Thursday, 28 May 2015

Paypoint finals

Provides clients with specialist consumer payment transaction processing and settlement across a wide variety of markets: (energy pre and post-payment, telecoms, housing, water, transport, e-commerce, parking and gaming) through its retail networks, internet and mobile phone channels. I have a holding in my income portfolio (epic code: PAY).

Paypoint announced their final results today with sales up 3% to £218.5m and operating profits increasing by 8.8% to £48.2m. 
Total transactions for the group were up 5.9% to 812.7m.  The highest increase in volume was for the Collect+ joint venture with an increase of 38.7%, although price competition and increased logistics costs reduced their margins, the growth in revenue offset this and helped deliver profit ahead of last year.
EPS was up 9.1% to 57.4p and a final dividend was recommended of 26.1p, making 38.5p for the full year, an increase of 9.1% and covered 1.49x by earnings and 1.3x by free cash flow (FCF).
FCF was strong again at £34.8m, marginally above last year's £34.3m.  After dividend payments of £24.7m and a translation loss on cash balances of £1.8m (presumably in Rumania) the net cash position increased £8.3m to £43.4m.* Over the last three years Paypoint's FCF has returned an average 49.5% on its capital employed, substantially exceeding its weighted average cost of capital of 9.2% (this also being its cost of equity, since it has no debt).
Management has decided to sell the parking and online payment processing companies to realise their value.  They have taken this decision as the "Fin Tech" market has entered what management have described as an arms race of investment, which resulted in a changed competitive landscape, bringing pressure for both faster development and larger scale to support lower margins.  Management rightly feel this is not a market that would generate acceptable returns, comparable with the rest of the Group.  The business has sales of £17m, is loss making (due to the recent increase in investment needed) and has net assets of £54.8m.
With the strong FCF, the increasing net cash position and disposal proceeds from the business up for sale, I would expect another special dividend (2013: 15p) at some point in the next 18 months.  At today's price of 929p (up 5.8%) the company is yielding 4.3% on the expected dividend next year, excluding any potential upside from a special dividend.
On a discounted cash flow basis I would estimate that the intrinsic vale of the shares at ~1025p (17x next year's expected earnings), giving a margin of safety of ~10%, this is based on the conservative assumption that they grow their FCF by 5% pa for the next 10 years; over the last five years they have grown it by 9%. 
A good candidate for an income portfolio - a reasonable yield, with a record of increasing dividends (12% over the past 5 years) and special dividend payments, backed by a strong FCF and net cash on the balance sheet.

* Net cash excludes client cash (2015:£3.8m; 2014:£6.5m), but includes cash that is part of the assets of the parking and online payment processing companies held for sale (2015:£3.3m; 2014:£nil).  

Tuesday, 19 May 2015

ICAP finals

ICAP is an interdealer broker and provider of post trade risk mitigation and information services.  I have a holding in my income portfolio (epic code: IAP).

ICAP released their full year results today.  A difficult period with revenue down -7.4% to £1,276m and adjusted operating profit falling by -13.1% to £252m, with reported operating profit showing a decrease of -12.6% to £118m.  Adjusted profits though were up 8% in the second half of the year compared to the prior year. 
Adjusted EPS was 28.1p a decline of -13.8% and reported EPS fell -16.9% to 12.8p. A final dividend of 15.4p was declared making an unchanged 22p for the full year.
Free cash flow (FCF) was the one bright spot rising from last year's £75m to £142m, which just covered the dividend payment in the year of £141m.  A foreign exchange translation gain was the main reason for a reduction in the net debt from £89m to £68m.
With little debt on the balance sheet (gearing of 7%) and FCF returning an average of 14% over the last three years on its capital employed, ICAP is able to continue to weather what is an extended difficult period for its business.  They have been able to achieve this through introducing a comprehensive restructuring programme.  
For this current year management have stated "...Since the start of the financial year the external environment has been mixed and we continue to expect near term headwinds...".  Improvements in trading may occur as markets become more volatile during periods of uncertainty, this may be caused by the European in/out referendum in the UK and uncertainty over interest rate decisions in the UK and USA towards the end of the year.  

Vodafone finals

Vodafone Group PLC is engaged in providing voice and data communications services for both consumers and business customers, with a significant presence in Europe, the Middle East, Africa and the Asia Pacific region.  I have a holding in my income portfolio (epic code: VOD).

Vodafone reported their final results today, reporting revenue up 10.1% to £42.2bn, with a LFL decline of -0.8%.  Service revenues declined -1.6% on a LFL basis, but in the fourth quarter saw 0.1% growth, the first for almost three years, reflecting a steady recovery in Europe and continued growth in Africa, Middle East and Asia Pacific.  Sales in Europe represented 66% of Group revenue, up from 63% in 2014, due to acquisitions in Germany, Italy and Spain.  India was the best performing territory growing 9.6% and represented 10.2% of Group turnover. 

Adjusted operating profit was down -18.6% to £3.5bn and reported operating profit was £2bn compared to a reported loss of £(3.9bn) last year.

Adjusted EPS was 5.55p down -27.8%, with reported EPS at 21.42p compared to 41.77p last year, 2015 included a 4.8bn tax credit, while 2014 included a much larger £16.6bn tax credit.  A final dividend of 7.62p was declared, making 11.22p for the year up 2% and covered 2.8x.

Free cash flow (FCF) was weak with a £(0.3bn) outflow, but was an improvement on last year's outflow of £(1.7bn).  Although operating cash flow was up 71% at £8.4bn, the substantial capital spend of £8.7bn caused the FCF outflow; the high capital spend is mainly due to Project Spring, that has a further year to go and then capex will decline to 13-14% of revenue, plus any spend on spectrum purchases.

Net debt increased by £9.1bn to £28.2bn, the majority of the increase was due to the negative FCF, payments for dividends of £2.9bn, a £3.2bn net cash outlay on acquisitions plus the assumption of £3bn of debt on those acquisitions.

Guidance from the management for 2016 has EBITDA in the range of £11.5bn to £12.0bn (£11.7bn for 2015) and positive free cash flow after all capex, although this does exclude spectrum and restructuring costs.  They also stated that they intend to grow dividends per share annually.

Vodafone fell 2.9% on the release to 227p, which places it below book value at 0.9 and on an historic yield of 4.9%.  This might be good value as an income share, if the FCF is improved in 2017 (after Project Spring is completed) and is able to cover the proposed increasing dividend payments.  If this improvement is not made, it will place increasing pressure on its financial structure, although gearing is not excessive at 42.6%, the low cover of operating cash flow to net debt of less than 30% is weak and paying a proportion of the dividends from debt will weaken the position further.

From a quality perspective, Vodafone is the weakest holding in my portfolio.


Sunday, 17 May 2015

Compass Group interims

Compass Group

Provides contract food, catering and support services to a wide range of commercial businesses and government departments operating in over 50 countries.  I have a holding in my income portfolio (epic code: CPG).

Compass Group released their interims on 13 May and reported sales increased by 4.7% to £9,062m, while organic revenue grew 5.7%, boosted by 8.2% growth in North America and Fast and Emerging growth of 7.7%, with Europe & Japan increasing 0.9%.  Total organic growth was in line with their first quarter, commented on here.
Underlying operating profit was £688m, an increase of 6.3% and reported operating profit was £674m up 6.5%.  It was also positive to see operating margins improving by 10bps to 7.6% and management feel there is more to come here.  Underlying EPS at 28.4p was up 12.3% and reported EPS increased by 11.7% to 27.6p.
Free cash flow at £302m was similar to last year, but insufficient to cover dividends (£295m) and the high priced buy-back of their own shares (£139m) - the main reason for the increase in net debt from £2,414m to £2,699m.
An interim dividend of 9.8p was declared, a healthy increase of 11.4% on last year. 
Management have stated that "...expectations for the full year remain positive and unchanged. However, the economic environment in some of our emerging markets is uncertain, and lower commodity prices are impacting our Offshore & Remote business..."  A similar statement to February's first quarter IMS, that prompted me to state that I would expect that organic growth might pull back to a 3-4% range for the year.  Obviously with a second quarter in a row of 5.7% organic growth there is a lower risk of this, but I am still expecting some pull back.

Anite trading update

Anite plc

Anite is a global provider of hardware and software solutions, systems integration and managed services within its core markets of Wireless and Travel. I have a holding in my growth portfolio (epic code: AIE).

Anite released a positive trading update on 12 May, stating that trading in the final quarter was in line with expectations and expects to report full year revenue and adjusted operating profit in line with expectations. 

They also stated that net cash at 30 April 2015 stood at £36.9m (31 October 2014: £29.8m) slightly better than expected.

Another positive announcement was released on 14 May stating that China Telecom has selected Anite's interoperability and performance test solution - SAS - for LTE data throughput testing.  China Telecom will use the solution as a key part of its LTE device acceptance programme.  

These two positive announcement left Anite's share price up 6.4% on the week at 91p.


Diploma interims

Diploma PLC

An international group of businesses supplying specialised technical products and services. They operate globally in three distinct sectors - Life Sciences; Seals and Controls. I have a holding in my growth portfolio (epic code: DPLM). 

Diploma announced their interims on 11 May, showing a revenue increase of 9.8% to £163.2m and organic growth of 2%.  Acquisitions added 10% to revenues, but foreign exchange headwinds had a 2% adverse effect on revenue.

By division organic growth was:

Life Sciences +1% (Canadian Healthcare faced difficult markets)

Seals +8% (North American market strength)

Controls -5% (Soft European industrial markets)

Adjusted operating profit (eliminating acquisition related charges) increased by 6.5% to £29.6m, with adjusted operating margin at 18.1%, down from last year’s 18.7%.  Reported operating profit was up 6.1% to £25.9m.

Adjusted EPS increased by 6.3% to 18.6p and reported EPS was up 8.7% to 16.2p.

An interim dividend of 5.8p was declared an increase of 7.4%, that management said reflected their confidence in growth prospects.

Free cash flow (FCF) was £14.1m marginally down on last year's £14.7m, this decline was due to a capital spend that at £2.8m was £2m higher than last year.  Of this capital spend £1.1m was due to the construction of a new warehouse and office facilities for FPE Seals, a further £2.1m will be spent by August this year when it will be completed and then sold and leased back by the business. 

The business finished the period with net debt of £14.9m compared to £21.3m of net cash at the year-end; this was mainly due to dividend payments of £13.1m, share repurchases of £1.7m and acquisition payments of £34.4m substantially exceeding FCF.  Excluding an further acquisitions, the net debt should be eliminated within 12 months due to the highly cash generative nature of the business - producing an ~25% FCF return on its capital employed. 

Management's outlook stated that Diploma "...aims to deliver "GDP plus" organic revenue growth with carefully selected acquisitions accelerating the growth to the target double-digit level. While headwinds to organic growth remain in certain key markets, the acquisition pipeline remains encouraging..."

The shares at 810.5p were down 4.3% on the week and 11.6% short of its 52 week high.  A high quality cash generative business, that very rarely trades at a substantial discount to its intrinsic value.  I would currently assess its intrinsic value at 850 - 900p, based on being able to grow its FCF by 10% pa over the next 10yrs and 3% in perpetuity.  Since the 10 year FCF growth is dependent on acquisition success, I have used a higher discount rate of 9.5% than might be used for a similar sized company with a comparable beta, to reflect the execution risk.


Friday, 8 May 2015

Amerisur pipeline update

Amerisur Resources is an independent full-cycle oil and gas company focused on South America, with assets in Colombia and Paraguay. I have a holding in my growth portfolio (epic code: AMER).

Good news from Amerisur today as they announced approval of the modification to the Platanillo field global exploitation licence for the construction and operation of the Ecuador pipeline.  There was also approval for the operation of up to two water disposal wells per production Pad.  Each well is permitted to dispose of up to 20,000 barrels of water per day into the Tertiary Pepino formation.

This is excellent news in that it will not only release any physical constraints on export capacity, but reduce the cost of transport by $18 per barrel.