UK Edition
Healthy cash generation, an increase in earnings guidance for the year and reaffirmation of a planned 10pc rise in the dividend for 2021 all suggest that ContourGlobal, the power plant company, could continue to appeal to income investors in particular, especially as the prospective dividend yield exceeds 6pc.
The FTSE 250 firm has 117 power plants across 20 countries. Energy sources are both thermal and renewable, including wind, solar and hydroelectric facilities. ContourGlobal continues to focus its future growth on low-carbon and sustainable options.
More than four fifths of adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) are drawn from energy supply contracts that are index-linked, while more than four fifths of the firm’s debt is fixed rate.
This should provide some comfort to investors worried about inflation or interest rate rises around the world, especially in light of ContourGlobal’s $4.1bn (£3bn) net debt position, which increased in the first half thanks to the closure of the $837m acquisition of power plants in America and Trinidad & Tobago.
That said, a utility’s business model is well suited to bearing plenty of debt, given the relatively stable nature of demand; and in this context, first-half interest cover of 1.2 times was comfortable enough, especially as cash flow remained robust.
Latin America and Africa account for 40pc of Ebitda, so emerging market risk is a factor, and to some degree a lofty yield is required to compensate for that. Foreign exchange movements negatively affected first-half earnings.
Another wrinkle to note is the limited “free float” – the proportion of shares held by investors unconnected with the company. This stands at barely 20pc against the regulator’s minimum 25pc listing requirement, although it has given special dispensation until July 2022, by which time the threshold could be just 10pc under proposed rule changes.
Whether ContourGlobal meets the rules or not, investors need to bear in mind that the shares may not necessarily be as easy to trade as others in the FTSE 250, even if the “spread” between the prices at which brokers offer to buy and sell the shares looks narrow enough, at least during times of normal stock market activity.
Potential near-term catalysts include the planned 10pc increases in the third and fourth-quarter dividends in October of this year and spring of next, and greenfield investment and further acquisitions to expand the portfolio. ContourGlobal is also committed to realising some of the value that resides in its portfolio of renewable assets.
The stock still looks like a good option for long-term income investors.
Questor says: hold
Ticker: GLO
Share price at close: 191p
Update: St Modwen Properties
Shareholders approved the 560p-a-share offer for St Modwen from Blackstone, the private equity firm, last month, and the shares ceased to trade on August 6. Shareholders should have received their cash by August 20 to close out a profit of more than 20pc on the brownfield site regeneration specialist. The bid highlights the investment case for Harworth, also covered by this column.
Update: Alumasc
Alumasc was not a successful selection for Questor in February 2017 and even if our decision to bail out a year later looked smart at first, as the shares quickly halved, a strong rally means we would have been better off holding on. Memo to self (again): be more patient (again).
The firm’s move to switch from engineering conglomerate to focused provider of niche building products, many of which help to conserve energy and water, looks more sensible than ever, the balance sheet is strong and construction appears to be a hot spot in the British economy. A forecast 4pc yield is an added attraction.
The main danger comes in the shape of input cost inflation and shortages of materials, labour and haulage capacity, so trading could become more volatile, both operationally and in terms of the share price, but at least a forecast price-to-earnings ratio of 10 does not leave shareholders a huge hostage to fortune. If you still own the shares, hold on.
Questor says: hold
Ticker: ALU
Share price at close: 217.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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