New stock: Why I’ve bought Lamprell plc (again)

Disclosure: Roland owns shares of Lamprell and Petrofac.

Having sold my shares of Lamprell (LON:LAM) back in July for 103p, I bought back into the stock on 30 November for 62p — a fall of around 40% in five months.

My purchase came after the shares tanked following news that the group’s foray into renewables had met with some hitches. By its own admission, the company is learning on the job and “the learning curve has proven to be steeper than anticipated”.

I’m fairly relaxed about this operational setback. In my opinion (and experience), the reality of engineering businesses is that when a company takes on a sizeable project in a new area of work, setbacks are very likely. In my view, Lamprell generally has a reputation for good quality engineering and for delivering projects on time (and usually) on budget.

Why I’ve bought

I don’t normally dip in and out of shares, but it struck me that as before, Lamprell’s share price had fallen so far that the business was almost being thrown in for free. The strength of the balance sheet is worth noting — net cash was $305m (c. £231m) at the end of H1, versus a market cap today of £237m.

Although net cash is expected to fall somewhat in H2, these figures suggest that the firm’s current enterprise value could be as little as £10-20m. I believe Lamprell’s business is worth much more than this.

I’m also attracted by cyclical factors, as anecdotal evidence seems to suggest that the oil market recovery is now starting to trickle down to services companies (although CEO Christopher McDonald has warned that he doesn’t expect any improvement in FY2018).

Value credentials

Here are some key metrics from September’s interim results to illustrate the fundamental value I believe exists here:

Net cash: $305.9m
Net current asset value (current assets – current liabilities): $389m
Net current asset value (current assets – total liabilities): $327m
Net tangible asset value: $527m or c.116p per share

And here’s how these figures compare to the current market cap:

Market cap today (17 Dec 2017): £238m (c.$315m)
Share price today (17 Dec 2017): 69p

Allowing for some reduction in net cash during H2, it seems likely to me that Lamprell is currently trading somewhere close to its net current asset value. That seems too cheap to me for a company with such a strong balance sheet and a strong franchise in the jack-up rig-building sector.

I paid 62p for my shares on 30 November. I’m hoping for another bounce to the region of 90-100p, at which point I would most likely sell again, as my core holding in this sector is Petrofac.

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.

Why I’ve sold Millennium & Copthorne Hotels plc without waiting for another bid

Leave a Reply

Disclosure: Roland does not own shares in any company mentioned.

After just over six months, I’ve sold my entire position in Millennium & Copthorne Hotels plc (LON:MLC). My reasoning was simple.

In October, the company has received a potential offer worth 552.5p per share from its majority shareholder, Singapore-based City Developments Limited. Several large institutional UK investors have complained that this falls far short of the group’s tangible net asset value per share, which was last reported at nearly £10 per share.

But the group’s committed strategy is to own and operate its hotels directly. CDL says this would remain its policy post takeover. On this basis, a higher bid may not be justified, as the business is valued relative to earnings, not net asset value.

To some extent I agree. CDL’s latest possible offer values the stock on 17 times 2017 forecast earnings. That seems reasonable in the short term, although I think it’s a little mean for a long-term business of this kind.

The market wants more

Since the possible offer of 552.5p per share was made public, the stock has been bid up much higher and seems to have settled at around 600p. That values the stock on 18 times 2017 forecast earnings, with a prospective dividend yield of 1.4%.

The stock’s sustained premium to CDL’s offer suggests to me that the market is pricing in a higher offer a higher bid.

I have to admit that my view of fair value is around 650p, but there seems to be no certainty that CDL will bump up its offer. It has no real need to — it already controls around 65% of the company and can simply wait for a better opportunity in the future if it doesn’t want to pay more.

As I explained in my original piece when I bought the stock, CDL’s majority ownership of Millennium means that a third-party bid is very unlikely, if not impossible.

Hold or sell?

My choice was to hold on in the hope of a higher bid, or take the cash from the market and settle for a healthy and rapid profit. As I’d topped up in September, this was a fair-sized holding for me.

I decided to sell on the basis that the shares are already trading at a premium of around 9% to CDL’s most recent possible offer. In my view, holding on and hoping for a higher bid was pure speculation.

I’m far from confident that CDL will be willing to pay a lot more. My impression of Millennium’s billionaire chairman, Kwek Leng Beng — who also controls CDL — is that he’s a shrewd and patient investor who understands the value of owning quality assets and not overpaying for them.

By selling I may have thrown away a bumper payday. But in this case I’m happy to leave something for the next man (or woman).

I recently sold all of my shares in Millennium & Copthorne Hotels plc for around 600p, generating a net profit of 30.5% and an annualised total return of 112%.

Simple maths suggests Dixons Carphone plc may be cheap

Leave a Reply

Currys PC World store Oxford Street, London. Image credit: Dixons Carphone plc

Disclosure: Roland owns shares of Dixons Carphone.

Currys PC World owner Dixons Carphone (LON:DC) currently trades on just 5.5 times forecast earnings, with a prospective yield of 7.1%.

The stock also trades on a cheap-looking EV/EBITDA multiple of 3.2.

I think it’s fair to say that it’s either a value trap or too cheap to ignore. The question is which?

Pension deficit blues

One problem is that the group has a big pension deficit. The Dixons Retail scheme deficit was £589m at the end of April. That’s sucking up big deficit reduction payments. Dixons Carphone paid £43m into the scheme last year, putting a nasty dent in its otherwise impressive free cash flow.

My calculations suggest that the impact of this payment was to increase the trailing P/FCF ratio from 12 to around 17. However, I’ve seen several companies report sharp reductions in pension deficits recently, as bond yields have risen slightly. With a company of this size, I’m not overly concerned by the defecit.

The real question is sales (and margins)

In my view, the key to the investment appeal of this stock is the outlook for sales. Like all retailers, Dixons Carphone will experience operational gearing as sales rise and fall.

What this means is that due to retailers’ large proportion of fixed costs, if sales rise by 10%, profits typically rise by more than 10%. Similarly, if sales fall by 10%, profits might be expected to fall by more than 10%.

To try and get a better understanding of how operational gearing might affect Dixons Carphone, I’ve done some back-of-the-envelope calculations. My goal was to model what might happen if the firm’s sales fell by 10%. Please note this analysis was using basic estimated figures for my own purposes. It should not be considered as a forecast or guidance of any kind.

What I found was that a 10% fall in sales from the level seen last year might be expected to result in after-tax earnings falling by around 20%.

Consensus forecasts at the time of writing (Nov ’17) suggest the group may report adjusted earnings of 26.7p per share this year.

Reducing this by 25% (to give a greater margin for error) would give earnings of about 20p per share. This would put the stock on a forecast P/E of 7.7.

It would also still be enough to cover the dividend twice, although I still wouldn’t bet against a cut in such a scenario.

My verdict

I think it’s worth noting that the group’s most recent trading update showed an increase in like-for-like sales in all three of the group’s territories (UK & Ireland, Nordics and Greece).

Although some underlying factors are expected to result in a fall in profits this year, the group’s “core trading profitability” — presumably this means its main retail business — is expected to be in line with last year.

Although it’s not without risk, I think it’s reasonable to suggest the shares are quite cheap at the current level of less than 160p. I may add some more to my holding.

Next plc has removed key information from its results: why?

Leave a Reply

Image credit: Next plc

Disclosure: Roland owns shares of Next.

When a company changes the information included in its results, I tend to get worried. In my experience, there’s always a reason for this. And it’s rarely good news for shareholders, especially when the missing data relates to a key profit driver.

The problem

One of the things that worries me about Next plc (LON:NXT) and some of the other big retailers is their dependence on consumer credit. Last year, I estimate that roughly one-quarter of Next’s operating profit came from interest payments (currently 22.9% APR) made by the group’s store card customers.

But until now, Next has at least been transparent about the money it makes from credit.

Indeed, I tweeted about the shocking scale of its customers’ indebtedness last year, after the group’s 2016 interim results were published:

Is it me, or do credit customer stats from Next’s interims $NXT.L suggest problems w/ UK consumer spending habits? pic.twitter.com/j28Z6H7vTr

— Roland Head (@rolandhead) September 16, 2016

It’s gone!

The screenshot above provides a breakdown of key stats about Next’s customer credit operation. It was taken from last year’s interim results. Next’s financial reporting is generally a model of detail and consistency and this table has been a regular feature over the years.

So naturally I looked for the equivalent table in last week’s interim results. But it was missing.

I then looked back to last year’s annual report. It was missing from there, too.

So why has Next stopped breaking out these figures? After all, if last year’s H1 interest income figure was repeated in H2, then interest from credit customers accounted for nearly a quarter of Next’s £827m operating profit last year.

What do the reporting changes hide?

For some reason, someone very senior at Next has decided not to include a breakdown of the group’s consumer credit business in its results anymore.

This isn’t a fluke — this will have been a carefully considered, deliberate decision. Changes like this worry me. They’re usually done for a reason, and it’s not always good news.

So why has this change been made? I can see three possible reasons:

Next wants to distract attention from the declining profitability of its retail business.
The profitability of the credit business about to decline and the company wants to delay recognition of this.
Both 1. and 2. are true.

1. Deteriorating retail profits: I think credit profits are being used to disguise the deteriorating performance of the retail business. Looking back, this may have been a systematic process that’s taken place over several years:

In February 2015, the company reduced the minimum payment on its credit accounts from 9.4% of the balance to 5%. It was surprised at how rapidly balances rose, saying that monthly payments reduced across the board, not just from those who were previously paying the minimum. During the six months following the reduction, the group’s Directory debt balance rose by £120m, or 18%.
In its 2015/16 results, the company said “credit sales grew by only 2%. However, reduced minimum payments led to higher balances”. Interest income added 0.6% to Directory margins.
In its 2016/17 results, the company said that “higher interest income, as a result of reduced minimum payments” added 1% to Directory operating margin.

Interest income would have risen even faster, except that Next has cut its credit APR from 25.9% to 22.9% since 2014/15.

Overall, I estimate that Next’s credit business accounts for about 50% of Directory profits and adds about 5% to the group’s operating margin. My concern is that this dependency could be rising as underlying retail margins fall.

2. Are credit profits under pressure too? At the same time, the company is being slightly cryptic about the outlook for its credit business (my bold):

It remains to be seen whether we will be able to improve or even maintain the stability we have achieved. We believe it will be harder to sustain this improvement as we approach the anniversary of our marketing drive and come up against tougher comparisons. We will have a better understanding of the long-term outlook for our Credit business in six months’ time. Towards the end of this year we plan to launch at least one new credit offer.

Should I hold or sell?

In last week’s interim results, Lord Wolfson discussed at length how in a worse-case scenario, with LFL store sales falling by 6%, the group’s bricks-and-mortar business would still be profitable and cash generative.

I thought the narrative was convincing except for two points:

Retail LFL sales fell by 8.3% during the first half. That’s considerably more than 6%.
Directory profits aren’t growing fast enough to offset the decline in retail profits.

While I agree that Next is likely to remain profitable and cash generative, that doesn’t mean those profits are going to rise. With the stock now trading on nearly 13 times 2018/19 forecast earnings, I’m starting to think the shares may be fully priced.

I’m still holding, but I’m losing conviction. I’ll update this piece if I decide to sell before the next set of results.

Portfolio update: PETS, BLT, CNA, NTG

Leave a Reply

Disclosure: Roland owns shares of Pets at Home Group, Centrica and Northgate.

Work and home commitments have left me short of time this summer. Unfortunately I have not updated this site as often as I would have liked to.

But I have made some changes to my portfolio recently. I have already added these to the portfolio page but will expand on them a little in this post.

Pets at Home Group

The RSPCA was founded in 1824, 60 years before the Reverend Benjamin Waugh founded the NSPCC in 1884. And while I wouldn’t suggest that the pet owners I know care more about their four-legged friends than their offspring, it can be a close-run thing.

Pets at Home Group (LON:PETS) is a business that’s designed to capitalise on Britons’ obssession with our furry friends, by offering an integrated online and offline mix of retail and vet services. This seems to me like something that could work well.

The business itself benefits from low debt levels, good free cash flow generation and fairly healthy margins. Stronger growth from veterinary and grooming services should help to support margins. The main risk seems to be that merchandise prices will be pushed down by discounted competition or that the group’s services business could fail to gain enough scale. In either case, this could mean that large stores become less profitable.

However, this hasn’t happened yet. Like-for-like services revenue rose by 10.5% during the first quarter, while merchandise LFL remained positive at 1.5%. Overall revenue growth was 5%, boosted by new store openings.

As things stand, the 4% dividend yield seems to be supported by free cash flow and a healthy balance sheet. The shares look reasonably priced to me, on a multiple of about 14 times both earnings and free cash flow.

I bought some shares when they dropped below 160p in the middle of July. They’ve since climbed around 20% following a solid trading statement on 8 August. I continue to hold.

Centrica

I discussed my recent purchase of Centrica (LON:CNA) in an article for the Motley Fool in July.

British Gas is struggling with falling energy consumption and falling customer numbers. But it remains a very sizeable business that’s still reasonably profitable. Centrica’s other divisions — utility services in North America and energy trading and production — also make a reasonable contribution, and provide what I believe is valuable diversity.

Underlying all of this are a more robust balance sheet and stronger dividend cover than were the case a year ago. Net debt has fallen by 22% to £2.9bn over the last year, and should fall a little further during the remainder of 2017. This gives a net debt/net profit ratio of 3.3x, based on consensus forecasts for 2017. For a business of this type, I think that’s fairly comfortable.

The shares now trade on a forecast P/E of about 12.5, with a prospective yield of 6%. In my opinion, that’s cheap enough to buy, but not cheap enough to be alarming.

I continue to hold.

Northgate

I wrote about some of the reasons for my investment in van hire group Northgate (LON:NTG) in a recent article for the Motley Fool.

The underlying attraction here for me is as a turnaround, under new management. Comments from the new CEO — ex-Avis Europe MD Kevin Bradshaw — indicate that Northgate has been getting by with dated IT and sub-par sales and marketing processes.

Mr Bradshaw seems keen to transform these elements of the group’s business. If business conditions remain stable, I believe these changes could provide a useful uplift to profits. The group’s cash generation is strong and net debt is acceptable, at less than half the group’s net fixed asset value.

Another attraction is that the group has caught the attention of activist hedge fund Crystal Amber and has been talked about as a potential bid target. Consolidation is ongoing in this sector; a few years ago, US giant Enterprise Rent-a-Car bought UK independent commercial vehicle hire firm Burnt Tree. A similar deal for Northgate isn’t too hard to imagine, especially as it has scale in two major European markets, the UK and Spain.

The shares currently trade on a forecast P/E of 9, with a well covered forecast yield of 4.3%. I think this is attractive and bought some for myself at 419p, in July.

The main risks appear to be macro risks. Although market conditions are fairly stable in both the UK and Spain at the moment, it’s hard to be sure how long this will continue. However, on balance I think this is a risk worth taking to gain exposure to the potential upside.

I continue to hold.

BHP Billiton

I recently sold my remaining shares of BHP Billiton (LON:BLT), bringing to an end a disappointing investment. Although the dividends received mean that I walk away with a profit of 1.8%, this is a pretty poor result for a stock I’ve held since December 2014.

The main lesson here is that I purchased far too early during the mining downcycle. This would have been okay, had I been able to average down as the shares continued to fall (as I did, successfully, with Anglo American).

Unfortunately, I didn’t have sufficient cash in my account to be able to repeat this success with BHP. It was painful to watch the stock hit bargain lows of 600-700p and not be able to buy any.

The stock still looks reasonably priced to me, and offers an attractive yield. I’m positive about the potential for the oil and gas business to be spun off or for petroleum profits to rebound, if and when oil prices finally recover.

The imminent arrival of the group’s new chairman, Ken MacKenzie, also seems positive to me.

However, on balance I feel that some of this upside potential is already in the price. The stock now trades on a price/book value of about 1.7, with a 2017/18 forecast P/E of 14 and a prospective yield of 4.3%.

Overall, my view here is neutral. I’d be happy to hold the shares in an income portfolio, but am unsure about value. On this basis, I sold my remaining shares to free up cash for another opportunity.