Good morning! Today I shall be reviewing results from Thorntons (LON:THT), Alliance Pharma (LON:APH), and Ubisense (LON:UBI). The market has opened down a little, with the FTSE 100 currently down 15 points, at 6,577.
So, turning first to Thorntons (LON:THT), I've been sceptical this year to date about the strong rise in share price here, mainly because they still have a mountain to climb in terms of paying down a considerable amount of net debt, plus the cashflow drain that their pension deficit continues to be.
So starting with valuation, the shares are down 2p this morning so far, at 88p. With just under 68.4m shares in issue, that equates to a market cap of £60.2m. Net debt has reduced slightly, but is still considerable, reported at £27.5m on 29 Jun 2013. So that's about 40p per share in net debt to factor into the valuation. The pension deficit is a further £24.9m (down from £29.1m a year earlier), so that's another 36p per share in debt effectively.
Revenues for the 52 weeks ended 29 Jun 2013 came in up 1.8% to £221.1m, and profit before tax rose from £0.9m last time to £5.6m this time. So a good recovery, but still a pretty marginal business, only delivering a 2.5% profit margin - I can't get excited about that performance.
Cashflow generation was £8.3m, as you tend to find with retailers that they are good at generating cash, once the depreciation charge for the shops is added back. That's why the sector was so attractive to Private Equity a few years ago, as they viewed the sector as cash cows to be milked to repay the crippling debt that PE loads onto companies they acquire. Although Thorntons seem to have accumulated a fair bit of debt themselves, without any assistance from PE.
Basic EPS dropped out at 5.6p, which looks to be slightly ahead of broker consensus forecast of 5.36p, and with 6.92p forecast for the current year that puts the valuation at a PER of 15.7 times 2012/13 actual EPS, and 12.7 times 2013/14 forecast. That doesn't look cheap to me, considering there's no dividend, and in all likelihood profits for the next few years are likely to be consumed in reducing debt & to plug the pension deficit.
Underlying profits were £1m higher that profit before tax, at £6.6m, once you strip out £1m in redundancy and store closure costs. They have a staggeringly high bank facility available to them of £57.5m, which is over 10 times annual profits. Quite why the Bank have given such a large facility is a mystery to me, and I would imagine the company must be under pressure to reduce the bank debt, which is probably why they haven't paid a dividend (indeed, they talk about "rebuilding the Balance Sheet").
Overall, I don't want to sound too negative, as they have undoubtedly done a good job in saving the company from what looked a terminal position a couple of years ago. However, in my opinion the market price has run ahead of itself, and their Balance Sheet is far too highly geared for me to consider investing here.
I'll change the running order now, as readers are probably more interested in how my meeting yesterday with Spaceandpeople (LON:SAL) went, rather than reviewing more results.
Overall, I was very impressed. Matthew Bending is an excellent CEO in my view - a proper entrepreneur, who founded the company, and is obviously immersed in the company, and constantly coming up with new ideas for how to develop it. However, his ethos is also frimly grounded in terms of not spending money speculatively - e.g. they will only expand into new territories if they have profitable contracts in place with customers.
Possible expansion into France was rejected after a feasibility study, because the bureaucracy and social costs of setting up a new business in their sector were too high (Socialists please note - too much Socialism inhibits jobs & wealth creation!).
Germany has performed very well, and more than offset a poor performance in the UK in H1 just reported. I was initially concerned after reading the results statement yesterday, when it referred to the loss of business from a "clear Mall" strategy by some customers. This was discussed at length yesterday, and it seems that the results narrative was rather badly worded, and that in reality the UK downturn was a result of just 2 shopping centres having a revised strategy of clearing out the existing kiosks which had a cluttered and poor quality appearance, and replacing them in due course, through Spaceandpeople, with fewer, but larger bespoke units. Therefore the downturn in the UK is only temporary, as the existing contracts expire, and this should be seen as a hiccup that should reverse in H2.
We were shown a glossy brochure of SAL's new kiosk designs, which are customised to the client's requirements, to e.g. match the colour scheme in the shopping centre. These new kiosks are semi-permanent, and underpin SAL's ethos of "giving clients what they want, instead of giving them what we have". SAL have found that involving clients at the design stage of the kiosks is paying off in terms of getting emotional buy-in from them, which will make the contracts last longer.
A good example of SAL's clever thinking, is that they inevitably have client churn, e.g. a shopping centre might decide to take their promotional marketing & kiosks in-house. When this happens, SAL send them a bottle of champagne and a bunch of flowers, saying that it has been a pleasure working with them and to call if they ever need help in the future. They say that invariably, within 2 years, the clients come back, having found that things worked better when they were outsourced to SAL. That sort of thing is just music to my ears - it's a sign of a quality business, and quality management.
Aside from new kiosk designs, there are also new clients coming on stream in 2014. Spaceandpeople+ is their new web platform for marketing companies to manage promotions in multiple sites. SAL believe this could become highly significant in the long-term, but it's a new venture so they are in uncharted territory in the short term. Another interesting development is that the company has spent £150k developing a software package that they hope to licence internationally in the medium to long-term - i.e. future international roll-outs might well be done through selling software systems, rather than setting up a physical presence abroad.
They sounded comfortable with the Equity Development £2.6m profit target for this year, which equates to 9.6p EPS. Personally I'll be disappointed with under 10p. The note was deliberately couched cautiously, as SAL are conscious of the big share price rise, and the big % profit gain in H1, and want to keep investor expectations grounded - a good approach which makes me feel comfortable - this share is all about steady long term progress, not shooting the lights out with a fancy PER.
So as things stand at the moment, we're on a PER of about 13, which feels about right to me. There's possibly a little more short term upside to say 140-150p? (the ED price target is 150p, which I think is sensible). In the meantime I'm happy to collect in the generous & growing dividend, and in my opinion this is an excellent long term growth stock, which is ideal for inclusion in my SIPP, which is where it is. I haven't top-sliced any of my shares bought between 86-103p, and do not intend doing so. I just expect the share price to gently meander upwards over the long term.
Overall, I think the company is in safe hands, and that long term the future looks bright. They should deliver 10-20% earnings growth each year in my view, and the concept has potential to be rolled out into any open spaces, e.g. garden centres, railway stations, festivals, anywhere that people congregate. They are accumulating expertise all the time, and have a strong defensible "moat" around the business, in that long-term relationships with shopping centres and a dominant market position, mean they almost have this niche to themselves.
I have 7 pages of A4 notes that I took during the meeting, so have really only touched on the key points here.
Next, I've had a very quick look at interim results for Alliance Pharma (LON:APH) for the six months to 30 Jun 2013. This is a Mark Slater stock, whose business model is to buy up sundry drugs rights from pharmaceutical companies, and then just enjoy the cashflow from them. Profits are then recycled into buying more drug rights, and paying divis.
The results look good. Turnover is up 4% to £22.8m, but profit has risen much more, up 29% to £6.8m, so you can see that the profit margin is very good. Basic EPS was up 23% to 2.22p, so doubling that gives us full year EPS of about 4.4p (assuming no H1:H2 seasonality, which seems to be the case). At 35p that puts them on a pretty reasonable PER of 8.0.
Although there is net debt of £26.6m to consider too, which is about 10.6p per share, which would take the PER up to above 10 (strictly speaking you should then adjust earnings to exclude interest cost, but I don't uusually bother, as am only looking for a ballpark figure).
Ah, slight correction to the above, I've just read the outlook statement, and it says the H2 is "unlikely to be quite as strong" as H1, so that tempers my enthusiasm somewhat. Broker consensus is for 3.66p EPS for the current full year, so at 35p the shares are currently on a PER of nearer 10 than 8. Adjusting for debt takes that up to about 12, which is probably about right. There might be a bit of upside on that price, but not enough to get me excited.
The forecast dividend yield is reasonable, at about 2.5%. There's a bit of convertible debt left, of £2.7m, so that would need considering (what dilution is involved?). Overall, it might be worth a look, but just doesn't excite me at this valuation. Also, I'm not keen on debt, so am not entirely comfortable with their Balance Sheet, even though the debt does not appear to be a problem, relative to the level of profits/cashflows. I just prefer companies with net cash.
Next, I've had a very quick look at results from Ubisense (LON:UBI). I love the concept of what they do, but a £50m market cap is too rich for me, given the lacklustre figures announced today. It's not making any profit. Although the order book looks strong. It's not really my thing - if you pay £50m for a company that is currently loss-making, then you really need to understand the sector very well, and what competitors are doing, and be super-confident that this thing can deliver growth to an acceptable level of profitability. I can't glean that just from looking at the accounts, so for the moment cannot really value this company.
Finally, NetPlay TV (LON:NPT) are presenting to investors on Monday, at the usual monthly Mello Beckenham event. If you are interested in attending, then please follow this link. At least 40 of us are already booked in to attend, and it's a very enjoyable evening - with drinks & a 3-course meal (for about £25 per head) and networking with other investors, who are a very friendly & jolly crowd.
Right, got to dash, off to another investor lunch!
(of the companies mentioned today, Paul has long positions in SAL and NPT.
A Small Caps Fund to which Paul provides research services also has a long position in SAL)