Friday, 29 August 2014
One of the world’s largest retailers. I have a holding in my income portfolio (epic code: TSCO)
Tesco issued a trading update today that confirmed most investors' worst fears, after the recent figures released from Kantar that showed Tesco's sales falling 4% over the last 3 months and their market share falling by 4% to 28.8%. The Board has revised its outlook for the full year and they now expect trading profit for 2014/15 to be in the range of £2.4bn to £2.5bn; market expectations were for £2.8bn and compares to £3.3bn last year. They also stated that trading profit for the six months ending 23 August 2014 is expected to be in the region of £1.1bn.
Then even more bad news - management have guided that they expect to set the interim dividend at 1.16p - a reduction of 75% from last year's interim dividend. As Tesco joins the ranks of a dividend cutter, I will be cutting my losses and reinvesting the proceeds in an alternative stock. This is one rule that I will not break for an income stock - once the difficult decision has been made to cut a pay-out it becomes much easier for directors to revisit this as a course of action in the future.
They also mentioned that Dave Lewis (previously President of the Personal Care Division at Unilever) will now join Tesco a month earlier as Chief Executive on Monday 1 September 2014.
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).
The trading statement from Pan African Resources today may not be as catastrophic as it first read, after the share price initially dived and at one point was down 8.5%, but ended the day up 1.7% to 15p.
The Company advised that it expects its 2014 full year EPS in Sterling terms to be between 42% and 47% lower than last year's 2.63p, so between 1.39p to 1.53p. Current expectations before the announcement had already factored in a 39% decline to 1.60p. This expectation reflected the impact associated with the low grade mining cycle at Evander Mines and only partially the weaker gold price received in sterling terms, that Pan African say has fallen by 19% . PAF's income in GBP has suffered the double hit of a stronger pound and a weaker gold price that is set in US Dollars.
The Board has committed to propose a final dividend not lower than that paid in 2013 in ZAR terms of 0.134c, which equated to 0.8033p at the time, but would be 0.7575p at today’s rate, a yield of 5.1%.
With so much uncertainty in the world, I'm surprised that the gold price, with a rise of only 7% over the past 12 months, has not seen a greater return to favour as a safe haven.
Thursday, 28 August 2014
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).
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Tuesday, 19 August 2014
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).
Sunday, 3 August 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 their interim results on Friday and were yet another international company affected by the strength of Sterling on translation of their results. Revenues were up 3% on an organic basis to £808m, but declined by 2.9% on a reported basis.
Before exceptionals (mainly impairment charges), operating profit was down -7.1% to £135.7m and on a reported basis down -12.8% to £112.6m. Adjusted EPS for the continuing businesses was 34.5p up 10.2% and on a reported basis 29.4p up 6.5%.
The company completed the disposal of its Beverage Dispense and Merchandising divisions on 1 January 2014, realising an exceptional profit of £478m. Following the disposal, the Group returned £620m of cash to shareholders accompanied by a share consolidation of 7 for 8.
Free cash flow was £41.2m for the six months, compared to £95.1m last year. The disposal mentioned above also generated £662.6m of cash and settlement of derivative contracts generated cash of £23.2m; from these amounts and the FCF, £620.3m was returned to shareholders, a one-off payment to the UK pension fund of £53.2m was made and dividends of £60.6m paid. This resulted in an increase in the net debt position from £225.9m at the year end to £231.8m at 30 June.
Management have stated that "...based on this first half performance and an expectation of improved revenue momentum in the second half, the Board has decided to increase the interim dividend by 6.25% to 13.6p..."
In commenting on the longer term prospects management state that "...the opportunities are significant and that is reflected in our ambition to double the Group's 2014 operating profits over the next five years, while retaining our financial discipline..."
Mark Selway the new CEO in addition to his strategic review of the business, has changed the names of the divisions. The former names are shown in parenthesis below. As part of the strategic review the following size growth and share of those markets have been disclosed:
Critical Engineering (Severe Service) - market size £6.7bn, estimated growth 6.4%, share 9.8%
Precision Engineering (Fluid Power) - market size £13.5bn, estimated growth 4.3%, share 5.3%
Hydronic Engineering (Indoor Climate) - market size £2.4bn, estimated growth 5.1%, share 12.8%
To double their operating profits by 2019 will require compound growth of just short of 15% pa. To achieve this will require the company to increase their market share either organically or by acquisition, since their return on sales in most sectors they operate in are amongst the best in the market, leaving little leverage there.
Initially there will be some strain on the operating profit as they intend to progressively increase R&D from ~3% of sales to 4-5% and progressively increase capital expenditure to 2x depreciation (currently ~1.2x).
If we assume that the 15% growth over the next five years comes equally from market growth, increased share by organic means and the remainder by acquisition, then I make the total spend on acquisitions likely to be £0.5bn over the next five years. This can be comfortably achieved within their own resources, since they state they are prepared to accept a net debt/EBITDA ratio of 2x (currently ~0.7x).
IMI operate in thirteen market sub-sectors and are market leader in just two and have a double digit share in just five sub-sectors, so there should be opportunities for market share growth both organically and by acquisition.
Importantly management have stated that their capital allocation priorities are:
IMI at 1445p is not a cheap share at 15x expected 2015 earnings and offering just 2.85% as a prospective yield, but if they achieve their 5 year targets with internal resources, then any price below 1600p might be considered good value.
Royal Dutch Shell a global group of energy and petrochemical companies. I have a holding in my income portfolio (epic code: RDSB)
Saturday, 2 August 2014
Diageo is the world's leading premium drinks business, I have a holding in my income portfolio (epic code: DGE)
Diageo released their preliminary results last Thursday and with economic weakness in emerging markets they declared net sales for the year of £10.3bn which produced organic growth of just 0.4% and with adverse foreign exchange movements, reported sales declined by -9.2%. The third quarter appeared to be the weakest period with a -1.3% organic decline, with Asia Pacific declining the most by -19%.
In China the effects of the government's anti extravagance campaign severely impacted sales, but with such a wide geographic spread there were some bright spots such as India, North America, Latin America and the Caribbean.
In North America Diageo make the point that beer's share of the alcoholic beverage market is declining, while spirit consumption is increasing up from 28% to 32% over the last 10 years - increasing Diageo's available market.
Operating profit before exceptionals was £3,134m a decline of -9.9%, but up 3% on an organic basis; reported operating profit at £2,707m was down -20% as Diageo wrote down £264m in its Shui Jing Fang investment.
Adjusted EPS at 95.5p was -7.4% below last year and reported EPS for the continuing businesses was 92.6p down -5.5%. The final dividend was increased by 9.2% to 32p making 51.7p for the year an increase of 9.1%.
Free cash flow was £1,228m, £208m below last year and is the fourth year of decline. I have commented previously about Diageo's negative cash flow trends here. Net debt increased by £275m to £8.9bn and represented gearing of 130%, debt was high at 2.7x EBITDA and operating cash flow was just 20.2% of net debt, although interest costs are covered 7x.
Not a great set of results, but Diageo is still earning operating margins of over 26%, a ROCE of over 17% against a WACC of 6.4%. Diageo's weakness is in the rate it turns its capital over and its FCF generation, its FCF yield is just 2.8%.
Friday, 1 August 2014
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 announced their interim results yesterday and were in line with expectations. Sales in the first half declined by 10.3% to £7.6bn, with approximately 4.7% of the decline due to foreign exchange translation.
Operating profits declined by 8.4% to £689m and underlying EPS declined by 1.1% to 17.7p. Statutory EPS increased by 7.1% to 13.5p, due to lower finance and corporate tax charges and a 2.1% reduction in the average number of shares due to the buy-back programme. The interim dividend was increased 2.5% to 8.2p.
Free cash flow was negative at -£0.3bn, but was an improvement on the -£1bn from last year. The cash generation was made positive by the receipt of £0.4bn from the sale and leaseback of two properties in Saudi Arabia. The net debt position at the half year was £1.2bn an increase of £0.5bn from the year-end, as payments were made of £0.4bn for dividends and £0.2bn for share buy-backs.
The order backlog was down £3bn from the year-end, but still represented good visibility at £39.7bn. Overall performance by division was:
Electronic Systems Division was in line with expectations. Although margins improved for Cyber & Intelligence, sales were down by 13%, due to US budget pressures. As expected Platform & Services (US) was below last year as the Bradley reset activity almost halved. Platform & Services (UK) was below last year as Typhoon deliveries are heavily weighted to the second half, 12 were delivered in the first half and 30 planned for the second half. Although Platform & Services (International) sales was down 5% on last year, although this was due to foreign currency translation from the Euro and Australian Dollar.
With respect to the outlook for the year management have said that "...Sales are anticipated to be weighted towards the second half of 2014..." and "...excluding the impact of exchange translation, the Group remains on track to deliver earnings in line with our expectations for the full year..."
Guidance from management for the full year (excluding the effects of foreign exchange translation) is for underlying EPS to be 5-10% lower than 2013, which would place it in a range of 37.8p to 39.9p. At today's share price of 426p, expectations would place it on a multiple of between 10.7 to 11.3x with a 4.8% yield - still good value.
Although 2012 saw the first fall in global military expenditure in real terms since 1998, recent events around the world have created a need for more, not less military expenditure. With just the UK and USA achieving NATO targets for defence spending of 2%, there will be pressure for increases as the world becomes less stable. As a strong global supplier, BAE will be a beneficiary of increased defence spending.