Small Cap Value Report (22 Dec 2016) - HSS, HSP, KOOV, WJG

22nd Dec '16 by Graham Neary

37 comments 18703 reads

Good morning! Paul is off today, so there's no need to look for a Part 2.

HSS Hire (LON:HSS)

Share price: 84.25p (+0.3%)
No. shares: 154.8m
Market cap: £130m

Fair dues to Paul for noting that he saw no alternative to an equity fundraising at this equipment hire company (link here - and thanks to a reader for pointing out this was as far back as November 2015!).

I've also written bearishly on this company before, and have been surprised to see the share price remain somewhat resilient over the past year.

However, this potential placing is much smaller than the amount which I and perhaps others would have viewed as necessary to fix the balance sheet. I suppose bulls might interpret it as a message, from the two institutions taking part, that the hole in the balance sheet is not so large

Shares are up a little bit on the news, so perhaps the placing is being seen as a good show of support from the private equity/hedge fund owners (who will own c.76% of the company after the deal, up from 73.4%).

Rationale:

The scale and complexity of the programme (including £12.5 million of previously announced one-off costs for the nine month period ended 1 October 2016), together with the on-going investment to support revenue growth, has led the Board to conclude that an equity injection would strengthen the balance sheet of the Group and provide additional flexibility to fund fleet investment as it completes the change programme in early 2017.

The programme being referred to involves the use of a new "National Distribution and Engineering Centre", which is supposed to transform how the company operates. Implementing change across the business is taking slightly longer than expected (forecast until Q1 2017 rather than by the end of 2016).

My opinion: It's interesting that the owners are willing to pour some more money into this, albeit just a fraction of the value of their existing holdings. They must be convinced that the next 2-3 years, at least, could turn out in a reasonable way for them.

For those of us on the outside looking in, in my opinion, it's not a transformational deal…

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timarr

22nd Dec '16

Hi Graham

Yes, the potential oversupply of student properties is something I have wondered about. With relatively recent IPO's it's always worth looking for the reason, but the significant stake held by the Watkin Jones family mitigates against the belief that the owners were looking for a quick exit.

But as bestace has remarked that's probably a long way off and even if it wasn't I think the business model could be modified to address the private market; the fundamental undersupply of property is not a problem that's going away. In addition the Fresh management business is an interesting operation in its own right, with gross margins at about 65% and the potential to double the number of rooms under management over the next three years.

As a holder I'm conscious that I'm putting the bull case here. The business depends on finding a constant flow of suitable locations and that the market for forward selling their properties holds up. Zeus are lyrical on the forward visibility but I think that could vanish in a severe downturn.

But I'm a great fan of family run businesses with a decent track record, and as Watkin Jones has been around since 1791 I think we can at least agree that it has longevity on its side :)

timarr

epson

I'm not a holder of WJG looks a good company, but what put me off was the company aeroplane which I read of on this thread post 47, http://uk.advfn.com/cmn/fbb/thread.php3?id=35318049&from=1&to=435 it's not just the £3m cost (which doe's seem excessive for a small AIM listed company) as much as the directors attitude to company money.

Lion Tamer

Hi Epson

Watkin Jones (LON:WJG)
If true, it may not be a big thing, but I thought I'd look anyway. However I don't have an ADVFN login (yeh, I know), so I can't see the post. Therefore I thought I'd look for a secondary source of the information. I could not find anything on Google, including the following search strings (and others)...
+"watkins jones" +airplane
site:watkinjones.com airplane

Does the ADVFN post give a source?

Thanks.

ln1sof

Hi Lion Tamer,

Watkin Jones (LON:WJG) aeroplane is mentioned in the admission document, see http://www.watkinjonesplc.com/results-centre/key-corporate-documents. From that it was purchased prior to 1st October 2012 for a smidge over £3.3m and had been depreciated by £432k by 30/09/2015.

It's not mentioned specifically in the recent interim results but looks to me like it has been rolled up within Property, plant and equipment in non-current assets.

Simon.

JohnEustace

Yes, the Watkin Jones (LON:WJG) aircraft is mentioned in the admission document, but it says it will be sold!
Page 121:
"9.18 Proposed Sale of Aircraft. Saxonhenge Limited, a member of the Group, will, prior to the end of
the current financial year, sell its aircraft to a new company to be incorporated by Mark Watkin Jones,
at its book value. The Group may, following such transfer, charter this aircraft on arms-length terms.
Planehouse Limited, the landlord in respect of a hangar at Caernarfon Airport that is leased to Watkin
Jones & Son Limited (as described in paragraph 9.12.3 of this Part V), shall surrender the lease of
this hangar, for nil cost to the Group, on the transfer of such aircraft."

I have a modest holding.

aflash

23rd Dec '16

From June 2013 to August 2016 it was chugging along at 15p. Since then it has been a vertical rise. You ARE missing something.

I do wonder if the the market for student accommodation might not become oversupplied in the next few years, cutting off development opportunities for Watkin Jones (LON:WJG). Even if it took 5-6 years for this to happen, it could make all prior applications of earnings multiples redundant (since there would no way to produce 4,000+ beds at the prior rates of return). Some companies in the building sector have a nasty habit of looking the cheapest when they are the most overvalued, after all.

If one compares it with UTG (Unite group) which has been involved with Student Accomodation for longer it seems we are at the top of the cycle. WJG cashed in on the trend. Since the spring of 2015 UTG has been trading at the top of its range. Nobody wanted it from July 2011 to July 2012.

The business models are similar but not the same. Nevertheless your point on oversupply is spot on.

Watch the piworld video www.piworld.co.uk/company-video.../watkin-jones-at-mello-1371

https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&sou...

and Draw Your Own Conclusions

Thanks Simon!

buyhard

I don't think Paul ever gives "advice"; he merely offers an opinion.

Carcosa

In the real world, the difference between advice and opinion by Paul is a matter of semantics. Clearly he is giving tips/advice and indeed on occasion when I know there is a share he is fond of I shall occasionally buy it ahead of his comments published here if it is a small cap and the share price not risen a great deal follwoing an RNS release. Then he publishes and a few hours later I sell after a small price rise.

The reason why it has to be advertised as 'advice' or not a 'tip' is a legal one to protect himself and Stockopedia.

If SCVR was purely about education then there would be no need whatsoever to choose shares that issue an RNS on the day; could easily comment about a share that issued an RNS months ago or just omit the name of the company all together, to achieve the same purpose. But then that would hurt the commercial viability of Stockopedia.

There is definite value in his explanation and views about how a company presents its information.

The sooner the better this fallacy of not being a tipster is dropped the better. Same goes for a number of other commentators.

Thank you to the posters who put me right over the ownership and sale of the plane, also to aflash who brought to my attention UTG which seems to be the closest comparative. I do feel that watkins Jones has been brought to the market at just the right time for the owners but you cannot blame them for that can you?

My longer term reason for being interested in Watkin Jones (LON:WJG) is the potential to extend their development model beyond student housing into the wider rental market. There seems a lot of potential to me for them to work with their current slate of institutions who are seeking alternative sources of income. Now that students are burdened with so much debt on graduation they are mostly forced into renting for years rather than buying a place of their own and I am seeing some city centre developments come to market that are essentially adult versions of halls of residence.
My small Watkins Jones holding hasn't done much but I'm keeping it for now to keep myself interested in the way the market develops.

Dennis Ayling

RE: Watkin Jones and student property over-supply.

I don't hold WJG but do hold Empiric (ESP) another student property company but with a different business model. They (ESP) appear to have no problem pre-letting their rooms with very high occupancy rates. Also they regularly point out that a large proportion of (their) students are not from the UK or EU therefore Brexit is of little concern but the week pound does potentially reduces foreign students fees, accomodation costs etc. making the UK a cheaper place to study.

Dennis.

bestace

Although it may be superficially appealing to compare Watkin Jones (LON:WJG) to Unite (LON:UTG) simply because they both operate in the student accommodation sector, I think there are some critical differences:

Unite (LON:UTG) are property developers and rent collectors. They retain their properties on the balance sheet and their main income is in the form of rent. Their customers are students. Watkin Jones (LON:WJG) have no properties on their balance sheet (other than half constructed 'work in progress') and their main income stream is in the form of property construction. Their customers (who are the ones taking the investment risk) are institutional investors
Watkin Jones (LON:WJG) generally doesn't use its own capital to fund the property developments because they have buyers lined up at the outset, who are billed monthly during the construction phase
As a result, Watkin Jones (LON:WJG) are asset light, have high returns on capital and low working capital requirements compared to Unite (LON:UTG)
This is reflected in the net debt that Unite (LON:UTG) carries on its balance sheet of over £800m, whereas Watkin Jones (LON:WJG) has net (and growing) cash on its balance sheet

To me, there are significant differences in their operating models and I think Watkin Jones (LON:WJG) is by far the more attractive investment proposition.

dfs12

Brilliant analysis. Do you think it would be fair to suggest that this will give Watkin Jones (LON:WJG) an advantage whilst the market is bouyant and growing but might leave them a little exposed if the market goes quieter for some reason?

Thank you, although much of what I wrote was merely synthesising what I have read elsewhere on the internet.

I think being debt free and asset light is always an advantage. This applies even more so in a downturn so I think they will be less exposed than the likes of Unite (LON:UTG) or general property companies when the next downturn does arrive.

However I would make three further points:

Firstly, as property development is their main income stream, they do depend on identifying a continuous pipeline of development opportunities each year. Yes this could dry up in a downturn and on this specific point they are in direct competition with Unite (LON:UTG). It's why I would like to see Watkin Jones (LON:WJG) growing the property management side of the business as that provides regular recurring, and high margin, income. However my feeling is that Watkin Jones (LON:WJG) is less exposed to a downturn compared to the wider property market because (as I alluded to in an earlier post) there are different dynamics in play in the student accommodation sector - mainly chronic undersupply and the interplay with the private rented sector and local authorities.

Secondly, in a downturn other property companies may not be able to take advantage of new sites becoming available because they are unable to finance their construction. This could play into the hands of Watkin Jones (LON:WJG) given their different operating model.

Finally, and as this very thread demonstrates, I think there is a fair amount of misunderstanding of Watkin Jones (LON:WJG) 's operating model, not least because they are a new IPO and I am not aware of any other directly comparable listed competitors. That's why it's easy to dismiss them as just another Unite (LON:UTG) whereas the reality is somewhat different.

All of this suggests to me that Mr Market is currently presenting a buying opportunity in Watkin Jones (LON:WJG), but as ever DYOR etc. I could be wildly wrong with my thinking, it has been known before!

peterg

Also they regularly point out that a large proportion of (their) students are not from the UK or EU therefore Brexit is of little concern

But the Brexit related pressure on immigration is finding it's way through to the easy option of cutting foreign (non EU) student visas, and that is likely to impact - a lot of higher end student accommodation is let to overseas students. It's also economically illiterate for a country one of whose major foreign currency earners is education, but that's another discussion.

Peter

AnonymousUser192020

Re WJG, FT on Monday mentioned a recent EY report under the heading "Key UK university towns near ‘saturation point’ with student homes". The article seems to be available without an FT subscription https://www.ft.com/content/fdf1a7ec-c302-11e6-9bca-2b93a6856354 but i haven't tracked down the full EY report.

Paul Scott

Carcosa,

That's not how I see things at all (post 27).

I'm giving a personal opinion on company results & trading updates. The emphasis here is on people doing their own research, and hopefully my articles may well be of use to people in flagging up interesting companies, and avoiding dodgy companies.

However, I'm absolutely not giving buy or sell recommendations. I don't want to do that - because it's completely wrong as a concept. People should be researching companies in depth themselves, not blindly following tipsters. I deplore the whole concept of magazines & bloggers putting buy or sell recommendations on shares - that's completely wrong - because it encourages people to punt on things, instead of doing proper investing & taking responsibility for their own investments.

We could give recommendations here if we wanted to - other websites do, and rely on the journalistic override that allows such tipping. However, none of us here at Stocko want to do that. Instead we like producing articles that stimulate thought, and debate.

I'm very much against people blindly following me into shares. Although I can't control what people do, so am not going to get too stressed about it either way.

Paul.

Maddox

28th Dec '16

Thought I'd add a few comments as I very much like this sector; Unite Group UTG is my largest single investment. I also like the look of WJG but prefer Unite's asset backing and frankly I'm fully invested in this sector.

Firstly, the idea that the student accommodation market is becoming saturated is very difficult to believe. The number of new students has been rising faster than the accommodation is being built. Last year 25,000 beds were added but student numbers increased by 60,000. Also, there were 180,000 more applicants than places in 2015/16. The future is uncertain of course but it would take a major disruption to significantly affect this market - which is one of its major attractions. It was the best performing property asset class throughout the Global Economic Crisis.

UTG also has a development pipeline of 5,500 beds but will be adding them to its wholly owned or partially owned student property portfolios (98% occupancy 16/17 ac yr) . It is very conservatively financed with a LTV of only 36% and as at 30th June its NAV (independently valued) was 620p versus a current sp of 593p.

So with a solid market underpinning, asset backed, and transparent future growth trajectory - it's a very boring investment. Which is probably why I'm talking to myself on Advfn where I mostly post http://uk.advfn.com/cmn/fbb/thread.php3?id=16292632&from=520.

Regards and Happy New Year, Maddox

Small Cap Value Report (22 Dec 2016) - HSS, HSP, KOOV, WJG

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Graham Neary

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