Friday, 29 August 2014

Restaurant Group interims


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 issued their interim results today and continue what has been an excellent income and growth story for investors.  Total revenue increased 10% to £308m with like-for-like sales increasing by 2.5% and operating profit margins up by 22bps to 11.32%.  Although this does compare with a stronger like-for-like growth at the 19 week point of 4%, the lower growth for the six months was due to a negative June as a result of the impact of the football World Cup on takings; like-for-like sales for the 34 weeks to 24 August 2014 were 3.5%
Excluding non-trading items EPS rose 14.7% to 12.78p and reported EPS rose 45.5% to 16.21p, reflecting the £6.9m profit made on the disposal of part of its interest in The Living Ventures group by selling the Gusto business.  RTN  distributed the net proceeds of this disposal by way of a special dividend of 3.45p in July. 
The interim dividend was increased by a very substantial 16% to 6.1p and is still covered 2.1x by trading earnings.
Free cash flow (FCF) at £11.0m was up from last year's £10.8m and with no dividend payments (both final, interim and special are paid in the second half), £7m from the Gusto sale and a £5.3m purchase of shares for the employee trust, net debt declined by £12.6m to £32.5m, representing gearing of just 13%.  Average FCF performance over the last 3 years has returned just over 12% on average capital employed, above its 7.7% weighted average cost of capital (WACC).
Expansion of the estate continues with 17 new sites opened in the first half and they plan 38 to 43 new sites for the full year, part of management's plan to double in size over the next eight to ten years.
The Chairman stated that "...With an improving economic outlook, lower inflation and higher levels of employment the prospects for TRG continue to look good.  I am confident that the Group is well placed to deliver another year of profitable progress..."
Andrew Page the outgoing CEO hands the company over in robust health to Danny Breithaupt on 1 September, in marked contrast to the situation at Tesco. 

Tesco trading satement

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.

Pan African Resources trading statement

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 interims

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 interim results today and declared that revenue for the continuing businesses in the period was £780.9m down 11% and 5% at constant exchange rates.
Adjusted profit before tax, which excludes discontinued operations, exceptional items and amortization, was £109.9m a rise of 2% and 10% at constant exchange rates.  Reported earnings for the period for continuing operations was £50.3m an increase of 6.8%.  Adjusted EPS, excluding discontinued operations, exceptional items, amortisation and using the number of shares in issue at 30 June 2014 for both years, was 7.3p, an increase of 2.8% and 11% at constant currency.  Reported EPS on a continuing basis was 4.4p an increase of 22.2%.
Melrose's profits have been severely affected by weak currencies for Elster compared to last year.  Using constant exchange rates improves the 1.5% growth (before central costs) to 9.4% showing the underlying performance in this part of the business:
Click on table to enlarge
An interim dividend of 2.8p was declared representing an increase of just 1.8%, that probably reflects their caution for the year when they state in their outlook that "...Economic recovery in Asia, the USA and the UK, while somewhat underwhelming by historical standards, nevertheless looks strong compared with continental Europe and some other parts of the world.  The uneven nature of this recovery has made it unusual and harder to forecast..." 
Free cash flow (FCF) at £29.3m was below the £63.3m from last year, but that did include operating cash flows of £25.3m from discontinued operations.  After returning capital of £595.3m and paying a final dividend of £53.6m, net debt was increased from £140.8m at the end of the year to £750.6m, representing gearing of 50%.  Debt represented a reasonably comfortable 2.4x their trailing twelve months EBITDA (their bank covenant requirement is 3.25x)
This is a reasonable result for the business, but as we have seen in other international companies, struggling with foreign currency headwinds due to the strength of sterling.  Melrose over the past three years has suffered from weak FCF, being below their weighted average cost of capital; they have mitigated this by selling businesses at very good multiples to provide shareholders with very good total returns in excess of 20% pa compound over the last 4 years.  So the weak FCF is probably a feature of the improve (reorganisation costs) and invest (high capital expenditure) to sell.

Tuesday, 19 August 2014

Bhp Billiton finals

BHP Billiton

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 their full year results today and although production was up 9% (commented on here), weaker commodity prices meant sales increased by just 1.9% to $67.2bn.
Reported EBIT was up 11.5% to $23.4bn, this reflected $0.5bn of gains on asset sales compared to net impairment charges after gains on asset sales last year of $1.9bn, consequently underlying EBIT was flat.
EPS was up 23.3% to $2.59, reflecting exceptional gains this year of $0.5bn compared to exceptional charges of $1.9bn last year, lower interest costs of $0.1bn and a reduced tax charge of 31.5% compared to 35% last year. 
A final dividend of 62c was declared to make a total dividend of $1.21 for the year an increase of 4.3% on last year.  Sterling holders at current exchange rates ($1.67=£) are likely to see a decline of ~4.5% to about 72.36p from (35.23p interim + 37.13p est. final) 75.82p last year.  The dividend is covered 2.1x by earnings and 1.4x by free cash flow (FCF).
FCF was improved this year to $8.9bn from an outflow last year of -$2.8bn as operating cash flow (OCF) was improved by $5.2bn and capital expenditure reduced by $6.5bn.  BLT has much to do here as currently their 3 year average FCF return on their 3 year average capital employed is below their working average cost of capital (WACC) by over 7.5%.  I have used three years to smooth out timing issues on working capital. 
After a dividend bill of $6.6bn and other net sundry payments from the FCF, net debt was reduced by $1.7bn to $25.8bn, this represented gearing of 33% and was just 0.8x EBITDA with the OCF at a comfortable 98% of net debt.  Interest was covered 20x.
BLT also announced plans for the demerger of its aluminium, coal (energy), manganese, nickel and silver assets.  This newco., of which current shareholders will receive 100 per cent of the shares through a pro-rata distribution, will only be listed in Australia and South Africa.  Many UK private and institutional shareholders, will likely choose/have to dispose of this holding, incurring overseas transaction costs, unless special provisions are put in place.
As I write the share price is down over 4% to 1980p, there would have been some profit taking as the SP had moved up lately from the lows of 1850p in mid June, but there will be some unhappiness with the process of the demerger, as clearly many UK shareholders would have no interest in an Aussie listed stock; far better would have been an IPO with proceeds distributed by way of a return of capital. 
On the outlook for BLT management have stated "...We 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...." and "...With a simpler portfolio, we are targeting at least another US$3.5bn of productivity-related gains by the end of the 2017 financial year..."
I purchased BLT foremost for the yield and portfolio diversification, with an expectation of above inflation dividend increases from an improving FCF and likely asset sales with a return of capital or special dividends from those disposals.  The demerger will involve more cost and effort on my part, but the result may not be too far off what I hoped for (depending on the detail) and sooner, but maybe someone like Glencore will come in for the "to be demerged" assets and offer a good price, making the whole process simpler and possibly more rewarding. 

Sunday, 3 August 2014

IMI interims

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:
  • reinvest for organic growth
  • progressive dividend policy
  • acquisitions to supplement organic growth
  • return excess capital to shareholders

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 half year

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

Royal Dutch Shell announced their half year results last Thursday.  Revenue for the second quarter was $111.2bn down -1.3% and for the six months at $220.9bn fell -2%.
Second quarter 2014 earnings, on a CCS basis, were $5.1bn compared with $2.4bn last year and excluding identified items, mainly for impairments, were $6.1bn compared with $4.6bn last year.
EPS on a CCS basis excluding identified items was $0.97, 32.9% above last year and for the six months period was $2.13 up 10.9%.  On a reported basis for the six months EPS was $1.56 a reduction of -0.6%.
A second quarter dividend of $0.47 has been declared, an increase of 4.4%.
Identified items of $1bn in the quarter included impairments of just over $2bn mainly for their dry gas properties in the US, offset by profits from divestments.  This follows on from $2.9bn of impairments in the first quarter mainly against refineries in Europe and Asia.
Free cash flow for the six months was $0.25bn less than last year at $6.7bn, but divestments netted $7.6bn and so with an outlay for dividends and buy-backs of $5.1bn and investments in JVs of $1.4bn, net debt was reduced to $28.7bn a gearing of 15.5%.
A reasonable performance from Shell, once the almost $5bn of impairments are excluded.  Shame that due to the strength of sterling the dividend increase will likely be a reduction, once the sterling equivalent is announced.
Although the rationale for share buy-backs historically was to off-set dilution of the scrip dividend programme that is now cancelled, management still expects to buy-back $5.4-6.4bn of shares over the next 18 months and, at a P/BV of less than 1.5, it probably makes economic sense.

Saturday, 2 August 2014

Diageo prelims

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

BAE Systems interims

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.