Damage control at Persimmon
One of my biggest holdings, the under-pressure housebuilder Persimmon, reported recently. I wasn’t thrilled with the results to be honest and it’s clear the company is having to deal with what might be termed “legacy” issues around poor build quality and customer satisfaction. The fact it is taking measures to improve this though I think is the right move and is good for long-term investors. Ultimately, dealing with a problem is better than burying it.
The housebuilder reported a 1.4 per cent drop in pre-tax profit, which fell to £509.3m for the six months ending 30 June. The average selling price of Persimmon’s homes rose to £216,942 – up from £215,813 the previous year.
Revenue was 4.5% lower at £1.8bn but the result was in line with expectations which limited the damage to the share price. Investors don’t like nasty surprises but can sometimes forgive a period of underperformance and that seems to be the case with Persimmon. Given customer care costs are going up by £15m it can hardly be a surprise if profits fall a little.
I think the aspect investors will have been pleased about – myself included – is that despite all the issues the group managed to increase new housing operating margins from 29.7% to 31%. That’s a small increase but Persimmon is already a highly profitable player and the direction of travel is good. It’s unrealistic to expect massive gains from this FTSE 100 giant.
Persimmon will remain under a dark cloud for a while. It’s attracted scrutiny because of the highly-publicised pay packet of its former CEO and because it is a major beneficiary of the Help to Buy scheme which is due to end in 2023. Persimmon can control executive pay and what it does about the end of government support for the housing industry and that is a good thing. What it can’t control is Brexit or wider economic fears and that could keep all the housebuilder’s share prices down for some time.
ITV – shares jump but it’s still not good news
The broadcaster ITV has today release results which has seen the share price rise – it was up around 6% this morning (24 July 2019) – despite what may seem like bad news. Advertising revenue, a major source of its income, fell by 5%, but because this fall was less than expected and the shares had been falling for some time, the share price jumped on the back of the results.
Popular show Love Island was credited with helping stem the decline in advertising sales and the show it has been reported is now going to have two editions a year which may help ITV further. However, despite the popularity of Love Island and other programmes ITV shows, first-half viewing figures were down 5% against the same period last year.
Another possible concern is that ITV Studios – which it is hoped will offset declines in advertising revenues – didn’t manage to grow. The revenue in that division fell 5.6% to £758m.
“ITV Studios has a solid pipeline of new and returning shows this year – from I’m A Celebrity… Get Me Out of Here! to World on Fire to Snowpiercer – and is firmly on track to deliver our full-year guidance,” said ITV Chief Executive Carolyn McCall.
ITV updated that it’s on track to launch BritBox UK and its programmatic addressable advertising platform in the fourth quarter of 2019. This will potentially help the broadcaster better compete with the likes of Netflix and Amazon – if the service is popular with viewers. It remains to be seen how successful the Britbox venture, being launched with the BBC, will be.
The shares now yield a little over 7% so they fall into the high-yielding category and can provide brave investors with an income. But the headwinds ITV faces means the share price will likely remain in the doldrums for the foreseeable future.
Petrofac – on the path to recovery or a red herring for investors?
Oil services companies are at the mercy of the oil price, the share price of companies such as Wood Group, Hunting and Petrofac, all listed in London, show that to be the case. After a difficult few years where the oil price crashed a recovery no seems to be taking hold boosting the fortunes of the support services and engineering companies in the sector as well as the oil exploration and production companies themselves.
Petrofac, which helps oil companies develop new oil fields, reported its half-year results this week. It showed an improvement in underlying profits, but at a reported level the company continued to show it is struggling. It made a loss of $17 million in the first half of the year. Revenue was also down nearly 11%. Underlying profit rose 20% to $190 million.
The main concern for investors has to be the struggle the group has in its largest division. The core Engineering & Construction arm saw revenues fall 18.6% and the order book also contracted which isn’t good news going forward.
The second largest arm of the business, Engineering & Production Services, fared much better although it has to be noted that it’s the smaller arm of the business by some distance. It saw revenues rise 9% and the order book gained very slightly.
The final part of the business is Petrofac’s own Integrated Energy Services which saw revenues rise a whopping 40.2% as higher production and an increased oil price boosted it.
Industry rival Hunting also reported this week. To me its results looked much better as it reported it had swung back into profit in the first half and it was able to reinstate its dividend. Note Petrofac was able to do this earlier and maintained the level of the dividend it was paying to investors announced in its results this week. The turnaround at Hunting seems to be creating much more momentum and the share price rise reflected greater optimism amongst investors. On the day its results were announced the shares rose by around 10%, showing the positivity investors have about Hunting’s future.
For me there have to be a few concerns for investors in Petrofac, none of which seem like minor details. Unlike Hunting which is building clear momentum, Petrofac is still curtailed by a serious investigation by the Serious Fraud Office which was launched all the way back in May 2017. Still unresolved, until the outcome is known the investigation will continue to act as a dampener on the company’s share price.
The declining order book and performance of the largest division within the company also has to be a concern. Petrofac will need to show that new contracts will replenish the order book, creating the opportunities for future growth. Now that the oil price has recovered significantly this should begin to happen, if it doesn’t then that should be a red flag for investors.
Lastly, for me investing in oil just isn’t a safe investment. As with many commodities, prices can be volatile making earnings visibility difficult and often short-term. Although oil may well be around for quite a while to come, overall it is an industry that will start to decline sometime soon. Producers such as Shell and BP are already moving into new areas and markets. The key is will Petrofac also be able to successfully transition once oil demand falls? In the short term this may not matter, but for long-term investors it could be crucial.
Markets are forward-looking. If concerns mount about the viability of oil servicing companies then the share price will tank along with your investment. For me, industries such as insurance and utilities provide a much safer way to grow your investments and wealth. I can say myself that I won’t be investing in Petrofac or any of its industry peers.
The Dogs of the Footsie portfolio – could it work as an investment strategy?
I was interested once again this weekend to read about the Dogs of the Footsie portfolio on the thisismoney website. For those who haven’t come across it before it’s basically a portfolio that tracks the 10 FTSE 100 companies with the highest dividend yields. It’s possibly the most basic version of income investing. The article points out that the strategy is based upon a strategy developed by US market guru, Michael O’Higgins, who suggested that investors would benefit over the long term from buying the highest-yielding shares in the New York Dow Jones index.
When share prices were rising between 2012 and 2017 the portfolio did well, benefitting from a combination of income and capital growth, which to me is a winning combination. In 2018 however, income-focused shares are underperforming, making it more difficult to profit from a portfolio set up purely to benefit from the highest paying dividend companies. In many ways, this makes sense because the high dividend yields can mean the shares are heading for a fall or brokers believe that future dividends will be cut.
On the upside it could just be the shares are undervalued by the market and a risk-tolerant investor who does their own astute research can pick up a bargain share and benefit from both future income and growth in the share price. There’s no doubt though that in the present climate especially, it is a risky strategy.
Which companies are in the Dogs of the Footsie portfolio?
In order of dividend yield at the current time the 10 shares in the portfolio are:
- Taylor Wimpey
- Direct Line Group
- Barratt Developments
- Standard Life Aberdeen
- Imperial Brands
As you can probably see, housebuilders are well represented in the portfolio following its latest reshuffle which saw Admiral, Lloyds, M&S and BT leave the Dogs portfolio to be replaced by Persimmon, Vodafone, Standard Life Aberdeen and Evraz.
Housebuilders have been a poor investment in recent times after many years of stunning growth. This is due to concerns about stagnating house prices, rising interest rates and consumer confidence, all of which are affecting investor appetite for the sector’s shares.
Other sectors represented include two energy companies which have been hampered for some time by regulation and competition concerns. Tobacco, steel production, telecoms, insurance and investment.
I’m currently an investor in two of the dogs within the portfolio, Persimmon and SSE. Overall, whilst I am very keen on income shares and the potential for dividends to create compounding I’m less keen on creating a portfolio of dogs. Whilst the yield of these shares is on average over 8%, more than double that of the FTSE 100 average; I do think that many of them face major hurdles and investors will need to be patient waiting for some of them to turn themselves around.
I’m therefore happy to hold Persimmon and SSE without adding to my holdings or buying any of these other highlighted shares. If you think differently leave a comment and let me know.
Persimmon continues to grow but at a steadier rate
A trading update today from housebuilder Persimmon showed steady but slowed growth from the company, with revenue, completions, average prices and enquiries all rising even against tough comparative figures from last year when the company was growing strongly.
The shares have been falling recently despite the company seeming to move past its executive bonus scandal. This update seemed to have reassured investors a little but didn’t produce the same boost for the share price previous more bullish updates did.
The first half of 2018 saw revenues rise 5% to £1.84 billion from £1.75 billion in the first half of 2017. Housing completions rose 3.6% to 8,072 from 7,794 in the same period of 2017 while the average selling price increased by 1.2% to around £215,800, it was £213,262 the previous year.
The average selling price of the new homes sold forward into the private sales market was around £236,700, which is around 2% ahead of the prior year.
The group has like the rest of the industry experienced inflationary cost pressures, despite that the operating margins are expected to continue on an upward trend. The group is confident it can build on last year’s second half margins of 28.8%.
Total land spend in the period was £343 million, down from the £369 million last year. Persimmon has 370 active sites and plans to open a further 100 this year.
As at 30 June, the group held £1.2 billion in cash on the balance sheet.
I own the shares and am happy to continue to do so. I continue to believe Persimmon is one of the strongest housebuilders in the country, with a strong balance sheet and generous dividend policy which rewards shareholders. As my second largest holding I probably won’t add more shares on the current price weakness but I won’t be selling either. I’ll just keep an eye on how the company grows going forward.
If margins get squeezed, that’ll be when I’ll consider selling the shares.
Dixons Carphone shares dive lower after disappointing update
Shares in Dixon Carphone, the mobile phone and electrical goods retailer, fell sharply this week when in a trading statement the group revealed that it expects pre-tax-profits of around £382 million, down from £501 million last year.
The group also said it would close 92 stores, its estate is currently over 70 stores. Even worse for shareholders is that profits aren’t expected to recover as it is predicted profits will fall to £300 million in 2018-19.
The company blamed “challenges” in the market for mobile phones and mobile services, including a declining market for long-term mobile contracts and people not renewing their handsets as frequently. The group had also seen weaker demand for computers.
Neil Wilson, chief market analyst for Markets.com, described the profits warning as “grim” but agreed the problems were “all entirely fixable”.
“Dixons looks a bit flabby, and the market is just as soft, but there should be some easy wins in terms of making it leaner, especially around store closures,” he added.
The update showed that growth is particularly weak in the UK. UK & Ireland full year like-for-like revenues rose 1% in Q4, slower than the average of 2% over the year.
Overseas markets delivered better performance for the group. The group’s Nordic division saw LFL sales rise 9% over the year, with Q4 up 8%. In Greece, LFL sales rose 11%, boosted by a particularly strong third quarter while Q4 LFL sales rose 10%.
Dixons Carphone does now offer a high yield after the steep share price drop. It now yields around just under 6% which is well above the average for the FTSE 250 and so is tempting for income-minded investors. However, the obvious drawback is the lack of growth. Without this the share price is likely to fall further cancelling out the positive impact of dividends and increasing the possibility of a dividend cut in future if its fortunes don’t improve.
Two utilities – two different sets of results
Pennon and SSE both updated the market this week. The former’s share rose strongly with its full year results showing revenue and profit both up which buoyed investors. The FTSE 250 fared much better than its FTSE 100 peer. SSE which is far larger than Pennon when measured by market capitalisation lost 430,000 customers and saw its profits fall, although revenue rose.
Pennon reported a 2.9% increase in revenue in the year, with underlying profits before tax up 3.5% to £258.8 million as both its businesses South West Water and Viridor delivered positive results.
The group announced a final dividend of 26.62 pence per share, which meant that the dividend for the full year will be 38.59 pence, an increase of 7.3%. This reflects the group’s commitment to growing the dividend 4 percentage points above RPI inflation.
Revenues rose 2.9% at South West Water to £571 million. A small increase in costs, which crept higher by 1.3%, supported a 4.7% increase in profit before tax, to £181 million. On another positive note, the division received £2.6 million in net ODI (outcome delivery incentive) payments from the regulator following a good performance in areas it monitors such as water quality and leakage to sewer flooding.
The waste management business Viridor saw revenues slip 1% to £786 million, but profits before tax rose 17.2% to £70.8 million as availability of the groups Energy Recovery Facilities (ERFs) improved.
Meanwhile, SSE was negatively impacted by “exceptional charges” linked to the merger of its retail arm with rival Npower.
The group reported a 6% fall in adjusted pre-tax profits to £1.45 billion in the year to March 31, while bottom-line profits were down 39% to £1.09 billion. However, the group’s revenue rose 8% to £31.23 billion, the result of the Beast from the East hitting Britain and resulting in increased gas and electricity consumption by customers.
SSE pointed to competitive pressures as the number of domestic energy accounts fell from 7.23 million to 6.8 million.
Over the year to 31 March, SSE delivered earnings per share of 121.1p, down 3.6%. This is in-line with its most recent guidance, but ahead of expectations earlier in the year.
Group adjusted operating profit was down 2.4% to £1.8 billion. The profits from its Wholesale division jumped to £652 million, although as had been predicted that rise was offset by lower return from the group’s Networks division. The division’s profit fell £173 million to £763 million.
I’m an investor in SSE and am disappointed by the continuing loss of customers and I’m not sure the deal with Npower will get regulatory approval, on that front we’ll have to wait and see. Pennon’s shares definitely did better this week based on its much more positive update and growth prospects. I’d potential consider switching my holding in SSE to Pennon, but I haven’t yet.
Crest Nicholson shares fall a soft market squeezes margins
Housebuilder Crest Nicholson reported strong sales growth for the first half of the year but profit margins are being squeezed by the softer housing market, leading to the share price dropping sharply.
In a trading update covering the six months to 30 April, average selling prices rose 5% to £439,000 thanks to a change in mix of sales, while 1,251 houses and flats were completed, up 17.6% on the same period last year.
Sales rates in the first half fell to 0.72 per outlet week from 0.81 in the previous year, while forward orders up 11%, with units up 5% to 2,079 and forward sales up 6% to £441 million.
Directors warned that operating margins for the full year and next year are expected to be at the bottom end of its 18-20% guided range, reflecting generally flat pricing as build costs rose 3-4%.
The conditions in the market which are squeezing margins and sales are expected to continue. It was probably this admission which had the biggest negative effect on the share price. It indicates that Crest Nicholson will struggle to grow profits as strongly.
Patrick Bergin, Crest Nicholson chief executive, said: “Flat pricing has had a negative impact on margins, but volumes in the new build housing market continue to be robust and Crest Nicholson remains well positioned to grow volumes and deliver the homes that the UK needs, while continuing to focus on delivering strong returns for shareholders.”
But analysts suggested that the company had failed to react to the changing market.
Anthony Codling, analyst at Jefferies, said: “It seems to us that they are more focused on volumes than optimising margins. Unfortunately, due to a shift in market conditions, while their product may well be in the right place, it is not being pitched at the right price, in our view.”
Fellow listed housebuilders also fell on the news.
Crest Nicholson is a major dividend payer with a yield above 7%. Investors may no have to ask if or for how long if market conditions remain tricky the company will be able to sustain such a high yield.
Imperial Brands to slim down after profits dip
FTSE 100 tobacco company Imperial Brands revealed that the half-year sales were steady at £14.3 billion, but profits fell 8% to £833 million. The dividend was pushed up by 10% which helped the share price despite the profit dip.
Imperial Brands saw its total tobacco sales volumes fall 2.1% in the six months to 31 March, outperforming an industry-wide fall of 5.7%, while its growth brands, such as Gauloises, Lambert & Butler and Winston, grew volumes 6.3%.
Imperial said it is increasing its investment in its next generation products this year, including e-vapour and heated nicotine, by GBP150 million. This is to support the launch of new products and “continue the progress we have been making on building our innovation pipeline”.
Looking forward, the company expects a “considerably stronger” second half.
“We expect a stronger tobacco revenue performance in H2, particularly in Returns and Growth Markets, with more modest growth in the US,” Imperial said.
Imperial also said it is “pleased” with its progress in its next generation products.
Chairman Mark Williamson said: “We are on track to deliver on our full year expectations. We are also making good progress delivering on our strategy, focusing on the key products, brands and markets central to delivering growth in Tobacco and Next Generation Products.”
“This clear strategic focus supports active capital allocation, and we are progressing a number of divestment opportunities that will further simplify the business and free up capital,” Williamson added.
All tobacco companies have been hit by price competition and growing government concern over health issues. Following BAT’s $47 billion merger with Reynolds last year, bankers immediately said Imperial would have to do something similar, with Japan Tobacco the obvious partner.
The chief executive, Alison Cooper however is resistant to this merger. Instead she revealed alongside the results that Imperial will sell £2 billion-worth of non-core businesses. She wouldn’t reveal which parts of the company might be sold off, however analysts speculate she will look to sell off parts of the sprawling company outside the key markets in the US, UK, Germany and Russia to increase returns to shareholders.
Analysts at RBC Capital Markets say their “worst fears have not arisen”, with volume and revenue declines within expected ranges, while operating profit and EPS were 1% and 2% respectively ahead of company-compiled consensus.
While volume and revenue declined, it was felt to be a solid performance: “Things seems to be going to plan for the first time in a while at Imperial…EBIT 1% ahead of consensus expectations – with no funnies that we’ve found so far – is also welcome.”
RBC noted management are “doing the right things to fix its top line”.
BT axes jobs, moves HQ and tries to deal with its ballooning pension deficit
BT’s final results show it is having to do a lot of work to try and return to growth as it continues to struggle. The share price has continued to slide, potentially putting the dividend at risk.
Most striking in the update from BT was the announcement that it will take the knife to 13,000 mostly management jobs in order to refocus the business. As part of the shift in focus and strategy the company will create 6,000 jobs in areas such as engineering, cybersecurity and customer service.
The job losses are part of a three year £1.5 billion cost-cutting plan designed to modernise BT and shore up its weakened finances.
Revenues in the year to 31 March fell 1% to £23.75 billion, which was a little less than expected after a very weak end to the year for broadband net additions. Adjusted earnings before interest, tax, depreciation and amortisation of £7.51 billion was slightly above average analyst forecasts; as was adjusted profit before tax, which fell 2% in the year to £3.4 billion after a 1% improvement in the fourth quarter.
BT said its results were in line with forecasts but a not-so-rosy outlook spooked investors which on the day of the results sent the share price tumbling (again). BT said underlying revenue will drop 2pc this year and adjusted earnings will be 1.3pc lower.
RBC Capital Markets summed up the operational results as “weak global services, strong EE, strong consumer but very weak broadband net adds”.
Overall, it looks like BT has a lot of work to do in order to get its share price back on track and moving upwards. It is likely that even if the actions taken by BT to try and improve the business work, it will take a while for the results to improve to the extent that the share price will rise. Any investors looking at BT will likely to have to be very patient. BT is my smallest holding and I’m hopeful of a turnaround, but I don’t expect the share price to recover any time soon.
Pennon shares may be worth a look after horrible 12 months
Shares in utilities group Pennon have been tumbling over the past 12 months. In a recent trading update (March 26) Pennon said it was on track to meet full year expectations but warned that its energy recovery facility in Glasgow would cost £95 million more than the original budget figure of £155 million. The update has done little to please disgruntled and nervous investors.
Pennon consists of two main business Viridor – its waste management business and South West Water – no further explanation needed for what it does. Across the group, Pennon said it has achieved a “robust underlying financial performance” and is on track to meet management expectations for the year ended March 31, 2018.
It added that it is well-placed to respond new price limits proposed by water regulator Ofwat. The company said its South West Water arm continues to “perform well” and expects it to reach a return on regulated equity of 11.8%.
Talking about the waste energy issues, Pennon said the final price rise was dependent on the outcome of litigation with Interserve after it handed the outsourcer its marching orders in 2016 after delays on the project, which is run by its Viridor unit.
“Viridor is contractually entitled to recover incremental costs from the original principal contractor, Interserve, under certain circumstances,” Pennon said.
“Discussions with Interserve are ongoing with regard to the contractual settlement. Dependent upon the conclusion of those discussions, margins over the life of the project to 2043 could potentially be lower than originally expected, although we do not believe there is any immediate impact on earnings.”
In its half year results, announced in November, Pennon recorded a revenue increase of 5.6% to £723.9 million while operating profit rose 5.5% to £162.4 million.
For income investors, pennon is potentially attractive, perhaps even more because of the bashing the utilities sector is taking in the short term due to political fears and the fact interest rate rises are seen as a potential drag on companies such as Pennon.
The dividend yield is over 6% and the PE ratio a little over 12. This seems to scream good value and certainly warrants further research. From my point of view, I believe now is a good time to look at the shares. The company wants to increase the returns to investors by RPI inflation plus percentage points per year; this is far more generous than utilities peer National Grid (which I hold). On top of that South West Water is performing well with a sector leading return on regulated equity at 11.8%.
As the bigger division, continued good performance by South West Water will boost the group and underpin investor returns. That said, in 2020 tougher regulatory conditions may come into force which could squeeze margins.
Pennon’s full year results are due out on May 25. Keep an eye out for more commentary on the outlook for the business and more information on problems with waste to energy contracts, cost overruns can eat into profits quickly.
United Utilities, a larger rival to Pennon, and part of the FTSE 100 also released a trading update. United Utilities, whose shares have also been hammered over the last year, said it was trading in line with management expectations for the year to the end of March.
The company said revenue is projected to be “slightly higher” than last year while underlying operating profit is forecast to be “moderately” higher”.
Next unable to defy High Street gloom as it struggles
Recently UK FTSE 100-listed retailer Next reported another set of results which showed the business is under significant pressure. However, despite the poor results, the share price rose on the day of the results announcement because investors had been expecting sales to drop even further.
Next’s chief executive, Lord Wolfson, said that “in many ways 2017 was the most challenging year we have faced for 25 years”.
He went on to add that, “it has also prompted us to take a fresh look at almost everything we do” including the structure of its shop portfolio and the “in-store experience”.
Group sales fell just 0.5% to £4.1bn in the year to 31 January, below the lowest estimates of any City analyst, as retail full price sales fell 7% but online grew 11.2%.
Profit before tax came out at £726.1m, down just over 8% on the prior year but just above the central point of management’s guidance. Earnings per share fell 5.6% to 416.7p, helped by substantial share buybacks in the year.
Net debt was £141m higher at £1.1bn and is expected to peak at £1.2bn this year. The business remains highly cash generative, however, with £335m in surplus cash after total cash generated of £882m and £361m returned to shareholders via buybacks and dividends.
Next said that it planned to roll out more concessions across its store after trying out a number of new services at its shop in Manchester’s Arndale Centre. The company also said it was in discussions to add other services to its stores including travel, branded footwear and cosmetics.
Over the year, profit from Next’s shops fell by 24% to £268.7m. Sales fell 7.9% to £2.1bn in what the retailer said was “a particularly difficult year” for its stores. However, online profits rose by 7.4% to £461.2m, with revenue up 9.2% at £1.8bn.
Neil Wilson, senior market analyst at ETX Capital, said: “The shift in the sales performance from retail to online begs the question as to when Next will look to shift its operations away from stores and focus more on maximising its online divisional strength.”
“In the year ahead we currently plan to open 98 concessions across our store portfolio and expect to generate annualised income of around £5m from these concessions.”
These supplementary experiential services include; a florist, a prosecco bar, a restaurant, a children’s activity centre, a café, a card and stationery shop, a barber and “shortly a car showroom”.
Other retailers have struggled in recent weeks, showing the overall pressure on the sector from the falling pound, rising costs, a shift in the retail landscape and falling consumer spending. Carpetright, has revealed it is exploring a company voluntary arrangement that could allow it to exit store leases or negotiate reduced rents whilst another listed retailer Moss Bros saw its shares drop dramatically when it issued a profit warning.
Home improvement group Kingfisher reported a 10 per cent fall in annual profits to £682m and Véronique Laury, its chief executive, pointed to an “uncertain” outlook for the UK business.
It will be interesting to see what the future holds for Next after its most challenging period for 25 years. Next is probably being quite smart in moving to more experience-based retailing, although further investment in online to compete with digital-only retailers might be an even better use of resources, especially given Next already has strong growth there despite not being an online specialist.
The market position of next does make it hard to compete with smaller, cheaper, more agile rivals. It has little to differentiate it. History shows the group has been run very well and the management are clearly very good at running a large retail company, however, the future does look like its still full of potential hurdles and I don’t think the shares offer much attraction for investors. They are not on my watchlist (and I strongly doubt they ever will be).