Want High Yield and Momentum? Go for Insurance!

Time to Love Non-Life Insurance

One of the key investment themes that I continue to champion is that of the "Hunt for Yield". Here we are, in a period where global central banks are conspiring to keep short- and long-term interest rates as low as possible in order to shore up what is fragile economic growth in the "New Normal" of a post-crisis Developed World. 

At a time when government bonds, and even investment-grade corporate bonds, are no longer offering anything like attractive yields to maturity, where can income investors turn? One solution is to subscribe to Neil Woodford's new fund, which unsurprisingly is stuffed yet again with AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and tobacco companies like Reynolds American, as it was back in his old funds at his former employer Invesco Perpetual. 

I prefer a stock-picking approach, focusing on sustainable value and momentum. Within the UK stock market, the sector that looks best placed on these metrics is the UK non-life insurance sector, containing such high yield gems as Brit (LON:BRIT), Amlin (LON:AML) and Catlin (LON:CGL) within the Lloyds of London reinsurance segment, and the RBS spin-off Direct Line Insurance (LON:DLG) in more classic Property & Casualty insurance. 

High and Sustainable/Growing Yields

Each of these four insurers offer prospective dividend yields in excess of 5%, up to 10% in the case of recently refloated Brit (LON:BRIT). 

Dividend payout ratios are of the order of 60% except in the case of Brit (LON:BRIT), and Returns on Equity are typically between 10% and 13% this year and next. All of which suggests that not only are these high dividend yields sustainable (except in the case of a sharp unexpected drop in earnings), but that long-term dividend growth should be in the region of 4-6% going forwards. Perhaps not exceptional, but certainly more than enough to compensate for inflation.  

Value aplenty too

To read the rest of this article, please click on the web link below:

http://www.stockopedia.com/content/want-high-yield-and-momentum-go-for-insurance-84575

Value Small-Cap of the Month: The Mission Group (TMMG) - Media Sector

Every month, I will be focusing on a compelling mid- or small-cap value story. This month, I a going to focus on a UK media company called The Mission Group (code LON:TMMG), whose current market value is £39m, and is listed in the AIM segment of the London market.

What Do They Do?

The Mission Group is comprised of a number of marketing, advertising and public relations agencies (11 in total), based in the UK, San Francisco and Singapore. Key clients include Tesco, Volvo, Scania and Virgin Atlantic. 

You can find a lot more information about The Mission on their web site.

Where is the Value?

In simple terms, The Mission is cheap on a number of traditional value metrics including forecasts P/E, price/book value and price/sales (Figure 1):

1. TMMG is Cheap!

Source: Stockopedia

For lovers of combining Value and Quality criteria, The Mission comes out extremely well on Piotroski's combination of low price/book value ratio (0.6x) and his F-score of quality, where the Company scores a high 8 out of a possible 9. So The Mission looks great value at least. 

The Total Shareholder Yield also looks strong, combining a 2.3% dividend yield with a £1.7m reduction in net debt worth another 5% or the Company's market cap, so a total yield of well over 7%, in line with the Free CashFlow Yield of just under 10%. 

What about Momentum?

Secondly, price momentum over the last 3 and 12 months has been very positive, with the shares gaining some 16% and 82% over these two periods respectively. 

2. TMMG Has Already Made Some Impressive Price Gains

3. But There is a Long Way to Go To Regain Prior Highs

But back in late 2007, the stock reached a high of 150p, if only briefly. So even after such impressive gains over the last 12 months, it would need to nearly triple to get back to historic highs. 

And Is There a Reason to Buy the Company Now?

Key highlights from The Mission's 2013 Annual Report were encouraging:

• Revenue +9% to £51.6m;
• Profit Before Tax +3% to £5.0m;
• Net Debt sharply lower to £10.7m, -£1.6m versus FY2012;
• Annual dividend of 1.0p put in place, versus nil before.

So operating trends certainly look promising, while back in February this year, the Investor's Chronicle publication highlighted The Mission as a very cheap recovery stock. 

A key driver for the Company, as for all advertising-related companies, is the strong underlying economic growth being experienced in the UK, with London the epicentre. Normally, domestic economic growth has a leveraged effect both on top-line revenues (clients want to spend more on advertising) and also on profitability (as the major cost of ad agencies are their staff salaries, plus office rent, which are largely fixed). 

What are the Risks?

1. Even after nearly halving the debt in 4 years since 2009, there is still nearly £11m of net debt outstanding (Figure 5).That said, this is less than 1.5x the 2014e forecast EBITDA of £7.7m, so normally this should not be a big issue.
2. The promised boom for advertising from the growing economy may not materialise as expected.
3. Most of the stated book value is net Goodwill (£71m), so who knows what the true economic worth of TMMG's intangibles like branding, network etc. really is?  

5. TMMG's Balance Sheet

Investment Summary

Overall then, TMMG is very cheap, with a share price that is moving up nicely (has broken through recent price highs) but which has plenty of scope to move up further before hitting all-time historic highs, together with plenty of leverage to the improving UK economy. 

On Stockopedia's StockRanks system, this all adds up to a near-maximum 99 combined StockRank (Figure 6)!

6. TMMG's Combined StockRank is 99!

Source: Stockopedia

So The Mission (TMMG) is the first company to go into my UK Model Portfolio, at an entry price of 54.75p.

Edmund

CNBC Closing Bell: Guest Host 23 July 23014 (Video)

I appeared on Louisa Bojesen's Closing Bell show on CNBC Europe yesterday as guest host. 

Here is a short video link of me discussing why I like exposure to US shale oil & gas:

CNBC Closing Bell: Shale Oil

Video: Why I like Energy and Technology in a bullish US stock market environment

Why I still like the Energy and Technology sectors while US stock market trends remain bullish: 

Video link here:

Key Investment Themes: Energy, Technology, Hunt for Yield

Edmund

Buying Into Black Gold, for the Long-Term

Oil As a Strategic Long Holding

Here are some reasons why I think that the Energy sector and Oil is still an excellent long-term investment theme for some time to come, with a couple of short-term drivers to drive oil-related commodity and share prices to boot...

1. Seasonal Effect - US Gasoline Prices Break Out For Summer (Driving Season)

Source: St. Louis Fed, Bloomberg

Energy: The Long-Term View

2. Long-Term Oil Driver: Consumption Growth from China, India etc.

3. So far, Non-OPEC (North America) Production Growth Has Kept Up

4. But Will Be Tough to Keep Up With Demand...

Energy: Short-Term Risks

5. Iraq, already OPEC's 2nd-Largest Producer, Is Forecast Huge Production Growth

6. With ISIS Advances, Iraqi Civilian Deaths Now Highest Since 2007

Investment Conclusions

7. Buy US Integrated Oil, Oil Services, MLP Stocks on Weakness

(JPMorgan MLP ETF: US code AMJ; 

iShares Oil Equipment & Services ETF: US code IEZ)

8. Buy US Oil, LNG Shipping On US Export Growth

(Guggenheim Shipping ETF: US code SEA; 

Teekay Corp. (US code: TK)

Summary

1. The Oil Sector Remains A Key Long-Term Investment Theme
2. World energy demand to grow fast
3. Short-Term: Geopolitical Risks to OPEC Oil Production (Iraq)
4. US, European Oil Stocks to Continue to Outperform
5. The PowerShares DB Commodity Index ETF (US code DBC) one way to play higher Brent crude oil, gasoline prices.

Bowleven: An interesting junior oil play on the rise

Why Bother Looking at Bowleven (code: BLVN.L)?

1. Value: A very cheap stock on certain deep value measures: Price/Book Value ratio of 0.4x;
2. Value (2): Estimated Net Asset Value per share (BMO, Barclays): 99-135p. Current share price: 40.8p: Price/estimated NAV: 0.3-0.4x;
3. Catalyst: Agreement to sell down a 50% interest in its Etinde permit offshore Cameroon for Lukoil and NewAge for a total $250m, giving Bowleven enough cash to finance its share of development capex through to finding first oil (25% share left);
4. Revaluation: Offshore Cameroon oil & gas resources worth potentially 70p/share for Bowleven, 71% higher than current share price.
5. Technical: BLVN.L share price has bottomed out, now rising steadily, gap to close at 52p. 

A Small-Cap in one of my favourite sectors: Oil & Gas

I remain unashamedly keen on the global Oil & Gas sector, with recent Middle Eastern geopolitical worries in Iraq, Syria and Libya keeping the Brent crude oil price at relatively elevated levels, despite the onrush of shale oil production Stateside. 

Bowleven (BLVN.L) is a junior oil exploration company (market capitalisation £130m) with development interests offshore Cameroon in Africa. 

The Etinde permit, the subject of this latest stake sale to Lukoil and NewAge, comprise 3 blocks MLPH-5, 6 and 7 (Figure 1). 

1. Etinde permit, offshore Cameroon

Source: company

While I admit that I am no oil & gas specialist, Bowleven piques my interest as an investor for a number of reasons, despite the rather large stumbling block of being loss-making at present (consensus EPS estimates are pegged at a loss of $0.036 for this year and $0.035 in 2015), which normally rules a company out of consideration for me. 

Value: Lots of unexploited value in Cameroonian assets

The stated balance sheet gives a trailing book value per share of $1.82 (Figure 2), which translates to 107p at the current $1.70 exchange rate. 

2. Balance sheet shows lots of potential value hidden

Source: stockopedia.com

This gives a price/book value ratio of just 0.4x, including the $38m of cash already on the balance sheet, before the cash infusions from the stake sale to Lukoil and NewAge. 

3. Price Book Valuation Attractive

Source: stockopedia.com

The stake sale to Lukoil and NewAge is to bring in some $170m initially on completion (in September), plus assigns $80m further cash and carry thereafter dependent on completion of certain milestones (details can be found here). 

Taking the $32m on the balance sheet already (as of February) plus the $170m the company is to receive initially amounts to $202m, or £118m which is virtually Bowleven's entire market cap today. 

If you add the $80m contingent value from the deal, then we arrive at £166m. Of course, Bowleven is going to spend much of this cash in developing their share of these blocks to hopefully start to produce oil, but this is the situation today. 

Value (2): Net Asset Value Estimates of 99p - 135p

Broker research from Barclays and BMO pegs the Net Asset Value (NAV) of Bowleven (prior to this latest deal) at somewheere between 99p (BMO's estimate; Figure 4) and 135p (Barclays' estimate), yielding a price/NAV ratio of 0.3-0.4x. 

4. BMO's NAV estimate for BLVN.L

Source: BMO Capital Markets

Now a Takeover Candidate?

With this Lukoil/NewAge deal finally validating Bowleven's oil exploration efforts, could it now even become a takeover target for a larger oil & gas concern? There are plenty of large companies looking to add oil & gas reserves, and Bowleven is now both cash-rich and offers some interesting exploration assets. 

Of course, we can ask why Lukoil didn't just buy the entire company, if it was so obvious a deal. This is of course a very good question. Nevertheless, with this deal due to complete in September, something may still happen in this regard... I am certainly not banking on this prospect, but it is a nice free option to have. 

Why still so cheap then?

While Bowleven is a retail investor favourite, it has had a very chequered history, culminating in the last rights issue in November 2013 when 29.47m shares were issued at 45p, 10% above the current share price. So current shareholders have certainly suffered over the last few years with this stock, judging by the long-term price chart (Figure 5):

5. Bowleven's Long-Term Price Chart: A Tale of Woe

Source: Bloomberg

It is hardly surprising that some major shareholders are unhappy with the current deal, e.g. Bowleven-rocked-by-row-after-asset-sale. 

Technical View: Solid Uptrend Established, Gap to Fill at 52p

Three things to note on the short-term chart (Figure 6): 

1. The previous downtrend has been broken;
2. A new uptrend has been established;
3. There is a gap to fill (from the time of the last share placing in November 2013) at 52p.

6. Bowleven's Short-Term Chart is Encouraging

Source: Bloomberg

Summing it all up: A Speculative Value Opportunity in Oil

Bowleven is certainly speculative, but has an interesting combination of value opportunity, catalyst and positive technicals in a sector that I favour, trading at 41p. 

But as always, this is just my view, not an official recommendation by any means, so as always, Do Your Own Research!!

Disclaimer: I do not hold Bowleven shares at present, though may initiate a position in the next 48 hours...

Tracking the Surprising Gold, Silver Rally

I thought I would just post up some charts looking at the surprisingly strong rally in Gold and Silver of late, that has been boosted in particular by the recent Federal Reserve meeting in the US, with no change of speed on monetary policy announced (i.e. they are not looking to raise interest rates faster than previously expected). 

So here are some charts looking at Gold and Silver, that may give some clues as to whether the current rally can continue:

1. Gold Breaks Out of 200-day Moving Average

2. Rally in Silver Even Stronger

3. A Weaker US$ Is Helping Gold and Silver Post-Fed Meeting

4. A Relaxed Fed and Improving Growth is Pushing up
Long-term Inflation Expectations

5. Gold ETF Holdings Relatively Stable in 2014

6. Seasonal Effects Favour Silver, Gold from late June

7. China and India Drive Gold Jewellery Demand 

8. Gold is Cheap Relative to Oil

Summary

1. Gold, Silver benefit from short-covering post Fed meeting
2. Gold, Silver break above their 200-day moving averages
3. Seasonal Effects Favour Silver in July, Gold in August, Sept.
4. Is this just a short-covering rally or something longer-term?
5. Rising inflation expectations may boost Gold further