Small Cap Report (14 Mar) - TNI, HOME, OCDO, RGS, IND

14th Mar '13 by Paul Scott

10 comments 27113 reads

Pre 8 a.m. comments

Regular readers of this Blog will remember that my biggest success of 2012 was Trinity Mirror (LON:TNI), when I gave chapter & verse on why TNI shares were ridiculously cheap at 25p a share here on 22 June 2012.

A lot of us did very well on the shares, although personally I made my usual mistake of selling far too early at 64p, when new phone hacking revelations emerged and panicked me into selling. We're in a bull market of course, so the money from selling TNI was recycled into other things which have since risen strongly too, so all is not lost.

Well, amazingly TNI shares have risen almost 5-fold since I wrote that article, and they still look cheap on conventional valuation measures!

Preliminary results for the 52 weeks ending 30 Dec 2012 are issued today, and the story is the same, i.e. of declining turnover, but cost savings out-pacing that decline, hence delivering an increase in adjusted EPS of 10.7% to 29.9p. Therefore the PER is only just over 4. The market cap at 120p is £310m.

The very strong cashflows (since capex is largely done, with up-to-date printing presses already installed) have enabled TNI to reduce its net debt further to £157m, which should continue falling rapidly. So no worries there.

The prospect of a dividend is dangled in front of shareholders in today's announcement, but then whipped away again, as they have decided to play it safe and not pay dividends until after the big loan note repayment due in 2014. Bear in mind also that over-payments into the pension fund will rise from £10m to £33m in 2015 and onwards. Although they do make this interesting comment about the pension deficit (bolding below added by me):

It is clear that a change in the financial markets over the coming years, in particular an increase in long term interest rates could have a material beneficial impact on our pension scheme obligations.

TNI's pension deficit has risen in accounting terms to £298m, or almost the same as the market cap. Although as I've mentioned before, TNI does have a large offsetting asset in freehold property, which taken together with the likely reduction in the pension deficit due…

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Fugwit

14th Mar '13

Morning Paul, good to get your views on Trinity Mirror (LON:TNI) as ever, if we agree to zero off pension and property I suspect there is upside value in the rate of debt decline. From current levels a transfer of debt value in EV to equity value in PE would suggest an approx 50% upside from here to a PE of approx 6. This is on a constant basis, I accept the caveat re rate of top line decline. Ieuan.

Boros10

Fugwit, if you zero off pension and property on the assumption the latter could be sold to finance the deficit on the pension you need to factor in the increase in rents (unless these properties are surplus to requirement). I take your point, though, on the boost to equity value as debt gets repaid; investing in the style of a private equity house.

MrContrarian

I have shorted Ocado again at 155 and 159. My first short at 208p ended badly as I closed at 240p with the SP spiking madly. I feared it could to to any level, it was already so irrational. And it didn't! I closed at the top.

There's a borrow charge of 5.5% PA with iDealing.

Edward Croft

Just check out the short interest on OCDO - http://www.shorttracker.co.uk/company/GB00B3MBS747/all

You've got Jim Chanos, Steve Cohen - all the heavies out there and lots of smaller funds too.

There's 17% out on loan... the stench of short covering is all over this one.

Morning Mr B, agreed, I don't expect property sales until values rise and then not to fund pension requirements which will naturally fall as economy improves and interest rates rise.

SevenPillars

Difficult to see how Ocado would do that well financially out of a tie up with Morrisons. The market cap does not make it attractive to takeover, Morrison clearly has to get an online presence, but it's not going to pay close to a £billion, the almost market cap of Ocado, to do it. So, how much is Ocado likely to make out of a partnership, especially one where it is not clear how it will work and one where Ocado is unlikely to sign up to anything that hurts its market take.

Market does like these type of deals however, although once the euphoria is out of the way a pullback is inevitable. Morrisons was initially up around 5% this morning, but the traders have sobered up to the fact that this is a long term situation and it is now up around 1-2% which is perhaps a better reflection of what is happening.

Some comment in FT Markets Live http://ftalphaville.ft.com/marketslive/2013-03-14/

Barclays bullish but Panmure cut pretax profit forecasts last week from £2m to -£10m (2013) and from £22m to - £13m "to reflect higher depreciation charges and lower productivity. The shares have rebounded strongly after last year’s fundraising. We think that it is possible that Ocado could ultimately be acquired, but we think that the price would be well below its current valuation. The company’s NAV is 39p and it is this that we would use as a starting point for its valuation. We therefore reiterate our Sell recommendation and target price of 50p."

Paul Scott

Oh dear, the phone hacking scandal has resurfaced at Trinity Mirror (LON:TNI), as I warned it might do.

TNI have this afternoon issued an RNS saying:

Operation Weeting

We note the arrests this morning of two current and two former journalists employed by the Group as a result of the Metropolitan Police Operation Weeting. The police are investigating allegations of phone hacking on the Sunday Mirror in the period 2003 and 2004.

We take any allegation against employees very seriously and are co-operating with the police on this matter.

johnrosier

Hi Paul, I feel you are not being positive enough on Regenersis. Company is delivering and 12x for 20% growth looks pretty good to me. With another 20% growth it falls to 10x June 2014 and I bet there are upgrades to earnings! My report below....

Regenersis (192.5p and 3.4% of JIC portfolio) issued a strong set of interim results for the 6 months to 31st December 2012. Revenue was up 29% at £90.2m, operating profits up 21% at £4.6m, earnings up 18% to 7.96p and an interim dividend of 0.67p was declared. Cash flow improved to £3.8m v £2.7m in the prior year. The Company highlighted the strength in its Advanced Solutions division which saw revenues rise 73% and operating profits more than double.

Its In-Field Tester units, which I mentioned in my 30th January posting were rolled out to Virgin Media with royalty payments commencing in December. Recurring royalty revenues are expected from the US during the second half. In order to capitalise on the growth opportunities in North America it has centred its sales and marketing operations in the US and has hired a new Group Sales and Marketing Director who also has a remit to seek out suitable acquisitions.

Conclusion: The outlook statement is positive with the Company clearly stating that shareholders should not have to wait long for news on acquisitions and new contracts. I think the management team, under Executive Chairman Matthew Peacock is strong both operationally and strategically. On 12.2x consensus earnings forecasts to June 2013 for 20% growth and 10.1x to June 2014 for a further 20% growth, allied with a strong balance sheet, the shares in my view are still good value. I would also expect to see earnings upgrades as 2013 progresses. Very Happy Holder!

Hi John,

As mentioned in my report above today, my conclusion on RGS was;

But if I held the shares, then I would sit tight, as it seems to me that a price of 200-300p could conceivably be on the cards over the next year or two, based on these figures & growth prospects.

So I think we're on the same page! However, for me I won't be buying now, as I think markets overall are overheated, and there isn't enough immediate % upside from 195p for my tastes.

Good company though, and I think the shares will go up longer term, so we don't really disagree at all!

Cheers, Paul.

Small Cap Report (14 Mar) - TNI, HOME, OCDO, RGS, IND

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