Two previous value picks report their results.
Two of my previous value selections published results today, 09 September, so I’ll review them here.
IG Group
The financial markets bookmaker IG Group (LSE: IGG) went xd with their 11p final dividend today and at the same time issued a trading update for their first three months to 31 August. They have the somewhat unusual year end of 31 May.
Compared with the same period last year, revenues were up 28% in total, or 17% organically which excludes their major Japanese forex business acquired last year, FXOnline Japan (FXOJ). As expected, following new credit controls, bad debts were reduced to less than 1% of revenue.
New account openings, which the company says is a key lead indicator of future growth, totalled 21,000, an increase of 72% over last year, or 23% on a like-for-like basis to exclude Japan.
In a recession, this is all pretty good news. In fact, growth of such a substantial proportion would be pretty good news in a boom too.
Regular readers of my stuff over the years will know that I am always highly suspicious of foreign acquisitions. Actually, I have a negative view of all acquisitions and see them as a value destroyer, but when a foreign business is acquired they are doubly damned because of the additional risks and problems involved, and Japan is notoriously more difficult than many other countries in which to do business. In this respect I note that IGG describes FXOJ as experiencing a “challenging environment for forex”. The word “challenging” is directorspeak for lousy. However, we are told that it is making good progress on other products like CFDs, which are relatively new there and for which the competitive environment is more favourable.
As we were told earlier, the company faces tougher comparatives in the second quarter because last year was a period of enormous volatility in the markets and the punters like that. Looking slightly further ahead, they don't give much guidance but claim that the strong rise in new accounts, etc., leaves them well placed for further growth.
Thus the news is nearly all good, though with a bit of a question mark over Japan. Second quarter profits may be down on last year but that would appear to be an isolated event. Current consensus forecasts show EPS of about 25.0p for 31/05/10 with a dividend of 15.1p. At 351p, that gives a projected P/E of 14 and a yield of 4.3%. For what it’s worth, in 31/05/11 they anticipate EPS of 27.1p and a dividend of 16.1p giving a P/E of 13.0 and a yield of 4.6%.
The shares have had a good run since I bought-in some months ago at 202p, at what was then a low P/E and a pretty high yield plus a large chunk of net cash, all in classic value style. The company did not supply any figures for this first quarter but I'm guessing the net cash is still there. However if we are to believe the forecasts, EPS growth over the next couple years is pretty slow with 2010 hardly changed from actual 2009, and 2011 only about 8% up on 2010. On the face of it then, the forecast P/Es are not that cheap with such pedestrian growth prospects though the yield isn't too bad. Is there more to IGG than meets the eye? Could be.
A&J Mucklow Group
The property company A&J Mucklow Group (LSE: MKLW), set up as a REIT, issued preliminary full year results to 30 June. The key indicator with property companies is net asset value and here it was 266p on that date, having fallen by 28% from 371p last year. This compares with the current share price of 280p and thus it is standing at a small premium. The norm for property shares is to stand at a discount but what’s happening here is that the market is anticipating recovery and getting a little ahead of itself.
The other key indicator is their net debt level, and here it was £38m -- equivalent to 24% gearing against shareholders’ funds. For Mucklow that is a gigantic figure by their historical standards, but by the standards of property companies in general, it is zip. Gearing of 100% or more is quite common. However even the traditionally peanut-geared Mucklow still saw its debt rise from £29.2m last year, which at the time represented gearing of only 13%. So they faced the double blow to gearing, common to the sector in these recessionary times, of reducing asset value and increasing borrowings.
Avoiding the dividend cuts seen amongst many in the sector, the company is paying a final of 9.65p to make a total of 17.68p, maintaining the same payout as last year and making a yield of 6.3% at 280p. If you are interested in the shares and want to catch that final, they go xd on 25 November with payment on 04 January 2010.
Looking ahead, they say they do not expect any immediate recovery in the property market, though values are likely to stabilise. Income returns and capital growth prospects are now starting to look very attractive and they intend to recommence acquiring suitable properties.
My take is that all property shares are a play on that market. Value is to be found in a combination of the lowest gearing levels and greatest discount to asset value. Whilst Mucklow doesn't score well on the latter, it is around top of the class on the former. Throw in that nice yield and I continue to view Mucklow as an attractive buy at relatively low risk, by the standards of the sector, for those with patience and who foresee a strong recovery in commercial property on the horizon.
Original 'Value Pick' Articles
> Stephen Bland holds IGG.
