Category Archives: Portfolio

Jackup rig

Lamprell plc FY update: With cash of 50p per share, I’m happy to wait

Disclosure: Roland owns shares of Lamprell.

23/01/2017: Just a brief review of today’s pre-close update from rig builder Lamprell plc (LON:LAM).

The group’s shares ended the day down by about 7%, but having read through the statement I didn’t see anything especially alarming or surprising.

Year-end net cash is expected to be above last year’s figure, which I take to mean above the 2015 year-end net cash figure of $210m. This should mean that Lamprell has about 50p per share of cash, with more to come in H1 has the firm’s remaining new-build rigs are completed and paid for. Costs are falling fast as staff are laid off following the completion of each rig, but Lamprell says it is maintaining capacity in areas of core competency.

The firm confirmed revenue guidance of “around $700m” for 2016, which is slightly below the consensus figure shown in Stockopedia of $748m. Guidance for 2017 is $400-500m for 2017, “with the current market pointing to the low end of the range”. That’s in line with the consensus figure of $416m shown in Stockopedia at the time of writing.

These figures are a touch disappointing but aren’t really a surprise. It’s been clear for some time that Lamprell faces a lean 2017. The company says that cash generation should remain positive this year. I’d hope to see some more contract wins during H2. But for me, the main story remains the group’s high level of net cash and its potential for future growth.

I 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.

A share tip circled in a newspaper share listing

Up 68% in one year: was I good or just lucky?

A share tip circled in a newspaper share listingDisclosure: This page provides information about shares I own. However, it is not guaranteed to be a complete or current reflection of my own portfolio and does not constitute any kind of investment advice.

2016 was a good year for my value portfolio, which delivered an outstanding gain of 68.2% and soundly outperformed the FTSE All-Share Total Return Index, which rose by a more modest 16.2%.

It’s an investment performance I suspect I may never repeat, so I think it’s important to try and understand how much of my success was due to good method, and how much was down to dumb luck.

In this post, I’ll review the performance of each of my current holdings in 2016. I’ll also take a look at the stocks I sold last year.

What went so right?

I went into 2016 heavily overweight in mining and banking stocks. After experiencing painful levels of drawdown early in the year — during which time I either did nothing or averaged down — these stocks delivered most of the gains generated by my portfolio last year.

But there were also a number of other good performers, such as Morrison’s and BP. Indeed, pretty much every stock in the portfolio ended the year higher.

I’m obviously pleased with this outcome. But I’m conscious that a fair chunk of luck may have gone into this result. Indeed, one of my goals in writing this review — as its title suggests — is to try and decide whether I was good, or just lucky, in 2016.

A particular concern is my approach to averaging down. A recent post by the always-entertaining John Hempton of Bronte Capital has made me think again about this. Am I too ready to buy more when the price dips, or is my logic sound?

I’ve ordered this list in alphabetical order to make it easy to find specific companies, but have included the original purchase date of each holding to provide some context.

Anglo American (AAL.L)

Original purchase: 19 June 2015 (averaged down 7 Dec 2015)

I was too early when I bought my original Anglo American shares in June 2015. The lesson I learned about commodity downturns was to wait until valuations became distressed before buying. By the end of 2015 I thought we’d reached that stage, and added more shares to my holding.

The market came round to my view in 2016, helped by a surprise rebound in commodity prices. Although perhaps it shouldn’t have been such a surprise: the decline in coal and iron ore prices had been ongoing for about five years. At some point supply and prices would respond. The risk was that the recovery was always going to be dependent on the enigmatic Chinese authorities.

Anglo’s plan to flog its iron and coal assets was put on hold indefinitely to allow the firm to tap the flow of cash now gushing from these ‘non-core’ assets. Ironically, the firm’s supposedly core assets — diamonds, platinum and copper — had a more humdrum year, albeit with copper displaying signs of life during the final quarter.

The City is now firmly behind Anglo. Earnings forecasts have been upgraded in every month since February. This proves what short-sighted nonsense broker analysis can be, but it does also provide a useful gauge of expectations. As things stand at the start of January 2017, Anglo trades on a modest 2016 forecast P/E of 11, falling to a P/E of 7 for 2017.

I’m hoping for a solid set of results in February and will be looking closely at margins, free cash flow and debt — and dividend policy.

Barclays (BARC.L)

Original purchase: 3 March 2014 (averaged down 13 April 2016)

Barclays is currently the oldest holding in my portfolio. Last year saw concrete progress towards a turnaround, as part of the group’s Africa business was sold and profitability started to improve.

The non-core division remains a challenge, but based on his performance so far, I’m prepared to accept CEO Jes Staley’s assurances that progress will continue apace.

My initial target price remains somewhere in the region of 300p, in line with the bank’s tangible asset value of 287p.

BHP Billiton (BLT.L)

Original purchase: 10 Dec 2014

BHP benefited from a rapid improvement in coal, iron ore and oil prices last year — as well as a turnaround in market sentiment. But the big story — and the reason I’m still holding — is the expected free cash flow from the firm’s assets in 2017.

Capex and exploration expenditure fell by 42% to $6.4bn last year, and is expected to fall to $5bn during the current year. Production costs also fell — for example, the unit production cost of the firm’s conventional petroleum assets fell by 30%. Unit cash costs for iron ore fell by 19%.

Management guidance is for free cash flow of $7bn in 2016/17. This implies a price/free cash flow ratio of 12.3 and an enterprise value/free cash flow ratio of 17. Both figures are attractive, in my view, especially as recently revised broker forecasts now give BHP stock a forecast P/E of 14 and a prospective yield of 4%.


Original purchase: 3 Feb 2016

One of my better-timed purchases. My BP shares have risen by 50% in less than a year, and no averaging down has been required!

The depreciation of the pound means that the dividend yield on my original purchase cost of 335p is currently a whopping 9%. Of course, this assumes that BP’s payout will remain unchanged at $0.40. I believe that’s likely, but with the firm now starting to increase capital expenditure and target growth once more, I’ll want some reassurance that cash flow is responding to the higher price of oil.

I don’t really want to see debt levels rise much further, relative to profits. However, with such a massive yield on tap, I’m not planning to sell unless I think management are taking too many risks.

Braemar Shipping Services (BMS.L)

Original purchase: 25 Oct 2016

I bought shares in this shipping and energy services group in the wake of Braemar’s most recent set of interim results. Both management commentary and the figures seemed to suggest that trading and cash flow could improve during the second half of the year.

As I explained in my original buy post, the shares also looked cheap to me on a host of traditional value measures.

I’m hoping that this position will prove a well-timed entry into a notoriously cyclical sector. Although the 8% forecast yield suggests a dividend cut is likely, the group has net cash and solid history of profitability. I think the downside risk ought to be relatively limited.

However, I’m live to the possibility that I’ve set sail too soon here… I await the next set of results with keen anticipation.

Hargreaves Services (HSP.L)

Original purchase: 29 May 2015 (averaged down 8 Dec 2015, 13 April 2016)

Hargreaves’ recent rebound has lifted my position to breakeven, but has also made it the largest position in my portfolio. I’m not sure whether I should be comfortable being so heavily exposed to this company. I may trim my holding soon.

For me, Hargreaves’ attraction is that it’s an asset play that’s run by an owner-manager with an excellent track record. CEO Gordon Banham owns a 7.1% stake in the firm, and in my opinion has delivered on all of his promises so far.

Hargreaves has emerged from a complex and wide-reaching restructuring with minimal debt and a profitable operating business. The group is now in a position to realise significant value from its property portfolio and legacy coal assets.

Concrete progress will be needed this year, but in the meantime I’m happy to continue holding. As a sidenote, this company’s RNS statements are always detailed, precise and transparent. I commend them to the house!

Indigovision (IND.L)

Original purchase: 30 June 2015 (averaged down 3 March 2016)

It’s been a tough eighteen months for shareholders in this small-cap video surveillance firm. I probably should have heeded Paul Scott’s regular warnings about the unpredictable nature of the group’s lumpy profits.

However, cash flow and the balance sheet remain sound, and operating performance is expected to improve significantly this year.

The shares are currently trading at a discount to tangible book value and Indigovision has net cash equivalent to 37% of its market cap. I’m happy to continue holding, and expect further improvement in 2017.

J Sainsbury (SBRY.L)

Original purchase: 19 Dec 2016

One of two purchases I made just before the end of last year. I believe the group is undervalued based on its assets and the synergy potential of the Home Retail Group acquisition.

For a more detailed look at why I bought, take a look at my original buy post.

Lamprell (LAM.L)

Original purchase: 24 March 2015 (averaged down 22 Sept 2016)

Last year’s interim results were a turning point for Lamprell. With the oil market starting to recover and cash due to start flowing in from completed projects, the group’s shares were trading significantly below net current asset value when I bought more at 59p.

I explained the numbers in detail here.

The shares have since rebounded strongly, but still look good value to me if the firm can continue winning new work for 2017-19. With the outlook improving in the oil market and Lamprell branching out into the renewable sector, I’m happy to continue holding.

Royal Bank of Scotland Group (RBS.L)

Original purchase: 19 Dec 2016

This was the second of my two pre-Christmas buys.

I explained why I’ve taken the plunge in this post. In brief, I think 2017 could be a turning point for several reasons. I believe the underlying value in the stock may soon start to be recognised by the market.

Standard Chartered (STAN.L)

Original purchase: 28 Jan 2015 (took part in rights issue 27 Nov 2015)

After a long time in the wilderness, things seem to be improving at Standard Chartered. I touched on some of the reasons for this in an article for the Motley Fool today. In short, bad debt levels appear to be moderating, and profitability is improving.

The added potential for higher interest rates could give profits a boost. I also believe that as with Barclays and RBS, StanChart’s newish chief executive Bill Winters is making good progress in dealing with legacy problems.

The shares remain at an attractive discount to book value, despite an improved balance sheet. I continue to hold.

Wm Morrison Supermarkets (MRW.L)

Original purchase: 18 August 2014

Last year was a good year for Morrison’s, as CEO David Potts delivered solid sales performance and very impressive free cash flow and debt reduction.

An improved deal with Ocado and a new deal to supply Amazon added icing to the cake, but the real eye-opener for me was the speed at which Mr Potts generated cash and reduced Morrison’s debt levels.

It seems that the balance sheet was quite inefficient under previous management, with working capital levels much higher than necessary. Optimising this has generated a lot of free cash flow.

Clearly this process can only go so far. The contrast between Morrison’s trailing P/E of 25 and its trailing P/FCF of about 8 is remarkable. I’ll be watching closely to see how this gap closes during 2017.

The ones I sold

I sold five stocks last year. I was going to cover these here, but time is short and this post is now far too long. Instead, here’s a list of the stocks I sold, along with a link to my original ‘sale’ article:

Final thoughts…

That’s it for another year. For what it’s worth, my conclusion about my performance last year is that my averaging down was okay. It was the original purchases that were poorly judged! In a number of cases, I should have waited longer for signs of deep value and (sometimes) distress to emerge.

My goal for 2017 is to become a harsher critic of value: is a stock really cheap?

The game plan for my existing holdings is simply to keep a close eye on the fundamentals and valuations of each firm, and allow these to guide my trading decisions.

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.

Royal Bank of Scotland logo

Is the tide turning for Royal Bank of Scotland Group plc?

Royal Bank of Scotland logo

Source: Royal Bank of Scotland

Disclosure: Roland owns shares of Royal Bank of Scotland Group.

Today I’m going to look at what I intend will be my final stock purchase of 2016.

Despite its apparent potential as a distressed asset play, I’ve stayed away from Royal Bank of Scotland Group plc (LON:RBS) until now.

In this post, I’ll explain why I’ve changed my mind and added shares of the state-controlled bank to my value portfolio, paying 226p per share.

Catalysts for a turnaround?

I believe RBS could be approaching a turning point in its recovery. This is a topic I touched on in a recent article for the Motley Fool, where I highlighted three potential catalysts for RBS shares.

Costly legal woes: The recent stress test failure was unfortunate, but the criteria for the test were very severe and also served to highlight how much stronger UK banks are now than they were five years ago. As far as I can tell, RBS only failed because it faces a potential multi-billion dollar settlement relating to mis-selling allegations in the US.

I expect this case to be resolved in 2017. It may prove to be a painful one-off hit — analysts are forecasting a fine of up to $12bn — but it will pass, leaving RBS in a better position to move forwards.

A profitable core: The bank’s core operations generated an adjusted return on tangible equity of 12% during the first nine months of the year. Given that the group-wide figure was -0.6%, it seems to be that if the bank can shed enough of its bad assets, underlying profits could rise sharply.

Government action: By all accounts, Chancellor Phillip Hammond is both pragmatic and decisive. He may well decide to start selling the government’s stake in RBS without waiting for some arbitrary and contrived breakeven point to be reached. This could even happen in 2017.

I believe that a clear decision to return RBS to private ownership would be well-received by the market, as it would resolve uncertainty about the bank’s control over its future strategy.

Value credentials

RBS shares continue to trade at a discount of about 33% to their tangible net asset value of 338p. This implies that the market doesn’t believe these assets are of sufficient quality or profitability to justify a higher valuation. It’s certainly true that RBS’s tangible net asset value has fallen significantly over the last five years as a result of impairments and the discounted sale of non-core assets.

I suspect this process may have further to run. But I don’t think it’s going to eliminate the value opportunity which lies between the current share price of 225p and the bank’s tangible net asset value of 338p.

Should I set a price target?

I believe the outlook for RBS is gradually improving. The bank’s net interest margin has been stable this year, while the adjusted cost: income ratio has fallen slightly. Bad debt levels (known as Risk Elements In Lending, or REIL) were down to 3.8% of gross customer loans at the end of September. That’s still relatively high, but is an improvement on 4.5% one year earlier.

Lots of the bank’s key performance metrics seem to point to progress, in my opinion. However, I’m not going to pretend that I’m able to undertake a meaningful and precise valuation of this business. There’s no way I could do this — big banks are far too complicated and opaque for that.

Instead, I’m just going to stick to time-honoured value investing principles and buy shares at what appears to me to be a discount to their net asset value. Such asset plays can be risky and slow to come good. I may end up with egg on my face, but that’s a risk I’m prepared to take.

For what it’s worth (not much) RBS currently trades on a 2016 forecast P/E of 16.3, falling to a P/E of 13.9 in 2017. I believe that both earnings and the share price are likely to rise significantly over the next few years.

I’ve added RBS to my value portfolio at 226p.

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

Why J Sainsbury plc could be worth 415p per share

Sainsbury's CEO, Mike Coupe

Mike Coupe, Sainsbury’s CEO, is betting that an expansion into non-food and finance can improve returns. Is he right?

Disclosure: I own shares in J Sainsbury plc, Tesco & WM Morrison Supermarkets.

As the year end approaches, I’ve been on a bit of a buying spree. J Sainsbury plc (LON:SBRY) is the second new stock I’ve added to my value portfolio in the space of three months!

I’ve watched Sainsbury’s share price languish this year with mixed feelings. But having considered the recent results and the medium-term potential of the Home Retail acquisition, I’ve started to think that the market’s cautious view may be too pessimistic.

My decision to purchase had two elements:

  • The shares offer good value and an attractive yield, based on current forecasts and historical performance;
  • The market may be underestimating the potential benefits of integrating Argos and Argos Financial Services into Sainsbury’s wider business.

A simple value buy?

Sainsbury looks affordably priced on a number of measures, in my opinion.

  • PE10 = 10
  • Price/tangible book value = 0.95
  • P/FCF (TTM) = 15.5
  • Forecast P/E = 12.4
  • Forecast dividend yield = 4.1%
  • Earnings yield (Op. profit/EV): 10.3%

There’s nothing to dislike here. The earnings yield of 10.3% is above average and suggests to me that the  group is very attractively valued, relative to its profitability. By way of contrast, the equivalent figures for Morrison and Tesco are 5.6% and 3.5% respectively.

What these figures tell me is that the market is pricing in lots of profit growth at Morrison and Tesco, but none at Sainsbury. I don’t believe that’s a realistic view to take of the UK’s second-largest supermarket.

Is the balance sheet strong enough?

Excessive debt and lease obligations nearly forced Tesco into a rights issue at the start of the year. Is Sainsbury safe from such problems? Here are the key figures:

  • Net debt: £1,341m
  • Capitalised lease obligations: £5,988m
  • Lease-adjusted net debt: £7,329m
  • Estimated freehold property: £2,027m

These figures present two very different pictures. Measured by net debt alone, Sainsbury’s gearing is much lower than that of its peers. As a multiple of post-tax earnings, my favoured measure, net debt is around 2.98 times. That compares to more than 5 times for Morrison, and even more at Tesco.

Adding in capitalised lease obligations changes the picture. This figure represents future lease payments the company is obligated to make, regardless of whether it is utilising the properties concerned.

To help judge the impact of these commitments, Sainsbury also reports a lease-adjusted net debt figure. According to the firm’s reporting, the ratio of lease-adjusted net debt to EBITDAR* was 4.0 times at the end of September.

(*EBITDAR = Earnings before interest, tax, depreciation, amortisation and rent. The exclusion of rent is to avoid double counting; the rent is paid to reduce the lease obligations.)

The nearest parallel to this metric for most companies would be the net debt/EBITDA ratio, which is typically used for banking covenants. I wouldn’t normally invest in a company with a net debt/EBITDA ratio of more than about 2.5. So it might seem inconsistent for me to accept Sainsbury’s more elevated debt level.

I’ve decided to do so because I think there is a difference. During the ordinary course of business, Sainsbury’s lease payments are effectively a normal operational cost. If properly managed, they should not inhibit profitability or growth.

I don’t see this as an exact parallel with outright debt, which is the repayment of money previously spent.

Lease obligations only become a debt-like problem when the lessee no longer wants to use the leased building and cannot sell the lease. This is a risk factor that’s common to many big UK retailers, not least Tesco. It can be mitigated by higher levels of freehold ownership (as at Morrisons), but not entirely avoided.

Ultimately, it’s no secret that the big supermarkets do have too much floor space, and that it’s not always in the right place. In my view, this risk is already reflected in Sainsbury’s share price. However, the acquisition of Home Retail Group has the potential to resolve this problem.

Why the Home Retail deal could work

Sainsbury’s acquisition of Home Retail Group has had mixed press, and has not excited the market. But I can see why chief executive Mike Coupe felt that decisive action was necessary, and that Argos could be the answer.

Here’s a screenshot from Sainsbury’s 2016 annual report:

Figures from Sainsbury's 2016 annual report

Source: J Sainsbury plc 2016 Annual Report (

The decline in sales per square foot and the fall in operating margin are a concern. An intense supermarket price war means that increasing prices — and margins — is not possible. Nor is reducing the size of stores, not least because of the lease obligations I’ve discussed above.

I believe the only satisfactory way to arrest the decline in trading intensity and operating margin is to increase sales per square foot. In parallel to this, it would be nice to see rising profits from activities which leverage the group’s large customer base and strong brand, but don’t use store space. These fall into two categories — banking, and online sales.

The acquisition of Home Retail Group (HRG) has the potential to solve all of these problems:

  • Closing Argos stores as their leases expire and moving them into Sainsbury’s supermarkets should increase sales/sq ft and reduce property costs. Argos generated £4bn of sales last year at an operating margin of 2%.
  • The acquisition of Argos Financial Services gives Sainsbury’s Bank a £625m loan book of apparently reasonable quality.
  • The deal also included cash of £322m and various other assets. According to Sainsbury, the total consideration paid was only £18m more than the fair value of the assets. This amount has been charged to goodwill, but is negligible in the context of a £1.1bn deal. That suggests to me that Sainsbury paid a very reasonable price for HRG.

Sainsbury hopes to make cost savings of £160m as it combines the two groups’ property, logistics and central and support functions. I’d expect this to make a positive contribution to operating profit, which totalled £830m across the two groups last year.

Why I’ve bought

Sainsbury looks cheap relative to historic earnings, and reasonably priced based on current forecasts. The shares also offer an attractive 4% dividend yield.

Looking ahead, I would be surprised if Sainsbury’s cost-cutting integration programme doesn’t enable the group to squeeze some additional profit from Argos’s £4bn annual sales.

Supermarket non-food sales should benefit from greater purchasing scale and Argos’s logistics infrastructure. Sainsbury now also has a sophisticated and established national delivery network for non-food, with the ability to handle larger items.

Finally, banking has proved to be highly profitable for Sainsbury (and Tesco). The acquisition of the Argos loan book has led to a step change in the scale of Sainsbury’s banking operations, and positioned it well for next year’s planned move into mortgage lending.

Price target = 415p

I don’t think the current value of Sainsbury’s equity reflects the potential value of the combined Sainsbury-Home Retail Group business. So I’ve added the shares to my portfolio at about 250p.

I note that Morrison’s equity currently trades at about 1.4 times its book value. If Sainsbury can return to earnings growth over the next couple of years, I think a similar valuation should be possible. Based on the group’s current book value of 297p per share, that implies a price target of 415p.

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: Is now the time to buy?

View from front of ship Mattoso

Disclosure: I own shares of Braemar Shipping Services.

The newest addition to my value portfolio is a company I’ve had my eye on for some time.

Braemar Shipping Services (LON:BMS) provides “technical expertise and professional marine and energy services around the globe”.

This is — I hope — a reasonably well-timed entry into a cyclical sector. Shipping is generally going through something of a weak patch at the moment, while the energy sector is beginning to emerge from one.

I paid 329p per share for my Braemar shares in October 2016 following the publication of the firm’s interim results. The share price has slipped to about 310p since then. I’ve sized the position to allow me to average down (or up) at some point, should I see fit.

About Braemar

Market cap: £97.6m
Index: FTSE All-Share

Braemar Shipping Services has its origins in a shipbroking business founded in 1982. It’s since grown organically and by acquisition to have three divisions:

  • Shipbroking – one of the world’s largest shipbroking businesses, with a focus on tankers, LNG and bulk shipping.
  • Technical services – e.g. engineering and insurance consultancy services
  • Logistics – freight forwarding, port agency and land/sea logistics services

I’m sure it’s clear to you from this brief summary that Braemar’s fortunes are closely correlated with those of the energy sector,35 as well as the wider shipping market. Recent years have seen the shares fall by 50% from a peak of 580p in early 2014.

Earnings performance has also been somewhat disappointing. Margins have weakened over the last few years, as revenue has risen while profits have drifted somewhat. So what might Braemar have to offer value investors?

Value credentials?

I’ve looked at Braemar’s valuation using five key criteria.


In my opinion, the cyclical nature of Braemar’s business means that it is unlikely to deliver smooth, progressive earnings growth. So my focus was on the group’s average historical earnings, via the 10-year average P/E ratio (PE10):

  • 10-year adjusted earnings per share is 39p
  • Adjusted PE10: 8

My one reservation here is that Braemar’s adjusted earnings have, in recent years, excluded a number of significant costs. Are these truly exceptional items? Last year, for example, the company included £2.7m of amortisation and share plan (i.e. remuneration) costs relating to the merger with ACM Shipping Group in 2014. I can live with the amortisation aspect, but as a general rule, I believe remuneration costs should not be treated as exceptionals. On the other hand, this probably was a one off.

The risk is that Braemar might be a chronic ‘adjuster’, delivering underlying profits that don’t bear much resemblance to reality. So to gauge the scale of Braemar’s exceptional adjustments over the last ten years, I also calculated the PE10 using statutory earnings:

  • 10-year reported earnings per share: 34.6p
  • Reported PE10: 9.0

Calculating two versions of the PE10 may seem like a chore, but i think it helps to provide an idea of how transparently and consistently a firm reports profits. In this case both versions of Braemar’s PE10 are very similar — and attractively low.

The divergence of Braemar’s underlying and reported earnings only goes back three years, and appears to relate to a handful of major deals. On this basis I’m prepared to accept the company’s underlying figures. I’d hope that the divergence between reported and underlying earnings will soon start to narrow.

Net asset value

Braemar’s net asset value per share has risen from 181p to 332p over the last ten years. I’m encouraged by this, albeit with the reservation that much of this value is booked under goodwill/intangibles.

I guess this is inevitable in a service business, but it does mean that we are reliant on the company’s own valuation of its assets — principally its people and the companies it has acquired.

In my view, this kind of business isn’t suitable as an asset play, so Braemar’s modest discount to book value didn’t play a part in my investment decision.

Free cash flow

Profits are worth nothing without free cash flow, in my opinion. But free cash flow can be lumpy for a company like Braemar. So I’ve calculated average free cash flow for the last ten years.

I used underlying FCF (which I calculated directly from the cash flow statement) to get an idea of the cash-generating ability of the company:

  • 10-year average underlying FCF (exc. dividends, acquisitions and disposals): £4.9m
  • P/FCF10: 20

I also calculated a P/FCF10 including dividend, acquisitions and disposals to make sure that Braemar isn’t a cash-consuming monster. It doesn’t appear to be. 10-year average FCF was -£315,000 per year. Broadly speaking, Braemar has been cash neutral over the last ten years.

Both of these figures seem ok to me, but I was keen to get an idea of whether the company’s history of corporate transactions was creating value for shareholders.

My figures show that over the last ten years, Braemar has spent a net £51.1m on acquisitions, disposals and dividends.

Over the same period, the company’s equity (book) value has risen by £65.8m to £107.3m.

So if we are prepared to trust Braemar’s balance sheet, the company’s spending on acquisitions and its choice of disposals have created significant value for shareholders. Remember that the £51.1m spending figure I cited included dividends.

Overall, I’m happy — if not overjoyed — with Braemar’s free cash flow situation.


This section will be pleasantly quick. Braemar has net cash and has done so since at least 2011. The level of net cash does fluctuate, and came close to zero at the end of August, but stronger cash generation is expected during H2.

So no major concerns here. Except…


Braemar currently has a forecast dividend yield of almost 8%. This is clearly alarming: all things being equal, it’s far too high.

Another worrying sign is that the firm’s payout of 26p per year (which costs the firm £7.8m) has been unchanged since 2011. A dividend that has been held for several years often indicates that the payout is too high to be comfortable.

So is a cut likely? I’m really not sure. As I mentioned above, a combination of working capital timing and improved hedging cash flows should mean that cash generation improves during the second half. Braemar also had £22.7m of unused credit facilities at the end of August, although I’m not keen on using debt to fund dividends.

Looking ahead, consensus forecasts suggest an adjusted net profit of £6.6m for the current year, rising to £8.8m for the 2017/18 year. Braemar’s management may just save the dividend.

Have I bought too soon?

I’m satisfied that Braemar is a reasonably well-run business that looks cheap enough to offer value at current levels. But I said that about certain commodity stocks in 2015, and was wrong. My main concern with this investment is that I’ve bought too soon.

We’ll find out more in January, when Braemar should issue a trading update ahead of the 29 February year end.

Until then, I’m holding.

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 share tip circled in a newspaper share listing

Why I’ve sold Fenner plc for a modest profit

A share tip circled in a newspaper share listingDisclosure: I own shares of Anglo American, BHP Billiton and BP.

My purchase of Fenner plc (LON:FENR) back in January 2015 was woefully mistimed. I was far, far too early to catch the bottom of the mining downturn.

I should probably have cut my losses and sold when this became clear to me, but instead, I did what I usually do in such circumstances — nothing.

As it turns out, this was a successful strategy.

I sold my shares in Fenner this week for a total return of 27% (including dividends, after costs).

That’s not outstanding in 22 months, but it’s far from a disaster.

Fenner plc share price chart 2015-16

Source: Stockopedia

If I’m honest, I’m not sure whether this year’s move back into profit is the result of good investing process or just dumb luck. (This is a topic that’s worth considering — Ben Hobson published an interesting article on this subject on Stockopedia recently).

But in this post, I’m going to focus on the three reasons why I’ve sold.

1. Uninspiring outlook

Fenner’s recent 2016 results were pretty solid. But the outlook statement was very measured, in my view. (All bold is my emphasis)

Coal: Operational gearing means that rocketing coal prices have provided an instant profit boost for miners. But Fenner is only expecting to see a gradual pickup in conveyor belt sales. It isn’t directly exposed to the upside from rising commodity prices. Here’s what the group said about the coal market:

This is a more positive situation which we believe will eventually lead to increased demand.

Oil & Gas: Fenner’s other big profit driver is the US onshore oil and gas market. The North American rig count has been rising slowly in recent months and yesterday’s OPEC production cut deal suggests this trend could continue. But Fenner believes a return to historical levels of profit may take some time:

The structural changes that have taken place in the industry will, we believe, act as a short-term constraint to growth but, in the longer term, will enable us to accelerate our market share gains and, over the next few years, return the business to the levels of profitability we enjoyed before the decline of the last 18 months.

Medical business: Promising, but several years will be needed to deliver meaningful growth:

Our medical businesses have created a technology platform incorporating some important patents which will provide significant new opportunities for growth, albeit the incubation period for such products is likely to be several years.

None of this is bad news. But Fenner’s valuation now looks reasonably demanding and there’s competition for cash in my portfolio. This outlook doesn’t seem a compelling reason to hold.

2. Would I buy now?

A good test of whether to hold onto an investment is to ask whether you’d buy it now. In Fenner’s case, the answer is  no.

The shares trade on 23 times 2016/17 forecast earnings, falling to a P/E of 20 for 2017/18. Forecast eps growth of 13% next year doesn’t seem that exciting at this valuation. Dividend cuts mean that the yield on offer is less than 1.5%.

Fenner’s balance sheet also remains under some pressure, thanks to net debt of £150m. At the end of August, this resulted in a net debt to EBITDA ratio of 2.4x, up from 1.7x a year earlier. Although it’s still below the group’s covenanted limit of 3.5x, this is quite high, given current low profit margins.

Fenner’s net debt also looks high using my favoured measure of net debt to net profit. Even if we take a generous view and compare the group’s debt to 2017/18 forecast profits of £25m, Fenner’s borrowings still amount to six times its post-tax profits. I normally look for a maxmium of 4-5 times.

These factors would be likely to put me off buying at current levels.

3. Historically cheap, or not?

Another measure I favour is the classic value investing ratio, the PE10. That’s the ratio of the current share price to ten-year average earnings per share.

Following Fenner’s latest results, I recalculated its PE10. I calculated two versions — one using reported earnings per share (eps), and the other using the group’s adjusted figures. Here are the results, based on a share price of 254p:

  • Reported eps PE10: 21.5
  • Adjusted eps PE10: 12.3

As you can see, Fenner looks quite affordable based on historic adjusted earnings, but much less so using the group’s reported eps.

I’m often unsure whether to use reported or adjusted earnings when calculating a PE10. In an ideal world, there wouldn’t be much difference between them. In reality, there often is, as companies seek to massage out genuine exceptional costs — and sometimes to simply disguise indifferent results.

Interestingly, Fenner’s reported and adjusted figures used to be pretty close. It’s only in the last few years that they’ve really diverged. To some extent this is understandable, but I’m still wary about relying totally on such a rose-tinted view of the firm’s profits.

Although the Adjusted PE10 is still pretty low, I’m no longer convinced Fenner is truly cheap by historical standards.

Final thoughts

I’m aware that I may have sold Fenner too soon. Earnings upgrade momentum is improving and future earnings could be better than expected.

On the other hand, I’m already heavily exposed to commodity prices through my holdings in BPAnglo American and BHP Billiton. I wanted to free up some cash in the portfolio in order to be able to focus on new opportunities, as they arise.

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.

Jackup rig

I’ve bought more Lamprell after today’s results

Jackup rigDisclosure: I own shares of Lamprell.

After halving my holding in rig-builder Lamprell last December, I’ve hung on to the remainder — despite watching the shares fall by a further 40% or so.

My thinking has been fairly simple: Lamprell’s net cash and backlog of late-stage projects have meant that the firm should continue to generate cash next year, even without much new work coming in.

When the market does start to turn and new projects are awarded, Lamprell should be able to ramp up from a strong base — in terms of both financing and recently-upgraded facilities.

The risk, of course, is that the market slump will continue longer than expected, eroding the firm’s net cash and strong balance sheet.

I decided to wait until Lamprell’s interim results were published today before making a decision on whether buy more. I was also prepared to sell, if the figures were not what I expected.

Having read through the firm’s interim results this morning, I’ve added to my holding at 58.7p per share.

Deep value?

The biggest factor behind my purchase is Lamprell’s balance sheet. Here’s how things stand (as of 30 June 2016):

  • Current assets: $651.7m
  • Current liabilities: $240.0m
  • Net current asset value (NCAV): $411.7m / c.£314m or 92p per share
  • Market cap: £203m

Lamprell appears to be trading at a 35% discount to its NCAV. A substantial slice of this is net cash of $151m. However, a substantial part of the group’s appeal is its $412m of trade and receivables.

What this implies is that the market is valuing the firm’s ongoing business and fixed assets at zero. I think that’s overly pessimistic, given Lamprell’s strong net cash position and recently-upgraded dockyard facilities.

My thinking has been that while new work may be thin on the ground for a little longer, Lamprell’s yards are currently full of major projects due for completion over the next 6-12 months. As these complete, the firm’s receivables should gradually be converted to cash.

On Lamprell’s investor call this morning, CFO Tony Wright confirmed this view. As all major projects are at a fairly late stage, the group has no customer cash on its balance sheet (i.e. advance payments) and expects net cash to rise as receivables start to fall.

I’ve defined NCAV as current assets minus current liabilities. But even if we use the more demanding Ben Graham measure of current assets minus total liabilities, Lamprell still has a NCAV of $321m, or about £244m (71p per share).

The current £203m market cap equates to a 20% discount to Ben Graham’s fairly demanding measure of net current asset value.

…or cheap for a reason?

It’s worth repeating that one reason for the shares’ discounted value may be that the market expects Lamprell’s cash to be consumed by the business of surviving the current downturn.

The group certainly does have relatively high fixed costs. SG&A costs totalled about $26m during H1, so are likely to be more than $50m for the full year.

A second concern is that the recent problems with the Cameron jacking equipment on the Ensco 140 rig have reduced Lamprell’s full-year profit by $35m. I suspect that the company will recover this money and other incremental costs incurred on similar projects from Cameron. But it may be a long and slow process, and could involve costly legal action.

In the meantime, revenue forecasts for 2017 have been cut to $400-500m and the firm’s bid pipeline has shrunk from $5.3bn last year to just $3.9bn. Lamprell has very little work lined up when current projects complete, and may even end up losing money in 2017.

Oil market outlook

The final element in my decision is that I believe the oil market is reaching a low point, and that a material level of rebalancing is likely in 2017. I don’t expect oil to trade anywhere near $100, but I don’t think it will need to in order to trigger some increase in activity levels.

Oil at $55-60 will be enough — in my opinion — to start bringing the market back to life. Costs have fallen dramatically over the last two years and investment in new fields has all but dried up. This situation won’t remain static forever.

I’ve bought more

As things stand, I reckon Lamprell shares are worth about 80p — their NCAV minus a 10% discount. But if the firm can start refilling its order books, then significant further upside should be possible.

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.

CCTV security camera

IndigoVision Group H1 results: improved trading + good value?

CCTV security cameraDisclosure: I own shares of IndigoVision Group.

Yesterday’s interim results from video security system firm IndigoVision Group were encouraging, without being outstanding.

The main points were:

  • Revenue down 3.5% to $21.8m
  • Camera volumes up 20%
  • Gross margin maintained at 52%
  • Overheads reduced by 8% to $11.9m
  • Operating loss reduced by $1.0m to $0.3m
  • Net cash up to $4.6m from $2.76m at the end of 2015, thanks to lower inventories and longer payment terms

The group reported a number of new orders and said that trading is expected to be stronger during the second half. R&D spending is being maintained to ensure products are updated and renewed.

The group anticipates “satisfactory operating results” for the year. I took comment to mean that FY result are expected to be in line with forecasts from the firm’s house broker.

These forecasts suggest the shares may be going cheap at the moment: earnings of 22.6p per share and a dividend of 7.5p are expected this year, according to Stockopedia. This puts the stock on a forward P/E of 6.5 and a prospective yield of 5.1%.

Despite the stock’s recent gains, IndigoVision also continues to trade slightly below both its book value and its net current asset value:

  • Tangible net asset value: $22.5m
  • NCAV: $16.5m
  • Market cap: $15.5m

Although the discount to NCAV isn’t large, this should provide some downside protection. The tangible net asset value of $22.5m translates to roughly 224p per share.

That would give a 2016 forecast P/E of 10 and ought to be achievable, in my view.

I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Fifty pound note

Could rising debt undermine Fenner’s recovery?

Fifty pound noteDisclosure: I own shares of Fenner.

Shares in Fenner have been on a tear this week, climbing 13% on the back of an upgraded broker note and an upbeat trading statement. The shares are now worth 32% more than they were at the start of the year and my holding — which I bought too early in the mining downturn — is close to breakeven when dividends are included.

However, I can’t ignore the fact that Fenner’s net debt has risen to £150m. That’s the highest level since 2009 and looks quite demanding alongside 2017 forecast profits of just £17.4m.

An excellent Stockopedia interview with Nick Kirrage — who manages some of Schroder’s value funds — nudged me into researching this situation in more detail. (Incidentally, Nick and his colleagues blog at — worth reading for value investors.)

To get a fuller picture, I’ve gathered information about three key aspects of Fenner’s debt — borrowing levels and maturity, covenants and gearing/debt ratios.

Debt facts

At the time of its interim results (30 April) Fenner’s balance sheet looked like this:

  • Cash: £93.2m
  • Current debt (due < 1 year): £39.9m
  • Non-current debt (due > 1 year): £191.3m
  • Net debt: £138m
  • 8 Sept 2016 year-end trading update: Net debt c.£150m

According to last year’s annual report, £58.4m is due to mature in June 2017, with £38.7m due in July 2019. Beyond this, nothing is due for repayment until September 2021.

Interest costs were £14.7m last year, and were similar the previous year. That’s fairly material relative to forecast net profit of £13.6m in 2016 and £17.4m in 2017.

Currency effects: The devaluation of sterling after the EU referendum had an adverse impact on net debt, most of which is denominated in US dollars. Over the next year, this should be offset to some extent by the boost the weaker pound will give to Fenner’s US dollar earnings, which are considerable. Overall, I’m tempted to say that currency effects will be broadly neutral.

Liquidity: Current assets comfortably exceeded current liabilities, giving a current ratio of 1.64. That’s acceptable, if not outstanding.

Are the lenders happy?

Fenner’s debt level remained within its banking covenant levels at the time of its interim results. I’ve listed the two key covenant ratios below, with the covenant limits in brackets:

  • Net debt/EBITDA = 2.3x (< 3.5x)
  • EBITDA interest cover = 4.8x (> 3.0x)

There isn’t a massive margin for error here. But Fenner expects results for the year which ended on 31 August to be at the upper end of expectations. So EBITDA-related covenant problems seem unlikely for the time being. I imagine the firm’s lenders will be happy enough as long as interest payments are maintained.

Debt ratios

The standard measure of indebtedness used by most analysts and stock market data services is gearing. This measures debt relative to a company’s equity value.

Fenner’s net gearing (net debt/equity) was 50% at the end of February. However, I’m not convinced this is a very useful measure of a company’s ability to repay debt. After all, the only way Fenner could raise £150m to repay its debts today would be by flogging its best assets or issuing new shares.

Both measures would be a desperate last resort.  I’m more interested in a company’s ability to reduce debt by generating cash profits, without sacrificing planned capex or growth plans. After all, if a company cannot manage debt in this way, then its dividend will eventually be cut.

Inspired by John Kingham’s work at UK Value Investor, I’ve started to look at debt relative to companies’ profit and cash flow. On this basis, Fenner looks more heavily geared:

  • Net debt/10yr average free cash flow*: 5.2x
  • Net debt/10yr average net profit: 5.4x
  • Net debt/10yr average net profit (inc. 2016 forecast): 5.6x

These ratios look fairly high to me, but they’re not disastrous. As market conditions appear to be improving, I’m inclined to wait until the firm’s final results are published in November before making any further decisions about my holding in Fenner.

*I define FCF as operating cash flow – investing cash flow (exc. acquisitions) – interest payments

Is Fenner cheap or expensive?

However, I will leave you with two other statistics which suggests to me that the shares may be approaching fair value: The PE10 is a favoured metric of value investors, as it compares a company’s share price to its ten-year average earnings. This is enough to smooth out most cyclical peaks and troughs.

Deep value investors tend to look for a PE10 of 8-12. Fenner’s ten-year average net profit is about £26m, giving a PE10 of 14.

I’ve also calculated Fenner’s 10-year average free cash flow (see definition above), which is £29.1m. That puts the shares on a P/FCF10 of 12.6, which looks quite reasonable.

I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

An open-cast coal mine

Why I’ve sold South32 Ltd

An open-cast coal mineDisclosure: I own shares of Anglo American and BHP Billiton, but not South32.

I’ve sold my shares in BHP Billiton-spin off South32 Ltd (S32.L). There are three main reasons for this:

  1. My holding was limited to the shares I received as a BHP shareholder. As such, it was a very small part of my portfolio. I’m trying to maintain a more deliberately-constructed portfolio without such oddments.
  2. I already have considerable mining exposure through my holdings of BHP Billiton and Anglo American. Both are sizeable positions (for me). I remain confident about the medium-term outlook for both companies but don’t feel that South32 adds much to the opportunity offered by these much larger firms.

As it happens, I think South32 is a fairly decent company. The balance sheet appears strong and cash generation also seems reasonable. Had I invested in size in South32 when the shares were lower, I might have made this a core position.

However, South32 looks fairly valued to me for now. I’m not tempted to buy more. So I decided to swallow the dealing cost and sell, in order to boost my cash position ahead of my next buy.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.