Small Cap Value Report (1 Sep 2015) - LTC, AGA, ENTU, ZZZ

1st Sep '15 by Paul Scott

49 comments 26899 reads

Good morning!

Just when I thought it was safe to go back in the water...! Markets have taken another tumble this morning, with the FTSE 100 down 115 points at the time of writing at 6099, and the US futures off heavily. I'm not entirely sure what reasons are being given by commentators - probably the usual - China worries, when will interest rates rise, etc. Sometimes markets just get nervous about future earnings, and sell-off.

I've got my limit orders in with my broker, to automatically buy some US large caps, if there is another disorderly open with bizarre price aberrations. I'm not selling any of my UK small caps this time, because they held up so well last time (the prices were marked down, but on very little volume, and things very quickly bounced).

China

I've been thinking a bit more about China. A lot of us have disregarded the slowdown there as not affecting small caps we hold in the UK. I think that is true for consumer-facing UK small caps.

However, some comments in last week's results from Xaar (LON:XAR) made me ponder this more. Xaar manufactures print heads which are mainly sold to Chinese ceramic tile manufacturers. However, this is not necessarily reflected in their international sales statistics, because Xaar products might be sold to European manufacturers which incorporate them into products which are ultimately sold to China. This will be recorded as a European sale in Xaar's books, but ultimate demand for the end product actually comes from China predominantly.

I wonder how many other companies are in the same boat? What about Trifast (LON:TRI) ? They've done very well selling fastenings to European car manufacturers, but a lot of those products end up being bought in China. So Trifast is probably more dependent on Chinese demand than its accounts might suggest.

So I'll certainly be thinking much more about where the end products go to, rather than where a product is assembled. This might reveal more China-dependency in my portfolio than I realised was there perhaps?

Anyway, on to specific company news for today.

Latchways (LON:LTC)

Share price: 1068p (up 48% today)
No. shares: 11.2m
Market cap: £119.6m

1100p recommended cash bid - this looks a cracking deal for Latchways shareholders. As you can see from the chart below,…

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BlueFrew

1st Sep '15

Entu has been making money while house prices in the UK carried on rising, firstly from silly levels, then to ridiculous levels and then to the ludicrous levels we see today. You only needed to repaint a wall and an estate agent would add 20K to the asking price. The banks were falling over themselves to increase mortgage lending. So home improvements, cars, holidays and whatever else you care to mention went on the mortgage.

But the new Mortgage Market Review (MMR) rules have largely put a stop to that. Somebody has realised that paying for a holiday for the rest of your life, by adding it to your interest only mortgage with no repayment vehicle was foolish in the extreme. The MMR rules The current prices are only being held up by buy to let landlords who are the only people who can still access unregulated, interest only borrowing.

Walk around any area where the property is mainly rented and you'll see that maintenance is very often kept to the bare minimum, or less if the landlord thinks he can get away with it.

So that all means that the group people who might be minded to actually maintain their property don't the same access to debt as they once did. Of course they will have to renew and replace as things wear out over time, but it won't happen with the same vigour as it once did. But anyway the number of owner occupiers (or people who are renting from the bank) has been falling, while the number of buy to let landlords has risen. These are all headwinds for Entu that they haven't had to face before.

It seems rather convenient for Entu to blame the Government's Feed In Tariff changes for having to shut down the solar panel division. But the changes were only announced on Thursday. That doesn't really explain the dire performance during July and August. I think that a lot more is going on here than is admitted to in the RNS. I think we'll see another profit warning arrive in the next few months.

janebolacha

Paul, why compare with SAL?
Are the circumstances really similar?
The SP of SAL recovered 25% in one day but simply because of their being the preferred bidder on the Network Rail deal. Otherwise, it could well have been at the same level today as after its results announcement.
Yes, SAL had two profit warnings but it is, nevertheless, in a growth market niche and has a strategy and distinctive product offerings, hence its success with Network Rail.
I really don't see that with ENTU nor do I see, really, what is the "moat" or market advantage that ENTU has.
Yes, it may well be oversold but as a long-term holding, well, I think there are much better.
Sorry but this is where I have tremendous problems with investment decisions made on the basis of published figures and statements by the company itself.
The market and business strategy matters just as much or, for me, rather more.
I would not compare ENTU with SAL, in fact I rarely compare any one company with another since I find that circumstances are only rarely comparable.
Each and every company is unique.

Best wishes,
Jane.

iwright7

The key Investors Champion link between Entu and Epwin is below.

The Admission Document for Entu reveals the following in respect of the latter:

For the year ended 31 October 2013 approximately 68 per cent. of windows, doors and conservatories were supplied by Indigo Products Limited which is a wholly owned subsidiary of Epwin Group plc in which Brian Kennedy, a Selling Shareholder of the Group, is a 15 per cent shareholder. On 11 July 2014 the Company entered a five year exclusive supply agreement with Epwin Group plc to supply the Group with certain products, primarily windows and doors. The Group is committed to purchasing 75 per cent. of its PVC-U windows and doors and 100 per cent of other products in the first year and 100 per cent. of all products thereafter from Epwin Group Limited and its group companies. The Directors believe that this supply agreement will provide the Group with continuity and security of supply in addition to better forward visibility on product supply costs.

I certainly do not trust Entu and sold my Entu shares back in July. Today have sold my Epwin shares because I do not trust their linked dealings.

Too much smoke and mirrors involved here. Ian

apad

I never could spell 'engineer' and now I are one.
The dichotomy between what is an engineering and an accountancy judgement about a company is beautifully depicted by the likes of ENTU. They surf a moral panic in society and its attempts to fix a market for a golden future.
Bloody nonsense if you ask me. Anyroadup, if you don't understand the core activity of a company, balance sheet gymnastics are meaningless.
apad
ps there was a company that was selling what was essentially a perpetual motion machine. Started off as an outboard motor engine in Australia and ended up stirring chemicals in the UK have consumed millions of 'investors' money through several incarnations. Can't remember the name!

underscored

Not for long."The current prices are only being held up by buy to let landlords who are the only people who can still access unregulated, interest only borrowing."

http://citywire.co.uk/money/why-buy-to-let-mortgages-will-be-tougher-to-come-by/a826812

http://www.bis.org/bcbs/publ/comments/d307/coml.pdf

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11816720/Death-of-buy-to-let-landlords-wake-up-to-Osbornes-150pc-tax.html

Still a return to owner occupation would be bullish for companies for Entu long term, as most BTL I have lived in or visited have been less then well looked after?

I think you're right about the tax changes being bullish long term for home improvement companies. I wouldn't be surprised if Osborne had made a political calculation that home owners tend to vote Tory and renters tend to vote Labour. I don't expect the changes in the last budget to be the end of his assault on buy to let.

Trouble is, I'm not entirely convinced that the average buy to let landlord even understands what is coming down the track at them. Since the changes don't start until 2017 and are phased in gradually, it may be a while before they realise. But George Osborne has painted a great big target on their backs for HMRC to aim at.

Until house prices come back into the range of the average MMR constrained owner occupier, I wouldn't look at companies like Entu.

We are in agreement I think. Although I am expecting the knife to be plunged before 2017.

GavSmith01

I think there is potential trouble lurking for the continuing business at Entu too. There were two broker forecasts prior to today's update available for FY15:

- Zeus Capital (25-Aug, EPS 13.8p, Operating Profit 11.05m)
- Edison (31-Jul, EPS 12.7p, Operating Profit 10.60m).

The trading update today said that discontinued activities (solar) had a budgeted contribution of 1.6m previously, and of course in the H1 results they said they were in line to meet market expectations - which implies to me that the remainder of the business should have been hitting 9.0m-9.45m operating profit based on the range of broker forecasts.

Hitting therefore only 8.0m for this business is a big miss and would be a profit warning in its own right - but I think they've buried it within the larger issues with the solar division.

I still don't think we're getting the full picture here, and this today was the straw that broke the camel's back for me, so I no longer hold.

Paul Scott

Hi Jane,

I know that Spaceandpeople (LON:SAL) and Entu (UK) (LON:ENTU) are not comparable in terms of their business models, that wasn't what I meant.

The reason I compared them is the sequence of events is the same;

1) Company says everything is fine.
2) Shortly afterwards a shock profit warning is issued, based on specific problems which are fixable.
3) Investors believe the company should have issued the bad news earlier
4) Investor confidence crashes, and people ditch the shares whilst ignoring that the company remains profitable, still pays dividends, has a credible recovery plan, and is very cheap.
5) Everyone hates the company and its management
6) After a few months, the company reassures with a stable trading update, and shares begin recovering strongly, giving an excellent profit to investors who did the opposite to the herd, and bought at the lows instead of selling.

This is what played out at SAL, and I believe is what is likely to play out at ENTU. Hence my comparison of them.

Incidentally, SAL's recovery was not triggered by the Network Rail contract. That gave it an extra boost, but the shares were already clearly in an up-trend when that was announced.

Regards, Paul.

Paul, re your last para, sorry, you're wrong, in fact this is from your own SCVR of June 26:

"Share price: 78p (up 25% today)
No. shares: 19.5m
Market Cap: £15.2m

(at the time of writing, I hold a long position in this share)

Award of preferred bidder status - I don't normally comment on contract win announcements, unless they look material. Since this announcement came 25 mins before the market close, and moved the share price up 25% on the day, then it's worthy of a mention!"
- See more at: http://www.stockopedia.com/content/small-cap-value-report-26-jun-2015-tni-tung-ess-sgi-sal-101827/#sthash.sSErK44e.dpuf

The sp movements, including this day's rise, are shown clearly on the sp graph on the Stockopedia site.

Best wishes,
Jane.

xcity

Current forecast profit 8.0m
Add back the 2.0m+ loss = 10.0m
Add back the previously expected 1.6m contribution = 11.6m

So the rest doing what is expected - if you believe the statement.
Not sure how they are all differentiating operating/pretax/posttax etc though.

No, I misread it. It is going to be 8.0 - 2.0+. As you say, other divisions must be underperforming too. Wouldn't have made more than 9.6 if solar had performed as expected.

Hi Jane,

No, I am correct! Here is the proof (see annotated chart below).

Or rather we are both correct - SAL had formed a base, and was clearly in an up-trend in H1 of 2015, such that it was up about 50% from the lows by the time the Network Rail contract was announced.
Network Rail then gave it an extra boost, as you can see below.

Regards, Paul.

TheWatchmaker

2nd Sep '15

I agree with your final line. I, too, had overlooked the 'continuing operations' phrase in the operating profit estimate when I first read it.
Current forecast profit 8.0m from continuing operations (assume this excludes solar which will be discontinued)
Therefore, actual operating profit for 2015 will appx 8.0m - 2.0m for solar losses = 6.0m.
This will probably convert to earnings of 4.5 to 5m . . . if you can believe any figures they quote.
These figures are well short of the broker forecasts - appx half.

Sully8786

It's nice to see that I've managed to avoid another car crash with Entu (UK) (LON:ENTU)

It had some of the hallmarks of Shoe Zone (LON:SHOE) - both recently listed, both show management to either be incompetent or dishonest.

Spaceandpeople (LON:SAL) was a similar situation, I remember speaking to the CEO and thinking do I trust this individual with my capital? The answer was not really. Accordingly I sold and put the money to better use.

Bottom line is do you trust management? If not, move on.

Regards,

Sully.

jonthetourist

I looked at the Snoozebox product at Mello and was impressed, but spoke to the management and swung the other way.

They seemed not to grasp that utilisation was the key metric for their business - i.e. nights sold, requiring rapid breakdown and recommissioning at new location. No sense of urgency. In my youth I worked for a temporary grandstanding outfit and there were very few days in the summer when the kit wasn't earning, with the staff working through the night on transitions.

Jon

dasv

Pursuit Dynamics? PDX?

snickers

Snoozebox's latest development is the Snoozy, which looks more like a tent than a hotel. I'm not sure how much of a defensible moat tents have. As a business.
Maybe there's a good franchise business in there, based on the excellent design and branding, but without the heavy metal?

A particular ENTU take from a blog on one of the financial magazine's website this afternoon.

Does anyone know if there is any truth in the individual companies being brought out of administration and packaged?...

Entu is a can of worms; the Entu group is no more than an umbrella for various low quality businesses/brands cheaply assembled at minimal cost as several companies that constitute Entu were bought out of administration (doubt the founders have invested much at all in forming this group). Strategy of the founder shareholders was to package all of this into one corporate vehicle and sell as much in an IPO as possible; they sold 50% of the group on the IPO at what was deemed to be a low valuation; not looking so cheap now anyway. Not the actions of owners that genuinely believed in the future prospects of the Entu group.

Rusty2

Yes it does appear to be true, Entu did buy several companies in administration: http://www.thisismoney.co.uk/money/investing/article-2955828/SMALL-CAP-SHARE-IDEAS-Soaring-sales-solar-panels-help-Entu-solid-start.html

Also Astley which is their latest acquisition was loss making last year, they bought it for £200,000.

3rd Sep '15

Yup, dasv, PDX is the one. Complete fraud based on a bought Australian patent. Vicious bulletin board. It'd make a wonderful case study for Winnifrith. An engineer friend was interviewed for a job - he was laughing for a fortnight.
There are so many examples of investors not standing back and looking at the business from a common sense viewpoint before plunging into balance sheets.
apad

Small Cap Value Report (1 Sep 2015) - LTC, AGA, ENTU, ZZZ

China

Latchways (LON:LTC)

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Paul Scott

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