Tuesday, 3 November 2015

Europe earnings comments today: Weir Group, Imperial Tobacco & Standard Chartered

Another busy earnings day in Europe. I will come back with some thoughts on UBS and BMW later (after I listen to the latter's conference call) and I might even add a comment or three on Glaxo's R&D day (if I understand it) but first some UK names which updated thoughts earlier today.

First Weir Group.  I don't think I have ever reviewed the service supplier to the minerals and energy sector but no surprises that the shares have been whacked over the last year:

Inevitably the law-of-round-numbers adherent to me notes the bouncing of near/around the 1000p share price level... In present the notes I made from the conference call below:

’70 announcements of mining capex cuts YTD…accelerated in September in October’

Mining -
Original equipment – ‘lumpy’, no clear up trend yet
Aftermarket – feel stated weak numbers ‘one-off’ reflecting tough comps/market factors and pleased with cost containment.

Oil/gas –
Noted further declines since last updated the market in July due to oil prices -25% etc.
‘the longer the downturn the quicker the bounceback will be’ – noted Exxon upping Permian Shale bets

Provide FY16 guidance in Feb
Noted slowdown across all divisions but also market leading positions
‘Strong cash generation’, inventory down £30m helping

Q&A –
Pricing pressure – ‘been pricing pressure for the last four years…been able to mitigate that through efficiency drives’

Aftermarket – ‘disappointing Q3 performance’ but noted different geographic splits (Middle East, selected emerging markets better).  ‘Lots of moving parts’.  ‘Pricing (pressure) in the Middle East is nothing like we are seeing in North America’

‘customers are pushing the boundaries about how long before equipment breaks…rise in emergency orders when something goes wrong’

The bottom? – fudged the question: ‘crystal ball gazing’.  Feb when the update is.  Noted many levers on the balance sheet ‘very comfortable with headroom we have got versus our covenants’.  Noted ‘limited visibility’.  

My view here?  You wait.  I still prefer on margin the actual producers be it a BHP Billiton or a Royal Dutch Shell or BP.  Nevertheless I will be all over the numbers in February including the new guidance. 

Moving on, Imperial Tobacco has been a regular feature on these pages (see for example here).  Back in June I noted a top-slice opportunity (I actually switched monies to Philip Morris International where I see better upside at the moment - link here) and an opportunity to rebuild sub a £30 share price (which occurred in September).  Here however we appear to be technically running out of a bit of steam:

Today's announcement was very solid.  As I noted on Twitter:

nos solid today. Fav slide this one showing post 4% div pre acq FCF & 16e div +10% too (15A +10%)

Which is underneath all this is strong pricing (more than offsetting any Iraq/Syria volume issues) which is - of course - a trait across all tobacco stocks:

Looking ahead the key is going to be the development of the US business which was significantly augmented by a very sensible acquisition earlier this year (and which has helped induce much of the YTD share price performance).  If there is one metric to follow over the next year with Imperial Tobacco it is the US market share one in my view: 

Overall thoughts? Prospectively c. x14 forward EV/ebit and a 5% free cash flow yield (4% paid out with a 10% dividend progression).  This is fine for longer term capital but I would not be putting new money in.  That is for a sub £32 share price currently. 

And finally Standard Chartered.  Two announcements here: first the Q3 results...

...and second a much anticipated money raising to rebuild core tier 1 (above that fabled 13% level).

 As I noted on Twitter:

On the CC. Even though latter column not annualised point clear. 2nd chart: lots low RoE assets

The charts above show what a mess the bank has become a point memorably noted by the still newish CEO:

'pockets of excellence buried under piles of..."fertiliser" ' - Standard Chartered CEO on what he has found in his first 5 months on the job

So what to think about the money raising?  Well the first aspect to note was that the rhetoric (as noted by the comment above) is suitably aware of the problems the bank is in:

‘thorough root-and-branch review…no sacred cows’

‘developed a very comprehensive set of actions’

‘package aggressive and realistic’

‘our starting point is far from where we would like to be'

Good therefore to see hopes that costs will be materially cut...

...and that RoE recovers over the rest of the decade.  8-10% RoE is not particularly exciting compared to other banks I have looked at over this results season I note.  

Interesting too to note why the RoE has declined so much: blame regulation and cyclical issues!

So should you support this deal?  I think you do.  At a current c. x0.6 price to book value (link here) there is value in simplification albeit you need faith in management to impose the plan and hope that extra regulation costs are not too onerous (plus some outstanding money laundering court cases - see here).  The shares have been dire over the last year including a fall below 650p today...

...and as I was foolish enough to still hold some shares (not a top 20 position) I will be looking to augment and lower my average purchase price. 

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