Small Cap Value Report (22 Apr 2016) - CTH, GPRT, CDGP

22nd Apr '16 by Paul Scott

10 comments 12838 reads

Good afternoon!

It's been amazingly quiet for company results this week, so I've made a diary note to take this week as holiday next year. I suppose we're in that lull, where all the decent companies have already reported their 31 Dec year end figures. So we're just getting a few companies with unusual year ends reporting now. Then we'll need to ready ourselves for the next deluge of results in May/Jun from the popular 31 Mar year end.

Ben has written another excellent article in his series of interviews with famous fund managers. This time he's met Gervais Williams of Miton Group.

Here is the list of Ben's other interviews - all of which are very interesting I think.

Ed's webinar from yesterday, looking at Stockopedia's greatly expanded international stock coverage is now on YouTube here. Do take a look, if you're interested in international investments.

Caretech Holdings (LON:CTH)

Share price: 252.7p (up 1.1% today)
No. shares: 62.3m
Market cap: £157.4m

Trading update - for the half year to 31 Mar 2016. The company owns & operates specialist social care facilities - e.g. for children & adults with learning difficulties. The customers are therefore local authorities, and health service commissioners, out-sourcing to CareTech.

The company (or group rather) appears to be trading well:

The Board confirms that trading for the half year is in line with its expectations. This performance has been underpinned by the strategic initiatives undertaken over recent years which have delivered a stronger performance compared with the same period last year on all of the key financial metrics.

Clearly then, the success or failure of the business will depend on the willingness of local authorities to accept fee increases. This is especially important, as Living Wage will be a constant ratchet up in costs between now and 2020.

Annual fee rate negotiations with local authorities remain at an early stage and this year are against the backdrop of the Living Wage, which was introduced on 1 April 2016. The Board anticipates that a more positive outcome will be achieved than in recent years and that the Living Wage costs will be covered by fee increases.

That sounds encouraging.

Net debt - is reported at £156.6m, slightly down in the last 6 months. Whilst that might sound a lot, it's supported by freehold property with a Net Book Value (NBV) of £234.8m, as…

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kenobi

22nd Apr '16

Hi Paul, I see that as you predicted, BON has drifted off after it's profit warning, do you have a feeling re what a good entry point might be there ?
I'm tempted, wondered what your thoughts were ?

K

CliveBorg

Hi Paul,

I'd like to claim the award of saddo of the year: Here's a quote from you early last May.

"It's quiet again for company results today - I must make a note to take this week as holiday next year."

It's a kind of train spotter mentality. Speaking of train spotters, there seems to be no end of them around suddenly. I counted 17 of them at St. Pancras last weekend, until my pencil broke...

Brackendale

I wondered about BON as well. Strip out the cash on balance sheet and the business is valued at about 6 or 7 times earnings now. Strong financially. Seems like market has overreacted to the cautious statement, and perhaps also the uncertainty created by boss leaving. ROCE is very strong (and that with a lot of cash sitting there). The red flag for me is the operating margin which seems a lot lower than peers, single figures. Can't see the amount of fat or old people reducing - I am entering both categories myself! Any other thoughts welcome!

Maddox

Hi Paul,

The Chapel Down Wines are delicious - and you can try a bottle of their Bacchus at a Mellow Monday event as it's on the SeaSalt Wine List - the restaurant venue. Excellent with fish.

Cheers Maddox

ridavies

Hi Paul. Interested in your very thorough review of Caretech. It is a favourite of mine, and I feel that it is unfairly treated in terms of its SP, PER and PEG qualities. You have quite rightly set out all the risks, both direct in terms of fees and indirect in terms of revaluation of the properties for alternative use. However, I feel that the government and LAs are far more likely to take the knife to general care of the elderly that to the specialised groups that Caretech specialise in. Also, they invested heavily in taking over a company specialising in training of care workers for which I think it should be given an extra value versus other companies. I feel this gives not only a real comparative strength in terms of the quality of care and a reduction in the likelihood of ill treatment by staff of patients/clients (whatever they are called here!) but also a psychological reassurance to their clients - the LAs and government, and the patients' relatives etc. Also do I get the feeling that in your mind to make money/profit out of this field makes you uncomfortable, the way I feel about tobacco and alcohol companies, peddling death (especially tobacco)? As always, grateful for your thoughts and thorough expert analysis.

Aislabie

I invested in Chapel Down on the understanding, strongly asserted by Frazer, the CEO, that it was not going to be a lifestyle business. I still believe that with Nigel Wray as a NED there is a good chance that it will hold to that promise, but their decision to hire fairly heavyweight industry expertise is clearly putting the expenses up before the relevant size arrives. But the perks ARE good, there are excellent products well discounted.
The statements today are a bit of a presentational mess and do not clarify what has happened over the last year.
There have been two crowdfundings, one for the parent to support the purchase of significantly more vine acreage,and then a second directed to its 80% subsidiary Curious Drinks (the bees and ciders) for building the new brewery.
I am not sure who advised them to do this but it is a crackpot idea to have a subsidiary with a public 20% minority holding. The sharing of joint expenses (including the group Board) will always be a sensitive issue, as will allocation of costs for taxes. This loony structure has done more to convince me that this is not a regular business than hiring people and remunerating people who are inappropriately expensive for such a small company.

Noodle Hat

re: Bonmarche Holdings (LON:BON) I finally got out last week realising 10% loss, looks like a good move as is down another 10p since then. It does look cheap and the numbers do look good, I may buy back in if it tracks lower however from my limited research reviews of the range aren't very good and people not impressed with the clothes. Decided there were better opportunities with better quality companies elsewhere.

BIACS

25th Apr '16

HI Paul - any comments/thoughts on Augean (AUG)? Not one of your favoured stocks to cover I know, but having last been visited in your reports a couple of years back (and with a tantalising promise to review the interims which left us all dangling with baited breath...) and with results just having come out last month I thought you might consider giving it a quick once-over. Looks interesting (if a little dull) from the figures - low valuation, manageable (and reducing) debt, decent NTAV, cash generation pretty good, growing and well-covered dividend and it's in a boring simple to understand industry (waste management) demand for which is definitely not going away, which I always like.

Main points for concern as I see it are potential hit from North Sea oil & gas part of the business given the state of the oil industry (especially for high cost zones like N Sea) and the reduced Nuclear waste business for this year which they have 'fessed up to in the results (but which sounds like it should be swiftly back on track for the next year).

Never going to shoot the lights out but looks pretty solid and wouldn't take much to get people excited about it given lowly rating (which could happen from an acquisition perhaps? Results say thay have entered an acquisition facility with a bank so they have funding available if it's used well...).

Any thoughts? Cheers...

cig

Simplicity is in the eye of the beholder: in that industry the shareholder is exposed to some big waste mismanagement cock up... At some point the discount may be enough to account for that risk, but it's tricky to assess.

From a quick glance at the stock report there's something odd: the future revenue estimates are about flat compared to the last couple of years, but the earnings projections seem much higher than historical. Historical PE does not look so cheap. What's up?

26th Apr '16

Agreed regarding the environmental/regulatory risks here and this may be the main reason why the stock is low rated (though many similar companies, albeit larger in scale and with a size and scale advantage, sit on a higher rating). The flip side to this is high barrier to entry. e.g. the Environment Agency regulates how hazardous waste is processed and would be competitors need vetting and permits to operate...

Believe revenue and profit were lower in 2012 and 2013 (both have been growing over last few years) hence PE higher if you look a few years back on historic basis.

Small Cap Value Report (22 Apr 2016) - CTH, GPRT, CDGP

Caretech Holdings (LON:CTH)

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Paul Scott

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