Bottom Feeding - TLW, JDW, and SDY
Tullow Oil (TLW.L)
TLW is an independent energy company with over 30 drilling licences across several countries in Africa and South America.
In the year ended 31 Dec 2023, it generated $1,634.1m of revenue (FY22: $1,783.1m), $764.9m of gross profit (FY22: $1,085.6m), $295.9m of operating profit (FY22: $733.9m), and made a net loss of $109.6m (FY22: $49.1m net profit). Revenue guidance for FY24 is c.$1.5bn.
Total equity at 31 Dec 2023 was negative $359.4m (FY22: -ve $459.5m), and it had net debt of $1,608.4m (FY22: $1,863.7m). We don’t have the audited financials for FY24 yet, but the company has disclosed that its net debt has been brought down to c.$1.45bn at YE24, and its gearing stands at c.1.3x.
TLW generated net cash flows from operations of $876.2m in FY23 (FY22: $1,077.8m), and invested a net $268.5m (FY22: $356.2m) into principally PP&E assets. It generated free cash flow of $170.2m in FY23 (FY22: $267.2m), and FCF guidance for FY24 is c.$156m. Looking out to FY25, the company is forecasting FCF of c.$200m.
Market capitalisation: £217.42m
Valuation: Using the FY23 figures, the shares currently offer a very negative earnings yield of 38.8%, a very positive free cash flow yield of 60.3%, and a nil dividend yield. Debt repayments do arguably give you a good shareholder yield, but with negative equity this doesn’t count for much at the moment.
The guided FCF for FY24 would equate to a 55.2% yield on the current share price, and the forecast for FY25 would give you a 70.8% yield.
Reason: Heavy debt burden, recent CEO departure, and uncertaintly around contingent liabilities.
Interest level: High - The company is looking to bring its net debt down below $1bn and maintain gearing of <1x. It’s also talking about implementing a capital returns framework following the completion of its debt refinancing and the appointment of a new CEO, so there’s the potential for a very high dividend/buyback yield in the near future.
J D Wetherspoon (JDW.L)
JDW owns and operates an estate of 796 pubs and hotels in the UK and Ireland, and sits very much at the value end of the market, with a focus on the affordability of the food and drink it serves.
In the year ended 28 Jul 2024, it generated £2,035.5m of revenue (FY23: £1,925.0m), £142.6m of operating profit (FY23: £106.0m), and made a net profit of £48.8m (FY23: £59.6m).
Total equity at 28 Jul 2024 was £401.6m (FY23: £413.1m), and it had net debt of £660.0m excluding lease liabilities (FY23: £641.9m), and £1,072.8m including lease liabilities (FY23: £1,063.5m). Since 2010, the company has been steadily increasing the percentage of its estate for which it owns the freehold; it currently stands at 72% compared with 41% in 2010.
JDW generated net cash flows from operations of £172.6m in FY24 (FY23: £362.4m), and invested a net £98.6m (FY23: £67.2m) into predominantly a mix of maintenance and growth capex, and freehold reversions (acquiring the freehold for properties it currently leases). It also repurchased £52.2m worth of its own shares (of which £12.7m will be used for share-based payments), and declared a final dividend for FY24 of 12.0p per share (FY23: nil), with a cash cost of £14.4m. The company generated free cash flow in FY24 of £33.0m (FY23: £271.1m).
It should be noted that the FY23 operating and free cash flow figures are skewed by the cash proceeds on termination of the company’s interest-rate swaps.
Market capitalisation: £687.22m
Valuation: Using the FY24 figures, the shares currently trade with an earnings yield of 7.1%, dividend yield of 2.1%, free cash flow yield of 4.8%, and price to book value of 1.7.
If we normalise the earnings and free cash flow to their pre-pandemic levels, which I’d say they’re likely to return to in the medium-term, we’re looking at double digit yields for both with the current share price.
Reason: Near-term outlook is grim due to £60m of additional labour costs from the 1 Apr 2025 as a result of the national insurance (NI) and minimum wage increases - more than the company made in profit in FY24.
Interest level: High - I have a feeling the share price will continue to fall as the industry feels the impact of the NI and minimum wage changes, which could produce an excellent buying opportunity for this high quality business. JDW has proven itself to be very resilient over the decades, and I’m confident it will be able to return to profitability in the medium-term.
Speedy Hire (SDY.L)
SDY provides tool and equipment hire services in the UK and Ireland, with clients across the construction, infrastructure and industrial sectors.
In the year ended 31 Mar 2024, it generated revenue of £421.5m (FY23: £440.6m), gross profit of £230.0m (FY23: £219.0m), operating profit of £17.8m (FY23: £10.4m), and net profit of £2.7m (FY23: £1.2m).
Total equity at 31 Mar 2024 was £175.7m (FY23: £184.6m), and tangible net asset value was £136.0m (FY23: £159.6m). Net debt at this time amounted to £101.3m excluding lease liabilities (FY23: £92.4m), and £198.9m including lease liabilities (FY23: £178.5m).
SDY generated net cash flows from operations of £52.6m in FY24 (FY23: £40.4m), and invested a net £24.2m (FY23: £3.4m), primarily in PP&E and a business acquition. Dividends totalling £11.8m (FY23: £10.9m) were paid during FY24, and in the prior year the company repurchased £24.0m of its own shares. Free cash flow in FY24 was £23.5m (FY23: £10.6m).
Market capitalisation: £87.44m
Valuation: Using the FY24 figures, the shares current offer an earnings yield of 3.1%, dividend yield of 13.5%, free cash flow yield of 26.9%, and price to tangible book of 0.64.
Reason: Outlook for the construction sector in 2025 is looking bleak, along with delays to some infrastructure projects that impact SDY.
Interest level: Moderate to high - Valuation looks very attractive, but there are questions around how well the company could withstand a serious and prolonged economic downturn.
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