Flybe E195 jet

Flybe updates suggest turnaround is on course

Disclosure: I own shares in Flybe.

Two recent trading updates from Flybe suggest that the firm’s turnaround is continuing at a steady pace.

Surplus planes

Flybe E195 jet

One of the Flybe E195 jets that’s surplus to requirements (Photo: copyright of Flybe)

Flybe’s biggest headache is the 14 E195 jet aircraft on its fleet for which it has no use.

According to last year’s results, getting rid of these could result in a maximum cost of £26m.

Flybe is of course hoping to avoid this by finding new uses for the planes.

By the end of last year,  five had been handed back to the lessors and two had been based at Cardiff Airport “under a long-term agreement”.

On 8 October, Flybe announced that a further E195 aircraft has been redeployed under a five-year contract to serve Exeter and Norwich airports with either routes to five European destinations, starting in March 2016. This leaves six aircraft which still need new homes.

Although this latest deal doesn’t guarantee that there will be no further costs associated with this aircraft — the new routes could flop, for example — it’s a good sign of progress, in my view.

Trading update

Luckily, Flybe has the cash it needs to pay off any liabilities relating to the E195 aircraft, thanks to a £155m placing and open offer in 2014.

This means the firm’s management can focus on turning the business around and generating new growth without having to worry about running out of cash. Today’s trading update suggests this process is continuing.

Seat capacity was 13.8% higher during Q2 than at the same time last year, while passenger numbers were 10.7% higher. The difference between these two numbers does of course mean that the load factor has fallen slightly, from 80.5% in Q2 2014/15 to 78.3% in the quarter just ended.

This isn’t great, but I don’t see it as huge concern, as passenger yield was 2% higher than last year in Q2m and total passenger revenue rose by 13%. However, it’s a point to watch — too many empty seats aren’t sustainable.

Flybe shares are up by around 6% following today’s trading update, and I believe the investment story here remains attractive.

Target price: 100p

Flybe’s financial year ends in March, and earnings are likely to be subdued for the current year due the ongoing turnaround and the drag imposed by the unwanted E195 jets.

However, consensus forecasts for 2016/17 suggest earnings per share of 11.8p could be possible, putting the shares on a forecast P/E of just 6.5. This chimes with my view of the firm’s underlying earning potential.

My view is that things are going well at Flybe and patience is likely to be rewarded. On that basis, I’m holding, with a medium-term share price target of 100p.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.


Stanley Gibbons: 4 reasons why things could get worse

StampsDisclosure: I have no financial interest in the companies mentioned in this article.

I’ve been quite bearish on Stanley Gibbons over the last year.

In my view the firm has been exhibiting the characteristics of business riding an unsustainable bubble.

In this article I’ll explain why events so far seem to have vindicated my view and take issue with the more bullish stance taken by others, notably Tom Winnifrith and until quite recently, Investors Chronicle.

What I said

Back in September 2014, I took a look at the firm’s investment schemes and promotional offers, which I found unappealing and even slightly worrying.

I also explained why Stanley Gibbon’s role as a price setter (through its widely-used catalogues) means that it might be able to create price inflation to serve its own purposes, as long as it can find a ready supply of punters investment buyers and discerning collectors.

More recently, I took a dim view of the firm’s costly acquisitions and online investments in an article for Stockopedia.

What’s happened

Events so far suggest my view may have been correct to be cautious.

The firm’s shares have fallen by 65% so far this year, from 285p to just 96p. The latest trading update  — a profit warning, just 13 days after the previous trading update — has flagged up several of the problems I warned about previously.

1. New money drying up?

The number of high value sales appears to have fallen below expectations. The rare stamp market has been fuelled by new Chinese money over the last few years, but this supply of fresh capital may be slowing along with the Chinese economy.

Stanley Gibbons says that while it did manage to complete some high value sales during the first half, “sales achieved for the first six months were only at a similar level to the same period last year, despite the inclusion of sales from the Mallett acquisition completed in October 2014.”

High-end antique dealer Mallett is another firm that’s likely to have lumpy irregular sales, a costly inventory of illiquid stock and a dependence on new (overseas) money. So far, this £8.6m, debt-funded acquisition doesn’t seem to be paying for itself.

2 The illiquidity problem

For sellers seeking to achieve a top market price, like Stanley Gibbons, rare stamps are highly illiquid. The have no intrinsic value, generate no income, and have no meaningful utility.

In this week’s update, the firm says that “the weakness being experienced in our Asian operations and the continued illiquidity in high value stock items[my emphasis] are the main reasons it will miss full-year profit forecasts.

In my view this acknowledgement of the illiquidity of their stock is significant. The cost value of the group’s inventories rose by £11.6m to £53.8m last year. This is the asset backing to which Tom Winnifrith has referred frequently (most recently here, at about 9m30).

Much as I generally respect Tom’s views and analysis, in this case I must disagree. The value of these assets is highly subjective and subject to writedown if the market dips, in my opinion.

As Stanley Gibbons is currently demonstrating, it’s very hard to sell high-value rare stamps if the market dries up, unless you are willing to slash prices.

3. Margins under pressure

Stanley Gibbons shares are already trading at their net tangible asset value, but in my view this provides uncertain downside protection. Prices may have to be cut to get stock moving, and profit margins are already falling. In this week’s profit warning, Gibbons warned investors that:

“Gross margins and profits are expected to be substantially below those of the same period last year, which benefited from high margin sales of material sold from exceptional purchases of major collections.”

My reading of this is that Stanley Gibbons is having to pay closer to market rates for its stock than it has done previously. Thus the margin left for price cuts is much lower than it was. This is a classic feature of the top of a cycle.

I’ve worked a little in the antique and collectibles sector, albeit at a lower level than Stanley Gibbons. I’ve seen how the market value of an item can collapse, for no apparent reason. It’s just down to fashion, sentiment and availability of disposable income.

There is far less rhyme and reason to the valuation of such alternative investments than there is to shares, in my view.

4. Is the balance sheet safe?

At the end of March, Stanley Gibbons had no cash, net debt of £11.7m and a £5.8m pension deficit (all much worse than at the same time in 2014). On this basis, I’m not sure I can agree with Tom Winnifrith’s view that the firm has a “very solid balance sheet”.

In my view there could be further trouble ahead. At best I’d say it’s 50:50 as to whether trading will improve over the next 6-12 months.

I wouldn’t be long here.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Morrisons Newport IoW

Morrison’s interim results: I’m not selling

Morrisons Newport IoW

A Morrisons supermarket (copyright Editor5807

Disclosure: I own shares in Wm Morrison Supermarkets.

After delivering a crowd pleaser yesterday by announcing the disposal of its loss making convenience stores, Wm Morrison Supermarkets (LON:MRW) delivered a mild disappointment today.

The firm’s interim results were slightly below expectations, and the firm’s shares ended the day down by around 3%.

Having read through the results, however, I’m not too concerned.

Firstly, I’m not concerned because this was always going to be a multi-year turnaround.

Secondly, I’m not concerned because the essentials still seem to be ok. Both operational and financial metrics appear reasonable and suggest progress is continuing to be made. Here are some extracts from the results:

Sales performance (ex-VAT)









Group LFL:

Sales ex-fuel*







Sales inc-fuel*







* For supermarkets, online and convenience stores, reported ex-VAT and in accordance with IFRIC 13

Summary of operational key performance indicators (KPIs)









LFL Items per Basket

y-on-y change*







LFL Number of Transactions

y-on-y change*







I’m not bothered about falling fuel sales, as this is simply the result of fuel price deflation. The decline in sales ex-fuel is continuing to slow, as is the rate at which transaction numbers are declining, over the first half as a whole.

Financially, things aren’t too bad either:

  • Operating margin: 2.1%
  • Free cash flow, excluding property disposals: £289m
  • Proceeds from property disposals: £181m
  • Net debt down by £254m to £2,086m
  • Overall positive cash flow of £64m

Cash flow questions: I do have some reservations. Much of the free cash flow appears to have been driven by an improvement in working capital. In other words, stretching credit and demanding more prompt payment from debtors.

Although I can believe that these improvements are sustainable, I am not sure how much further they can be extended. Morrisons might struggle to continue to generate free cash flow in this way, although it’s good to see the progress which has been made.

Dividend: A minimum payout of 5p is guaranteed for the current year, but there’s no commitment beyond that. The firm expects to decide an approrpriate dividend policy for future years at a later date. Current market forecasts suggest a payout of 5.9p, but I’m not sure I’d be that optimistic at present.

Management: New CEO David Potts appears to have a firm hand on the tiller and to be happy to make big decisions quickly, as we’ve seen with the disposal of M Local.

Mr Potts has built a new core team of very experienced supermarket and retail people, almost all with signficant experience in major UK retail chains.

Outlook: I see Morrisons as a long-term investment which could take a few years to come good, but which remains a quality business with an attractive brand. The valuation is at a long-term low, as I highlighted here.

I remain happy to hold for the long term.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

Lamprell Plc: Solid numbers, but why the review?

Offshore oil or gas platformDisclosure: I own shares in Lamprell.

This week’s 2015 interim results from Lamprell (LON:LAM) contained no nasty surprises.

A net profit of $20m and revenue of $341m is consistent with the firm’s guidance for a result heavily-weighted towards H2, due to the timing of construction cycles.

Cash flow looks strong and net cash was up slightly to $316m, representing 44% of the firm’s market cap.

Although the level of net cash varies with working capital requirements, this balance sheet strength must provide a good chunk of downside protection for investors.

The only problem is that the unexpected retirement of CEO Jim Moffatt has coincided with the firm deciding that it needs a strategy review. Should shareholders be concerned?

Just a precaution?

Thus far, Mr Moffatt appears to have done a good job of turning around Lamprell and sorting out the firm’s finances. As far as I can tell, the firm is on a sound footing both financially and operationally.

This is what Lamprell had to say in this week’s interims about its decision to launch a strategy review:

In the context of the prolonged market weakness, the Board is undertaking an in-depth review of the earlier announced strategy to ensure that it is sufficiently robust to withstand the current industry challenges. The Board remains confident the Group is well positioned to leverage growth opportunities in the medium to long term, whilst maintaining a competitive position in the short term.

The message seems to be that the firm has revised its view of market conditions and now expects them to remain softer, for longer, than expected.

There doesn’t seem to be an obvious problem. The firm’s order backlog was unchanged from the year end at $1.2bn at the end of June, while revenue coverage was 90% for 2015 and 60% for 2016, slightly higher than comparative figures from 2014.

Margins appear to remain reasonable. Lamprell reported a gross margin of 11.6% for the first half of the year, down from 13.6% last year. That translates into an operating margin of 7.6%, down from 8.4% for the same period of last year.

Unless pricing on newer work is collapsing, these margins don’t seem to be a cause for concern either.

For the time being, I don’t see any reason to change my view on Lamprell and continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Iron ore

Market correction portfolio update / BHP Billiton results review

Iron oreDisclosure: I own shares of BHP Billiton.

Monday’s market correction wasn’t a lot of fun.

Clearly I had made the classic value investing mistake of buying too soon with some of my recent purchases, especially in the commodity sector.

Yet the logic behind each purchase remains valid, as far as I can see, so I did the only sensible thing to my portfolio on Monday — absolutely nothing.

I haven’t bought or sold a share this week. I should say that if funds had permitted I would have topped up on a number of stocks, but sadly I was already pretty much fully invested. Possibly a lesson for the future.

What about BHP?

Moving on from that, yesterday’s results from BHP Billiton plc (LON:BLT) coincided with a market rebound. The big miner ended the day up by around 6%.

I was encouraged by the figures, too. The firm maintained its progressive dividend commitment, inching up the payout by 2% to 124 cents.

However, as I’ve said before, in my view the most important financials in the current environment relate to cash flow. A company generating positive cash flow with a well-structured debt profile won’t run into trouble.

Cashflow & capex

BHP appears to score highly in the cash flow department. After stripping out the assets that have been divested, mainly into South32, we get the following:

  • Net cash flow from continuing operations: $17.8bn
  • Net cash ourflow from investing in continuing operations: $11.5bn.
  • Free cash flow from continuing operations:$6.3bn.
  • Price-to-free cash flow ratio of 13.5 (continuing operations)

Although net repayment of debt and dividend payments totalled $7.2bn, I think this is a pretty strong cash flow result in the circumstances.

Reducing its cash balance from $8.7bn to $6.6bn also BHP to reduce net debt by $1.4bn to $24.4bn during the period, which should help to protect its credit rating.

It’s worth reiterating the value of BHP’s ‘A’ credit rating. The last time the firm issued new debt, in April, it was able to sell 2030 bonds with a rate of just 1.5%. That’s lower than most governments can manage.

BHP plans further cuts to capex for the coming year. Planned expenditure is expected to fall from $11bn in 2014/15 to $8.5bn in 2015/16, and to $7.0bn in the 2016/17.

I suspect this will be enough to protect the dividend and the firm’s balance sheet strength, although it’s not possible to be certain at this point.


Given BHP’s balance sheet strength and cash generating ability, the firm’s 7%+ yield alone would be enough to make it a buy at the moment, in my view. A trailing P/E ratio of 13.5 backed by free cash flow is also pretty decent.

Although BHP’s earnings are expected to fall again in the coming year, I believe the big miner remains a buy, and will continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.