Restaurant Group, easyJet & Braemar Shipping Services yield above 3%

Some weekend thoughts:

Restaurant Group, Cheap and Cheerful
The Restaurant group, which owns chains like Frankie & Benny’s and Chiquito, is one of the biggest fallers this year, down 46% year to date Analysts downgraded forecasts after management reported 1.5% softer like-for-like sales and “challenging conditions in the first 10 weeks of 2016”. Rollout continues and 44 new sites were opened last year and 10 closed, bringing the total number of Frankie & Benny’s to 506. A similar number of new openings is expected for this year and this brand represents 52% of group revenue.

Based on last year payout, the stock offers a dividend yield of 4.8% and trades at an undemanding P/E of x10.6. Perhaps the dividend yield is higher than peers like Mitchells & Buttlers (LSE: MAB) paying just a 1.8% divi, on worries of a potential cut. However, Restaurant Group has a robust balance sheet and last year generated operating cashflow GBP 116m, adequate to cover dividend payments worth GBP 32m and a GBP 2.1m interest expense payment. Analysts forests revenue growth of 7.5%, supported by new store openings, indicating of a potential rerating.

easyJet, deserves some sunshine
The stock of the budget airline is down 16% this year, offering a dividend yield 3.8%. Recently easyJet announced encouraging passenger statistics, with rolling 12 month load factor improving to 91.5%. On the outlook update for the first half of the year management guides for a reduced loss comparing to last year, given this is the seasonally weak period of every airline. Management expects 2% stronger revenue per seat, which is an improvement comparing to previous guidance for ‘flat’ revenue. . Fuel costs will be lower and revenue per available seat is expected to see a modest growth. EasyJet is a good value, in my view, trading at a P/E x9.8 representing a 30% discount to its long-run average valuation. The arch-rival Ryanair trades at a P/E x14. There were plenty of external factors that could be a tailwind on next easyJet results like the strikes at Air France, new slots at London Gatwick coming on-stream, disruption in Italy and the sharp fall in kerosene price.

Braemar Shipping Services, resilient shipbroker
Braemar is a small cap (GBP 131m) shipping broker with a dividend yield at 6% and is one of the favorite stock picks of Lord John Lee, the legendary small cap investor.
Trades at an undemanding P/E of x12.5, a steep discount to the valuation of the much bigger rival Clarskon that trades at a P/E x17.4. At recent trading update the group reported strong activity in tanker markets as cheap oil prices grow investor interest in leasing oil tankers to use them as storage until oil prices pick up (contago trade). Technical servicing business reported a robust performance as well. Shipbroking Drybulk cargo remained the weak spot as demand for shipping coal and iron ore remains subdue, however this weak segment was more than compensated by the other robust businesses of the group. The tone of the trading statement points positively to the medium term reporting “the Company is on track to meet its objectives for the year”

Should you buy Apple instead of FANGs?
Apple shares offer a good value, trading at an undemanding P/E x11.9, offering a dividend yield of almost 2%. This valuation is at a discount comparing to the Wall Street FANGs, the acronym used for the analyst darlings Facebook, Amazon, Netflix and Google. Facebook that trade at a forward P/E x34, Amazon x63, Netflix x225, Alphabet (i.e. Google) x22.
Perhaps investors apply a discount to Apple on fear it might end up like Nokia or Research in Motion (the blackbery maker). But this approach ignores Apple’s business model that is based on integrating a softtware and hardware econsystem for a seamless user experience, whereas the failed handset makers were focused solely on hardware.
Apple generates 65% of Revenue from the US and Europe and only 31% comes from Asia, Pacific an dChina, which shows the potential for growth as most of the world’s population leaves outside the US and Europe. In fact the new 4” iPhone SE at a starting price of $399 makes the introduction to the brand more affordable to the newly formed midle class in emergin markets. Analyst consensus expects a net profit decline of 7% for next year, which appears conservative given the pending launch of iphone 7 which could trigger an upgrade cycle in the west.

Tesco, every little profit taking helps

Tesco stock price is up 27% year-to-date and trades at a lofty P/E x38 on forecasted earnings, despite its massive pile of debt (GBP 12.6b or almost as big as the current market capitalization). Tesco’s valuation commands a punchy premium versus peers like J Sainsbury that trades at P/E x12.6 paying a 4.7% divi, and WM Morrison at a P/E x19 paying a 2.5% divi. The rally started in January after the new UK CEO, Matt Davies announced improved UK like-for-like sales for the 6-week Christmas period. Like for like revneue growt imporved to -1.2% from -5.1% in previous quarter. I believe it is dangerous to extrapolate consumer behavor from the Christmas period, as it is very likely customers decide to temporary trade-up and one-off days like Black Friday can be very impactful in non-food sales. Competition from discounters like Lidl and Aldi remains fierce, with Lidl moving full steam ahead onits GBP1.5b plan to double the number of stores it operates in the UK.

 

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