Monday, 30 March 2015

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 their trading update today before the close of their interims.  The interims are expected to be ~9% ahead of last year, due to the businesses acquired during the past year.  Organic growth was ~2%, but this was off-set by the effect of adverse currency movements. 

This performance is lower than in the first quarter, when total sales were 12% ahead and up 4% on a like-for-like basis.

Management state that after spending  ~£34m on completing the acquisitions of TPD (Life Sciences) in October 2014 and Kubo (Seals) in early March 2015, they expect to have net debt of ~£18m at 31 March 2015, compared with cash balances of £21.3m at 30 September 2014.  So with dividends paid out of approximately £13m, that would imply free cash flow of £7.7m; that compares unfavourably with the £14.8m generated at the interim stage last year.  One should never read too much into FCF generation over short periods, but this is certainly worth keeping an eye on.

The share price was down marginally today at 809p, but has shown a 12.8% increase over the past 12 months on the back of a strong fundamental performance.  


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 released a trading update today ahead of its interim close.  Management stated that they are having a strong first half, with expected organic revenue growth towards 5.5% and operating profit margin improvement of around 10 basis points.  Organic growth for the first quarter was 5.7% and 4.1% for the whole of last year.
North America's organic growth is expected to be 8% and operating margins should improve by 5bps.  Europe & Japan organic growth 0.5% and operating margins improved by 10bps. Fast Growing & Emerging organic growth 8% and operating margins deterioration by 10bps.
Management indicated that currency movements, compared to last year, are expected to have a positive translation impact on half year revenue and profit of £35m and £5m respectively.  If current spot rates continue for the remainder of the year, it is expected that foreign exchange translation would benefit full year revenues by £323m and profits by £31m.
The company states that expectations for the full year remain positive and that they are excited about the significant structural growth opportunities globally and the potential for further revenue and margin growth.
This is a positive statement from Compass and the share price was up 1% on the day close to its 52 week high. 

Saturday, 21 March 2015

Pennant finals


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 announced their full year results on 17 March and were as indicated in their trading update (see here).  Sales were down 4.7% to £17,798k and operating profit was 3.6% lower at £2,175k, due to delayed contracts in the Training and Data Services Divisions that will benefit 2015. 

Following a £815k tax credit, EPS was 10.88p up 71.9% on last year and a final dividend of 2p was proposed, making the full year 2.9p up 11.5% on last year.

Free cash flow (FCF) was £643.9k up substantially on last year's outflow of -£223.7k.  Dividends paid out of £710.7k exceeded FCF, which was the main reason for a £77.7k decline in the net cash balance to £1,034.9k.  The FCF improvement reflected improved working capital and the effect of the receipt of contracted stage payments on major contracts.  There is a tax asset of £743k on the balance sheet, which I assume is part of the uncollected element of the R&D tax credits claimed for, which should benefit 2015's FCF.  Management also state that there are unrelieved tax losses of £3m.

With respect to the outlook management stated that "...The Board looks forward to further progress across the Group in the current year, with an anticipated weighting towards the second half. The forward visibility of the order book also provides additional confidence in Group revenues for 2015 and beyond..."  On the subject of the order book, it would help investors if greater clarity was given, so that we were able to see the growth in the order book and calculate book/bill ratios.

The SP fell 15% on the day of the announcement to 84p and are now at 78.5p, rather bizarre since these results were telegraphed by management and 2015 should benefit from some of the contract delays and possibly further tax credits.  It is probably the part of their outlook statement "...anticipated weighting towards the second half..." that concerned the market, with management anticipating a weak first half and hoping that the second half will improve as those delayed contracts arrive - or not!

Pennant sit on a low forward  P/E of about 8 and a forward yield of 4%.

Thursday, 12 March 2015

Melrose Industries finals

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 full year results on 4 March.  Revenue was 6.1% below last year at £1,377.5m, although flat in constant currency terms.  Revenue constant currency performance by division was:
Elster Gas +6%
Elster Electricity -4%
Elster Water -12%
Energy -3%
Operating profits by division showed a very different picture, as rationalisation of the Elster businesses along with cost reductions and exiting some unprofitable business showed substantial profit improvements for those parts of the business:

Elster Gas +13%
Elster Electricity +23%
Elster Water +11%
Energy -7%

Headline PBT was £212.5m up 11%, but down 10.5% to £128.9m on a reported basis.  Headline EPS was up 2% to 15.3p and on a reported basis flat at 7.8p.
A final dividend of 5.3p has been declared making 8.1p for the full year an increase of 4.5%.
Free cash flow was £73.0m below last year's £121.7m, mainly due to the sale of Crosby at the back end of 2013.  Dividends paid were £83.6m and capital returned to shareholders was £595.3m the result of a sale in the previous year.  Net cash received from disposals this year was £366.3m, of which £200.4m will be returned to shareholders in 2015.  Net debt increased from £140.8m to £501.3m. 
Management's outlook for the current year stated that "...Adjusting for currency effects, our Group is trading in line with management expectations for 2015 despite the expected downturn in the performance at Brush..." 

Melrose performs more like a VCT/private equity fund - buying companies, improving them and then selling them on.  So one way of looking at their performance over say 5 years is to look at the return per share.  At 31 December 2009 they had a book value of 153.1p and since then have returned capital of 122p and paid dividends of 46.95p and at 31 December 2014 had a book value of 157.9p.  This equates to a CAGR of 16.3% pa.; if you calculate an IRR which accounts for the timing of the dividends and returns of capital it is 24.5% pa.  These are very good returns from a strong management team. 

Wednesday, 11 March 2015

Greggs finals

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 announced their full year results on 4 March, which confirmed their trading update (commented on here).  Total sales were up 5.5% to £804.0m (excluding the impact of accounting for a 53rd week in 2014 sales grew by 3.9%) and own shop like-for-like sales were up 4.5%.
Pre-tax profit excluding exceptional items (mainly redundancies and shop closure costs) was up 41.2% to £58.3m and reported pre-tax was £49.6m an increase of 48.6%.  Adjusted EPS increased by 41.8% to £43.4p and reported EPS rose by 54% to 36.8p.
A final dividend of 16.0p per share was declared, making 22p for the year an increase of 12.8% and covered 1.67x by earnings, which equates to the company retaining just over 40% of its earnings.  This follows a freezing of the dividend in 2013, so is a welcome return to dividend increases.  The management have also stated that they have capacity to return up to £10m to shareholders in the first half of this year and so will resume a share buy back programme.  A buy-back is a poor use of funds, especially with the current share price at over 4x book value.
Free cash flow (FCF) was strong at £51.3m compared to £23.9m last year and was sufficient to pay the dividends of £19.6m and increase net cash by £29m to £53.6m.  The net cash position was flattered by £6.4m of profit share commitments, that previously would have been paid in the reporting year, but will not be paid until March 2015.  The company intends to run with a net cash position for the foreseeable future, due to the leasehold nature of the store portfolio.    
With respect to the current year management have stated that "...Overall we are confident of delivering a further year of good growth and progress against our strategic plan in 2015..."

These were a very good set of results and met expectations that had been increasing during the year.  Greggs' ROCE is over 19% and their 3 year average FCF return on capital was 14.5% compared to their weighted average cost of capital of just over 8%. 

With a share price today of 1004p they are rated at 21.4x this year's earnings and have a prospective yield of 2.4%.  So while the shares may be perceived to be fully valued for now, on a longer view, using a discounted cash flow basis, if management could grow FCF by 7% pa for the next 10 years and we assume 3% growth after this in perpetuity, then the intrinsic value of the business is 1375p discounting it by its 8.2% cost of equity; which would imply a safety margin of 37% at today's price.

Monday, 2 March 2015

Dialight finals


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 released their preliminary results today.  Group revenue increased by 22% to £159.8m and up 25% on constant exchange rates (CER) with underyling operating profit up 25% (30% CER) to £18.1m and up 36.2% on a reported basis to £15.8m.

Lighting performed strongly with revenue up by 46% and operating profit up 26%.  Signals revenue was down 4% due to a 20% decline in traffic lights, partially off-set by a 16% increase in lighting for the obstruction sector; operating profit for Signals was up 15%.  Components revenue and operating profits were down 6% and 69% respectively.

Click on table to enlarge

Underlying EPS was 36.8p an increase of 20% and 29.2p on a reported basis up 23%.  Underlying operating margins were up 20 bps to 11.3% and ROCE was a healthy 23.9%.  Free cash flow, although an improvement, has not recovered to historic levels with £1.2m compared to -£4.7m last year.  Dividend payments amounted to £4.8m and £3.1m was paid on an agreed earn-out for the acquisition of Airinet purchased in 2012, consequently cash declined by £6.5m to £0.6m.  

A final dividend of 9.8p was declared making 15p for the year, an increase of 4.2%. 

The otlook was positive, but rather general in nature "...The adoption of LED lighting in the industrial and hazardous markets is still at an early stage and the opportunity for growth remains significant. We continue to see strong demand for our LED lighting and the Board remains confident in the future prospects of the Group..."
The share price responded well to these results, up over 4% to 689p, although there will continue to be some uncertainty, until a new CEO is appointed to replace Roy Burton who retired due to ill health and, free cash flow returns to historic levels.

Sunday, 1 March 2015

IMI finals

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 announced their final results on Friday declaring that group revenues on an organic basis increased by 2%, but fell 3% on a reported basis to £1692m. 

Operating profit decreased by 0.3% to £269.8m and Eps increased by 15.1% to 68.6p, excluding exceptionals EPS was 78p up 7.4%, in line with market expectations.

Free cash flow (FCF) was substantially below last year's £252.2m at £33.6m, mainly as a result of increased working capital, higher capex and additional pension scheme funding.  The additional pension funding of £87m was part funded by £70m from the £696m proceeds from the sale of the Beverage business, £620m was returned to shareholders in addition to the £97.5m in dividends.

Net debt was reduced by £25.9m to £200m and represented gearing of 39.3%.  Net debt was just 0.5x EBITDA, but the weaker operating cash flow was only 52% of net debt.

A final dividend of 24p is being proposed making the full year dividend 37.6p an increase of 6.5%.  If we add back the £70m of additional pension scheme funding, that was financed by the Beverage disposal, to the FCF then the resultant £103.6m covered the £97.5m of dividends.

The 3 year average FCF return on capital employed is 20.4%, substantially in excess of the weighted average cost of capital of 11.6% and their current ROCE is 38%.

Management's outlook for 2015 was rather cautious with an implication of flat earnings for the year - "...In 2015, based on current market conditions and excluding the impact of exchange rate movements, we expect the Group to deliver modest organic revenue growth weighted towards the second half with margins slightly lower than in 2014 reflecting the impact of the disposal of Eley and acquisition of Bopp & Reuther by the Critical Engineering division and the ongoing investments we are making in all our businesses as we ready them for accelerated long-term growth..." 

Currencies may have a major impact on the 2015 results as they are more heavily exposed to the Euro than the US$.  A 1c movement in either currency would affect operating profits by +/- £0.5m for the US$ and +/- £1m for the Euro.  Average rates for 2014 were $1.65 = £1 and €1.24 = £1. 

Despite the cautious outlook for 2015, management have set a target  of doubling operating profits by 2019, which if achieved, will be a considereable performance.

At Friday's close of 1381p they are on an historic P/E of 17.7 and a forward yield of 2.9%.