Melrose, BAE, Dechra IMS

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)

MRO issued an interim management statement declaring that trading for the Group in the Period is in line with expectations. Revenue was 1% lower than last year, at constant currency, but operating margin was higher. Trading in the Period within Elster, their recent (June 2012) £1.5bn acquisition, has been strong and there are clear signs that continuing improvements are being delivered in each of the three businesses, namely Gas, Electricity and Water. Management also mentioned that a sale process is underway for Marelli Motori, their Italian generator business.  This follows on from their recent disposal of Truth Hardware mentioned in my post of 1st May.

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 issued an interim management statement commenting that trading for the period has been consistent with management expectations at the time of their 2012 results announcement and their outlook remains unchanged. They expect to produce modest growth in underlying EPS for this year, which is subject to the continued uncertainties relating to US defence budgets and the effect of Sequestration on US defence spending.

 

This expectation for the year excludes the benefit from the share repurchase programme, which is a three year plan to re-purchase £1bn of its own shares.  They have to date repurchased 17m at an average price of 382p.  These repurchases are being undertaken at a price to book value that is not value enhancing for long term investors (P/BV of over 3).  The value of what I own - the equity per share (BV per share) declines by the amount of the repurchase and, the increase in dividend per share is insufficient to offset this.  The only way I can benefit is by selling my shares, thereby enjoying any SP improvement due to there being fewer shares in issue. 

 

Finally they mention that if there is a satisfactory conclusion to discussions with Saudi Arabia relating to the formalisation of price escalation on the Salam Typhoon programme, there would be a further increase of around 3 pence in underlying EPS for this year.

 

An international veterinary pharmaceutical company that develops, manufactures, distributes,  products exclusively for veterinarians worldwide.  I have a holding in my growth portfolio (epic code: DPH)

Dechra in their interim management statement stated that revenue for the three months ended 31 March 2013 was 14.6% (13.7% at constant currency) ahead of last year. For the nine months ended 31 March 2013, Group revenue increased by 18.4% (19.8% at constant currency) over the corresponding period in the prior year.  The strong performance reported in the first half of the financial year has been partly offset by a weaker than expected third quarter which was affected by poor weather in Northern Europe and third party supply problems within the US. Following good trading in April the Board does not anticipate that the third quarter's performance will materially impact its expectations for the full year.  They did mention at the time of their interims that there was pressure on European veterinarians to self-regulate a reduction in antibiotic usage and this continues.

 

Dechra has been an interesting growth story, but it does of late appear to have stumbled over a number of problems.  I was rather concerned when back in October the CFO left "...with immediate effect...", this followed on from a non-executive director who was a member of the Audit Committee leaving, also immediately, back in July.  Nothing negative has transpired from this, but with the few stumbles I mentioned and the price looking a little high at 750p, I sold 90% of my holding back in April. It is now probably time to dispose of the other 10%.  My internal rate of return will equate to  an annualised 41% pa (dividends not reinvested) after an 18 month holding and a 3 for 10 rights issue in May last year.