sustained, could help to boost their earnings. I note also that there is something about sharing the swings on the US$ with their supply partner more equally. The downgrades will no doubt reduce the current CIS of 97.
32Red (TTR) had their full year results which look like a miss on the adjusted earnings 6.97p v 8.7p (F) although dividend was better than expected at 2.8p v 2.5p (F) and they have already previously announced a 3p special dividend. I note also that the adjusted earnings also exclude all the bad stuff as follows from the statement: Adjusted Earnings Per Share is calculated on Underlying Earnings adding back exceptional items, share option costs, amortisation and losses from the Italian business and uses the weighted average number of ordinary shares for diluted earnings as calculated in note 6 to these accounts. Actual diluted eps including all the bad stuff was er 1.14p which would put it on an astronomical 136x at the current 155p. However taking the adjusted numbers and increased dividend puts it on an expensive looking 22.2x with a 1.8% yield. Thus it will need to produce the strong growth which is currently forecast, but given the miss on earnings today it will be interesting to see if we see any down grades on the back of these figures, which if we do, will not be helpful given the current rating. For now it remains a high scoring stock with a CIS of 98, despite a value score of only 14, so again if we do see downgrades I would expect the Score to fall.
Finally not one that is in the CIS Portfolio but I note in passing that Cineworld (CINE) had blow out results which were not only ahead of this years forecasts but also those for 2016 too. So unlike Restaurant Group yesterday, no sign of a slow down there, although I they did benefit from the steady stream of Blockbuster last year which is not expected to be fully repeated this year. CIS currently 72, but may improve on the back of these numbers and if it leads to upgrades.
Month End Update for January 2016.
So one of the worst starts to a year ever from equity markets around the world comes to a close with a sharp rally. This fall seems to have been caused or rationalized post event as being driven by fears of a global slowdown, especially in China and the effects it was having on commodity prices and in particular the oil price. In addition markets had been on a bull run for nearly seven years on the back of Central Bank support and as a result some markets, such as the US, had also got onto extended and historically high ratings.
Thus with the US Federal Reserve starting to tighten monetary policy in December it seems as though investors came into the New Year and suddenly feared that the Fed put may have been withdrawn and so like Wylie Coyote they suddenly looked down and had a panic attack.
Fast forward to the end of the month and we had a sharp rally seemingly on the back of the Japanese central bank introducing negative interest rates and some weak US growth numbers which probably firmed peoples expectations that the US Fed may now be one and done in terms of raising rates, rather than doing a series of rate rises this year, perhaps.
However, it does all beg the question of how dependent markets have become on central bank support as each time they try to start withdrawing it markets seem to have a fit. Thus I guess time will tell if the central banks have now blinked on the back of the markets sliding in January and if therefore this current sell off turns out to be another temporary affair or if it is the harbinger of something worse. Which brings me nicely onto a look at the monthly timing indicators and how the Compound Income Scores Portfolio has done in this difficult month.
A couple of stocks which are in the Compound Income Scores portfolio reported updates today. Firstly we had a trading update from W.H. Smiths (SMWH) covering the 20 weeks to the 16th January 2016 and the all important Christmas trading period. Once again these pleasantly surprised despite ones natural scepticism about their format. They saw total sales up by 4% and like for likes (LFL's) of +2% over this period with the travel business again leading the way with 12% growth overall and +5% LFL's. The high street business was essentially flat and apparently continued to benefit from what they describe as the "colour therapy phenomenon" (colouring books for adults). As a result of the strong sales performance in High Street over the 5 week Christmas period, they say they now expect profit growth for the year to be slightly ahead of plan.
So it is good that they are at least ahead of plan so no need for downgrades like some other retailers, but whether it is enough to see estimates edge up a few percent remains to be seen. Therefore using current forecast with the shares up 6% to 1685p this morning in a weak market leaves them on a fullish looking 18x with a 2.6% yield which both come off the back of forecast growth of around 10% currently. Meanwhile with this continued growth and some other good operating metrics they continue to score highly on the Compound Income Scores (CIS) with a score of 99 so it seems likely that they will continue to be held in the portfolio.
The other holding that has reported a year end trading, product and technology update is the £150m market cap. fire alarm manufacturer Sprue Aegis (SPRP). These were also suggesting a performance slightly ahead of forecasts with sales at £88.3m some 2.2% ahead of forecasts for example. Otherwise the statement was a bit mixed covering as it did a slow down in France in h2 after a strong boost from regulatory changes in the first half, while the UK saw a good pick up on new product launches into the trade. Meanwhile they highlighted a big negative effect from the strength of £ v € and weakness of the £ v $, although I note the first of these has gone in the opposite direction recently which may help them going forward if that is maintained or extends further. The other negative was that they flagged higher stock levels, as expected, as a precaution when they moved some production facilities to a new site last year. Despite this they did however flag that they expect to still have £22.4m of cash up from £15.9m last year demonstrating their cash generation.
On the outlook they struck a cautious tone and while they said they expect to trade in line with forecasts they see the results being heavily second half weighted, which then leaves them at risk of disappointing if things slip. This seems a risk as they flagged a delay in launching some products this year in the carbon monoxide and hard wired fire alarm sectors but at least they should boost next year now they are launched.
Talking of expectations, forecasts are for earnings to fall from this years expected 21 to 22p to around 17p - probably as the boost from the initial boost from French regulatory changes drops out.
On this basis at this mornings price of 328p (down 3%) they trade on a full looking 19.3x with a decent 3.65% yield on a forecast 12p dividend, +20% from this years expected 10p. However on my preferred EBIT to Enterprise Value metric they trade on a decent 9.4% yield on this metric adjusted for the £0.5m of share based cost that they flagged in the statement. As a result of this, the decent growing yield and quality operating metrics it continues to score well in the CIS coming in with a score of 96 and as such it will likely remain in the portfolio.
Summary & Conclusion
So a couple of reassuring updates form stocks in the portfolio which are therefore holds, but I note that the market is continuing its slide today as the bearish mood of the market from the start of this year continues. Therefore probably no rush to get out there buying unless you have lots of cash to invest as the market seems to be trying to break its lows of last summer. It may however be worth watching out for opportunities thrown up by indiscriminate or forced sellers but always do your own research first to make sure you are comfortable with what the company does and how it makes its money.
I say makes it money as I would not recommend buying blue sky loss makers or those that do not pay a dividend, although I know some do - each to their own I guess. By the same token if you are fully invested or geared even, then definitely worth looking through your holdings and making sure that you are happy to continue holding them for the long term and think about weeding out any flaky or weak holdings and especially zero yielders unless you are really confident about their future prospects being reflected in the share price at some point.
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)..
Further to the September / quarter end performance update here are the changes as a result of the latest quarterly screening. First up though a quick reminder of the screening criteria and a small tweak to these that I have been hinting at in recent weeks.
Firstly the normal criteria remain in place for new purchases which are:
1) Selecting new stocks from top scoring stocks
2) Maximum PE of 20x, minimum dividend yield of 2% and an earning yield in excess of 5%.
3) Minimum market cap. of £50m
Now for the tweak which I have decided to add which is to also look at price momentum and exclude from the purchase list any candidates which have negative 12 month price momentum. There are several reasons why I have decided to do this as follows. While I have momentum in the Scores to a certain extent with earnings momentum, which does correlate with price momentum, I have generally fought shy of using price momentum that much myself although I pay some attention to it. However as per this graphic from one of my recent posts:
I am also adapting my mode having implemented it and assessing the evidence. The thing that struck me, although this may have been a coincidence and I could be making a false connection, is that the two troublesome stocks in the portfolio in the first six months had negative 12 month price momentum when they were selected. The stocks concerned were Plus500 (PLUS) and Utilitywise (UTW) and on reflection both seemed to have had some background concerns and therefore despite the apparently attractive financial metrics they had both underperformed suggesting the the market was wary of them. It is also noticeable that most top scoring stock tend to also have strong price momentum so when a high scoring stock has underperformed I'm now going to let the mechanical process use it as a red flag and skip that stock. Plus the fact that price momentum itself seems to be a powerful factor despite my own reservations about using it, so it is good force the model to use it in this way as I'm trying to use the model to counter my own human biases.
That's it for the tweaks on the purchase side but I guess it does raise the question as to whether I should use price momentum on the sale side too to cut losers even if they still score well, but I have not applied that this time around to Utilitywise as there were already 4 natural sales using an 80 cut off point on the Scores. So it will be "interesting" to see how it goes from here to see if I should perhaps have applied this rule to sales as well.
Any way enough already what about the changes I can hear you thinking. Well on the sale front the natural sales using the 80 Score as a threshold were Alliance Pharma (APH) - which had been re-rated and didn't get any upgrades after results so I'm relaxed about that as I had sold my own holding any way. A.G.Barr (BAG) - had a poor update and big weather related downgrades so as a result it has to go, although personally as it was not an operational problem and the quality and dividend growth remain, I would probably have given it the benefit of the doubt if I held it. Finsbury Foods (FIF) was the next stock to go as it's score had collapsed like a soufflé to 28 on the back of the share price rise, big downgrades post their results and on going low scores in quality and financial security. So I'm sure Paul Hollywood & Mary Berry might have thought it over baked too, that's a British bake off reference in case you don't know who they are. I heard on the news today that sales of baking equipment are booming on the back of it so trying to think of a way to play that. Any way I digress, finally PLUS500 (PLUS) was still coming up as a sell and I only kept it last time because the cash bid was supposed to have completed by now. So since that has dragged on and been delayed by regulatory clearance taking longer than expected, I have decided to eject it this time given it did its job as a cash proxy in the market sell off this quarter any way and I guess the bid could still fail if clearance is not received.
That gave me around £6500 to reinvest which I split equally between four top scoring candidates after applying the criteria mentioned above and adding the 12 month performance filter which excluded Elementis (ELM). So the new stocks were the top scoring Sprue Aegis (SPRP) the fire alarm producer which has a strong following in the private investor community so I'm sure that will be a popular choice. Less popular maybe 32Red (TTR), an on line gaming company, which seems like a natural replacement for PLUS500 if you know what I mean. The portfolio has a retailer already and quite a lot of exposure to consumer cyclicals, but nevertheless I let it buy Next (NXT) as the weighting in FTSE stocks is quite low and the alternative would have been Computacener (CCC). I left this because the other purchase was RM Group (RM.) which adds another technology related stock to the portfolio, although this exposure is mostly software rather than hardware.
I must admit personally I'm a bit uneasy about buying 32Red but that is the point of this exercise. I'm also probably prejudiced against RM as it doesn't seem to have gone any where for years, although on closer inspection it does seem to be turning around under new management, so it might be one that is worth investigating further. Finally I mentioned the exposure to consumer cyclical earlier so I thought I'd include the charts below to add a bit more colour to this. While it was not surprising to see it tagged as small cap exposed I am a bit surprised to see it identified as growth, but since I'm targeting quality growing income maybe this shouldn't come as such a surprise.
So there you go, just remember that if you are attracted to any of the names I have mentioned, don't forget to do your own research as there are no guarantees although I'd say it has been good so far. Cheers good luck with your investing in these difficult times, have a great weekend whatever you are up to, enjoy the weather while it lasts and come on England in the Rugby!