BG Group
EPS 69.3c Div 14.38c
The performance of the BG share price as the market opened yesterday is instructive. The shares shot ahead by nearly 5 per cent as the market reacted to second-quarter earnings that were well ahead of forecasts.
They ended lower, off 8½p at £11.72, as analysts realised that there were a number of one-off factors, and that the outcome for this year had little changed. Meanwhile, BG is sounding increasingly gloomy about prospects at its Egyptian business, which has unsettled the shares since I tipped them at the start of the year.
The phrase BG used about Egypt was “at risk”, which has an ominous ring. The gas that should be shipped out as liquefied natural gas is being diverted by the authorities to the domestic market, which is less profitable. The backlog of overdue payments is up from $700 million to $1.2 billion.
If something is not done, and there are some positive signs, the company will probably have to take another writedown.
Second-quarter operating profits were up 11 per cent at $1,992 million. Production was running 10 per cent lower at 591,00 barrels of oil equivalent a day. Both these were ahead of expectations, but this is because planned maintenance in the North Sea has been pushed into the fourth quarter. Costs will rise and production will fall accordingly in the second half, and BG is sticking to previously announced production forecasts for the full year.
On the positive side, the flow rates from its huge Brazilian fields are ahead of expectations. BG is on target to ship its first LNG out of the Queensland project in the fourth quarter despite industrial unrest.
BG is becalmed until a new chief executive arrives to replace Chris Finlayson, who departed in April. Two catalysts could move the shares, but both are a way off.
The first is the sale, for up to $4 billion, of the 540km pipeline that connects the Queensland project to the mainland. The second is the sale of part of those Brazilian assets. Both will have to be more advanced and derisked before this can happen, and it would make sense to await for the new chief executive as well.
BG shares still look good value for those prepared to take a long view. Whether they can beat the jinx by the end of the year is another matter.
My advice Buy long term
Why Market is still undervaluing BG and its two main assets, LNG and Brazil, though short-term problems persist, especially Egypt
Spirent Communications
Revenue$221m Dividend 1.68c
There is a long-running debate over whether companies such as Spirent, in high-tech, high- growth areas but generating large amounts of cash, should hand this back to shareholders or invest it in expanding the business.
At the start of the year the main investors in Spirent indicated they would prefer the second course of action, and share buybacks were suspended. Instead, the company, which makes equipment that tests telecoms and IT, paid nearly $40 million for two businesses in the first half and another $25 million for a third early last month.
The aim is to extend the business into other areas that require the sort of testing equipment it supplies. Spirent has upset the market in the past, mainly because the supply of work is lumpy and unpredictable. The first-half figures were encouraging enough.
Revenues are up 16 per cent, operating profits 13 per cent ahead at $20.6 million, and the potential order book is building up. The shares, off 1p at 103p, sell on 17 times this year’s earnings, but that multiple falls to 12 times next year’s because of the sharp upturn in profits as those improvements feed through. Buy for the long term on any weakness.
My advice Buy on weakness
Why Restructuring and recovery gaining ground
Thomas Cook Group
Revenue £2.2bn Ebit £33m
At least one analyst was concerned that Thomas Cook might be about to produce a profit warning. There is serious overcapacity in the European airline industry — 10 per cent on some routes — and this is impacting on the price the company can charge for its package holidays.
This should not affect margins, and doesn’t seem to have in the third-quarter trading statement to the end of June. Those concerns over prices, though, are largely behind a fall in the share price from a peak of 189p at the start of the year. Most important, Thomas Cook is running ahead of the promised cost savings in its transformation programme under Harriet Green, the chief executive. These are forecast at more than £360 million in the financial year to the end of September; expect some increase when the company guides the market with its finals in November.
Aside from prices, off by 4 per cent for this summer’s selling season, all the other metrics are moving in the company’s favour, with promising bookings for this winter. Thomas Cook was reporting a £33 million profit for the third quarter before interest in tax, up from £1 million a year before. Over the past 12 months, those profits were ahead by 21 per cent to £306 million.
Much of the easy change is done, and one senses it will be a tough grind in challenging markets henceforth. There is no immediate prospect of a dividend. The shares added ½p to 122½p, and sell on about 12 times earnings. That share price fall seems overdone, though, and they look good value again.
My advice Buy
Why Shares have fallen too far and more benefits to come
And finally . . .
Speaking of share buybacks, the car dealer Inchcape has extended its own programme, aiming to buy another £100 million of its shares over the next 12 months. In Inchcape’s case this makes sense. The company had £160 million in the bank at the end of the first half and precious little to do with it — there is a limit to how many flash dealerships around the world it can buy. Pre-tax profits were up by 10 per cent to £162.1 million even after taking currency factors into account. The dividend is up 10 per cent too.
Follow me on Twitter for updates @MartinWaller10
