Small Cap Value Report (20 Jul 2015) - BRY, MBH, XLM, ENTU

20th Jul '15 by Paul Scott

33 comments 27831 reads

Good morning!

It's hot and humid here in Spain (near Barcelona), where I shall be residing this week, in a modern but strangely sterile resort called Dolce Sitges. However, these reports carry on as usual, albeit with probably a few more typos than usual - my ancient Chromebook has latency on the keyboard, so misses out the occasional letter when it can't keep up with me! (one of the spin-off benefits of writing these reports every weekday, is that I've learned how to touch-type, quite fast, which is nice).

Mello Beckenham

David Stredder has just texted me to ask if I would remind regulars (many of whom read these reports) that there is no meeting tonight. The next one is on 21 Sep.

Brady (LON:BRY)

Share price: 105p (down 2.3% today)
No. shares: 83.3m
Market cap: £87.5m

Trading update - the company says positive things about contract wins, but then reveals that H1 turnover will actually be slightly below last year;

55acb08d4594aScreenshot_2015-07-20_at_10

Usually I'm very sceptical about companies which say they hope to achieve full year results after a soft H1, but in this case they do seem to have good grounds (contract wins & a strong pipeline) to justify confidence.

Valuation - given that valuations are quite high at the moment (PERs are much higher than 2-3 years ago on most stocks I follow) then this looks priced about right, relative to the rest of the market, in my opinion:

55acb164b1ea2Screenshot_2015-07-20_at_10

Sofware companies generally - there's an argument that software companies have strategic value, if they have systems which are a critical part of their customers' operations, so they're not usually cheap. Also in my experience, software companies seem to often get away with charging multiple customers for the same enhancements - i.e. the code is already written, but they don't tell customers this fact, when they request an additional feature. So the same work can be charged for multiple times - so good for profitability.

Another advantage that software companies have, is that if they're not paid (even disputed invoices), they can go nuclear by just switching off your business-critical systems. As you might have gathered, my experience of dealing with software companies as a customer, has not always been positive, but it has made me admire their business models, and hence it's a sector I like investing…

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danjamesbaker

20th Jul '15

Hi Paul, any thoughts on the Horizon Discovery (LON:HZD) statement today?

imranawan

Entu (UK) (LON:ENTU) just issued interims this afternoon: http://www.investegate.co.uk/entu--uk--plc--entu-/rns/half-yearly-report/201507201511505488T/ presumbaly in response to SP decline.

janebolacha

Another blatant leak in advance of the results announcement with those in the know cashing in and the small investor, as usual, left with the bill.

TheWatchmaker

How can they inform the market that the results will be released on Wednesday and then issue Monday afternoon ? Ridiculous

Rusty2

Yes I did not realise the results were out, think this is bad practice.

My take on the ENTU interims published this afternoon:

Overall its a mixed bag, but I did breathe a sigh of relief when reading through the interims. The energy saving division is the main reason for the decline in revenues, and operating profits. They mention two headwinds in this division, firstly lower solar sales and key departures in the sales and marketing teams. A new Marketing director has been appointed and they have invested in the marketing team and have won a recent £4.5m contract.

Other interesting bits were:

A corporate contract has been signed with a DIY retailer and anticipated revs are expected to build to £10m per annum, and they have the ability to cross sell other products and services.

Paying an interim divi - a sign of confidence in the underlying performance of the business

They confirm they'll achieve market expectations for the full year. I can't see broker forecasts on the Stockreport page for ENTU, but checked back through me records and Edison published a note shortly after the company IPOd and projected EPS of 13p for 2015. Based on EPS achieved in H1, it will take a better level of performance in H2. They do allude to H2 being stronger, so I think there's all to play for going forward.
Overall a mixed bag, and can see why the SP has trended downwards over the past week. Again a leaky ship with insiders privy to information and acting upon it.

I agree, but assume they issued them earlier as the SP was dropping like a stone this morning. Still don't agree that they issued them early!

iwright7

I gather there is/was a £ENTU Edison forecast for the year giving pre-tax profits £11.1M, EPS 13.3p, Revenue £127M. This H1 is nowhere close and obviously the bad news started to leak recently. Future hinges on whether you can you believe a double glazing salesmans claim of a record order book. Sales of double glazing (sorry about the Grazing typo), must have taken a H1 hit and with the other news I am pleased to be out of this one. Ian

EPS is down 41%?

Hmmm, was going to sell but to late, market closed.

Paul Scott

Hi Ian,

I think you're being too sceptical. Entu has explicitly confirmed performance is in line with full year forecasts today, you can't say that unless it's true.

Also bear in mind the seasonality of the work they do - I think it's credible that H2 (May to Oct) would be busier than Nov-Apr (H1).

With an 8p divi for the year apparently on track, there's a very nice divi yield available after the recent SP plunge. Plenty of upbeat comments in the narrative too.

On the balance of probabilities, I'd say this share is more likely to be going up from this level (110p) than down.

Regards, Paul.

Paul,

Unless I have missed it H1 results don't spell out where the year on year sales revenue (and thereby EPS) shortfall actually is. The pre-IPO H1 sales weighting was good so why isn't H1 at least similar this year? Lots of talk about a +ve H2, but for me they now lack credibility and even if the Entu (UK) (LON:ENTU) price dropped further I wont be buying back because the company narrative has too much of a sales spin feel about it. One thing we should recognize is that double glazing companies are optimistic sales supremos! I do concede that their +ve H2 story may win converts and the share price may move up short term. Good luck with this one. Ian

Paul, I understand that H2 may well be more than H1 but why is H1 is down 41% EPS?

Tortoise investor

Paul, thanks for your super speedy analysis of ENTU. I declare an interest as someone long in the share (currently at break even point!). A couple of other points to highlight:
- Buried in the text is a note (in a light font so easy to miss!) that recently acquired Astley Facades made a loss of £500k in the current period. That isn't fully reflected in the H1 results (only 1 month is) so that has the potential to weigh on full year results.
- Operating margins for most of its offer areas seem to have fallen in comparison with H1 2014 (and to some extent full year results), including for insulation which they've said would drive growth for them. Presumably some of these margins could face further pressure with the changes to Government incentives for green products.
- Nothing is mentioned about the FLOW tie-up and how that is progressing.
- I'm not buying the 'seasonality' comment from them. I've seen that used in other RNS' as an unreasonable excuse. Looking at both SFE and ENTU their H1/H2 results in the past seem to have been split 50/50. In other words, there doesn't seem to be a much stronger second half of the year unless H2 2014 sales were poorer (but SFE said theirs went up 9% in H2-14 which was the same rise as in H1-14 - unless they were expecting higher than 9% in H2). Admittedly, I don't know for certain what the seasonality is here. I would have thought during the warmer months people would be less likely to think about double-glazing, insulation etc.
- Based on the above a 8.5-9p full year EPS isn't out of the question. That 8p DPS isn't looking so secure especially if they need to fund acquisitions.
- As you note, they have not been clear about what market or company expectations actually are so I'm not putting much faith into those statements.

I'm feeling sceptical! On the other hand, some of the comments about the order book and tie-ups with national organisations are positive. This feels priced about right for now.

Mrx9000

Paul in regard ENTU what are your thoughts on it's Beneish M Score? The score suggests potential earnings manipulation?

GavSmith01

21st Jul '15

House broker Zeus Capital has FY 2015 EPS of 13.8p and FY 2016 EPS of 16.2p from their last update on 8th April. Edison's last update of 13.26p is from October last year, and so is a bit out of date.

If they hit their house broker figures, as they suggest they are in line to do, they are on a forward PER of less than 8 with a well-covered 7.3% yield, which, for me, for a company with net cash on the balance sheet, more than adequately prices in any concerns I have about credibility a this stage.

Entu say that VAT change has had little impact but has VAT increase even been implemented yet?

Dearg Doom

Entu results released yesterday coupled with the recent share price decline, encouraged me to look at their results with a view to purchasing the shares.

Couple of concerns arose however which I may have misread or over estimated their actual significance..

Concern 1 The purchase of Astley Facades Ltd in March 2015 seems to have major negative adjustments in fair value. The purchase cost of 200K has had to be paid back as initial estimates for fair value seem to have fallen by more than a million caused by trade receivables decline and trade payables needing to increase.

"The provisional fair value adjustments at the date of acquisition are:

· Provisions against recoverability of retentions, potential bad debts and recognition of income £324,000

· Adoption of a prudent Group accounting policy for warranty claims £1,343,000

· The initial purchase consideration of £200,000 has been reduced as a result of an adjustment in the level of net assets at the date of acquisition. The initial cash consideration was repaid to the Group post period end.

Revenue and profit contribution

The acquired business contributed revenues of £419,451 and operating profit of £Nil to the Group in the month from the acquisition date to 30 April 2015."

It seems that there is a possibility of a multi million loss in this business and further write offs before any meaningful profits can be made. The purchase price of 200K for a business with such a large revenue could have been a clue to the minefield of potential problems.

"The total revenues and operating loss for the 6 months ended 30 April 2015 were £4,552,000 and £490,100 respectively."

On a positive note to provide balance.

"The integration of Astley is proceeding well, and the forward order book has risen from £2 million to £14 million, which is in excess of one year's trading activity. "

Concern 2 Sales and Marketing team as a significant group have left either for better job prospects or poor management retention of key staff.

"Energy Generation & Saving remains a key growth area, but has had a challenging six months: due firstly to lower solar photovoltaic product sales as the potential customer base becomes accustomed to lower tariff levels from the sale of surplus energy generation back into the grid, and secondly due to significant departures and disruption in the sales and marketing teams over the period."

Other concerns as noted before by others are the negative cash flow, increased vat issues, and lower first half profits compared to last year. The Company says it is on target for y/e. Is this for revenue and profits before tax or after once offs?

I would not dismiss this company altogether as an investment opportunity but will wait until the next trading statement is issued for better clarity.

Any comments or further insight welcome.

Dearg Doom

Bezhe

I would say "run, run, run", Dearg Doom.

23rd Jul '15

Hi Cisk

Very strong results from Breedon Aggregates (LON:BREE) this morning and it looks like they'll achieve EPS for 2016. Valuation looks a little stretched for my value investing type approach, but will have to research further.

Best wishes,
Imran.

Cisk

Hi Imran, I agree the results read very well, combined with a note of optimism from the management for the full year.

If you have the time, it's worth looking at the results presentation from them:
http://www.breedonaggregatesir.com/~/media/Files/B/Breedon-Holdings-AIM/Attachments/pdf/h1-2015-presentation.pdf

I've seen broker targets for between 55 - 58p per share, based on today's figures though that seems a little pessimistic.

I agree the stock isn't cheap; I haven't crunched the numbers based on projected full year numbers yet.

However, given the strength of their end markets, the fragmentation of the industry and possible acquisitions under consideration, I'm hopeful they will exceed full year market expectations.

Would welcome further views, either +ve or -ve.

Regards

Cisk

Small Cap Value Report (20 Jul 2015) - BRY, MBH, XLM, ENTU

Mello Beckenham

Brady (LON:BRY)

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Paul Scott

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