Small Cap Value Report (11 Nov 2015) - FLYB, BRAM

Good morning!

Today is my visit to Boohoo.Com (LON:BOO) in Manchester, so I'll rattle through a few announcements here, and then run for a train from Euston. Should be an interesting visit, so of course I'll report back with my findings tomorrow.

Flybe (LON:FLYB)

Share price: 91.5p (up 2.2% today)
No. shares: 216.7m
Market cap: £198.3m

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

Interim results to 30 Sep 2015 - this is the first set of clean numbers that we've had from Flybe in a long time - i.e. with no large adjustments, or exceptional items. The airline has been dealing with big legacy problems for a while now, but seems to be emerging in better shape - with the loss-making Finnish operation now disposed of, and the surplus planes beginning to earn their keep (although it's not yet known how successful new routes will be).

Turnover rose 10.3% to £339.6m, which is for only six months remember, so it's a sizeable business.

Profit before tax rose dramatically, from a loss of £3.3m last time, to a profit of £22.9m in H1 this time. There is some seasonality, so H1 is a lot more profitable than H2. A full year profit of £5.2m is forecast by one broker.

A broker note I'm reading this morning says that the results were in line with their forecast.

It's difficult to value, as it's a turnaround situation, and next year's forecasts will benefit from reduced surplus aircraft costs, so the direction of travel for profits should be upwards.

Balance sheet - is particularly strong, with £164.8m net tangible assets, and a decent net cash position of £86.3m.

Dividends - it doesn't pay any, but is expected to rejoin the dividend list, in a modest way this year.

My opinion - the investment case is all about looking beyond the current year, and what turnaround progress might be made in future. It seems to me that this business is on the mend, but it's difficult to value at this stage.

I'm minded to hold for maybe another year, and see where things get to. I very much like the balance sheet strength - once again this company has demonstrated the point that companies with balance sheet strength have time on their side, in that problems can be fixed without worrying about solvency, or highly dilutive equity fundraisings, etc.

So holding throughout the previous disappointments has turned out to be the right thing to do so far.

Brammer (LON:BRAM)

Share price: 166p (down 19% today)
No. shares: 129.4m
Market cap: £214.8m

Profit warning - the shares are down 19% today, for "Europe's leading distributor of quality industrial maintenance, repair and overhaul products".

I last reviewed it here on 15 May 2015, and couldn't see any attraction in the shares at 354p - good job too, as they're less than half that figure now. Note that the company said back then that it expected an H2-weighted year - nearly always meaning that another profit warning is likely a few months later.

Today's update is very clear, and gives a specific revised figure for calendar 2015 expected profit - of £28m. Weak sectors include UK (steel & aerospace in particular), and as mentioned before, Nordic oil & gas.

On outlook the company says today;

Our markets remain challenging, with a significant deterioration in the UK, and we do not expect this to change in the immediate future.  Full year profits will be lower than last year, reflecting testing market conditions and FX headwinds. We now expect full year underlying profit before tax for 2015 to be approximately £28 million. Adverse translational exchange rate movements expected to reduce Group full year revenue by approximately £43 million and underlying** operating profit by £2.5 million. In addition, we expect to incur an exceptional charge for the full year of £6 million as part of our cost initiatives to save £5 million against prior year. 

Looking ahead, we will continue to focus on our growth drivers, on recovering momentum in our UK business, improving profitability in our Nordic business, and ensuring our cost saving actions protect profitability. Our vending proposition has gained momentum and we expect this programme to be an important growth driver in the years to come.

Dividends - the yield is now looking very attractive, at over 5%, but that may not be sustainable perhaps?

Balance sheet - my review on 15 May 2015 mentioned a number of balance sheet issues - it's not very strong, basically.

My opinion - this is another one to go on the list of things that might be a nice recovery punt at some point. I probably won't dabble here, due to the level of debt, and generally weakish balance sheet. It's better to find situations where the downside is copper-bottomed in my view.

Drat, I've run out of time, sorry about that. Gotta dash,

Regards, Paul.

(of the companies mentioned today, Paul has long positions in BOO and FLYB, and no short positions.

A fund management company with which Paul is associated may also hold positions in companies mentioned.

NB. These reports are personal opinions only, never recommendations or advice)