IMI IMS

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.

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.

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..."

                   

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.

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.   
         

Amerisur operations 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).

 

Amerisur issued an operations update today, informing the market that they have reactivated a limited production volume from Pad 3N in the Platanillo field.  Pad 3 is currently producing around 1,300 BOPD, and the entire field production is currently ~5,030 BOPD.

Operational netback to the Company during early April was US$24 per bbl, with an estimated sales price of US$51, and the volume contribution from Pad-3N is expected to increase operational netback to US$29 per bbl at a sales price of US$55.

Once the interventions of wells on Pads 9 and 5 are completed, field production in May is expected to be around 5,600 BOPD, with an operational netback of US$30 per bbl in that month.

It is worth comparing this detail with their guidance here in February.  Their estimate of $34 EBITDA was based on volume of 2.22m barrels of oil (6082 BOPD) a netback of $24.68 and an average sales price of $48/bbl.

So current production is -17.3% below the average guidance for the year, and the netback during early April is -3% above guidance.  May's increased production will be -7% below the average guidance, but the netback will, if the average sale price remains at around $55, more than eliminate the production short-fall.

This looks to be good control of the resource by management. 

Greggs trading update & capital structure review

The leading bakery food-on-the-go retailer in the UK, with almost 1,700 retail shops throughout the country.  I have a holding in my income portfolio (epic code: GRG).

Greggs announced today a trading update and a capital structure review.  The update covered the 16 weeks to 25 April 2015 and sales grew by 5.0% and like-for-like sales in their own shops grew by 5.9% - ahead of their expectations.  This compared to total sales growth for 2014 of 3.9% (adjusting for the extra week in 2014) and like-for-like sales in their own shops of 4.5%.

 

During these 16 weeks they have been busy, completing 69 shop refurbishments and opening 24 new shops, including 17 franchised units in transport locations.  They also closed 18 shops, giving a total of 1,656 shops trading at 25 April; this comprised 1,594 of their own shops and 62 franchised units.  They expect to refit 200 to 220 shops in 2015. 

 

As part of their capital structure review management have stated that they intend to maintain their progressive dividend policy, with a target that the ordinary dividend is two times covered by earnings.

 

They also see a need to maintain a year end net cash position of around £40m.  They state that due to the leasehold nature of their shop portfolio, they do not believe that it is appropriate to take on structured debt in the way of loans, overdrafts or bonds.

 

Importantly they have stated that they will not carry out the proposed share buyback announced at the time of the Group's preliminary results.  This is an excellent decision, a pity more management teams, with high P/BV ratios, do not come to this conclusion .  As I stated here at the time of the preliminary announcement "...A buy-back is a poor use of funds, especially with the current share price at over 4x book value..."; I am pleased their review has come to the same conclusion.

 

Instead of the buy-back management are declaring a special dividend of 20p, at a cost of £20m.  An excellent outcome, with the expectation of this being the preferred route for returning capital in the future for material amounts of excess cash.

 

In the outlook for the remainder of the year management have stated that they "...expect to deliver good growth for the year as a whole and further progress against our strategic plan..."

As I stated here, I estimate that Greggs on a DCF basis have an intrinsic value of approximately 1375p and at today's price of 1119p (up 4%) would yield 3.9% and have a 22% margin of safety.