Friday, 30 January 2015

Royal Dutch Shell finals

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 full year results yesterday.  Revenue for the year was $421.1bn down 6.7%, on production output for oil & gas that was down 4%. 
Earnings on a CCS basis were £19.0bn an increase of 13.7% and excluding identified items (mainly restructuring costs, asset impairments and re-pricing derivatives) were $22.6bn up 15.8% from last year. EPS on a CCS basis excluding identified items was $3.57, 15.1% above last year and on a reported basis, EPS was $2.38 a reduction of -8.5%.
Free cash flow improved over last year's $0.8bn outflow to $11.9bn.  FCF though was not quite sufficient to cover the dividends and share buy-backs of $12.9bn, so the $14bn for the sale of assets and JV interests (well timed before the oil price decline), mainly went towards that and reducing net debt by $10.9bn to $23.9bn.  Gearing was a very conservative 13.9% and just 0.4x EBITDA, operating cash flow was a substantial 183% of net debt.  Shell have always run with a conservatively financed balance sheet and this will, during what may be a prolonged period of an oil price around $50, support the business. 
A final dividend of $0.47 was declared making $1.88 for the year - an increase of 4.4%. management 
stated that they expect to also pay a first quarter dividend of $0.47.
Management in a separate statement said that they are deferring spending in many areas, exiting some projects, and driving down purchase costs.  They expect this to result in a reduction of capital expenditure for 2015-17 of over $15bn.

Shell's return on capital employed is just under 15% and with a weighted average cost of capital of 10% there is little margin of safety.

The share price was down to 2104.5p today and if the dividend remains at the current level, on a prospective yield of 6% and assuming an EPS of $3 for 2015 on a prospective P/E of 10.5.  Good value if the oil price recovers over the next 24 months, before pressure is put on the sustainability of the level of dividend.

Thursday, 29 January 2015

Diageo interims

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

Diageo released their interim results today and reported that sales were down by 0.5% to £5,900m, although at constant currency and excluding acquisitions the decline was just 0.1%.
Reported gross margins were 59.0% compared to 63.2% last year, although if you strip out acquisitions and the foreign currency effect they were similar to last year at 63.1%.
Adjusted operating profit (excluding exceptionals, acquisitions and the effect of foreign currency) was £2,073m marginally higher than the £2,060m last year; reported operating profit was £2,040m a decrease of 18.2% from last year.
By territory sales and operating profits (not incl. corporate) were:
Click on table to enlarge

The worst performing area was Latin America and Caribbean with Venezuela the worst performing country in that territory; due to import restrictions and high inflation, reported Venezuelan sales declined 79%.
Reported EPS was 52.2p -22.3% below last year, mainly the effect of foreign currency headwinds.
Free cash flow (FCF) saw a welcome improvement to £723m from £327m last year, mainly due to increasing trade payables, which looks like early implementation of their intent to increase payment terms from 60 days to 90 days for their suppliers.  This makes the trailing twelve months £1.6bn comparable to the FCF in 2012, still a way to go (DGE should be generating closer to £2bn), but a step in the right direction.
An interim dividend of 21.5p has been declared - an increase of 9.6%.  Management stated that they have a target of 1.8 to 2.2x cover and, since the cover was below the low end of the range last year and bearing in mind the foreign exchange headwinds, they may review the level of dividend for the final, so that they meet at least 1.8x cover.  If they meet the market's expectations for EPS of 95p, that would mean a reduction in the final dividend of -2.2% giving 52.8p for the year an increase of 2.1%. 
Commenting on the outlook Menezes said "...We have already taken action to improve the performance of those brands and markets that have not performed as well as we would expect.  This contributed to our stronger second quarter performance and I expect to maintain this momentum through the year..."
The next report from Diageo will be the 9 month IMS, which will be their last IMS, as they have chosen to implement the change in reporting requirements declared by the FCA.  So after March there will be just interims and prelims.

A reasonable IMS, with some good news on the cash flow.  Any substantial improvement in earnings though will not occur until its most profitable territory North America improves, having slid from 5% organic growth in Qtr1 2014 almost steadily quarter by quarter to a -2% decline this half year (NA. sales grew at 0.1% for the first quarter of this half year).  The shares finished the day up by 3.1% to 2022p

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 released their third quarter IMS today declaring that transactions processed for the quarter were 216.9m, up 5.5% and revenues of £58 million were up 2% on last year. 
UK and Irish bill and general transactions were up 1% on last year. 
Retail services transactions (ATMs, debit/credit cards, parcels, money transfer and mobile phone SIM cards) up 29% on last year. 
Mobile top-ups continued to decrease as the prepaid mobile sector declined.  
The number of UK & Irish retail sites at 31 December numbered 28,292, up by 295 since the half year end. 
Romania, continued with its profitable growth and had 9,024 sites an increase of 268 in the quarter. 
Collect+ ( the JV with Yodel) saw volumes increase by 37% to over 5.8m transactions and the network increased by 205 sites to 5,822 in the quarter.
Mobile and Online transactions increased by 9% to 36.5m in the period, although net revenues in the quarter were lower than last year.
Net cash at 31 December was £28m, after payment of the interim dividend of £8.4m in the period, compared to £25m at 30 September 2014.
Of some concern the company stated that HMRC had issued a ruling, that is effective  from 1 March 2015, that renders some services partially exempt for VAT; which means that on related costs the VAT would be irrecoverable.  The ruling would cost the company between £1m and £2m .

Commenting on the outlook for the year chief executive Taylor said: "We expect to deliver results for the full year to March 2015 within the range of market expectations..."
Although outside of their control, it was disappointing news on the VAT ruling, but despite that, they still expect to be within the range of analysts' estimates, which I make 55.4p to 57.5p EPS.  Even at the lower part of this range it would still give adequate cover to an expected 38p dividend, a yield of 4.5% on today's reduced price of 837 (down 4.1%).  Reasonable value for a highly cash generative business paying out a growing dividend, assuming you can stomach the continual drag, on about a third of their revenues, from the mobile top-ups business.

Friday, 23 January 2015

API Group offer

API Logo

API Group PLC a global supplier of foils, films and laminates.  I have a holding in my growth portfolio (epic code: API).

With API's share price falling to 10x this year's expected earnings at 47p, following disappointing interims, it is no great surprise that the company has received an approach.

Cedar 2015 Limited, an indirect subsidiary of Steel Partners Holdings L.P. (who already hold 32.3% of API), announces its intention to make an offer to acquire API at 60p per share.  The offer values the equity at approximately £46m.

Interesting approach, since back in February 2012 there was pressure from Steel and Wynnefield (who hold 29.7%) for the directors to initiate a sale process by inviting tenders.  A year later, it was announced that indicative bids were below 90p per share and all three activist shareholders (including Chrystal Amber who own 11%) took the view that an offer at that level would not reflect the value of the company.
The directors of API have said that there have been no discussions to date relating to the Offer between Cedar and the API Board, which probably implies that Cedar have lost faith in the management, or disagree with the strategic direction of the business and the normal channels of communication have broken down . The API Board have said they will "...carefully consider its position and a further announcement will be made in due course...".  This may be management speak for taking the time to seek a "white knight" who may be prepared to pay a bigger premium.  At 9.2x expected 2016 earnings 60p is not a "killer" offer. 

Cedar has indicated that it has letters of intent or irrevocable undertakings for 62% of the issued share capital.  Cedar's own shares (32.3%) and the irrevocable undertaking from Wynnefield (15.2%) are 46.5%, as Wynnefield have only signed a letter of intent for their balance of 14.5%, which leaves one with the impression that they are both trying to flush out a higher offer. 

Pennant trading update


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

Pennant released a post year-end update on Thursday stating that underlying pre-tax profits for the group are expected to be in line with market expectations on revenues slightly below expectations.  So similar to the interim results discussed here.
The reported profit after tax though is expected to be significantly ahead of current market expectations. This is due to claims in respect of R&D Expenditure for the periods ending 31 December 2012 and 31 December 2013. These claims have resulted in a cash refund of approximately £0.65m and an increase in the allowable tax losses carried forward within the Group to £0.83m.  Management expect there to be no tax charge in 2014.
Management have also taken the decision to restate tangible fixed assets to market value, this will result in an uplift of approximately £1.1m in the value of the Group's net assets at the year-end.
Whilst the tax credits are welcome, it would be good to see the company return to growth on the top line.

Pearson IMS


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 released their post year IMS on Wednesday and said that they expect to report 2014 results in line with the guidance they set out at the beginning of 2014 of EPS between 62p to 67p.  They expect to be at the top end of that guidance with adjusted operating profit and adjusted EPS expected to be approximately £720m and 66p, respectively.  

Their guidance range for 2015 is adjusted EPS of between 75p to 80p, a growth range of 13.6% to 21.2% on an historic P/E of 20.

Preliminary results will be announced on 27 February 2015. 

Bhp Billiton half-year operational review

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 updated the market on Wednesday on half-year production.  They stated that Group production increased by 9% during the period and production guidance remains unchanged and are on track to deliver Group production growth of 16% over the two years to the end of the 2015 financial year.

By major resources:

Metallurgical coal production increased by 21% to 26 Mt

Iron Ore production increased by 16% to a record of 113 Mt.

Petroleum production increased by 9% to a record 131 MMboe

Copper production decreased by -2% to 813 kt.

For the other resources, that will form a planned demerged company sometime this year, had the following changes to production: energy coal -3%; alumina 1%; aluminium -16%; manganese ores +7%; manganese alloys +23% and Nickel -11%.

More critically were the declines in prices for the major resources compared to last year:

Metallurgical coal -23%

Iron Ore -38%

Petroleum -17% (oil)

Copper -11%

To help mitigate these price decreases, management are reducing costs and improving both operating and capital productivity across the Group faster than they originally planned and, in Petroleum, they will reduce the number of rigs they operate in their onshore US business by approximately 40% by the end of June.

Not unexpectedly, this is the worst performing share in my income portfolio over the past 12 months, but still remains a core holding (5% of my income portfolio), for its exposure to basic materials and its record of paying an increasing dividend.  I am expecting a 30% reduction in earnings this year, but that will still leave the expected dividend covered and with the planned reduction in capital expenditure may also be covered by free cash flow.

Diploma trading update

Diploma PLC

An international group of businesses supplying specialised technical products and services. They operate globally in three distinct sectors - Life Sciences; Seals and Controls. I have a holding in my growth portfolio (epic code: DPLM). 

Diploma released a trading update on Wednesday announcing that group revenues in the first quarter to 31 December 2014 were 14% ahead of last year.

The majority of this growth (12%) was due to businesses acquired during the past year.  Eliminating those businesses saw like-for-like revenues at constant currencies increase by 4%, although these revenues were reduced by 2% when the results of the overseas businesses were translated into UK sterling.

Acquisition payments and debt assumed totaled £13.2m in the quarter, so with net cash funds at 31 December 2014 expected to be ~ £14m, compared with £21.3m at 30 September 2014, approximately £5.9m of free cash flow must have been generated.  Free cash flow for the whole of last year was £39.6m and for the first quarter £5m.

Thursday, 22 January 2015

Unilever Final

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 reported their results for last year on Tuesday and given the economic backdrop were generally good.  Underlying sales growth in the fourth quarter was the same as the third quarter at 2.1%, with volume declining -0.4% and price up 2.5%.  Full year sales were €48.4bn a reported decline of -2.7%, although underlying growth (using constant exchange rates and excluding acquisitions and disposals) for the year was 2.9%, with volume & price contributing 1.0% and 1.9% respectively.
Core operating margin was up 40bps to 14.5% at current exchange rates; reported operating profit was up 6.2% to £7,980m and covered interest 16.7x. 
By category the results were:
Click on chart to enlarge
Although there was double digit growth in Indonesia, India, Turkey and the Philippines, emerging markets growth generally continued the trend of much lower increases:
EPS was up 7.8% to €1.79 and core EPS increased 1.9% (11% at constant exchange rates) to €1.61.
Free cash flow (FCF) was below last year's €3.9bn at €3.1bn, due to €0.8bn payments on tax for disposals.  Net debt increased by €1.3bn to €9.9bn, due mainly to paying out of FCF €3.2bn in dividends and €0.9bn for the Estate shares.  Gearing has increased to 72.5%, the result of the increasing debt and a €0.6bn reduction in equity.  This reduction in equity (or net book value) was primarily caused by dividends, pension deficit increases and the effect of buying out the Estate shares and other shares, exceeding the profit earned in the year.  Net debt is 1.1x EBITDA and operating cash flow is 52% of net debt.
A dividend of €0.285 (a Sterling equivalent of 21.77p) was declared for the quarter, making €1.14 (90.20p) for the year an increase of 5.9% although a decrease of 0.9% in terms of Sterling.  The dividend was covered 1.57x by earnings, although represented 106% of FCF, 84% if the tax payment on disposals is excluded.
Unilever is generating a return on capital employed of over 33% and over the last 3 years its FCF has generated a return of 16.3% on capital employed, these compare to their weighted average cost of capital of 6.7%, demonstrating the company's strong ability to add value - the result of the wide economic moat their brands enjoy.
Polman in his outlook states - "...We do not plan on a significant improvement in market conditions in 2015. Against this background, we expect our full year performance to be similar to 2014 with the first quarter being softer but growth improving during the year. We remain focussed on competitive, profitable, consistent and responsible growth..." which places Unilever on a P/E of 22.5x 2015 earnings and a prospective yield of 3.3%.  Expensive, so worth waiting for any weakness during the year, before I add to my position in what is a high quality business.

Tuesday, 13 January 2015

Greggs trading update

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 a trading update today, describing the continuing momentum within the business.  For the whole of 2014  (which was the 53 week period ended 3 January 2015) total sales grew by 5.5% including the impact of the additional trading week and like-for-like sales for their own shops were up by 4.5%.  This compares to a 3.1% growth at the interim stage and LFL sales growth of 3.2% for their own shops.
Sales have steadily improved during the year with their own shop like-for-like sales growth in the fourth quarter averaging 6.0%, so this compares very favourably with the 3.2% at the interim stage mentioned above and 5.4% for the 12 weeks to 13 September (mentioned in their 15 September IMS). 
For the five week Christmas trading period ended 3 January 2015, total sales grew by 7.6% and like-for-like sales grew by 8.2%.
During the year Greggs opened 50 new shops, including 20 franchised units (68 last year including 15 franchised units) and increased the number of shop closures to 71 (68 LY) resulting in 1,650 shops trading at 3 January 2015 (1671 LY), including 45 franchised shops (25 LY).  Management successfully completed 213 shop refurbishments in the year, compared to 216 last year. 
Management have stated that "...Following the very strong finish to the financial year we now anticipate that we will report full year results above previous expectations..."

The momentum in the SP over the past year has been quite exceptional, as the business has continued to develop the food-on-the go model:

Click on chart to enlarge

Friday, 9 January 2015

Restaurant Group post close update


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 released today their post close update and details of their Christmas trading period.  The statement was a positive one declaring that turnover for the 52 weeks ending 28 December was up 9.6% on the prior year, and like-for-like sales increased by 2.8%.  LFL growth was up on the first six months of the year that showed 2.5% growth, but down on that reported for 35 and 45 weeks that were 3.5% and 3.0% growth respectively. 
The Christmas trading period was impressive, with like-for-like sales growth of 5% over the 2 week holiday period to 4th January.
During 2014 they opened a total of 40 new restaurants, compared to 35 in the last year.  Management have said that they anticipate opening between 42 and 50 new restaurants during 2015.
Management have said that the full year results will show material growth in both earnings and cash flow versus the prior year; the range of external forecasts for profit before tax for 2014 is from £77.5m to £80.9m.  My own estimates on sales of £635m is for a pre-tax of ~£79m, ~8.7% up on last year.  
The statement stated that the outlook for 2015 and beyond is very positive with growth in disposable consumer incomes, an increasing number of new site openings, and a considerably improved outlook for UK Cinema performance (many of their restaurants are located in areas near cinemas and other social entertainment).
At today's price of 702p (up 2.5%) the shares are valued at 23x earnings and are probably fully valued, but deservedly so for a well run business with an economic back-drop of rising disposable incomes, low inflation and low financing costs for expansion.