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High-yield Stobart is going places

A high yield and switch in focus to biomass supply and airport ownership means it is time for investors to reconsider Stobart.
November 27, 2014

Concerns of abrupt strategy changes have sent shares in Stobart Group (STOB) plummeting this year, but the decision to focus on biomass and airports looks set to produce rapid EPS growth in coming years and there is a 6.2 per cent dividend yield to enjoy in the meantime.

IC TIP: Buy at 97p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Net debt reduced by 94 per cent to £8.1m
  • 6.2 per cent dividend yield
  • Fast growing businesses
  • Share price below net asset value
Bear points
  • Reputation for abruptly changing strategy
  • Dividend not covered by earnings in the short term

In April, Stobart sold a 51 per cent stake in its iconic haulage business, Eddie Stobart, for £281m and used the proceeds to fund a £34m share buyback and pay off £191m of loans, taking net debt to just £8.1m. Now, with a much healthier balance sheet, the group is focusing on its faster-growing air and biomass businesses.

 

 

Transporting old timber to biomass power stations provides extremely predictable revenues. Indeed, on top of a string of previously announced long-term contracts, Stobart's energy division recently inked a 16-year index-linked deal worth £108m to supply one of the UK's biggest biomass plants with 146,000 tonnes of wood waste a year once it goes live in December 2016.

But that's not where it ends. After selling the land used to build the renewable electricity plant for £2m, Stobart's property development business then bought a 40 per cent stake in it for £7.5m, and will use the heat generated in a neighbouring facility to dry 140,000 tonnes of virgin wood to sell. This wood-drying venture is expected to generate a total of £200m of revenue, and further illustrates the growth potential of a biomass market underpinned by the Renewables Obligation legislation.

Meanwhile, there is also plenty of earning potential in Stobart's aviation business, which owns and operates Southend and Carlisle airports. Passenger numbers at the former are now over the 1m mark and expected to increase substantially in the next few years as London air travel volumes grow by about 1m passengers a year.

The seaside town airport is essentially the only one close to London that has spare capacity in peak air travel periods, and also boasts lower handling fees and top grades for customer satisfaction. At present, the likes of Flybe (FLYB) and easyJet (EZJ) fly from there to several European destinations and, with the railway station just 100 paces from the terminal and London less than an hour away, the future looks bright.

While these two exciting projects show plenty of potential, it will take a few years before they generate sufficient earnings to cover the 6p dividend - broker Oriel predicts underlying EPS of 7.2p in the year to February 2017. However, Ken Rumph, analyst at Oriel, reckons that after disappointing investors with a lack of clarity on future plans, coupled with a controversial property purchase from a company part-owned by chief executive Andrew Tinkler, management is committed to maintaining the dividend even if it is not covered by earnings in the short term. Property disposals and the strong balance sheet should support this.

STOBART GROUP (STOB)
ORD PRICE:97pMARKET VALUE:£318m
TOUCH:97-98p12-MOMTH HIGH:155pLOW: 93p
FORWARD DIVIDEND YIELD:6.2%FORWARD PE RATIO:19
NET ASSET VALUE:126p*NET DEBT:2%

Year to 28 FebTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201249235.48.56.0
201376.86.35.36.0
201499.25.47.26.0
2015**1151.33.46.0
2016**13417.55.16.0
% change+17---

Normal market size: 3,000

Matched bargain trading

Beta: 0.64

*Includes intangible assets of £118m, or 36p a share

**Oriel Securities forecasts, adjusted PTP and EPS figures