Friday, January 4, 2013

Fri 4 Jan - COST, JSG, CKN, MMC

Another quiet day for RNSs. Engineering group Costain (COST) issues a good solid pre-close trading statement (since their results are due to be issued on 6 March, then the Close Period starts 2 months before that, so 6 Jan).

They finished the year in line with expectations, order book slightly down on last year £2.4bn vs £2.5bn, and with over £700m of work secured for 2013 (presumably up from the "in excess of £650m secured for 2012" at this time last year, although the wording could be ambiguous, since both are in excess of a stated number).

They also have a "strong cash position and no significant borrowings".

This looks a nice steady company, churning out reliable EPS of around 30p on average each year, and a steadily rising divi (10p last year). So the expected EPS of 30p this year puts them on a PER of 8.3, and a divi yield of 4.2%.
At first glance that looks fairly attractive to me, for a company which should benefit from the cyclical upturn in the economy which will happen at some point. So could be worth a further look?

Dry cleaning outfit Johnson Service (JSG) puts out an in line trading statement for y/e 31 Dec. Results will be issued in early March. Interestingly, they say that the dry cleaning estate has shown LFL sales growth, "the first such increase for a number of years".

If dry cleaning is a proxy for the overall health of the economy, then this could be a reassuring sign. Although a trend I have noticed, is that with many people feeling insecure about their jobs, people are tending to dress more smartly in the office, in order to project a more professional image. When I turn up for meetings without a tie these days, I'm usually the only person in the room tie-less. Whereas a couple of years ago there were more open-necked shirts.

So perhaps JSG are benefiting from a trend towards smarter office dress?
Anyway, the shares look fully priced to me, EPS forecast of 4.4p means they are on a PER of about 8.5 at 38p. Cheap? Not really, when you consider they have £59m of debt (which is 62% of their market cap of £95m). So that would take the PER up to almost 14 if you add back the debt. There are better bargains out there in my view.

Shipping broker Clarkson (CKN) issues a brief statement saying that despite challenging markets, trading continues to be in line with expectations. Nice company, but the shares look fairly priced to me (whereas I'm looking for bargains!)

Management Consulting Group (MMC) issues an in line trading statement, and a share repurchase programme. It looks fairly cheap on a PER basis, with 2.7p EPS expected for 2012, so at 23p a share I make that a PER of 8.5.

However, I don't like the balance sheet - loads of intangibles, and too much debt. They note that y/e net debt is £30m, and has reduced well in the last few years. There is a reasonable divi yield of about 3.5%. It's not for me, due to the balance sheet being too weak for my preference.

OK that's it for this week, should be busy next week with lots of trading statements I would imagine, so be sure to check back here every day.

I always Tweet to announce when articles are published here, so if you follow me on Twitter, @paulypilot then you will be amongst the first to know when reports are published (which saves checking back multiple times).

Oh, also want to mention that there is an interesting "meet the management" event being organised by Equity Development on 17 Jan in London, in the evening. The 3 companies presenting all look interesting; Regenersis, Tracsis, and VP Group.

I'm told there are a few spaces left, so if you would like to attend then check out the contact details here.
I shall be attending, so say hello if you also attend! I'll be the guy with no tie!

Regards, Paul.


  1. Dear Paul
    First of all, congratulations on a really interesting and informative site (which I found totally by accident). As far as Costain are concerned, away from the figures, this is a very solid and well-run company with a very active tendering department. I have been watching the company, who a relative worked for, for a year or so, but it has never been cheap enough for me. However, if you are looking for a sound, reliable, long-term investment that will pay decent dividends, this may be it.
    Thanks for all the excellent info.

    (Any opinion on Nature Group, by the way?)

  2. What I like about Costain is its huge cash holdings. When I bought into it about a year ago its cash was equivalent to its entire market capitalisation. Plus 90% of its contracts come from existing contracts, and it targets non-discretionary spending which should continue even when other construction spending is squeezed.

    1. Hi James,

      Looking at Costain's balance sheet as a whole, I think the large net cash position is something of a red herring, because it appears to be caused by the fact that they collect in cash from customers a lot more quickly than they pay it out to trade creditors (trade creditors might also include deferred income, i.e. up-front payments from customers).

      So if you look at the most recent balance sheet, current assets is £317.9m (including £133.2m cash), but current liabilities is higher, at £343.4m! So they actually have a deficit on working capital overall, i.e. the cash is really the supplier's cash, that is sitting on Costain's balance sheet temporarily!

      It also has a £39m pension deficit.

      It's low margin work, and there is contract risk (i.e. of unforeseen costs), so overall I'll probably pass on Costain, although I can see the attraction for including in a slow & steady long-term portfolio.

      Cheers, Paul.

  3. Hi Paul

    A belated thanks for mentioning my blogspot on your site. I also enjoy reading your blogspot, and I wish you continued success with it and your investing.