Thursday, 4 December 2014

API Group interims

API Logo

API Group PLC a global supplier of foils, films and laminates.  I have a holding in my growth portfolio (epic code: API).

API's interim results announced on 3 December had little seasonal cheer about them.  Revenues were £56.4m down 1% on last year, although they were up 1.6% at constant currency. 

The really bad news came in operating profits (excluding exceptionals) that were down 20% at £2.8m, caused by the Foils Americas division, where sales were down 24% causing a £0.4m loss compared to a profit last year of £1.1m.

Underlying EPS fell 37% to 2.4p and reported EPS also 2.4p was down 29.4%, although an interim dividend of 0.75p was declared, up 7.1% on last year.

Free cash flow showed an outflow of £(4.8m), compared to an outflow last year of £(2.9m), after payment of dividends of £1m, the net cash of £0.2m from the beginning of the year was reduced to a net debt of £5.7m. 

Management state that "...The Group has experienced tough trading conditions so far in the second half, with the outlook for profits this financial year slightly down on previous expectations..."

Management state that the expected slow recovery in metallic pigment orders at Foils Americas will be partly offset by the seasonally weaker second half in the US market for graphics foils.  There was little good news elsewhere - Foils Europe is experiencing sluggish markets on the continent, while Laminates have strong order levels, profits will be diluted by a weaker sales mix and  Holographics is expected to drop below break-even in the third quarter.

Not comfortable reading; I continue to hold at this stage and will review my position at the full year and decide then whether to cut my losses.


Anite interims

Anite plc

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

Anite released their interim results on 2 December.  Revenue was up 3.3% to £49.0m and adjusted operating profit up 89% to £5.1m.  A good turnaround, but on weak comparatives.
Adjusted EPS was up 117% to 1.3p, with reported EPS 0.1p compared to a loss last year of (0.5)p.  The interim dividend was increased by 9.6% to 0.63p.
Although group order intake was down 4.6% to £49.4m, it still produced a book to bill ratio of 1.
Free cash flow was strong up from £3.8m last year to £6.3m.  Following dividend payments of £3.7m and the net proceeds from the sale of the Travel Business less the acquisition of Xceed producing £20.8m the company's net cash position was increased from £6.1m at the end of last year to £29.8m.  Placing the company in a healthy position, along with its strong FCF to develop the business.
Management commented on outlook for the rest of the year "...Given the recent momentum we have seen across the Group and the specific opportunities identified for the second half, the Board remains confident of meeting its full year expectations..."
A step in the right direction in returning the business to meaningful profits and at today's price of 84p, places the company on 15x expected earnings for this year, still below the industry median.

Monday, 1 December 2014

Aberdeen Asset Management finals

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 final results today showing that net revenues were 3.6% higher at £1,117.6m and underlying profit before tax had increased by 1.6% to £490.3m.

With a 5% increase in average shares in issue due to the SWIP acquisition, underlying EPS decreased 4.1% to 31.1p, with reported EPS down 13.1% to 22.79p due to increased amortization and acquisition costs.  A final dividend of 11.25p was declared, making 18.0p for the full year – an increase of 12.5% and covered 1.3x by earnings and 2x by free cash flow.  Aberdeen Asset Management have an excellent record of paying out increasing dividends as demonstrated by the chart below, where the pay-out was increased by 18% pa over this period.

Click on chart to enlarge

Free cash flow at £442.2m was 3% below last year and after paying dividends of £222m and purchasing £64m of their own shares net cash was improved to £653.9m.

AuM were £324.4bn, a £124bn increase that included £134.9bn added from the SWIP acquisition.

Click on chart to enlarge

Management stated in their outlook "...We remain confident that, over the longer term, we will be able to deliver attractive returns, both for our investment clients and our shareholders..."

ADN is a strong dividend payer with plenty of headroom within their level of cash generation and net cash balances.  Despite halving my position in early 2012, they still represent 8% of my income portfolio and, have performed well over the 8 years I have held them, both in terms of the SP and more importantly the 16% pa growth in dividends I have received. 


Sunday, 30 November 2014

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 released their interim results on 27 November declaring net revenue had increased by 7.0% over last year to £57.9m, with transaction volume up 6.1% to 373.4m.

Operating profit was up 6% to £22.2m and EPS was increased by 8.3% to 26.0p.  As they mentioned in their first quarter IMS (discussed here), operating profit growth is less than revenue growth due to increased development, sales, marketing and IT investments, that management say will produce benefits in the future.   

An interim dividend was declared of 12.4p up 8.8%.

Free cash flow (FCF) was again strong with £6.9m generated, compared to £6.6m last year.  After payment of £16.3m for the interim & final dividends and £2.8m purchasing shares for share based remuneration, net cash declined by £12.9m to £28.7m.

With respect to the outlook, management state that "...Looking ahead, we expect our retail networks in the UK and Romania to continue to deliver profitable growth from our breadth of services and extensive client base. Trading since 30 September 2014 is in line with our expectations..."

Paypoint at 959p produce a 4% yield and almost a 20% margin of safety to their estimated intrinsic value (calculated by assuming 8% growth in FCF over the next 10 years and 3% in perpetuity, discounted by their cost of equity of 9.4%).  

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 released their final results on Wednesday 26 November and were as indicated in their trading statement on 29 September, commented on here.  The SP now is at an all time high of 1090p and is probably fully values the company. 
Revenue for the Group increased by 4.1% on a constant currency basis to £17.1bn and underlying operating profit increased by 5.9% to £1,245m, with reported operating profit at £1,217m up 51.7% due to goodwill impairments taken last year (see here for the details from last year).
The largest region North America had a good year with revenue up 6.8% on an organic basis to £8.2bn and operating profit increased by 7.9% on a constant currency basis to £666m. 
Europe & Japan continued to decline, this year by -1.5% on an organic basis to £5.7bn, but this was a slower rate than last year's 3%.  Operating margins were improved in this region through efficiency improvements and cost reductions, so operating profit increased by 1.2% on a constant currency basis to £409m.
Fast Growing & Emerging Markets saw good organic growth at 8.2% in revenues to £3.1bn and operating profits up on a constant currency basis by 7.6% to £226m. 
Click on chart to enlarge
EPS was 48.7p up 10.5% on a constant currency basis and 110% on a reported basis. The final dividend was increased by 10.6% to 17.7p, to give a full year dividend of 26.5p an increase of 10.4% and is covered 1.84 times by earnings.

Return on capital employed was over 25%, compared to their weighted average cost of capital of 8.2% and their 3year average free cash flow return on capital employed was over 15%.  These are very good indications of a business that adds substantial value, well above the cost of the capital deployed in the business, ensuring there is sufficient capital to invest in non-organic growth and deliver above market returns for their shareholders.
Free cash flow at £680m was similar to last year and with dividends paid of £444m, share re-purchases of £280m and a £1bn return of capital to shareholders, net debt rose by £1.1bn to £2.4bn.  Equity has been depleted by almost £1bn from last year to £1.8bn, due to the share re-purchases and the return of capital, consequently gearing is high at 130%.  So is this level of debt a concern for Compass?  Looking at a debt/EBITDA of 1.5x and operating cash flow of 47% of debt, whilst not amongst the best, is very comfortable.  Management though should reconsider their share re-purchase programme especially with a SP that is close to 10x its NBV.  Standard & Poors give Compass an A rating and consider it stable.  The company pays just over 4.5% on their mix of debt and the maturity profile is well balanced, as demonstrated by the chart below that shows the maturity dates for their debt:
Click on chart to enlarge
Looking ahead to next year, management state that the pipeline of new contracts is healthy and they expect to see further good performances in all of their regions.
For the longer term they expect to deliver further cost efficiencies, which will help to support future growth and further improve the operating margin.
Opportunities remain good for Compass to continue to grow the business; as management stated "...The structural opportunity in the outsourced food service market, estimated at more than £200bn, is a key growth driver.  With only around 50% of the market currently outsourced..." add to that the small regional players that service about 33% of the market and may be open to acquisition or loss of market share through competition, then Compass despite its size should have many years of good growth ahead of it. 

A good set of results from Compass, but at the current SP there is no margin of safety.  Patience can provide opportunities though, when you consider that during the past 12 months, when there was no change in expectations for the business, there is a 23% swing from the low to the high in the SP.  The major risk to the business remains food commodity prices. 

Thursday, 20 November 2014

Globo trading update

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 released their third quarter IMS today announcing that revenues for the first 9 months of the year grew by 46% to €73.2m and gross profit margin improved to 62% from 58% in the first half.  Management stated that the margin improvement reflected the effect of direct sales compared to indirect channels.

The net cash position at 30 September 2014 was €36.3m, this compared to €46.0m at 30 June 2014 and €42.4m 31 Dec. 2013, but is after payment of US$12.0m (~€9m) for the acquisition of Sourcebits in July 2014.  Management say they continued to generate free cash flow during the third quarter, but that is not evident from the numbers provided in the announcement, unless the associated costs of the acquisition and other investments were around €1m.

Management state that they are confident of meeting market expectations.

Sales growth is impressive, but many will still not be convinced by their ability to generate sufficient free cash flow commensurate with a business that is likely to turnover €100m this year.


Wednesday, 19 November 2014

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 announced their interim results today with group revenue decreasing by 9% on a constant currency basis and 14.6% on a reported basis to £620m, in line with their trading announcement on 30 September, commented on here.
Trading operating profit (that excludes acquisition & disposal costs and exceptional items) for the six months was £100m, down 26% on a constant currency basis and 33.8% on a reported basis. Trading EPS was 10.1p down 37.7%, although reported EPS was up 51.7% at 4.4p due to lower acquisition disposal costs and exceptional items.  A maintained interim dividend of 6.6p was declared.
Free cash flow was a negative £17m and along with the final dividend payment of £99m were the main causes of net debt increasing from £96m at the beginning of the year to £204m.  
The current restructuring programme is expected to deliver annualised savings in excess of £60m, of which £43m will be realised this year, the majority in the second half.
Management's expectations for the full year remain unchanged, despite seeing some increased activity and positive sentiment, as they feel it is too early to predict whether those current activity levels will persist.
In a separate announcement ICAP stated they were in discussions to combine ICAP Shipping with Howe Robinson Group Pte Ltd, the leading ship-broking group to create one of the world's leading businesses in the sector. The newly formed ship-broking company is expected to be operational in the second quarter of 2015.  Further announcements will be made on the details of the deal. 
The SP fell 10% today to 386p, back to where the price was after the trading announcement on 30 September.  So no change really and the company is still seeking a replacement for the FD Torrens who announced his departure on that day. 


Telecomplus interims


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 interims today showing revenue up 8.7% to £267.3m and adjusted PBT up 55.5% to £21.3m.  Adjusted EPS was up 40.6% to 21.8p and reported EPS up 1.4% to 14.2p, with the interim dividend being increased by 18.8% to 19p.

Despite Operating cash flow being up substantially by 63%, free cash flow was under pressure due to capital expenditure on refurbishing their new HQ, so FCF saw a decrease from £6.9m last year to £2.1m.  After receiving £4.1m in dividends from their investment in Opus and paying out the final dividend of £15.1m, net debt increased by £9.7m to £63.3m (£84.8m if you include the £21.5m of deferred consideration due to npower in December 2016).

With respect to the outlook management stated that "...We are confident that we will deliver record revenues, profits, and earnings per share for the current year. This is reflected in the 19% increase we are making in our interim dividend payment, and our intention to pay a total dividend of 40p for the full year..."

Management, in referring to the medium term, said they intend to extend their current range of services into a number of complementary areas, including insurance (eg: household and motor policies) and the provision of boiler cover.  I find this troubling, that they wish to move into the provision of insurance, when by their own admission they have such a small share of the market for their existing services and insurance brokerage (I'm assuming they don't intend to underwrite) is a very different business model.

So still on track to produce adjusted PBT of £63m, which would be impressive growth of almost 50%.  

Dialight IMS


Supplier of light emitting diode (LED) solutions for industrial users. Applying leading edge LED technology, it produces retro-fittable lighting fixtures designed specifically for hazardous locations, obstruction signals and traffic signalling.  I have a holding in my growth portfolio (epic code: DIA). 

Dialight today issued an IMS for the period from 1 July 2014 to 18 November 2014 and confirmed that their expectations for the full year remain unchanged. 

The Lighting business continues to perform well, with strong sales and order growth in the year to date.  Although during the period the business experienced component delays and disruption arising from their investment to increase production capacity and capability; management state that these problems have now been resolved.

In the Signals Segment, the performance of their Obstruction business continued to improve steadily and the Traffic business remained in line with expectations.

The performance of their Components segment remained steady.

The Group's net debt at the end of October was £4.2m which implies a cash outflow this year of £11.3m and £7m since the half year.  This is highlighted as due to increased working capital in the Lighting business and, investment in increasing production capacity in their Mexican and Malaysian facilities. 

A reasonably positive update, that means that Dialight is on track to return to growth this year after stumbling in 2013.  

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).

Today Melrose Industries released an IMS for the period 1 July to 19 November and stated that trading is in line with expectations.  I just wish that management would be consistent in their reporting on the business segments, rather than leave investors to infer from their comments on progress.  I have added my interpretation of management's comments in blue.

Elster Gas on a constant currency basis revenue is up 4%, matched by a very similar rise in order intake. 

Elster Electricity on a constant currency basis sales are up 5% and order activity is consistent with expectations for the year.  Probably means that order intake is below the rate of sales growth.

Elster Water has seen the most significant increase to headline operating margins since acquisition and its second half margins are in line with expectations.  Probably means that sales and order intake are weak. 

Brush continues to experience slower turbogenerator sales offset, in part, by improved aftermarket performance.  So probably a decline in sales and weak order intake. 

At current exchange rates management expect an adverse currency effect of approximately 7% for the full year.

After the purchase of Eclipse for £99m and the sale of Bridon for £365m, leverage at the end of the year is expected to be below 2x EBITDA, although that will increase somewhat after the planned return of capital. 

Commenting on the planned return of capital management stated that "...Early next year the Board of Melrose expects to recommend a return of capital to shareholders.  The exact amount is yet to be decided but it is expected to be approximately £200m..." so about 18.5p per share.

Tuesday, 18 November 2014

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).

Halma reported their interim results today with revenue for the half year up by 2.4% to £341m, although organic revenue growth at constant currency was up by 4%.

Adjusted profit before taxation increased by 6% to a record level of £69.0m, with organic constant currency profit growth of 7%.  Adjusted EPS increased by 8.2% to 14.05p and the diluted EPS was 12.56p up 11.4%.

Organic revenue growth by geographic destination was:

USA                               +7%
Mainland Europe           +1%
UK                                 +2%
Asia Pacific                   +2%
Other                             +9%

No surprise here that the worst performing area was Mainland Europe.

Organic revenue growth by division was:

Process Safety                    +8%
Infrastructure Safety           +6%
Medical                               +4%
Environmental & Analysis  -2%

One of the reasons for the negative performance in Environmental & Analysis was lower demand from the UK water utilities, due to the final year of their five-year investment cycle.  Management expect this market to pick up during 2015.

An interim dividend of 4.65p was declared an increase of 6.9% over last year and in line with the 5 year compound growth in the pay-out of 7% pa.

Free cash flow continues to be strong at £47.6m compared to £44.6m last year.  During the period they paid out £25.8m on dividends and £82.9m net on acquisitions/disposals, which had the result of increasing net debt from £74.5m at the year-end to £136.3m (gearing of 27%).

Commenting on the outlook management stated that "...Order intake since the period end has continued to be ahead of revenue and order intake last year. Halma remains on track to make further progress in the second half of the year in line with our expectations..."

That all looks very positive and Halma look set to achieve market expectations of 30.3p and a full-year dividend of 11.98p.  Although, at today's price of 651p (up 2.7%), that places the business on a high earnings multiple of 21.5x and a yield of just 1.8%.  This is the reason they represent just 2.5% of my income portfolio, the quality of the business, the momentum of earnings and dividends might suggest a higher proportion, but there is just too little value here.  A general market correction in the future may produce a buying opportunity, but until then it is a reluctant hold - which does sound strange for such a high quality business.

Monday, 17 November 2014

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 released their preliminary results today with underlying revenue and adjusted operating profit both increasing by 8%; a similar growth rate to the nine month period (commented on here).  With ~75% of revenue generated outside of the UK, the strength of sterling adversely affected results, offsetting any benefit from acquisitions, so reported revenue and adjusted operating profit increased by 7% and 4% respectively.

By sectors underlying growth in sales were:

Life Sciences +9%
Seals +7%
Controls +8% 

Adjusted EPS was 36.1p an increase of 3.7% and beating the consensus 35p.  Reported EPS was up 2.3% to 31.4p and the final dividend is to be increased by 8.4% to 11.6p, to produce a full year dividend of 17p up 8.3%.

Free cash flow was strong (a consistent feature of DPLM) at £39.6m an increase of 9.1% on last year. The majority of this FCF was spent on dividends (£18.2m) and acquisitions (£16.5m), with net cash increasing at the year-end by £2m to £21.3m.

With respect to their outlook management have stated that "...Given the strong comparatives and the uncertain macroeconomic backdrop, the Board expects growth to trend this year towards our target "GDP plus" rates..."  This "GDP plus" rates has historically been defined as "...The businesses target organic revenue growth, over the economic cycle, at a rate of 5-6% p.a. ("GDP plus" growth), with higher growth rates achieved at the Group level through carefully selected value enhancing acquisitions..." see here on their web-site. 

At 689p Diploma is rated at 19x earnings and 19.7x FCF, not cheap, but for a high quality cash generative business that has increased EPS, FCF and DPS by a compound 27.3%, 9.4% and 16.9% respectively over the past 5 years - good value. 

Over the past 5 years Diploma has returned dividends and increased their net book value by a compound 15.6% pa per share and over the past 3 years their FCF has returned 23.4% on the average capital employed in the business compared to their weighted average cost of capital of 9%.



Reckitt Benckiser demerger

Reckitt Benckiser Group is a manufacturer and marketer of branded products in household, health and personal care products, sold into nearly 200 countries from operations in over 60 countries.  I have a holding in my income portfolio (epic code: RB.) 

Reckitt Benckiser announced today the new name of Indivior PLC for the pharmaceutical company to be demerged from the Group.  As expected it will be UK domiciled and listed on the London Stock Exchange.

The General Meeting to approve the demerger will be held on 11 December 2014, with completion set for 23 December.

Shareholders will receive one Indivior ordinary share for each RB ordinary share held.

The circular to shareholders will be distributed today, that should include particulars as to price and yield for Indivior.  There may also be some indication of any effect on the core Reckitt Benckiser from the demerger, given the highly cash generative nature of Indivior.

Friday, 14 November 2014

Vodafone interims

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

Vodafone announced their interim results on Tuesday with total revenue up 8.9% to £20.8bn, but down 3% on an organic basis.  Organic service revenue was down 2.8% to £19.1bn.

Profit before tax was £0.4bn, down from £1.5bn last year, as depreciation and amortisation increased by £1.3bn.  This will be an ongoing feature as Vodafone plan to spend £19bn on capex over the two years to 31 March 2016.  So EBITDA at £5.9bn was 5.5% above last year and management expect it to be in the range of £11.6bn to £11.9bn for the full year, a tightening of the range from £11.4bn to £11.9bn that was the previous guidance.  

EPS was 20.37p from continuing operations compared to 58.42p last year and the interim dividend was increased by 2% to 3.6p.

Free cash flow was a negative £1.2bn as capex and working capital were increased by £1bn each.  Dividends of £2bn were paid during the period, which in addition to the £1.2bn free cash outflow, £2.9bn cash paid for the shares in Ono and assumption of its £2.9bn of net debt, were the main causes of Vodafone's net debt increasing by £8.6bn to £23.9bn. 

Vodafone is placing some big bets on improving its network, which if they pay off and the timing is right, will provide good returns for investors as European markets stabilise.

The shares at 224.8p have moved up almost 22% over the last month, but still yield 5.5%.



Thursday, 30 October 2014

Royal Dutch Shell 3rd qtr results

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

Royal Dutch Shell announced their third quarter results today with revenue for the third quarter down 7.4% from last year to $107.9bn and for the nine months down 3.9% to $328.7bn, reflecting lower prices and production for oil.
Third quarter earnings, on a CCS basis, were $5.3bn an increase of 26.2% and if we exclude identified items of $0.6bn, earnings were $5.8bn an increase of 28.9%.  This improvement was mainly due to better refinery margins in their downstream segment; lower exploration costs and higher margins for upstream production, despite lower volumes.
EPS on a CCS basis excluding identified items was $0.92 a 29.6% increase above last year and for the nine months period was $3.06 up 16.3%.  
The identified items of $0.6bn in the quarter included impairments, divestment gains and losses and restructuring costs. This follows on from $3.9bn of identified items in the first six months.

On a reported basis for the nine months EPS was $2.26 a reduction of -2.6%.  As expected a second quarter dividend of $0.47 has been declared, an increase of 4.4%.

Free cash flow for the nine months was $11.2bn up from $8.3bn last year and sufficient to cover dividends of $6.5bn and $2.4bn in share repurchases.  Net debt fell from $34.9bn at the year-end to $24bn, principally the result of asset sales and net divestments of interests in JVs and associate holdings totalling a net $10bn.  Gearing at the period end was 13.3%.

The progress on FCF is a positive sign, that highlights the new management's focus on costs and investment returns.  Exxon announce their results tomorrow, so it will be good to how they are performing in this low oil price environment.    

Friday, 24 October 2014

Pearson IMS


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).

Pearson issued their nine months IMS today and at the same time informed the market that CFO Freestone has decided to leave the company sometime in 2015.  He has been with the company for ten years and has agreed to stay until a successor is in place.  Never good news when a well respected finance head decides to leave during a period of transition, even on good terms, as there will always be some uncertainty about the quality of the replacement. 

For the nine months reported sales are down 6%, but flat on an underlying basis. Their Core markets showed an underlying decline of 6%, North America grew by 2% and Growth markets were flat.

The full year guidance of adjusted EPS between 62p and 67p was reiterated, so on a SP of 1136p (down 2.8% this morning) a P/E rating of 17-18 with a 2014 yield of 4.5%.  On 2014 earnings this share is fully valued, but with an enticing yield and prospects of high double digit growth in 2015 if their plans in the US bear fruit.  So definitely a hold, but there may be better opportunities over the next few months to accumulate if the price continues to weaken.