Thursday, 22 May 2014

Unilever disposal

Unilever Logo

A manufacturer and supplier of fast moving consumer goods, with more than 400 brands focused on health and wellbeing, 14 of which generate sales in excess of €1 billion a year. I have a holding in my income portfolio (epic code: ULVR).

Unilever announced today that it has signed an agreement for the sale of its North America pasta sauces business under the Ragu and Bertolli brands to Mizkan Group for a total cash consideration of approximately $2.15bn.
The annual turnover for Ragu and Bertolli is more than $600m, so at over 3.5x turnover this looks to be a very good price, for what Unilever considers to be a relatively low growth business.  There was no mention of the tax charge that Unilever will incur, so we will have to wait for a disclosure on this.  

Wednesday, 21 May 2014

Telecom Plus finals


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 final results today with revenue up 9.5% to £658.8m, they state that the relatively modest rise in revenue is due to much lower average energy consumption by domestic households during an exceptionally mild winter, although continued strong organic growth in the number of customers using their services (530,639 up 15%) and industry wide increases in energy and telephony prices last autumn did more than compensate for this. 
Adjusted profit before tax was up 25.3% to £44.6m and reported pre-tax up 5.8% to £36.6m.  EPS increased by 2.9% to 39.2p and adjusted EPS rose by 26.5% to 49.7p.  A final dividend of 19p was declared increasing by 5.6%, making 35p for the year up 12.9%.
Free cash flow for the year was a negative £22.9m compared to a positive FCF the year before of £17.7m.  The negative FCF and the ~£200m spent on the NPower deal caused the net cash of £0.8m last year to become a net debt of £53.6m after the £130m placing and rights issue.  The net debt position represents gearing of just 26% and is a comfortable 1.42x EBITDA, so perfectly manageable.  Although it should be recognized that cash flows will come under pressure over the next two years due to completion of the £20m refurbishment to their new headquarters office building this year, supporting the distribution channel with branded BMW Minis and Tablets and funding growing demand from customers for smartphones with no upfront costs. 
Management state that they remain comfortable with market expectations for adjusted pre-tax profits for the current year of £63m and expect to deliver a progressive increase in dividends as they continue to grow; although the rate of dividend increase will be tempered over the next few years, as they service and repay the £100m of debt borrowed in the autumn to part-fund the transaction with Npower.
A positive set of results bearing in mind the mild winter, but with the added risk of a higher leveraged business with some additional working capital and capex requirements over the next two years.  These risks are manageable if the business continues to grow and, in the current environment, there are probably few reasons why it should not.

Tuesday, 20 May 2014

Vodafone finals

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 final results today, that in summary underlined the continuing challenges in their European markets and, the substantial impact on their finances of the sale of their Verizon Wireless stake that gives the company the breathing space to tackle those European issues. 
Revenue increased by 0.8% to £38.3bn and if we include the share of associate revenue declined by 1.9% to £43.6bn.  EBITDA at £12.8bn declined by 5.4% and adjusted operating profit declined by 37.4% to £7.9bn.
The statutory operating loss was -£3.9bn after allowing for discontinued operations' profits (£3.2bn), impairment charges for Germany, Spain, Portugal, Czech Republic and Romania (-£6.6bn) and various other charges including amortisation of intangibles and restructuring costs (-£2bn), compared to a -£2.2bn loss last year.
EPS from continuing operations was 41.77p, although a loss of -31.21p if we exclude the deferred tax asset, compared to a loss of -15.66p last year.
As expected there was a final dividend of 7.47p, giving total dividends per share of 11.0p an increase of 8% on last year.
Free cash flow was a negative -£1.8bn, although net debt decreased substantially by £13.1bn to £19.1bn due to the proceeds from the sale of Vodafone's stake in Verizon Wireless.  This has reduced gearing from 45% to 27% and debt/EBITDA from 2.4x last year to 1.5x, this should provide Vodafone with the financial capacity to improve its position in the difficult European market.  
For the financial year 2015 management expect EBITDA to be in the range of £11.4bn to £11.9bn and free cash flow to be positive, after all capex, but before spectrum and restructuring costs.  They expect their total capex programme to be around £19bn (including Project Spring) in the two years to March 2016 and have stated that they Intend to grow dividends per share.

Vodafone are making some big investments in its network, with the intention of creating "clear blue water" between them and their competition on service and support.  This is likely to hurt results and free cash flow (that's real FCF not some management adjusted figure) over the next two years, but if successful will provide superior returns for investors.  Meanwhile the 5.2% yield makes it an attractive income share, providing they do not slip up with Project Spring along the way. 

Monday, 19 May 2014

Key announcements 12 - 16 May

Announcements during the week 12-16 May 2014

During last week while I was away there were ten announcements of note for shares that I hold:

Anite plc     Anite issued a trading update on the 12 May and stated that trading in the final quarter of the year was encouraging and reflected the improvement anticipated at the time of the third quarter IMS.  Management therefore expects to report full year results in line with expectations.  They also stated that cash generation in the second half was stronger than expected, due to improved working capital management.  Group net cash at 30 April 2014 stood at £6.0m compared to a net debt position of £6.0m at 31 October 2013.  

Diploma PLCDiploma issued their interim results on the 12 May with revenue showing an increase of 6.4% to £148.6m, adjusting for acquisitions and currency effects revenue increased by a very respectable 9%. Reported operating profit increased by 0.8% to £24.4m, with adjusted operating profit increasing by 3% to £27.8m.  EPS grew by 1.4% to 14.9p, with adjusted EPS up 2.9% to 17.5p. The interim dividend was increased by 8% to 5.4p.  Free cash flow was strong at £14.8m compared to £12.7m last year, although £11.1m spent on acquisitions and a £12.1m dividend payment were the main causes for the net cash declining from £19.3m at the end of last year to £8.0m at this interim stage. The Board stated that they remain confident of future growth, as the recent Investment for Growth programme provides the platform to benefit from continued underlying growth, supported by attractive and value creating acquisitions.


Glaxo on the 13 May issued results of a phase III trial for Darapladib informing the market that it did not achieve the primary endpoint of a reduction of major coronary events, versus placebo when added to standard of care. Glaxo will conduct further analysis, but this looks like the end of the road for this drug.  The drug comes from the Human Genome Sciences pipeline - a $3bn Glaxo acquisition from July 2012. Let's hope the rest of HGS's pipeline is more productive.

  On 13 May Diageo announced that they had launched and priced €1.7bn of fixed rate Euro denominated bonds.  The issue consisted of €850m 5 year bonds at 1.125% and €850m 12 year bonds at 2.375%.  That's low-cost borrowing and compares to an average interest cost of 4.9% for the Group last year.  NB I have been buying DGE for my income portfolio since late April when the share price dipped to below 1825p.

 Melrose Industries issued an IMS on 13 May stating that trading remains in line with full year expectations with order intake in the period from 1st January to 13 May up 3% over the same period last year.  The Elster Gas business has achieved a 10% increase in order intake, although underlying sales year to date were down 1% year on year.  The Elster Electricity business shows encouraging signs of significant growth for the year though trading is, as usual, weighted to the second half and notably the final quarter.  Elster Water continues to show a much improved performance since acquisition.  Brush is trading in end markets for power generation which have been slow for a while; consequently revenue was down in the period as expected.  The order intake for Brush though was up 8% in the period.  Bridon is still being held back by a tough mining end market and consequently order intake is down 3% in the period.  Continued current forex rates will likely have an adverse effect of 6% on Group profits.  A bit of a mixed performance, but overall positive, although with the usual forex headwind for international companies.


Compass Group Compass Group announced their interims on 14 May 2014.  Although revenue fell by 1.6% to £8,659m it grew by 4.2% on an organic basis, driven by North America and Fast Growing & Emerging growing by 6.6% & 9.7% respectively, partially off-set by Europe & Japan declining by -1.6%.  Operating profit at £634m was similar to last year, but on an underlying basis grew by 5.5% to £647m.  EPS grew by 7.4% to 24.7p and on an underlying basis grew by 10% to 25.3p with the interim dividend being increased by 10% to 8.8p.  Free cash flow was £319m for the six months compared to £265m last year.  The Board stated that they believe it is appropriate to increase the balance sheet leverage through returning £1bn of cash to shareholders by way of a special dividend and share consolidation (that's a return of capital not a special dividend).  Management state that following the proposed return of cash, the Group's pro forma balance sheet leverage as at 31 March 2014 would have been approximately 1.5 times, which the Board believes is consistent with its policy of maintaining strong investment grade credit ratings. Looking out to the second half of the year, management's expectations for the full year remain positive and unchanged, notwithstanding the translation impact of ongoing movements in foreign currencies.  The return of capital will be about 56p per share, so depending on the share price at the time, might equate to a share consolidation of about 50 for 53.


   ICAP issued their preliminary results on 14th May.  Revenue at £1,397m was below last year by 5.1% and trading operating profit 4.2% below last year at £295m, with reported operating profit (including exceptionals and acquisition & disposal costs) at £140m compared to £91m last year.  Reported EPS was 15.4p an increase of 133% and normalised EPS was 32.6p an increase of 0.3%.  The final dividend was maintained at 15.4p making a maintained 22p for the full year.  Free cash flow was weak at £74m compared to £233m last year.  In addition management state that market conditions remain very challenging.  Regulatory change continues to create uncertainty within the marketplace and they expect this challenging environment to endure.  In the circumstances I was surprised the share price was not weaker following this outlook, although I guess the yield at 5.8% gives some support and their profits came in as expected.
Home Restaurant Group issued an IMS on 15 May that covered the first 19 weeks of the year.  Management stated that trading has been strong with total sales 11% ahead of the previous year and like-for-like sales 4% ahead.  During those first 19 weeks they opened 15 new restaurants and in total they expect to open between 36 and 43 new restaurants this year, roughly half of which will be Frankie and Benny's.  Interestingly they state that the quality of their new site pipeline over the next three years is the strongest they have seen since before the onset of the financial crisis.  The Group is trading in line with expectations, and they state that they are on track to report a very satisfactory first half performance.  This is a solid update from a very well run restaurant chain. 

Home  On 15th May Synergy health stated that they acquired Bioster S.p.A. and associated companies for a cash consideration of €29.0m (£23.6m) on a cash and debt free basis.  Bioster operates ethylene oxide and electron beam sterilisation facilities in Italy, Slovakia, and the Czech Republic.  In the year ended 31 December 2013, Bioster had revenues of EUR 20.2m (£16.4m), and underlying EBIT of EUR 2.6m (£2.1m).  The cash consideration equates to a 6.2x EBITDA multiple and is expected to be earnings enhancing in the current financial year.  Looks like a good fit at a very reasonable price.

Halma p.l.c    
On 15th May Halma announced that they had made two acquisitions - the first Advanced Electronics Ltd manufactures networked fire detection and control systems. The initial cash consideration for the share capital of Advanced was £14.1m.   There is deferred consideration of up to £10.1m payable based upon earnings growth for the period to March 2015.  Unaudited accounts for the year ended 30 April 2014 report revenue of £14.6m for the business.  The second acquisition was Plasticspritzerei located in Wolfhalden, Switzerland at the same facility as another Halma subsidiary company, Medicel AG.  Plasticspritzerei manufactures plastic components including critical parts for Medicel's ophthalmic products.  An initial cash consideration of CHF 8m (£5.4m) was paid for assets which included CHF 0.3m of cash.  Halma then immediately sold the industrial segment of the business to a third party, resulting in a net cash cost to Halma of CHF 4.8m (£3.2m).  These transactions have resulted in Halma owning only those assets which support Medicel's business.  Unaudited accounts for the financial year ended 31 December 2013 show revenue of CHF 3.6m (£2.4m) for the business retained.



Thursday, 8 May 2014


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).

IMI released an IMS today commenting on the first four months of the year stating that trading has been in line with expectations with Group revenues up 1% on an organic basis and down 4% on a reported basis reflecting the ongoing adverse impact of exchange rate movements.
Management state that their overall expectations remain unchanged, with the Group on track to deliver modest organic revenue growth in the first half with slightly lower margins compared to the first half of last year and an improved overall performance in the full year.
During the period the disposal of the Beverage Dispense & Merchandising business in January for about £690m, allowed £620m to be returned to shareholders and a £70m contribution to the UK Pension Fund.  Following this return of capital there was a 7 for 8 share consolidation. 
Net debt at the end of April stood at a creditable ~£212m which included a £40m purchase of their own shares for the Employee Benefit Trust, this compares to a net debt position of £225.9m at the end of last year.  

Tuesday, 6 May 2014

Aberdeen Asset Management interims

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 announced their interim results to 31 March 2014 today, that continued to show a decline in Assets under Management (AuM).  Although AuM were £324.5bn, if we exclude the £134.1bn added as a result of the SWIP acquisition, AuM were £190.4bn compared to £200.4bn at the end of the last financial year end and £193.6bn at 31 December 2013.

Revenue was down 2.4% at £503.5m, with underlying profit before tax (PBT) down 2.6% at £217m and reported PBT £168.7m down 10.4%.  Underlying EPS was 14.32p down 3.8% and reported EPS at 10.67p was below last year by 14.2%.  Although free cash flow was below last year's £220.1m, it was still relatively strong at £177.8m and net cash decreased only slightly from the year-end figure of £426.6m to £410.4m at the interim stage.  The interim dividend has been increased by a very substantial 12.5% to 6.75p, this compares to the first interim dividend I received back in June 2007 of 2.6p. 

Management stated that "...Towards the end of the period, there were indications of some pick-up in investor sentiment towards emerging markets, although we anticipate that some uncertainty could remain. More recently, an encouraging improvement in investment performance should improve the outlook for our equities strategies..."

There was reinforcement from management on their strategy of the use of free cash flow "...As we stated when we announced the transaction, the addition of SWIP will reinforce Aberdeen's progressive dividend policy and, while we will incur some one-off integration costs over the next year, it will enhance our ability to return surplus capital to shareholders over time..."

Friday, 2 May 2014

GlaxoSmithKline 1st quarter results


GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

Glaxo reported first quarter results on Wednesday with some disappointing news in their US market. Group turnover was down 2% on a constant exchange rate basis and excluding divestments to £5.6bn, on a reported basis turnover was down 13.3%.

Core operating profit was down 18% at £1.5bn and down 33% on a reported basis to £1.1bn. Core EPS was 20% down at 21.0p and on a reported diluted basis down 30.1% to 13.7p.

The major decline in sales came from the US which was down 11%, caused mainly by a 30% slide in Advair sales to £455m.  Although loss of market share has been expected, due to loss of patent protection, this is a larger than expected decline in just one quarter.  GSK have introduced Breo/Relvar, Anoro and Incruse to their respiratory portfolio and they state that there are six other drugs in late stage development, but it will take some time for these new drugs to compensate for the Advair/Seretide decline against generic competition.

It may well be that 2-3 years from now Glaxo will be a better balanced business, less reliant on just two or three block-buster drugs.  The recent Novartis deal where Glaxo sell them their oncology business, take a 63.5% majority stake in a combined consumer healthcare business and buy Novartis's vaccine business, is a step in this direction.

Free cash flow for the quarter was down substantially to £522m from £897m last year, due to the decline in profitability and the effect of Sterling's strength against their trading currencies.  After dividend payments and the purchase of increased shareholdings in their Indian pharmaceutical business and Indonesian consumer healthcare business, net debt increased £1bn from 31 December 2013 to £13.7bn.

I am not convinced by management's continued commitment to share buy-backs with a target of £1-2bn for this year.  At a share price that is over 11 times book value, it will further distort the financing of the balance sheet and expose the company to eventual interest rate risk.  I would judge the equity to debt cost differential for Glaxo at about 3% net of tax (GSK does have a much lower tax rate than many other large international companies). 

For 2014, management continue to target core EPS growth of 4-8% CER ex-divestments.  They also continue to expect to grow sales at CER and on an ex-divestment basis.  Finally, reflecting management's confidence for the full year, the dividend was increased by 5.6% to 19p.

Thursday, 1 May 2014

Globo prelims

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 announced their preliminary results yesterday with revenue up 55.4% to €71.5m and operating profit up 53.6% to €27.3m, although operating margin down slightly by 44bps to 38.2%.

EPS increased by 42.3% to €0.074 and importantly free cash flow (FCF) was €5.2m up from €1.7m last year.  Net cash increased by €28.6m to €42.8m following net proceeds of €27.3m from a placing and €3.9m of the FCF spent on an acquisition.  Although these FCF amounts are small in comparison to the earnings, the last two years are a substantial improvement on the company's history of burning cash.  Globo will need to continue this trend in a more substantive way, before the share price reflects the true worth of the business; which will also dissuade some traders from taking short positions in the stock on the basis that they believe the business model is unsustainable.

Management commented on the outlook for the business stating that the current year trading has started strongly and they anticipate that as IT budgets from customers start to be deployed and BYOD and mobile app needs increase further, Globo will have the opportunity to deliver another year of excellent growth and market penetration.

At 57p Globo is rated at about 7 times 2014 expected earnings, which does look good value, but the risks still remains until stronger cash flows are generated.

Greggs IMS

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).

Greggs announced a very positive IMS yesterday with a few cautionary comments.  Total sales in the 17 weeks to 26 April 2014 was up 4.0% and own shop like-for-like sales in the first 17 weeks up 3.7%.  Although as they point out that the last year comparatives were weak, it does show a good uplift from last quarter's 2.6% like-for-like growth.   
Management state that input cost inflation has been lower than they have experienced in recent years and so there has been some benefit to margin in the period.  They add that the business remains highly cash-generative and maintains a strong balance sheet position, so I would expect a rising net cash position at the interim stage and the possibility of a return to increasing dividends.  My forecast for the year as a whole is still for the business to be cash neutral see here for my original estimate.
For the period being reported 66 shop refurbishments were completed (200 targeted for the year), they opened 20 new shops and closed 28. Also a number of freehold properties were disposed of in the period for a profit of £1.4m.
The cautionary part of the announcement states that they expect the second half to be more challenging, as they come up against relatively stronger sales comparables and likely cost inflation. Although overall management expect to deliver satisfactory financial results for the year.
I'm pleased with progress at Greggs, but I wonder if the share price at 551p has got a little ahead of itself.

Royal Dutch Shell 1st quarter results

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

Shell announced first quarter results yesterday and they seem to have been well received by the market.  Revenue at $109.7bn was similar to the fourth quarter and 2.8% below last year.  Earnings were $4.5bn compared to $8.2bn last year, although excluding exceptional items earnings were $7.3bn down 2.7%.  Basic EPS was down 44% to $0.71, but excluding those exceptional items again adjusted EPS was down 1.7% to $1.17.

The largest item included in exceptional items of $2.9bn during the quarter was $2.3bn for impairments to refineries in Asia and Europe.

Oil production was down 10% and gas production down 8%.  This compares to production at Exxon in their first quarter (announced today) of oil down 2.1% and gas down 9.1%. 

Capital expenditure was $7.4bn approximately 6% lower than last year.  Exxon managed a 28% reduction in their capital expenditure.

With operating cash flow up almost 20% to $13.7bn and the reduced capital expenditure, free cash flow at $6.3bn showed a substantial improvement of 75.6% compared to last year.  This and the confirmation that $15bn of divestments are still planned for 2014-15, was the reason for the positive market reaction.

It is important that capital expenditure is tightly controlled as promised, last year Shell spent in excess $40bn consuming all of the operating cash flow, despite starting the year in relatively modest fashion.

A 4.4% increase in the first quarter dividend was declared taking it to $0.47.