Buy: Imperial Innovations (IVO)
Imperial Innovation’s shares trade at a big premium to net assets, but unrealised value within its portfolio could get bigger still, writes John Adams.
Half-year figures from the technology investor were dominated by the flotation of Circassia, the largest company in its portfolio. The initial public offering raised £200m in March, prior to which Circassia had a carrying value of just £45m. The gain on the revaluation of this asset provided a net £33.2m boost for Imperial, which has a 14 per cent stake.
Last year, investments in immunology specialist Oxford Immunotec – which listed on Nasdaq in December – and digital health group IXICO – which joined Aim in October – also paid off.
In fact, companies in biotech or healthcare account for over half of the gross carrying value of Imperial’s top 30 investments. The company invested a further £11.1m into the sector last year, as well as £4.7m into a portfolio of engineering companies.
Funding further investments should not be problematic – there is a decent cash pile and Imperial has a £30m loan facility from the European Investment Bank.
Sell: Evraz (EVR)
Roman Abramovich’s Evraz faces plenty of issues and, ahead of the first-quarter update, there’s little to justify a positive stance, writes Mark Robinson.
The steelmaker, which exports steel products from Ukraine into Russia, was already struggling with faltering steel prices and constraints on free cash flow. This year’s political crisis in Ukraine would have done little for its near-term prospects.
In fact, at present, analysts at JPMorgan Cazenove expects a 24¢ loss per share for 2013 and the group is likely to remain cash flow constrained for some while. The shares, meanwhile, hit an all-time low of 53p midway through March as tensions escalated between Russia and Ukraine – but the price has subsequently recovered to 79.5p as bargain hunters have bought on the dips.
The company will release its full-year results on Wednesday and investors may well look for some progress on the group’s debt overhang. But don’t expect much elaboration on the impact that the political uncertainty in the region is having on performance – its first-quarter update, due out a week later, is more likely to offer guidance on that.
Hold: Johnston Press (JPR)
Shares in Johnston slumped more than 6 per cent after the publisher of the Eastbourne Herald and Northampton Chronicle recorded an operating loss of £246m. Print media’s decline remains the overriding issue. Print advertising sales fell 13 per cent, driving a double-digit drop in overall advertising revenues.
But it wasn’t all bad news. Johnston’s losses were driven by its decision to slash the carrying value of its titles by £202m and that of its print presses and properties by over £68m, as well as by £33m of spending on restructuring. Adjust for these and other one-off costs and operating profit crept up 3 per cent to about £54m, its first increase in seven years.
Johnston continued its transition into the digital age. Online advertising sales grew by over 19 per cent to almost £25m, with property and motoring websites leading the charge. It also lowered its operating costs by 12 per cent to £238m and reduced its debt pile by 5 per cent to £302m.
Stock screen: Nine long-term income stocks
While my long-term income screen has yet to distinguish itself, some encouraging signs have emerged from this strategy based on a five-year buy-and-hold investment approach, writes Algy Hall
Although the performance reflects some major extremes on a stock-by-stock level, overall things are now moving in the right direction.
Dividend growth is picking up, rising by 5.1 per cent over the 12 months, compared with a disappointing 4.1 per cent the year before.
The overall historic yield on the portfolio is now 4.3 per cent, compared with 4.1 per cent last year and 3.9 per cent when the screen was originally conducted.
The screen from two years ago has started to outperform, giving me more confidence in the longer-term potential of last year’s screen which is lagging behind the market. It delivered a total return of 4.9 per cent over the past year, compared with 8.4 per cent from the FTSE 350, which is the index from which my long-term income stocks are selected.
The premise of my long-term income screen is to use past dividend growth rates as an indicator of future growth in conjunction with a number of other tests. Most stocks have failed to live up to their records so far, but have nevertheless delivered some dividend growth.
The key criteria is to look for stocks that are forecast to produce a top-quartile “discounted” annualised yield (4.28 per cent or more) over the next five years.
This approach attempts to look at both the current yield and a likely growth rate, so stocks with low initial yields but high forecast growth can make the grade.
The growth rate I use to estimate a potential payout over the next five years is an average of the compound annual growth rate over 10 years, five years and the past year (this puts more weight on recent periods). This is then “discounted” using the risk-free return from a five-year government bond to find an annualised average yield over the five years on a “net present value” basis.
Stocks that pass the key dividend growth test are allowed to fail one of the screen’s other tests, below:
● Dividend growth forecast in the current financial year and next financial year;
● No dividend cuts in the past 10 years;
● Dividend growth of 5 per cent or more in each of the past three years;
● A compound annual dividend growth rate of 5 per cent or more over both five years and 10 years;
● Net debt to cash profits of less than two times;
● Forecast earnings per share (EPS) growth;
● Dividend growth last year must be at least half the three-year compound average growth rate – this is to allow for stocks that may be down on their luck but not completely off track;
● My dividend forecast for next year must be at least 1.5 times covered by forecast EPS.
Nine stocks made the grade this year: Legal & General, Amec, Rio Tinto, Domino’s Pizza, WPP, Croda International, Mitie, Cobham and ITE.