It would come as no real surprise if, as widely expected, Rolls-Royce cuts its final dividend this week. In July, Warren East had just started as chief executive and the payment was raised by 3 per cent at the halfway stage. The company has made clear the next couple of years are going to be difficult ones, in terms of cashflow and profits.
The latest in a string of profit warnings, in November, held that “shareholder payments policy will be reviewed”, and it was obvious that this was not going to mean an increase.
Rolls-Royce shares have halved since last April, but even at yesterday’s price, off 14p at 515p as the market absorbed the news, they yield 4.5 per cent on the 2014 payment.
Rolls-Royce said in November that 2015 numbers would come in at the bottom end of the guided range, so about £1.325 billion in profit terms, while cashflow estimates were reduced from a range of £50 million and £350 million given in February to £150 million at best, and possibly a £150 million outflow. This reflects a reduction in the number of Trent 700 engine sales as airlines move to more economical jets rather than the wider-body aircraft that the company supplies.
Meanwhile, its marine business is being squeezed by a fall in sales to the oil and gas market. Rolls-Royce expects another £650 million of headwinds on profits this year. Mr East has confirmed what the market has long believed — that the company’s cost base is too high and has indicated cost savings of £150 million to £200 million deliverable from next year onwards.
Analysts believe that Rolls could return to 2015 levels of profitability by 2020, with cashflow turning positive again. This is, therefore, a temporary dip for a company that remains a world leader. The question is whether the market has the patience to wait out a couple of difficult years. Marine is not going to recover in the near term, given the prospects for the oil price.
Rolls-Royce is not saying anything until the formal announcement of 2015 profits on Friday, but I do not think we are looking at yet another profit warning. Nor are we looking at much short-term improvement. The shares sell on less than ten times’ earnings, but I would still be wary of them.
MY ADVICE Avoid for now
WHY Though this week’s figures will probably not contain another profit warning, the company faces several difficult years ahead
Premier Farnell shares are the classic falling knife. They have halved since last May and the distributor of electronic components is one business where the slightest swing in margins can have a disproportionate effect on profits. It has issued a series of warnings.
As well as a search for a chief executive, there is a review of operations under way. The dividend has been cut and the company has guided towards a decline in earnings from £88 million to between £73 million and £77 million in the year to January 31, just completed. That’s the bad news. The good is that it has sold its Akron Brass operation, decidedly non-core, for $224 million, or almost £154 million, rather more than the market had been expecting. This makes equipment for firefighting and it is going out on an earnings multiple of almost nine.
This will hit earnings further, but will mean that reduced dividend is safe, while the company has reassured on earnings and dividends, which means that the final numbers in March should not contain yet another profit warning.
The shares fell 4½p to 101½p amid some understandable profit-taking yesterday. The sale allows management to focus on its core distribution business and possibly some acquisitions. The market is, after all, wildly fragmented, with lots of small businesses. Alternatively, some have wondered if Premier might itself become a target.
The shares yield 6 per cent, which gives a pretty good reason to hold them for an upturn, if you take the view that the worst is over.
MY ADVICE Buy long term
WHY The worst may be behind Premier Farnell
It is baffling why Imagination Technologies felt the need to persist so long with Pure, the loss-making digital wireless producer. This has been put up for sale, and not before time. Imagination’s are among the most erratic shares on the market and they have fallen back from almost 250p as recently as October.
The lost another 2½p to 129¼p after the latest profit warning, which was accompanied by the news of the departure of Sir Hossein Yassaie, the long-serving chief executive. The warning should not have come as too much of a surprise, given the widely reported slowdown in the smartphone market, because Apple is the biggest customer for Imagination’s chips, as well as being an 8 per cent shareholder.
The key to yesterday’s statement is that Imagination will be “focused on core activities”. There is a feeling among investors that the company has tried to be all things to all men.
There is a huge amount of useful intellectual property locked up within Imagination. Pretty much anything seems possible now, including an offer for the company. Still, with Imagination heading into a loss this year, it is not clear why anyone would buy at this stage.
MY ADVICE Avoid for now
WHY The company’s future path is far from clear
And finally ...
All the metrics are moving in the right direction for Lok’n’Store, the self-storage business quoted on AIM. Occupancy was up by 2.4 per cent and prices by 3.3 per cent, which meant that revenues at the core business were up by 5.4 per cent. I have suggested before that businesses such as Lok’n’Store, Big Yellow and Safestore are good proxies for the booming property market, particularly in the southeast. They also have the option of trading on assets if they can be used for other purposes.
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