Good morning! Judges Scientific (LON:JDG) announces a Placing of 0.5m new shares at 1625p, raising £8.125m before expenses. This represents a discount of 7% to Friday's closing price of 1747p, which looks reasonable. Dilution of existing holders is just over 6%, which again looks reasonable to me. The shares have done very well, and are on a forward PER of 20.5 this year's earnings, and 17.2 times 2014 forecast earnings, which is pretty racy rating considering they are buying businesses at considerably lower ratings.
However, that's the beauty of their business model - having not put a foot wrong with roughly 10 acquisitions to date, investors have rightly put a management premium on Judges shares, betting that its CEO David Cicurel will continue his unbroken track record of adding shareholder value from shrewd acquisitions. Judges operates in the medical instruments sector, where small businesses can be bought at reasonable prices, often because the founder wishes to retire for example. This creates growth at Judges, so investors then put a premium rating on its shares, making the whole thing self-fuelling, as more cheap acquisitions continue to drive growth, and hence the share price. Clever stuff.
We will have a chance to consider this in more detail tonight, as Cicurel is giving an update presentation at Mello Beckenham tonight, which myself and several dozen other investors will be attending. He's a charismatic speaker, and always has some great insights, so should be an interesting & enjoyable evening, as usual.
The Placing proceeds are being used to pay down debt, and is described as "substantially oversubscribed". This will give them the financial flexibility to make more acquisitions, and looks a sensible move to me - shareholders should be happy that more equity is being raised at a high rating, as that minimises the dilution to existing holders, yet enables the growth to continue from more acquistions.
I've never held shares in this one, as it's always looked too expensive, but the lesson learned is that when you spot a great business model & top notch management, maybe it's a question of just paying up, even if the price is a bit warm? With the shares having been an 18-bagger in the last 5 years, I suspect Mr Cicurel will have a queue of people offering to buy him a drink tonight, as quite a few Mello regulars have held the stock for some time.
This is an example where getting under the bonnet, understanding the business model, and meeting the management paid off handsomely. Unfortunately I didn't meet Cicurel until I'd already missed the boat, at nearly ten pounds a share, but it reinforces my view that, providing you are sceptical, meeting management can prove very lucrative every now & again.
Tracsis (LON:TRCS) uses the same business model, although is earlier stage than JDG. So it has strong management, with a good track record of making small, shrewd acquisitions, resulting in its shares becoming highly rated, therefore making further deals automatically earnings enhancing. Tracsis specialises in planning software for the rail sector, and specialised equipment to monitor the condition of key rail components, and flag an alert when they are close to failing, thus enabling repair or replacement before failure in service, with obvious benefits to safety & reliability.
It annouces today the award of a 5-year framework agreement. So not quite contract wins, but it sounds as if significant contract wins should follow, as it grants Tracsis preferred supplier status. The forward PER is almost 20, so it's fairly pricey. However, we're in a bull market (for now!), so the share price has broken through the 200p level, and is now 210p. So possibly chartists & momentum buyers could take it even higher. Good luck to them.
...operating profit will be below market expectations. We have continued to achieve large interest savings against the prior year in line with market expectations which do help mitigate the lower operating profit year-on-year.
It's a very low margin business, with 2012 showing turnover of £280m, but only £13m in operating profit, and £4m in net profit. There's rather too much debt for my liking too, and it must be susceptible to an increase in interest rates, unless they have capped or fixed rates in place - that would need checking in the Annual Report.
Businesses with wafer thin profit margins are very difficult to value, as profits are so volatile, so you cannot reliably use PER as the basis for how to value them. It's capital intensive too, and there are no dividends, so you really wonder what is the point in this company being Listed, or even existing at all?
Although I suppose there might be cyclical recovery potential? This type of business would be far better off being a workers co-operative, rather than a Listed company.
Insurance broker & financial consultancy, Jelf (LON:JLF) issues a reassuring trading update for their year ended 30 Sep 2013, saying that they have had a positive H2, with results expected to be in line with market expectations. The outlook statement sounds cautiously optimistic;
Markets remain challenging but we remain strongly cash generative and continue to focus on improving efficiencies and controlling costs whilst growing the business organically where opportunities present themselves.
It looks good value on broker forecasts - PER of 11.3 based on 7.7p EPS for 2012/13, and a PER of 8.5 on 10.2p forecast EPS for 2013/14. That's quite a big jump in forecast EPS though, so I'd want to do some digging on whether that's realistic or not?
Dividends were resumed in 2012, and the forecast yield is about 2%. Not great, but it should grow over time. I remember seeing management present at Mello Central some time ago, and thought it looked a boring, but reasonably priced business, and that seems to still be the case. Might be worth a look?
Well sorry it's been such a dull report this morning, just a very quiet day for news, and the things that have come out seem to be mostly resource stocks, which I don't cover here usually.
Have a good day, and see you tomorrow.
(of the companies mentioned today, Paul has no long or short positions)