Grade AA

The roadside assistance and insurance group reported that full-year trading earnings before interest, tax, depreciation and amortisation should come in at £390m to £395m, in line with last September’s guidance. New members grew 7% year-on-year while retention was broadly flat at 82%, even though Insurance Premium Tax has fuelled yet another large premium hike.

The AA did report a drop of around 1% in paid membership to 3.29m, or 70,000, but that was mostly down to discontinuing free roadside membership for its insurance customers, which blocked the pipeline of free-to-paid conversion.

Roadworthy

Insurance services and underwriting are performing well, with 6% growth in motor policies to 629,000, which offset an expected 5% decline in home policies to 818,000. The business continues to generate healthy levels of cash, while last year’s refinancing has further reduced its borrowing costs and extended the average maturity of the group’s debt. 

The AA has a strong brand and distribution platform and is investing further resources in this area, with more than a million members now registered for its app. There may be further bumps in the road but these look baked into its lowly forecast valuation of just 5.8 times earnings.

The yield is purring at a forecast 6.6%, covered 2.6 times. City analysts reckon earnings per share (EPS) may fall 3% in full-year 2018, but should accelerate to 7% in 2019 then 10% in 2020. This looks like an AA-rated income and growth play right now but my Foolish friend G.A. Chester has also warned of the potential dangers, noting that the AA still has a huge debt pile.

Cop out

Last time I looked at Millennium & Copthorne Hotels (LSE: MLC), in June last year, I described the stock as one to sleep on for now. That looked like a good call until October, when the shares suddenly rocketed on sudden takeover talk, after its Singapore-based parent company proposed a full cash buyout of its London-listed subsidiary. However, the stock has trailed downwards since then as critics rounded on what many see as a low bid.

Its share price has ticked up slightly on publication of today’s full-year and Q4 results to 31 December, which revealed a 7.9% rise in annual revenue per room, helped by the weaker pound and strong growth across its markets, with the exception of Europe.

Brexit bother

Reported revenue per available room (RevPAR) rose in all regions in Q4 but fell 2.9% due to a drop in occupancy, with the company claiming Brexit concerns have affected all its hotels, especially in London, adding to pressure on labour costs from the recent minimum wage increase.

Last month, Singaporean billionaire Kwek Leng Beng’s £2bn buyout offer was blocked by minority shareholders who refused to tender their shares, around 37% of the total, into “such an unattractive offer”. Today’s results have done little to reignite investor enthusiasm. One to watch, rather than buy today. Especially when there are far racier stocks on the market right now, such as the AA. Brrm, brrm.

The post One 6% yielder and one growth stock I’d consider buying today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Sell or wait?

Today’s strong third-quarter results from Millennium & Copthorne Hotels (LSE: MLC) could increase pressure on the group’s majority shareholder to table a higher offer for the stock.

After stripping out currency benefits, revenue per available room rose by 4% to £79.25 during the nine months to 30 September. Pre-tax profit climbed 8.3% to £109m. It’s a solid set of figures.

Indeed, I suspect today’s news may encourage some of the company’s big shareholders to apply pressure on the board to negotiate a higher takeover offer.

What’s on the table?

Earlier in October, Singapore-based City Developments Limited (CDL) announced plans to make a cash offer for the 35% of Millennium shares it doesn’t already own. The proposed offer totalled 552.5p.

The shares have since marched higher and currently trade at 589p. That’s a premium of about 6.5% to the possible offer. The market seems to be pricing in the chance of a higher offer from CDL.

The logic behind this is that the group’s global portfolio of hotels gives it a book value of 985p per share. CDL says this isn’t relevant as it’s not going to sell the buildings. CDL’s potential offer is based on earnings, and values the stock on a 2017 forecast P/E of 17. So who’s right?

My view

Millennium shares have always traded at a discount to the value of their net assets, but not such a large discount as this. In my view, a fair price would probably be about 650p.

CDL has until 6 November to make a firm offer or withdraw. I may sell some of my shares before then, as there is no guarantee that a better offer will be made.

One stock I’d buy

I won’t be buying anymore Millennium shares. But one stock holding I may expand is Dixons Carphone (LSE: DC). The electronics retailer has been battered by poor market sentiment and weak results this year.

The shares collapsed following a profit warning in August. They’re now worth 50% less than they were at the start of 2017.

I believe this sell-off may have gone too far. Although the August profit warning was fairly serious, much of the expected reduction in profit is down to one-off items, such as changes to EU mobile roaming rates.

The group’s guidance is for “core trading profitability” to be in line with last year. My understanding of this is that the main retail business is fairly stable.

Sales figures from the first quarter seem to support this. During the 13 weeks to 29 July, UK like-for-like sales rose by 4%. The equivalent figure for the Nordic region was 8%, while in Greece, comparable sales rose by 6%. Market share grew in all of these markets.

Falling profits at retailers are usually accompanied by slowing sales. This doesn’t seem to be the case here. Dixons Carphone has a large market share and strong finances.

In my view, the shares’ forecast P/E of 6.7 and prospective dividend yield of 5.9% may be too cheap to ignore.

The post One FTSE 250 value stock I’d buy today and one I’d sell appeared first on The Twelfth Magpie.

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Roland Head owns shares of Millennium & Copthorne Hotels and Dixons Carphone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

City Development is owned by Hong Leong Group, which is itself part of Singapore billionaire Kwek Leng Beng’s business empire. It already owns 65.2% of Millennium. 

The 552.5p offer includes a 7.5p special dividend and values the hotel business at just under £1.8bn.

Performance leaves much to be desired

Now that this deal has been announced, I would avoid Millennium in favour of buying its larger peer InterContinental Hotels (LSE: IHG). 

These two companies operate in the same industry but have both achieved very different results for investors over the past five years. For example, even including the rally inspired by today’s bid, shares in Millennium have underperformed those of InterContinental by around 50% excluding dividends over the past five years. 

Including dividends, InterContinental has blown its smaller peer out of the water. Indeed, since 2003 the company has returned $12.8bn or £9.8bn to investors via special dividends, 125% of its market value today. For comparison, Millennium’s shares only yield 1.9% today. 

The better buy 

The owner of the Intercontinental brand is a model hotel operator and outperforms most of its peers on many metrics. Last year the company reported an operating margin of 40%, compared to Millennium’s 11% and return on capital employed was 38%, compared to just 2.4%. These figures are slightly misleading because the smaller company owns the majority of its hotels, so has a higher asset base, but InterContinental’s asset-light strategy has paid off for investors. 

For the year ending 31 December, the company reported a 9.5% increase in underlying profit as global revenue per available room – a key industry metric known as RevPAR – grew 1.8% in 2016. On an underlying basis, stripping out asset sales, managed leases and other items, revenues rose 4.6% to $1.6bn, while operating profit rose 9.5% to $702m. 

Off the back of these figures, the company announced a $400m special dividend as well as an 11% hike in its regular dividend to $0.94 per share. The regular payout is equivalent to a yield of around 2.1% at current prices. However, including special payouts, the firm returned 510p to investors last year giving a total yield of 12.4% and this year shareholders are in line for an overall yield of 5.6%. 

Expensive shares 

The one drawback to InterContinential’s success is that it’s put the company on the radar of income-seeking investors, which means the shares now trade at a premium valuation. Specifically, shares in the group trade at a forward P/E of 21.1. 

Still, while this valuation might seem dear, it’s not all that demanding considering the group’s cash generation, steady growth, brand reputation and dividend history. 

As long as the company can continue on its current trajectory, I believe that a multiple of 21.1 times forward earnings is a premium worth paying for this world-class business. 

The post Why I’d avoid this ‘hot’ stock despite today’s 20% rally appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.