Friday, 29 November 2013

Pearson disposal


An international media and education company, providing educational materials, technologies, assessments and related services to teachers and students.  Owner of The Financial Times and part owner (47%) of Penguin Random House.  I have a holding in my income portfolio (epic code: PSON).

Today Pearson announced that they have agreed the sale of The Mergermarket Group to funds advised by BC Partners for an enterprise value of £382m, payable in cash; this values the business at 15x operating income.

Mergermarket was acquired by Pearson back in 2006 for £101m plus a subsequent earn-out; revenues for the period to 31 December 2012 were £100m with operating income of £25m and profit before tax of £23m.

This is part of Pearson's strategy to focus on global education through digital technologies.  This will again raise questions as to the future of the Financial Times within the Pearson Group.

Thursday, 28 November 2013

Compass Group finals

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 announced their full year numbers yesterday and underlying results were as indicated in their trading statement, commented on here, on 26 September 2013.

Briefly - revenue grew by 3.9% to £17,557m and 4.3% on an organic basis.  Underlying operating margins improved by 20 bps to a record 7.1% and underlying pre-tax profits grew by 9.2% to £1,188m.

Underlying EPS grew 12.5% to 47.7p and a final dividend of 16p was proposed - an increase of 13.5%, bringing the full year dividend to 24p up 12.7%.  

On the surface, this looks to be a good set of results, but there were some weak areas:

Although underlying EPS grew by 12.5%, reported EPS declined 26.6% to 23.4p, due mainly to a £377m goodwill impairment charge.  This is an increase on goodwill impairment, relating to the Granada merger in 2001, as a result of increases in the UK gilt yield that is part of the calculation in valuing expected cash flows from a business unit.  Put simply too high a price was paid by Compass in merging with Granada back then and, future profits and hence the net book value of the company are depleted. 

Europe & Japan continue to suffer and revenue fell by 3% on an organic basis to £6,039m, this had the effect of decreasing profits by £60m although this was offset by productivity improvements that produced a 60bps increase in operating margins.  Consequently operating profits from this division increased by £23m to £420m, this must be considered a good outcome in difficult markets.

The largest region North America continues to perform well and grew revenue on an organic basis by 8% to £8,150m, while improving operating margins by 10bps; all of which had the effect of increasing operating profits by £59m to £657m.

The Fast Growing & Emerging regions grew revenue organically by 10.2% to £3,368m, although operating margins fell by 30bps due to exiting some non-core contracts and implementing a new regional management structure, so operating profits increased by just £7m to £242m.

Financially Compass is in a strong position, net debt is just 0.8 of EBITDA and operating cash flow is  89% of net debt.  Free cash flow (FCF) was £681m for the year, similar to last year and gearing just 45%, with interest covered over 10 times.  Compass returned 19% on their average capital employed in the business a good margin over my estimate of their WACC of 8.3%.

Owners' earnings (dividends plus growth in NBV) have increased by a CAGR of 16% over the past 5 years and FCF has returned 19.5% over the same period. 

The increase in the dividend was by my reckoning the 12th successive year and has grown by a CAGR over that period of 12.7% pa.  This is an impressive record, more so since recent increases have not faltered, with the full year dividend for the period just ended having doubled over 5 years.  For those that are concerned with the 0.98 dividend cover from earnings for this year, dividends declared over the last three years have represented 63% of FCF (covered 1.6x), as FCF can move around from one year to the next, it is more meaningful to view it over an extended period such as three years.  This is both generous to shareholders, but comfortable for the company. 

At today's closing price of 922p Compass is fully valued at 17.9x this year's expected earnings and with a forward yield of 2.77% offers a below average income.  Some may argue that with these growth rates in the pay-out this may be a price worth paying, but there is little in the way of a margin for safety and remember it will take almost 5 years to catch up and replace the lost alternative dividend with say a 4% yielding stock with little or no growth.  Although having stated that, I currently have no intention of selling, but would not add to my position with any spare funds.

On a discounted cash flow basis I have calculated an intrinsic value of 925p per share for Compass.  This assumes that this year's FCF grows by 10% pa for the next 10 years, in perpetuity for 2.5% pa and I have used a cost of equity of 9.8% as the discount rate.

This note would not be complete without some comment on the new share repurchase plan announced of £500m, this follows on from two previous repurchase plans totalling £900m.  At a P/NBV of almost 6 this is value destroying for shareholders; companies should only repurchase their own shares when they are considered to be well below their intrinsic value. 

Tuesday, 26 November 2013

Pan African disposal amendment

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).

Today Pan African announced an amendment to the disposal conditions of the sale of its Manica mine.  This disposal was initially agreed on 29 August 2012 and amended on 14 December 2012.

In the initial agreement PAF received 25m shares in Auroch Minerals (the acquiring company) and deferred consideration of AUD 2m to be received 18 months after completion.  There were also potential further consideration dependent on future milestones.

This consideration in the initial agreement has now been replaced in whole by the receipt of AUD2m, of which AUD150k will be received on 30 November 2013 and the balance by 1 March 2014.  The balance payment can be extended by a further two months on payment of AUD50k per month, this is not an additional AUD50k per month, but part of the AUD2m.  So there is little benefit in Auroch paying the balance on 1 March.

The shares of Auroch Minerals currently owned by PAF will be returned on receipt of the AUD2m for no consideration.  The shares have a market value of AUD2.625m (£1.496m) and are carried on PAF's books at £1.183m.

I fail to see any benefit to Pan African in agreeing to this, since they were in any case due the AUD2m some months later than now agreed and have given up 25m shares with a market value of £1.5m.

Monday, 25 November 2013

Petrofac contract award


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 today announced a contract award in a 50/50 joint venture with Korean based Daelim Industrial Co Ltd.  It is a 36 month Engineering, Procurement and Construction contract for Oman Oil Refineries and Petroleum Industries Company - a new customer for Petrofac.  The contract value is valued at US$2.1bn, so Petrofac's annualised share is just over 10% of next year's expected turnover.

Friday, 22 November 2013

Paypoint interims

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 interim results to 30 September yesterday with revenues up just 0.4% to £102.2m.  Transaction volumes were up 2.1% to 351.9m and the value of transactions up 4.1% to £6.9bn.  These show a decline from the growth historically experienced mainly due to the expected decline in Top-ups revenue.  Transaction and revenue performance is shown in the table below, compared to last year's numbers:

Click on table to enlarge

Operating profit improved by 10.9% to £20.9m benefitting from a delay of IT project costs into the second half of the year.  EPS improved by 18.8% to 24p and an interim dividend was declared of 11.4p up 11.8% on last year.

Free cash flow was £6.6m for the half year compared to £8.6m last year.  Net cash stood at £23.5m, compared to £46.6m at the beginning of the year after paying out £24.8m in dividends, which included special dividends of £10.2m and share based payments of £5.3m.

Commenting on the outlook management stated "...Trading is in line with the company's expectations taking into account moving expenditure into the second half of the financial year, which has benefitted our first half results..."

Paypoint is a highly cash generative business and I would expect the continuation of inflation beating increases in the dividend pay-out, along with the occasional special dividend. 

Wednesday, 20 November 2013

Telecom Plus interims & acquisition


Trading as the Utility Warehouse, Telecom Plus PLC provides a range of services to households and small to medium sized businesses. The Company is engaged in the supply of fixed telephony, mobile telephony, gas, electricity and Internet services through independent distributors. I have a holding in my growth portfolio (epic code: TEP).


Telecom Plus announced their interim results today together with details of an acquisition and placing of approximately 8.8m shares (~12.4% of current issued shares) at 1475p.

For the six months to 30 September revenue was up 17% to £245.8m, profit before tax (excluding share incentive scheme charges) was up 10.1% to £13.7m and adjusted EPS up 11.5% to 15.5p. Statutory EPS was up 6.1% to 14p and the interim dividend increased by 23% to 16.0p, although some of this increase is due to TEP moving to a more even split between the interim and final payments.

Free cash flow was £9.9m compared to £11.2m last year and the net cash at the beginning of the year of £0.8m was reduced to a net debt position of £1.4m, following £12.7m pay-out for the final dividend.  

Commenting on the outlook for the full year: "...The Board has expressed confidence that we will deliver record turnover, profits and earnings per share for the full year (excluding the benefit or any other impact of the acquisition), notwithstanding the significant and growing amount we are investing each month in expanding our customer base; this is reflected in the 23% increase we are making in our interim dividend payment and by our stated intention to pay a total dividend of 35p for the full year..."
Also being announced was that TEP are to acquire Electricity Plus Supply Limited and Gas Plus Supply Limited from Npower Limited, a subsidiary of RWE AG, for £218m.
As part of the Acquisition, they will enter a new 20 year energy supply agreement with Npower which will substantially increase the energy margins available to TEP and enable it to provide even more competitive tariffs to its customers.
The details of the consideration is that £196.5m is payable on completion in cash and £21.5m deferred for three years.
TEP will fund this from a combination of a firm placing a placing and open offer and a drawdown of approximately £100m from new debt Facilities entered into with Barclays.
The Firm Placing and the Placing and Open Offer are fully underwritten and will raise approximately £130m of gross proceeds at an issue price of 1475p.
The Firm Placing will raise £100m and the placing and open offer will raise £30m at a 1 new share for every 35 existing shares.
Following completion of the Acquisition, the gross margin that TEP earns from supplying energy to  customers will immediately increase by 4.25% and Npower will assume responsibility for certain metering costs currently borne by TEP.

Management state that PBT for 2013 would have been £9.3m higher if this deal had been in place then.  Using their average tax rate of 22% and the increased shares in issue after the placings, then a pro-forma EPS for 2013 would be ~43.2p an increase of 13.4% over the 38.1p reported.
Not surprisingly management state that the acquisition will be materially earnings enhancing in the first full year of ownership.

The market responded well to this and was up 15.5% to 1739p in early morning trading. 


Tuesday, 19 November 2013

Halma interims

Halma p.l.c

Designs, manufactures & markets equipment for process safety, infrastructure safety, medical and environmental & analysis.  Typical products include - fire detectors, gas detectors, water treatment systems, ophthalmic instruments and machine safety systems.  I have a holding in my income portfolio (epic code: HLMA).

Today Halma announced their interim results and as expected after a strong start to the year, commented on here, the results were good with revenue up in all geographic segments and in all product divisions.

Revenue from continuing operations increased by 11.7% to £333.1m and adjusted PBT up 9% at £65.1m.  On an organic basis growth was 8% for revenue and 5% for PBT, this is impressive since organic revenue growth for the first quarter was 6% and 3% for the whole of last year.

Geographic sales growth was:

Asia Pacific  +15%, including +32% in China;

USA  +15%;

UK  +9%;

Europe  +8%;

Adjusted EPS from continuing operations was up 7.2% to 12.99p and Statutory EPS down 12.8% to 11.27p as last year benefited from a gain on disposal; if we exclude this gain from last year statutory EPS is up 4.9%. 

An interim dividend of 4.35p per share was declared, up 7.1%.

Order intake since the period end has continued to be slightly ahead of revenue and in line with their expectations.  In their July IMS they stated that order intake was 3% ahead of revenue for the first quarter, so I'm reading into this that it might be slightly less for the six months. 

Free cash flow was £47.1m compared to £40.2m last year and net debt decreased slightly from £110.3m to £109.8m as the majority of free cash flow was spent on acquisitions (Talentum plus ear-out payments on prior year acquisitions) for £16.7m and £29.7m on dividends and share buy-backs.

Management state that the business "...remains on track to make further progress in the second half of the year..."

This is a good set of results by a well run company, so not surprising that at 584p the company is probably fully valued at 23.9x last year's earnings, 20.5x this year's and 19.5x next year's.  The forward yield is less than 2% and so although Halma is a quality business with a wide economic moat, at these prices its difficult to see value, but worth watching for any weakness in the SP.

Melrose Industries IMS

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 issued an interim management statement today that covered the period from the half year to now.  Management state that trading for this year is in line with expectations and that Elster (their most recent acquisition from last year) continues to perform strongly and that the remaining FKI businesses is trading as planned.  They comment that "...revenue growth across the Group still remains hard to find but there are some early signs that 2014 could also be a better sales environment..."

Some specific comments on the Elster business were encouraging - the Water division has more than doubled its headline operating profit, the Electricity division's order intake was up 14% and the Gas division's sales were up 8%.  Management believe that the Gas division is expected to be the source of most value creation in Elster over the medium term. 

Management commented on the return of capital to shareholders and assuming the disposal of Crosby and Acco completes this year, they intend to return capital in the region of £600m.  This is as a result of the following disposals:

July 2013 Truth £129m
August 2013 Marelli Motori £181m
Assumed December 2013 completion £627m

Producing  total gross proceeds of £937m

I did expect them to hold more cash back to reduce their high level of net debt, but I guess their admirable willingness to return a high portion of the proceeds to shareholders, underlines their confidence in the cash generating abilities of Elster which now account for 66% of the Group.

The return of capital if it is, as in the past, in the form of cash will amount to 47p per share (based on 1,266.6m shares).  Which will require another capital reorganisation if they wish to retain EPS and DPS historical comparability.

Monday, 18 November 2013

Aberdeen Asset Mgt prelims & acquisition

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 released their preliminary results for the year ended 30 September 2013 today and agreement for the acquisition of Scottish Widows Investment Partnership (SWIP).

Net revenue was 24% higher at £1,078.5m, underlying profit before tax increased by 39% to £482.7m and underlying EPS increased by 44% to 32.5p, with statutory EPS increasing by 49.4% to 26.22p. All of this was a little better than was expected by the market.

The final dividend was increased by 40.8% to 10.0p per share, making 16.0p for the full year up 39.1%.  I believe the markets were expecting a full year dividend of 15.1p.

AuM were £200.4bn compared to £187.2bn last year, with the greater portion of the increase coming from higher margin pooled funds.

Free cash flow showed a healthy improvement over last year increasing by 31.6% to £457.7m, net cash (here I'm including the Perpetual Capital Notes) improved from £68.3m last year to £105.0m. 

Management state that "...investor sentiment may remain volatile for the foreseeable future, we have entered a new financial year in a strong financial position and remain well placed to continue the Group's profitable growth..."

ADN have increased owners' earnings (NBV and dividends) by a CAGR of 16.3% pa over the past 5 years and FCF has increased by a 5 year CAGR of 19.9% pa over the opening NBV.  I have held ADN since 2007 and although I sold off half my holding in 2012 to rebalance my portfolio, they have not disappointed and returned a compound 12.8% pa (dividends not reinvested).  My current yield on my original cost is 8.1% and with the recent acquisition announcement I feel there is more mileage in this stock.

Commenting on the acquisition - ADN have acquired SWIP from Lloyds Banking Group for 9.9% of ADN's equity plus a potential £100m earn-out.  For this ADN receive £136bn of Assets under Management (68% of ADN's AuM) and £234m of sales (21.7% of ADN's sales), this is expected to be materially earnings enhancing by the 2015 financial year.  We should expect some reorganisation costs in 2014 as any overlap is eliminated and ADN take action to improve the performance of SWIP.  This probably places ADN within the top 30 fund managers in the world and although size is not everything, the increasing cost of regulation creates a substantial barrier to entry within their market with smaller players finding it increasingly difficult to achieve returns on the required investment.   


Diploma prelims

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 their full year results today and came in much as expected, which included a strong second half.

Briefly - revenue increased by 10% to £285.5m and underlying revenue was up by 4% with a stronger second half growth of 6%.

By division sales and margins were:

Life Sciences - Sales £93.2m (LY £78.4m); operating margins 22.4% (LY 23.0%)

Seals - £106.1m (£99.9m); 18.4% (20.4%)

Controls - £86.2m (£81.9m); 16.1% (17.6%) 

Adjusted profit before tax increased 3% to £54.3m; adjusted EPS was up by 5% to 34.8p and the statutory EPS was 30.7p up 10%.  The Full year dividend was increased by 9% to 15.7p, covered 1.96x.

Free cash flow (FCF) was again strong at £36.3m, up from £32.7m last year and the Group ended the year with net cash of £19.3m up from £7.9m last year and £7.3m at the interim stage. 

The Board state that they are confident that they will make further progress in the current financial year.

Diploma have increased owners' earnings (NBV and dividends) by a CAGR of 17.6% pa over the past 5 years and FCF increased by a 5 year CAGR of 18.5% pa over the opening NBV.  This is a well managed business that should see benefits from an improvement in the North American economy (59.8% of sales).

Petrofac IMS

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 issued an interim management statement today, which started well with "...We continue to deliver good operational performance across our portfolio of projects and are on track to achieve our guidance of modest growth in net profit in 2013..." and "...The Group has continued to secure new awards during the second half and we expect to exit 2013 with our highest ever year-end backlog... " , but ended by reducing expectation for 2014 and creating some uncertainty with respect to their 2015 target.
They expect Group net income in 2014 to show flat to modest growth year-on-year this is due to the re-phasing of two projects one in Abu Dhabi and one in Malaysia.  This is an approximate $100m decline in expectations for 2014 earnings to $650m, reducing EPS to $1.9. 
They also state that achievement of their 2015 earnings target* will be dependent on the timing of potential ECOM (Engineering, Construction, Operations & Maintenance)  contract awards during 2014.  The growth in earnings will need to be about 33% in 2015 to meet their earnings target, although they have achieved this in the past (2008), it was from a much lower base. 
Group backlog was declared as US$14.3bn at 31 October 2013 the same level as at their half-year and net debt position was US$0.5bn at 31 October 2013 an increase from US$0.4bn at the half-year.  They also anticipate remaining in a net debt position for the remainder of 2013 and throughout 2014, which they say will result in a significant increase in year-on-year interest costs in 2014.  I have voiced my concerns before here about their weak free cash flow in contrast to their earnings declarations.  They clearly require high levels of working capital and capital expenditure, of which both have increased at a faster rate than turnover over the past 5 years.
I first purchased PFC in February 2010 for 882p and sold half six months later after it rose 59% from an under-priced share to an over-priced one at 1406p.  It may be time now to sell the remainder of my holding, as the company struggles with generating sufficient cash returns on its investments.    

* Management's earnings target for 2015 was $862m.

Friday, 15 November 2013

The Restaurant Group IMS


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 issued their IMS for the 45 week period and continues to make excellent progress compared to other chains in their sector.  Total sales were 9.1% ahead of last year and like-for-like sales were 3.5% ahead - this is in line with expectations.

They opened 21 new sites in 2013 to date and they expect to open a total of between 33 and 35 new restaurants this year.  They also stated that they expect to open more new restaurants in 2014 than in 2013.

Management state that although the like-for-like comparatives are much tougher during November, they are confident that the business will continue to make good progress during the remainder of the year and they are on track to meet expectations for the full year.

At the current price of 557p they trade on almost 21x expected earnings for this year and yield 2.6%, so currently fully priced.  Analysts are expecting EPS growth of 12% next year, although this may rise based on the comment of greater expansion next year.

Wednesday, 13 November 2013

Fenner finals

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 announced today their results for the year ended 31 August 2013 and were in line with their pre-close trading statement.

Revenue was £820.6m down 1.2% and underlying operating profit was £101.5m own 14.6%.  Operating margins showed a decline from 14.3% to 12.4%.  Underlying operating profits exclude amortisation of intangible assets acquired of £16m (£11.2m LY).

Underlying profit before taxation was £86.9m down 16.4% and underlying EPS was 30.1p down 16.6% with statutory EPS at 23.5p down 22.2%.

The Engineered Conveyor Solutions division was the cause of the weaker results as the mining industries in the USA and Australia saw weaker trading environments, causing revenue to decline in this division by 7.3% to £549.8m.  Management state that they have seen some recovery in the USA and a stabilisation of demand in Australia.

Advanced Engineering Products saw good demand, most especially from the oil & gas and medical sectors resulting in revenue up 14.2% to £270.8m.

Both divisions contributed to the decline in operating margins, with ECS showing the more marked decline from 14.2% to 11.5%.  AEP's margins declined from 18.4% to 17.3%, although management state that margins in this division improved in the second half to 19.1%.

A Final dividend of 7.5p was declared making a total dividend for the year of 11.25p providing an inflation beating increase of 7.1%.

On the back of these results the SP has moved ahead to a 52 week high of 443p.  At this price the historic yield is 2.5%.

Free cash flow for the year was £60.1m compared to £63.0m last year and net debt increased from £97.7m last year to £121.1m, although substantially reduced from £171.5m at the interim stage. Gearing is 35% and net debt represents just 90% of EBITDA and operating cash flow was 72% of net debt, so not much to concern me on the finance front.  I make their sustainable growth rate about 7%, so any increase on this next year will require additional debt or higher returns from the business.

Over the past 5 years their owners' earnings (growth in dividends and equity) has been acceptable at 13.7% pa and the free cash flow return on equity over the same period better at 16.5%.  They have a high WACC of 13%, but do make returns of close to 20% on their capital employed. 

Management reconfirmed that they continue to expect that the current financial year will see a return to growth.

My only concern now is the declining current yield from a stock that is not one of my top 10 core holdings.  One to ponder over and decide whether there is a better opportunity elsewhere, having already reduced my original holding over the years by 84% as the SP recovered. 

ICAP interims

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 issued their interim results to 30 September 2013 today and revenues and profits were as indicated in their pre-close trading statement.

Revenue was £736m, 1% below the same period last year, although operating profit was £153m up 6.3%, with an improvement in the operating margin from 19.3% to 20.8%.  Pre-tax profits were £139m, 1.5% ahead of last year.  These profits are before acquisition and disposal costs and exceptional costs. 

Adjusted EPS was up 5.2% to 16.2p although the statutory EPS was down 62.3% to 2.9p.  The decline in statutory EPS was due to exceptional costs in the period which included - fines imposed due to manipulation of Yen LIBOR of £55m, a provision of £8m relating to Link Brokers for wrongdoing that pre-dates ICAP's ownership and various associated legal costs less tax credits of £2m.  If we exclude the exceptional costs (but not the acquisition & disposal costs) from both years then the EPS would have increased by 17.3% to 12.9p.

Free cash flow was weak at just £3m for the six month period, compared to £26m last year.  Net debt increased from £25m at the beginning of the year to £87m, but still represents a low level of gearing at just 9%. 

An interim dividend of 6.6p has been declared, this is the same as last year following their custom of paying an interim of 30% of last year's full dividend.

Management stated that they expect that PBT for the full year to be marginally ahead of the prior year.

These results showed the full half year effect of the £80m of annual cost savings implemented last year.  Further cost savings are in process and it is expected that an additional net £5m will be saved this year, with the full effect next year expected to be £15m.

ICAP are taking the right decisions with respect to reducing its cost base, that is beginning to offset the current lack of growth in what is a subdued financial market.  The shares look to be up about 5% on these results, but still offer a yield of over 5.5%. 

Tuesday, 12 November 2013

Synergy Health interims


Delivers a range of specialist outsourced services to healthcare providers and other clients concerned with health management. Such as hospital sterilisation services; applied sterilisation technologies for single-use medical devices; reusable surgical solutions for daily delivery of sterile reusable gowns and towels; clinical pathology, toxicology and microbiological services; chemical and microbiological analysis; linen management services for healthcare facilities and product solutions designed for infection prevention and control, patient hygiene, surgical procedures and wound care.  I have a holding in my growth portfolio (epic code: SYR)

Synergy announced their interims today and declared that revenue for the period increased by 12.0% to £192.1m, and underlying revenue, excluding currency effects, increased by 9.0%.

Adjusted operating profit increased by 9.8% to £29.2m and adjusted EPS was 33.54p up 8.5%; reported EPS was 28.27p up 15.3%. The interim dividend was increased by 8.5% to 8.57p.

By geographic regions - UK and Ireland revenue increased by 1.5% to £81.5m, on a constant currency basis revenue increased by 0.9%. Margins increased slightly by 0.2% to 20.2% and operating profit increased by 2.6% to £16.5m.

Europe & the Middle East revenue decreased by 1.1% to £59.5m, although on a constant currency basis decreased by 6.3%, due to the effect of weak prices in the Dutch linen market, reflecting predatory pricing by competitors. Operating margins were largely unchanged at 15.4% but operating profit declined by 1.7% to £9.1 million reflecting the lower revenue.

The Americas revenue increased by 87.6% to £41.4m, with revenue on a constant currency basis increasing by 81.4%. Operating profit increased 95.6% to £4.7m, with operating margins increasing by 0.4% to 11.2%.

Revenue for Asia and Africa increased by 7.6% to £9.7m and by 5.0% on a constant currency basis. Operating profit increased by 4.5% to £2.0m with margins decreasing by 0.6% to 20.7%.
It was good to see that despite some of the issues in Europe gross margins for the Group showed a slight improvement from 39.8% to 40.0%.  
Free cash flow (FCF) at £15.1m up by 17% on last year continues to be a strong feature of Synergy's business.  They do supply a split between maintenance capital expenditure and capital expenditure for expansion and on that basis FCF is £22.7m, similar to last year.  Net debt was reduced from £177.3m at the beginning of the year to £168.8m and gearing fell from 51.5% to 50%.
Management state that the Dutch linen service is depressing growth and there is a risk that this will continue to impact the Group in the second half of the year, although they currently anticipate that earnings for the year will be in line with the their expectations.

Still worth holding for the opportunities in the USA and Asia and the benefits of their strong FCF. 

Vodafone interims

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 announced their interim results today and in summary Group revenue increased by 2.5% to £19.1bn, with service revenue of £17.5bn showing a decline of -2.3% on an organic basis.

On a management basis (includes 5 months of Verizon Wireless and share of associates) - service revenue was £20.0bn, a decline of -4.2%.

For the second quarter Group organic service revenue on a management basis declined -4.9%, with North & Central Europe down -4.9%; Southern Europe down -15.5% and Africa, Middle East and Asia Pacific (AMAP) up +5.7%.

AMAP continues to perform well and now represents 29% of the Group's service revenue and 34% of the Group's EBITDA.  The two fastest growing countries within Vodafone were Ghana growing at 21.2% and India 13.5%.  India is now the fourth largest EBITDA contributor within the Group and has a healthy margin of 31.8%.

Southern Europe continues to perform badly and contained the two worst performing countries Spain and Italy whose service revenues declined by 10.7% and 11.1% respectively.  CEO Colao believes that Europe is at a turning point with an expectation of a return to economic growth during the next two years.   

Adjusted operating profit on a management basis fell -8.3% to £5.7bn and adjusted EPS of 7.85p fell -2.6%.  Reported diluted EPS from continuing operations was 31.97p compared to a loss last year of 8.81p; the reported EPS benefited from £14.7bn of deferred tax assets being recognised, relating to tax losses in Germany and Luxembourg of £17.7m and a likely tax charge of £3bn relating to rationalisation & reorganisation of Vodafone's non-US assets prior to the disposal of its share in Verizon Wireless.

An interim dividend of 3.53p has been declared, which represents an 8.0% increase over last year and management intend to increase the final dividend (post share consolidation after the Verizon Wireless sale) by 8%.  This will result in a total dividend of 11.0p and they have committed to grow it annually thereafter. 

Management have stated that they are on target to deliver adjusted operating profit of around £5bn and free cash flow (defined using a number of adjustments) in the £4.5 - £5.0bn range.

Free cash flow for the six months was £279m compared to £406m last year, with an additional £3.5bn (LY £1.2bn) of associate dividends.  Dividends and share repurchases totalled £4.4bn for the period.

Net debt (I have not included mark to market adjustments on debtors and creditors that Vodafone include) at the period end was £25.8bn compared to £27.3bn at the beginning of the year, much of this improvement is due to foreign exchange translation differences.  Gearing is a comfortable 31% compared to 38% at the beginning of the year.

Vodafone is performing well in its emerging markets, but its future over the next 5 years will still be heavily reliant on an improvement in its European territories.  If Colao has called this right and, his substantial capital expenditure plans (£19.1bn by March 2016) produce the expected free cash flow returns, then undoubtedly Verizon will still be a core constituent of any income portfolio.