Experian (EXPN) ... I remain short

I remain short of Experian. For a fuller list of reasons I refer to my previous EXPN post.

One of my reasons to sell was the group’s approach to acquisitions. Experian has spent $4.5bn on acquisitions since 2006, and when accounting for the benefit this has provided to its top line, I reckon its organic revenue growth has been lacklustre. These acquisitions also appear to have been priced relatively expensively, and bloated its balance sheet with a stack of intangibles. Were one to strip out its goodwill and intangibles, then the group has net liabilities of c. $2.8bn compared to a market cap of c. $16.6bn.

This morning Experian reported that the sale of its price comparison businesses, PriceGrabber and LowerMyBills, had fallen through. In May, it had announced that it was going to sell the businesses to Ybrant Digital (YBRA IN, mkt cap £423m) for US$175m, consisting of US$100m cash and a US$75m loan note. The businesses were to be sold as they had “been non-core to Experian for several years.” I would take that to mean that Experian had been trying to sell them for several years.

I have no clue why the deal fell through. One reason may be that Ybrant may have failed to raise sufficient finance to complete the purchase. This may be possible as from a cursory glance at Bloomberg, it appears that Ybrant has failed to generate more than £1m in operating cash in any one year since 2007. So paying $175m may have been a stretch. Another reason may be that having looked more closely at PriceGrabber and LowerMyBills, Ybrant decided to pull out. In the case of the latter, it would suggest that Experian may have a difficult time realising much value out of the businesses, for which it originally paid a combined $815m.

Valuation

While the consensus earnings outlook for Experian continues to deteriorate, its valuation continues to rise. It is now priced at its highest P/E on forward earnings in five years. I find that odd and reckon that investors should take a closer look at the quality of its earnings, to see whether it warrants such a lofty rating. I did, which is why I sold. 

Experian 2013 & 2014 consensus EPS compared to share price

Experian forward year price-to-earnings multiple

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

CO-OP 08/49 ... good to call?

I bought some of the Co-op’s BB+ rated perpetual bonds. They were/are priced at 76.5p/shr and pay a coupon of 5.5555p/shr (7.3% yield) until December 2015. In December 2015 the Co-op can decide whether it wishes to call them at par (100p/shr). If it does then I’ll get 23.5p/shr (100p less purchase price of 76.5p) and will have accumulated three lots of 5.5555p/shr in between. That comes to 40.2p/shr, or a 52.5% (gross) return over three years.

Of course the Co-op may decide not to call in 2015 and in that event the coupon drops from 5.5555p/shr to 3-month LIBOR +205bp. Not calling is generally discouraged, but it would mean a post 2015 coupon of c. 2.69p/shr (at current LIBOR). If the bonds aren’t called and the coupon drops to 2.69p/shr, then I reckon the price of the bond drops to c. 68p; this price would equate to a 3.9% yield.  In that event the return over three years is 3x5.5555p/shr + 68p/shr – 76.5p/shr = 8.2p/shr, or a 10.7% (gross) return over three years.

All in all, to me this looks like 52.5% upside return to 10.7% upside return over three years. I expect the Co-op will call the bonds, which is why I bought.

CO-OP Bank COOPWH 08/49, price

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Sportingbet (SBT) ... GENTs first?

I have a long position in Sportingbet (SBT, mkt cap £300m). I am long because I reckon it to be a good business, in a growing market, ripe for consolidation. On the third point I note some interesting activity announced this morning by Genting (GENT MK, mkt cap MYR33.5bn), the enormous Malaysian gambling group.

 

Genting appears to have announced it's looking to offload its stake in its Australian Casino business, Echo Entertainment (EGP AU, mkt cap AUD3.4bn) for $160m. This may be important for Sportingbet. Genting has been touted in the press as a potential suitor for Sportingbet, see link. An argument against this has been that in the Australian market, a company is apparently permitted to manage a land based casino or an online casino but not both. This ignores the fact that for the moment Sportingbet only does sports betting in Australia so land vs. online casino gaming obstacle is currently moot. But there is undoubtedly ambition on the part of Sportingbet. On today’s move, maybe Genting is freeing up a bit of pocket money and getting its ducks in a row to ease any problems switching from land to online gaming?

 

I would also add that the $160m really is pocket money to Genting; from what I can tell it's forecast to achieve c. £860m in free cash flow this year. Further, once one breaks ranks for Sportingbet, I reckon others follow.

SBT share price

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Rio Tinto (RIO) ... trousering some calls

Whereas the ECB just jawbones, the FED gets on with it. So this latest wodge of USD has to find a home. The usual port of call is in commodities. With that in mind, I reckon some December calls in Rio Tinto (RIO LN, mkt cap £63bn) look attractive. A December strike at 4000p/shr can be bought at a cost of just 24p/shr. I note that prior rounds of QE have shoved RIO higher by 95% (QE1), 19% (QE2), and 31% (LTRO). On that basis, getting RIO 30% up by Christmas, to say 4300p/shr does not seem much of a stretch. And if that happens, the return is c. 12x. Those odds seem perfectly acceptable, so I trousered some calls.

RIO share price and prior QE

RIO share price vs. FTSE. A gap

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

United Rentals (URI) ... Ashtead suggests a buy

Annoyingly I’ve missed out on Ashtead blitzing it this morning. Having marched all this way it was never likely to miss out on cracking 300p/shr, which it’s done with style. US revenues were up 20% YOY in its Sunbelt business, while EBITDA rose by 36% YOY during Q1. Momentum in the business is clearly strong, leading AHT to already anticipate full year numbers as “materially ahead of its previous expectations.”

 

Although I missed out on AHT, I think it presents an opportunity in United Rentals (URI US, mkt cap $3.0bn). On a USD basis, both companies’ share prices have closely tracked each other during the past four years. But this began to break down shortly after URI bought RSC Holdings for $4.2bn in April last. This possibly reflects investor apprehension over integration of the two companies, or uncertainty over the outlook for US construction, or both. On the latter concern, given that AHT is going gangbusters, I suspect URI is also trading well. AHT’s current share price and empirical regularity would suggest that URI should be closer to $47/shr; 47% higher than Friday’s close at $32/shr. If this disparity reflects just integration concerns, then to me that discount seems overdone. So I splashed out on some URI at the open paying $33.65/shr. I think this could be a quick performer. 

 

United Rentals share price compared to Ashtead, USD adjusted

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.