Tuesday, 19 August 2014

European stock observations - Imperial Tobacco, CRH and AP Moller-Maersk

The results season may be very mature now but there are still disclosures to be observing.

Imperial Tobacco continues to please.  I titled my last write-up 'Buying from a forced seller is good news' concerning their US brand acquisitions from two merging US listed peers.

Today's IMS is fairly routine, reiterates a 'modest' EPS advance and a 10% rise in the dividend payment. Operationally the key always lays with pricing power and the comment that 'Price/mix has improved in Growth Markets and remains strong overall in Returns Markets' is pleasing to read.

In terms of a target price my view is to use the guidance of the headline yield.  Taking the 10% advance at face value, the share prospectively trades at a 5% yield just north of 2900p.  The stock remains a core pension fund position for me - and now with enhanced growth optionality following the US deals.

Is it really a year since I wrote on CRH?  In August last year (link here) I noted their caution about Europe in particular concluding that:

'The real news/driver for the shares is in Europe.  Cost-cutting efforts have been raised and a potential Euro300m could cut from the cost base (70% viewed as 'permanent') over the next couple of years.  That is helpful for a company with an EV of around Euro16bn but frankly the cyclical and operational realities matter more. Given depressed profitability, valuation work is not easy but here is a thought.  Sub Euro15 the share is below book value'

Except with writedowns...it is not any more.  Nevertheless the shares have actually not moved that much from a year ago albeit there has been some transitory optimism:

In terms of the numbers I liked the generalised good margin progress...

 ...and how the underlying numbers were driven by proper organic growth:

Meanwhile in the outlook statement I like the comment on the general economy: 'modest if mixed economic recovery'
Valuation is still tricky with CRH especially as divestments (potentially up to Euro2bn worth) continues as do general restructuring / cost cutting initiatives plus from a (depressed) earnings perspective it is still trading at a x22 P/E.  There is however the 3.5% dividend yield (maintained) to grab hold of.  I am still watching and hopeful of something closer to book value.  It is a stock worth keeping an eye on however from a general management strength and end asset exposure perspective.

Finally AP Moller-Maersk.  Back in June (link here) when the P3 deal broke up I wrote how I was awaiting the DKK12,500 level over the summer.  The share briefly touched this level and of the various more cyclically-exposed stocks that I bought at the time I focused on those that had already reported (link here).  Possibly sensibly but as today's numbers show for Maersk per se this was a missed opportunity.

My observation last quarter (link here) of a 'global leader who appears to be having greater profit / returns / communication focus' appears still to be driving the share:

'we upgrade the outlook for the Group result to be around USD 4.5bn for 2014. Due to the current strong financial situation, the Board has decided to buy back shares of USD 1bn within the coming 12 months'

Technicians are going to observe the resistance in the mid DKK14ks and clearly this is going to be an important level.  The buyback (a little under 2% of market cap equivalent) sounds good and supplements the just over 2% yield.  

I note strong progress especially at the Maersk Line and Maersk Oil divisions with Terminals being - as always - very solid. 

The key remains cost control...

...and improving ROIC.  At a company level they are anticipating 10%+ over the cycle and it is the container shipping side which is driving this.  

There will always be volatility in these areas but buying into volatility on Maersk remains sensible.  These numbers impressed me.  Sub DKK13k on a bad day and each DKK1k down? (Or am I always designated always to 'miss' this one?)

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