Monday, 31 March 2014

Amerisur reserves update

Amerisur Resources is an independent full-cycle oil and gas company focused on South America, with assets in Colombia and Paraguay. I have a holding in my growth portfolio (epic code: AMER).

Amerisur gave their annual update on reserves and resources today; their certified 1P (Proven ie. about a 90% certainty of being exploited ) gross field reserves increased from 12.0 MMBO last year to 19.8 MMBO.

Their 2P (Proven and Probable, probable has about a 50% certainty of being exploited) gross field reserves increased from 29.9 MMBO last year to 32.8 MMBO. They state that these 2P reserves have been evaluated by Petrotech to represent a Net Present Value ("NPV") to Amerisur after tax and all royalties of US$1,974m undiscounted and $1,251m at a 10% discount rate.

Amerisur are currently on a constrained output of 7,000 to 7,500 BOPD, due to transportation/logistic issues, which represents about 50% of available production.

Thursday, 27 March 2014

Compass Group trading statement

Compass Group

Provides contract food, catering and support services to a wide range of commercial businesses and government departments operating in over 50 countries.  I have a holding in my income portfolio (epic code: CPG).

Compass issued a trading statement ahead of its half-year end stating that  organic revenue growth for the first half is expected to be just over 4%, with an increase in the operating profit margin of around 10 basis points (bps).

Management said that they expect North America to show organic revenue growth for the first half of around 6% and the operating profit margin to increase by 10 bps; Europe & Japan is expected to have declined by just under 2.5% with the operating profit margin increasing by 30 bps and organic revenue growth in the first half for the Fast Growing and Emerging region to be around 9% with a 50 bps decline in the operating margin that they expect to reverse in the second half.

As for so many international businesses, Compass will suffer from a strong Sterling currency when reporting results this year.  Management have said they expect a negative currency impact of approximately 5.5%, or £486 million, on revenue and 5.7%, or £37 million, on underlying profit. If the current spot rates were to continue through the second half of 2014 they would expect a negative currency impact of 5.9%, or £1,029 million, on 2013 full year reported revenues and 6.2%, or £78 million, on 2013 full year underlying profit.

The currency impact is similar to the situation recently reported by Diploma, commented on here, where the share price fell by over 7.5% despite underlying growth of 7%.  Fortunately there is no such effect on the Compass share price that is down just 2.5p (0.3%) to 926.5p.  Compass currently looks to be fully valued on a one year rolling prospective P/E of 18 and a forward yield of 2.8%, my current view of a fair value range for Compass would be about 840-970p*.

*Using last year's FCF of £640m, an estimated 8 to 10% growth (FCF has grown by about 7% over the last 5 years) over the next 10 years and 3% in perpetuity; then discounting theses cash flows by 9.8%, which I judge to be CPG's cost of equity.

Compass Group's high levels of dividend growth (~15% pa over the past 5 years) and their consistent earnings performance have kept me invested.  They represent just over 5.5% of my income portfolio and, over the 3 years of my holding period, have produced an IRR of 23.5% pa.

Monday, 24 March 2014

Diploma trading statement

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 a pre-close trading statement on their six month results today.  Revenues on an underlying basis after adjusting for currency effects and acquisitions, are expected to increase by ~7%.  This is slightly ahead of the 6% underlying growth seen in the first quarter here. 

Controls are expected to show underlying growth of ~10%; Life Sciences ~7% and Seals ~4%.

This is a strong underlying performance, but exchange rates have adversely affected the results of the overseas businesses when translated into Sterling.  Diploma have about 75% of their revenues generated outside the UK, so for the half year they are likely to increase by ~5% and adjusted profit before tax is expected to be similar to last year.

Management state that free cash flow has been strong, benefiting from lower capital expenditure.  Net cash funds at 31 March 2014 are expected to be ~£7m down from £19.3m at 30 September, but this allows for an approximate £24m outlay on acquisitions and dividends since the year-end.  

Results are clearly being held back by the significant adverse currency movements and therefore management expects that adjusted profit before tax for this financial year is likely to be at a similar level to last year.  This has had a negative effect on the share price today down -7.6% as I write, but with the exception of the currency headwinds, the business looks to be in fine shape.


Monday, 17 March 2014

Vodafone acquisition

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 have agreed to acquire Ono for a total consideration equivalent to €7.2bn (£6.0bn) on a debt and cash free basis.
Ono is the leading next-generation network operator in Spain with 7.2m homes released to marketing (equivalent to 41% of total homes in Spain), providing its customers with broadband speeds in excess of 200 Mbps and the country's most innovative pay-TV service through TiVo.
The Transaction values Ono at a multiple of 7.5x 2013 EBITDA and 10.4x 2013 FCF adjusted for cost and capex synergies. The Transaction is expected to be accretive to Vodafone's adjusted EPS and FCF per share after cost and capex and before integration costs from the first full year post completion.
This follows on closely from the Kabel Deutschland acquisition for €10.7bn (13.8x FCF) and £1.9bn for Indian spectrum licenses.

Monday, 10 March 2014

Pennant finals


Pennant International provides a range of services that extend across e-Learning, Computer Based Training, Emulation and Simulation, Technical Documentation, Media Services, Cartography, Supportability Engineering Software products and related services. I have a holding in my growth portfolio (epic code: PEN) 

Pennant announced their final results today for the year ended 31 December 2013.   Their sales increased by 29% to £18.68m and operating profit was up substantially by 41.3% to £2,256k as operating margins increased from 11.0% last year to 12.1%.

Diluted EPS increased by 44% to 6.33p and the final dividend increased by 28.6% 1.8p making a full dividend for the year of 2.6p an increase of 30% over last year and covered 2.4x.

Free cash flow was the weak area in the results, producing an outflow of -£224k compared to FCF last year of £533k, management state this was due to "...a requirement for increased working capital during the year as major contracts progressed.  Major stage payments are expected to reduce this requirement in the first half of 2014..."  I can only assume that this accounts for the £1,832k increase in debtors, where the stage payments have been invoiced, but not yet received.  So for the year, net cash reduced from £2,144k to £1,113k.  

Management state that orders received during the year were worth in excess of £20m, which would produce an increased order book and a reasonably healthy book to bill ratio in excess of 1.07.  Management in their outlook have said that  "...the Group is currently actively involved in a number of significant opportunities with existing and prospective customers. These opportunities, together with the size and visibility from the current order book give confidence for the future..."
A good set of results from a company that at 91p is still reasonably priced with an historic P/E of 14.4 and, assuming modest growth of 10% in earnings for this year, a prospective P/E of 13 while offering a 2.9% yield. 

Thursday, 6 March 2014

IMI finals

IMI is a global engineering group focused on the precise control and movement of fluids in critical applications and comprises five platform businesses - Severe Service, Fluid Power, Indoor Climate, Beverage Dispense & Merchandising. I have a holding in my income portfolio (epic code: IMI).

Today IMI released their final results and excluding the Beverage Dispense and Merchandising divisions that were sold in January 2014, revenues were £1,743m, up 1% on an organic basis.

Adjusted operating profits grew 7% to £321.6m, and operating margins improved from 17.7% to 18.4%. 

Adjusted diluted EPS (Excluding both exceptionals and the non-continuing businesses) increased 12.2% to 71.7p.  Statutory EPS was 70.1p up 4.6% on last year, but excluding non-continuing businesses was 59.6p up 12.0%.

The final dividend has been increased by 8.7% to 22.5p, making a total dividend for the year of 35.3p, an increase of 8.6% over last year.  The dividend was covered 2x, although if we exclude the earnings from the businesses sold the cover was 1.69x.

Free cash flow was £252.2m, considerably higher than last year's £148.5m, although due to dividend payments (£106.2m), share buy-backs (£164.3m) and share bought for an employee scheme (£24.2m) net debt increased from £143.8m to £225.9m.  Net debt was covered 134% by operating cash flow and with debt to EBITDA at 0.5, IMI is in a strong financial position.  Gearing was  37.6% and interest cover more than 20x. 

Commenting on the outlook management said: "...Looking at the year ahead: in 2014, based on current market conditions and excluding the adverse impact of exchange rates, we expect the Group to deliver modest organic revenue growth in the first half with margins slightly lower than in the first half of last year and an improved overall performance in the year..." 

IMI disposed of their Retail Dispense Operations on 1 January 2014 for $1.1bn and have returned to shareholders £620m, reflecting this in a 7 for 8 share consolidation.

If EPS for this year moves up to say 74p (+3.2%), that has the company valued on a prospective P/E of almost 20x on a share price of 1459p, with a below average yield of 2.5% (assuming a ~5% increase in the dividend).  It looks to be fully valued for the time being and sets new CEO Selway a few challenges.  My returned capital (200p per share) will be looking for other stocks at this valuation - does not detract from the fact that IMI is still a quality business.


Wednesday, 5 March 2014

Melrose Industries finals

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 announced their final results today, the results are after a number of major disposals and receipt of the cash, but before the return of capital that has only recently taken place.  See here for the details.

Revenue was reported as £1,732.8m up 64.9% on a continuing businesses basis, but down 3.3% on like-for-like basis (assuming a full year's ownership of Easter in 2012).

Normalised EPS on a continuing basis (also excluding exceptional and amortisation costs) was 12.8p up 45.5% on last year, due mainly to the Elster acquisition and statutory diluted EPS was 9.3p compared to a loss last year of (0.9p).  There is a final maintained dividend of 5.0p, producing a full year dividend of 7.75p, an increase of 2% on last year.

During the year free cash flow of £113.1m was generated, compared to a free cash outflow of -£9.1m last year.  Five disposals during the year realised gross proceeds of £950.4m, of which £600m was returned to shareholders in 2014 by way of a return of capital and a 11 for 13 share consolidation.  Net debt was therefore reduced substantially by £856.9m to just £140.8m.  Adjusting net debt for this year's return of capital, gearing would be 33.9%, net debt would be 2.3x EBITDA and their operating cash flow 21.3% of net debt.

Management state in their outlook that much of their recent growth has been from margin improvement rather than revenue growth.  They say that sales growth remains challenging and they face a likely negative impact from the strength of Sterling (over 87% of sales were to outside the Sterling area in continuing businesses last year).  They do believe though that there is more margin improvement to come.

Undoubtedly the  amount of profit being squeezed from the Elster acquisition is exceptional, with sales declining by -3% on a like-for-like basis, EBIT was improved by +37%.  Although as they mention there is further to come from margin improvement, management need an uplift in their markets to enhance a realisation from this acquisition.

In the short-term some investors will be concerned whether margin improvements at Elster will be sufficient to off-set the headwinds from a strong pound and continuing weak market demand for all of their businesses.  This should not concern longer-term investors who are likely to experience, as in the past, market beating total shareholder returns; although the private equity type model is not to everyone's liking and the 2.5% yield not compelling.

Saturday, 1 March 2014

Pearson finals


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 announced their final results yesterday and they were as expected following their trading statement on 23 January commented on here.

Sales increased +2.2% to £5,069m and +1% on a LFL basis.  Adjusted operating profit was £871m, down -6.5% and on a like-for-like basis down -9% with statutory operating profit at £458m down -6%.

Adjusted EPS after restructuring charges was 70.1p*, down -15.1% and as guided at the time of their trading statement.  Statutory EPS was 66.5p up +72.3% and from continuing operations 36.3p up +17.1%.

The final dividend was increased by +6.7% to 32p, making 48p for the year an increase of +6.7%; the 22nd year of dividend increases above the rate of inflation.  The dividend was not fully covered by continuing operations at 0.8x, although covered 1.46x by the adjusted EPS.

Free cash flow at £183m was well down on last year's £634m and net debt increased by £287m to £1,491m.  Net debt is 1.9x EBITDA and operating cash flow is just 24% of the debt; interest cover though is adequate at 6x.

Return on capital employed for the business was an unimpressive 6.4%, affected by lower profitability and restructuring charges; this compares to their weighted average cost of capital of 9.3%.

With respect to the current year management have said: "...At current exchange rates, we expect to report adjusted earnings per share of between 62p and 67p in 2014..."

Managements view of 2015 and beyond is - "...We are in the middle of what we believe will be a short, but difficult, transition - one that through our combined investment and restructuring programs will drive a leaner, more cash generative, faster growing business from 2015..."  As I mentioned here at the time of their trading statement a little more patience is required while Fallon returns the business to growth.

It was surprising that the market reacted in the way it did, by pulling the share price down almost 6% to 1013p yesterday, as much of the 2013 result and expectations for 2014 was already in the public domain, but that's the market - best to turn it off at times!  Worth remembering that after the trading statement on 23 January 2014 the price was 1191p.

*Adjusted EPS essentially includes trading of discontinued businesses and excludes amortisation and acquisition costs.