Does mid-cap 250 transport, infrastructure and biomass energy firm Stobart Group (STOB)merit holding for an attractive yield of around 7.6% – albeit derived currently from disposals – until its operations can achieve better profits?
Or is the market justifiably wavering in confidence, given a 20%-plus fall in the stock since late 2017?
Latest results for Stobart’s year to end-February proclaim a big advance in underlying pre-tax profit from £27.4 million to £117 million, but this includes £124 million profit on the part-sale of Eddie Stobart Logistics (ESL) now listed on AIM.
The board had previously indicated it is financially resourced to support the dividend through to 2022, at which point operating income should sustain it.
Thus, holding the stock is significantly an act of faith in this bearing out, given for example net tangible assets per share are 85.7p versus a market price around 236p currently.
Diversified but lumpy revenue profile
I’ve drawn attention to Stobart various times in recent years when priced at around 100p and offering a then 6% yield given a regular 6p annual dividend.
In 2014, the stock hit 152p, but volatile profits (see table for 2014/15) saw it dip briefly below 100p again in 2016, then a powerful rally that breached 300p a year ago as expectations grew for realising value from the business model.
It’s well-diversified, albeit with a unitary theme of owning/operating infrastructure assets, which in a wider sense attunes to public policy objectives to see infrastructure improve.
Revenue has been transformed on the aviation side by 539% to £180 million by the acquisition of Stobart Air, helping group revenue up 87% to £242 million; otherwise activities generally show higher profit on reduced revenue, except for infrastructure.
This flags straight away, revenues prone to be lumpy and tricky to predict, also it being hard to ascribe genuine operating profitability given central costs have risen 64% to £13.3 million.
A key challenge is judging the extent Stobart’s development of long-term progressive operations, is able to offset medium-term cyclical risks given transport activity tends to ease in a recession.
Yet asset managers such as Woodford and Miton holding 20.1% and 3.5% respectively, shows they perceive a longer-term prize and value also in the dividends meantime.
Big swings in investments/infrastructure profits
Wariness as to true underlying profitability is shown also by the contribution from the part-sale of ‘Logistics’. The results highlights proclaim: “All operating divisions increasing underlying EBITDA, year on year: energy up 18%, aviation up 3,500% and rail up 13%”, although £135 million underlying group EBITDA includes a £124 million profit on the divestment implying a £9.5 million loss at the pre-tax level if ignoring this.
The directors would probably say “investments” – including trading – are integral to this group’s normal operations, although investors generally want to know exactly how value-positive/negative are the trading businesses, otherwise where will the group be left when disposals slow?
Stobart’s operations review sounds plenty positive, but it’s not until past the chairman/chief executive’s detail, in the financial review, that you see underlying EBITDA – effectively operating profit – broken down.
Energy, aviation and “rail & civils” (specialised rail industry engineering) are each marginally ahead if constituting just 14.3% of the total, which is 92.7% dominated by investments, up from 27.3% in 2016. There’s a big swing also in infrastructure-related profits, down from 54.9% to 2.9% of the total.
Stobart Group – financial summary Estimates year ended 28 Feb 2014 2015 2016 2017 2018 2019 Turnover (£ million) 99.2 117 127 129 242 IFRS3 pre-tax profit (£m) -10.2 -9.4 10.0 -8.0 101 Normalised pre-tax profit (£m) -2.2 -7.1 11.2 19.2 117 32.1 Operating margin (%) 8.8 -8.8 3.0 9.2 IFRS3 earnings/share (p) -3.1 -2.4 2.7 -2.7 Normalised earnings/share (p) -1.8 -1.7 2.0 8.0 31.8 3.7 Earnings per share growth (%) 300 298 -88 Price/earnings multiple (x) 7.4 63.8 Annual average historic P/E (x) 55.4 54.6 23.2 Cash flow/share (p) 7.1 -4.3 0.5 -1.1 Capex/share (p) -0.6 -9.7 11.6 -9.5 Dividend per share (p) 6.0 6.0 6.0 13.5 18.0 18.0 Dividend growth (%) 125 33.3 0 Yield (%) 5.7 7.6 7.6 Covered by earnings (x) 0.4 0.5 2.2 0.4 Net tangible assets per share (p) 98.3 88.4 87.5 78.8 85.7
Source: Company REFS Past performance is not a guide to future performance
Disposal and sale & leaseback drive cash flows
Scrolling forward to the latest cash flow statement shows cash absorbed by operations up from £1.7 million to £9.3 million, before things like £75.1 million property, plant and equipment being acquired.
Properly, investors also want to see operations as cash generative besides profitable; meanwhile, the £58.1 million cost of dividends in the latest financial year was enabled by £127 million sale and leaseback proceeds and £112 million from the disposal of ‘Logistics’ enabling net cash inflow from investing activities to soar 352% to £181 million.
The current outlook for the investments side is described in simple terms of the 12.5% Eddie Stobart Logistics stake: “to hold this investment for growth in the short term and to consider realisation at the appropriate point”.
Prospects for infrastructure are described quite as to justify the group’s diversity: “By utilising our resources in rail & civils, we are able to develop land and add warehousing and distribution centres to a number of sites owned… e.g. will own an area of land set aside as a business park.” Fair enough for the longer run if very much a guess as to what profits and when.
New deputy CEO asserts “clear 2022/23 growth targets for each division”
Integral to hopes for Stobart as it boosts its aviation-related interests has been the 2016 appointment of easyJet’s chief operating officer, described as “providing added impetus as we build on the platform we have created in our aviation division.”
In airports – London Southend and Carlisle – there’s scope to benefit from London’s capacity constraints and demand for a better customer experience away from congestion.
Building on a 29% increase in passengers at the group’s London Southend Airport, after investing £10 million last year e.g. with a Flybe franchise flying to Europe, a further £30 million will be applied up to February 2021.
New air routes are currently starting with Air Malta, also passenger flights from Carlisle, and Stobart’s airport aviation services has obtained a new ground handling services contract for easyJet at Stansted.
Rail & civils supports airports with fuel storage/processing besides regularly securing engineering contracts, for instance, with Network Rail; and it also develops land and distribution services for the infrastructure side. In energy, increased deliveries on biomass energy contracts are targeted to power plants across the UK, with sourcing closer to end users to improve margins.
Cash from the disposal has also cut debt
Intangibles comprise 25.7% of net assets, reflecting the element of service businesses alongside those asset-driven. Long-term debt has been cut 52.6% to £63 million and, together with £16.7 million short-term, offset by £43.1 million cash, means net gearing of just 9% and a modest net finance charge of £1.7 million – which has averted the cost of higher interest rates in due course.
Another sign of prudent management is trade payables at 1.2 times trade receivables i.e. not as if the group is taking substantial free credit from its suppliers like some companies have extended this ratio extends up to three times. There’s only a small pension deficit of £3.7 million.
Director buys £858,250 of shares around current prices
On 2 February a key executive director (previously chief executive) bought 250,000 shares near 247.8p; then, on 7 February, a further 100,000 shares at 238.8p, to own 27.2 million overall or 7.7% of the group.
Admittedly, last September he did sell 250,000 shares at 285p and 1.25 million shares at 291.05p in order to re-balance his interests in Stobart Group and Stobart Capital – being a director of ‘Group’ and executive chair of ‘Capital’ which identifies and develops investments for ‘Group’.
The aim being to invest his own capital alongside ‘Group’, which sounds incestuous, but at least his recent trading shows he reckons the current price range offers value.
Stobart is, therefore, for long-term investors able to stomach some volatility and the unknown, and is why the market prices the stock for a 7%-plus yield.
The transition to Brexit looks likely to cause the UK economy some disruption, but the group is positioning itself well in areas of long-term growth, with mutually supportive interests. There’s a fair chance of long-term capital growth backed by excellent yield. Accumulate.
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