UK Daily Stock and Finance News Report Thursday 12th October (SKY, SMWH, HAS, BMWG, NXR)

SKY PLC

Share price: £9.26 (up 1.5%)

Sky PLC is under takeover propose from 21th Century Fox, a firm owned by Rupert Murdoch. It is currently under government review, and the takeover price is £10.75 per share.

Current share price stands at £9.13 per share, a discount of 17.7%. Anyone playing this takeover needs to do due diligence. especially those using leverage. There is a chance the deal would get block by the government. The huge discount means investors aren’t optimistic this deal gets made.

 

Before the takeover got announced, Sky’s shares were trading around £8. A miscalculation could potentially cost investors 12%. unless Sky PLC saw improving operational performance.

 

First quarter update

Main numbers are:

– 5% increase in like-for-like revenue to £3.3 billion.

– 11% increase in EBITDA to £582 million.

 

Business in Sky has been getting along and we can assume cost savings are made because sales increase is smaller than EBITDA.

Rule of thumb

(2% growth in sales and 10% growth in operating profit = increase in operating margin.)

(10% growth in sales and 2% growth in operating profit = decrease in operating margin.)

 

Historical Performance

Without much data from Q1 trading update. Let’s look at Sky PLC over the years.

Although turnover has grown exponentially, SKY has struggled to grow EPS consistently.

There is a lot of debt on their balance sheet, especially after their acquisition of Sky Deutschland and Sky Italia for £7bn. However, this resulted in net borrowing spiking from £6bn to £15bn in one year. Now, it stands at £18bn, which is 23 times larger than net profit (£700m).

Despite the low-interest rates, SKY’s interest cover is below their historical average of 6.4 times to stand at 4.7 times.

 

Market Valuation

With only the first quarter numbers out, there’s a lot of information to measure valuation. Most brokers are putting a “hold” on the stock with price target of £10.75. One broker is super optimistic with a £13 price tag.

Using 2018’s forecast, EV/EBIT is on 15 times multiple, with EBIT margin at 10.8%, below their historical average of 17%.

 

Final Thoughts

If takeover review panel blocks 21th Century Fox acquisition, then the potential downside is £8 per share. But, SKY’s performance has been up and down if you delve into the raw data.

Here is the performance of SKY, summed up below:

Sky PLC(SKY) - EBIT and ROCE

 

It explains why net debt to market cap. has risen from below 10% to 60%.

 

Hays

Share price: £1.90 (up 0.11%)

QUARTERLY UPDATE

Every region was up by double-digits, apart from the UK & ROI (up by 1%).

The update is rather pointless. The company revised full-year operating profits higher by £5m due to currency movements. Also, it stated cash position of £60m, down from £110m three months ago. That was in-line with expectation and resulted in movements to cash flow.

 

A more fruitful analysis is to look at historical operational and financial performance.

 

Historical performance

Hays saw revenue effectively doubled, manage zero earnings growth for 15 years. This reduces their operating margin to 4.3% from 10%+.

The good news is debt and pension deficit is close to zero. Net borrowing went from £232m in 2002 to net cash of £111.8m. Maybe this explains why market value has risen to record high.

 

There is some concern of rising receivable, but this notion is squash as it’s in-line with sales growth.

debtors and creditors

Cash Flow

Hays’s cash flow paints a perfect paint of how cylindrical the recruitment industry is.

Hays PLC(HAS) - cash flow

In the absence of major acquisitions, it has ave. free cash flow of £100m for the past four years.

 

Valuation

Due to the stock doubling in value since 2016, their PE ratio is back above historical average and is at 20 times’ earnings. Meanwhile, dividend yield of 1.7% is at a historical low, especially when payout ratio is around 30%.

 

Final thoughts

Despite their international operations growing at a double-digit, their UK business remains a problem, especially when it accounts for 35% of group sales. With that said, along the shares did double. At these levels, along with peak employment levels, Hays look fully-priced in.

 

WH Smiths

Share price: £20.65 (down 0.22%)

PRELIMINARY RESULTS

Another great result from Smiths, which saw revenue grew for the first time since the financial crisis. But, as always, shareholders are more interested in net profit and EPS growth.

Net profit rose to £116m, as diluted EPS broke pass 100p per share to record 103.6p.

Meanwhile, it has low debt and a credit facility of circa. £150m.

Also, management has increased dividends by 10%.

 

Business Breakdown

Smith’s operate two divisions, High-Street and Travel. Their travel division saw sales rose 9%, as LFL grew by 4%. Also, its revenue has overtaken their high-street division.

Again, their high-street division saw revenue decline by 5%, as LFL fell by 4%. Trading profit is unchanged at £62m but is much lower than £92m earned in their other division.

 

How did they do that?

Management has made a fascinating claim when it said: “Including the share buyback announced on 12 October 2017 and the declared final dividend, since our 2007 financial year we will have returned over £900m of cash to shareholders, increased the dividend each year and reduced our issued share capital by 40%.

Financial YearOrdinary Dividend4

£m

 

Buyback6

£m

Special

 Dividend

£m

 

Total

£m

2018

2017

2016

2015

53 5

50

46

42

50 7

41

47

54

c. 103

91

93

96

2014

2013

2007 – 2012

 38

34

147

41

50

173

57

79

84

377

 41045657c. 923

3 Free cash flow is cash generated from operating activities adjusted for capital expenditure, repayments to HMRC (see Note 5 to the financial statements), pension funding and net interest paid.  See analysis of cash flow (page 8).  Refer to the Glossary on page 31 for an explanation of the definition and purpose of the Group’s alternative performance measures.

4 Cash dividend paid

5 Proposed final ordinary dividend for year ended 31 August 2017 and for illustrative purposes only assumes 2018 interim dividend to be the same as in 2017

Buyback in financial year

7 Buyback of up to £50m announced on 12 October 2017

 

Valuation

The market was right to re-rate WH Smiths to 20 times PE from 10 times, due to increasing operating margins, although EPS growth is around 10%.

 

Final thoughts

WH Smiths shares are fairly valued.

 

 

NORCROS

Share price: £1.76 (up 4%)

 

This household business manufacture and market showers, tiles, adhesives and taps. They own brands like Triton and Johnson Tiles.

Trading Update

At £1.76 per share, Norcros is an interesting company because the valuation looks insanely low.

Half-year results showed a big improvement, with revenue growing by 12.5%. Their South Africa division grew by 21% helped by their currency.

Half-year to 30 September 2017
ReportedConstant currency
UK8.4%8.4%
South Africa21.0%4.8%
Group

 

12.5%

 

7.1%

 

 

There has been no mention of profits. I expect South Africa will deliver higher profits, due to favourable currency movements. But, it only contributes 35% of pre-tax profits. I’m concern about their UK division whether reported sales growth of 8.4% has offset greater than expected rise in UK costs.

 

Valuation

Forecast for normalised EPS in 2018 and 2019 is 28.5p and 30p, giving it forward-PE of 6.2 times and 5.8 times, respectively.

The market capitalisation is 30% below 2013’s peak, despite net cash from operations at a record high of £23m vs. 2013’s £5.6m.

It is currently paying 4.5% in dividend yield, despite the payout ratio being around 35%. The dividend is growing at 10%.

 

Final thoughts

I like this company and would invest at this level. But given my 30 minutes’ analysis, I urge you to DYOH! If everyone checks out, I can’t see why you shouldn’t buy this share.

 

N Brown Group

Share price: £3.35 (down 4%)

FIRST HALF RESULTS

 

Group revenue grew by 5.6%, helped by 7.5% increase in their product revenue division. Their financial services division grew by 1.1% but was able to increase gross margin by 56.5%. Meanwhile, their product division will see margin fall 1.9% to 54%.

 

Financial statements

Despite higher revenues, N Brown saw adjusted net profit fell to £21m from £25.1m. The company reported higher exceptional items of £54.9m, up from £10m last year. This was due to a £40m writedown on their financing division because of an investigation from the FCA. It involves selling certain insurance products which were provided by a third-party insurance between 2006 and 2014.

Meanwhile, store closures resulted in costs of £13.8m.

Balance sheet

One item looks out of place trades debtors. This is because debtors’ days is over 200 and the product isn’t overly expensive. In fact, N Brown merged their finance division and their product division together meaning loans lent to customers to pay for their products takes a while to pay off.

 

Meanwhile, net borrowing has risen to £305m from £290.9m.

 

 

Guidance for FY 2018

Here is the good news:

– Financial Services gross margin +100bps to +200bps, compared to flat to +100bps previously.

 

Here is the bad news:

– Product gross margin -120bps to -70bps, compared to -120bps to -20bps previously.

– Group operating costs up 4.5% to 5.5%, compared to 3.5% to 5.5% previously.

– Net debt £325m to £335m, compared to £300m to £320m previously, reflecting the increased cash flow impacts of exceptional costs, together with the growth of our customer loan book

-Exceptional costs of an additional c.£2m in the second half, as a result of our ongoing tax disputes with HMRC.

 

Market Valuation

Shares in N Brown has battled back from below £2 to £3.50. When it came to their valuation PE is trading close to their historical average of 13 times. Dividend is yield at 4% with growth in payout dropping to 5%. The dividend payout ratio is around 50% of earnings.

Earnings yield is around 7%.

 

Final Thoughts

It looks like N Brown is experiencing rising costs from their product division. Also, the shares recovered from their lows and the half-year results and guidance won’t inspire further appreciation. At best, the share price would consolidate at around £3.

 

Thanks for reading, please leave any comments below. 

DISCLAIMER

The above analysis is my opinion and nobody else. It does not constitute professional investment advice. Data is correct on available information at the time.

  • Richard Goodwin

    Thanks Walter. A worthy large cap addition to each morning’s scvr☺