UK Edition
Questor: double-digit growth in the offing? Not bad for a stock trading at 11 times earnings
Questor share tip: a rise in the dividend from Devro, the sausage skin firm, hints at the board’s confidence in profit growth
Our initial look at Devro, the sausage casings specialist, in January 2017 has yet to yield a capital gain, but the shares are down by only a smidgen and 17.6p in dividends take us nicely into the black.
And a first increase in the annual divi since 2014 alongside last month’s full-year results suggests the board feels profit momentum is about to accelerate and reward our patience.
Volumes and revenues were broadly flat last year, but profit margins rose. A period of investment in new production facilities and capacity means Devro is primed to make the most of steady industry growth, especially as collagen casings replace those made from gut, and further improve its return on sales.
This could prompt profits to grow at a double-digit clip once more.
Interest cover of more than four times shows that the debt position and pension deficit are perfectly manageable, while consensus analysts’ forecasts imply that earnings cover for the meaty 5.3pc prospective dividend yield is a healthy 1.8 times.
That yield, coupled with a forecast price-to-earnings multiple of just under 11, suggests that the shares are good value; Spanish peer Viscofan, for example, trades on 21 times 2019 estimates and its 3pc yield is not quite so well covered by profits.
Questor says: hold
Ticker: DVO
Share price at close: 180.6p
Update: Centamin
The gold price is firm? Check. The US Federal Reserve and other central banks continue to backtrack on plans to tighten monetary policy? Check. Politicians continue to debate looser fiscal policy? Check. Our chosen gold miner promises increased production and improvements in its cost base? Ah. So much for that theory. How embarrassing, for this column at least.
No sooner had Questor turned to Centamin and its Egyptian mine as a potential play on gold price strength thanks to central bank laxity than the miner released a rather tarnished forecast for 2019. Gold production is indeed projected to rise to 490,000-520,000 ounces, but this is a smaller improvement than analysts had expected. Worse, the “all-in sustaining cost” of production is expected to rise to $890-$950 an ounce, not fall from last year’s $884 (£668).
The problem seems to be increased waste volumes that must be mined and handled at the open pit site. The net result is that 2019’s profit forecasts are falling and shares are down by a fifth. All this column can do is apologise.
At least the balance sheet has net cash, so we can afford to be patient (which is lucky as we will clearly have to be), and management is working on new cost-reduction initiatives. Meanwhile, Barrick Gold’s plan to merge with Newmont Mining, having just gobbled up Randgold Resources, suggests that gold executives think precious metal miners represent value after years of underperformance.
Somewhat chastened, we will stick with Centamin for now, but weigh up other gold miners as potential alternative plays.
Questor says: hold
Ticker: CEY
Share price at close: 89.1p
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Update: Provident Financial 7pc 2020 bonds
The all-share bid for Provident Financial from smaller rival Non-Standard Finance has caused a stir, not least because the approach has been firmly rejected.
As a result, Provident Financial’s shares have not moved much and our 7pc 2020 bonds have held firm at around £101.50. The debt matures in 13 months’ time and the yield to maturity is a tempting 5.6pc, once you adjust for the small capital loss that will result when the paper is redeemed at £100.
This still seems like a fair reward relative to the risks involved – and risks do remain, given that Provident has yet to fully prove it is back on track strategically or operationally after 2017’s missteps and profit collapse.
But last year’s £331m rights issue bolstered the balance sheet. That is what matters to bondholders as it puts cash in the kitty for the all-important £3.50 interest payments due in April and October and ultimately next spring’s repayment of the bond itself.
Should NSF’s bid prevail – something that looks far from certain – it will inherit the liability and in all likelihood continue to pay the interest, as happened with our Ladbrokes Group Finance 5.125pc 2022 bond when LadbrokesCoral was acquired by GVC. There is scope to redeem the bonds early, at their £100 face value, but only in very specific circumstances.
Questor says: hold
Ticker: PFG7
Bond price at close: £101.45
- Questor archive: telegraph.co.uk/questor