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To be taken to the 2015 report.
Post mortems are a legal requirement in many countries! It helps to understand the reasons why 2015 brought a good measure of ups and downs.
2015 started well with a positive result from the May UK General Election (“positive” i.e. a majority government and not the expected hung parliament). But 2015 then dissolved into concerns over the slowing global economy, corporate scandals, and weak corporate results.
The sharp depreciation of currencies v US dollar (a 2015 theme) has reduced the purchasing power of non-US consumers. Weak conditions in many large economies have yet to hit US S&P 500 company results partly due to the strong US economy.
2015 has been a “tug of war” between the bear sectors; oil majors, oil services, energy, mining, engineering, banks, engineers, property, food retailers and the bull sectors; beverages, travel & leisure, telecoms, healthcare. The bear sectors have combined a higher weighting than the bull sectors.
The decelerating Chinese economy, a stagnant Eurozone and problems in Brazil, Russia, Canada and Australia and the Middle East weighed on UK company results. A number (Anglo American, Antofagasta, Centrica, Glencore, Rolls Royce, Standard Chartered, Morrison, Tesco) cancelled dividends or signalled large dividend cuts.
As 2015 ends, the dividend stalwarts that “bought time” are candidates for a 2016 dividend cut. BP, BHP, Pearson are likely cut candidates. Even Shell, a reliable dividend payer since 1945, whose CEO promised to pay $1.88 on Shell’s enlarged share capital (post BG Group merger) is subject to speculation on dividend affordability. Is Shell’s promise the “bridge too far”? There is a snowball effect building, as companies cut, there is less willingness among competitors to hold their dividend. It all puts a hole in dividend based strategies!
What happened to our 2015 recommendations?
We are pleased with our 2015 recommendations, particularly UK “challenger bank” TSB (acquired by Banco Sabadell for 340p per share or £1.7bn in July 2015).
| 2015 Top Recs | Share Price (p) | Target (p) | What Happened? |
| Alliance Trust | 469 | 520 | Hit Target 18/3/2015 |
| Old Mutual | 185 | 230 | Hit Target 19/3/2015 |
| Pearson | 1142 | 1300 | Hit Target 22/1/2015 |
| TSB | 278 | 330 | Hit Target 12/3/2015 |
We were disappointed with US based Elliott Partners going quietly with Alliance Trust. We expected their approach to result in a change of CEO. However this did not transpire and Alliance is now buying back its shares with the intention of reducing the discount to net asset value to “single digits” ie a maximum of 9%. We were also lucky that the price target on Pearson hit before very weak results.
Aldermore is a UK “challenger” bank specialising in diverse property lending, including BTL “buy to let” lending, “SME” small and medium sized commercial loans. Q3 results detailed strong 20% loan book growth to £5.8bn (residential mortgages +22% to £3.1bn/ SME +19% to £2.7bn). The board commented on “benign” lending conditions in the UK alongside the group’s continued success in attracting deposit funding, which grew 20% to £5.4bn. Aldermore had total capital ratio of 15.6% and leverage of 7.2% above the challenger peer group.
| Company | Aldermore Grp |
| Share Price | 229 |
| Target Price | 315 |
| 52 Wk Hi/Low | 316/214 |
| Shares O/S | 344.7m |
| Market Capitalisation | £790m |
| Avg Daily Volume | 580k |
| Dividend Yield | 0% |
Source; Fidessa plc
| Key CatalystsAldermore is making progress towards its 40% cost/ income target (due 2017) currently this is 53.3% hence reaching this objective could boost profit by 35%. Recent changes to the treatment of BTL loans, ending their tax deductibility by 2020 has caused concern over loan demand as these changes are phased in. Still profit growth has been impressive, more than doubling over H1 2015 to £44m, on track for £95m 2015 forecasts. Aldermore is a likely consolidator in the challenger bank peer group. |
Key Risks to Price Target
i) Aldermore shares are highly rated at 1.23x TNAV (tangible net asset value is 185p ps).
ii) Changes to the tax treatment of BTL loans will reduce BTL profitability and could reduce demand for Aldermore’s BTL loans, as these changes are phased in over 2017-2020.
iii) Subject to UK property market conditions, lending demand and collateral values
Barclays is UK financial institution comprising, Barclaycard, Africa Banking, Barclays Retail and Commercial and Barclays Capital. Barclays has significant “non-core” businesses (£55bn risk weighted assets) that are for sale. Over 2015 John MacFarlane (former Aviva Chairman) took over as executive chairman whilst Jes Staley joined on 1st December as new CEO.
| Company | Barclays |
| Share Price | 224 |
| Target Price | 280 |
| 52 Wk Hi/Low | 289/220 |
| Shares O/S | 16.78bn |
| Market Capitalisation | £37.6bn |
| Avg Daily Volume | 28.8m |
| Dividend Yield | 2.9% |
Source; Fidessa plc
| Key CatalystsBarclays realisation of “non-core” should accelerate over 2016 reducing the drag on profits – and resulting in the shares trading nearer to TNAV (tangible net asset value) of 289p per share. At present there is a 22.5% discount. We expect continued strong performance from Barclaycard/ UK Retail/ Commercial on the revenue side but also the benefit of recent cost savings initiatives. We await guidance on the 2016 dividend after the disappointment over the decision to hold the 2015 dividend at the 6.5p paid in 2014. |
Key Risks to Price Target
i) Liquidation of Barclays non-core assets could result in lower than expected proceeds. Recent higher cost estimates (£400m) could be raised, due to complex litigation and operational risks.
ii) Barclays is exposed to the tougher regulatory environment both in the US and UK. It is exposed to more US regulatory scrutiny as a “SIFI” (systemically important financial institution) and due to past wrongdoings in respect of LIBOR rigging/FX market manipulation.
iii) Recent hires suggest an increased strategic emphasis on Barclays capital markets business an area of previously heavy expenditure and low returns.
Breedon Aggregates is a UK based supplier of cement, block, gravel and asphalt to the construction industry. The board have announced the acquisition of Hope Construction for £336m to be funded 60% via debt and 40% equity – a deal that will significantly enhance Breedon’s market share and ability to secure larger surfacing Ministry of Transport projects.
| Company | Breedon |
| Share Price | 64 |
| Target Price | 85 |
| 52 Wk Hi/Low | 67/41 |
| Shares O/S | 1.15bn |
| Market Capitalisation | £731m |
| Avg Daily Volume | 1.58m |
| Dividend Yield | 0% |
Source; Fidessa plc
| Key CatalystsGoing into the merger, Breedon was performing strongly with aggregates volumes up 19% and group revenue up 20%, benefitting from good UK weather conditions. The Hope merger will add (in 2016) £285.6m revenues and c £24m annual profit to Breedon (whose annual revenues were £269.7m and annual profit of £21.4m in 2014) prior to cost savings. The deal is expected to be earnings enhancing lifting EPS by 16% in 2016 after £10m-£15m costs to realise £10m synergies. |
Key Risks to Price Target
i) The Hope Construction acquisition will involve the issuance of 259.1m shares to Hope owners and a further 78.78m shares to placing investors at 51.79p per share.
ii) Breedon’s estimated £10m cost synergies from 2018 might be revised down.
iii) Breedon’s greater size will bring it into more direct competition with Lafarge, Cemex, Tarmac and Heidelburg Cement
Compass Group is a global market leader in contract catering, facilities management (“FM”) and food retail. Compass has grown from its UK roots in the 1980s to a very large international business (in 65 countries) with annual revenues of £17.6bn of which £1.8bn is UK based. Compass growth has been derived from both acquisition and organic growth. In recent years however organic growth has been more in evidence allowing Compass to increase shareholder returns.
| Company | Compass Grp |
| Share Price | 1158 |
| Target Price | 1300 |
| 52 Wk Hi/Low | 1219/991 |
| Shares O/S | 1644m |
| Market Capitalisation | £19.04bn |
| Avg Daily Volume | 4.88m |
| Dividend Yield | 2.52% |
Source; Fidessa plc
| Key CatalystsCompass reported profit growth in 2015 with EPS +11% to 53.7p on revenues up 5.8% to £17.8bn. The results reflected organic growth in North America (revenues +7.9%) and 11% emerging markets growth. The closely managed operating margin rose 0.1% to 7.2%. Compass is building traction in North America via new clients in US education, sports and healthcare sectors. Compass could announce a special dividend over 2016 given gearing is just 15%; the board said they will return surplus cash to shareholders. |
Key Risks to Price Target
i) Exposure to emerging markets small businesses and competitive pressures.
ii) Subject to operational & regulatory risks relating to Food Safety and Health& Safety standards.
iii) Compass overseas profits would be reduced during periods of sterling strength or if difficulties arose in the repatriation of overseas profits.
Johnson Matthey is a global leader in the manufacturing of ECT (emission control technologies typically catalytic converters), process technologies in chemicals and oil refining, platinum metal products (platinum and palladium). Johnson Matthey sold its research chemicals business in 2015 and will distribute the proceeds to shareholders via a 150p special dividend – with an XD date of 11th January 2016. The board recently signed an important deal with Intelligent Energy to bring its fuel stack technology to the consumer automobile market by 2020.
| Company | J Matthey |
| Share Price | 2670 |
| Target Price | 3400 |
| 52 Wk Hi/Low | 3571/2318 |
| Shares O/S | 204.92m |
| Market Capitalisation | £5.47bn |
| Avg Daily Volume | 541k |
| Dividend Yield | 2.56% |
Source; Fidessa plc
Key Risks to Price Target i) Recent declines in platinum group prices and slack demand will impact the refining business. ii) Johnson Matthey is exposed to weaker demand for diesel cars/catalytic converters iii) Exposure to global Heavy Duty Vehicle annual growth (expected at 11.3% to 2020)- these forecasts could prove optimistic if global GDP slows.
Senior BUY – UK 250Senior is a UK manufacturer of high technology components and systems for worldwide aerospace, land vehicle and energy markets. Over 2015 Senior bought Lymington Precision Engineering for £47.5m and US based Steico Industries (2014 revenues $37m/profit before interest, tax and depreciation $6.6m) for $90m. Senior’s aerospace division provides extensive components and systems for Boeing and Airbus as well as Sikorsky commercial helicopters. Senior guided analysts to expect a result near the bottom of its range of £99m-£106.5m post the appointment of the new CEO David Squires on 1st June 2015.
Source; Fidessa plc
Key Risks to Price Target i) Senior’s key markets, aerospace and energy have experienced sluggish trading conditions of late. ii) Possible further updates to profit guidance ahead of 2016, given new CEO’s cautious stance. iii) Senior’s growth is achieved primarily via acquisition-led growth. This approach entails execution and balance sheet risks. Senior could write down part of the acquisition costs in 2016. |