Saturday, 28 February 2015

Pearson finals


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 final results yesterday and reported sales down 3.8% to £4.9bn, but up 2% at constant exchange rates. 

Reported operating profit was down 13.1% to £398m, but adjusted operating profit (excluding Mergermarket and intangible costs) was up 8% to £720m. 

Reported EPS was down 17.6% to 29.9p and adjusted EPS was down 4.9% to 66.6p in line with their guidance on 21 January (see here) and at the top end of the guidance they gave at the beginning of 2014 of 62-67p.  

An interim dividend of 34.0p is proposed making 51p for the year an increase of 6.25%.  Pearson have a strong history of increasing their payout, as demonstrated by the chart below, which represents a CAGR of 6.5% pa over 17 years. 

Click on chart to enlarge

Underlying growth was essentially flat, but progress was made in operating profits due to action taken on restructuring:

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Restructuring charges during the year totaled £84m off-set by savings of £40m.  In 2015 restructuring charges are expected to be lower at £30m, that will be more than off-set by the additional savings of £45m.  

By line of business there was good growth in Higher Education which has the higher margins of 19.6% (excluding reorganisation costs):

Click on chart to enlarge

Free cash flow at £284m was an improvement on last year's £204m, but was still insufficient to cover the dividends paid of £397m.  Net debt was increased by £0.2bn to £1.7bn and represented gearing of 28.1% that in isolation that looks very safe, but net debt was 2.1x EBITDA and operating cash flow was just 27.1% of net debt.  Three to four years ago PSON was in a much stronger position, but restructuring costs have taken their toll.

Mangement have stated that they expect adjusted EPS of between 75p and 80p in 2015, so growth in the range of 12.6-20% on a prospective P/E of 18.9-17.8 and expected yield of 3.7% at yesterday's close of 1420p.  Good value for a business that has gone through the pain of restructuring and is starting to see the benefits from the greater use of digital learning in its educational markets.  There is also the growing exposure to emerging markets that have increased from less than 7% in 2007 to currently over 16%:

Click on chart to enlarge

The next task for the management of Pearson, following the major restructuring, is to return their free cash flow generation to over 70p per share from the current 35p.  Over the last three years they have returned just 5.2% FCF on their average capital employed compared to their weighted average cost of capital of 9%.  Their operating income ROCE this year is at a similar rate to the FCF return, even if you exclude the intangible costs, the return is just above their cost of capital.  Lower restructuring costs in 2015 will help in improving this as will increasing educational budgets in their main markets.

Friday, 27 February 2015

Restaurant Group finals


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 announced their final results today which were in line with expectations (see comments here).  Revenues were up 10% to £635m and like-for-like revenue was 2.8% ahead of the previous year. 

Group operating profit was £80.5m, up 7% and pre-tax profits up 7.4% to £78.1m, within the analysts expectations of £77.5-80.9m.  There was a further non-trading gain of £6.9m before tax, due to the disposal of its holding in the Living Ventures Group, the proceeds were distributed to shareholders as a special dividend of 3.45p in July 2014. 

EPS was up 7% to 29.92p and including the exceptional gain from the sale of its shares in the Living Ventures Group reported EPS was 33.35p. 

A final dividend of 9.3p was proposed, making a full year dividend of 15.4p, up 10% on last year. This is covered 1.94x by earnings.  Including the special dividend total dividends paid during the year were 18.85p.

Free cash flow (which excludes the sale of the associate) was substantially up on last year at £38.2m (2013: £21.8m), covering the normal dividend payments of £29.5m and £5.3m of purchased shares. Net debt decreased by £3.2m to £41.8m and represented gearing of 17.1%, covered 252% by their operating cash flow and is just 0.3x EBITDA.

RTN have a 3 year FCF return on capital employed of 12.4% compared to a weighted average cost of capital of 9.4%, remarkable for a restaurant chain that is increasing its estate at about 10% pa over the past 3 years.  Their current ROCE is a substantial 28%, produced by operating margins of 12.7% and turning their capital over 2.22x.

During the year 40 new sites were opened and management have said that 42- 50 new sites are expected for 2015.  Management have also stated that that there has been a "...Strong start to the new financial year with total sales up 9.5% and like-for-like sales up 2.5% for the 8 weeks to 22 February 2015..."

RTN is a quality business with good momentum, but is probably fully priced today at 738.5p representing 22x 2015 earnings and 6.1x net book value.

Pan African Resorces interims

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).

Pan African Resources announced their interim results yesterday that were affected by not just the gold price, but internal production issues.

Gold sold decreased by 13.5% to 86,675oz due to oil contamination within the BIOX® plant and by a Section 54 safety stoppage as reported during November 2014 at Barberton and the expected low grade mining cycle and a Section 54 safety stoppage during November at Evander.  

In addition to the production issues mentioned, the gold price declined by 6.1% to $1,231 in the period resulting in a revenue decline of 20% to £67.8m.  EBIT fell 65.4% to £8.0m and EPS was 67.4% lower at 0.31p.

Currently the gold price is $1,217 and as you can see from the chart, this is a price that creates some challenges for PAF.  The important costs are "all-in sustaining cash costs" (which is essentially the operating cash costs plus maintenace capital expenditure) and "all-in costs" are total operating costs including overheads, interest costs and tax.  So the gold price less "all-in sustaining cash costs" should equate to free cash flow and the gold price less  "all-in costs" should equate to earnings

Click on chart to enlarge

Before the acquisition of Evander during 2012, PAF was one of the lowest (below $1,000) cost producers in the industry.  Management state that there has been an improvement in the grade being mined, which should improve the cost base in the second half, but any substantial improvement in results will not occur until the gold price moves above $1,400 an oz.

Free cash flow was £5.6m compared to £22.3m last year after capital expenditure of £12m compared to £10.1m last year.

PAF is a high yielding stock (almost 7%), where management have said "...We will also maintain ourfocus on generating cash flows from our asset base to ensure the continuation of future dividend payments..." and offer an exposure to the gold price. 

Thursday, 26 February 2015

Bhp Billiton interims

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 interim results on 23 February and considering that the decline in commodity prices were only being partially offset by increased production and cost savings, were very much as expected.
Revenue at $29.9bn decreased by 11.9% and underlying operating profits were down 25.5% to $9.2bn. Underlying EPS was down 31% at $1.007 and the statutory diluted EPS was $0.8 down 47.3%. 

The biggest contributor to the $3.2bn reduction in underlying operating profits was falling commodity prices, reducing profits by $6.1bn, this was only partially off-set by $1.9bn from production increases and $2bn from cost savings that were reduced faster than expected.

The reductions in commodities are shown in the table below:

Click on table to enlarge
Most of the main commodities have continued to soften, most especially oil. In response to weaker prices, the Company will reduce its onshore US operated rig count from 26 at period end to 16 by the end of the 2015 financial year.  One of the benefits of onshore oil operations is the speed in being able to close down or start up operations that offshore does not have.

There was some very positive news on dividends - the interim dividend was increased by 5.1% to 62c and management stated that following the proposed demerger of South32, BHP Billiton will maintain its progressive dividend policy and any dividends from South32 will represent additional cash returns to shareholders.

Free cash flow was $3.6bn compared to $3.2bn last year and just covered the $3.6bn of dividends.  In a full year the company will lose about $1bn of free cash flow after the demerger of South32, so they will need to find this sum from efficiencies or increased production to cover the dividend payment.  Although with just 31.2% gearing ($24.9bn net debt), they do have substantial headroom to cover part of the dividend from debt if commodity prices remain low for a number of years.  

Managements guidance for their man commodities are that iron ore production for the current year remains unchanged at 225 Mt. Total copper production is under review following an electrical failure which caused a mill outage at Olympic Dam in February 2015. The mill is expected to be offline for approximately six months with an associated reduction in copper production of between 60 to 70 kt.  They will provide an update in the March 2015 Operational Review.  Petroleum production remains unchanged at 255 MMboe and metallurgical coal production remains unchanged at 47 Mt.

BLT has become an extremely low cost producer as demonstrated by the graphs below and this will support the company during what may be an extended period of low commodity prices.

1.Excludes freight and royalties. 2.Includes freight and royalties.3.Includes freight.
4.Includes freight; excludes treatment and refining charges.
 BLT's further planned cost reductions and improvements in productivity, their ability to reduce or increase onshore oil production quickly and their strong balance sheet, provides comfort that the company will be able to achieve its commitment of a progressive dividend policy.

Thursday, 19 February 2015

BAE Systems finals

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 released their final results today. Sales were down 8.5% to £15.4bn, although 3.3% of this decline was due to currency translation.  Operating profit was up 61.3% to £1.3bn, principally due to a £717m reduction in impairment of intangible assets, where last year they took a charge relating to the US Intelligence & Security and Land & Armaments businesses, due to the expected decline in US DOD expenditure.

Results by segment were:
Click on table to enlarge

Reported EPS was 23.3p, up from 5.2p last year.  Normalised EPS was down 9.3% to 37.9p and was at the bottom end of their guidance of 37.8p to 39.9p and below my estimate of 38.7p (see here). 

In 2015, management expect the Group's underlying EPS to be marginally higher than in 2014.

A final dividend of 12.3p has been declared making 20.5p for the year, an increase of 2% and covered 1.14x by earnings.

Free cash flow showed an improvement on last year's outflow of -£368m, but was well down on earlier years at £354m.  The free cash flow was improved by the addition of £418m on the sale and lease back of properties in Saudi Arabia, so the resultant £772m was sufficient to cover the dividends paid of £642m, but debt was increased by £0.3bn to £1bn to pay for £282m of share buy-backs and £233m for acquisitions.

Gearing was increased from 20.8% last year to 56.2%, the result of the increased debt mentioned above and a £1.5bn reduction in equity, that included £2bn for the increased deficit of their defined benefit pension schemes.  Net debt is 0.6x EBITDA and operating cash flow is 65% of net debt, so reasonably comfortable, although it would be good to see dividends and buy-backs covered by FCF in the future, so that this position does not become strained.

Return on capital employed (ROCE) is exceptional at over 40% compared to a weighted average cost of capital of about 9%.  This high level of ROCE is achieved by low levels of working capital requirements, more than off-setting mediocre operating margins.  Their 3 year average FCF return on capital employed is good at 15%, but is bolstered by strong FCF three years ago, so that this metric will fall if 2015 does not see a return to a £1bn+ FCF.

In addition to the guidance for 2015 mentioned above, CEO King said "...Looking ahead, defence spending remains a high priority in a number of international markets. In the UK, we benefit from long-term contracts, notwithstanding continued pressure on public spending. We believe US budgets are now relatively stable, with some early indications of a modest improvement in 2016..."

So 2015 is going to show a marginal improvement on 2014 and 2016 may start to show a better picture, with modest improvement in US spend, higher spend in international markets and stability in the UK with a substantial order book.  Currently cash outlay on pension costs, that are above the normal service costs, have been around £390m pa which are manageable; based on the latest triennial valuation this looks to be set at about that level for the next 3 years.  In summary the dividend over the next 2-3 years looks safe and yields around 4% at the current price of 526p. 


Wednesday, 11 February 2015

Reckitt Benckiser finals

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 final results today, their first results announcement since the demerger of their pharmaceutical business as Indivior in December 2014, so all of my comments exclude the pharmaceutical business. 

Net revenue was £8,836m, an increase of +4% at constant exchange rates, although a -4.6% decline on a reported basis.  Gross margin was increased by +100bps to 57.7% the main driver behind a 160bps increase in the adjusted operating margin to 24.7%.  Reported operating profit was £2,164m an increase of 14.7%, although if we exclude exceptionals (2013 was hit by £210m of legal costs) the increase is 2%.

By territories LFL revenue growth was:
ENA (Europe/North America) +2%; (+2% at the interim stage)
LAPAC (Latin America/Asia/Australia & New Zealand)  +5%; (+7%)

RUMEA (Russia/Middle East/Africa/Turkey)  +11%; (+5%)

Food +3% (+3%)

South Africa and Turkey experienced strong double digit growth and Russia had a strong year, although Ruble weakness would have probably eliminated any growth in reported terms.
By product groupings like-for-like sales growth (excluding Food detailed above) was:

Health +8% (10%)

Hygiene +3% (3%)

Home +1% (0%)

Portfolio -5% (-6%)

Diluted EPS from continuing operations was 227.6p, an increase of 18.4%, but excluding those exceptional items mentioned above, adjusted EPS was up 3.8% at 230.5p.

A final dividend of 79p was declared - an increase of 2.6%, to give a full year dividend of 139p, an increase of 1.5%.  The dividend is covered 1.64x by earnings and 1.9x by free cash flow (FCF).

FCF was a healthy £1,934m compared to £1,906m last year.  The main calls on FCF were dividend payments of £988m, net purchase of shares of £201m and £340m on acquisitions.  Net debt was reduced by £304m to £1,655m and gearing reduced to 24.2%.  Net debt was just 0.7x EBITDA and operating cash flow was a substantial 127% of net debt. 

Management stated that their 2015 targets are like-for-like net revenue growth of +4% and moderate to "nice" (I'm assuming this is the colloquial meaning - being attractive or agreeable) operating margin expansion.

Their new project - "Supercharge" will incur exceptional costs of £200m in 2015, but will produce annualised savings of £100-150m.

Their medium term key performance indicators are:

  • Growth in net revenue of 200 bps a year ahead of the global market growth across their categories and geographies.

  • A moderate operating margin expansion. 

  • Above average growth in Health & Hygiene so that they will represent 80% of the company's net revenues by 2020, currently 72%.

  • Above average growth in developing markets so that they will represent 40% of company net revenues by 2020, currently 30%.


Reckitt Benckiser operates with a low weighted average cost of capital of 7.6% and adds substantial value by returning operating profits in excess of 25% on its capital employed.  Over the past three years its FCF has returned 23% on its average capital employed.


This has translated into shareholder returns over the past 3 years that have been excellent, with an IRR of almost 22% pa (dividends not reinvested).

An excellently run company, but at 5775p fully valued at 25x historic earnings and a yield of 2.4%.  If we assume earnings and dividend growth of ~5% that's still a prospective p/e of 23.9 and a yield of 2.5%.  

Using a DCF valuation with FCF growing by 5% pa for 10 years and 3% in perpetuity with a 9% (cost of equity) discount rate, it place an intrinsic value on the shares of 5313p.  Today's price of 5775p assumes a 6%pa growth in FCF for the next 10 years, with no margin of safety. 

Monday, 9 February 2015

Amerisur pipeline update

Amerisur Resources is an independent full-cycle oil and gas company focused on South America, with assets in Colombia and Paraguay. I have a holding in my growth portfolio (epic code: AMER).

Amerisur today announced the signing of the Operation Letter of Intent by PetroAmazonas, the Operator of the CuyabeƱo gathering system, and the wider Amazonas pipeline network.

The LOI allows the final negotiation and signing of the final definitive agreements with PetroAmazonas and other Ecuadorian entities, ahead of construction of the pipeline.

In Colombia, the modification of the existing Platanillo environmental license to include oil transport by pipeline is being reviewed by the Licensing Authority and management expect a positive response. Following these approvals the Company expects to construct and commission the Ecuador interconnector in the first half of 2015.

In a presentation update here, management expect to produce a reduced 2.22m barrels of oil for 2015 at an average netback of $24.68 per barrel (assuming an average $48/bbl), producing EBITDA of $34m.  Assuming depreciation of ~$20m and ~37% tax, earnings will be around $9m or $0.009 per share.  With increased production in 2016 and management's assumption of an oil price of $65/bbl, then earnings will treble.  At 34p that places Amerisur on an enterprise value of 14x 2015 EBITDA and a P/E of 18x 2016 EPS - fully priced for now.

Friday, 6 February 2015

Compass Group trading update

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 released a first quarter trading update yesterday stating that revenue on an organic basis grew by 5.7% for the quarter.  This compared to organic growth for the whole of last year of 4.1%. 

By region - North America - saw trends seen in the second half of 2014 continued into the first quarter of 2015.  Europe & Japan returned to growth, driven by good levels of new business wins and better retention.  In Fast Growing & Emerging, there was double digit organic growth in emerging markets that offset volume pressures in some countries, due to a mixed macroeconomic back drop and the expected decline in the Australian offshore and remote sector. 

Currency movements, compared to last year, had a negative translation impact on revenues and profit in the quarter of £40m and £2m respectively.

For the year management stated "...We maintain our positive expectations for the full year.  However, the economic environment is uncertain in some of our markets, and lower oil prices may impact our oil extraction related offshore and remote business..."

Based on the their outlook for the year with respect to the oil industry and the comments on Australia, I would expect that organic growth might pull back to a 3-4% range for the year.  Still a core income portfolio holding for dividend growth (14% over the past 5 years), rather than yield (2.6% prospective).

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 released their third quarter IMS yesterday.  Their group revenue in the quarter increased 13.5% to £10.9bn and 0.7% on an organic basis (excluding acquisitions and at constant currencies) and service revenue declined by 0.4% on an organic basis.  This is an improvement on the interim comparisons (see here ) where group revenues were down 3% and service revenues down 2.8% on an organic basis

The main areas of organic service growth were India 15%; Turkey 11.8% and Qatar 16.6%.  The UK has returned to growth with 0.9% and the rest of Europe declined at slower rates than last year.

Management stated that net debt increased by £0.5bn in the quarter to £22.3bn and with respect to the guidance for the year said: "...The performance of the Group remains in line with our expectations. Consequently we remain on target to deliver EBITDA for the 2015 financial year in the range of £11.6 billion to £11.9 billion, and expect free cash flow to be positive, after all capex. Guidance excludes Ono..."