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.