Small Cap Value Report (14 Feb 2017) - SXS, PEB, RWS, PDG, ALT

14th Feb '17 by Graham Neary

15 comments 14207 reads

Good afternoon!

I'm planning to cover a couple of today's trading updates, plus the full year results from Spectris. Feedback is very welcome as usual - especially in helping me to understand which companies are most in demand, which will influence future reports.

Cheers,

Graham

Spectris (LON:SXS)

Share price: 2500p (+3%)
No. shares: 119m
Market cap: £2,980m

I'll keep this brief since everything seems to be going pretty well for Spectris at the moment, after a difficult year but with an improving trend in the final quarter. Like-for-like sales finished down by 2% (they had been running at -4% prior to the final quarter).

This is a global instrumentation/controls business - giving exposure to a wide range of industrial markets.

There is currently some change afoot:

Our strategy is evolving from being the supplier of products towards the provision of complete solutions (a combination of hardware, software and services) to our customers, based on our deep application and technical expertise. As our customers focus on their core activities and seek to reduce cost and complexity, they have a greater need to outsource services to a trusted, reliable partner who is able to deliver high quality technical solutions.

Project uplift: A new project, expected to cost £45 million in one-off costs, but which will result in annualised cost savings of £35 million - a highly material amount.

Results: there was unfortunately a large impairment of goodwill, creating a discrepancy between adjusted and reported results.

Impairment:

Always worth investigating impairments:

The reported operating profit included a non-cash impairment charge of £115.3 million pre-tax relating to a write-down of the balance sheet goodwill and other intangibles associated with Omega Engineering ('Omega') and ESG Solutions ('ESG'). The impairment charge arose from the recent weaker trading performance due to the challenging conditions experienced, particularly in North America, and ongoing process improvement requirements at Omega and for ESG, the continued weakness in the global oil and gas markets.

Dividend: up by 5%, made possible by 113% of adjusted operating profit being converted into cash.

My opinion:

I've always perceived this to be a very good-quality business - too large to get a good handle on without doing a lot of detailed research, but almost certainly worth considering for a diversified FTSE-250 portfolio. Diversified exposure to niche industrial services, along with a…

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alterego

14th Feb '17

RWS has issued an upbeat AGM statement, an acquisition and a placing. The shares look pricey, but they always seem to be highly rated.

Gerry43

Any chance of taking a look at Pendragon today Graham?

Ramridge

alterego - I had a good look at RWS Holdings (LON:RWS) this morning. I like the acquisition as it seems to be on modest multiples. However as you say, RWS's ratios suggest the shares are over-priced. I calculated that any positive impact from the acquisition would still make the shares over priced IMO.
So reluctantly I did not buy any.

sharw

Pebble Beach Systems (LON:PEB) is worth a mention. On January 16th Paul Scott referred to "the idiot in charge (Hawkins), who has run this company into the ground". Today it has been announced that he has been given the order of the boot. Alleluia.

Bonitabeach

Be careful what you wish for - he may just have made for the exit with his payoff before the administrators walk in.

No position.

Graham Neary

Thanks very much, I'm covering RWS and PEB and will also check if I can add something on PDG.

bestace

RWS Holdings (LON:RWS) has always looked expensive, yet their revenues and profits continue to grind higher and higher each year with the share price following.

There's no arguing with the quality metrics here and they have a decent track record on acquisitions. This latest acquisition seems to fit the mould with healthy margins, they are paying what seems to be a reasonable price with dilution held to a minimum. I also like that they are diversifying away from the patents business.

I'm happy enough to continue holding for now.

tabhair

The most recent annual report says he is entitled to 12 months salary, which means another £360k goes out the door for a company that is already in breach on banking covenants. That is a real kick in the teeth for suffering shareholders.

re RWS, Graham you asked if the growth was all due to the size of the market. The answer is partly yes as the number of patent applications is growing each year but there's competition for translation services from less qualified suppliers and machine based translation. My understanding is that RWS is highly regarded for its accuracy and reliability. Most of its staff are graduates and quality is paramount when dealing with large multinationals who will not tolerate sloppy work. Who do you turn to when you need a patent translated into multiple different languages for all the territories your corporation operates in? They also own and operate a searchable database of more than 47m patent families which is a pretty unrivalled source of data going back to 1990.

Andrew Brode is the driving force behind the company and owns 41% of the stock so he's clearly got a huge amount of skin in the game. I like the fact that RWS are very selective in the way they grow the business as the track record demonstrates. I'm inclined to believe the broadening into life sciences will pay off.

I've had a holding in RWS since 2010 when the SP was under 60p and although I always think the p/e might be overcooked, I've resisted the temptation to believe it.

Gostevie

Hello Graham,

I have no personal knowledge of such things, but a friend of mine who is a recently retired Patent Attorney told me that Companies like RWS Holdings (LON:RWS) could face a threat from the new European Unitary Patent:

https://en.wikipedia.org/wiki/Unitary_patent

https://www.epo.org/news-issues/news/2016/20160101.html

https://www.theguardian.com/small-business-network...

I stress again, no personal expertise in this subject.

Steve

LongbeardRanger

Hello Steve,

yes, this is an issue RWS have been drawing attention to for a while. You can find discussion of it in their most recent annual report. They anticipate "minimal revenue loss in FY17" and say something a bit more vague relating to 2018 and beyond. To be fair to them, I dom't think this is evasiveness - I think they genuinely don't know what the effect will be.

The acquisition of CTi last year and now LUZ this year means that, while RWS' biggest source of revenue is still patent translation, it's not as dominant a source of revenue as it once was.

Rgds,

Phil

RWS and the European Unitary patent issue boils down to the desire to have a single patent which applies in multiple countries. It sounds sensible but the evidence so far is that large corporations do not want to risk a system that is untested while they have the option of individual patents they know have legal resilience. As with many things, better the devil you know.

Yes - especially so where the cost of the individual parents are low in the context of their potential value.

I do expect the unitary patent to gain traction over time, but I don't think there will be sudden mass take up of it.

jonesj

Purchased RWS in 2010 for £2.57.
They rose to over £8, then had a 5:1 stock split.
Current price is £3.55.
So effectively 6.9x original purchase cost.

I continue to hold, but whether I should do that at the current valuation is another question.

samanddee

Any chance of covering Melrose Industries - not small cap but one that seems to get little attention and had a stellar year or so. Is this another one to price on PEG perhaps?

Small Cap Value Report (14 Feb 2017) - SXS, PEB, RWS, PDG, ALT

Spectris (LON:SXS)

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Graham Neary

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