Member Info for londoner7

Pretty good. I didn't heed their half year warning about rev being slower than first half - it was marginally. But their 2.68 was close to my >2.7p EPS target. Which points to very good operational performance. A low key warning about a slow Q1 will scare some short termers but for the longs I think the most impress statistic was the sector split: England rev +16% and EBIT +71%, and Scotland rev +1% and EBIT +8% (I think I heard those numbers correctly on the call). That is outstanding gearing. Imagine the impact of the two new orders on Scotland's business and Hope synergies. Definitely one to lock away for a few years topping up when Mr Market offers up some cheap stock - like sub 50p last autumn. Londoner7

Correction: "In 2004 12% of burials were performed by Dignity and in 2014 it was 23%." I meant to say that pre arranged plans represented 12% of Dignity's burials in 2004 and 23% in 2014.

Benjie, You say, “inflation cost of funerals is running at 7 per cent annually”. Cost to whom? In the 4 years and 8 years to 2014 the costs to clients (Dignity revenues per burial) has increased by a compound rate of 6.0% and 5.6% respectively. Over the same 4 and 8 year periods Dignity’s costs, which are most relevant to the Trusts target returns, have increased by 5.4% and 5.1% respectively. You are right to focus on the Trust investment returns, but the target rate, historically, has been 5.1-5.4%. I haven’t seen the trust accounts. I’d appreciate it if you would post a link. I admit even 5% would be an unlikely return from low risk bonds. This is from Dignity’s 2014 report: “The financial position of the independent trusts holding members’ monies is crucial, given the Group ultimately guarantees the promises made to members. At the end of 2014, the Trusts held over £700 million of assets. The latest actuarial valuations of the pre-arranged funeral plan trusts (at 26 September 2014) showed them to have sufficient assets to pay out all funerals at the current projected rates anticipated by the actuary. The Trustees, the majority of whom are independent of the Group, have informed the Group that they have now, with independent external advice completed a review of the Trust’s investment strategy. This will result in the Trust’s assets moving to a wider mix of investments, including exposures overseas and in equities.” Plans have been the fastest growing part of Dignity’s business but to put the segment in perspective the sale of plans still only represents 10% of group revenues and it’s their lowest margin segment. In 2004 12% of burials were performed by Dignity and in 2014 it was 23%. Any pressure due to underachievement in the Trust’s investment performance is negated to a degree while the number of plans sold exceeds the number exercised. In 2014 the respective numbers were 40K and 15K. All things considered I don’t see any looming issues. I appreciate the discussion.. Londoner7

Correction - 15K plans exercised in 2014. This doesn't affect my numbers. Londoner7

Benjie, Responding to your query prompted me to try and put a value to the “plan” model. Again, this is my understanding and some of it is subjective. Working the 2014 numbers per burial: Source Revenue Profit Margin In the door £2,992 £1,192 39.8% Plan £2,200 £400 18.2% This assumes the provision and costs associated with each funeral source is the same – costs shared. If I add the £185 profit on a plan sold today then the combined plan margin is 26.6%. The 40K plans exercised in 2014 represent 11.5% of outstanding plans. Let’s turn this on its head and say the time to exercise is 8.7 years. ROC is 13% (conservatively including intangibles), subtract 3% cost inflation and that £185 today (£148 post tax) is worth £339 in 8.7 years. Add £339 to profit and plan margin equates to 33.6%. Other benefits? Dinity say this about plans, “Whilst these funerals represent substantially lower average revenue per funeral, their incremental nature means they are a positive contributor to the Group’s performance.” I guess the last part essentially means that Dignity perform more funerals as a result of offering plans so that’s a positive in a business with high fixed costs. Does anyone see any flaws in this assessment? Londoner7

Good question. The answers are in the yearly accounts but can be difficult to extract. This is my understanding of this part of the business. In 2014 the number of unfulfilled plans increased by 25K. About 23% of 2014 funerals had been pre-arranged. So putting the two together indicates a total of about 40K plans were sold during 2014. The plan segment numbers for 2014 are £29.3m revenue and £7.4m profit. Therefore, on average each plan Dignity sold generated £739 of revenue and £185 profit. Other organisations also sell these plans – you may have seen Age UK in today’s news. There are different insurance based financing models but a lump sum purchase is typically £3-4K. The funds reserved for these burials to be performed at a future date, or as the Americans like to say “at-need” are held in trust independent of Dignity. In 2014 Dignity were paid an average £2,200 per burial performed and the trust held an average of £2,300 for each outstanding plan. These revenues result in a lower margin than the in through the door business, but that’s part of the trade off for the up-front payments. The trust is tasked with investing funds so that outstanding commitments can be met, while receiving new funds and associated additional commitments. These are long term funds so something much better than 1% should be achieved on investments. Perhaps they hold some Dignity shares. It’s a bit like the operations of a final salary pension scheme except that the “at need” payout is a single lump payment. Londoner7

Good question. The answers are in the yearly accounts but can be difficult to extract. This is my understanding of this part of the business. In 2014 the number of unfulfilled plans increased by 25K. About 23% of 2014 funerals had been pre-arranged. So putting the two together indicates a total of about 40K plans were sold during 2014. The plan segment numbers for 2014 are £29.3m revenue and £7.4m profit. Therefore, on average each plan Dignity sold generated £739 of revenue and £185 profit. Other organisations also sell these plans – you may have seen Age UK in today’s news. There are different insurance based financing models but a lump sum purchase is typically £3-4K. The funds reserved for these burials to be performed at a future date, or as the Americans like to say “at-need” are held in trust independent of Dignity. In 2014 Dignity were paid an average £2,200 per burial performed and the trust held an average of £2,300 for each outstanding plan. These revenues result in a lower margin than the in through the door business, but that’s part of the trade off for the up-front payments. The trust is tasked with investing funds so that outstanding commitments can be met, while receiving new funds and associated additional commitments. These are long term funds so something much better than 1% should be achieved on investments. Perhaps they hold some Dignity shares. It’s a bit like the operations of a final salary pension scheme except that the “at need” payout is a single lump payment. Londoner7

Robust MPA Sales Suggest Construction More Positive in 2015 than Official Data Indicates http://www.mineralproducts.org/16-release05.htm

Should ensure any progress this year gets regular media coverage.

Well said Mike. Looking at the numbers it makes my wonder why the £41m placing was even necessary. It's the modern equivalent of an £8m brown envelope, as I predicted in an earlier post if an acquisition over £40m went through. Also, why pick 90 day average weighted price other than to justify the placing premium. I've no issues with the pricing in relation to Abicad shares - that's the cost of the deal - but at yesterday 60p closing price the true cost is £357m rather than the headline £336m. I can't pretend to understand or appreciate the merits of the deal (my spreadsheets are now up in the air) but I'm encouraged that Amit is on board with skin in the game through his 18% holding. I'm also holding till I understand Breedon's longer term prospects. Londoner7

YTD revenue is near top of my range but UOP just below the middle of my range. The Laurel acquisition appears to have impacted margins more than I expected. Looking back, a similar effect was seen in 2013 Q1 following the acquisition of Yew Holdings. There was good margin recovery in the following quarter- expect the same for next quarter (2015 Q4). Based on Q4 revenue growth (8%) and Q4 UOP margin (29%), my full year EPS expectation is now 113-117p. The 2015 full year death rate is pointing to 6% up on 2014. Good news on the Derby crematorium planning application. This is one of 4 in the pipe-line at the half way stage. The application in Dartford has the support of the borough council and looks likely to go through too. On my measure (Barclays website) broker forecasts for 2015 were upped this morning to 105.58p following an additional broker forecast. I can’t be certain but adding some maths it appears this broker is forecasting 115.5p for 2015 (in the middle of my forecast range). Londoner7

Q3 is typically Dignity’s weakest quarter but (along with 4 weeks of Q4 ONS numbers) Q3 gives a very good indication of year-end results. Broker forecasts for full year are 102p EPS. Berenberg are on 99.2p but their number preceded the good interims. Perhaps they’ll put out an update after Q3. Putting my head above the parapet - my full year expectations are well above that at 113p-120p. To hit this range my Q3 YTD target for Monday is Rev £217m-£229m & UOP £76m-£81m, on deaths running 9% ahead of comparable 2014 period. Londoner7

http://www.mineralproducts.org/15-release29.htm While PMI Construction and Construction GNP numbers are a useful guide to activity, it's the MPA numbers that are most relevant to Breedon's market. A key take-away from today's release, "Major construction projects also led to strong third quarter sales of aggregates, asphalt and ready mixed concrete in Scotland." Londoner7

Just a note of caution on my 2015 earnings forecast "I base this on a 10% 2nd half improvement in organic revenues over 1st half and same again margins. My 10% organic revenue call is largely due to momentum improvements in last years acquisitions." During the interim call management guided at a 50 :50 1st : 2nd half split or worse 52:48 but certain conditions have been more favourable than they predicted at the time. Hence my optimism. Londoner7

Hi Cellis, Your right there is a 1% step threshold before notification but I thought this is cumulative. To be precise I mean than Invesco or any other large shareholder can't stay below the radar by trading <1% per day. I still maintain that no shareholder with a holding above 3% has bought or sold a cumulative 1% since Invesco's buy notice 24/04/15. You clearly have some knowledge trading and notifications so I don't make the following point directly at you but more generally. Breedon is a relatively illiquid stock making a large trade difficult to execute without accepting a significant discount or paying a significant premium - well above the typical 1p spread. Therefore, large shareholders tend to make their trades close to a news event when liquidity is good. For this reason I'm comfortable to await RNS holding notifications rather than react to intraday trades - not that I would, I'm long term unless the business changes. Besides, why do you view today's large movements as sells? According to my logs they occurred at the mid market price. I still believe they were book balancing movements between market makers. Re "I've been awaiting your target/forecast as to where you think the share price will be come December" I don't forecast share prices so if I raised an expectation on this I didn't intend too. For anyone familiar with a spreadsheet I put forward my expect ions on business performance and market expectations over the next few years aligned to a key target metric of 15% EBIT by 2020. From this I have my own targets for 2018-2020. I suspect the institutions have similar holding periods which is another reason I'm unconcerned by intraday trades. They'll be looking to snap up any discounted placings that may be offered following a large acquisition - an opportunity denied us smaller fish! Based on my assessment of the market with 3 months the year to go I feel confident in predicting that broker forecasts will be revised up for this year and next. Barring a significant event such as weather I expect > 2.7p earnings for 2015. I base this on a 10% 2nd half improvement in organic revenues over 1st half and same again margins. My 10% organic revenue call is largely due to momentum improvements in last years acquisitions. I think a positive boost to the share price would be triggered by an acquisition before the end of the year of around £30-£40m, generating £20m+ revenues. Londoner7

Hi Cellis, What is your evidence for this? I have a record for Breedon's large shareholders from 26/06/15. As of yesterday Woodford's and Invesso's shareholdings are unchanged. My understanding is that any change in holdings of an investor holding >3% will be reported in a "Holdings change" RNS usually within a day or two of the change. I believe the large trades going through at mid market prices this morning are market maker transfers. These happen most days. If Woodford or Invesco are selling (or buying) then expect an RNS tomorrow The last "holdings change" RNS was 21/04/15 when Invesco increased their shareholding to it's current number. Londoner7

Last month I commented, “With regard to the 2nd half there was an interesting Q&A discussion about the factors that may adversely impact the 2nd half compared to the 1st half. The top three were, increasing oil prices, weather and comparisons with a record breaking March performance.” With Q3 complete this is my assessment of these factors: Diesel prices – Q3 average price is 3.9% below 2015 H1 average. The sharp drop during Q3 has levelled off over the last two weeks at 110.5p/Lt. If prices remain at this level average H2 price will be 5.2% below the average H1 price. Weather – March was described as the “perfect storm” in that a number of positive factors came together, not least the weather. September and October was described as another key period in the business calendar. The “Indian summer” we are currently experiencing is timely. Market – the headline from today’s UK construction PMI is “Construction output growth accelerates to a seven month high in September” http://www.markiteconomics.com/Survey//PressRelease.mvc/d7221fcd0bae4cb7aaa9cf60248f6f81 A memorable quote from the interim presentation was, "it's good for us when everyone in the industry is busy, we feed off the crumbs from the table at more favourable margins." (or words to that effect) And another, "we have moved from a period of self help to a period of market help." Londoner7

I sold last week. The only solace I can take is that I never saw this bid coming, but with the benefit of hindsight perhaps I should have so I mark it up to experience. It was clear from recent company news that debt was weighing heavily and uncovered by ROC. Debt capital payments were postponed and projects were being delayed for lack of finance e.g. Nooks farm. In the 2014 finals presentation Alkane stated in their page on debt that capital expense for 2015 would be £3m. In the event it was running ahead of £3m at the interims. First half performance was poor compared to the 2nd half of 2014 so, in my opinion, the company’s future hung in the balance and was dependant on a severe winter. I suspect Alkane’s board saw a similar picture. For Alkane shareholders this bid is timely and IMO should be welcomed. As to the acquiring company I can see the attraction of the power response business given their likely reduced cost of capital, and the low risk option on UK shale via Egdon. Although watching Alkane’s planning struggles over the years I’m not optimistic on UK shale development anytime soon. So the lesson I take from this is to consider the attractions of a business beyond the myopic view of a shareholder focused on the balance sheet. In hindsight I’d still have sold on the interims. Londoner7

dyche It's a nice thought :-) But in my experience comments on these sites rarely move markets. Coincidentally, also on Friday morning Investors Chronicle put out a tips of the week for Breedon. IC carries more clout that I or this chat room. Generally, IC has covered the same stuff as me so the best I can claim is that I've saved participants here a £3.95 subscription ;-) The broker forecast in the IC piece is interesting and I may come back to that later. Londoner7

Two questions remain, the year that target is achieved and the terminal PE ratio. In the latest call one of the directors indicated 40/60 fixed/variable costs. Running these numbers against Breedon’s EBIT margin indicates 11% of volume growth from existing plant would lead to an EBIT margin of 15%. (Price increases above costs also moves EBIT in the right direction). If Breedon management believe they can achieve 15% EBIT (short of wage beating price rises) then they must believe their plant can handle these increased volumes so the remaining question is the time to get this volume. MPA forecast volume growth rates of 4-5% pa for the next few years. So that equates to 3 years – 2018. Finally, to reach a share price target apply your terminal PE. My range is between 15-25. If margin target is reached in 2018 rather than 2020 it’s at the high end. If it’s later and growth has dropped to mid single digits it’s at the lower end. This process has set my price target. So what could go wrong? Most of the risks are domestic, i.e. UK. Short of some 2008 style global hit the current construction cycle should remain intact. The current government should be in place for the next 5 years although the EU question may create some turbulence. I think the main risk of a management mistake would revolve around an inappropriate acquisition. They seem very capable of managing their existing business model. An obvious external risk is a significant increase in oil prices, but this can be hedged by oil investments. With the availability of construction data from various organisations, ONS, DECC, and MPA a disciplined watchful investor should stay on top of these risks before any impact is reported by Breedon. Bottom line - I find the risk reward ratio very attractive. Londoner7