Category Archives: Portfolio

Jackup rig

Why I’ve sold Lamprell plc

Jackup rig

Disclosure: Roland owns shares of Petrofac.

I’ve sold my entire holding of Lamprell for a net profit of 21.6%, and an annualised net profit of 14.6%.

In essence, my decision was made because the company appears to be moving from a deep value investment to a future growth story. There were two specific factors behind my decisions to sell.

Uncertain outlook

The oil market recovery is taking longer than expected. While Lamprell continues to generate cash as its receivables unwind, the outlook for revenue is poor for the next two years. Consensus forecasts show revenue of $407m (2017) and $459m (2018). No profit is expected during this time.

Thus the firm’s valuation is becoming heavily dependent on its cash pile and future growth. This leads me to point two.

Growth plans may erode value

News of the Saudi Aramco-backed Maritime Yard project joint venture in Saudi Arabia is potentially exciting for Lamprell in the long term. It appears to put the firm into a group of well-respected companies with preferential access to future work from Saudi Aramco, and potentially from other Middle Eastern groups. But it will require an investment of up to $140m by Lamprell and isn’t expected to be operational until 2019.

There’s some prospect of Lamprell taking JV work in its Dubai yards in the meantime, but given the state of the oil market I’m not sure how immediate or material this is.

In the meantime, Lamprell’s financial commitments to the Maritime Yard JV and the fixed costs of its existing facilities seem likely to eat up the group’s net cash of $275m (31 Dec 2016). Although this stock may well still be an attractive buy for long-term growth, that’s not what I signed up for. So I’ve sold.

Balancing the portfolio

The other reason I sold is that my relatively large position in Petrofac means I’ve ample exposure to the oil market and the Middle East, without Lamprell.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Scales of justice

Why I’ve sold Murgitroyd Group plc


Disclosure: Roland does not own shares of Murgitroyd Group.

Murgitroyd Group plc (LON:MUR) was a recent addition to my value portfolio. It appears to be a cash generative and conservatively-run business, but a comment on Twitter from @maynardpaton has made me look again at this firm’s accounts and reconsider my view on the firm’s appeal:

For at least the last eight years, MUR has credited increasingly large and very material credits to operating profit as a result of exchange rate gains. These appear to relate to EUR and USD versus GBP.

You can find details of these credits in the footnotes to the firm’s annual reports. To gain a picture of what might be happening, I’ve collated the exchange rate gains versus operating profits since 2009. Something interesting appears to have happened to the firm’s margins:

Year 2009 2010 2011 2012 2013 2014 2015 2016
Revenue (£’000) 28904 29429 33218 35699 35969 38353 39819 42231
Operating profit (£’000) 3494 4008 4184 4538 4679 4133 4182 4294
Op. margin including FX benefit 12.1% 13.6% 12.6% 12.7% 13.0% 10.8% 10.5% 10.2%
Foreign exchange credit (£’000) 348 418 555 734 1237 1355 1656 2394
Operating profit ex. FX (£’000) 3146 3590 3629 3804 3442 2778 2526 1900
Op. margin excluding FX benefit 10.9% 12.2% 10.9% 10.7% 9.6% 7.2% 6.3% 4.5%

Source: Annual reports 2010, 2012, 2014 & 2016

It’s hard to understand* quite why the FX credits have increased so rapidly, but the underlying trend seems fairly alarming to me.

These figures seem to show that excluding favourable exchange rate movments, operating margin has fallen from 10.9% to 4.5% over the last eight years.

Is the mix of business changing?

I wonder if this decline relates to the rapid growth of the group’s US revenues and the stagnation of the UK business during this period?

  • 2009: UK revenue: £18.3m / US revenue: £3.9m
  • 2016: UK revenue: £16.7m / US revenue £18.8,

In 2009, US revenues represented 13.5% of the total. This figure has increased steadily and US revenue now accounts for 44.5% of all revenue, more than the UK (39.5%).

Oddly, the company doesn’t provide a segmental breakdown of operating profit, citing IFRS 8 and saying:

The Group does not manage its business by reference to separate geographical locations. Consequently, an analysis of net assets and operating profit by location is not monitored and is therefore not provided.

Really? Personally, I’m a bit surprised that a listed company with £40m+ of revenue doesn’t know how much profit it’s making it its two largest operating geographies.

I often feel sceptical about companies which refuse to breakdown profitability by segment. There’s sometimes a good reason why they don’t want to shout about this information.

Having missed this potential risk in my original review of the company, I’m not ashamed to change my mind and admit I may have been wrong. Although these FX gains may continue to support profits for years to come, they may not. I’m no longer sure that Murgitroyd is worth the risk, and have now sold my position.

*A somewhat opaque description of the group’s currency management policy is given:

Foreign currencies

Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the income statement. The assets and liabilities of overseas operations are translated at the rate of exchange ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period. Exchange differences arising from this translation of foreign operations are taken directly to reserves.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Sainsbury's CEO, Mike Coupe

Does J Sainsbury plc deserve such a big discount?

Sainsbury's CEO, Mike Coupe

Disclosure: Roland owns shares of J Sainsbury plc.

I’ve been reviewing the stocks in my portfolio recently, with a view to culling low conviction positions and focusing more heavily on stocks where I feel there’s significant value on offer.

As part of this, I reviewed my holding of the UK’s number two supermarket, J Sainsbury plc (LON:SBRY). The firm’s recent FY results seemed broadly as expected to me and didn’t highlight any serious concerns.

The group’s main value ratios still look attractive to me:

  • Trailing price/earnings = 14.5
  • Price/book ratio = 0.9
  • Trailing dividend yield = 3.65%
  • PE10 = 11.1
  • Price/sales ratio = 0.23

Why the big discount?

It’s this last ratio I want to focus on. Despite a fairly solid performance last year, Sainsbury’s price/sales ratio of 0.23 puts it at a significant discount to listed rivals Tesco (P/S = 0.27). and Morrison (P/S = 0.35).

One possible explanation for this is different debt levels. But if we swap price for enterprise value, the result is the same. In fact, Sainsbury’s discount is even greater:

  • Sainsbury EV/sales = 0.27
  • Tesco EV/sales = 0.36
  • Morrison EV/sales = 0.43

The conventional explanation for this should be that Tesco and Morrison are significantly more profitable. Are they? Let’s compare each firm’s 2016/17 return on capital employed (ROCE):

  • Tesco = 2.6%
  • Sainsbury = 5.8%
  • Morrison = 7.3%

So Morrison is currently more profitable than Sainsbury, while Tesco is less so. Leaving Tesco’s valuation aside, this might go some way to explain why Sainsbury’s has a lower price to sales ratio than Morrison.

However, I would argue that the scale of Sainsbury’s price/sales discount is too large for this to be the only explanation.

A different angle

One of my favourite valuation measures is earnings yield, calculated as EBIT or operating profit divided by enterprise value. This provides a profitability-weighted measure of valuation. Here’s how the three supermarkets compare in terms of earnings yield:

  • Sainsbury: 9%
  • Morrison: 6.7%
  • Tesco: 3.4%

On this measure, Sainsbury is significantly cheaper than both of its rivals. The only logical explanation for this seems to be that the market is expecting Sainsbury’s profits to stagnate or fall, while those of Morrison and Tesco are expected to rise.

I’m not sure I share this view. I’d have thought that competition in this sector is tough enough to make such diverging performance unlikely unless managers at one company display rank incompetence . The only big risk that springs to mind is that Sainsbury’s expansion into non-food via its Argos business will be a disaster that distracts management from the core food business.

Sceptics may yet be proved right, but the signs so far are that the Home Retail acquisition is working to improve sales intensity in Sainsbury’s stores, and thus improve their profitability.

What if the discount closed?

If Sainsbury traded on the same price/sales ratio as Morrison, then that would imply a market cap of £9.2bn. That’s about 50% higher than the current figure of £6.1bn. In this best-case scenario, the shares could be worth about 420p.

On the other hand, Morrison’s price/sales ratio might fall, closing the discount in a different way. Sainsbury’s share price could languish at current levels.

A third option is that that two stocks will meet in the middle.

I’ve no idea what combination of shifts will take place, but I believe the valuation discount between Sainsbury and Morrison is likely to narrow at some point. In the meantime, I’m continuing to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.


Offshore oil and gas platform

Is Petrofac Limited now too cheap to ignore?

Offshore oil and gas platform

Disclosure: Roland owns shares of Petrofac.

I was attracted to (but not invested in) Petrofac Limited (LON:PFC) before the news of the Serious Fraud Office investigation broke and the share price collapsed.

Prior to the SFO news, I think it’s fair to say that outlook and valuation for Petrofac were reasonably attractive for value investors. The stock was trading on a forecast P/E of about 9, with a prospective yield of 6.3%.

Fast forward two weeks, and the shares now trade on a forecast P/E of 4.5, with a prospective yield of 12.8%. Notably, the stock trades on a multiple of about 4.4 times trailing free cash flow.

Measured against Petrofac’s profits over the last ten years, the current share price of 395p gives a PE10 of 6.1. That’s potentially very cheap, if the firm can continue to operate as it has done in recent years.

I note that various newspaper articles have suggested a potential fine of $800m in the event that Petrofac is convicted of alleged corruption offences. For more on this, see – The Times (paywall), The Telegraph and Financial Times (paywall).

I’m not going to attempt to expand on this, but I have bought Petrofac shares as they’ve fallen, with an average buy price of 513p.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Game Digital

New stock: I’m unable to ignore value credentials at Game Digital plc (updated 07/07/2017)

Game Digital

Source: Game Digital

Disclosure: Roland owns shares of Game Digital and Next.

Update 07/07/2017: In my view, Game’s recent profit warning didn’t change the story much as I’ve set it out below. The prospects for next year still seem likely to improve and the firm’s amazingly short lease portfolio should give it an unusual level of flexibility and (hopefully) some protection for shareholders.

I don’t see this as a long-term buy, but I do believe it’s a special situation with the potential for some attractive upside.

Furthermore, with the shares trading at roughly half my purchase price, averaging down seemed more likely to improve my eventual result than to worsen it.

So I added more Game Digital shares to my portfolio at 23p.


Today I’m reviewing my latest stock purchase, video game retailer and event organiser, Game Digital plc (LSE:GMD).

The abbreviated form of the post is once again an almost-direct transcription of my personal notes, in order to (hopefully) increase my posting rate to this blog.

The story

The physical retail of games may be subject to long-term decline in favour of online distribution, but the group’s business appears to remain viable at present. Game Digital is also taking steps to build its brand and convert its stores into destinations, by organising local gaming events and by becoming become a gaming conference event organiser.

In my view, there’s no immediate sign of demise. This retailer also has an unusually strong balance sheet with very limited liabilities. The valuation doesn’t seem to reflect this; hence my recent decision to add Game Digital to my value portfolio.

Value credentials

Game Digital appears to be priced for failure, or at least imminent decline. No value at all is being assigned to the group’s net cash, even though it remains profitable and is generating positive cash flow.

Here is a summary of the reasons why I’ve invested.

Net cash of £69m versus market cap of £73.5m: this implies that the market believes either that the current business is almost worthless, or that Game Digital’s net cash will be consumed by the business without generating any improvement in profit. I’m not sure either of these views is reasonable. Net cash has bounced around at these levels for the last few years. The business is profitable and doesn’t appear to be burning cash uncontrollably.

Net current asset value (current assets – total liabilities) = 37.8p per share versus a current share price of 43.5p per share — that looks cheap to me

Forecast dividend yield of 4.6%, comfortably backed by cash.

Forecast P/E of c.12 looks reasonable based on expected growth and doesn’t take into account net cash.

Market sentiment is poor, the stock is down by 55% over the last year, but broker forecasts have been fairly stable since January.

Asset light model: average UK lease 1.2 years, average lease in Spain is one year. Game Digital says that it has 240 “lease events” due in the next two years. The company appears to be capitalising on falling high street rents to drive hard bargain with landlords.

According to the recent interim results, 22 leases were renegotiated on improved terms during the first half of this year, realising over £0.5 million of annual rent savings. The firm says this represents a rent reduction of approximately 44% across these properties.

Game Digital’s unusual lease profile suggests to me that its store portfolio could be rapidly re-shaped or reduced if necessary, without excessive cash losses on unproductive stores.

In my view, falling high street rents and greater flexibility from landlords is likely to be a recurring theme among successful retailers over the next few years. It’s certainly something that’s helping Next, another of my value portfolio stocks.

Major shareholders: One final point is that the list of major shareholders contains some encouraging names (in my opinion):

  • Chief executive Martyn Gibbs has a 1.2% stake
  • Woodford Funds has 19%
  • Schroders has 5%

My feeling, having looked at the numbers, is that Game Digital is unreasonably cheap at the moment. Although this business isn’t without risk, the narrative in the recent interims seemed encouraging to me. The firm expects to benefit from the launch of the Nintendo Switch in H2 and Microsoft’s Project Scorpio in H1 of the 2017/18 year. Overall, the firm’s recent commentary suggests to me that Game Digital has the potential to adapt and evolve to remain relevant and profitable.

Time will tell. For now, I hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A tunnel in a deep mine

New stock: Why I’ve added Highland Gold Mining Ltd to my portfolio

A tunnel in a deep mineDisclosure: Roland owns shares of Highland Gold Mining, Kingfisher and Millennium & Copthorne Hotels.

I’ve been on something of a spending spree recently, adding three new stocks to the portfolio so far in May.

You can see all the details on my portfolio page, but in short the companies are B&Q owner Kingfisher, FTSE 250 group Millennium & Copthorne Hotels and Russian gold miner Highland Gold Mining Ltd (LON:HGM).

I’ve thought long and hard about whether to invest in gold. I’m not a gold bug, but the market for gold now seems fairly stable. On that premise, a number of cash generative and low-cost gold producers have started to show up in my value screens.

Highland Gold Mining has emerged as the winner from a short list of three:

  • Centamin
  • Pan African Resources
  • Highland Gold Mining

Centamin: I ruled out Centamin because of its ongoing legal problems in Egypt. The biggest worry is that a case challenging the validity of its mining licence will go against the firm. I also feel that on 17 times forecast earnings and 1.7 times book value, Centamin stock is quite fully valued at the moment.

Pan African Resources: I’v nothing against this South African/Zimbabwe-based miner, but free cash flow has lagged behind earnings over the last few years. Plus I find PAF’s RNS announcements unnecessarily confusing and difficult to read. I also have concerns about the ongoing labour relations problems afflicting South African miners. These are justified, in my opinion, but nevertheless are a deterrent from an investment perspective.

Why Highland Gold?

Having ruled out Centamin and Pan African Resources, I decided to go with Russia-focused Highland Gold Mining. This is something of an oligarch stock, with backers including Roman Abramovich and former Sibneft president Eugene Shvidler.

The company was founded in 2002 “for the purpose of acquiring, consolidating and developing a portfolio of quality gold mining projects in the Russian Federation”. It’s been reasonably successful. In common with most Russian miners, costs are low by industry standards. Cash generation is strong and the firm pays generous dividends.

One downside of HGM’s ownership profile is that the free float is only 50%. But Highland Gold has traded continuously on AIM for 14 years. It has a far better trading record than many more freely-held commodity stocks. I’m also reassured by the presence of Canada’s Barrick Gold on the shareholder register. Barrick has a 20% stake in HGM, which would seem likely to give it the casting vote in the event of any corporate action.

The stock looks affordable to me

I’ve not carried out an in-depth analysis of the quality of Highland Gold’s mines or reserves. Such a task is outside my competence and would take more time than I have available. So I based my decision to buy on key performance measures and valuation metrics.

  • Spot gold price 12/05/17: $1,228/oz
  • 2016 all-in sustaining cost AISC: $652/oz
  • P/B: 0.8
  • Trailing P/E: 12.2
  • Trailing P/FCF: 7.5
  • Earnings yield (Op. profit/EV): 11%
  • Net debt to net profit: 4.3x
  • 2017 forecast P/E: 10.8
  • 2017 forecast yield: 6.5%

In my view, these are all attractive values, with the possible exception of the net debt. However, net borrowing fell from $231m to $205m last year. The group’s cash generation leads me to expect further reductions this year. I don’t think this level of gearing is likely to cause a problem.

My overall view is that HGM looks good value at current levels. The yield is attractive and the group’s low mining costs should help to ensure a reliable stream of free cash flow, regardless of the price of gold. On that basis, I recently added Highland Gold Mining to my value portfolio.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Shanghai skyline

New stock: A stay at Millennium & Copthorne Hotels plc could prove profitable

Shanghai skyline

Disclosure: Roland owns shares of Millennium & Copthorne Hotels and Hargreaves Services.

In this post I’m going to look at one of two new stocks I’ve recently added to my value portfolio. A second post will follow, covering the second addition.

Buying stocks which trade at big discounts to their tangible net asset value is often riskier than Ben Graham devotees (of whom I am one) would have you believe.

Although it’s worked out well for me with Hargreaves Services, the liquid and heavily-analysed nature of modern markets means that mid-cap or larger stocks rarely trade at big discounts without good reason.

Notwithstanding this risk, I’ve recently added FTSE 250 hotel group Millennium & Copthorne Hotels (LON:MLC) to my portfolio. This luxury hotel group was founded as CDL Hotels International in 1989, as a subsidiary of the Singapore-based Hong Leong group.

Today, MLC is controlled by City Developments Ltd (SES:C09), a Singapore-based property group with a market cap of £5.4bn.

I think it’s fair to say that the whole enterprise is essentially a family business: both MLC and City Developments were founded by members of the Kwek family, which runs the Singapore-based Hong Leong group.

Why buy?

The opportunity on which I’ve based my purchase is that at 450p, Millennium & Copthorne currently trades at a 54% discount to its tangible book value of 989p per share. That’s despite having a strong balance sheet and an improving outlook.

MLC’s shares have historically traded at a discount of around 20% to book value (e.g. in 2015, book value was c.700p and the share price was about 580p). This suggests to me that the current discount is exceptional and should narrow as and when the firm’s profits recover. My calculations suggest that a return to a 20% discount to NAV would imply 50% upside from a share price of 450p.

Although trading has been disappointing over the last year, I don’t see this as a reason to write down the value of a large portfolio of upmarket hotels in prime city locations across the world.

In the short term, the current valuation doesn’t seem excessive. I’m also reassured by the group’s low level of gearing:

  • 2017 forecast yield of 1.8%
  • 2017 forecast P/E of 15.7
  • Net debt of £710m, versus fixed assets of £4.3bn.

One other point in favour is that analysts’ forecasts have recently been upgraded for both 2017 and 2018. This graph from Stockopedia shows the recent improvement in City sentiment:

MLC Broker forecast trend May 2017

MLC broker forecast trend May 2017 (source: Stockopedia)

What could go wrong?

As far as I can see, there are four main risks:

1. A bid is unlikely: MLC’s majority-owned structure means that a bid  from an external buyer is very unlikely. In last year’s third-quarter update, management reiterated its commitment to a long-term ownership strategy: “The Group has a long term perspective and considers asset ownership as key to its strategy.”

2. No shortcuts: This commitment to asset ownership also means that MLC is unlikely to turbocharge its returns in the way that its FTSE 100 peer InterContinental Hotels has done. InterContinental’s franchise/management model makes it hugely profitable, but net fixed assets have shrunk from £2.2bn in 2012 to just £857m at the end of 2016.

My reading of MLC’s Asian owners is that they are shrewd and share my view that over the long term, the value of prime real estate in major cities is only ever likely to rise. They won’t exchange this advantage for shorter-term profits.

3. Valued by yield, not assets: Points 1 and 2 could mean that the market only values MLC by its dividend yield. As this is already low, at about 1.8%, the shares could stagnate until the company lifts the payout.

4. Not very profitable? MLC’s business will continue to struggle in an indifferent global market. In my view, this is a short-term risk that’s unlikely to be a longer-term problem. Improved management, currency shifts and other cyclical factors should mean that profits reflect the quality of the assets.

Points one through four are all valid risks that could limit the profitability of my investment. But in my view, none of them imply any particular downside risk. Even if the shares don’t go up, the risk of a long-term decline seems low to me.

On that basis I’ve added Millennium & Copthorne Hotels to my portfolio. I see this as a safe long-term buy with decent upside potential from asset backing and improvements to profits.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A picture of a CPU

Is Murgitroyd Group plc poised for a recovery?

Disclosure: Roland owns shares of Murgitroyd Group.

A short post to introduce one of the latest additions to my value portfolio.

Murgitroyd Group (LON:MUR) is a £36m firm specialising in “intellectual property advisory services”.

The main part of the business seems to be providing patent attorney services and the group operates throughout Europe. It’s also active in the US, where it’s targeting longer-term growth by selling European patent services to US companies.

Murgitroyd’s share price fell by about 25% in one day in January, after the company warned investors that first-half profits would be below expectations. Full-year profit guidance was also cut. I am generally a believer of the adage that profit warnings often come in threes, so I’d normally have stayed away a little longer.

However, last week’s third-quarter trading statement was much stronger than expected, advising investors that:

“The Board also confirms that the underlying trading result for the third quarter was much improved on the first half performance and ahead of revised internal forecasts for the period.”

A further trading update is expected in June 2017. Arguably I should have waited until then to consider a buy. But I’ve been tempted by the company’s strong balance sheet and value credentials.

I’d also argue that this sector is only likely to expand over the coming years, providing attractive growth and consolidation opportunities for a mid-sized player such as Murgitroyd.

Why I bought

Here’s a short summary of Murgitroyd’s financial attractions:

  • 10-year average eps growth rate of 4.6%
  • 10-year average dividend growth rate of 6.2%
  • Earnings per share convert consistently to free cash flow — around 72% cash conversion since 2011
  • Free cash flow consistently covers the dividend, usually by a large margin
  • Debt free with net cash of £1.1m, which is a significant amount relative to TTM net profit of £2.7m
  • 5-year average ROCE of 16%
  • Forecast P/E of 13, falling to a P/E of 12 for 2018
  • 4% dividend yield

This appears to be a consistently profitable and cash generative business, with a moderate valuation and stable long-term growth.

Another point worth noting is that founder Ian Murgitroyd remains chairman of the group, with a 26.8% shareholding. Edward Murgitroyd, who I assume is his son, has a 4.3% stake and heads up the group’s US presence in his role as vice chairman. This family ownership ought to ensure that the focus remain’s on sustainable long-term growth and that acquisitions are proportionate and carefully considered. I hope.

In any case, I’ve bought some Murgitroyd shares and await the trading update in June and the firm’s full-year results in September with keen anticipation.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Morrisons Newport IoW

Portfolio changes: MRW, AAL, BLT & BP

Disclosure: Roland owns shares of Anglo American, BHP Billiton and BP.

Robert Louis Stevenson said in 1878 that “To travel hopefully is a better thing than to arrive”. This is often true in life but also in the stock market, where it translates into “buy the rumour, sell the fact”.

I’ve been agonising about what to do with my holdings in Wm Morrison, Anglo American, BHP Billiton and BP this year. After travelling hopefully last year, they seem — to varying extents — to have arrived back at something approaching business as usual.

After much thought, I’ve made the following changes:

  • Sold: Wm Morrison Supermarkets (MRW.L);
  • Reduced: Anglo American (AAL.L) & BHP Billiton (BLT.L);
  • Hold: BP (BP.L).

Here’s a summary of the thinking behind each of these decisions.

Wm Morrison Supermarkets

The firm’s 2016/17 results were pretty decent and showed continued progress. ROCE rose to about 7% and the group’s operating margin increased from 1.9% to 2.9%.

But the shares are no longer anomalously cheap, in my view:

  • PE10 = 13
  • Trailing P/E = 21.3
  • Trailing yield = 2.4%
  • P/TB = 1.55

A second factor is that the firm’s free cash flow fell from £854m to £670m last year. I commented in my 2016 review that free cash flow would have to fall back towards profits eventually. That this is now happening suggests to me that the extraordinary gains from squeezing working capital and improving stock management are now slowing.

The group’s results seem to confirm this:

  • £1bn cost savings achieved. Further productivity and cost savings to come
  • Good progress with medium-term cash flow targets: achieved over £900m of £1bn working capital, and almost £900m of £1.1bn disposals

My investment in Wm Morrison was (as ever) made too early, but has delivered a satisfactory result nonetheless:

  • Capital gain: 36%
  • Dividend return: 16%
  • Annualised total return after costs: 19%

Anglo American & BHP Billiton

FTSE 100 miners BHP Billiton and Anglo American still look relatively cheap to me:

  • BHP Billiton
    • PE10 = 9.0
    • 2017 forecast P/E = 10.5
    • 2017 forecast yield  = 5.7%
    • Trailing P/FCF = 11.5
  • Anglo American
    • PE10 = 6
    • 2017 forecast P/E = 6.2
    • 2017 forecast yield = 3.2%
    • Trailing P/FCF = 6.6

I’m conscious that these forecasts are heavily subject to currency risk, commodity price risk, and — and in Anglo’s case — political risk in South Africa. But I think that there’s the potential for further gains, for example from oil (BHP) and copper (AAL).

Overall, I think there’s still value on offer. But I also feel that the upside risks no longer outweigh the downside risks so decisively as they did a year ago. So I’ve halved my position in both stocks.


Should I sell BP? Is a full recovery already in the price?

After some thought, I’ve concluded that the oil market recovery remains at a relatively early stage and that BP’s valuation reflects this:

  • PE10 = 9.0
  • 2017 forecast P/E = 15, falling to a P/E of 12 in 2018
  • Forecast yield of 7%
  • The devaluation of the pound means that my dividend yield on cost is currently 9.6%!

To a large extent, the price of oil is still too low to encourage fresh investment. On balance, I think this situation is unsustainable and that prices are likely to rise further at some point in the future. The current stumbling block is the backlog of inventories, which in the US at least, remain high.

However, I’ve noted recently that financial commentators have started to suggest that there is no foreseeable reason for oil prices to rise. This kind of complacent speculative gloom may be a sign that the tipping point towards a rebalancing could be closer than we think. Remember when $100 oil was the new normal?

Another positive is that BP recently announced plans to target a much lower cash breakeven price of $35-40 per barrel by 2021. That’s a significant reduction from the c.$60/bbl it needs at the moment. Even a measure of success towards this target could unleash a significant level of free cash flow.

I have left my position untouched for now, and continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

View from front of ship

Braemar Shipping Services plc: profit warning and dividend cut. What next?

View from front of ship Mattoso

Disclosure: Roland owns shares of Braemar Shipping Services and Lamprell.

23/01/2017: Braemar Shipping Services plc (LON:BMS) shares fell by 16% today after the group announced a profit warning and dividend cut.

It wasn’t the best start to the week, but in some ways it wasn’t a big surprise.

Dividend cut: Braemar’s 8% forecast yield was always likely to be cut, given the lack of earnings cover and weak underlying market conditions. Today’s update advised investors that the final payout will be cut by 70% to 5p, giving a total payout for the year of 14p (2015/16: 26p).

Assuming that next year’s interim payout is cut proportionally, then shareholders are looking at a 2017/18 dividend of about 7.7p. That’s a yield of about 3.1% at current prices, which seems about right to me.

Profit warning: The group’s shipbroking and oil and gas exposure was always a risk. As it turns out, shipbroking performed well last year and is on track to meet full-year expectations. The culprit behind the profit warning was the group’s Technical division, which has heavy exposure to the oil and gas market, where conditions have worsened “further than the board originally expected”.

Helpfully, Braemar provided precise guidance on revised profit expectations for the year ending 29 February:

… underlying operating profit before interest, acquisition related costs and tax for the year ended 28 February 2017 is now expected to be within the range of £3.0 million to £3.5 million.  This excludes a one off gain before tax from disposal of its interest in The Baltic Exchange of £1.7 million and one off costs associated with restructuring of approximately £2.7 million.

I’m not entirely sure how to map this onto broker consensus (prior to today) of adjusted post-tax earnings of £6.58m, but it’s clearly a decent-sized miss.

Back in October, the firm expected a stronger result in H2. It’s disappointing this hasn’t materialised. Given that management is experienced, this suggests that earnings visibility is poor. I guess this may continue for a little longer yet.

The much-flagged recovery in the oil price will take a while to translate into increased activity levels for service providers. How long appears uncertain. I wouldn’t be surprised to see more updates in the vein of today’s from both Lamprell and Braemar.

So what does the future hold?

The good news in today’ statement was that Braemar expects to end the year with net cash of £1.7m and an unused debt facility of £30m. Clearly the group’s balance sheet remains in good health and the business has generated cash this year. Albeit with some risk the debt facility may come into use this year.

Restructuring activity has intensified and annualised cost savings of £6m are expected this year. That’s quite significant for a company that reported full-year earnings of £6.8m last year.

My view that the company is a good quality business with attractive medium-term potential hasn’t changed. As I suspected, I bought too soon at 329p, but I’ve no intention of selling. I may average down at some point, although I haven’t done so yet.

As with Lamprell, I’d expect to see some signs of progress during the second half of 2017. For now, I’m sitting tight and doing nothing.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.