Small Cap Value Report (12 Aug 2015) - UTW, HRN, CAP, TRB, TRCS, SCS

12th Aug '15 by Paul Scott

22 comments 27346 reads

Good morning!

I'm running late today, as had to check out of my hotel in Bournemouth at 10:30, and then remembered that I'd left the car a mile away (due to being over the limit after last night's curry). Anyway, it took a while to get organised, but here we go.

Utilitywise (LON:UTW)

Share price: 193p (down 12% today)
No. shares: 76.6m
Market cap: £147.8m

(EDIT: I opened a small long position in this share, after publishing the article below)

Trading update - the market has interpreted this as a profit warning, as the shares are down 12% today, and have been on a losing streak for a while now (see chart below). It's a rather long-winded update, so I'll work my way through it, and this relates to the year ended 31 Jul 2015.

Turnover is higher than expected;

The Board is pleased to announce that revenue for the period is expected to be slightly ahead of market expectations at approximately £69m, representing growth of c.42 per cent. against the prior year.

Six bullet points are then given explaining why costs have risen, and all seem to relate to increased headcount, for sales & marketing, overseas trials, etc. As a result;

As a result, EBITDA is expected to be slightly below market expectations.

So only a slight miss, which is not the end of the world.

Net debt - is reported at c.£7.5m at 31 Jul 2015, which looks modest compared with the level of profitability and size of the business.

Outlook & Directorspeak - this sounds upbeat, including;

This momentum provides the Board with confidence in its expectations of continued significant revenue growth in the new financial period.

Also, it sounds like the company is gearing up for further growth;

Fuelling and sustaining our growth is key and, as such, we now have significantly more Energy Consultants acquiring new customers than at any time in the Group's history and, importantly, the internal infrastructure sufficiently bolstered to support them. At the same time, we are continuing to build out our multi-channel route to market and drive innovation through the introduction of new products such as controls technology into the smaller and medium size business segments, which we believe is integral to building our reputation as a trusted advisor.

My opinion - I've flirted with this share in the past, but have always felt uneasy when going through their accounts. I'm not keen on their accounting…

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Aislabie

12th Aug '15

I , like you Paul , have not been comfortable with this company and have not bought. My discomfort centres on the business model which essentially relies on utilities being too inefficient to price their offerings correctly. I cannot see how this can be a long term business in the age of the internet.

danjamesbaker

Hi Paul, any thoughts on the contract win for £SIM? Looks slightly suspicious that the shares went up 10% yesterday after being pretty much static for 2 weeks ahead of this morning's RNS.

johnrosier

Not sure I overpaid in the past; bought in February just forgot the second part of the trade! Anyway good luck.

What I don't like is the way it wrote the update;

How about something like this

"Update for the year ending 31st July 2015. Pre-tax profits for the year are expected to be about X% below current market expectations. This is despite revenue coming in slightly ahead of expectations and is due to the following factors;"

Be upfront and open rather than trying to pull the wool over readers' eyes.

BTW, forecasts for EBITDA (not a measure I particularly like; earnings before the bad stuff) that I have seen have been adjusted down by about 9% and earnings per share by 8%.

It is of little irrelevance to me from now as I am out but I just wanted to put a bit more gloss on why I sold. I said it might "sound" emotional but I can assure you the decision wasn't.

Camtab

I made a small investment at £2.30 right into the decline which was unfortunate. I think the market was spooked by the perceived increase in risk. The management team placed a big focus on revenue and as shareholders we like profit, which has failed to hit targets. Sure costs are fine if rewarded but investing in sales people can always be a mixed bag. Hence my view the risk profile has increased. I am going to hold though as the company has seen good growth, is in a current sector and trades at a low PE relative to the market with a high operating margin. I suspect that the key to the business is getting firms onboard which then drives longer term opportunities to sell to them. Not over happy but get a sense your £2.50 will materialise Paul.

Mark Simpson

One more bit of news today is a trading update from Pure Wafer (LON:PUR):

http://www.investegate.co.uk/pure-wafer-plc--pur-/...

The expected return has gone from "...unlikely to be more than 125p per share." to "...estimate the return of surplus funds...to be in the region of 140p - 145p per share.".

Remaining facility is performing in-line:

"The Board would like to emphasise that the Company's facility in Prescott, Arizona, continues to operate successfully and those operations are unaffected by the closure of the Swansea facility. We are pleased to report that Prescott's underlying profits for the year are in line with management expectations, and with the facility currently running at record levels of productivity and high utilisation this provides confidence in the strength and profitability of this business going forward"

This was responsible for 44% of revenue so pro-rata would have been c£10m sales & £1m. The actual ongoing profit figures are hard to pin down exactly because they will be impacted negatively by central higher overhead without the Swansea facility but positively by revenue that has been transferred from Swansea.

However the current 163p offer values the remaining business between £5-7m so could still be good value even after today's rise and very good value if we see any short term share price weakness between now and the payout date (not yet declared.)

Hmcg

Hi Paul

Thanks for the report on UTW. I was wondering in percentage terms what you consider a small position relative to a medium or large position. Also interested to hear any other thoughts you have on your process around sizing initial stakes?

Thanks

Hi HCMG,

I posted my thoughts on holding size a few weeks ago.

Holding size!
I have been asked a number of times what criteria I use when deciding what weighting to give an individual stock in the Portfolio. I don’t think there is any right or wrong answer and that ultimately it is all about what one is comfortable with. I think it is all about judgement; what’s the upside, is the valuation on my side if things go wrong, how convinced am I that it will deliver to my expectations?

I think that it is more an art than science with different investors taking different approaches. Neil Woodford for instance currently holds 95 stocks in his Equity Income Fund, with the largest 10 making up 45.5% by weight. Stock number 31 is less than 1.0% of the portfolio and the 14 smallest holdings comprise just 1.0% of the portfolio! He has clearly been very successful with this strategy; the larger, safer holdings provide steady growth and income whilst the smaller holdings have the potential to provide a boost to overall portfolio growth and no doubt, whilst there will probably be some failures in the bottom 40 or so stocks there could be some multi-baggers to which he will probably add. Anyway, that’s enough about Woodford, what do I do?

I prefer to have a more focused portfolio with between 20 and 30 holdings, (currently 25) and am keen, that in general, all my holdings are contributing to performance; I try not to have too many sleepers which I think will come good at some stage in the future. This does not preclude me from holding the odd small growth stock where I think there is substantial upside if things go well; current examples might include Bioventix, Fox Marble, Gem Diamonds, Tribal and Avation. I am quite happy to start with smaller weightings in these types of stocks, i.e. around 1-2% and then if they start to deliver, as I hoped when I initially bought the holding, I will add. Tribal for example; I think the valuation looks very attractive and that it has the potential to grow at a decent pace over the coming years. last year, delays to new contracts hit the share price, presenting me with the opportunity to buy an initial exposure but before I would consider increasing the holding above the current 2.5%, I would need to be convinced that last year’s problems were a blip and are now behind them.

As a general rule my largest holdings will be focused on those stocks which I judge to have the greatest upside and where I have the highest conviction that my expectations will be achieved. I try also to take a stab at what the downside might be if things go wrong. For instance, earlier this year I bought a holding in FlowGroup, but only 2.0%, as although I was excited by its potential the valuation was not priced to withstand disappointment. Had everything gone swimmingly well I could have added to the holding but sadly news from the company pointed towards slower order flow than expected. I ended up cutting at a loss and although painful, it did not hit overall portfolio performance too badly.

Currently, the three largest holdings are investment trusts, (and 5 of the top 10), where my main risk is getting the theme wrong rather than individual stock risk. Sure, if Japan does not do what I expect and starts to fall, then Baillie Gifford Shin Nippon is unlikely to emerge unscathed; equally it is also highly unlikely that I will come in one morning and find it down 30% due to a profit warning! The same goes for European Assets Trust, Worldwide Healthcare Trust and the other investment trust holdings.

Finally, I am happy to push holding sizes up in the short term if I am expecting some sort of catalyst that will drive up the share price but will then be happy to book some profits and pare the holding back a little after a good short term run. Take Crawshaw for example: it got sold down at the start of the year providing an opportunity to build up the holding but then by late June had recovered some 65% from February’s lows. In the mid 60p’s, although the longer term story still looked attractive, the valuation looked rich in the short term, so I booked some profits and pared back the holding. A more recent example is Matchtech; I took the holding up to 4.0% a week last Monday as I am hopeful that its first half trading statement due early next month will drive the share price up towards my target price of 680p. The valuation looks attractive and recent statements from the company give me some confidence that I won’t be disappointed. So, why not 5.0% or 6.0%? Ultimately it’s all about judgement and what I feel comfortable with, as I could of course, be wrong!

Leven

I worry about the quality of UTW. Woodford has met management but has he met customers? Some strangely polarised views here http://www.reviewcentre.com/reviews262861.html?time=six&ratingfilter=0#refineYourSearch

http://www.indeed.com/cmp/Utilitywise-PLC/reviews?fcountry=ALL

rmillaree

Ref Utilitywise

As an aside i spoke to them today to get a quote for some business gas an electric - it's an added bonus for me that they appear to be based in my neck of the woods (north east). I think North East is a good place to base admin type operations like this as overheads are reasonable and there is a decent pool of staff who are happy just to have a job. I have always found North East based customer service to be very efficient and non spivvy although i may be a bit biased. Bod i spoke to seemed efficient and i have no negatives from a phone call and a follow up email or two.

With regard to the business type - i am probably like some others here a bit reluctant to believe that they will not be liable having margins squeezed or have to work harder simply to earn their commissions. shame they don't concentrate more on advising in relation to actual profit expectations rather than dancing around this situation a bit speak wise. I guess we need to see how the new broker notes pan out as the EPS forecasts are the proof of the pudding provided this isn't another permanently glass 99.99% full type business where they turn into be over optimistic with regard to the future when in reality they are being squeezed from all sides like an ACHL orange.

In some respects the main players seem to make semi obscene profits - so one has to presume that there should be a place for a well run nimble operation - even with regard to things like mobiles there seems to be a place for virtual operators so possibly best not to get too paranoid.

Anyway if growth story remains intact despite this blip and they can deliver over 20p of EPS in 2016 ( i am awaiting revised forecasts) then it does seem like a reasonable portfolio type share that one would need to keep a reasonably close eye on.

Bonitabeach

Polarised?

5* 704
4* 346
3* 8
2* 2
1* 22 I make that 97% 4* or 5* - good enough?

jonesj

Some sizeable trades going through just before lunch.

00mrmark00

13th Aug '15

Anyone managed to get hold of the revised forecasts/research notes for UTW?

Tristan_Treacy

Re Utilitywise.

Have wanted to buy this stock for a while, now looks like a good moment price wise.

However, what concerns me is the cash position. Net cash at end of H1 was £1.6m after a cash outflow of £7.6m. On page 21 of their H1 presentation they stated that cash flow would be better in H2 due to "tranche payments". Yet today net debt is -£7.5m so a £9.1m outflow. Now if cashflow from operations was better in H2 than H1 then they must have spent at least £6m on incremental headcount/ scaling up costs. H1 admin costs were £5.9m, so a doubling of overheads in 6 months? That really doesn't look right to me and the fact that it is not explained makes me cautious. Could it be that they are having to write off or further defer some of the Accrued Revenue they are holding on the balance sheet? I think I'd like to see a proper reconciliation before I bought - you can make good money on a stock that's had a pull back, but lose your shirt on something incorrectly booking long term contracts.

#Cashwise

14th Aug '15

Correction to my post above (for some reason can't edit), rate of cash outflow increased by £1.5m, so incremental overheads could have been just £1.5m not £6m as stated. Given that in H1 management didn't say how much "better" operating cash flow would get in H2 it is not possible know what is going on. The combination of long term contracts and growing cash outflows does make me nervous but perhaps the picture is not as bad as I had initially thought.

Thanks for the detailed response on holding size John.

Re: Utilitywise cash position:

I think you need to factor in acquisition of t-mac Technologies in April 2015 - initial consideration included £6.25M cash -but still a very clumsy and damaging trading statement. The silver lining is that it creates an opportunity for believers.

Woodford is loading up... 165 was a stonking buying opportunity yesterday...

Are you still in Paul?

Thanks - had missed that and it does change the picture.

tradermark

I have always looked at UTW as a trade rather than a longer term investment. The accounting makes me nervous and there will always be the shadow of government or utility firm changes which will impact their business. I got in at £2.05 and out at £2.62 earlier this year and it's back on the watch list. I am tempted to go back in again once it settles after further falls today with a 1-3 month holding window.

Small Cap Value Report (12 Aug 2015) - UTW, HRN, CAP, TRB, TRCS, SCS

Utilitywise (LON:UTW)

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Paul Scott

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