Rolls-Royce
£59m civil aerospace order book
Some analysts were wondering over the weekend at what level Rolls-Royce shares should be considered a “buy” again. I have argued here that they look seriously undervalued, although I confess I do not see them going to the £12.71 level by the end of this year at which I tipped them at the start of it.
The long-term prospects for the group, which gets almost half its revenues from the burgeoning civil aircraft industry and has strong positions on the Boeing 787 and Airbus A350 programmes, look good.
The profit warning at the end of last week, though, looks like one warning too many after a similar downgrade in February in markets that are deeply unforgiving. It was also surprising for a business that has a strong forward visibility of earnings — the civil aerospace order book stood at just short of £59 billion at the halfway stage. It had little to do with that civil aerospace division; indeed, guidance here for 2014 was actually upgraded, although sales of Trent engines will be affected in the short term by the successful launch of the latest model.
The real shock was the expected fall in free cashflow, something that has worried analysts before, coming back from a forecast £780 million, similar to 2013, to £350 million. However, the medium-term case is strengthened by an expected 80 per cent free cashflow conversion in 2018. Likewise, guidance in medium-term margins was more positive than some had feared. Power systems and marine engines, the main focus of the warning, will return to growth, although, as the company admits, it is hard to discern exactly when.
Russian sanctions notwithstanding, there was not a lot in the statement to derail the long-term story for Rolls-Royce. The shares fell fell another 14p to 818p yesterday as analysts reconsidered their positions.
This puts the shares on about 13 times earnings for next year, which should mark the low point for profits, while they yield just short of 3 per cent on this year’s payment. That earnings multiple in particular looks too low, given the group’s prospects. Although it may take the market time to appreciate it, the shares still look like a good long-term bet.
My advice Long-term buy
Why Shares have fallen so far this year that they look undervalued, although the market may take time to appreciate this
McBride
2% estimated revenue growth
As one analyst put it, McBride looks like a company not in control of its own destiny.
There are three main factors that affect its fortunes. One is the behaviour of the big grocers, always demanding lower prices from suppliers. The second is the attempt by consumer goods companies, such as Procter & Gamble, to gain shelf space at the supermarkets by heavy promotional activity. The third is the oil price. Here, McBridge should benefit, except that the raw materials it needs are priced in euros, which limits the upside as the European currency falls against the dollar, in which oil is priced.
So any gains are down to self-help. McBride is carrying out a cost-cutting programme that will reduce this by £12 million by 2016-17, although it will inflate borrowings in the interim.
The latest trading update, though not saying much, talked of a solid start to the financial year from the beginning of July, and growth in revenues of about 2 per cent for the year, driven by a flat results in Britain and rises in Germany, looks achievable. The shares, up 3¾p at 84p, sell on 12 times earnings, which does not suggest much upside.
My advice Hold
Why McBride’s main markets remain tough going
President Energy
£31.2m capital raised February
Anyone who ignored my advice and sold shares in President Energy when they were languishing at about 16p earlier in the month will be kicking themselves. As I suggested, shares in the oil explorer, which has assets in Paraguay, had been artificially depressed, possibly by rumours that it was about to announce bad news and a dearth of oil.
Quite the opposite. Yesterday’s drilling update reported the first oil find in the near-desert Chaco region of Paraguay, which looks set to start to produce, subject to testing, some time next year. There are three wells being explored. Lapacho has oil at a higher level than had been expected, which suggests that there should be more further down. As a result, the Jacaranda well, which was seen as unpromising, will be re-examined, if President’s partner agrees, with every indication that there is oil there, as well.
The third prospect, Tapir, will be put on the back boiler, although it is equally promising, as there is enough work at the first two to be going on with for now.
President has enough cash, after a fundraising this year, to progress with testing at those two wells, though not enough to advance them to production. If the tests work out, finding further funds wll not be difficult, either by bringing in another partner or by raising debt.
This is enormously promising news and President shares doubled at one point, ending up 13p at 30p. They are not quite where they were at the start of the year, but this is no time to give up. Indeed, this looks like a good time to buy.
My advice Buy
Why Potential for Paraguay wells is enormous
And finally...
Close Brothers has carried out a spot of tidying up and sold Seydler Bank, its German offshoot. This provides services to small and medium-sized businesses there and seemed to have no real strategic fit with the rest of the group. The amount raised, £36 million, suggests that the bank is going out on a multiple of about seven times’ earnings, well below the valuation that the market puts on the rest of Close. The positive is that the cash can be deployed more usefully elsewhere, such as on its fast-growing loan book.
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