Growth portfolio candidates

Candidates for the growth portfolio

These are the current candidates for the growth portfolio using the filters that I detailed in my post on 26 April.  This will produce companies that have a recent record of managing good growth, are expected by the market to grow over the next 12 months at a rate of at least 15% and are reasonably valued.

Company	Rolling P/E	Est. EPS 1yr growth	PEG	ROE	P/BV	Operating Margin
Gable Hldgs (GAH)	5.47	57.1%	.096	26.1%	3.07	16.9%
Xaar (XAR)	18.5	48.2%	.39	18.6%	5.15	18.0%
Idox (IDOX)	11.6	35.2%	.33	18.0%	4.37	14.1%
First Derivatives (FDP)	13.4	35.0%	.39	18.5%	2.99	16.5%
One Media IP (OMIP)	12.0	28.0%	.43	22.6%	3.22	20.5%
Filtrona (FLTR)	18.6	25.8%	.72	23.6%	6.41	13.0%
888 Hldgs (888)	18.6	24.9%	.75	26.3%	6.25	10.4%
ITV (ITV)	12.1	22.4%	.55	32.9%	6.00	19.0%
Wilmington (WIL)	10.9	21.4%	.51	17.5%	2.34	15.3%
Berkeley Grp (BKG)	12.3	19.1%	.65	16.5%	2.26	20.1%
Globo (GBO)	8.55	18.1%	.48	24.0%	2.00	32.8%

Gable Holdings is struck through as it is an insurance company and I do not invest in either insurance companies or banks (see my post on 25 April for reasons why).  I have ranked the top three in each criteria above green, orange & yellow for 1st, 2nd or 3rd.

I will try to cover some of these companies in an analysis over the next few days.  The only companies I currently have a holding in are GBO and IDOX.  I produced an analysis of IDOX on 1st May.

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)

Announced 1st quarter results today - in summary: 

Sales were $112.8bn a 6% decline.

Earnings, on a CCS basis, were $8.0bn compared with $7.7bn for 2012, excluding identified items the comparatives were $7.5bn compared with $7.3bn an increase of 3%. Reported earnings were $8.2bn compared to $8.7bn LY a decline of 4.6%.

Basic CCS EPS was $1.26 compared to $1.17 LY, although reported EPS was $1.29 compared to $1.4 LY.

Dividends are $0.45 a 4.7% increase on LY, although as usual UK holders will have to wait until 10 June to know what the sterling equivalent is.

Production output was similar to LY at 3,559 boe/d compared to 3,552, although gas production was up by 3% and oil production down by 2%.

Free cash flow was $4bn compared to $8.9bn LY, last year benefited from a rather large sale of capital assets.

Gearing was a low 10.1% compared to 11.9% LY.

CCS is current cost of supply, used by commodity companies in an attempt to normalise the effect of fluctuating commodity prices from one period to the next.

In a separate unexpected announcement the company mentioned that Peter Voser, the CEO since July 2009, has elected to retire from the Company in the first half of 2014.

Comparisons with Exxon (XOM) and Chevron's (CVX) Qtr 1 results

This shows the increase or decrease compared to the prior year:

	RDSB	XOM	CVX
Sales	-6%	-12.3%	-6.4%
Net Income	-4.6%	+1%	-4.6%
EPS	-8%	+6%	-2.8%
Dividend	+4.7%	+21%	+11.1%
Production	Same	-3.5%	+0.8%

Idox growth portfolio candidate

The Company is engaged in the development and supply of software solutions and services to the United Kingdom public sector and asset intensive industries worldwide.  It operates in four segments: Public Sector Software, which delivers software service solutions to mainly local government customers across a broad range of departments; Engineering Information Management, which delivers engineering document management and control solutions to asset intensive industry sectors; Information Solutions, which delivers both an information service and consultancy services to a diverse range of customers across both private and public sectors and Recruitment, engaged in providing personnel with information, knowledge, records and content management to a diverse range of customers. It also provides information management, Web development, online publishing and training services. I have a holding in my growth portfolio (epic code: IDOX)

Market	Aim	Industry	S/ware & IT services
Sales	£57.9m	Earnings	£6.71m
Market Cap	£170.5m	Share Price	48.9p
Norm. EPS	2.23p	Historic P/E	22.0
Est. 2013 growth	79.5%	Prospective P/E	12.2
Est. 2014 growth	10.6%	Prospective P/E	11.1
Rolling PEG	0.33	SGR	11%
PBV	4.36	Historic Yield	1.38%
ROE	18.3%	Operating Margin	14.1%
5 yr BV + Div return	16.97%	5 yr FCF return on BV	16.4%

 

IDOX predominately sells into the UK where 69% of its sales are generated, the second largest market is the USA at 18%.  They have a dominant position within local authorities in the UK, where they sell document control systems to over 90% of them.  Although there are restrictions on Government spending, IDOX supply cost saving solutions for paper management and appear to have been unaffected by the Government cuts.

 

IDOX has started this year well with a stronger pipeline than the year before across all of the divisions, giving some weight to the expectation of a near 80% growth in earnings for this year.  Although following on from the AGM statement on 28 February the SP declined from its 52 week high of 58.7p.  To summarise the statement the Public Sector Software division (representing 52% of sales) saw continuing progression of new business, this is expected to result in further growth in the first half and an increased order book of contracted services to be delivered in the second half. The Engineering Information Management division (representing 31% of sales) though saw a quieter start in license sales compared to last year, as there are no global contracts currently planned to be signed in the first half.

 

The company acquired a French engineering document control business on 11 April 2013 for £2m, specialising in the oil & gas sector, which has been the only acquisition so far this year (they have a 31 October Y.E.), having spent £24m in their last financial year.

 

IDOX own a recruitment services business that is loss making (sales of £2.5m, operating loss £1m)and does not fit well with the rest of the business and it would be good to see them dispose of this.  They will probably have to wait until the sector improves before this can happen.

 

They have a healthy operating margin of 14% (16.5% if they sold the recruitment business) and a good ROE of over 18%.  Over the past 5 years they have grown the book value per share and returned dividends at a compound rate of almost 17% pa, with the FCF almost matching this return at just over 16%.  This demonstrates that over a reasonable period the earnings are being converted in to cash.  Sales and EPS over the past 5 years have grown at a compound rate of 23% and 24% pa respectively and they have a manageable level of gearing at 55%, with interest covered 6.5x.

 

 It is likely there will be a trading statement in late May and their interims announced in late June.

 

The slower start from the EIM division has concerned some and depressed the SP, so many may be waiting for the trading statement in late May before making decisions on investing or increasing their holding.  If IDOX can achieve these growth numbers then a 2014 P/E of 11 looks cheap, there is obvious risk here, but this level could be a speculative buying opportunity.

Melrose disposal

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)

The company has signed a conditional agreement for the disposal of Truth Hardware to Tyman PLC. The total consideration of US$200m (£129m) is payable in cash on completion and is on a debt and cash free basis. For the year ended 31 December 2012, Truth recorded sales of US$126.0m, operating profit of US$18.6m and EBITDA of US$22.5m. Melrose intends to use the proceeds to pay down existing borrowings.  Truth was originally purchased as part of the FKI acquisition in 2008.  At 10.8x operating profit, this is a good price for a company that designs and manufactures products such as windows and patio doors for the residential housing market in the US.  The purchasers are probably betting on a recovery in the market.