Friday, 28 February 2014

Spectris finals


Spectris develops and markets productivity-enhancing instrumentation and controls.  Operating in four segments - Materials Analysis, Test & Measurement, In-line Instrumentation and Industrial Controls.  I no longer have a holding in my growth portfolio (epic code: SXS).

Spectris announced their finals on Thursday and reported sales growth of 1.7% to £1,197.8m with an equal contribution coming from acquisitions and foreign currency exchange movements. On a like-for-like constant currency organic basis, sales for 2013 were broadly flat.

Sales by territorial destination grew in Europe and rest of the world by +5.8% and +6.0% respectively, but declined in North America and Asia by -0.9% and -0.6% respectively.  By division sales increased in Materials Analysis, Test & Measurement and Industrial Controls by +4.1%, +1.0% and +1.7% respectively with In-line Instrumentation declining by -0.3%.

Adjusted operating profit declined by 1% to £214.7m and like-for-like operating profit decreased by 3% with operating margins declining by 50 bps to 17.9%, principally as a consequence of an adverse product mix.

Adjusted EPS increased by 2% to 132.9p and statutory diluted EPS increased by 42.4% to 168.5p, statutory earnings reflected the profit on the sale of Fusion UV partially offset by general amortisation costs. 

The final dividend is increased by 9.8% to 28.0p, which amounts to a full year dividend of 42.75p up a healthy 9.6% on last year and well covered 3.9x by the statutory EPS and 3.1x by adjusted EPS.

Free cash flow at £112.6m was almost 25% below last year as operating cash flow declined by 18.7% and capital expenditure was increased by 13.9%.  Net debt though was reduced by £138.2m to £104.1m helped by the use of the proceeds from the sale of Fusion UV.  The company does state that net debt has declined by £150m, as management use a starting net debt figure from last year of £254.1m (this is not a number I recognise from their statements).  Their financing position is strong as operating cash flow represents 137% of net debt and their debt/EBITDA ratio is just 0.4 with gearing at 12%.  There is substantial capacity here for acquisitions or/and improving the dividend pay-out from 32% of underlying earnings and 45% of free cash flow.

The management's outlook states that "...Overall, our broad geographic and end market exposures, strong financial position, and on-going investment in the business provide the Board of Spectris with confidence that the company is well positioned for 2014 and beyond..." Any sustained improvement in trading will not all flow through to the bottom line as they have stated that: " previously highlighted, a return to sustainable growth will lead to a gradual reversal of the discretionary cost savings made in 2013..."

Analysts' consensus estimates for 2014 and 2015 are for EPS of 139.6p and 149.6p respectively, so growth of 5% and 7%.  With the share price at 2457p, SXS is on an historic P/E of 18.5 and a 2014 prospective of 17.6 which puts the shares on an unattractive PEG of 3.5.  Even the prospective yield offers a below market return at just 1.8% (consensus div for 2014 of 45.2p). 

My view is that SXS is now fully, if not slightly overvalued and therefore I took the decision to sell my holding today, having made a profit including dividends of 61.6% since my purchase back in June 2012 at 1548p (incl. costs) - when I believed they were undervalued.

Thursday, 27 February 2014

Petrofac finals

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

Petrofac announced their full year results on Wednesday.  Revenue was up 1.4% to $6.3bn with net profit up 2.8% to $650m and diluted EPS up 2.8% to 189.10 cents.

They declared an increase of 1.9% in the final dividend to 43.80c (6.25p) making a full year dividend of 65.80c up 2.8% on last year and covered 2.9x

They mention that their backlog is up 27% to a record level of $15.0bn.  Operating margins were maintained at 12.2% and the business had a return on capital employed of 38.9%, meaning they were turning over their capital employed an impressive 3.2 times (38.9/12.2).  Their return on equity was 36.7%, so since they retain 65% of their earnings, they should have a sustainable growth rate (SGR) of 24% (36.7% x 65%) i.e. an ability to grow at this level without any external finance.  

So far so good, but gone is any mention of achieving their target of doubling their 2010 earnings by 2015.  This would require profits of $862m in 2015 and since they have said   "In line with our previous guidance (see here), we expect flat to modest growth in net profit in 2014 and remain confident of a return to strong earnings growth in 2015." that would require growth of over 30% in that year.

Their business model requires them to lay down a substantial amount of capital alongside their customers on many of their projects.  This requirement has a very negative effect on their free cash flow (FCF), so much so that the FCF generated over the past 5 years has amounted to just $142m - insufficient to pay the dividend for a year.  Consequently the net cash position of $552m at the beginning of this five year period has turned into a net debt position of $727m at the end of 2013.

Currently this net debt position represents a gearing of 36.6% and a comfortable 0.7 of EBITDA, but the operating cash flow is just 11.7% of the debt.  With such a high return on equity and retention of earnings, if working capital and capex profiles are constant, then the business should have sufficient finance internally to grow the business, as demonstrated above in the SGR calculation.  This is clearly not the case, so a compound growth rate in sales of 13.6%pa over the past 5 years has required a $1.3bn switch from net cash to debt.  Implying a fundamental shift in capex and working capital requirements on many of their projects over that period.  

As I posted on 18 November 2013 "...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..."  As the share price has climbed back from the depths of 1089p in mid December to 1371p, I will be looking to exit, as I am uncomfortable with a business that over any reasonable period does not generate sufficient free cash flow.    

Wednesday, 26 February 2014

The Restaurant Group


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

The Restaurant Group announced their final results today and were as expected following their post close update on 9th January.

Revenue increased by 8.8% to £580m and on a like-for-like basis increased by 3.5%. The operating margin was up 40bps to 12.9% and the EPS increased by 16.3% to 27.97p. The full year dividend was increased by 18.6% to 14p and was covered 2x.

Free cash flow was £21m down from £30.1m last year, due to an increase of £22.2m on capital expenditure due to their accelerated opening programme of new restaurants.  New restaurant openings were 35 in 2013 and management expect to achieve 36-43 new openings in 2014.

Net debt increased from £39.1m to £45.1m, although this is perfectly manageable with gearing just 20.9%, and an operating cash flow to Debt of 218%.

A good set of results and the current year's start is described as "...the first two months of 2014 have started well with total sales 10% ahead of last year (like-for-like sales up 3.5%)..."

Management describe their aim as " continue to strengthen our market positions, to judiciously roll out our brands and deliver long-term and sustainable profitable growth. The Group has demonstrated its resilience and we expect it to benefit significantly from an upturn in consumer confidence..." This with their strong operating cash flows, should enable RTN to deliver above average increases in the dividend for some years.

Greggs finals

Greggs the Bakers

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

Geggs announced their final results for the year ended 28 December 2013 today and profits were marginally below expectations.  Sales were up 3.8% to £762.4m, although like-for-like sales were down 0.8%.  There was though an improving trend in the second half of the year, with like-for-like sales up 1.2% driven by a fourth quarter that was up 2.6%.

Pre-tax profit before exceptional items was down 18.9% to £41.3m and diluted EPS before exceptional items was down 20.1% to 30.6p, this compared to market expectations of £42m and 31.4p respectively.

Statutory EPS was 23.9p a decline of 39.3% from last year and covered the maintained full year dividend of 19.5p 1.2x (covered 1.6x by the pre-exceptional EPS).  Management's comment "...In the short term, so long as cash flow allows, it is the Board's intention to maintain the dividend at or around this level..."  gives cause for some concern that a dividend cut may be considered.

Free cash flow was strong at £23.9m compared to £15.2m last year and was slightly better than I was forecasting here in my analysis of the company.  Indeed with the exception of the comment from management about the short-term outlook on dividends, nothing has changed my view on the analysis I set-out.

Net cash increased to £21.6m from £19.4m last year and £12m at the interim stage.

With respect to their outlook management stated that "...Although economic activity across the UK is showing some signs of improvement, management is planning for continued pressure on footfall and consumer spending and an increasingly competitive food-on-the-go market...".  It is also worth showing here management's view on input costs compared to 2013 detailed in their presentation:

This shows a somewhat better position on input costs and inflation for 2014 compared to the difficult 2013 position.

It will undoubtably be a difficult two years as management restructure the business and improve the logistics within the company, but at the current price of around 487p there should be a 6% margin of safety based on my previous analysis and a 4% yield.  I would though exit on any cut to the dividend.  

Monday, 24 February 2014

Dialight finals


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 announced full year results today and marginally missed their guidance of PBT not to be below £14.5m, issued in their trading update of 8 January see here.

The company has undertaken an assessment, assisted by an independent consultant, of their forecasting and performance process; which has highlighted a number of process improvements, that they have started to implement.  Management believe, that as a result of this, they will have a much more robust and focused system of internal control.  This explains the sudden departure in January of the CFO and the immediate replacement by an interim.

Results showed that revenue from continuing operations had grown by 14% to £131.2m, although underlying profit from continuing operations at £14.5m declined compared to the £19.6m last year.  Underlying PBT was £14.4m, below the guidance of PBT " be not less than £14.5m..."

Basic underlying EPS was 30.8p, down 26.1% with statutory diluted EPS of 25.9p below last year by 37.3%.  The final dividend was maintained, so the full year dividend was 14.4p up 6.7% on last year and covered 1.8x.

Net cash on the balance sheet declined from £15m to £8.8m, due to free cash flow declining from a positive £2.5m last year to a negative -£4.6m in 2013.

The Lighting segment continues to show excellent growth at 50.5% and now represent 52% of group sales.

The Signals segment, the cause of disappointment since the second half of 2012 when a major US reseller of Dialight's equipment became a competitor, declined by 13.1%; however, the second half showed a reversal of the decline and was 6.9% up on the first half .

With respect to the current year management state that they expect " drive strong Lighting growth for 2014 and the years to come. This, combined with a stabilization of the Signals business leads the Board to expect a return to earnings growth in 2014..."

A disappointing result, but action has been taken with respect to their internal controls and it would appear that the Signals business has halted its decline, allowing the Lighting's performance to show thorough in future years.

Thursday, 20 February 2014

BAE Systems finals

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

BAE Systems released their final results today, which included the benefit of the finalisation of the Salam Typhoon agreement with Saudi Arabia announced yesterday.

Sales grew by 1% to £16,864m and underlying operating profits were up 3.4% to £1,925m; however, mainly due to impairment charges taken for the US business of £865m*, statutory operating profits were £806m - 50% below last year.

Underlying EPS was 42p an increase of 8.5%, although the statutory EPS was just 5.2p, which would have included a 6-7p improvement from the Saudi Salam agreement.   The final dividend was increased by 3.4% to 12.1p making a total dividend for the year of 20.1p an increase of 3.1%.

Orders received in the business were below last year and detailed below is the breakdown of those orders received by segment over the past three years.  Orders in this type of company will always be lumpy, but the real concern is the fall last year in order-intake for Platform & Services (US) to a level below two years ago, also the lack of growth in Cyber Intelligence in a market that is seeing double digit growth.

Click on chart to enlarge

The order backlog finished the year at a similar level to last year at £42.7bn.

Sales and profit by segment are detailed in the charts below.  What it obvious from this, is the lower performance from the Platform & Services (US) division, contributing 22% of sales, but just 13% of operating profits, as the division earns 6% on sales compared to a group average of over 10%.  This lower profitability, declining order intake and reduced prospects (management expect sales this year to be 20-25% lower) for the US business, is the background to the £865m impairment charge* - a result of overpaying for acquisitions in the past.   

Click on chart to enlarge

Free cash flow was negative for the year at -£247m compared to £1,909m last year and this resulted in the net cash of £367m at the start of the period turning in to a net debt position of £704m, after dividend and buy-back payments totaling £850m.  This level of debt is perfectly manageable, representing gearing of just under 21% and a Debt/EBITDA ratio of just 0.3.  This year will of course see the benefit of the cash receipt associated with the Salam Typhoon agreement; if the effect on EPS was 6-7p, then the net cash receipt will be between £195-227m.

Management have given guidance for 2014 and expect that EPS is likely to reduce by approximately 5% to 10% compared to 2013.  So with an expected EPS range of 37.8-39.9p and at a share price of 400.4p, BAE is rated on a prospective P/E of 10.5 with a 5% yield.  This compares to Lockheed Martin, General Dynamics and Raytheon who are all on P/Es ranging from 15-18 and with yields below 3%.

My own estimate for 2014 based on the guidance given by the company is shown below:

Click on table to enlarge

BAE Systems, because of its end market, will sometimes have erratic performances, this increases the risk of holding such a share, but a yield of 5% may go some way to compensate for the additional risk.

Wednesday, 19 February 2014

BAE Systems agreement

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

So finally the negotiations regarding the settlement of contractual pricing on the Salam Typhoon agreement has been agreed.  Management state that "...The terms of the agreement are broadly consistent with the Group's prior trading outlook for 2013.  Cash settlement is expected to follow this pricing agreement, commencing in the early part of 2014..."  So that would be 6-7p on EPS

At the time of their last update on these negotiations in December they mentioned that "...A timely agreement in the new-year would be reflected in trading for 2013..."  Their results are due tomorrow, so this probably just makes it!  

Pan African Resources interims

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 announced their interim results today and were in line with their trading update on 29 January.

The Group's gold sold increased by 123.0% to 100,172oz and Gold reserve inventory increased by 666.7% to 9.2Moz, both reflecting the Evander Gold Mines acquisition completed in February 2013.

Sales increased by 70.8% to £84.4m, EBIT increased by 34.9% to £23.2m and EPS by 11.8% to 0.95p.

These results clearly demonstrate the quality of the management - continuing to produce good results from the original operation, delivering on the Evander acquisition, whilst concurrently commissioning the Barberton Tailings Retreatment Plant on schedule and to budget that contributed 11,603ozs of gold in the period. 

Free cash flow was strong generating £13.6m, as operating cash flow increased by £13.2m to £22.3m.

PAF is currently rated at a prospective 8.5x 2014 earnings, which places them on about a 30% discount to their sector, while having one of the top dividend yields.

Anite IMS

Anite plc

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

Anite issued their third quarter IMS today and clearly order placement in the Handset Testing business is still slow.   The third quarter is traditionally their quiet period and this year is no different.  Trading has been in line with expectations and with a continuation of the trends experienced in the first half.

Handset Testing achieved revenue in line with the same period last year. The Handset Testing business enters the final quarter in a similar position to twelve months ago with an expectation of a comparable level of order intake and revenue supported by a strong pipeline of opportunities. 

Network Testing and Travel have both had strong third quarters, in line with expectations, and are on track to achieve their full year targets.

Group net debt at 31 January 2014 stood at £3.7m a reduction of £2.3m from their interim position.  In the fourth quarter last year net debt was reduced by £7.6m despite paying out £1.3m for the interim dividend.  A similar result this year will see the business move back in to net cash a regular position during the years of 2009-12.

Tuesday, 18 February 2014

Bhp Billiton interims

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

Bhp Billiton announced results for the six months to 31 December 2013 today.  Revenue increased by 5.9% to $33,948m, with Iron Ore being the major contributor to this increase with a $1,718m uplift in revenues, representing a 20.5% increase.

Underlying operating profits were up 4.9% to $12,382m, with once again Iron Ore being the major contributor showing a $1,707m uplift.  The charts below show the split of revenue and profits by resources:

Click on chart to enlarge

Production volumes were up in most areas with Metallurical Coal and Iron Ore showing the largest increases.  The chart below shows the production increases for the half-year compared to half-year 2012:

Click on chart to enlarge

Management stated that Iron Ore and Metallurgical Coal are well positioned to achieve full year production guidance, although the current wet season in northern Australia represents a key risk. Full year guidance is also retained for their remaining pillars of Petroleum and Copper.  Management expect this momentum to be maintained, with production growth of 16 per cent anticipated over the two years to the end of the 2015 financial year.

Underlying diluted EPS was up 30.6% at $1.454, with statutory diluted EPS up 83.0% at $1.51. The interim dividend of 59c was increased by 3.5%, although this follows the recent precedent of the interim replicating the previous year's final. 

Operating cash flow was very strong, increasing by 65% to $11,859m and with capital and exploration expenditure reduced by $3,155m to $8,832m, free cash flow (FCF) was converted from a negative -$4,814m last year to $3,027m.  Management are projecting continuing strong FCF for the second half and expect the net debt of $27,088m to approach $25bn by 30 June 2014.  They also confirmed that capital and exploration expenditure is expected to decline by 25% this year to $16.1bn and decline again next year.

Management are delivering on their promise of introducing strict financial disciplines in their management of FCF, providing the company with the ability to be able to focus on improving shareholder returns.  BLT remains a key component of my equity income portfolio, currently representing about 8%.