Thursday, 28 May 2015

Paypoint finals

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 announced their final results today with sales up 3% to £218.5m and operating profits increasing by 8.8% to £48.2m. 
Total transactions for the group were up 5.9% to 812.7m.  The highest increase in volume was for the Collect+ joint venture with an increase of 38.7%, although price competition and increased logistics costs reduced their margins, the growth in revenue offset this and helped deliver profit ahead of last year.
EPS was up 9.1% to 57.4p and a final dividend was recommended of 26.1p, making 38.5p for the full year, an increase of 9.1% and covered 1.49x by earnings and 1.3x by free cash flow (FCF).
FCF was strong again at £34.8m, marginally above last year's £34.3m.  After dividend payments of £24.7m and a translation loss on cash balances of £1.8m (presumably in Rumania) the net cash position increased £8.3m to £43.4m.* Over the last three years Paypoint's FCF has returned an average 49.5% on its capital employed, substantially exceeding its weighted average cost of capital of 9.2% (this also being its cost of equity, since it has no debt).
Management has decided to sell the parking and online payment processing companies to realise their value.  They have taken this decision as the "Fin Tech" market has entered what management have described as an arms race of investment, which resulted in a changed competitive landscape, bringing pressure for both faster development and larger scale to support lower margins.  Management rightly feel this is not a market that would generate acceptable returns, comparable with the rest of the Group.  The business has sales of £17m, is loss making (due to the recent increase in investment needed) and has net assets of £54.8m.
With the strong FCF, the increasing net cash position and disposal proceeds from the business up for sale, I would expect another special dividend (2013: 15p) at some point in the next 18 months.  At today's price of 929p (up 5.8%) the company is yielding 4.3% on the expected dividend next year, excluding any potential upside from a special dividend.
On a discounted cash flow basis I would estimate that the intrinsic vale of the shares at ~1025p (17x next year's expected earnings), giving a margin of safety of ~10%, this is based on the conservative assumption that they grow their FCF by 5% pa for the next 10 years; over the last five years they have grown it by 9%. 
A good candidate for an income portfolio - a reasonable yield, with a record of increasing dividends (12% over the past 5 years) and special dividend payments, backed by a strong FCF and net cash on the balance sheet.

* Net cash excludes client cash (2015:£3.8m; 2014:£6.5m), but includes cash that is part of the assets of the parking and online payment processing companies held for sale (2015:£3.3m; 2014:£nil).  

Tuesday, 19 May 2015

ICAP finals

ICAP is an interdealer broker and provider of post trade risk mitigation and information services.  I have a holding in my income portfolio (epic code: IAP).

ICAP released their full year results today.  A difficult period with revenue down -7.4% to £1,276m and adjusted operating profit falling by -13.1% to £252m, with reported operating profit showing a decrease of -12.6% to £118m.  Adjusted profits though were up 8% in the second half of the year compared to the prior year. 
Adjusted EPS was 28.1p a decline of -13.8% and reported EPS fell -16.9% to 12.8p. A final dividend of 15.4p was declared making an unchanged 22p for the full year.
Free cash flow (FCF) was the one bright spot rising from last year's £75m to £142m, which just covered the dividend payment in the year of £141m.  A foreign exchange translation gain was the main reason for a reduction in the net debt from £89m to £68m.
With little debt on the balance sheet (gearing of 7%) and FCF returning an average of 14% over the last three years on its capital employed, ICAP is able to continue to weather what is an extended difficult period for its business.  They have been able to achieve this through introducing a comprehensive restructuring programme.  
For this current year management have stated "...Since the start of the financial year the external environment has been mixed and we continue to expect near term headwinds...".  Improvements in trading may occur as markets become more volatile during periods of uncertainty, this may be caused by the European in/out referendum in the UK and uncertainty over interest rate decisions in the UK and USA towards the end of the year.  

Vodafone finals

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 reported their final results today, reporting revenue up 10.1% to £42.2bn, with a LFL decline of -0.8%.  Service revenues declined -1.6% on a LFL basis, but in the fourth quarter saw 0.1% growth, the first for almost three years, reflecting a steady recovery in Europe and continued growth in Africa, Middle East and Asia Pacific.  Sales in Europe represented 66% of Group revenue, up from 63% in 2014, due to acquisitions in Germany, Italy and Spain.  India was the best performing territory growing 9.6% and represented 10.2% of Group turnover. 

Adjusted operating profit was down -18.6% to £3.5bn and reported operating profit was £2bn compared to a reported loss of £(3.9bn) last year.

Adjusted EPS was 5.55p down -27.8%, with reported EPS at 21.42p compared to 41.77p last year, 2015 included a 4.8bn tax credit, while 2014 included a much larger £16.6bn tax credit.  A final dividend of 7.62p was declared, making 11.22p for the year up 2% and covered 2.8x.

Free cash flow (FCF) was weak with a £(0.3bn) outflow, but was an improvement on last year's outflow of £(1.7bn).  Although operating cash flow was up 71% at £8.4bn, the substantial capital spend of £8.7bn caused the FCF outflow; the high capital spend is mainly due to Project Spring, that has a further year to go and then capex will decline to 13-14% of revenue, plus any spend on spectrum purchases.

Net debt increased by £9.1bn to £28.2bn, the majority of the increase was due to the negative FCF, payments for dividends of £2.9bn, a £3.2bn net cash outlay on acquisitions plus the assumption of £3bn of debt on those acquisitions.

Guidance from the management for 2016 has EBITDA in the range of £11.5bn to £12.0bn (£11.7bn for 2015) and positive free cash flow after all capex, although this does exclude spectrum and restructuring costs.  They also stated that they intend to grow dividends per share annually.

Vodafone fell 2.9% on the release to 227p, which places it below book value at 0.9 and on an historic yield of 4.9%.  This might be good value as an income share, if the FCF is improved in 2017 (after Project Spring is completed) and is able to cover the proposed increasing dividend payments.  If this improvement is not made, it will place increasing pressure on its financial structure, although gearing is not excessive at 42.6%, the low cover of operating cash flow to net debt of less than 30% is weak and paying a proportion of the dividends from debt will weaken the position further.

From a quality perspective, Vodafone is the weakest holding in my portfolio.


Sunday, 17 May 2015

Compass Group interims

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 their interims on 13 May and reported sales increased by 4.7% to £9,062m, while organic revenue grew 5.7%, boosted by 8.2% growth in North America and Fast and Emerging growth of 7.7%, with Europe & Japan increasing 0.9%.  Total organic growth was in line with their first quarter, commented on here.
Underlying operating profit was £688m, an increase of 6.3% and reported operating profit was £674m up 6.5%.  It was also positive to see operating margins improving by 10bps to 7.6% and management feel there is more to come here.  Underlying EPS at 28.4p was up 12.3% and reported EPS increased by 11.7% to 27.6p.
Free cash flow at £302m was similar to last year, but insufficient to cover dividends (£295m) and the high priced buy-back of their own shares (£139m) - the main reason for the increase in net debt from £2,414m to £2,699m.
An interim dividend of 9.8p was declared, a healthy increase of 11.4% on last year. 
Management have stated that "...expectations for the full year remain positive and unchanged. However, the economic environment in some of our emerging markets is uncertain, and lower commodity prices are impacting our Offshore & Remote business..."  A similar statement to February's first quarter IMS, that prompted me to state that I would expect that organic growth might pull back to a 3-4% range for the year.  Obviously with a second quarter in a row of 5.7% organic growth there is a lower risk of this, but I am still expecting some pull back.

Anite trading update

Anite plc

Anite is a global provider of hardware and software solutions, systems integration and managed services within its core markets of Wireless and Travel. I have a holding in my growth portfolio (epic code: AIE).

Anite released a positive trading update on 12 May, stating that trading in the final quarter was in line with expectations and expects to report full year revenue and adjusted operating profit in line with expectations. 

They also stated that net cash at 30 April 2015 stood at £36.9m (31 October 2014: £29.8m) slightly better than expected.

Another positive announcement was released on 14 May stating that China Telecom has selected Anite's interoperability and performance test solution - SAS - for LTE data throughput testing.  China Telecom will use the solution as a key part of its LTE device acceptance programme.  

These two positive announcement left Anite's share price up 6.4% on the week at 91p.


Diploma interims

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 announced their interims on 11 May, showing a revenue increase of 9.8% to £163.2m and organic growth of 2%.  Acquisitions added 10% to revenues, but foreign exchange headwinds had a 2% adverse effect on revenue.

By division organic growth was:

Life Sciences +1% (Canadian Healthcare faced difficult markets)

Seals +8% (North American market strength)

Controls -5% (Soft European industrial markets)

Adjusted operating profit (eliminating acquisition related charges) increased by 6.5% to £29.6m, with adjusted operating margin at 18.1%, down from last year’s 18.7%.  Reported operating profit was up 6.1% to £25.9m.

Adjusted EPS increased by 6.3% to 18.6p and reported EPS was up 8.7% to 16.2p.

An interim dividend of 5.8p was declared an increase of 7.4%, that management said reflected their confidence in growth prospects.

Free cash flow (FCF) was £14.1m marginally down on last year's £14.7m, this decline was due to a capital spend that at £2.8m was £2m higher than last year.  Of this capital spend £1.1m was due to the construction of a new warehouse and office facilities for FPE Seals, a further £2.1m will be spent by August this year when it will be completed and then sold and leased back by the business. 

The business finished the period with net debt of £14.9m compared to £21.3m of net cash at the year-end; this was mainly due to dividend payments of £13.1m, share repurchases of £1.7m and acquisition payments of £34.4m substantially exceeding FCF.  Excluding an further acquisitions, the net debt should be eliminated within 12 months due to the highly cash generative nature of the business - producing an ~25% FCF return on its capital employed. 

Management's outlook stated that Diploma "...aims to deliver "GDP plus" organic revenue growth with carefully selected acquisitions accelerating the growth to the target double-digit level. While headwinds to organic growth remain in certain key markets, the acquisition pipeline remains encouraging..."

The shares at 810.5p were down 4.3% on the week and 11.6% short of its 52 week high.  A high quality cash generative business, that very rarely trades at a substantial discount to its intrinsic value.  I would currently assess its intrinsic value at 850 - 900p, based on being able to grow its FCF by 10% pa over the next 10yrs and 3% in perpetuity.  Since the 10 year FCF growth is dependent on acquisition success, I have used a higher discount rate of 9.5% than might be used for a similar sized company with a comparable beta, to reflect the execution risk.


Friday, 8 May 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).

Good news from Amerisur today as they announced approval of the modification to the Platanillo field global exploitation licence for the construction and operation of the Ecuador pipeline.  There was also approval for the operation of up to two water disposal wells per production Pad.  Each well is permitted to dispose of up to 20,000 barrels of water per day into the Tertiary Pepino formation.

This is excellent news in that it will not only release any physical constraints on export capacity, but reduce the cost of transport by $18 per barrel.

Thursday, 7 May 2015


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 first quarter IMS today declaring that economic and market conditions have continued to be challenging.  Consequently revenues for the quarter were 1% lower on an organic basis and on a reported basis, revenues were 4% down.
Commenting on the expected six month performance they stated that organic revenues and margins  will be lower than in the first half of 2014.  They do expect an improved performance in the second half; however, both organic revenue and margins for the full year are expected to be slightly below last year.  In March when announcing their 2014 results management stated "...we expect the Group to deliver modest organic revenue growth weighted towards the second half with margins slightly lower than in 2014..." no mention was made as to why they have changed their view.
The share price is down 4% to 1190p on the news and has drifted 14% from the level at the time of their prelim announcement.  Since Selway took over from Lamb as CEO at the beginning of 2014 the share price has fallen over 20%, as an income investor I can live with that, but what I can't live with is a consistent erosion of free cash flow.  As I commented on here last year's management of cash caused me some concern, with increased working capital and capital expenditure.  So I will be looking for an improvement in this area during 2015, otherwise dividend growth may come under pressure.

Wednesday, 6 May 2015

GlaxoSmithKline 1st quarter results

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

GlaxoSmithKline reported their first quarter results today and a change to their return of capital plan (previously commented on here).

Turnover for quarter 1 increased by 0.2% to £5.6bn, on a like-for-like basis turnover declined by -1%, with Pharmaceuticals down -5%, Vaccines up 3% and Consumer Healthcare up 8%.

Adjusted operating profit decreased by -14.7% (-14% at constant exchange rates) to £1.3bn and reported operating profit which also included the gain on the sale of the vaccine business to Novatis was £9.2bn.  Adjusted EPS decreased -17.6% (-16% at CER) to 17.3p, with reported EPS at 166.4p.

A quarterly dividend of 19p has been declared and management stated that they expect to pay a dividend of 80p for each of the next three years (2015-2017).

During the period free cash flow was an outflow of -£28m, compared to £512m generated last year. Obviously the Novartis deal had a substantial effect on net debt, so that at the period end it stood at £8.1bn compared to £14.3bn at the end of last year; likewise gearing was substantially improved from 337% to 109%.  There is still a £1.9bn tax bill to be paid on the profit resulting from the Novartis deal, but clearly Glaxo's financial position is much healthier. 

The company plans to pay a special dividend of approximately £1bn (20p per share) with the quarter 4 2015 dividend, instead of the previously announced return of capital (ROC) of £4bn (see here).  Given Glaxo's debt position and commitments (possible future transactions relating to ViiV and the Consumer Healthcare JVs), this is a better use of the proceeds from the Novartis deal and if I need the additional 60p per share that the ROC would have provided, I can always sell the required shares, to leave myself in a similar position.  The difference is that under current legislation the original ROC would have been treated as income, the same as the special dividend, but any sale of shares will be treated as capital gains.

With respect to the outlook management have stated, that in 2015 core EPS is expected to decline at a percentage rate in the high teens on a CER basis, this is due to continued pricing pressure on Advair in US and Europe, the dilutive effect of the transaction and the inherited cost base of the Novartis businesses.  In 2016 they expect to see a significant recovery in Core EPS with percentage growth expected to reach double-digits.  They also expects revenues to grow at a CAGR of low-to-mid single digits on a CER basis over the five year period 2016-2020.

On balance I prefer the special dividend and Glaxo's balance sheet being in a much healthier position to protect future dividend payments.  I am not happy that the next three year's of dividends are flat, but I'm hoping that as the prospects improve this may change, but their commitment not to cut the dividend over the period is on balance a positive statement.

Tuesday, 5 May 2015

Aberdeen Asset Management interims

A global investment management group, managing assets for both institutional and retail clients from offices around the world. I have a holding in my income portfolio (epic code: ADN).

Aberdeen Asset Management released their interim results today, stating that revenue was up 20.2% to £605.2m.

Adjusted operating profit was up 24.9% to £270.6m, with reported operating profit up by 12.3% to £189.0m.  Adjusted EPS increased by 12.9% to 16.17p and reported EPS increased by 0.5% to 10.72p.

Assets under management increased by £6.2bn to £330.6bn, with market performance and foreign exchange gains of £13.5bn and £4.0bn respectively, offsetting net outflows of £11.3bn.  Net outflows were £6.5bn in the second quarter substantially up from the first quarter when they were £4.8bn. 

Free cash flow (FCF) was down £16.6m from last year to £161.2m, so the trailing twelve months (TTM) of FCF is £425.7m compared to £442.3m for 2014, but still represents a TTM FCF yield of 7.1% on today's price of 454p.  Dividends and share buy-backs totalled £196.7m, which along with acquisition and net investment spend totalling £60.4m, consumed all of the FCF and reduced the net cash by £87.3m (including a forex gain of £8.6m) to £566.6m.

An interim dividend of 7.5p was declared, an increase of 11.1% on last year.  Management have stated their intention to launch a share buy-back programme of up to £100m which will be conducted over the remainder of 2015.  With £221m of headroom over their regulatory capital requirement, strongly cash generative and £566.6m of cash on the balance sheet, they clearly have the capacity, but with their current share price at 3.5x their book value, this does not represent the best use of excess funds.  A special dividend would represent better value for shareholders, but since they have increased the dividend by a CAGR of 16% pa over the past 8 years I really have little to complain about, it is just that the allocation of capital is one of the key decisions management have and it irritates me when they get it so wrong.  See here for a company that eventually got it right by reversing their decision on buy-backs and replaced it with a special dividend.

Commenting on the outlook management stated "...We remain convinced that adherence to our long term investment approach will generate value for our clients and shareholders..."


Sunday, 3 May 2015

Royal Dutch Shell 1st qtr results

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

Shell announced their first quarter results on Thursday 30 April, the biggest effect on results was the substantial decline in oil prices since the peak in June 2014, with revenue down by -40.1% to $65.7bn.  Oil production was up 4%, gas production down 8% and liquefied natural gas production up 1%. 
CCS earnings excluding identified items (mainly divestment profits in 2015) were down -56.2% to $3.2bn.  CCS EPS excluding identified items decreased by -55.6% to $1.04 and reported EPS was $0.69 a -4.2% decrease.  A maintained dividend of $0.47 has been declared, which in Sterling, due to the stronger US Dollar, will appear as an increase for UK investors.  On a maintained dividend for the year and at the current exchange rate, Shell yields 5.9% on Friday's share price of 2098p. 
Free cash flow in the period was $0.5bn compared to $6.5bn last year, proceeds from the sale of investments added $2.2bn to this, but was still insufficient to pay for dividends and share buy-backs that totalled $3.3bn. 

Oil prices have improved from the first quarter; WTI crude oil has increased from below $45 in March to currently $59, this may help the current quarter, but there are planned maintenance programmes that will reduce production and of course those divestments and natural gas prices remain subdued.

Saturday, 2 May 2015

Globo finals

A technology innovator delivering mobile, telecom and e-business software products and services. I have a holding in my growth portfolio (epic code: GBO).

Globo announced their full year results on Thursday 30 April.  Revenues was up 48.8% to €106.4m and approximately 42% on a like-for-like basis.

Operating profit was up by 36.6% to €37.3m and earnings were up 38.2% to €35m.  EPS increased by 27% to €0.094 on an 8.5% increase in the average number of shares, due to the placing of 33.9m shares in October 2013 (incidentally the placing price was 71p).

Free cash flow (FCF) improved again to €7.3m from the €5.2m last year, equivalent to €0.020 per share and yielding just 2.7% on the current 55.5p share price.  Net cash declined from €42.8m to €40.4m, mainly due to the €9.4m acquisition cost of Sourcebits in July 2014.

Return on capital employed for the year was creditable at 32.4%, similar to last year's 32.6%, although the FCF return on capital employed at 6.3% was below their weighted average cost of capital.

Management have stated that they are confident that 2015 will be a year of significant progress.

The risk with Globo remains the same, whether the high level of R&D investment will ever generate sufficient cash to provide a return that comfortably exceeds its cost of capital.  It is also worth noting that accounts receivable have increased by 78%, well above the increase in revenue and that 40% are more than 3 months old, compared to 30% in the previous year.