Even more new share write-ups

Earlier in the week, I wrote a piece titled...

"Sports Direct - drive a bus through the numbers and forecasts!"

...which was uploaded to the ShareProphets website.  A link to the piece (free sign-up) is here.

Meanwhile I also wrote on the same website: 

"Getting Wood...Group"

...at this link here. 

Apache - thoughts on the third quarter

In terms of position size my most important oil and gas sector holding at the moment is Apache.  Three months ago I wrote up my review of the quarterly numbers (link here) and noted:

'My view: to complement the mega cap exposure in the space with their dividend focus (link here) Apache is a good choice.  For me the conference call reiterated they have the experience and acumen to see through the current conditions and ultimately prosper and move materially above the current decade plus share price low is clear.  As with probably any other energy sector call over the last year I have been wrong to buy/build in Apache shares but you can only invest going forward - and this is no time to be selling their shares in my view'

Over the last three months the shares are slightly up but clearly it has been a tough last year given the backdrop of sharply falling oil prices.

These difficult conditions were reflected in Apache's headline results (even before consideration of a multi-billion write down) which showed a small net loss and a year-on-year revenue reduction of around 55%. Despite this there was some good news...including a production guidance increase and impressive comments about onshore North American production, Egypt and the UK...

...during the conference call the company noted:

'Egypt, Permian Basin and North Sea were the most successful exploration areas'

Egypt (where the company is now the largest oil/gas producer) and the North Sea saw particularly good production increases year-on-year...

...but the clear production revenue bias of the company is shifting towards US onshore production

What else is of note?  The balance sheet of course...

The view on future cash flow priorities was pretty clear even if they are not willing to provide some thoughts on 2016 until the February full year results point: 

‘not in a position to provide guidance ranges for 2016…want to be cash flow neutral over the year…and not use asset sales to fund investing cash flows’.  2016 guidance coming in February with full year numbers.  Such matching includes the dividend.

‘we are not contemplating any material asset sales in 2016’ 

Perhaps slightly overstating the point, the Apache management noted:

‘Apache’s balance sheet is a leader amongst peers without raising new equity’

Fundamentally it is not easy to value oil companies today - especially the non-heavy dividend yielding ones like Apache (2% yield) - but I like the company's skill in raising production and (in previous quarters) selling assets - which is why I stay long the stock anticipating further recovery in its share price (undoubtedly influenced by the direction of the oil price - which I feel is bottoming). 

Even more European numbers (UBS, Royal Dutch Shell, BMW)

Lots and lots of numbers out today.  After my earlier post reviewing occurrences at Weir Group, Imperial Tobacco and Standard Chartered (link here) a few more thoughts.

First UBS.  I tweeted out earlier the observation that:

#UBS: slowdown in flows from Asia but margins sort of ok in WM division. My view: high teens value not at CHF20

In terms of level I derive this from noting the 15%+ target RoE...

...which suggests to me better value below the CHF18 level which is also a level where the company has also exhibited some support:

I also note that even applying the most ultra cautious Swiss National Bank model UBS is currently still at a 12%+ tier one ratio. Relative quality but wait for the right price in my view. 

As for Royal Dutch Shell I wrote up the numbers at length last week (link here) where I concluded it was 'hard not to see value'.  Today the company has published a 'management day' presentation with some further updated thoughts.  A few key slides in my view:

A lot of headlines will be taken by the boost in 'verified synergies' from Shell's combination with BG Group which is clearly a positive for deal rationale...

...especially as new projects coming on stream are moving aggressively into positive net free cash flow generation over the next couple of years: 

The combined LNG franchise is also in my view a real structural positive albeit the scope for some shorter-term price volatility in this space continues.  

Net net holding/buying Royal Dutch Shell or BG (cheaper way given given the discount the stock is trading at as I noted here) still makes sense to me. 

And finally BMW.  I noted on Twitter that: 

#BMW numbers fine in the wider scheme of things. Nice chart re surprising reality of auto sales momentum YTD

Still, as hinted above, the company's 2015 numbers hopes were reiterated.   

In terms of a few notes from the conference call I observed that:

9m revenue record

‘key financials are a result of a high demand for our products and services’

October continued to be a good month

‘business environment is facing many challenges…China…new models offset this’

‘we have changed the strategy in China…slowing prices…have to take care’. New car sales tougher, so more emphasis financing products, aftermarkets, second hand etc.

‘strategically adhere to legal restrictions…compliance guidelines…corporate and legal culture crucial for this’

‘focus always been on the long term’

‘leading provider of individual mobility in the premium sector’

‘pricing fairly stable as new cars are coming in’

‘good volume that should offset the costs...similar development to last year…margin not to improve’ (vs Q3)

‘slight improvement in mix in the third quarter’ – “X” products, 7 series launch in Q4 and beyond.  So far ‘very well received’.  

Generally good comments even if China remains uncertain and the timing of capex has just taken the edge off short-term margins.  The stock has jumped keenly since the sentiment low point towards German autos after the breaking of the VW scandal...

I did buy the stock near the mid Euro70s lows and am in no hurry to sell it.  A quality longer-term operator.  For new capital I would probably wait and see if you get an opportunity in say the Euro80s.

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:

#ImperialTobacco 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 #StandardChartered 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. 

Thoughts on some US earnings out today (Exxon, Chevron, Moody's)

Whilst it may not quite have been the flood of numbers seen on Wednesday and Thursday this week, Friday had some insightful earnings pronouncements.

In the large cap oil space, both Exxon and Chevron reported today.  I reviewed both stocks a quarter ago (link here) and since this point both have been locked together in share price terms (although Chevron offers the higher dividend yield):

Turning first to Exxon the inevitable first analytical stop is the sustainability of the dividend.  As I noted earlier on Twitter: 

No huge love for $XOM this morning despite the dividend coverage almost there. I still see value in the sector

Exxon's 3.5% dividend yield (and additional buyback) at current levels of cash flow generation is fairly safe.  

Otherwise the Exxon earnings were decidedly as expected: total year-on-year earnings went down due to the upstream division whilst downstream earnings went up a little.  

In the link above I noted more excitement three months ago in Chevron - and this remains the case today.  I found this macro-level oil market insight suitably provocative: 

'We are confident of a recovery in prices...just uncertain on the timing' $CVX

Elsewhere in the presentation the now obligatory sources and uses of cash slide shows an akin profile to the other large cap oil names i.e. there or thereabouts in terms of uses of cash (capex/dividends/buybacks) being covered by underlying cash flows and divestments.  With net debt less than one times ebitda I would still rate the current distributions (including a 4.9% dividend yield) as short-term sustainable.  

One of the more interesting charts in their presentation deck was this growth profile chart.  At the moment - in an epoch of falling capex and oil price concerns - little attention is paid to growth but like it or not depletion occurs and it was actually quite pleasant to see this sort of chart.  

Overall, is there value in Chevron shares?  Yes.  I am not surprised to see them up today and anticipate a US$100+ share price sooner rather than later. 

A final few thoughts.  I did a big piece on the rating agency Moody's a little over a year ago (link here) and observed a good business...but a valuation I could not get quite to work.  Today's quarterly update from the company (even when the FX factors are ironed out) indicated a dullness that smacks of tough comps: 

Perhaps then not too surprising that the shares have gone to sleep in the last year since I looked at the stock: 

I also note a nibbling down of certain aspects of the outlook statement (not for both Moody's Investor Services and Moody's Analytics for their non-US business interests) even though the broader numbers were reaffirmed.  

Still you are paid to wait (5% free cash flow yield) and at a current x14 EV/ebit prospective rating it is not super expensive.  Nevertheless am I very excited?  Not really.  I will keep it on my watch list but prefer to see the stock near its current 52 week low for another re-review. 

Friday European results thoughts: RBS, BG Group, A-B InBev

Another big results day especially adjusting for the fact that it is a Friday.  Let's start with some European reporters.  

RBS - 
Back in July I observed that the scope for a run to a 400p a share was apparent (link here).  Today's inevitably messy numbers (attributable profit, operating loss and the observation that 'RBS remains well on track to achieve substantially all its priority targets for 2015. The cost savings target for the year has already been exceeded'

I also observed on Twitter re the final element of the Citizens Financial disposal:

$RBS achieve that 5% leverage ratio & post Citizens disposal above this

Meanwhile the underlying asset value move piqued my interest:

Instinct on $RBS that beating/raising simplification targets most important comment. Trading at x0.82 TNAV now. Hmm

Of course the return on equity for the group is suitably opaque with the 'illustrative go-forward business profile' for the core business showing a 10% return on equity although adding on non-core dilutes this to 5%.

What is notable is that at the above link there is the equivalent chart from Q2...and what it shows is the sensitivity to lower income and higher costs (adjusted RoE from 16% to 10% and hence the blended RoE from 11% to 5%):

'With the company's shares in the mid 350s now they are trading around x.0.9 tangible book which is good value if you perceive the overall group is generating 11% RoE...of course this is 'adjusted'.  But the scope for a 400p+ share price is still there IF the turnaround plan is successfully applied'

Therein of course lays the opportunity and threat with RBS...and why the simplification push noted above is so critical.  If you get some further traction there then the seemingly inevitable cost and regulatory value inflation can start to be countered...and the UK government can start to offload their majority stake. Put it all together and the story becomes a leveraged management execution play.  I would say risk-reward is skewed in favour of a higher price. 

In short that sounds like a 300-400p share price range to me, so at the current c. 315p price the share price feels opportunistic...but as with all management led turnarounds you have to be a believer.  

BG Group - 

The UK-listed oil/gas/LNG player was mentioned in my Royal Dutch Shell write-up yesterday (link here) where I observed that the company was an important part of Shell's forward strategy (as they should be given the size of the deal to bring the two companies together).  

I found the conference call largely tiresome and almost the totality of my notes are below:

‘on track to exceed cost saving targets this year’

Not guiding re cash costs ‘working towards creating a resilient BG’

$2bn outflow at $55 oil. Think ‘significant scope to bring down our capital spend further’

‘China one of the biggest sources of uncertainty next year…China’s gas market has grown materially over the last year’

‘I am not going to predict whether the market is going to bottom in 2016 or 2017…the market changes very quickly e.g. India…where demand has ramped up very quickly due to lower prices’ 

My view is that the company's numbers today were - in the wider scheme of things with falling oil prices and hence inevitably compressed profitability - perfectly operationally reasonable:

As I noted on the Shell link I like what the deal is trying to do and at prevailing share prices BG Group shares trade a a 10%+ discount to the theoretical deal value.  For an early 2016 anticipated deal close that equates to value in a generally value-centric area.  

Finally, Anheuser-Busch InBev - 

Another company involved in a deal (this time with SABMiller) and any reluctant shareholder in the latter would have to be grudgingly impressed by this: 

 That smells like branded centred pricing power to me... $BUD

Underlying this pricing power for me the most important observation in the report was this one: 

'We are amending our guidance. Our previous guidance was for revenue per hl to grow organically in line with inflation, on a constant geographic basis, as a result of our revenue management initiatives and continued improvements in mix. We now expect revenue per hl will grow ahead of inflation due to higher than expected premium brand volumes'

With continued dividend progression...

...and with the shares prospectively around the x16 EV/ebit level (not too unusual for a leading consumer company with a c. 3% yield) I think the shares are reasonably in a c. US$105-125 range.  Yes the implied price paid for SABMiller - if that deal completes - is full but the brand enhancement / synergy value is high too even if the level of divestments required will be high.  Net net trade the range currently...and watch the deal / general continued execution as this one remains a consumer behemoth performer.