"BT Group - WIFI debacles, scandals and u-turns: got to be time to buy!"

I wrote a piece titled "BT Group - WIFI debacles, scandals and u-turns: got to be time to buy!" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Unless you are an unbending yield muncher… sell Vodafone here"

I wrote a piece titled "Unless you are an unbending yield muncher… sell Vodafone here" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Vodafone – the best things DON’T come in small packages"

I wrote a piece titled "Vodafone – the best things DON’T come in small packages"'' which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

A few thoughts and readacrosses from Asian corporate results #1

With an overload of China/Asia macroeconomic insights, how about some read across from Asian companies?

Cathay Pacific - this one caught my eye as a year ago I noted:

'...the stock trades sub book (x0.95)...A year ago I concluded that a Cathay Pacific share price sub book was an opportunity in times of strife and looking at the one year chart above that is below HK$14.  As with many airlines volatility is your friend / nudge to buy the shares'

And look where we are now...back in the US$14s.  Interesting - it sees to like an August 'run' down to this level based on the last 3 years or so.  

Of course the recent H1 numbers were better although the inevitable lower fuel costs were slightly counterbalanced by higher staff, landing and depreciation costs (as well as fuel hedging costs).  Still a good advance year-on-year as reported. 

No problems with passenger load...

...but cargo loads perhaps show the inevitable correlation with Asian/global trade and business realities.  Clearly this is the big fear underlying the stock at the moment.  

My view on the stock is that to buy it below book (< HK$14) remains a level of interest especially with the current high baked in negative sentiment. 

China Mobile 

Been a while since I have looked at this one but the shares in China's inaugural mobile company (as with China Unicom and China Telecom majority owned by the Chinese government making an investment inevitably deeply political).  

However the results did say something to me - and that is not that operating profit slightly surprised to the upside...but that mobile data traffic growth was so strong: 

And why is this?  Well as with any telecoms company at the moment this is centred on the growth of 4G...

...and that makes me think about mobile data company again.  Nokia due to their ongoing merger with Alcatel Lucent and the resulting self-help has been my favourite...and the stock is back around 1 year lows again:

That's interesting. 

Finally the Macau casino company Galaxy Entertainment unsurprisingly had a poor set of numbers (augmented apparently by some bad luck on the tables!)...

...although they continue to build their Macau portfolio (and so weaken their balance sheet).

The shares are trading near a 3 year low and a low/mid teens EV/ebitda rating - not classically cheap. However this is a macro sentiment play - just think what the rating change would be if earnings just went back to their 2013-14 trajectory...  My view on Galaxy: am watching with interest but no position at the moment.

A second part with thoughts on some financial and logistical companies will follow later.  

Swedish numbers frenzy - Ericsson, Electrolux & Volvo

We are now getting deeper into the Q2 earnings reporting and today in Europe three interesting Swedish names have reported.  I am hopeful of some insights given I noted earlier in the week from country peer SKF (link here):

'some of the macro pressures and issues that are potentially afflicting corporates in the rest of 2015.  This is why it is a fascinating current / upcoming results season...but also why waiting for the numbers to publish and extracting stock specific performances and insights are also key'

I have written thematically positively about Ericsson before (link here) and today's numbers showed some progress at the operating income level - although the good volumes influence was counterbalanced by North America/China 'mix' and ongoing restructuring costs.

Nevertheless I took three positives from the numbers.  First the cash flow side firmed up...

...second the key networking division saw higher sequential margins albeit not to the typical double digit level seen for most of the last couple of years...

...and third as described in the link above there are good structural underpinnings / opportunities.  I concluded last time that:

For me a x14 EV/ebit multiple based on the above criteria is closer to an interesting level which would imply the middle of the SEK90-95 range.  

With the shares back to the c. SEK95 they remain opportunistic but at the margin I would still prefer the company's peer Nokia which has the added advantage of self-help via synergies/benefits from the ongoing Alcatel-Lucent merger they are undertaking.  Nevertheless a positive theme and a good stock to be thinking about. 

I wrote earlier in the month about Electrolux observing back then that:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support.  One to watch however in the earlier part of the Q2 European earnings season'

The Q2 numbers surprised me by how good they were with good local currency organic growth...

...and generally positive outlook comments:

With the shares back into the SEK260s I am prepared to wait BUT the 'trust management' element of the valuation does appear to be well underpinned and I would say that the recent support for the shares below SEK240 is a noteworthy point. 

Finally Volvo.  Recently I have not liked the stock and whilst today's results showed progress across all their divisions (trucks, construction equipment, buses etc.) a stake sale capital gain did flatter the numbers further.  

If you extrapolate the underlying numbers the shares are trading at just over x10 EV/ebit which does not seem either excessive or cheap at face value.  I do note (using some excellent new presentation data provided) a suitably mixed truck backdrop with China bad...

...US good...

...but Brazil bad:

For me Volvo is cheap at c. SEK80, in cover territory at SEK90 but just north of SEK100 it provides solid industrial cover short-side scope (despite the activist shareholder). 

Blackberry - I am still not convinced

I mildly provocatively called my last write-up of Blackberry in March 'positive earnings but too much of a leap of faith'.  

A good call?  Well from March when I made that call to yesterday's (Monday) close it looked a solid call.

However look at Blackberry shares in the pre-market as noted by Fast FT:

'The once high-flying software maker reported an adjusted loss of 5 cents a share for the quarter to May 30. That was wider than the 4 cents Wall Street analysts had forecast (however) BlackBerry said revenues from its software business more than doubled from the prior quarter to $137m"

Regarding the software business back in March I noted that 'I thought the key to this company were the infamous handsets so beloved of the professional classes...a good few years ago?

They still sell them and the company confirmed that 90% of all phones sold in the quarter they were reporting on today were new generation phones that have higher margins.  But...let's put this into context: 

'in 160 carriers, 7,000 stores'

..but

1.3M Units = 0.4% mkt share

This is clearly not groundbreaking and unsurprisingly it is not the key to the stock's future...this is on the software side (effectively a business selling software that helps companies manage the handsets their employees have)...'

Additionally John Chen the CEO noted:

Our financials reflect increased investments to sales and customer support for our software business. In addition, we are taking steps to make the handset business profitable.

You can see what he means with reference to increased investments and the need to make handsets profitable. Even over US$100m of free cash flow generation during the quarter (looks as if they will be free cash flow positive at least for FY15 as they target), there are just not a lot of earnings for a US$3bn EV.  

My conclusion?  Same as last time I wrote up the stock:

'Pulling it all together Blackberry remains too much of a hope investment for me at prevailing in terms of the value you attribute to the ongoing business.  Undoubtedly there is some value in the intellectual property and the like but that is never easy to calculate precisely.  I will keep on looking at the stock as the next couple of quarters tick through but, for the moment, I remain on the sidelines with no position'

A fascinating new Ericsson Mobility Report...and you can consider buying the author's shares too

I wrote up my thoughts and favourite slides from March's Ericsson Mobility Report here and June's equivalent report does not disappoint again.  A few favourite charts first:

Stunning proportion of mobile phone adds in India during Q1...

...and the broader Asia-Pacific region is estimated to be responsible for over half of new smartphone subscriptions in the six years to 2020: 

Once again I observe the phenomenal ramp in data traffic...

...particularly sourced/associated with video use:

Here's a chart I have not seen in the report before though. Look at the importance from a traffic share perspective of the top third of subscribers. Not quite the pareto principle but akin...

So interesting stuff but how do you play the above? Back in March I noted Google (which I still like) and Telecity (pleasingly recently taken out - see here) as 'plays' on this theme that I liked.  I also noted:

'So how about the intellectual creators of the report Ericsson who clearly through their mobile base station and related interests are heavily involved and correlated with all the above?...For me a x14 EV/ebit multiple based on the above criteria is closer to an interesting level which would imply the middle of the SEK90-95 range.  

Usefully after a short-term sickly Q1 numbers update (I believe based more on specific timing rather than anything fundamental) Ericsson shares have come crashing back to this range:

So they are a buy then?  In isolation, yes but as I noted in my May performance review (link here) I have added a position in Nokia during last month.  And the reason why?  Potential opportunities around Nokia's recent agreed deal (subject to regulatory clearance) with its (and Ericsson's) peer Alcatel.  

This is a transforming deal for the sector - as shown below - and takes oligopolisation of the main tier 1 players (the new Nokia, Ericsson and Huawei of China) to the next level.  

This should be good for ultimate margins and hence Ericsson's share price performance.  Using the chart above you can see why there have been some rumours that Ericsson may consider a takeover of smaller entities like Juniper or Ciena but I remain unconvinced of the need or rationale for these.  

In short - unlike my conclusions at the time of the March report - I think you can read June's Ericsson Mobility Report and conclude that not only is it thematically fascinating but you can more seriously consider buying the author's shares.  

"Did anyone really think Vodafone was going to be taken over?"

I wrote a piece titled "Did anyone really think Vodafone was going to be taken over?" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Telecity’s epic last year ends with a takeover: another reason to think thematically"

I wrote a piece titled "Telecity’s epic last year ends with a takeover: another reason to think thematically" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Lenovo: challenges in Chinese smartphones

It has been a while since I last looked at Lenovo the HK-listed entity with a strong PC market share in China, a position they have augmented via server and smartphone acquisitions from companies like IBM and Google (parts of the Motorola unit).

The shares have performed strongly...

...but outside of the PC business I have not been blown away by recent market share gains in the smartphone and (to a slightly lesser extent) the tablet businesses.  

Of course market share is one thing, profitability is another. Looking at it from a full year results perspective whilst the PC business crunched forward both the 'Mobile' and 'Enterprise' divisions were loss-making.  

And geographically?  Interesting that Chinese revenues were slightly negative (although profitability was slightly higher as margins held up).  Geographically only the American region ("AG") saw lower margins.

Very interestingly taken an even more recent granular view throws up further insights.  What is really striking about the Q4 numbers specifically is that the critical Chinese market actually sees margins down due to an 'aggressive expansion' in the local smartphone business.  By contrast the other parts of the business seem fine. I note particularly the strong mobile growth elsewhere in the world plus positive PC market share development.  

Of course the Motorola Mobility acquisition (not yet a full year old) is still bedding down and the company note ongoing initiatives/product improvements but it can hardly be a huge surprise that life is not quite as rosy as in the core PC division.  With Enterprise acquisitions (via IBM) to complete the company's suite of products (and hence cross-selling scope) has yet to mature so whilst the future is certainly highly opportunistic I do wonder at the current (modestly improving year-on-year) US$1.1bn of profitability a prospective x17+ EV/ebit rating is not exactly super cheap.

I note the technical support/resistance at HK$12/share.  That is the 'flag' level for me.  Still a fascinating theme stock (China, technological devices) with strong historic execution and new opportunities/acquisitions to bed down but too rich a share price for me today. 

"Is Europe’s biggest telecoms company a takeover target or just a dividend play?"

My latest post as a Yahoo Finance Contributor titled "Is Europe’s biggest telecoms company a takeover target or just a dividend play?" can be found here.

Blackberry - positive earnings but too much of a leap of faith

I had a listen to the Blackberry conference call earlier.  The share certainly attracts wildly different opinions from the analyst community and it is easy to see why by looking at a few key metrics:

Market cap US$5.0bn

EV US$3.7bn i.e. positive cash of c. US$1.3bn AND they have started to generate free cash too

However...heavy losses over the last few quarters apart from today's Q4 fiscal 2015 numbers which saw a tiny amount of net income generation...

 ...and a very small positive EPS:

So a turning point?  Well the charismatic CEO John Chen may correctly be able to claim that ‘our financial viability no longer in question’ but there clearly needs to be a further - and substantial - improvement in the EPS/net income generation to justify the current EV...and to be fair this is not lost on the company's senior management as per some of the notes I made from the conference call: 

#1 focus ‘profitability…and that we can sustain it’

FCF aim‘every quarter in FY16’

‘all our effort is spent on stabilising the revenue’

-8-13c earnings per share expectations ‘somewhat reasonable…but do expect to do better’

And where do they see the opportunity?  

‘leader in mobile security’

‘traction in new handsets’ – do expect price to be ‘increasingly profitable’

‘good momentum’ in enterprise services

Tech licencing...

Hang on...I thought the key to this company were the infamous handsets so beloved of the professional classes...a good few years ago?

They still sell them and the company confirmed that 90% of all phones sold in the quarter they were reporting on today were new generation phones that have higher margins.  But...let's put this into context: 

'in 160 carriers, 7,000 stores'

..but

1.3M Units = 0.4% mkt share

This is clearly not groundbreaking and unsurprisingly it is not the key to the stock's future...this is on the software side (effectively a business selling software that helps companies manage the handsets their employees have)...an area where progress has not been singularly fantastic...but the hope for the future has nevertheless been increased:

FY15 (feb) did $275M in software + 'other' revenues down 19% Y/Y

now guiding to $600M in FY16

(previously said software $500M).

This is clearly a business still in material transition, a point reinforced by the comment by CEO Chen to ‘give us two quarters’ to show the potential of the software business assisted by shifting some internal resources towards it including trying to get the proportion of overall company workers in sales-centric positions up to 15% from a current 10-11% of the workforce.  

Pulling it all together Blackberry remains too much of a hope investment for me at prevailing in terms of the value you attribute to the ongoing business.  Undoubtedly there is some value in the intellectual property and the like but that is never easy to calculate precisely.  I will keep on looking at the stock as the next couple of quarters tick through but, for the moment, I remain on the sidelines with no position.

China Telecom - same issues as other telecoms companies but bigger opportunities

Is it really nearly 18 months since I last wrote about China Telecom?  Back then I described the company as 'probably the best balanced Chinese telecom company' given its strong combination of fixed and mobile interests (including in the former a very strong positioning in broadband and related). The last three years have ultimately seen an upward share price...although there has been material volatility too - particularly a year ago.

So why the volatility...but ultimately upward share price move?  Well China Telecom are facing many similar pressures to other telecoms companies around the world including (positively) huge data and related growth...

...a rising 4G mix BUT falling/under pressure mobile ARPU...

...and rising (4G influenced) mobile capex (30%+ increase!)

And then put all of this together with (as noted below) VAT reform...

...which helped suppress shorter-term headline numbers: 

The reality is that China Telecom should not be valued as a low/no growth entity given these monetisation trends in China (data, 4G, fixed-to-mobile substitution etc.) are ultimately very material in size. In Europe/the US this typically would be around a minimum of a x6 EV/ebitda multiple.  China Telecom today trades at a little over x4.  Admittedly there is the large state ownership, rising alternative competition (MVNOs) and a capex bump which ceteris paribus will hit profitability but bigger picture this seems a little rude...especially with a corporate net debt level at around x0.9 of ebitda and a free cash flow yield of around 4% (with a dividend yield of just under 2% therefore fine to finance).  I could certainly envisage a HK$6 share price target (around x5 forward EV/ebitda) and believe buying sub a HK$5 share price and each 50c below this level makes sense.

These are the levels I am going to write down.