Small Cap Value Report (1 Dec 2015) - BRY, ISG

1st Dec '15 by Paul Scott

51 comments 34086 reads

Good morning.

This morning's bombshell is a 51% crash in the share price of software company Brady (LON:BRY) . For whatever reason, the company issued a trading update at 5:47pm yesterday. Since the market closes at 4:30pm, and even allowing for 5 minutes after that for the closure process to occur, there seems little point in issuing an update after that. People just assume that it's being slipped out after hours, in the hope that the damage might be limited. The normal time to issue updates is at 7:00am.

This is why it's important to use an email service to send you every RNS from companies you hold or follow, as otherwise it's easy to miss ones that are put out at silly times, like this one:

Brady (LON:BRY)

Share price: 37p (down 52%)
No. shares: 83.0m
Market cap: £30.7m

Trading update - this is a software company, selling trading & risk management software to commodity and energy markets. Given the sector in which it operates, it was really only a matter of time before it issued a profit warning. That's not just hindsight, but it was pretty much the conclusion I came to, when reporting on their lousy interims, and unrealistically upbeat outlook here on 7 Sep 2015. It's yet another example of a company saying everything is fine, we'll recoup the shortfall in H2, and then failing to do so.

Here is the detail of last night's statement;

In our September update, we reported a healthy sales pipeline that more than covered the sales needed to complete the full year in line with market expectations. Whilst some of those opportunities have been converted into contract wins, including 5 cloud deals, we have seen a prolongation of the time required to convert the pipeline into the sales that we anticipated. Whilst most of the opportunities that were there in September are still good prospects, they will not be converted into sales in this financial year. As a result, revenues and EBITDA for the financial year ended 31 December 2015 will be materially below market expectations.

The Group's balance sheet remains healthy with cash in excess of £4 million and no debt. The Board has initiated a cost reduction exercise of £1.7million to improve profitability in 2016 over 2015.

My first reaction is that the business…

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jimbobjames2002

2nd Dec '15

Hi Paul, I see you didn't get to Character (CCT) yesterday, if you do get a chance to comment on it today it would be much appreciated. Also would be intrigued to hear your thoughts on International Greetings (IGR) too if possible.

Many thanks, James

iwright7

I see that ST of IC has tipped Character (LON:CCT) again today, with a 600p target.

janebolacha

Yesterday evening, when I had a little more time, I went back over Character's revenues figures, half-year by half-year: These are as follows (in millions of pounds):

2012/2013 H1 30.6
H2 36.5
2013/2014 H1 46.9
H2 51.0
2014/2015 H1 58.2
H2 40.8

Although, as I wrote yesterday, the profit for the year and the cash generation seem good and the Teletubbies relaunch likely to generate substantial business, I am very puzzled by the REVENUE figures for H2 2014/2015, deduced from yesterday's RNS. They show a 20% reduction on the H2 revenue figures for H2 of the previous year. Also, the H1 2014/2015 revenue figures were 24% higher than those for H1 of the previous year. So revenues figures seem to have gone from a 24% increase over the previous year for H1 to a 20% decrease over the previous year for H2, something I found rather startling.

I can't find anything in the RNS to explain this satisfactorily. There is a mention of currency headwinds and general economic conditions but for myself, I can't see that as explaining an apparent change of this scale. Neither do product launches nor the Christmas factor seem to help.

I have written to the CFO about this and will pass on his answer.

(PS: I have also asked him why there are 21.2m pounds of short-term borrowings when they have 25.8m pounds in cash and cash equivalents)

nehpets

Interesting point. It will be interesting to see what he says. It has to be said that the Character (LON:CCT) RNS was pretty sparse on detail all round actually.

Ramridge

Character (LON:CCT) Simon T of IC has published a very bullish piece today. His main thrust is that the teletubbies franchise is going to generate far more revenues and profits than peppa pig did.
I just wish that CCT's FD makes published accounts more transparent and simple. They don't need to tart up results. The business model is superb and a clear and honest presentation is enough to increase trust in the management.
I intend to remain long for the medium term.

Novice Investor

Jane, it seems that ever since Paul Scott garnered increased publicity on the effective demise of Globo, which said it had a large cash balance and also high debt (interest $4m or £4m p.a. I can't recall), the world and it's friend raises a question mark when any company has a decent sized cash balance and at the same time has some debt. What needs to be factored in is how much the debt costs on an annual basis (in the case of CCT it's only £216,000), and what the company might need the debt and cash for (buybacks if the board consider the ROI significant and designing, making and holding stock for example). Dividends for the year cost just under £1.3m I seem to recall when I last worked it out.

I'll be interested to hear the response from CCT of course, but I suspect everything is in order. Whatever the answer, if it's anywhere along the lines I'm suggesting, would that make anyone sell?

NI

simplicius

I have noticed of late that your reports are scant ,late or none existent. What appears to be the problem? I am an avid reader, but feel you are letting your subscribers down of late. I don't want to upset you at all by this query. I just want you want you to be back to your incisive self. I look forward to your column each day. But of late it has been somewhat erratic with its timing

look forward to

jonthetourist

Hi Simplicius. Paul has some issues with the health of a relative whereby he is helping out by day and then knocking out an SCVR in the evening. Most of us are just grateful that he is managing the latter. Fingers crossed for a happy outcome and the resumption of normal service, but family comes first.

ATB

Jon

Edward Croft

Simplicius - I find that a very unfair comment.

Paul has published more than 20 small cap reports every single month this year, bar May when he had a holiday. He's written from the beach, when he's ill and even when he's desperately hungover. He suffered a bereavement of a relative recently but still powers on. He writes more prolifically than anybody in the UK stock markets... regularly breaching 3,000 words per day. I don't know of any writer that can match his output, nor his impact.

In November, Paul wrote - 43,000 words - that's an average of over 2000 every weekday. I really don't think anybody should be berating him for having a day off... he deserves it. Paul is not a machine, so please don't treat him like one.

BTW, if you want to sign up to be notified by email each day that he publishes, you can do that using the form above.

TMFMayn

What would be useful for casual readers would be some obvious notification on this site that an SCVR will not be published for that day. At the moment we often have to look through old SCVRs or look at Paul's twitter feed to discover what is going on. I guess not everyone knows that, which is why readers ask where Paul is.

Another idea is if a placeholder SCVR is published early every morning, us punters can comment on the morning's results while awaiting Paul's own commentary.

Just my 2p

Santawani

Just would like to wish Paul and his relative(s) well. I have been following the thread yesterday and today because of CCT.
What I find most interesting is that due to Paul’s advice and discipline in how he values a company regarding strong balance sheets, ethics, common sense etc., even in his absence, due to his teachings, others are able to scrabble through the financial statements and have constructive conversations, applying logic and reasoning.
Thank you Paul for all your words of wisdom and the techniques you are showing us.

Mark Simpson

You are right that MS International (LON:MSI) are controlled by major shareholders in some ways they are like a private company with a listing. The downsides are liquidity to some extent, they pay themselves quite well and they don't bother with any city promotion. The positives are that they clearly run the business very conservatively, value balance sheet strength and are only willing to part with their cash when they see compelling opportunities (which is why I think the recent results narrative is positive for the company.) Given the management holding you are never going to get them to change strategy or do a city roadshow but equally I see very little risk of them taking the business private. If they were going to do that they could have done it at £1.20 using the company's own cash and small borrowing. These factors mean that it won't be suitable for all investors but I don't have any major concerns.

The real value of Paul's SCVR is the forum for up to date daily discussion it creates. Teaching people to 'fish' as it were. Therefore rather than people simply requesting companies to be analysed it would be good if they did some of the leg work themselves. So if there is a company that you follow that has released news and Paul hasn't covered it then write a short post in the comments yourself. It can follow a simple template:

Company £ X released results/trading statement/other news today.


Headline numbers

Market reaction

I think these results are goood/bad, and imo the market has under/over-reacted/got it right.

Quote from Management

Valuation/Balance Sheet Strength/StockRanks etc.

Outlook Quote

I will add this to my watchlist/bargepole list.

Also if it gets to say midday and Paul hasn't created a SVRC but there is a company that you think warrants discussion why not spend 15 mins of your lunchtime following the above template on the company as a seperate post. It doesn't have to be exhaustive since the idea is to get discussion going - call it 'daily discussion starter' or similar. It will be clear to everyone that you are just putting forward a quick analysis not an expert on the stock and you may get some good feedback on things you may have missed.

Just a thought...

Rusty2

3rd Dec '15

Thanks for your response. I agree with much of what you say. But I'm uncomfortable with directors earning so much in a company that does not make much profit, I looked back at some of Paul's reports and I see that he also mentions this. Yes things do seem to be moving in the right direction and if you are happy with the structure and remuneration then why not invest but its not for me. Paul also mentioned about pension deficit of over £5m, now that was a last year so that may need checking.

To be fair most of the companies people request are companies that Paul has covered in the past, I know Paul is busy but he does often respond to such requests. I think most people ask because of Paul's analysis of the balance sheet which is beyond some of us. I have seen a number of posts from other members about companies but most have no or little reaction.

jaypatani

4th Dec '15

Haven't looked at this in detail but it would seem that borrowings maybe debt factoring/ Character (LON:CCT) have always had this I think...

To compare with Globo is kind of not comparing Apples with Apples. Character (LON:CCT) has been around since the early 90s and are audited in the UK...Globo used all sorts of funky associate accounting balance sheet spin...

But of course better to check and verify

8th Dec '15

Ref. my post no. 34 above, I have had a response from the CFO which, in essence, seems to simply repeat what was said in the RNS relating to currency headwinds and general economic conditions, as well as the perhaps different and earlier timing of Christmas toy sales to overseas markets. I have also read through two quite lengthy reports from Allenby Capital which can be found here:

http://allenbycapital.com/research/research-char.html

Looking at these figures for revenues in another way and supposing the year-end had been February instead of August, revenues figures for those twelve-month periods would have been (in millions of pounds):

12 months to 28.02.2014 36.5 + 46.9 = 83.4
12 months to 28.02.2015 51.0 + 58.2 = 109.2
12 months to 28.02.2016 40.8 + ??

So, looking at the revenues figures this way, to match the revenues figures for the previous twelve-months period, Character would need revenues of 68.4 million pounds in the present half-year, that would be an increase of more than 17% ( 68.4 / 58.2 ) over those of the corresponding six months in the previous twelve-months period. Note, however, that the last declared figures for the six months to 31.08.2015 show a 20% reduction ( 40.8 / 51.0 ) over the corresponding previous period.

Note that I am referring only to revenues and not profits and that Character have declared higher margins for the last six months reported, an increase (stripping out the mark-to-market adjustments) from 32% to 35%, this being essentially the factor that enabled profit performance to be as reported. This increase in margins also puzzles me since, assuming they buy in US dollars from their Chinese suppliers, their buying prices ought logically to have been impacted negatively by the strengthening of the US dollar against sterling. However, perhaps they have been able to screw down Chinese suppliers' prices by even greater amounts to more than compensate for the currency factor. Or, perhaps, they were protected in that period by their currency hedging. For me, this remains an unknown, rather puzzling, how this combination of sterling weakness against the US dollar but strength against the euro has reportedly produced, at the same time, both higher margins and weaknesses (presumably in export markets) in revenues. Would there, for instance, not have been scope within those higher margins to be able to remain competitive in export markets?

Another factor that concerns me is the thought that Character may be going through a relatively weak patch in their product range, at least until the introduction of the new Teletubbies ranges in 2016, that is after this year's Christmas toy buying season. I'd explain my thinking this way. Reportedly, Peppa Pig accounts for about a quarter of Character's turnover and some 70% of export sales. I know that this little creature is still trotting along very nicely ( I'll avoid the "bringing home the bacon" comment that has been done to death!) wherever she sees a mud puddle to roll about in and she ought to produce bedrock revenues for years to come, in UK but also overseas, where the series is now being launched. That's why I find the apparent fall in reported revenues even more puzzling since Peppa seems to be doing at least as well ( I mean in terms of audience figures) in every country, not just in the euro countries where the strength of sterling may well have held back sales.

I wonder, in this market where novelty is everything, whether Character are simply weaker in their product range, at least until the Teletubbies reappear. Allenby actually do, in their latest report, hint at product fatigue in export markets. If they are right, then perhaps this is something that might be affecting sales in UK as well. On the basis of what I know at present, I can't see Character reaching the 68.4 million pounds of revenues needed to keep them on a growth track in the present twelve-months period (the period I refer to above) while I also wonder whether the present margins are sustainable long-term.

All of this is simply my own thinking but I have now trimmed my position in Character, which has to date been one of my best investments.

All IMHO, DYOR.

Damian Cannon

Excellent piece of research Jane - there's nothing like joining up the dots to see what picture you end up with.

lordboggitt

Jane,

Thank you for your detailed analysis. I sold my holding in Character before the RNS and am still wondering if I did the right thing. However, delving into the RNS and the 2014 AR I made the following adjustments: Deduct 2015 current mark to market £2,051, add back 2014 £1,932; add back intangible amortisation 2015 £960, 2014 £1,846; deduct payment for intangibles 2015 £1,559, 2014 £1,336. This gives adjusted Operating Profits of 2015 £9,834, 2014 £9,901, a £67k reduction. Bearing in mind the short 2 year write off time of intangibles I think my adjustments are fair, but I would appreciate comments.

The other interesting points are in relation to Sales and Trade Receivables. In the 2014 AR Sales rose by £30.7m and Trade Receivables by £5.2m to £20.8m, of which £13.1m related to 5 customers (2013 £6.7m). Sales have hardly moved in 2015 and total Receivables have dropped £7.9m. (The 2015 RNS doesn't have the detailed breakdown that the 2014 AR gives). How much of H2 2014 Sales referred to those 5 or fewer customers and have they been repeated in H2 2015? I look forward to this year's AR.

rosered

16th Dec '15

Thanks to jjis, JTG and janebolacha for the three suggestions for RNS. I have signed up for all three and I am in the process of evaluating them. It is a a real comfort to know when news comes through so I can relax but not obsessively monitor Stockopedia manually and laboriously but rather focus on longer term thinking.

Cheers, David

Small Cap Value Report (1 Dec 2015) - BRY, ISG

Brady (LON:BRY)

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Paul Scott

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