Wednesday, 30 July 2014

Greggs interims

Greggs the Bakers

The leading bakery food-on-the-go 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 released their interim results today declaring that sales of £372.8m grew by 3.1% and LFL sales in their own shops grew by 3.2%.

Operating profit excluding exceptional costs and property disposals was up 36.3% at £15.4m, at this level operating margins were 4.1% an increase of 101bps.

EPS excluding exceptional and property disposals was 10.47p a 25.4% increase; reported EPS including the profit on property disposals of £1.4m and exceptional costs of £8.2m was 6.1p compared to 8.5p last year.

The interim dividend was maintained at 6p, which is disappointing that it remains frozen, given the improvement in performance and the company's financial capacity. 

Free cash flow was £9.7m compared to £4.0m last year.  Although following payment of the final dividend of £13.7m net cash was £21.8m, down from £24.6m at the year-end.  It's worth noting that for the full year last year FCF covered the dividend 1.1x.

During the period they opened 26 new shops, this included 14 franchise units and closed 36 shops, this resulted in a total of 1,661 shops, of which 39 are franchise units.  Management mention that almost all of their new shops were opened in locations away from high streets.

Commenting on the outlook for the year they stated that "...Sales growth in July has continued to be strong as we have not experienced the widespread heatwave conditions that depressed sales last year, but this is expected to fall back in the months ahead as we compare with better trading in the remainder of the year..." and "...Input cost inflation has been lower than we expected, driven by ingredients and energy and we expect this to continue through the rest of the year..." so they "... expect to deliver an improved financial result for the year..."

Greggs look to be on track with their changes of developing a simpler and more efficient operations in their supply chain and support areas.  Management state, that they have completed the restructure of their support areas and, are making good progress with plans to consolidate their in-store bakeries into their regional bakery network.  They anticipate that the majority of these in-store bakery transfers will be completed by the end of this year. 

The combined financial benefits from these changes remain on track to deliver savings of £2.5m in 2014 and £6.0m per year from 2015 onwards.

Greggs are also investing in process and systems platforms that will enable them to compete more effectively in the fast-moving food-on-the-go market.  They expect to deliver the first two elements of this programme, relating to workforce management and supplier relationship management, in 2014.  The next phase of this programme will include installing a SAP ERP system, the risks involved in implementing this type of solution should not be under-estimated, as it will touch every part of the organisation.

Although much has been achieved so far and the risks associated with implementing the changes needed in Greggs are reducing as they are successfully progressed, they are still only part of the way through the process, but the strategy looks to be delivering value.

Compass Group IMS

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 issued their third quarter IMS today stating that organic revenue growth for the quarter was 4.0% and 3.9% for the nine months.  In addition the operating profit margin, has increased by 10 bps in the quarter and for the nine months.
Organic revenue growth by territory was:
North America - 3rd quarter +6.5% nine months +6.4%
Europe & Japan -  3rd quarter -1.2% nine months -1.8%
Fast Growing & Emerging - 3rd quarter +6.5% nine months +8.4%
The stand out number here is the decline in growth in the Fast Growing and Emerging markets.  At the interim stage Compass was reporting growth of 9.7%.  They attribute this decline to an acceleration in the slowdown of the Australian offshore and remote sector.
Their overall expectations for the full year remain positive and unchanged, notwithstanding the translation of ongoing movements in foreign currencies.  They have stated that if the current foreign currency spot rates were to continue for the fourth quarter and, the average for this year were applied to last year, then revenues and profits would have declined by 6.9% and 7.3% respectively.
A reasonable update, but with two negative issues to consider - the slow down of the Australian offshore and remote sector and foreign currency headwinds.

Diploma IMS

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 issued their third quarter IMS today stating that overall trading has been consistent with expectations at the half year. 
Group revenues for the nine months were 6% ahead of last year and on an underlying basis, after adjusting for currency effects and acquisitions, increased by 8%.
By sectors underlying growth in sales were:
Life Sciences +8%
Seals +6%
Controls +9% 
Net cash at 30 June 2014 was  ~£10m up from £8m at the half year and after payment of the interim dividend of £6.1m and £2.8m on acquisitions.
Diploma are in a strong financial position with good growth, although like many other international companies, suffering from the strength of Sterling on reported overseas sales.  In addition to the net cash position Diploma have access to a £25m multi-currency revolving facility and an accordion option to increase it to £50m.  Accordion options allow for the increase in facilities on the same terms as existing debt.  Diploma have a good track record on creating value from acquisitions and this facility gives the company some substantial firepower in determining the size of potential targets.

Monday, 28 July 2014

Aberdeen Asset Management IMS

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 issued their third quarter IMS today and Assets under Management declined by 0.6% from 31 March 2014 to 30 June 2014 to £322.5bn.

New business flows for the quarter were affected by the withdrawal by a single client of approximately £4bn of low margin AuM from their Asia Pacific and global equities strategies during the quarter.

Management state that they have continued to win new mandates which will be funded by clients in future periods, with over £2bn of mandates awarded but not funded at 30 June.


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 issued a trading update today on the first half year stating that revenues from continuing operations grew by 45% to €46.5m, slightly ahead of market expectations.
Profit before tax is also expected to be slightly ahead of market expectations and management state that they generated Free Cash Flow, driven by an increased weighting towards GO!Enterprise sales, which have a shorter cash collection cycle.  The net cash position was €46m, a £3.2m increase from the end of last year.

Management updated the market on Globo Technologies SA, the  Greek subsidiary that Globo divested 51% of in December 2012.  The Group has received the third instalment of €775k from the acquiring entity, comprising €500k of principal and €275k in interest due.  This third instalment was received on 30 June 2014 and maintains the schedule of payments which is due for completion in December 2016. To date, the Group has received €2m, out of €11 m, of principal consideration and €783k in interest, in line with the payment schedule.

Despite recent positive trading and cash generation (small but positive) the share price at 51p, remains well below the placing at 71p in October 2013 that raised €28m gross.  The company is rated at about 8x expected earnings this year, which appears good value, but as I stated after their prelims were announced - the risks remain until stronger free cash flow can be generated and the institutions and private investors with short positions are convinced that better profits can be had elsewhere. 

Reckitt Benckiser interims

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 their interims today showing revenue up by by 3% at constant exchange rates (CER) to £4,667m and up 4% to £4,323m, if we exclude the Pharmaceutical Business. 

By territories like-for-like growth was:
ENA (Europe/North America) +2%;
LAPAC (Latin America/Asia/Australia & New Zealand)  +7%;
RUMEA (Russia/Middle East/Africa/Turkey)  +5%;
Food +3%
Pharma -8%
Management stated that there is a modest reduction in the growth rate in India and marked slowing of growth in Thailand and Indonesia that impacted the (LAPAC) Area.

By product groupings like-for-like sales growth (excluding Food and Pharma detailed above) was:

Health +10%

Hygiene +3%

Home 0%

Portfolio -6%

Reported operating profit was £1,059m, an increase of 16% compared to last year and up 30% at CER, this is due to the reduction of exceptional charges from £249m last year to £22m this year.  Excluding theses exceptional costs then operating profit was down -7.1% to £1,081m, although once again if we exclude the effects of foreign currency, adjusted operating profit was up 3% at CER.
Diluted EPS at 111.1p was 22.9% higher, although on an adjusted basis declined by -4.1% to 113.4p.  The interim dividend is held at 60p.
Free cash flow was £729m compared to £893m last year and net debt has increased by £222m to £2,181m producing gearing of 35%.
Management have stated that they remain on track to achieve their full year revenue growth target of 4-5% (ex Pharmaceuticals), they also expect to have continuing operating margin expansion in the second half (ex Pharmaceuticals ).
Commenting on the possible divestment of the Pharmaceutical business, they have concluded that a demerger of the business with a separate listing on the London Stock Exchange is the preferred option for creating value for shareholders.  I am surprised at this choice, but I'm sure management would have sought views from a select group of institutional investors, who would have been made "temporary insiders" for the purpose.  Management expect to conclude this within the next 12 months. 
This is a similar performance to the first quarter and they remain on track to meet their guidance, although like many international companies, they will fall short on a reported basis, due the strength of sterling reducing their overseas earnings.  Due to this and the divestment plans, I would expect a positive response in the share price over the next few days.

I am a little concerned at no increase in the interim dividend, following a reduction in the final dividend for last year of -1.3%.  At the time I wrote: "My only concern is what message management are attempting to communicate, by reducing the final dividend by 1.3% (having increased the interim by 7.1%), so that the full year dividend increase was just 2.2%, a rate of increase not seen for over a decade from Reckitt Benckiser...".  This will need careful monitoring.


Friday, 25 July 2014

Pearson interims


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 interim results today and it is still very much work-in-progress with £43m of restructuring charges.  Sales were up 2% at constant exchange rates to £2.0bn and adjusted operating profit of £73m for continuing operations compared to £96m last year.  There was a reported operating loss of £(37)m compared to an operating profit of £8m last year.
Adjusted EPS was 4.7p down from 9.9p last year, reported EPS was a loss of (3.2)p for continuing businesses compared to a loss of (0.5)p last year. The dividend has been raised by 6.3% to 17p.
There was a free cash outflow in the period of £(345)m compared to an outflow of £370)m last year.  Net debt increased to £2.1bn from £1.5bn at the year-end.
Management reiterated their guidance given earlier in the year - based on 28 February 2014 exchange rates, they still expect to report adjusted EPS of between 62p and 67p in 2014.  Obviously continued Sterling strength especially against the US$ will adversely impact the actual outcome.
Pearson have taken substantial restructuring charges both last year and this - £176m for the whole of last year and they expect to make £50m this year.  They do expect to achieve £60m savings this year, but of course there is the £50m of restructuring costs and £50m of additional investment in digital, services and emerging markets to accelerate growth.  Next year we should see the benefit of these changes and investments come through, with a much smaller level of restructuring costs.  Management also believe that cyclical pressures will begin to ease from 2015 as curriculum change is implemented in the US and UK and US college enrolments stabilise and, in due course, return to growth.
With a 4.7% yield, good dividend growth and expectations of a return to growth in profits and FCF next year - I continue to hold.

Vodafone IMS

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 issued their first quarter IMS today and was much as expected.  Group revenue at £10.2bn was down 4.4% on an organic basis and service revenue down 4.2% at £9.4bn, Europe service revenue declined -7.9% and AMAP grew by 4.7%.  Fastest growing markets appeared to be India at 10.3% and Turkey at 3.7%. 
Capital expenditure of £1.9bn in the quarter nearly doubled year-on-year as they started their two-year £19bn investment programme.
Management have stated that "...Trading in the first quarter was consistent with management's expectation underlying the outlook statement for the 2015 financial year1. The Group therefore confirms its outlook for the 2015 financial year..."  Management's guidance is for 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. 

Thursday, 24 July 2014

Unilever half-year results

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 their interim results today that showed underlying sales growth 3.7% with volume growth of 1.9% and price up 1.7%; similar to the first quarter emerging markets were up 6.6%.
Turnover on a reported basis decreased by 5.5% to €24.1bn with the currency effect reducing sales by 8.5%.
Core operating margin was stable at 14.0% using current exchange rates, although up 30bps at constant exchange rates.  Core EPS was up 2% to €0.78; reported EPS (including the profit on disposal of the Ragu and Bertolli pasta sauces brands in the United States) was up 16.9% to €0.97 and up 29% in constant currency.
An interim dividend of €0.285 (22.53p) has been proposed, making €0.57 (45.91p) for the half-year an increase of 5.9%, but a decline of -0.3% in Sterling due to the strength of the Pound.
Free cash flow was weaker than last year, with a €0.5bn decline to €0.8bn.  Net debt increased by €0.8bn to €10bn to a gearing level of 72%.
The much highlighted lower growth in emerging markets continues, but as in the first quarter Latin America was still growing strongly at 9.5%.  The chart below shows the emerging market trend in half-year growth over the past four years:
Click on chart to enlarge

Underlying sales growth by major geographic areas were:

Asia/AMET/RUB +6.1% 

The Americas +4.3%

Europe -0.4%
Considerable pricing pressure was the cause of the decline in Europe along with weak trading in Central Europe; the other two geographic areas show an improvement on the first quarter, although The Americas was bolstered by Latin America's strong growth.

Underlying sales growth by product categories were:

Personal Care +4.5%

Foods -0.5%

Home Care +6.8%

Refreshment +5.1%

Despite the headwinds of lower growth from emerging markets and weaker operating currencies compared to the Euro, management remain positive stating that "...We remain focused on achieving another year of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow..."

In the short-term UK investors will suffer two hits - some softening in the share price and reduced dividends due to the strength of Sterling.  Still a strong hold though, due to its wide economic moat generated by its strong brand portfolio, size and cost advantages that will provide superior returns to investors over the long-term.

GlaxoSmithKline half-year


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 their interim results yesterday and much like their first quarter results (see here) made uncomfortable reading.  Sales for the half-year were down 3% in constant currency and 12% reported to £11.2bn, with the US showing a 10% decline mainly due to Seretide/Advair that was down 24% in that territory.
Core operating profit at £2.9bn was down 7% in constant currency and 22% in actual currency, reported operating profit was £2.2bn down 10% in constant currency and 27% as reported with the US proving the greatest drag on profits
Core EPS was 40.1p down 5% in constant currency and 22% in actual currency with reported EPS at 27.1p down 33.7%.
The Board has declared a second interim dividend of 19p making 38p for the half year, an increase of 5.6%.
Free cash flow (FCF) was down substantially at £0.7bn from £2.0bn last year; in addition to the lower operating performance, the adverse foreign exchange environment from a strong Sterling currency would have had an effect.  The company reflecting on the underlying weak FCF and the sustained strength of Sterling state that " is likely that share repurchases over the balance of 2014 will be immaterial..."  Well thank goodness for that, as I commented here "...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)..." 
Although much is being done at Glaxo to realign the business, the progress on newly launched products is insufficient to offset pricing and contracting pressures in the US and generic competition to Seretide/Advair and Lovaza, that has hit the company harder than expected.  It was also disappointing to see Consumer Healthcare down 2%, mainly due to supply issues that are now beginning to improve.
The recent transaction with Novartis should reshape the Group and strengthen its position in the long-term growth businesses of Vaccines and Consumer Healthcare.  Management state that "...these businesses will represent around half of Group revenues over the coming years and are expected to be capable of generating mid-single digit sales growth on a more consistent basis..."
For this year management have reduced their guidance from 4-8% growth in core EPS (CER ex-divestments), to broadly similar to last year.  The expected dividend still looks safe at those levels, but there will be further pain on the Seretide/Advair and Lovaza front and it will be a year or two before their substantial pipeline compensates.  Within two years though Glaxo should be a more balanced business not reliant on one or two block-buster drugs, with Vaccines and Consumer Healthcare representing ~50% rather than ~33% today and a broader Respiratory offering replacing the unbalanced ~70%+ contribution from Seretide/Advair.

Paypoint IMS

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 issued their first quarter IMS yesterday stating that overall transactions processed for the quarter were 189.3m, up 5% and revenues of £53m were up 4% on last year.
UK and Irish bill and general transactions were down 4% on last year due to lower gas consumption. Retail services transactions were up 29% on last year, but mobile top-ups continue to decrease as a result of the decline in the prepaid mobile sector, although other top-ups are growing. UK and Irish retail sites at 30 June numbered 27,705 and were up 463 since the financial year end.
In Romania, profitable growth continues and the company has processed 12.3m bill payments in the quarter, up 65% on last year. 
Collect+ volumes increased by 43% to over 4.0m transactions in the period, but costs have increased and there has been a small decline in Collect+ sites by 67 to 5,515.
Mobile and Online transactions increased by 14% to 36.1m with mobile transactions showing the biggest increase up 45% and online transactions up 5%.
Net cash at 30 June was £34m, compared to £35m at 31 March 2014, but of course the £16m final dividend is due today.
Management mention that they have increased development, marketing and IT spend in the first half, the benefits of which are expected in the second half of the year and therefore, profit growth will be lower than net revenue growth in the first half.
So a few negative events to consider here - Collect+ costs increasing and a reduction in sites and reduced profit growth for the Group at the half-year, due to increased costs.
Alongside a few positive events - Romanian profitable growth, substantial volume growth in Collect+ and Mobile transactions.

Bhp Billiton 12 months operations review

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 yesterday reported a strong production performance for their full year with a 9% increase in Group output and annual records achieved across 12 operations and four commodities.
Western Australia Iron Ore achieved a fourteenth consecutive annual production record as volumes increased to 225 Mt on a 100% basis, significantly exceeding initial full-year guidance.  Management now expect production of 245 Mt on a 100% basis from the Pilbara in the 2015 financial year.  Iron ore production was up 20% on the year, but average prices declined 6%, expectations for the current year is for an 11% increase in production.
Metallurgical coal production of 45 Mt exceeded full-year guidance as Queensland Coal achieved record production and sales volumes.  Metallurgical coal production was up 20% on the year, but average prices declined 20% for hard coking and 14% for weak coking, expectations for the current year is for a 4% increase in production. 
Copper production increased to 1.7 Mt as an improvement in mill throughput and concentrator utilisation offset grade decline at a number of operations.  Copper production was up 2% on the year, but average prices declined 5%, expectations for the current year is for a 5% increase in production.
Petroleum production increased to a record 246 MMboe with an 18% increase in liquids volumes underpinned by significant growth at Onshore US and Atlantis.  Petroleum production was up 4% on the year, but average oil prices declined 4% although gas prices were buoyant up 16% (US 25%), expectations for the current year is for a 5% increase in production. 
Management say they expect to maintain strong momentum and remain on track to generate Group production growth of 16% over the two years to the end of the 2015 financial year.
Today it was reported in the WSJ that BHP Billiton and Anglo American are in talks to sell their jointly-owned portfolio of manganese assets in South Africa and Australia.  The assets under discussion are reported to include two mines in South Africa, one in Australia, and processing plants in both countries.  BLT owns 60% and AAL 40% of the operations.

Wednesday, 23 July 2014

Synergy Health IMS


Delivers a range of specialist outsourced services to healthcare providers and other clients concerned with health management. Such as hospital sterilisation services; applied sterilisation technologies for single-use medical devices; reusable surgical solutions for daily delivery of sterile reusable gowns and towels; clinical pathology, toxicology and microbiological services; chemical and microbiological analysis; linen management services for healthcare facilities and product solutions designed for infection prevention and control, patient hygiene, surgical procedures and wound care.  I have a holding in my growth portfolio (epic code: SYR)

Synergy issued their first quarter IMS today and, like many companies that have a large proportion of their business overseas (in SYR's case ~60%), are suffering from currency headwinds.  Underlying sales, excluding currency effects, was in line with the Board's expectations with revenue at £99.1m, 2.6% above last year.  Reported revenue declined by 1.1% to £95.6m.

Applied Sterilisation Technologies had a very good quarter and showed underlying growth of +13.6%, despite a fire in June in their Malaysian gamma facility.  Hospital Sterilisation Services declined by -1.3% and Healthcare Solutions declined by -4.2%.

Reported operating margin declined by 0.2% (0.1% on an underlying basis) as a result of currency effects and increased investment in research & development.  The company had highlighted the likely reduction in operating margins at the time of their prelims, commented on here. 

Management's outlook for the year remains positive due to progress with new contracts and sentiment in their core service lines and markets, although they are facing obvious currency headwinds.

At the time of the prelims I stated "...I have held SYR for 9 years now and they have been a good growth stock, with their share price over that time growing by over 14% compound per annum.  Today at 1311p they look fully priced at 16.8x this year's forecast EPS of 77.9p.  Those forecasts are for 10.4% growth for this year and just 5.8% to 82.4p in 2016.  There may be better prospects elsewhere, so I may part company with my longest held growth stock..."  I still hold the stock, but since then the share price has moved up to 1360p and the consensus forecast (probably due to the effects of currency headwinds) has declined to 76.7p and so on a P/E of 17.7 I may look again at either reducing my holding or exiting completely.

Monday, 21 July 2014

Tesco CEO appointment

One of the world’s largest retailers.  I have a holding in my income portfolio (epic code: TSCO)

Well I guess it was just a matter of time - the board of Tesco have made the decision to replace Philip Clarke, taking the view that insufficient progress is being made.

He is to be replaced by Dave Lewis who is President of the Personal Care Division at Unilever.  Patrick Cescau one of the non-executives on the Tesco board will know Lewis well, having been CEO of Unilever from 2005 to 2008.

On trading management have stated that "...sales and trading profit in the first half of the year are somewhat below expectations..."

Dialight interims


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 their interim results today, highlighting (pardon the pun) that Group revenue had increased 18% and 25% at constant currency to £70.9m.
This was due to the continuing high level of growth in their lighting division, increasing sales by 46.8% to £43m and now represent 61% of the Group.  Signals sales fell 9.4% to £18.3m and Components sales declined 7.7% to £9.6m. 
Group underlying operating profit increased 18% and 26% at constant currency to £6.5m.  Lighting contributed £7.1m (£4.4m last year), Signals £1.4m (£1.6m LY) and Components -£0.4m (£1.0m LY), with unallocated overheads -£1.6m (-£1.5m LY).   
Underlying EPS increased 22% to 14.2p and an interim dividend of 5.2p was proposed, an increase of 6.1%.  The non-underlying operating costs relating to employee severance and restructuring were £1.1m. 
Free cash flow was -£1.1m compared to -£0.8m last year, so after dividend payments of £3.1m net cash was down £4.3m to £2.8m.
This is a good result from Dialight, although it is disappointing that the Signals division had not flattened out and shows both a decline compared to last year's interims and the second half of last year (-15.3%).  They look on track to achieve market consensus of 38.8p and management have said "...the Board expects to drive strong Lighting growth for 2014 and the years to come. This, combined with a stabilisation of the Signals business leads the Board to expect a return to earnings growth in 2014..."

Thursday, 17 July 2014

Key announcements 11-16 July

During the period I was away there were a few announcements for shares that I hold:

API Logo The company issued a statement at its AGM on 16 July, the essence of which is that management's expectations for the current financial year remain consistent with what was indicated when full year results were announced on June 4th 2014.

They stated that Laminates and Foils Europe are trading well and Holographics is on track to at least hold the breakeven performance established in the final quarter of last year. For Foils Americas - it has continued to experience reduced demand from the metallic pigment sector, exacerbated by destocking of the supply chain. Volumes are expected to start to recover in the second half and action has already been taken to re-align operating costs.

Overall they expect progression in results compared to last financial year.

The company also announced that Chris Smith their CFO will be leaving the company at the end of the year.  He is joining McBride (MCB) as CFO a £175m market cap. private label contractor for household and personal care products.


A very strong IMS from Telecom Plus on the 15 July, stating that customer numbers for the period rose by 16,739, representing a jump of 25% on the increase last year and their customer base now stands at over 547,000, an increase of 15.4% over the last 12 months.
The number of services being provided grew by 56,574 in the quarter to 1,963,734, making it their 12th consecutive quarter in which they have achieved net growth of more than 50,000 services.
Management expect profits for the first half to be significantly ahead of the corresponding figures for last year and, they remain comfortable with the guidance they provided in May that profits for the full year will increase by almost 50% to £63m.
Further weakness at ICAP as their IMS released on 16 July stated that Group revenue for the quarter was 14% behind the same period last year on a constant currency basis and19% below on a reported basis. 
They also stated that the cost savings programme remains on track to deliver the annualised target of at least £60m for the current year. Since announcing their full year results in mid-May, over £28m of annualised cost savings have been identified partly through a reduction in broker headcount. These savings are in addition to the £125m of cost savings delivered over the past three years.

Tuesday, 8 July 2014

Diageo and its cash flow

 Diageo is the world's leading premium drinks business, I have a holding in my income portfolio (epic code: DGE)

Diageo has an outstanding collection of alcohol brands and earnings and valuation to match, but if one had to be critical of Diageo, it would be on the deterioration of their cash generation over the past few years.  If you take the view that the value of a business is the discounted value of all future free cash flows (FCF) - then it matters, or even if you are sceptical of any management’s EPS numbers – then it matters.

One year of operating cash flow (OCF) or FCF on its own is less informative, but an accumulation over the years or a trend is informative.

DGE’s last four years of earnings, accumulation of those earnings (ACC) and the last twelve months (LTM) show a positive trend:

2010 - £1,629m

2011 - £1,900m

2012 - £1,942m

2013 - £2,485m

ACC - £7,956m

LTM - £2,546

Although FCF shows a different trend and accumulation:

2010 - £2,023m

2011 - £1,763m

2012 - £1,609m

2013 - £1,405m

ACC - £6,800m

LTM - £939m

Part of the FCF decline has been due to increase in capital expenditure, up from £374m in 2010 to £643m in 2013, but OCF has also declined from £2,396m in 2010 to £2,048m in 2013.  Part of the reason has been the requirement for DGE to hold higher levels of working capital.  For example Inventory has increased from £3,281m in 2010 to £4,222m in 2013 representing an increase from 26.1% of sales to 27.3% and, over the same period, receivables have increased from £2,008m to £2,484m representing an increase from 15.5% of sales to 16.0%.

 Over the last four years DGE has returned 62% of its FCF to shareholders by the way of dividends, this looks to be a very comfortable ratio, but the trend is more concerning as the distribution has deteriorated each year from 47% in 2010 to 85% in 2013 and 131% for the LTM.  Here I have used the declared dividend in each year.

On a FCF valuation basis DGE’s SP is 51x its LTM FCF, the median for the FTSE All Share is 20x, but then companies such as DGE will be highly valued at times, due to the expected future FCF from its brands.  So the market must be assuming that the trend of the last four and a half years will be reversed, or it has become obsessed with the EPS trend and is ignoring the cash that is being generated.