Monday, 30 September 2013

Unilever trading statement

Unilever Logo

A manufacturer and supplier of fast moving consumer goods, with more than 400 brands focused on health and wellbeing, 14 of which generate sales in excess of €1 billion a year. I have a holding in my income portfolio (epic code: ULVR).

Unilever were next due to update the market on 24 October, when they announce 3rd quarter results, but have today issued a trading update, after the markets closed in Europe, ahead of an investor conference hosted by Sanford Bernstein and Bank of America Merrill Lynch this week.

They state that it has seen weakening in the market growth of many emerging countries in quarter three and now expects underlying sales growth of 3 to 3.5% in the quarter. The emerging market slow-down has accelerated as a result of significant currency weakening. Developed markets remain flat to down.

This statement is not as clear as it might be:

I am assuming that emerging countries include Latin America, that had underlying double digit growth in the 2nd quarter and Asia/AMET/RUB (AMET = Africa, Middle East & Turkey; RUB = Russia, Ukraine, Belarus) that had underlying sales growth of 9.2% and that the underlying sales growth of 3 to 3.5% mentioned in the statement refers to underlying "group" sales growth, although it does not specifically say this; underlying group sales growth for the first and second quarters was 5%.

The emerging market slow down they say has accelerated as a result of significant currency weakening, which I'm assuming relates to the cost of imported raw materials pushing up prices, since underlying sales measures exclude currency.

CEO Polman states:
"We continue to grow ahead of our markets and expect underlying sales growth to improve in quarter four. For 2013 we are still on course to deliver against our priorities of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow".

Both Unilever and P&G are expecting global market growth of about 3.5%, so the fourth quarter would not need to improve by much over quarter three to achieve growth ahead of their markets, as they had such a strong first six months.

This announcement will undoubtedly hit the SP tomorrow, the shares are quoted on the NYSE and are currently down 2.56% at $38.65.  Since UV trades at 1:1 to ULVR that's equivalent to 2398p. 

This announcement and the budget stand-off in the US may produce some interesting opportunities for long-term income investors in ULVR, with the anticipated dividend approaching 4% for 2014 at 2398p. 


Friday, 27 September 2013

IMI CEO succession

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 today the planned retirement at the end of the year of Martin Lamb as CEO, a position he has held for almost 13 years, having been with the company for almost 30 years.  This came as a bit of a surprise to me, at 53 I assumed he would continue for a few more years yet.

He is to be replaced by Mark Selway, who in his previous job was CEO of Boral Ltd an Australian building & construction materials company with sales of AUS$5bn and EBIT of AUS$200m.  He was terminated without cause from his position there in September 2012.  An article in Australia's Business Review Weekly added some more colour to the situation:

"...This year, building products group Boral became a talking point when its board fired CEO Mark Selway.  At the time, in May, the company released a bland statement, saying it required a CEO “with a leadership style suited to harmonising the changes that have occurred over the past two years”.  However, the business community was awash with talk about Selway’s abrasive manner.
A competitor told The Australian Financial Review about an exodus of senior Boral staff: “We have interviewed a number of people from Boral and everyone has the same tale: Selway’s style is very hard to live with and they want out of there”..."

Prior to that he was 8 years with the Weir Group as CEO and before that a Divisional MD at Britax.  As recently as May 2013 he was on the short-list for the CEO position at Sims Metal Management Ltd an Australian scrap metal recycler.

Martin Lamb's record at IMI is quite exceptional and the expectation is that Selway can continue his legacy.  Boral may well have been a company in need of substantial change and a hard abrasive style might have been the approach required - IMI is a very different situation and I hope that Selway has the skills to recognise that and, adapt his style accordingly.

Thursday, 26 September 2013

Amerisur interims & 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 made two announcements today - their interims and an update on the Platanillo field in Colombia.

For the six months to 30 June 2013 revenue increased to $64.4m from $6.0m last year.  Profit before tax increased was US$29.1m up from US$0.4m last year and EPS was 1.80c compared to last year's LPS of -0.22c.
Production in the first half was 672,533 barrels of oil, or 3,715 BOPD.  Although production prior to the forced closure (see here) is being ramped up as new wells come on stream; on 16 July they stated that total field controlled production was estimated at 8,500 BOPD and for the period from 1 July to 18 August they averaged production at 6,522 BOPD.  In the second announcement today they state that the production rate is 7,500 BOPD.

As transport and export facilities were a problem previously (second paragraph here) they updated the market on their capacity:

Trucking to Orito - 94km, currently taking between 2,000 and 4,000 BOPD; Trucking to Rio Loro - 308km, currently taking up to 5,000 BOPD; Trucking to Dina - 428km, currently not being utilised; Trucking to Vasconia - 750km, currently not being utilised and Pipeline under the Putumayo river into Ecuador to use the SOTE system - up to 10,000 BOPD capacity initially.

Management state that all commitments and planned discretionary programmes for the remainder of this year and next are fully funded; they have a cash position of US$40.4m and I would expect them to start generating free cash flow next year.

The second announcement updated the market on the Platanillo field, the main message was that oil production and export has recommenced after the road restrictions were lifted and production was ramping back up and is currently at about 7,500 BOPD. Also Platanillo-2 ST1 has produced 1,023 BOPD on test and the Serinco D-10 rig will be moved to begin drilling in well Platanillo 14.

No mention was made of market expectations, I believe that analysts have been pencilling in about $100m post-tax, assuming 1.1bn shares that gives an EPS of $0.09, placing the company on a very attractive prospective P/E of about 8.  To achieve the $100m post-tax though will require an average production level of about 10,000 BOPD for the second half.*  A challenging target although we probably have a starting controlled level of production of about 9,500 BOPD (8,500 BOPD see here + 1,023 BOPD from Platanillo-2 ST1).  It will though require substantial exploration success over the coming months and a ramp-up in production to off-set the lower production & closure caused by the unrest.

Calculation for estimated average 10,000 BOPD for the second half of the year:

$100m less $19m for the half year = $81m required for the second half divided by a rough $45 net profit per barrel of oil = 1.8m barrels of oil export required at an approximate 180 days of production = an average 10,000 BOPD. 



Compass Group trading statement

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 issued a trading statement today ahead of its year-end.  For the full year, they expect organic revenue growth at constant currency to be just over 4%.  If you Include the contribution from acquisitions, revenue growth is expected to be towards 4.5%.
The underlying operating profit margin for the full year is expected to be over 7% for the first time, and 20 basis points higher than last year's 6.9%.  They also mention that free cash flow conversion remains strong.
By territory North America's organic revenue growth will be around 7.5% and the operating margin is expected to improve by 10 basis points.  Europe & Japan's organic revenue growth for the full year will decline by around 3% but the operating margins to improve by 50 basis points.  Fast growing & emerging markets' organic revenue growth for the full year is expected to be around 10%, but the margin is expected to decline by around 20 basis points compared to last year.
Looking ahead to next year, management state that the pipeline of new contracts in North America and Fast Growing & Emerging is encouraging and they expect to see further good performances, but economic conditions in Europe to remain challenging.
Another good performance from a well run business that has delivered sustainable dividend growth.  It's just a pity they persevere with a £400m share buy-back programme at a P/BV that makes it unattractive to investors.

Diploma trading update

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 issued a trading update today ahead of its full-year close.  Revenues for the year are expected to be approximately 10% ahead of those reported last year.  After adjusting for currency effects and acquisitions, underlying revenues for the year are expected to have increased by about 4%.  The underlying increase in fourth quarter revenues is expected to be around 6% which is at a similar level to the third quarter increase. Group adjusted operating margins are expected to be 19% compared to 20.3% last year. Cash flows are strong with the year end cash expected to be ~£20m up from £7.9m last year.

The key highlights are the continued improvement in underlying growth - 6% for the third and fourth quarters compared to 2% at the half year and the substantial generation of cash.

Wednesday, 25 September 2013

ICAP trading statement & settlement

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 two announcements today, a trading update ahead of their half-year end and a settlement agreement with the UK Financial Conduct Authority (FCA) and the U.S. Commodity Futures Trading Commission (CTFC).

In their trading update they state that activity levels in global financial markets were encouraging at the start of the financial year, but trading began to ease off in July followed by a more significant decline in August.  Although they state that there has been a modest improvement in September overall volumes remain relatively subdued.  Management expect group revenue for the six months to be around 1% lower than the previous year and profit before tax to be in line with the previous year.

The settlement agreements with the FCA and the U.S. CFTC relate to the involvement of certain brokers in the attempted manipulation of YEN Libor by bank traders between October 2006 and January 2011. Under the terms of the settlements, ICAP has agreed to pay penalties of £14 million to the FCA and $65 million to the CFTC, totalling £55 million ($87 million).  Although the fine is small by comparison to the banks involved (UBS, RBS and Barclays have paid $2.4bn in total), it represents 26% of last year's normalised post tax profits and 3.7% of its turnover.  This whole unfortunate episode, that covered a period of 4 years, reflects badly on the culture that exists within ICAP.  



GlaxoSmithKline Seretide/Advair


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). 

Since Seretide/Advair represented 21% of GlaxoSmithKline’s sales for the six months to June 2013 and patent protection expired in 2010 in the US (52% of S/A sales) and expires in Europe in 2013 (28%), I thought I would undertake some limited research and look at the current market situation the company faces in this very important area. 

Within the US market it is without doubt that the US FDA have made the barriers to approval for generic and competitive original drugs to Advair higher than in Europe.  A good example of this is SkyePharma’s (epic:SKP) Flutiform that has received European approval as an alternative to Seretide, but the US FDA have not given permission for the marketing of Flutiform without a substantive safety study equivalent to existing products, consequently due to the high levels of cost involved, SKP has put any further work for the USA on the back-burner. 

Evidence of the difficulties faced by potential generic competitors of Advair in the US came from a recent statement from the Mylan Inc. (NASDAQ: MYL) President Rajiv Malik who said: "…. we still believe that the hurdles for a generic Advair remain high and that there will be a very limited number of companies who are able to successfully bring a generic version of this complex product to market."  

Flutiform has approval in Europe and in the UK is about 15-23% (depending on dosage) cheaper than Seretide.  Not unexpectedly the UK health authorities have begun the process of replacing Seretide.  NICE estimate that the average primary healthcare trust (serving 339k people) would save about £167k pa by switching from Seretide to Flutiform.  It is worth noting that although Flutiform is approved for the treatment of asthma in Europe, it is currently not approved for COPD (chronic obstructive pulmonary disease).

So my expectation is for Seretide/Advair to continue to hold up reasonably well in the USA, but expect a different outcome in Europe and Japan (where Flutiform is also approved) and show some sharp declines over the next 2-3 years, unless patients find the Flutiform medication less effective.

As one would expect, GSK is not standing still in the important area of respiratory medicines and is developing enhanced drugs for asthma and COPD including Relvar/Breo (recently approved by the US FDA) and Anoro (not yet approved, but recommended earlier this month by the Pulmonary-Allergy Drugs Advisory Committee to the US FDA). 

Certainly in the past, pills have been fairly easy for generic drug companies to copy, requiring a relatively straightforward chemical synthesis.  The more complex inhaled multiple drugs made of complex biological ingredients; require skills that most generic drug companies don't have.  This creates a substantial barrier to entry, the skill lies just not in the drug itself but also the inhalation device.  It’s worth noting that GSK’s Advair inhalation device in the US is still patent protected until 2016.
The US sales for Advair have held up well since protection fell away for the medicine itself in 2010 and its sales may well continue near the current level, but I fear there may be a different experience in the rest of the world. 
Click on chart to enlarge
This threat underlines the importance of the current strong pipeline of drugs in GSK's portfolio, that are expected to produce 15 new drugs over the next 3 years, a good number in the respiratory sector with its high barriers to entry.

Monday, 23 September 2013

Amerisur Platanillo 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 announced today the lifting of the road blockages associated with the national strikes in Colombia.  The Platanillo field that was closed down on 27 August and had been on reduced production since 19 August, has now been brought back onto production.

The Company has designed a detailed field start up plan and intends to ramp up production while carefully monitoring well performance.


A global investment management group, managing assets for both institutional and retail clients from offices around the world. I have a holding in my income portfolio (epic code: ADN)

Aberdeen Asset Management issued their pre-close trading update today.  Assets under management at 31 August totalled £201.7bn compared to £209.6bn at 30 June 2013.  £1.2bn of the decline was due to net business outflows, £3.7bn due to market declines (mainly equities) and £3.0bn due to exchange rate movements.

Management state that due their strong cost control culture and the recent shift towards higher margins products they now expect underlying pre-tax profit for the current financial year to be towards the top end of analysts' forecasts (current range £431 million - £477 million).  This should produce an EPS of approximately 30.9p and supports the expected 30%+ increase in the full year dividend.

Globo interims

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 their interim results today showing revenues up by 52% to €32.03m,  Profit before tax up 74% to €14.47m and EPS increasing by 58% to €0.041.

The company has secured a €20m 3-year revolving credit line, with a €5m extension option, with Barclays Bank plc.  This is critical to the company as they continue to be in a cash-burn stage, with free cash flow consumption of €3.7m for the half year, which reduced their net cash to €10.8m.  In their trading update on 25 July though they thought their net cash was €9.2m, where they appear to have overstated their debt by 15% (as gross cash was identical), which is a concern. 

Management state that positive trading so far in the normally stronger second half, with their international business continuing to grow strongly, and the prospect of a significant contribution from Enterprise Mobility in a Box in North America gives them confidence in achieving market forecasts for the year.  This implies approximate revenue growth of 40% for the second half.

Although the future of Globo will be reliant on their ability to succeed in North America, it is currently just over 20% of sales and with the exception of Greece was the slowest growing territory during the six month period.

Click on chart to enlarge
The summary from my very first post on Globo is still relevant: " exciting growth company in an expanding market at a cheap price. The risks are - that it has yet to turn results into FCF; that a much larger competitor such as Cisco affects their growth aspirations, or causes them to enter a price war and they then spend inordinate amounts of expenditure on R&D or marketing to protect their position – with the result that substantial FCF is never generated..."

In early August, since my investment in the company had doubled in value, I halved my holding so that I'm just exposed to the profit I have made and thereby protecting my capital.

Thursday, 19 September 2013

GlaxoSmithKline CHMP recommendation


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). 

GSK announced today that the European Medicines Agency's Committee for Medicinal Products for Human Use has issued a positive opinion recommending marketing authorisation for fluticasone furoate/vilanterol (FF/VI) under the proposed brand name RELVAR™ ELLIPTA™ for asthma and chronic obstructive pulmonary disease.

The US FDA has already approved this drug for use back in May of this year and is marketed as BREO ELLIPTA.

GSK, with its current pipeline, has the potential to launch 15 new drugs over the next 3 years and this year has seen good progress in the early stages of achieving this.

Also in a release, that was not a RNS announcement (due to its materiality), GSK stated it had signed a new four-year deal with the U.S. government for $196m to supply inhalation anthrax treatment, raxibacumab, for use in a potential bio-terrorist attack.


Petrofac contract wins


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 has announced the details of two agreed contracts this week, the first in Malaysia and the second in Kazakhstan.

The Malaysian contract announced on 16 September was an agreement with PETRONAS, the Malaysian National Oil Company, for the operation and management of two high-specification training facilities that Petrofac is building to support PETRONAS' workforce capability enhancement programme for the next five years with an option to extend for a further two years.  The initial contract is worth US$120m.

The Kazakhstan contract announced today, relates to a consortium with Linde AG of Germany and GS Engineering & Construction Corporation, Republic of Korea.  The consortium has been engaged by KLPE LLP, to provide services in relation to development of its Integrated Petrochemicals Complex and Infrastructure project, situated in the Tengiz and Karabatan regions of Kazakhstan.

The US$77 million first phase of the contract, valued at approximately US$21 million for Petrofac's share, will involve the consortium undertaking engineering work on an Open Book Estimate. It is contemplated that the IPCI project will move into a second phase, in excess of US$3.5 billion, for a polyethylene plant.

Although there are no time frames mentioned in the announcement the Kazakhstan's Energy and Natural Resources Ministry approved a feasibility study for the development of the gas-based petrochemical complex in May 2007.  At that time the first phase was expected to be completed by the end of 2014 and the second phase by end 2016.

Although the two contracts combined will add less than 1% to the company's order book and represent less than 2.5% of annual sales, they provide evidence of good order flow and opportunities for extensions on both contracts, following closely on the heels of the $95m Gazprom contract in Iraq announced at the end of August.

Petrofac recently confirmed at the time of their interims, that they remain on track to achieve their 2015 earnings target of $862m.  That will equate to a 10.9% CAGR over their 2012 earnings, which might suggest good value for a company on an historic P/E of less than 12.  This year's earnings though will show only modest growth and they have yet to return a positive free cash flow last seen in 2011. 


Tuesday, 17 September 2013

Pan African Resources finals

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 their preliminary results today and rewarded patient shareholders who have seen the transformational acquisition of Evander Goldmine and the company lose it CEO at the same time.  The market became cautious about the company's ability to manage the post acquisition process and deal with the management upheaval.  The company chose continuity of management in their CEO replacement as described here and their performance at the full year underlines the strength in depth they have in managing the business during a difficult period.

The Group's gold sold increased by 38.2% to 130,493oz and gross revenue increased by 32.0% to £133.5m. Headline earnings increased by 20.1% to £35.2m and headline EPS increased by 6.9% to 2.17p with diluted EPS increasing by 30.3% to 2.62p.  This is a good outcome for the year beating market expectations and, in addition to this, they have returned to the dividend list with a proposed dividend of ZAR 0.1314 which is estimated at 0.83p (to be confirmed at the AGM).

Free cash flow was strong at £20.7m compared to £12.6m last year, although due to the partial use of debt in the acquisition of Evander, net debt was £6.2m (3.6% gearing) compared to net cash of £19.8m at the end of last year.

All-in sustaining cash cost for the group was $992 per oz. and has been consistent over the past couple of years.  The increase in the all-in costs (which includes one-off capex) to $1,212 per oz. from $1066 was due to high capital expenditure incurred on the construction of the Barberton Tailings Retreatment Plant and Evander shaft deepening project.

Click on chart to enlarge

PAF have a target of 250,000 ozs. of gold production pa. through their existing infrastructure.  This would equate to an approximate £210m sales of gold at the current price of $1,300 per oz.  To this would be added about £8m pa of platinum sales once Phoenix is in full production. 

Even at this depressed level for the gold price we could see a 15% increase in the 2014 headline EPS.  So with a 5.5% yield on today's 15p SP and a prospective P/E of around 6, the shares look good value for a highly cash generative gold mine with reasonably long life assets from 12-20 years. 

Thursday, 12 September 2013

Idox contract win

Idox group logo

The Company is engaged in the development and supply of software solutions and services to the United Kingdom public sector and asset intensive industries worldwide. It operates in four segments: Public Sector Software, which delivers software service solutions to mainly local government customers across a broad range of departments; Engineering Information Management, which delivers engineering document management and control solutions to asset intensive industry sectors; Information Solutions, which delivers both an information service and consultancy services to a diverse range of customers across both private and public sectors and Recruitment, engaged in providing personnel with information, knowledge, records and content management to a diverse range of customers. It also provides information management, Web development, online publishing and training services. I have a holding in my growth portfolio (epic code: IDOX)

Idox announced today that its Engineering Information Management Division has agreed to supply its McLaren Fusion Enterprise application software suite and related services to PSEG Nuclear of the USA.  The contract in the first year is worth $2.3m equivalent to 2.5% of annual turnover, with an ongoing maintenance contract thereafter. 

Wednesday, 11 September 2013

Tesco sells Fresh & easy

One of the world’s largest retailers.  I have a holding in my income portfolio (epic code: TSCO)

Tesco announced yesterday that it had disposed of 150 of its 200 Fresh & Easy stores in the USA.  The remainder it will close at a cost of about £70m.  The disposal of the 150 stores (presumably at a benefit of the assumption of the liabilities only) includes a secured £80m loan.

This will conclude Tesco's exposure to the US market, an unhappy affair that never looked like delivering a return on its outlay, culminating in a low cost exit that will also provide 80% of its 5,000 workforce with continuing employment.

GlaxoSmithKline FDA advisory recommendation


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). 

Following on from their 5 September announcement on MAGE-A3 cancer immunotherapeutic failure to meet first co-primary endpoint in Phase III melanoma clinical trial, Glaxo announced today that the US FDA Advisory Committee recommended approval of umeclidinium/vilanterol for the treatment of chronic obstructive pulmonary disease.

This drug is jointly developed by Glaxo and Theravance and if approved, will be the first, once-daily dual bronchodilator available in the US.

Tuesday, 10 September 2013

Fenner pre-close trading statement

A manufacturer and distributor of reinforced polymer products. It operates in two segments, conveyor belting and advanced engineered products and is considered a world leader in reinforced polymer technology.  I have a holding in my income portfolio (epic code: FENR).

Fenner issued their pre-close trading statement for the year ended 31 August, disclosing that  its results will be in line with market expectations.

Net debt at £125m is better than expected and shows a substantial reduction from the £171.5m at the half year.  They have also reconfirmed management's expectation of a return to growth for this financial year.

With a yield above 3% and expected to be well covered by earnings at over 2.5x, Fenner with the added benefit of earnings growth this year, is likely to become an attractive addition to income portfolios.  This should result in an improving share price over the next few months  approaching its previous 52 week high of around 440p.  The shares this morning are up over  5% to 390p.

Monday, 9 September 2013

Pan African Resources directorate change





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).

PAF this morning informed the market that it had appointed Ron Holding, currently their Interim Joint CEO, as a director & CEO.  Also Busi Sitole has resigned as the Financial Director of Pan African with effect from 30 September 2013,  apparently due to a new addition to her family, to be replaced by Cobus Loots, who had been FD of PAF previous to Busi Sitole's appointment.

Both appointees have considerable experience of PAF's operations, Loots in his previous role of FD, resigning in December 2011 to become a non-exec of the company and, Holding as COO from 2009.

The CEO position became vacant following Jan Nelson's sudden resignation at the end of February.  

With Nelson's sudden resignation and Loots return to an executive role, one wonders whether there were management disagreements that caused those moves.

GlaxoSmithKline disposal


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). 

GSK confirmed in an announcement today it has reached agreement to sell its drinks brands Lucozade and Ribena to the Japanese company Suntory Beverage & Food Ltd, for £1.35bn in cash with an estimated £0.05bn to be taken for fees. 

Completion is likely to be by the end of the year and the net proceeds of £1.3bn will be used to reduce their net debt, which stood at £15.7bn at the half year. 

Tuesday, 3 September 2013

Vodafone sale of VZW interest

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

So yesterday Vodafone announce the agreed sale of their 45% interest in Verizon Wireless (VZW) to Verizon  Communications Inc. (VZ) for $130bn (£84bn).  VOD have agreed to distribute $84bn (£54.3bn) back to shareholders.

The distribution (return of capital) will be £38.9bn in the form of VZ shares and £15.4bn in cash, sterling amounts will depend on the US$/£ rate and the VZ share price.  The company have also stated that there will be special provisions for holders of less than 50,000 shares of VOD to enable them to sell the VZ shares in a cost efficient manner.

For any long term income investor this is crystallisation of value of an investment held and a return of capital, requiring reinvestment of the proceeds at an equivalent yield if they wish to maintain their income stream.

The other issue for all long-term investors is the VOD business post sale.  Management state that expected EBIT is likely to be £5bn in 2014 (excluding VZW but including 100% of Vodafone Italy), this compares to a like-for-like EBIT of £5.8bn for 2013.  Free cash flow is expected to be £4.5-5.0bn.  At the current price of 202p the market is placing an EV (enterprise value) of £47bn on the remaining rump, an EV/EBIT of 9.4x 2014 or 8.1x 2013.  This compares to the EV/EBIT of 13.1x for the sale of 45% of VZW, which is probably about right considering VZW's higher expected growth and historical performance.

The consolidation of share capital is likely to be in the region of 5 new shares for 11 currently held to allow for the return of capital that is equivalent to 112p per share, although this may change due to the VZ share price, the US$/£ exchange rate and the VOD share price.

As a rough guide to looking for a home for the capital that I will receive, I need to look for a minimum yield of approximately 4.8%, to be in the same position I expected to be in before the sale of VZW.  This is based on the original 11 shares producing an expected dividend of £1.144 (original market expectation of 10.4p per share) deducting the 11p per share dividend in VOD's statement for the 5 new shares i.e. £0.55 leaving me £0.594 to be  achieved on the £12.32 I have available i.e. 112p returned multiplied by my original 11 shares.

The VZ shares are unlikely to meet my dividend criteria, so I will need to sell them in the open market.

I could of course reinvest the proceeds back in to Vodafone shares that are likely to yield around 5.4%, although there is some considerable time before I need to make a decision.