Small Cap Value Report (10 Sep) - SDM, NPT, ZZZ, SAL

10th Sep '13 by Paul Scott

5 comments 15401 reads

Good morning! Stadium (LON:SDM) reports its interim results to 30 Jun 2013. It's a small electronics group, with a market cap of £12.6m at the current share price of 42p. Checking our archive here, I see they issued an H1 profits warning on 3 Jul 2013, at which time I commented that on balance the shares looked cheap at 30.5p, but didn't buy any because the market Bid/Offer spread was too wide.

Looking at the H1 figures announced today, they are not good. Turnover is up 2% to £21.4m, but adjusted profit before tax is down 50% to £0.37m, for a wafer thin profit margin of only 1.7%. Adjusted EPS is 1.0p (vs. 1.9p in H1 2012). So not good at all. However, what is interesting is the outlook statement, which suggests an improved performance in H2 (my bolding):

The closure of the Rugby site was completed in August 2013, the other re-organisation activities in Head Office and Asia are substantially complete, and the expected benefits will be realised in the second half of this year.

We expect a strong second half performance built on a solid order book within the interface and displays business and the book-to-bill ratio within the power products business supports a much improved second half performance, which will be further enhanced by our e-commerce platform and a broader commercial offering of power products. Within the iEMS business, we have secured a number of contracts with new customers, albeit at lower margins, reflecting the on-going pricing pressures prevalent in this market.

The Board remains committed to the growth strategy of investing in our businesses both organically and through acquisition, and will continue to explore opportunities to drive this strategy forward. Whilst trading conditions during 2013 have remained challenging, the Group is now firmly on a path to deliver improved operating performance. The Board is confident of delivering second half profits in line with current expectations, and has an increasing optimism towards 2014 performance and beyond.

So I read that as a positive outlook overall, with a few caveats about pricing pressures. Although personally I'm careful about buying into situations where H1 has been weak, but all sorts of reasons are given why H2 is going to be better, as it doesn't always pan…

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Camtab

10th Sep '13

Paul,
I appreciate you are quite conservative in your approach, a sentiment I echo incidentally and therefore pension deficits are important. I thought however it may be worth mentioning that with recent increases in yields on Govt stock the pressure on companies with pension deficits will decrease. It may also be true that those companies with higher cash holding will benefit as rates rise, therefore supporting your focus on balance sheets (we saw this play with GEC all those years ago and Weinstocks insistance on holding a billion in cash).
hope all is well with you.
Guy

Paul Scott

Morning Guy,

Absolutely, I agree on both points. Pension deficits are a lot less of a worry now that Gilt yields are rising, a point that I've made here many times this year.

Very good point also about interest on cash balances. That should certainly give an extra boost to cash rich companies over the next few years, and worsen results for highly geared companies, if they don't have fixed rate arrangements.

Cheers, Paul.

kenobi

The Gilt point is interesting, but surely it depends on the situation of the fund, if they already own gilts, higher yields just mean lower prices if they need to sell them surely ? so in a company with many employees, relatively young, with high commitments for the future but few pensioners now this helps. If however you have a relatively small base now, and the money coming in is the same or less that what is going out to fund commitments, then higher yields just means you have to sell more bonds to meet those commitments as the price is lower. I'm not saying I know which camp this company falls into, while I see generally higher yields are good for pension funds, and perhaps more money will flow that way when yields are in the 4-5% range, until they are buying cheaper gilts, not sure it really helps much.

This is probably just showing how little I know about bonds !

cheers K

kevanp

Paul, interesting to see you've overcome your aversion to online gaming shares (see your comments on 8 May, in a review of GVC Holdings (LON:GVC) ). GVC's interims are due c.23 Sep. I hope you have time to review them. Their balance sheet is perhaps not as strong as NPT's, but their forecast PER, EPS growth, and dividend yield are stonking. Their price, 315p, is currently only 10% above what it was on 8 May. I'm hoping the interims will indicate how the Sportingbet integration is going.

Cisk

Paul, if time allows upon your return from London, would welcome you view on the interims from Deltex Medical (LON:DEMG), announced this morning - I know you held a few of these a while back.

Small Cap Value Report (10 Sep) - SDM, NPT, ZZZ, SAL

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Paul Scott

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