Friday, 30 August 2013

The Restaurant Group interims


The Restaurant Group plc (TRG) is engaged in the operation of restaurants and pub restaurants. The principle brands are  Frankie & Benny’s, Chiquito, coast to Coast, Garfunkel’s, Home Counties Pub Restaurants and Brunning & Price.  I have a holding in my income portfolio (epic code: RTN).

The Restaurant Group announced their interims today and they continue to perform. Revenue increased by 11.4% to £280m and on a like-for-like basis was up 5%.  Operating profit increased by 14.2% to £31.1m and operating margins improved by 27 bps to 11.1%, which was due to a strong sales performance and tight cost controls. 

Profit before tax increased by 15.2% to £30.0m and EPS increased by 15.8% to 11.14p. An interim dividend has been declared of 5.25p an increase of 16.7% and covered 2.1 times.

Free cash flow (FCF) was also strong at £27.9m compared to £21.4m last year.  This FCF allows for maintenance capex, but not capex used to increased their capacity.  If we allow for the increased capacity capex the FCF was £10.9m compared to £5.3m last year.

With such strong FCF, net debt has declined from £39.1m at the start of the year to £30.3m at 30 june 2013.

They mention that the second half has started well, with year to date total turnover up 10.5% and like-for-like sales up 4.25% and management are confident that the Group is well placed to deliver another year of good progress.

They state that they have a strong portfolio of complementary brands with significant future roll out potential, their best ever pipeline of new sites stretching into 2015 and beyond.  They opened seven new sites in the first half, four between 30 June 2013 and today and expect to open a further 19 to 24 before the end of the year.

It is worth repeating here their strategic objectives " increase shareholder value and the strategy deployed to achieve this is to build a business capable of generating long-term sustainable and expanding cash flows. In pursuit of this we have focused our business on the growing casual eating-out market. We have targeted segments of this market which offer distinct barriers to entry, where we can be confident of delivering good growth in profits and cash flows and where there is considerable potential for high returns on investment..."  They seem to be delivering on these objectives with high levels of operating margins, strong cash flow, ROE of 28% and a CAGR in returns to shareholders in the way of dividends and an increasing book value of 28.8% pa over the past 5 years.

The comforting profile of RTN is that their internal cash flows are sufficient to pay for their capex on both maintenance and expansion, the increasing dividend and have ~£5m available to reduce their borrowings.  This is based on a forecast operating cash flow of £90m (LY £85m), capex of £55-60m (mentioned in the interim report) and dividends of £25m (2012 finals and 2013 interims). 

Amerisur Colombian operations 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).

Amerisur updated the market on operations today.  They key points were their latest exploratory drill Platanillo-2 ST1 sidetrack has been drilled to a depth of 9,396ft and encountered 68ft gross, 39ft net pay. Total oil produced from their Colombian fields during the 49 days to 18 August averaged 6,522 BOPD and they have signed oil transport agreements with Cenit, PetroEcuador and OCP Ltd to facilitate exports of Amerisur crude oil through the Ecuadorian transport system.  This latter point is part of the Company's plan to develop and pursue export capacity additions in both Colombia and Ecuador, in order to support continued growth in production.

Unfortunately Colombia has experienced a series of strikes by farmers and transport workers who are impeding traffic on the main roads of the country. This has compelled all oil producers in Putumayo and several other producing areas to suspend production. Amerisur reduced production over the past 11 days and closed in the Platanillo wells in a controlled manner 3 days ago as a contingent response. The Colombian Government is in negotiations with the strikers and the Company is prepared to immediately re-establish production as soon as those negotiations are completed.

Colombia is a difficult territory with rebel armies such as ELN and Farc causing disruption and kidnapping foreign workers, the latest a Canadian geologist along with four other workers working for Braevel Mining.  The current strikes also follow on the heels of the recent disruptions in the mining industry.

Oil exploration often takes place in harsh inhospitable environments, for the more difficult areas in the world there will be a risk discount to the valuation.  At a forward P/E of less than 6 AMER's discount is somewhat overdone, given its track record and growth expectations.

Thursday, 29 August 2013

Vodafone press speculation

Vodafone Logo

Vodafone the second largest ( behind China Mobile) mobile telecoms company in the world. I have a holding in my income portfolio (epic code: VOD).


Vodafone commented on press speculation this morning, confirming that it is in discussions with Verizon Communications Inc. regarding the possible disposal of Vodafone's US group whose principal asset is its 45% interest in Verizon Wireless.  Various analysts have stated that they believe that the price will be in excess of $110bn with a likely tax charge of $10bn.

If the deal does take place, then use of the funds will determine whether VOD continues to hold value for income investors after the sale of its most valuable asset. 

Melrose Industries interims

Melrose Industries, an engineering company that seeks to acquire businesses it understands, improve them by a mixture of investment and changed management focus, realise the value created and then return it to shareholders. I have a holding in my income portfolio (epic code: MRO).

Melrose Industries announced their interims today, with four key "take-aways" that were:

  1. The recently acquired business Elster is performing strongly and profit improvement is ahead of schedule.
  2. The existing continuing businesses are struggling with sales for the six months down 15%.
  3. Post year-end disposal of two businesses for £311.5m (less £10m costs) representing over 15x earnings.
  4. The process for the eventual disposal of Crosby is in progress, that will result in a return of capital to shareholders.
The results comprised the new business of Elster, acquired in June last year, the discontinued businesses of Truth and Marelli Motori and the existing continuing businesses. 

Revenue for the continuing businesses in the period was £1,022.2 million up 119.3%, but on a like for like (LFL) basis (excluding Elster) was down 15% to £114.1m.

Operating profit (excluding exceptionals) was £165m, compared to £75.8m last year, but on a LFL basis operating profit was down 2.6% to £73.8m.  Excluding exceptionals diluted EPS was 8.6p up 4.9%, if you include exceptionals, but exclude discontinued operations diluted EPS was 5.1p up 64.5%. The interim dividend was increased 5.8% to 2.75p and free cash flow was strong in the period at £64.6m compared to a weak outflow last year of £2.9m.

Net debt was up slightly from the year-end at £1,069.6m with gearing at 57% and interest cover of 5.3x (including discontinued businesses).  Net debt will obviously be reduced by £301.5m following proceeds from the disposals.

With respect to the outlook management state that "...with the excellent progress achieved at Elster and substantial shareholder value being created from disposals, 2013 is looking like it could be a very successful year..."

Looking at next year - for the existing continuing businesses the management see conditions slowly improving and expect a better 2014 and Elster is expected to continue to perform well.

MRO is an unusual business, with its reliance on successful deal making it has more in common with a private equity company than businesses from their Industrial peer group.  They have established a successful track record since their IPO on AIM for £13m almost ten years ago.  I have held the shares for just 3 of those 10 years and they have delivered an IRR of 31% pa (dividends and returned capital not reinvested).  They are though a complex investment to track, because of their capital returns, and restructurings, but worth the effort and I would not be surprised if performance over the next 5 years matches my historic returns.

Tuesday, 27 August 2013

Globo IBM partnership

A technology innovator delivering mobile, telecom and e-business software products and services. I have a holding in my growth portfolio (epic code: GBO).


Globo announced today that they have achieved advanced membership of IBM's PartnerWorld Program and its comprehensive Enterprise Mobility Management platform.  Globo's enterprise mobility platform, GO!Enterprise, is now included in IBM's Global Solutions Directory.

This will be of major benefit to Globo in their drive for penetration of the US market.  Their challenge is in differentiating themselves from the other dozen or so BYOD solution providers on the IBM program. 

Petrofac interims


An oil & gas services company providing design and build for oil and gas infrastructures; operates, maintains and manages assets and trains personnel. I have a holding in my growth portfolio (epic code: PFC)

Petrofac announced their interim results today with Sales down 12.3% to $2,794m, with the Onshore Engineering and Construction division causing the decline with revenue down by 31%. 

Operating margins showed a decline in all areas, with the Group losing 213bps resulting in operating profit and diluted EPS falling by 27.5% and 25.4% to $285m and 71.24p respectively. 

The order book revealed a positive trend increasing by $2.5bn from the December year-end to $14.3bn, with the majority of this increase arriving in the month of June.  At the same time as the interim announcement the company also revealed a contract award totalling $95m over 3 years, from Gazprom Neft Badra B.V. on the Badra Oil Field, situated 160km southeast of Baghdad City in Iraq.

The interim dividend has been increased by 4.8% to 22c and management believe they have the ability to deliver a strong second half performance and achieve their guidance of modest growth in net profit for 2013.

They reiterated that they remain on track to achieve their 2015 earnings target, which was to double their 2010 earnings by then, i.e. to $862m.  That will equate to a 10.9% CAGR over the next 3 years.

My major concern that I have expressed before, is the weak Free Cash Flow (FCF) performance.  They reduced their net cash position in 2012 by £1.2bn and in these interim results turned the net cash position at the end of last year of $233m to a net debt position of $370m, due to a negative FCF of -$469m for the six month period.  Short periods of FCF performance can be misleading, especially for a company in PFC's industry, but the company seem to have two weak years in any 3 year period, with the weak years becoming weaker.  The company need to demonstrate a return to strong FCF this year to break this trend; over the past 18 months Petrofac have generated $0.9bn of earnings, but have consumed $1.9bn of cash.

Thursday, 22 August 2013

IMI interims

IMI is a global engineering group focused on the precise control and movement of fluids in critical applications and comprises five platform businesses - Severe Service, Fluid Power, Indoor Climate, Beverage Dispense & Merchandising. I have a holding in my income portfolio (epic code: IMI)


IMI announced interim results today with revenue showing a very small decline from £1,090m to £1,087m and a 3% decline organically for the six months to 30 June.  Operating profits though improved by 4.6% to £162.2m with a 69bps increase in margins to 14.92%.

Diluted EPS was 34.5p an improvement of 8.5% and the interim dividend was increased 8.5% to 12.8p.

For the five divisions:
Severe Service showed good order intake momentum with orders up 19% and particularly strong in the Oil & Gas sector where orders were up 66%.  Sales were down -1.2%, but operating profit up 7.7% and second half margins are expected to show significant progress over the first half.

Fluid Power continues to suffer weak demand from the commercial vehicles market and consequently revenues were down -2.7% and operating profit down -7.5%.  Management expect a return to growth in the second half. 

Indoor Climate is continuing to rely on refurbishment activity due to the depressed market for new commercial construction in Europe; so a reasonable performance given the economic environment with sales up 2.8% and operating profits improving by 2.2%.

Beverage Dispense markets were weaker than expected as major customers in the US and Latin America delayed some capital expenditure, with sales down -4.4% and operating profit down -6.4%. 

Merchandising business continued to exhibit strong momentum across most of its end markets with sales increasing 18.6% and operating margins up 440bps resulting in operating profits up 73.1%.  The process to divest this division is on track.

Sales for the half year by territory and end markets are detailed below:

Click on chart to enlarge
Click on chart to enlarge

Free cash flow was strong at £95.1m compared to £6.6m last year.  In addition to dividend payments (£66.0m), a good portion of this FCF (£68.1m)  was spent on the stock repurchase programme, consequently net debt increased from £143.8m at 31 December to £210.5m, representing gearing of 31.6%. 

Finally in their outlook they state "...We continue to anticipate better trading conditions in the remainder of the year.   In addition, we expect the Group to benefit from an improving sales mix and an increasing contribution from a number of recently launched new products.  Overall, we remain confident that the Group will deliver good progress in 2013..."

So in summary a good performance given the economic backdrop and a positive outlook, with expectations for an improved second half from a well managed business.  Returns to shareholders by the way of dividends are likely to maintain their strong momentum, with ample capacity for high single digit increases.  I would be happier if the share repurchase programme, undertaken as the price to book value approaches 7, was not taking place.  At these prices the programme is value destroying and the funds would be better used if returned to shareholders by way of a special dividend.

Tuesday, 20 August 2013

Pan African Resources trading statement

A small South African based precious mining group that produces gold and platinum from high grade ore bodies at a low cash cost.  I have a holding in my growth portfolio (epic code: PAF).

Pan African Resources issued a trading statement today, declaring that EPS for the financial year ended 30 June 2013 is expected to be between 25% and 35% higher than the 2.02p per share generated last year.

Headline EPS is expected to be between 3% and 13% higher than the 2.03p per share reported last year. The net adjustment amount between HEPS and EPS is expected to be approximately £5.1m, due to the provisional purchase price allocation of Evander and, impairments as a result of lower precious metal price forecasts and exploration and mining challenges in the current depressed mining environment.

PAF produced 130,493 ozs. of gold in the year, with a four month contribution of 34,197 ozs. from Evander, its recent acquisition.  Phoenix its platinum mine produced 6,480 ozs. and at the year end production commenced at the Barberton Tailings Treatment plant.

Despite a difficult environment this is a creditable performance.  The highest estimate I have seen for the 2013 EPS is 2.3p, so an expected range of 2.52p to 2.73p puts them at 10-19% above the high end of the market's expectations and on an historic P/E of 5.5 to 5.0 at 13.75p.  This looks to be good value for a low cost producer, even with the low gold price and do not deserve the discount to their peers, although I do recognise that they need to recruit a permanent replacement for the interim joint CEO's.  

Bhp Billiton Finals

BHP Billiton

A diversified natural resources company and among the world’s largest producers of major commodities, including aluminium, coal, copper, iron ore, manganese, nickel, silver and uranium, and has substantial interests in oil and gas.  I have a holding in my income portfolio (epic code: BLT).

Bhp Billiton announced their results for the year ended 30 June 2013 today.  As expected the results were dominated by the substantial effect of falling commodity prices.  The largest contributor was iron ore prices that reduced operating profits by $4.1bn, from a total operating profit decline due to selling prices of $8.9bn.

These weaker prices were partially off-set by increased production improving operating profit by $1.8bn.  The most notable were - iron ore shipments from WAIO up 10%, copper production from Escondida up 28%, Queensland coal production up 19% and petroleum production up 6%.

Results were at the bottom end of market expectations with revenue at $65,968m down 8.7%, operating profit down 19% to $19,225m and earnings and EPS down 29.5% and 29.4% to $10,876m and $2.037 respectively.  Operating profits included $1,902m of net exceptional costs and earnings $922m of post-tax net exceptional costs, underlying Earnings and EPS are therefore $11,798m and $2.209 respectively.  

A final dividend of $0.59 was declared, an increase of 3.5% making $1.16 for the full year up by 3.6%.  The dividend is covered 1.76 times by earnings, but uncovered by a free cash outflow of $1,687m.  Free cash flow (FCF) showed a substantial decline from the $5.1bn last year, which in itself was down on the very strong $18.5bn from 2011.  It is no surprise then that capital expenditure & exploration costs will be reduced more than the expected $18bn this year to $16.2bn from $21.7bn in 2013, although that is still 31% up on 2011's level.

A decision was taken to complete the Jansen potash project in Canada, but over an extended period, spreading the $2.6bn of capital expenditure needed over the next 4 years.    The decision to complete this project is controversial, given weak potash prices and increasing production output from the Russian mines, that can only drive prices down further.  It is clear they have taken this into account in their delayed completion date and the statement that they may seek one or two partners.  On completion of the project BLT will have a mine capable of an initial production of 10 million tonnes pa, which is over 20% of current world production, they say they expect demand for potash to increase by 2-3% pa. for the next 17 years, so not enough by the time they start production to soak up their output.

For the Group they expect growth in production of 8% pa over the next two years and given the lower production costs for their mines and reduced capital expenditure, profits and FCF should return to respectable levels, unless we see commodity prices fall further.  If dividends are increased next year by another 4%, then the prospective yield is 4.1%, so still an interesting buy for an income portfolio despite their 16% climb from the year's lows, but of course with a commodity and currency risk attached.  It is worth bearing in mind that a 10% decline in the price of iron ore will have the effect of reducing operating profits by ~$1.4bn. 

Friday, 16 August 2013

Anite IMS

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 issued an interim management statement today covering their first quarter, declaring that trading has been relatively quiet, this though does reflect the usual quarterly seasonality that they traditionally experiences.  Despite this they do expect to meet market expectations for the year, due to the pipeline of opportunities for the rest of the year continuing to build, being materially ahead of the same period last year. 

For the largest division (65.7% of sales last year) Handset Testing, after performing strongly during the last few months of last year, they had a slow start to the current year.  Although they state that order intake in the first quarter is slightly ahead of the same period last year, the phasing of the delivery of these orders and the low opening order book at the start of the year, meant that revenue and operating profit for this division was down on last year.  They expect sales for this division to be flat at the half-year and operating profits to be slightly lower.  Key to the Division's full year will be the order intake level at the half-year stage.

Network Testing (19.7% of sales last year) has seen good underlying demand across its product range, with revenue and operating profit ahead of last year.

Travel (14.6% of sales last year) has benefited from an uplift in implementation revenue and from the increase in recurring revenues that it reported in the second half of last year, with revenue and operating profit ahead of last year.

Cash was consumed in the quarter, as net debt at the year-end of £0.9m rose to £4.0m at 31 July 2013.

 Obviously crucial to the full year is the realisation of the "pipeline of opportunities", most especially in the Handset Division, turning in to orders in sufficient time to be able to convert them to sales.

The market, as earlier in the year following their March IMS, is not giving the company the benefit of the doubt and marked the shares down by 6.9% to 117p.  They stated at the time of their prelims that the first and third quarters would be relatively quiet.  They delivered a creditable performance last year and I would expect them to do the same this year.  So, assuming the second quarter shows a good uplift in order intake from the materially higher pipeline of opportunities, I am still comfortable with a range of 9.1 to 9.4 EPS for the year as I detailed at the time of their prelims here.  

Tuesday, 13 August 2013

GlaxoSmithKline FDA approval


A global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

ViiV Healthcare (majority owned by GSK) announced today that the U.S. Food and Drug Administration has approved Tivicay (dolutegravir) 50-mg tablets. Tivicay is an integrase inhibitor indicated for use in combination with other antiretroviral agents for the treatment of HIV-1.   GSK own 76.5% of the JV ViiV Healthcare, with Pfizer owning 13.5% and Shionogi 10%.

The main competition for this drug is Gilead's Atripla, but in a recent competitive study Tivicay blocked all signs of the HIV virus in 88% of patients compared to 81% for Atripla after 48 weeks of use.

Atripla sales are about $3bn a year and JP Morgan have stated that they expect Tivicay to exceed this getting close to $5bn of annual sales.

This is GSK's fourth new drug approval this year and should be just the start, as GSK have stated that  over the next three years, they have the potential to launch around 15 new products globally.  This will mark the start of what should be a series of growth years for the company, following the last three disappointing years.

Wednesday, 7 August 2013

Greggs investments and write-offs

Greggs the Bakers

The leading bakery retailer in the UK, with almost 1,700 retail shops throughout the country.  I have a holding in my income portfolio (epic code: GRG).

Following the review of Greggs' interim announcement I had a look at their presentation and thought I would just add some more detail on where the write-offs are being applied and examples of the investment in processes and systems:

 £25m investment in processes and system replacement:

-        Integrated ERP-based stock system replacing legacy of autonomous divisional      manufacturing & warehousing systems.

-        New ordering processes to ensure better product availability and reduced waste.

-        Forecast-based manpower planning application to replace manually generated staff rotas.

-        More transparent supplier management and purchasing processes to drive full benefits of scale in buying.

£6-8m of one–off exceptional charges in H2 2013:

-        Sunk costs of plans for frozen manufacturing facility.

-        Impairment of Greggs Moment shop assets.

-        Provision for onerous leases on 9 accelerated closures.

-        Impairment of Southall development site value.
In simplifying the offering into one format “Bakery Food on the Go” and better use of space and flow to create ‘Greggs with seats’ the before and after was detailed in the presentation:

"Food on the go" shop


Click to enlarge pictures

It seems to me that Greggs' offering will in the future look more like a Pret A Manger shop, with the USP of a company owned fresh bakery supply.



Tuesday, 6 August 2013

Greggs Interims

Greggs the Bakers

The leading bakery retailer in the UK, with almost 1,700 retail shops throughout the country.  I have a holding in my income portfolio (epic code: GRG).

Greggs announced their interim results today.  Total sales grew by 3.4 per cent to £362m and although like-for-like sales improved in the second quarter, across the first half as a whole declined by 2.9 per cent. This lower like-for like sales in the first half led to a £4.7m decline in operating profit to £11.5m with a net operating margin of 3.2% (2012: 4.6%).

Diluted EPS were 8.5 pence, down 28.6% and the dividend was maintained at 6p.

Trading in the first five weeks of the second half to 3 August has been impacted by the heat-wave, with like-for-like sales falling by 3.2%. This, along with the change in the mix of sales from food items to lower margin cold drinks, has impacted profits by a further £2.0m.  As a result of this and the additional costs borne in the first half overall profits for the year are now expected to be around £3m lower than we had previously expected, so it looks like approximately £42m pre-tax.  This does not include one-off exceptional charges of £6-8m in the second-half, relating mainly to the impairment of asset values where the strategic direction of the business no longer supports the carrying value of these assets, therefore mainly of a non-cash nature.

The first half result includes one-off costs of £1.0m reflecting an updated assessment of the impairment of assets in under-performing shops and costs associated with the review of their strategy.  The company's strategic review, undertaken by new CEO Roger Whiteside, has concluded that the business will focus on their core market of "food on the go", a £6bn market growing at an annual rate of 9%. 

As part of this strategy Greggs will simplify their offering by merging their "food on the go" stores and their "local bakery" stores to create a "bakery food on the go" format. Whilst Greggs has defended its position as the leading retail bakery business, it has underperformed the "food on the go" market, as new entrants and existing competitors have rapidly expanded shop numbers and better met customer demands.  The expectation is that this new format will reposition the business for a return to growth.

As a more focussed business Greggs will not continue developing separate coffee shops and existing shops will be transformed, where possible, into the "bakery food on the go" format.  Although they will continue with their "bake at home" business with Iceland, they will not expand this offering to other retailers and they have no plans to develop an international business.

They have also stated that they will need to spend £25m over the next five years in process improvement and systems replacement.  They do expect to achieve £38m of benefits over this period, but I would have thought that the benefits will lag the cost outlays by 12-18 months.  This is always a difficult process within a business and may require a culture change along with the process and system changes.  

Assuming the normalised pre-tax guidance of £42m is achieved, then EPS will be about 31.4p, valuing the business on a P/E of 12.8 with a yield of almost 4.9% if the dividend continues to be maintained.  This would be an attractive price for the stock if management's plans were successful in returning the business to growth. 

My major concern is their free cash flow (FCF), that has declined steadily over the past 3 years, so that their average FCF yield on their capital employed* is just 6.7% compared to their weighted average cost of capital of 9.2%, this yield is likely to continue to decline in the short-term, as they make the necessary investments in re-focussing the business.

*FCF yield on capital employed is calculated using the 3 year average FCF (to allow for the cyclical effects of capital expenditure and working capital movements) divided by the average capital employed in the last year (opening equity + closing equity +/- opening net debt/cash +/- closing net debt/cash). 

Thursday, 1 August 2013

BAE Systems interims

A global defence, aerospace and security company. BAE Systems delivers a range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and support services.  I have a holding in my income portfolio (epic code: BA.)



BAE Systems announced their interims today.  Sales had increased by 1.5% to £7,952m with operating profit at £750m down by 2.3% and diluted EPS at 12.5p also down 2.3%.

Improvements continue to be made to the order book, where at £43.1bn it was up from £42.4bn at 31st December 2012 and above the £40.0bn at this time last year.  The division with the largest improvement from the year-end was Platform & Services (International), due to awards for the five-year Typhoon follow-on support contract and further weapons package in Saudi Arabia, together with renewal of the Australian Hawk support programme.

Free cash flow was negative at just under £1bn compared to £597m generated last year.  Not surprisingly a net cash position of £0.4bn at the year-end has moved to a net debt position of £1.2bn, leaving the company geared at 29.4%.  The dividend has been increased by 2.6% to 8p.

The company expects double digit growth in underlying EPS for the year, which includes the benefit from the share repurchase programme, the affects from reductions to US defence budgets and the satisfactory conclusion to Salam pricing negotiations this year.  They previously stated that they expected modest growth for the year, but that this excluded Salam (worth 3p per share), the affect of the share buy-back programme and any impact from US sequestration.  So we have 42.8p, up marginally from ~42p (both including Salem). 

Royal Dutch Shell half-year results

Royal Dutch Shell a global group of energy and petrochemical companies. I have a holding in my income portfolio (epic code: RDSB)

Shell announced their 2nd quarter and half year results today.  Second quarter 2013 sales were $112.7bn down 3.8% and earnings, on a CCS basis, were $2.4bn compared with $6.0bn in the same quarter a year ago. Earnings included a net charge of $2.2bn after tax, mainly reflecting impairments to shale assets in North America and impairment of Italian downstream assets.  A dividend of $0.45 has been declared for the second quarter, up 4.7% on last year and totalling $0.90 for the half-year. 

For the six months in total sales were $225.5bn down 4.9% on last year, earnings on a CCS basis were $10.3bn, down 24.3% and diluted EPS of $1.57 was down 23.8%. 

Production in the second quarter was down 14% from the first quarter and showed a 1% decline for the six months compared to last year, with gas production up 3%, but oil down by 5%.  CEO Voser's comments "...We are not targeting oil and gas production volumes; rather we are focusing on       
financial performance..." rang hollow, but may indicate further decreases over the coming months, certainly likely as they have indicated asset disposals in North America and onshore Nigeria in the future.                               

Net debt was $20.4bn an increase of $1.2bn from the year end, as free cash flow at $6.9bn for the six months was $5.7bn below last year.  Gearing (debt to equity, not the debt to equity plus debt, that Shell use) was 11.6% compared to 11% at the year-end, in most companies this would indicate inefficient financing of the balance sheet, but for Shell with their political, environmental and operational risks in addition to their substantial capital expenditure requirements it is probably prudent.

In the next 18 months Shell expect to see five major project start-ups, which should add over $4bn to their 2015 cash flow.  Ordinarily such a substantial increase in cash flow would lead to higher returns to shareholders in the form of increased dividend payments, unfortunately this may not materialise as they state that "...Shell is rich with new investment opportunities and is capital constrained...".  So I am not expecting dividend increases to exceed 5% over the coming years.

So why continue to hold Shell?  For the reason that it is a high yielding stock (5%+) and, with the exceptions of 2010 and 2011 when the dividend payment was not increased, tends to match or exceed inflation.  Over the past 5 years the dividend payment has grown by a compound annual growth rate of 3.6% pa, compared to an average inflation rate over that period of 3.2% pa.  I am comfortable with a weighting of just under 4% of my income portfolio and even with the decline in the share price today, my internal rate of return (dividends not reinvested) over the 3 years of my holding is 14% pa.

Exxon also announced their results today and have seen their net income fall 57% on weaker refining and lower production.  Although excluding the sale of their Japanese lubricants business from last year's numbers, earnings fell 19%.