Good morning. It looks like another weak open is likely, as the FTSE 100 Futures are down 32 points at 6,408.
The first company accounts I've looked at this morning are interims from Johnston Press (LON:JPR), the regional newspapers group. As mentioned in the past, in my opinion the shares in this company are worth nothing, because it is effectively insolvent - i.e. it has higher levels of debt than it will in all likelihood ever be able to repay.
The market disagrees, and is currently valuing Johnston at £106.8m at 16p per share. I think that's crazy, and regard these shares as little more than chips to gamble with. The problem is, they have a declining business, e.g. turnover shrank 9.8% versus the comparable period last year, to £144.3m for the 26 weeks to 29 Jun 2013. Not only is their business declining, but it also has gigantic debt, and the interest cost alone is swallowing up a lot of the still considerable cashflow generated.
So operating profit of £28.6m was made in this 26 week period in 2013, a very strong operating profit margin of 19.1%. However, interest costs were £20.1m in th period. So the business is effectively being run to service the debt & the pension fund. Net debt has fallen, but at £306.4m simply looks insurmountable.
I don't see how Johnston can possibly both service the interest payments, and repay the capital on that debt. Hence the shares really are worth nothing, because equity ranks behind debt. The only way I can see the market cap of £106.8m making sense, is if you assume that shareholders will be willing to inject more money, alongside perhaps a debt for equity swap, or a write-down of the debt by the Banks.
That is however a pretty herioc assumption to base an investment on, and looks foolish to me.
Most of the debt reduction in the last year appears to have come from one-off payments from News International, on the termination of a long-term printing contract. Without that revenue, it's difficult to see how they will be able to make much more of a dent in net debt after interest costs.
If you look at the Balance Sheet overall, there have been some large write-downs in this period, and net assets have fallen almost two thirds in the last year to £104.2m. However, there are intangible assets of £548.8m, which are the supposed value of their publishing titles. I don't suppose they are really worth anything like that amount, so I would write off the whole lot, which takes the Balance Sheet down to a Net Tangible Asset Value of negative £444.6m. Again, clearly an insolvent position, so the shares are worthless.
The outlook doesn't really matter, because it's not going to make much difference to the mountain of debt, but the key sentence says:
In view of this operational progress, we expect the results for 2013 to be broadly in line with current market expectations.
The pension deficit is large, but has come down somewhat, at just under £100m.
The auditors include a going concern "emphasis of matter" with these results, so it's not just me who's worried about the group's solvency, so again why would anyone risk their money holding shares in this company? It really does baffle me why anyone would willingly take such a large risk and invest in this company:
... These conditions, along with other matters explained in note 2, indicate the existence of a material uncertainty which may give rise to significant doubt over the group's ability to continue as a going concern. The condensed financial statements do not include the adjustments that would result if the company and group were unable to continue as a going concern.
So really JPR is entirely at the mercy of its Banks remaining accommodative in respect of the huge outstanding debt pile. Johnston are trying to remodel their business to improve profits, but it's difficult to see how that will make much difference, and the reality is that they are likely to see continuing falls in both circulation and advertising revenues.
There isn't much headroom on the bank covenants either by the looks of it, indeed the company today says:
While the Group continues to report strong and improving trends in like-for-like profitability, the negotiated buy-out of the News International print contracts means that the Group is operating closer to its financial covenants than was originally intended by both the Group and its lenders.
Overall, it's just a mess, and the £107m market cap is bonkers in my opinion, given how weak the Balance Sheet is.
Interim results from Bioquell (LON:BQE) don't look particularly interesting at first, with operating profit down from £1.5m to £1.0m for the six months to 30 Jun 2013, compared as always, with the comparable prior year period. However, that is after charging restructuring costs, so pro-forma profit rose from £1.5m to £1.7m.
The order book looks good, having risen 22% to £25.6m. The outlook statement is vague, and unless I missed it, cannot find any reference to performance against market expectations for the year. Really companies should always give a steer with the H1 results as to how they expect the full year to pan out, otherwise investors are left in the dark.
Stockopedia shows broker consensus of 8.32p EPS this year, and 9.96p next year, so at 135p the shares look priced about right to me, on a PER of about 13.6 times 2014 earnings. It has a small net cash position, and the Balance Sheet passes my review process. So it's not really clear to me what the catalyst would be for a higher share price here, therefore shall move on.
DRS Data and Research Services (LON:DRS) might be worth a look, for any readers with the time to research it properly. I've not looked at it before, as it's below my £10 market cap cut-off, although as we're in a bull market, I'm prepared to flex that down to about £3m, providing companies are profitable and have enough cash to remain Listed, as scraping the sea bed at that tiny market cap size can occasionally throw up something good, but almost completely overlooked.
At 23p, and with 32.69m shares in issue, the market cap is currently £7.5m. The company's activities look very niche, being in the field of data capture, for the educational and electoral markets. So voting slips & machines, and presumably multiple choice answer sheets, with electronic marking?
Interim results issued today look poor, with an H1 loss before tax of £638k versus £153k loss last time. Although that is mainly due to a one-off contract last year re the London Mayoral election, which has not recurred. So clearly their revenues & hence profits are lumpy, which needs to be factored into the valuation.
The oultook statement says that H2 should be the same as last year, which was a profit of just over £1.4m, so that shuold pull them back into a profit of about £0.8m for the full year this time, which doesn't look too bad.
The Balance Sheet looks fine, with £4.2m of cash, but £1.6m in borrowings, which seems odd. Why not just pay off the debt, and save on interest charges? Ah, I've just found out why! Note 10 says that they have a mortgage on freehold property of £1.8m. So it would be worth finding out where their freehold property is, and how much it's worth now? I like hidden property assets, but don't have time to research it today.
The interim dividend has been passed this time (it was 0.35p last H1), and I note that divis have only recently been resumed, with a gap between 2008-2012.
The upside here could come from overseas contracts, and I see they have delivered their first pilots in India and Africa. Overall then, this goes on my watch list as potentially interesting, but more research is needed to properly understand the business, and the growth potential.
I'll sign off now, as there are not any other reports of interest to me today.
See you tomorrow as usual, from 8 a.m.
(of the companies mentioned today, Paul has no long or short positions)