Good morning! Firstly, a quick report back on my Half Marathon yesterday in London. It went amazingly well, and although a physically very painful experience, was really worthwhile, as we've raised a fantastic £2,273 (incl. Gift Aid) for Scope, from 63 donors, the overwhelming majority being readers of this blog - so well done you, and thank you!
I've written up a rambling, mile by mile report of what it was like at the time, on my updated fundraising page, and of course it's still open for donations - so I know some people wanted proof that I completed the course, sadly it appears there is no photographic evidence, but I was "chipped" - will copy paste the details when their website is responding. I won't be bothering you for any more sponsorship until December, in readiness for January's "DryAthlon", and the Brighton Half Marathon in Feb 2014. I think 2 or 3 things each year is about right.
Looking at this morning's results, it's another quiet day. There are only about four results/trading statements of interest to me, so let's start with the "international engineering and environmental consultancy", Waterman (LON:WTM). It has issued preliminary results for the year ended 30 Jun 2013 today. As is the fashion, they present a number of different performance measures, so it is getting increasingly confusing for investors as we have to make a judgment as to which one is the most relevant for valuation purposes, and which presents the underlying trends best.
I really hope the accounting standards people are looking at this area, as things are getting increasingly out of hand, as the boundaries are relentlessly pushed by creative management, and PR people, such that no matter how bad things are, there always seems to be a way of presenting it positively! Along the lines of, oh dear my arm just fell off, but this has made me appreciate my other arm all the more, and I have developed a range of new skills for my remaining arm, etc.
I've not reported on Waterman here before, but do recall thinking it might make a good cyclical recovery investment. Their market cap at close of play on Friday was £14.9m, so that will have risen about 15% today to about £17m, on a share price currently of 56p. Here is their two year chart, compared with the Small Caps Index (the beige line):
Turnover is slightly down, at £66.8m, EBITDA is reported at £1.7m (down from £2.1m last year), and profit before tax is slightly down at £0.4m (£0.5m prior year). So straight away it looks as if they have a big goodwill amortisation charge, although digging deeper, I see that the amortisation charge is only £394k, so this seems like a case of rather aggressively presented figures.
They classify £414k costs as exceptional, including £336k of employee benefits, which I would say is questionable - a people business will always have costs for restructuring, etc, so they should be seen as normal in my view.
There is a very detailed narrative published with the figures, which I don't have time to read in full, however the bit that jumped out at me was this point, which sounds very bullish (my bolding, as usual):
Reflecting the improving market conditions and the ongoing benefits of the strategic restructuring the Board has set the realistic target of tripling adjusted profit before tax over the next three years.
Since adjusted EPS dropped out at 1.4p, then that means they are targeting around 4.2p in three years, which compares with the current share price of 56p. Hmmm, so that would put them on a PER of 13.3, after they have tripled earnings. So where is the upside for shareholders at the current price? It seems to me that we're being asked to pay up-front for three years profit growth that has not happened yet. How is that an attractive proposition?
Their Balance Sheet looks pretty sound - once you get rid of all intangibles, there are still net tangible assets of £15.9m remaining, and current assets are strong, at 173% of current liabilities, which is a sound position, especially as long term creditors are fairly low at £2.8m. My only concern is that debtors look high, at £32.1m, which seems a lot compared with turnover for the year of £66.8m, suggesting that a lot of sales have been booked to the P&L, but have not been paid for yet by the customers. That can be a warning sign.
I'm scratching my head on these numbers. They have just reported adjusted profit before tax of £1.1m so if they are intending on tripling that, to £3.3m, less say 25% tax, to be on the safe side, that would be £2.5m earnings, and with 30.756m shares in issue, I make that 8p EPS, which would bring the PER down to a more palatable 7. So there seems to be a discrepancy in my figures there, it would be helpful to see a broker note on this one, if there is any coverage. It appears there must be, as Stockopedia shows an EPS forecast of 3.2p for the current year, ending 30 Jun 2014. So that's an unexciting PER of about 15.
Overall then, their outlook does look good, but the share price appears to be up with events, so it's not of interest to me.
After a bit more digging, think I've found out why there is a discrepancy comparing EPS forecast with profit forecast, it's probably something to do with minority interests. This is where group subsidiaries are not 100% owned by the group - i.e. there are external shareholders who have a separate shareholding in a company that is consolidated into the group accounts. This is rare, but does sometimes happen.
So if you look at Waterman's P&L published today, the £269k profit for the year (post tax, & exceptionals) is split as being -£111k attributable to Waterman shareholders, and +£380k attributable to Non-controlling interests - i.e. minority shareholders in group subsidiaries. So it looks as if the most profitable part of Waterman has minority shareholders, so that skews the figures somewhat.
Therefore (and am conscious that I'm not explaining this very well!) the 1.4p adjusted EPS figure is rather distorted, and should not be used as the starting point for calculating what EPS will be once adjusted profit has tripled.
Overall then, there might be some further upside here, who knows? Also they indicate that the dividend is increasing rapidly, albeit from a low base, so the forecast yield is unexciting at just under 1%.
I've mentioned Digital Barriers (LON:DGB) here several times before, always questioning why the market cap is so high for a loss-making business? I see that the price has drifted down, from a peak of almost 200p in the spring of this year, to around 150p now. But that still values it at £78m market cap, which I think is crazy. It's forecast to remain loss-making this year and next. They have some sexy-sounding products, but so what, if it is loss-making?
Today's trading update goes into a fair bit of detail about product, but the bottom line is that they are only "moving towards breakeven". There's no way I would pay anywhere near the current share price. If it dropped by about 80-90% then I would start to consider it, but even then would need convincing that the company has adequate cash resources to finance its losses, and that it could indeed deliver higher sales, sufficient to move into profit. The jury seems out on that at the moment, yet the market is pricing it as if success is guaranteed. It's not for me - risk/reward is all wrong at this price, in my opinion.
I see that the main indices are seeing a bit of a correction, which is a good thing - things have been far too buoyant for a while now, especially with small/mid caps. What I like about market corrections, is that it only takes one or two clumsy sellers, or a stampeding herd of private investors, to throw up some real bargains. So a (say) 3% drop in the main index can throw up situations in small caps where a decent company is suddenly 10-20% cheaper. Hence why it's always a good idea to keep some cash on the sidelines, ready to pounce when such bargains appear.
I've used the dip in the price of Vislink (LON:VLK) to buy some more, as EPS forecasts are being revised up there, and in my opinion are probably still too low. Broker forecasts often lag behind reality, in both an economic slowdown (when they are too slow to cut), and in a recovery (when they are too slow to upgrade), which provides us with opportunities to buy at advantageous prices.
This research note from Edison forecasts 4.2p EPS in the current year, and the company still has net cash, and pays a good dividend too. I have no idea why the shares dropped from a recent peak of almost 50p to 42p today, but if you think it's a good company, then a sharp drop in price like that is a buying opportunity - on a forecast PER of 10.
(Edit: as kindly pointed out by rivaldo in the comments below, the 4.2p Edison forecast is for calendar 2014, so will not be the current year until January coming)
It baffles me the way most investors prefer paying more for their shares! In all other aspects of life we jump at bargain prices, but it seems with shares, people like to buy into a rising trend, hence actually like to pay a higher price - that's one of the bad habits that it's essential to un-learn in my view, if you are a value investor.
Gooch & Housego (LON:GHH) has issued a positive full year trading update, for y/e 30 Sep 2013. It goes into more detail, but the crux is that they say profit should be in line with market expectations. So looking at the Stockopedia StockReport, net profit of £7m is expected on turnover of £63.6m, which is 29.6p EPS. Therefore with the shares at 560p that translates into a PER of 18.9, which looks pretty rich to me.
EPS is forecast to rise to 33.1p this year, which gives a PER of 16.9. That price looks too high to me. The dividend yield is only 1.3%. I cannot see value here, so will move on.
That's it for today. I'll resume the 8am starts as from tomorrow.
(of the companies mentioned today, Paul has a long position in VLK, as also does a Small Caps Fund that Paul provides research services for)