Stockwatch: Ex-easyJet boss expects transformation and 6% yield

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Stockwatch: Ex-easyJet boss expects transformation and 6% yield

Is Stobart (STOB) primed to keep rising, with scope to lock in a 6% yield currently? After taking office in January, the deputy chief executive of this infrastructure and support services group has from end-February to early March accumulated a 130,105 shareholding mostly at 190p, investing £247,000.

"Following a Stobart director" has worked before, albeit in the long run - I drew attention at 120p in October 2011 when a non-executive director was buying and the stock yielded 5%. It was subsequently volatile despite a consistent dividend (see table) supported by disposals as the group has diversified from the original Eddie Stobart lorry business.

Otherwise, by mid-2013 the price was down to 75p. It then soared to over 150p only to drop to a 100-114p range for much of 2015 before doubling from May 2016, as property sales re-rated dividend prospects. Stobart has also progressed to quarterly dividends from last October.

The new director's buying has followed a 2 March update citing profit for the year to end-February 2017 in line with management expectations, the CEO "confident of delivering growth and good returns for shareholders over the coming years."

At first sight the stock looks fully valued

At 200p currently, the rating appears rich according to earnings: a price/earnings (PE) multiple 100 times for year to February 2016 drops to about 35 times projected earnings for the latest year and 26 for the current one to February 2018.

Stobart's PE is historically high, the table showing an annual average multiple of about 70 to 103 versus net tangible assets in the order of 90p per share and a long-term annual yield of 5-6%. Note also from the table, without disposals the intrinsic cash flow profile versus capital expenditure was not really capable of supporting the payout trend.

And looking back to October's interims for the six months to end-August 2016, the cash flow statement shows a £7.7 million net cash outflow from operations, albeit £37.5 million proceeds from property of which the dividend required £13.8 million. That was only part of a total 6p per share annual payout, the 2015 annual results show £19.7 million distributed as dividends, consistent with previous years.

Possibly, the re-rating implies just how sensitive stocks are to perception of yield in a low interest rate environment. Mind that dividend forecasts imply some £40 million to be paid out annually, and the group's intrinsic cash flow will need to support this once disposals reduce.

The end-August 2016 balance sheet showed £407 million net assets of which £110 million comprised intangibles (the book value of the Stobart brand estimated at £50.7 million) and £167 million land and buildings, thus net tangible assets of 86.3p per share. It's not as if the asset base can underwrite the projected dividend for long.

But a deputy CEO should not spend nearly a quarter of a million pounds on equity, due to bravado in a new role, so what might he sense about prospects?

Unlocking airports potential

His background as easyJet's (EZJ) chief operating officer until September 2016, and as a non-executive director of FirstGroup, (FGP) is pertinent to Stobart's development. Upon appointment last December, he said: "With the increasing pressure on the limited capacity at London's other airports, I see London Southend Airport as very well placed and I look forward to helping to unlock the potential of the airports and the regional airline business."

His relationship with Stobart is already established for some years given easyJet's operations from Southend Airport. Up to 18 new destinations via CityJet from April are targeted to bring up to 600,000 new passengers, with a target run rate of 2.5 million by 2018.

As yet, the interim divisional profit summary shows only £0.7 million aviation profits, despite a 75% rise. Energy – Stobart being the UK's leading supplier of "biomass" or recycled wood, to power plants – is the largest contributor with £4.9 million, up 17%, while "Investments" (the group's retained stake in Eddie Stobart) fell 14% to £5.5 million. Rail (engineering projects) is similarly modest, up 11% to £1 million, while Infrastructure leapt 1600% to £11.9 million albeit via disposals. It's a snapshot, but shows how much rests on the board's vision being delivered, versus a market capitalisation near £700 million.

Grand strategic objective

Stobart's aim is to be "the UK's leading provider of multimodal transport and logistics solutions... superior growth and shareholder returns by enhancing and realising our infrastructure and investment assets and creating new growth platforms in energy, aviation and rail."

Diversification is back, having been a dirty word since over-stretched groups hit trouble in the 1990s recession and "focus" became vogue. The board might argue it does have a strategic focus around transport and logistics, with biomass substantially a distribution business and dovetailing with Eddie Stobart lorries. "Rail" is engineering services though.

So the strategy is ambitious in terms of reach; as yet the board is coping with its extent of interests with no managerial upsets to report. It remains to be seen how resilient it proves; the interims cited some airlines deferring investment in their UK operations following the Brexit vote although management remains optimistic about passenger growth.

The rail side ought to benefit from infrastructure spending and has a £61 million pipeline of work. In the 2009 recession, the group (then more oriented to lorries) defied its shares falling from 180p to about 70p during the 2008 financial crisis; its continuing operations' turnover nearly trebled and the shares had rebounded by spring 2010.

However, that October, management had to trim earnings guidance by 8% as public spending cuts and the VAT increase weighed. The group sold a controlling stake in the lorry operation in 2014 and, while it would seem possible to divest fully, Stobart Biomass lorries look to be increasing. In the last recession, two-thirds of the trucks carrying food and drink probably helped mitigate the downturn.

Buying the stock, therefore, requires some leap of faith, yet one the deputy CEO judges worth taking. While the strategy has long-term potential, sustainable growth figures are yet to show through. However, affirming forecasts means they may start to with prelims on 11 May.

The board also has a canny record sustaining a useful dividend that defies scepticism. So the prize is re-based earnings growth backed by yield and to some extent tangible assets, able to reward long-term buyers again. Prelims should provide further scope to assess upside.

Stobart Group - financial summary               Consensus Estimates
year ended 28 Feb     2012 2013 2014 2015 2016 2017 2018
                 
Turnover (£ million)     492 76.8 99.2 117 127
IFRS3 pre-tax profit (£m)     29.2 3.0 -10.2 -9.4 10.0
Normalised pre-tax profit (£m)     21.5 6.6 -2.2 -7.1 9.5 23.0 30.3
Operating margin (%)     4.0 20.3 8.8 -8.8 1.7
IFRS3 earnings/share (p)     8.5 1.0 -3.1 -2.4 2.7
Normalised earnings/share (p)     5.2 1.4 -1.8 -1.7 2.0 5.5 7.4
Earnings per share growth (%)     -43.3 -74       182 34.2
Price/earnings multiple (x)             103 36.5 27.2
Annual average historic P/E (x)       71.4 103   69.3 61.7
Cash flow/share (p)     16.3 2.4 7.1 -4.3 0.5
Capex/share (p)     15.0 6.1 -0.6 -9.7 9.3
Dividend per share (p)     6.0 6.0 6.0 6.0 6.0 11.2 12
Dividend growth (%)               87.4 6.7
Yield (%)             3.0 5.6 6.0
Covered by earnings (x)     1.0 0.2     0.3 0.5 0.6
Net tangible assets per share (p)     54.3 50.6 98.3 88.4 87.5
                   
Source: Company REFS                  

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.


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