As far as investors are concerned, the latest annual results at Weir Group show the company heading in the right direction on almost all fronts, except perhaps one. Shareholders like their dividends and they like them even more when they are going up.
Revenue last year rose 19 per cent on a constant currency basis to £2.36 billion, pre-tax profit increased 32 per cent to £250 million and the value of the oil industry services company’s order book grew by 20 per cent to just short of £2.4 billion. Margins have been under pressure since the plunge in crude prices towards the end of 2014, but they rose, too, in 2017, from 11.6 per cent to 12.4 per cent.
So much for looking back; the outlook was positive, as well, with Jon Stanton, Weir’s chief executive since October 2016, suggesting that prospects in the oil and gas sector, particularly in North America, and in the overall minerals market were encouraging.
All of which may leave investors wondering why the dividend, at 44p, was left unchanged for the fourth year in a row. Some analysts had expected a rise of up to 3 per cent. In its defence, Weir could point out that as recently as 2009 the dividend was 21p per share, so the rise between then and 2014, when it reached its present plateau, was substantial.
And there are other factors to take into account. Mr Stanton and Keith Cochrane, his predecessor, pared back operations to reflect more difficult conditions, yet they protected the group’s research and development budget with a view to bringing innovative products to market and using more digital technologies. There are signs of those efforts starting to come through, with £168 million of revenue from new products in 2017, a rise of 53 per cent on the previous year.
The engineering group, founded as far back as 1871, was listed on the stock exchange in 1946. It employs 15,000 people, who make and maintain components such as valves, pumps and pipes for the industrial, mining and oil and gas sectors.
The stronger conditions in oil and gas in North America, where Weir has a big presence in shale basins, were a key driver of performance. Mr Stanton said that a thousand people had been hired for that business last year as it scaled up to meet growing demands from customers.
Revenue in oil and gas rose 76 per cent to £704 million and there was an operating profit of £92 million, after a £9 million loss in 2016. Minerals revenue was up 16 per cent at £1.29 billion, while operating profit rose 4.6 per cent to £227 million. Mr Stanton said that Weir was experiencing demand from customers who want to expand mining sites. Its exposure to copper mining, traditionally one of the biggest in its minerals division, could play well if demand continues to increase as a result of the metal’s use in electric vehicles.
Flow control, Weir’s smallest division, suffered a £3 million loss compared with a £30 million profit in the year before, in spite of a rise in revenue. Mr Stanton acknowledged that some markets in this area, such as coal generation, were likely to remain challenging, but added that the division had returned to growth in the second half of last year.
Tempus’s suggested holding on to Weir shares after a trading update in October, when the price had just slipped below £20. A strong run from then meant the shares reached a high of £23.05 in January, though they are now back to £20.36 (up 35p yesterday). It remains a stock reliant on conditions in its markets, but bullish analysts have a target price of £24 on the shares.
Advice Buy
Why Conditions in its biggest segments look good for this year, giving the opportunity for share price gains and a possible dividend increase
St James’s Place
The St James’s Place franchise seems as potent as ever. Clients placed a net new £9.5 billion with its army of self-employed advisers in the year to December. Its target market, the ten million people with between £50,000 and £5 million in investible assets, love the formula of hands-on advice and its array of proprietory products run by strongly rated fund managers.
While St James’s Place says that it largely beat its peer group, the results for the customers last year weren’t all that exciting, in fact, ranging from the SJP Defensive Portfolio, which produced a return of 4.6 per cent, to the Adventuruous Portfolio, which delivered 12.6 per cent net of all charges. By way of comparison, average world equities last year produced a total return of 16.5 per cent and global bonds 7.6 per cent.
Yet clients wanting someone to hold their hand in the face of the complexity of pension decision-making, inheritance planning and tax seem content. St James’s Place maintained its client retention rate at 96 per cent.
The growth prospects are strong. It aims to pick up gross new business of 15 per cent o 20 per cent a year. It claims only 3 per cent to 4 per cent of its addressable market. The main constraint on growth — recruiting good advisers — has eased, partly because the company now runs its own training academy. The number of advisers grew by 246 to 3,661.
With underlying pre-tax profits up by 55 per cent at £245.1 million, St James’s Place was able to lift the full-year dividend by 30 per cent. It plans to raise the payout ratio for future disbursements from 75 per cent to 80 per cent. The shares yield 3.7 per cent, not bad for a company with such strong growth prospects.
However, St James’s Place has a hidden weakness. The shares do terribly in bear markets. This is as much about sentiment as reality: even when markets are barrelling downwards, the company has managed to post net inflows. But because its revenues depend on the value of assets, it gets clobbered, nonetheless.
For those who believe the share market cycle has not been abolished and a bear market is coming sooner or later, there will be better times than now to buy the shares.
Advice Hold
Why It’s not yet the time to chase the shares
