Diploma prelims

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 issued their full year results today and came in much as expected, which included a strong second half.

Briefly - revenue increased by 10% to £285.5m and underlying revenue was up by 4% with a stronger second half growth of 6%.

By division sales and margins were:

Life Sciences - Sales £93.2m (LY £78.4m); operating margins 22.4% (LY 23.0%)

Seals - £106.1m (£99.9m); 18.4% (20.4%)

Controls - £86.2m (£81.9m); 16.1% (17.6%) 

Adjusted profit before tax increased 3% to £54.3m; adjusted EPS was up by 5% to 34.8p and the statutory EPS was 30.7p up 10%.  The Full year dividend was increased by 9% to 15.7p, covered 1.96x.

Free cash flow (FCF) was again strong at £36.3m, up from £32.7m last year and the Group ended the year with net cash of £19.3m up from £7.9m last year and £7.3m at the interim stage. 

The Board state that they are confident that they will make further progress in the current financial year.

Diploma have increased owners' earnings (NBV and dividends) by a CAGR of 17.6% pa over the past 5 years and FCF increased by a 5 year CAGR of 18.5% pa over the opening NBV.  This is a well managed business that should see benefits from an improvement in the North American economy (59.8% of sales).

Petrofac IMS

An oil & gas services company providing design and build for oil and gas infrastructures; operates, maintains and manages assets and trains personnel. I have a holding in my growth portfolio (epic code: PFC)

Petrofac issued an interim management statement today, which started well with "...We continue to deliver good operational performance across our portfolio of projects and are on track to achieve our guidance of modest growth in net profit in 2013..." and "...The Group has continued to secure new awards during the second half and we expect to exit 2013 with our highest ever year-end backlog... " , but ended by reducing expectation for 2014 and creating some uncertainty with respect to their 2015 target.

 

They expect Group net income in 2014 to show flat to modest growth year-on-year this is due to the re-phasing of two projects one in Abu Dhabi and one in Malaysia.  This is an approximate $100m decline in expectations for 2014 earnings to $650m, reducing EPS to $1.9. 

 

They also state that achievement of their 2015 earnings target* will be dependent on the timing of potential ECOM (Engineering, Construction, Operations & Maintenance)  contract awards during 2014.  The growth in earnings will need to be about 33% in 2015 to meet their earnings target, although they have achieved this in the past (2008), it was from a much lower base. 

 

Group backlog was declared as US$14.3bn at 31 October 2013 the same level as at their half-year and net debt position was US$0.5bn at 31 October 2013 an increase from US$0.4bn at the half-year.  They also anticipate remaining in a net debt position for the remainder of 2013 and throughout 2014, which they say will result in a significant increase in year-on-year interest costs in 2014.  I have voiced my concerns before here about their weak free cash flow in contrast to their earnings declarations.  They clearly require high levels of working capital and capital expenditure, of which both have increased at a faster rate than turnover over the past 5 years.

 

I first purchased PFC in February 2010 for 882p and sold half six months later after it rose 59% from an under-priced share to an over-priced one at 1406p.  It may be time now to sell the remainder of my holding, as the company struggles with generating sufficient cash returns on its investments.    

* Management's earnings target for 2015 was $862m.

The Restaurant Group IMS

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 issued their IMS for the 45 week period and continues to make excellent progress compared to other chains in their sector.  Total sales were 9.1% ahead of last year and like-for-like sales were 3.5% ahead - this is in line with expectations.

They opened 21 new sites in 2013 to date and they expect to open a total of between 33 and 35 new restaurants this year.  They also stated that they expect to open more new restaurants in 2014 than in 2013.

Management state that although the like-for-like comparatives are much tougher during November, they are confident that the business will continue to make good progress during the remainder of the year and they are on track to meet expectations for the full year.

At the current price of 557p they trade on almost 21x expected earnings for this year and yield 2.6%, so currently fully priced.  Analysts are expecting EPS growth of 12% next year, although this may rise based on the comment of greater expansion next year.

 

Fenner finals

A manufacturer and distributor of reinforced polymer products. It operates in two segments, conveyor belting and advanced engineered products and is considered a world leader in reinforced polymer technology.  I have a holding in my income portfolio (epic code: FENR).

Fenner announced today their results for the year ended 31 August 2013 and were in line with their pre-close trading statement.

Revenue was £820.6m down 1.2% and underlying operating profit was £101.5m own 14.6%.  Operating margins showed a decline from 14.3% to 12.4%.  Underlying operating profits exclude amortisation of intangible assets acquired of £16m (£11.2m LY).

Underlying profit before taxation was £86.9m down 16.4% and underlying EPS was 30.1p down 16.6% with statutory EPS at 23.5p down 22.2%.

The Engineered Conveyor Solutions division was the cause of the weaker results as the mining industries in the USA and Australia saw weaker trading environments, causing revenue to decline in this division by 7.3% to £549.8m.  Management state that they have seen some recovery in the USA and a stabilisation of demand in Australia.

Advanced Engineering Products saw good demand, most especially from the oil & gas and medical sectors resulting in revenue up 14.2% to £270.8m.

Both divisions contributed to the decline in operating margins, with ECS showing the more marked decline from 14.2% to 11.5%.  AEP's margins declined from 18.4% to 17.3%, although management state that margins in this division improved in the second half to 19.1%.

A Final dividend of 7.5p was declared making a total dividend for the year of 11.25p providing an inflation beating increase of 7.1%.

On the back of these results the SP has moved ahead to a 52 week high of 443p.  At this price the historic yield is 2.5%.

Free cash flow for the year was £60.1m compared to £63.0m last year and net debt increased from £97.7m last year to £121.1m, although substantially reduced from £171.5m at the interim stage. Gearing is 35% and net debt represents just 90% of EBITDA and operating cash flow was 72% of net debt, so not much to concern me on the finance front.  I make their sustainable growth rate about 7%, so any increase on this next year will require additional debt or higher returns from the business.

Over the past 5 years their owners' earnings (growth in dividends and equity) has been acceptable at 13.7% pa and the free cash flow return on equity over the same period better at 16.5%.  They have a high WACC of 13%, but do make returns of close to 20% on their capital employed. 

Management reconfirmed that they continue to expect that the current financial year will see a return to growth.

My only concern now is the declining current yield from a stock that is not one of my top 10 core holdings.  One to ponder over and decide whether there is a better opportunity elsewhere, having already reduced my original holding over the years by 84% as the SP recovered. 

ICAP interims

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 issued their interim results to 30 September 2013 today and revenues and profits were as indicated in their pre-close trading statement.

Revenue was £736m, 1% below the same period last year, although operating profit was £153m up 6.3%, with an improvement in the operating margin from 19.3% to 20.8%.  Pre-tax profits were £139m, 1.5% ahead of last year.  These profits are before acquisition and disposal costs and exceptional costs. 

Adjusted EPS was up 5.2% to 16.2p although the statutory EPS was down 62.3% to 2.9p.  The decline in statutory EPS was due to exceptional costs in the period which included - fines imposed due to manipulation of Yen LIBOR of £55m, a provision of £8m relating to Link Brokers for wrongdoing that pre-dates ICAP's ownership and various associated legal costs less tax credits of £2m.  If we exclude the exceptional costs (but not the acquisition & disposal costs) from both years then the EPS would have increased by 17.3% to 12.9p.

Free cash flow was weak at just £3m for the six month period, compared to £26m last year.  Net debt increased from £25m at the beginning of the year to £87m, but still represents a low level of gearing at just 9%. 

An interim dividend of 6.6p has been declared, this is the same as last year following their custom of paying an interim of 30% of last year's full dividend.

Management stated that they expect that PBT for the full year to be marginally ahead of the prior year.

These results showed the full half year effect of the £80m of annual cost savings implemented last year.  Further cost savings are in process and it is expected that an additional net £5m will be saved this year, with the full effect next year expected to be £15m.

ICAP are taking the right decisions with respect to reducing its cost base, that is beginning to offset the current lack of growth in what is a subdued financial market.  The shares look to be up about 5% on these results, but still offer a yield of over 5.5%. 

Synergy Health interims

Delivers a range of specialist outsourced services to healthcare providers and other clients concerned with health management. Such as hospital sterilisation services; applied sterilisation technologies for single-use medical devices; reusable surgical solutions for daily delivery of sterile reusable gowns and towels; clinical pathology, toxicology and microbiological services; chemical and microbiological analysis; linen management services for healthcare facilities and product solutions designed for infection prevention and control, patient hygiene, surgical procedures and wound care.  I have a holding in my growth portfolio (epic code: SYR)

Synergy announced their interims today and declared that revenue for the period increased by 12.0% to £192.1m, and underlying revenue, excluding currency effects, increased by 9.0%.

Adjusted operating profit increased by 9.8% to £29.2m and adjusted EPS was 33.54p up 8.5%; reported EPS was 28.27p up 15.3%. The interim dividend was increased by 8.5% to 8.57p.

By geographic regions - UK and Ireland revenue increased by 1.5% to £81.5m, on a constant currency basis revenue increased by 0.9%. Margins increased slightly by 0.2% to 20.2% and operating profit increased by 2.6% to £16.5m.

Europe & the Middle East revenue decreased by 1.1% to £59.5m, although on a constant currency basis decreased by 6.3%, due to the effect of weak prices in the Dutch linen market, reflecting predatory pricing by competitors. Operating margins were largely unchanged at 15.4% but operating profit declined by 1.7% to £9.1 million reflecting the lower revenue.

The Americas revenue increased by 87.6% to £41.4m, with revenue on a constant currency basis increasing by 81.4%. Operating profit increased 95.6% to £4.7m, with operating margins increasing by 0.4% to 11.2%.

Revenue for Asia and Africa increased by 7.6% to £9.7m and by 5.0% on a constant currency basis. Operating profit increased by 4.5% to £2.0m with margins decreasing by 0.6% to 20.7%.

 

It was good to see that despite some of the issues in Europe gross margins for the Group showed a slight improvement from 39.8% to 40.0%.  

  

Free cash flow (FCF) at £15.1m up by 17% on last year continues to be a strong feature of Synergy's business.  They do supply a split between maintenance capital expenditure and capital expenditure for expansion and on that basis FCF is £22.7m, similar to last year.  Net debt was reduced from £177.3m at the beginning of the year to £168.8m and gearing fell from 51.5% to 50%.

 

Management state that the Dutch linen service is depressing growth and there is a risk that this will continue to impact the Group in the second half of the year, although they currently anticipate that earnings for the year will be in line with the their expectations.

Still worth holding for the opportunities in the USA and Asia and the benefits of their strong FCF. 

 

Vodafone interims

Vodafone the second largest ( behind China Mobile) mobile telecoms company in the world. I have a holding in my income portfolio (epic code: VOD).

 

Vodafone announced their interim results today and in summary Group revenue increased by 2.5% to £19.1bn, with service revenue of £17.5bn showing a decline of -2.3% on an organic basis.

On a management basis (includes 5 months of Verizon Wireless and share of associates) - service revenue was £20.0bn, a decline of -4.2%.

For the second quarter Group organic service revenue on a management basis declined -4.9%, with North & Central Europe down -4.9%; Southern Europe down -15.5% and Africa, Middle East and Asia Pacific (AMAP) up +5.7%.

AMAP continues to perform well and now represents 29% of the Group's service revenue and 34% of the Group's EBITDA.  The two fastest growing countries within Vodafone were Ghana growing at 21.2% and India 13.5%.  India is now the fourth largest EBITDA contributor within the Group and has a healthy margin of 31.8%.

Southern Europe continues to perform badly and contained the two worst performing countries Spain and Italy whose service revenues declined by 10.7% and 11.1% respectively.  CEO Colao believes that Europe is at a turning point with an expectation of a return to economic growth during the next two years.   

Adjusted operating profit on a management basis fell -8.3% to £5.7bn and adjusted EPS of 7.85p fell -2.6%.  Reported diluted EPS from continuing operations was 31.97p compared to a loss last year of 8.81p; the reported EPS benefited from £14.7bn of deferred tax assets being recognised, relating to tax losses in Germany and Luxembourg of £17.7m and a likely tax charge of £3bn relating to rationalisation & reorganisation of Vodafone's non-US assets prior to the disposal of its share in Verizon Wireless.

An interim dividend of 3.53p has been declared, which represents an 8.0% increase over last year and management intend to increase the final dividend (post share consolidation after the Verizon Wireless sale) by 8%.  This will result in a total dividend of 11.0p and they have committed to grow it annually thereafter. 

Management have stated that they are on target to deliver adjusted operating profit of around £5bn and free cash flow (defined using a number of adjustments) in the £4.5 - £5.0bn range.

Free cash flow for the six months was £279m compared to £406m last year, with an additional £3.5bn (LY £1.2bn) of associate dividends.  Dividends and share repurchases totalled £4.4bn for the period.

Net debt (I have not included mark to market adjustments on debtors and creditors that Vodafone include) at the period end was £25.8bn compared to £27.3bn at the beginning of the year, much of this improvement is due to foreign exchange translation differences.  Gearing is a comfortable 31% compared to 38% at the beginning of the year.

Vodafone is performing well in its emerging markets, but its future over the next 5 years will still be heavily reliant on an improvement in its European territories.  If Colao has called this right and, his substantial capital expenditure plans (£19.1bn by March 2016) produce the expected free cash flow returns, then undoubtedly Verizon will still be a core constituent of any income portfolio.