BAE Systems F35 orders

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.)

 

 

 

 

Lockheed Martin and the DOD have reached agreement on orders for the next two batches of F-35 fighter jets, a deal worth over $7bn.  This will be good news for BAE Systems who are a major sub-contractor on this programme.  The agreement covers 71 aircraft, with 60 for the U.S. military, and 11 for Australia, Italy, Turkey and Britain.

BAE Systems has the lead in manufacture of the aft fuselage, vertical and horizontal tails and wing tips, and responsibility for the fuel system, crew escape, life support, prognostics health management integration and UK aircraft carrier integration support.  It also plays a key role in many other parts of the programme.

 

 

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Reckitt Benckiser interims

Reckitt Benckiser Group is a manufacturer and marketer of branded products in household, health and personal care products, sold into nearly 200 countries from operations in over 60 countries.  I have a holding in my income portfolio (epic code: RB.) 

Reckitt Benckiser announced their interim results to 30 June 2013 today.  Total Net revenue grew by 6% to £4,994m, with like for like growth of 5% and 6% if we exclude the pharmaceutical business (RBP). 

Operating profit was £914m down 15%, if we exclude exceptional costs relating to historical regulatory issues of £225m and restructuring costs of £24m, then adjusted operating profit of £1163m was up 3%.  They achieved a strong gross margin improvement of 230bps to 58.7% and adjusted operating margin (ex RBP) was up 10bps to 20.4%.

EPS was 90.4p down 14%, but excluding the exceptional costs mentioned in the above paragraph adjusted EPS was 118.3p up 7% on last year.

Free cash flow (FCF) was once again strong at £893m compared to £788m last year, although net debt increased from £2,387m at the year-end to £2,810m at 30 June.  The increase in net debt was mainly due to payments for share repurchases of £279m, payments for acquisitions in China & Latin America of £413m and payment of last year's final dividend of £561m from the FCF.  Gearing at the period end is 46.6% compared to 34.6% last year and 40.3% at 31 December 2012.

The company has increased the interim dividend by 7% to 60p.  This may be a marker that the final dividend may see a similar increase, which would place the full year at say 143p delivering a 3.1% yield on the current share price.

There has been some concern over the sales of Suboxone film, after CVS Caremark dropped the product in favour of the generic tablet form (RB. stopped marketing the tablet form of Suboxone in March of this year).  CVS Caremark were not contracted to RB., so were a rather special case and RB.'s market share of buprenorphine prescriptions in the USA has been maintained at about 64%, although they do expect erosion of their share over time.  I would expect a sale of the pharmaceutical business to a more appropriate parent over the next 2-3 years, once the market has stabilised between RB.'s film and the generic tablet form. 

RB. stated that they have medium term targets to have emerging market sales representing 50% of the core group sales by 2015 and Health & Hygene to represent 72% of core group sales by 2015.  At the half year, emerging markets were 45% and Health & Hygene 72% of the core.  

Management are confident that they can achieve full year total revenue growth at the upper end of the previous guidance of growth in a 5-6% range (ex RBP), while maintaining adjusted operating margins.

These are good results from a well managed business and some initial concerns when Rakesh Kapoor  took over the CEO role from Bart Becht in 2011 have been proved to be unfounded.  Kapoor has instigated some major changes, so that it is a more decentralised organisation with a higher emphasis on emerging markets.

Spectris interims

Spectris develops and markets productivity-enhancing instrumentation and controls.  Operating in four segments - Materials Analysis, Test & Measurement, In-line Instrumentation and Industrial Controls.  I have a holding in my growth portfolio (epic code: SXS)

Spectris announced their half year results today, which although not particularly good reading, was a substantial improvement on their first quarter IMS.

On a reported basis sales for the half-year at £570.4m declined by 4.4%. On a continuing basis sales declined by 1% and excluding acquisitions by 3%.  This is an improvement over the first quarter, as second quarter sales increased 3% on a LFL basis.  Sales declined across all territories with the exception of ROW, the chart below shows the spread of sales geographically for the half year, compared to the spread last year:

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Adjusted operating profit was £80.1m a decline of 14% on the same period last year, adjusted EPS declined 12% to 48.4p, although the interim dividend was increased by 9% to 14.75p, underlining managements confidence of growth for the full year. 

Free cash flow at £34.1m was less than last year's £56.2m, but due to the sale of the subsidiary Fusion UV, an additional £106.1m of net cash was received during the period, helping reduce net debt by £97.1m from the year-end to £145.2m, producing a decline in gearing from 35.0% to 17.8% at the half-year. 

Trading improved during the second quarter across all segments. Management say they remain encouraged by the strong overall level of their opportunity pipeline, which probably implies a weakness in their current order book, they also state that trading continues to be characterised by longer order cycles.    

They do have in place an annualised £10 million of net cost savings initiated during the first quarter, that will improve the second half results.

They believe that their businesses are strategically well positioned and, assuming the improved trading conditions seen in the second quarter continue, they are confident that they will deliver full year performance in line with its expectations.  The chart below shows the share of group sales by segment along with the markets they address and, like the geographic split, is evenly spread:

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Market expectations are for EPS of 137p for this year and 147p for 2014, valuing the business on 15 times this year's earnings and 14 times next year.  Spectris is a business that in the past has produced strong earnings (with the exception of 2009, as customers cut spending at the start of the global economic downturn ) and strong cash flow conversion (including 2009), with a return on equity (with the exception of 2009) above 20%.  As has been evidenced this year, with the £10m cost reduction programme, management are quick to react to any threats.  Over the past 5 years Spectris has grown earnings and cash flows by over 15% pa and dividends by over 12% pa., a strong record, with the directors owning a reasonable stake, ensuring an entrepreneurial focus.

Pearson interims

An international media and education company, providing educational materials, technologies, assessments and related services to teachers and students.  Owner of The Financial Times and part owner (47%) of Penguin Random House.  I have a holding in my income portfolio (epic code: PSON).

Pearson announced their interim results today.  Sales on continuing operations were £2,243m up 5% and at constant exchange rates growth was 3% with underlying growth of 1%.  North America Education performed well, with sales up 5% and developing markets growing by 9%.  Also of note was the 14% increase in FT digital subscriptions.  Penguin that was sold to the joint venture Penguin Random House on July 1 2013, grew sales at an underlying rate of 6% (16% on a reported basis) to £513m.   

 

Operating profit was £20m compared to £50m last year and on an adjusted (eliminating amortisation of intangibles and acquisition costs) and continuing basis was £109m down 34% from last year, partly due to £29m of restructuring charges.

 

Net debt has increased by £867m, mainly due to negative free cash flow of £370m and payment for £242m of dividends, this leaves gearing at 36% compared to 21% at the year end.

 

The interim dividend was increased by 7% to 16p.

 

The company has initiated a process to explore a possible sale of Mergermarket that provides financial intelligence, data and analysis to the M&A market.

 

In one of the most dramatic positive improvements I've seen over such a short period for defined benefit pension plans, the overall deficit on the UK group plan of £19m at the end of 2012 has become a surplus of £99m at 30 June 2013.

 

Their guidance for the year essentially remains unchanged; excluding the accounting treatment relating to Penguin Random House, where in the future it will be dealt with as an associate.  They continue to expect adjusted EPS to be broadly level with 2012 (82.6p) before expensing £100m of net restructuring costs.

Bhp Billiton EWS project

A diversified natural resources company and among the world’s largest producers of major commodities, including aluminium, coal, copper, iron ore, manganese, nickel, silver and uranium, and has substantial interests in oil and gas.  I have a holding in my income portfolio (epic code: BLT).

BLT announced yesterday that they have approved an investment of US$1,972m to sustain operations at Escondida in Chile, by constructing a new 2,500 litre per second sea-water desalination facility. 

BLT operate the Escondida copper mine in partnership with Rio Tinto and JECO; BLT's share of the mine is 57.5% and the investment is their share of the cost.  Work will commence this month and is expected to complete in 2017.

Escondida is located 3,100 meters above sea level in the Atacama desert, 170km South-East of the City of Antofagasta.

Synergy Health IMS

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 Health issued their IMS this morning, declaring that revenue for the three months to 30 June 2013 increased by 21.9% to £96.6 million.  This includes the effects of currency and acquisitions, excluding theses items they state that organic growth "...is in line with last year...".  I am assuming that this means that there was no organic growth, rather than organic growth was the same as last year's 2.4%.  This is not a particularly clear statement.

They state that there has been a slightly slower start to the year, with US healthcare volumes static as a result of structural changes in the market filtering through from the Patient Protection and Affordable Care Act, together with the continued impact of austerity measures in the UK and Europe.

Operating margins for the quarter were ahead of plan, despite increased investment in business development.

The result of this is that trading for the quarter has been in line with management's expectations.

After a good set of full year results announced in June, this slow start to the year will likely pull back the share price over the next few days.

In addition to the IMS, board changes were announced.  After 11 years serving as non-exec Chairman, Sir Duncan Nichol announced that he will retire on 31 March 2014. Dr Richard Steeves, the Group CEO, will succeed him. Dr Adrian Coward, the Regional CEO for the UK and Ireland for the past 3 years will step up to take over as CEO. 

Unilever interims

A manufacturer and supplier of fast moving consumer goods, with more than 400 brands focused on health and wellbeing, 14 of which generate sales in excess of €1 billion a year. I have a holding in my income portfolio (epic code: ULVR).

Unilever announced their interim results today, for the period to 30 June 2013.  Turnover was up 0.5% to €25.5bn; adjusting for foreign currency and disposals, underlying growth was 5%, with emerging markets growing by 10.3%.  Of the 5% underlying sales growth 2.6% was due to volume. Operating profits were €3.9bn up 14% (18% at constant currencies), reflecting stronger gross margins up 120bps, that they attribute to profitable innovations, an improving mix and continuing to apply a rigorous approach to supply chain costs and savings.

Core EPS was up 4% to €0.76 and reported EPS up 14% to €0.83.  Dividend for the second quarter will be 23.12p per share a 22% increase on last year, partly due to Euro strength, as the Euro dividend was increased by 10.7%.  Free cash flow was €1.3bn, compared to last year's €1.5bn, this does not yet reflect the €2.1bn that will be paid to shareholders of Hindustan Unilever (HUL) that accepted ULVR's open offer. 

Net debt was €11.6bn up from €7.4bn at the year end, due in the main to accounting for the maximum liability of the HUL offer of €3.8bn. Since fewer HUL shareholders accepted the open offer, the net debt if adjusted for this would be €9.9bn (maximum value of the offer was €3.8bn, $2.1bn accepted).  So the adjusted gearing would be 76.7% still a substantial change from the 48.5% at the December year end.

They caution what is a good performance in their markets by stating that growth is slowing in emerging countries, as macro-economic headwinds influence consumer behaviour.  For developed markets they mention that they remain sluggish with little sign of any recovery in North America or Europe.

Unilever's overall underlying sales growth of 5% is still ahead of their main competitor P&G, who are in a 3-4% growth range and expect to remain there for their fourth quarter to June 2013, due to be announced in early August.