Small Cap Value Report (13 Oct 2015) - NFC, FLYB, PHD, PTCM

13th Oct '15 by Paul Scott

12 comments 16242 reads

Good morning!

Next Fifteen Communications (LON:NFC)

Share price: 203p (up 2.3% today)
No. shares: 65.6m
Market cap: £133.2m

Interim results to 31 Jul 2015 - this is a group of marketing & PR agencies. I'm impressed with today's interim results, although it's important to remember that most of the top line growth has come from acquisitions - turnover being up 18.4% to £61.8m in H1, of which organic growth was 4.1%.

Three agencies were acquired during the period - "Encore, Incredibull and Animl acquired during period and performing to expectations". Who thinks up these names (and are they in the right job?!).

Net debt - has increased considerably, from £1.4m a year ago, to £8.9m at 31 Jul 2015, although that doesn't strike me as a problem, as it's only slightly more than 6 months EBITDA.

Operating profit margin - is good, and improved, at 11.7% of revenue, at £7.2m. Mind you, people businesses are coming under increasing pressure to give pay rises & bonuses to staff, so there may not be much scope to extend profit margins further, perhaps?

Outlook - the all-important forward-looking comments today sound positive, and reassure on full year expectations;

As stated earlier, the Group has made a good start to the financial year ending 31 January 2016. Current trading is encouraging with good activity levels across the Group and the benefit of recent acquisitions coming through. Despite increased investment, the Group is on track to meet expectations for the full year.

"Good start" is an odd description, considering they are almost three-quarters of the way through the financial year now!

Note that the financial year was moved from 31 July to 31 January, so there was an odd 18-month period to bring that about - hence why the prior year comparatives look unusual, with high turnover of £158.5m.

Balance sheet - overall I'd say this is a tad on the weak side, but given the good level of profitability and cashflow, I don't see this as a particular problem.

Although net debt of £8.9m looks reasonable, note that gross debt is a good bit higher, at £19.7m, partially offset by cash of £10.8m. Companies often scramble to collect in cash for the year end date, to minimise the net debt reported figure. So it's important to look at gross debt, of £19.7m in this case, which is probably the worst-case cash position, as…

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Glaws2

13th Oct '15

Hi Paul - thanks (again) for your insight into the balance sheet. Can you explain what a 'contingent consideration' is - at £7.3m it has to be more than some wriggle room.

Thanks

Richard Medland

Send for Ben Hobson immediately!

As always, a great write up. Hugely useful. Thank you.

Paul Scott

Hi Glaws2,

Contingent consideration relates to acquisitions, where there is an earn-out - i.e. the acquired company is set profit targets, and if achieved, then the vendors (often management) receive an additional payment.

It's a way to keep the vendors motivated, and striving to meet profit targets.

Companies need to accrue for what earn-out payments are likely to be paid. You can see adjustments going through the finance income & expense lines of the P&L.

Regards, Paul.

Thanks Paul

Ben Hobson

Ha - that's brilliant! Good grief, no pressure!

BrianGeee

Paul, re Flybe, normally the load factor and revenue per seat are key, but with the current significant reduction in fuel prices, just increasing flights and seats is probably more important in the short term. Much of the fuel is hedged at substantially higher prices, so it appears to me that incremental business at lower fuel prices is what will drive profitability over the next year or so. That would include putting the E195s into service, which should have happened over a year ago, if they hadn't been so busy blaming prior management.

rmillaree

Ref Flybe
One Issues with regard to Flybe is that this is a Golden period for Airlines like Flybe (just look at the Easyjet current profits compared to historical averages)

This would make me a little cautious about presuming the future will be more Orange as something may come along to spoil the Party - is is ceratainly much easier for things to suddenly go massively wrong(strikes/fuel price increased/fallouts with airports/planes one cant get rid of/terrorism etc etc etc) than for them to massively increase profits (as Easyjet have managed)

If they can't find a Golden Goose when Golden Geese are ten a penny how will they manage when everyone decides Golden Geese Should be eaten for XMAS and there are non left.

Carcosa

Flybe:
Capacity outstripping supply
No demand for E195 models because the variant that they have is particularly uncompetitive

The risk outweighs the potential reward in my view

Camtab

Paul,
With regard to Proactis, my past experience is that where companies grow by acquisition they have been a poor investment, driven by CEO ego. I would rather look for the company that they want to buy.
best

Mick Harkins

With regard to share based payments, my thinking is that companies exclude these amounts from the EPS calculation (whether they are a one-time event or a more regular occurrence) in order not to 'double-count' the cost, i.e., the number of shares issued as payment will already be included in the denominator of the EPS calculation.

Can anyone confirm if my thinking is correct as I confess I've not entirely convinced myself? ;-)

CMWilliamson

Warren Buffett seems to put his finger on it, as ever:

“If stock options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world do they go?"

Colin

Chris Johnson

Hi Paul

Ref Flybe, how far ahead are they actually hedging fuel prices? We seem to have had a decent period of low oil prices, I would have thoughts that should be beginning to show through by now.

Chris

Small Cap Value Report (13 Oct 2015) - NFC, FLYB, PHD, PTCM

Next Fifteen Communications (LON:NFC)

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Paul Scott

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