Good morning! One of my favourite small growth companies is Spaceandpeople (LON:SAL), which I was able to get into at 86p in a secondary Placing (disposal of early investors' stakes) a few months ago. It was obvious to me at the time that this was a remarkable bargain, because EPS was heading towards 10p, and this innovative company had created its own niche from scratch, and had delivered growth for the last five years. Management are impressive too - just the sort of canny entrepreneurs that you want to back. So to my mind the price was at least 50p light, and since then it has risen by over 40p, so I was right (although getting in at a 15% discount to the market price at the time was a bit of a coup too!).
Spaceandpeople manage "pop up" shops & kiosks on behalf of shopping centre owners, optimising the income from such sources in each shopping centre, and also managing promotional activities within shopping centres (e.g. new product launches, such as new cars). Both Spaceandpeople, and the shopping centre landlord get a cut of the income generated through these activities. Best of all, SAL effectively invented this market, and have no significant competition, and it is an area they now dominate in the UK and Germany, and has strong barriers to entry. So the future is all about developing these existing markets, and entering new geographies. I believe it is likely to be a much bigger company than now, in say 5 years time, and my intended holding period for the shares is forever, providing the story doesn't change and the valuation doesn't get too high. Here is the graphical history, which is pretty impressive in my opinion:
Anyway, their interim results to 30 Jun 2013 look good. Gross revenues are up 46% to £18.2m, and net revenues (after the landlord's share of income has been paid over) is up 29% to £6.66m. Profit before tax is up a whopping 60% to £613k, although it should be noted that profits are heavily weighted to H2, so the full year profit growth is likely to be a lower percentage against last year.
Assuming the same sort of H1/H2 split as last year, then broker consensus of 9.24p seems achievable, personally I have around 10p EPS pencilled in for this year, which would put the shares on a PER of about 13. Consensus forecast is for a dividend of 4.18p this year and 5.01p next year, so that gives a yield of 3.1% and 3.7% respectively at the current mid-price of 135p (edit: earlier error has been corrected, my apologies).
It's not as much of a bargain as it was when I bought, but to my mind they have such a good commercial opportunity, these shares could command a higher rating.
The Balance Sheet is fine, with net cash of £808k. It's good to read that their investment in S&P+, which is an online platform for marketing agencies to use, in managing experiential marketing campaigns, seems to be paying off, with positive comments about that.
There has been good growth in Germany, but the fly in the ointment seems to be UK retail (as opposed to promotions), where turnover fell 13% to £2.2m, as a result of "clear mall" strategies by some landlords. I'm a bit concerned by this, and will be drilling into this issue when meeting management tomorrow, so will report back on Weds here.
The outlook statement is too vague, but positive-sounding. However it does not comment on full year expectations, which seems a bit of missed opportunity - I always like to be told in the outlook statement how things are looking for the full year against expectations.
Still, the figures are impressive, and I think that at £25m market cap, the company has now grown to a point where it might start to be noticed by more investors. I don't see spectacular short term share price gains here, but a nice steady performer for the long term, probably going up maybe 20%-ish per year, with divis on top of that, at a guess? I'd be very happy with that.
Next I've been reviewing interim results to 30 Jun 2013 from recruitment business, Hydrogen (LON:HYDG). The figures are not good - net fee income up 2% to £15.9m, but profit before tax has fallen 32% to £1.3m, which they say is due to increased investment in people & offices. Although the outlook statement says that they are "on target to meet its expectations for the year".
Generally I'm not terribly keen on situations where H1 has disappointed, but a company reaffirms full year expectations, as there is clearly an increased risk of H2 also disappointing, and then you have a profits warning with typically 10-30% downside on the shares. Why take the risk when you don't have to?
That said, as you can see from the growth & value graphic to the right, there is an attractive dividend yield here, and the interim dividend of 1.5p has been maintained. Also, their Balance Sheet looks fairly sound to me, with a solid working capital position - current assets are £33.1m, and represent 148% of current liabilities, which is the sort of position I feel most comfortable with (150%+ is my comfort level, and we're near enough as makes no difference here). Furthermore, there are negligible (£0.1m) long term creditors, so that's a big positive too.
I cannot stress enough how important a solid Balance Sheet is - it means you can sleep at night, with no worries that the investment migth go bust. It means management, and not the Bank Manager, are making the key decisions, and it means they can continue paying dividends, even in a bad year. A strong Balance Sheet should also mean that suppliers get paid on time, hence are more loyal and prepared to deliver keener prices, and it means staff are confident about the future. Plus it gives flexibility to make longer term decisions, instead of worrying about the bank balance every day.
When I used to take more risks in my investing, my online dealing account was littered with tiny positions worth about £10 or £20, which were the 99% losses, or even 100% losses. If you tot up how much money you've lost on all those positions, it can amount to a tidy sum. That just doesn't happen to me any more, because I don't invest in companies with weak Balance Sheets, so cannot remember the last time I had a 100% loss, it just doesn't happen any more, because of my strict Balance Sheet rules introduced over the last year or two. That is making a big difference to performance - no big losers means that overall the net gains are bigger (although we are in a bull market). It's normal to still see 20-30% losses every now & again, but that's surviveable, whereas 100% losses make a nasty dent, and really can be avoided. It just requires a close look at the Balance Sheet, and to walk away whenever it is not strong enough.
So going back to Hydrogen, it's a tough call. There is probably upside on the current price from a cyclical recovery in the economy, and it has lagged the sector - the shares have trended sideways in the last two years, as you can see from the above chart.
It's well financed, and pays a big dividend, so there are attractions. On balance though, I don't think it's quite cheap enough to persuade me to hit the buy button. It's very close though.
Mediazest (LON:MDZ) is a good example of something that fails my Balance Sheet test. The market cap is only £1.7m, so it's too small & illiquid for me to consider anyway usually, but their final results for the year ended 31 Mar 2013 are poor. Also, the long delay in publishing them should be considered a warning sign.
Turnover of £1.85m is down from £2.5m the previous year, and they made a £551k loss for the year. Losses have to be funded by someone, and it has resulted in their Balance Sheet looking dangerously stretched. Current assets of £639k are only 34% of current liabilities (remember I usually look for 100-150% on this measure!). There are no additional long term liabilities though. So this means there's a nasty funding gap there that will need to be plugged somehow. Otherwise if creditors lose confidence, it's game over. Plus, who will finance the additional ongoing losses?
Another Balance Sheet test is to not invest in companies with negative net tangible assets. In this case, writing off Goodwill of £2,772k takes the Balance Sheet negative to the tune of £1,160k, which would be an automatic fail to me (unless the business was highly profitable & cash generative, in which case I'd consider being flexible on negative net tangible assets).
Their outlook statement sounds encouraging though, saying that business has been strong in the new financial year, and that they raised £358k in fresh equity after the year end, but that still leaves their Balance Sheet badly stretched. To my mind it's just a poor risk/reward situation - more equity fundraisings look inevitable, and who knows what discount investors will demand? It could lead to large dilution, which takes away the upside from existing investors, and potentially leaves you with a thumping paper loss on your shares when more new shares are issued at a lower price.
I've mentioned Brady (LON:BRY) here twice before, but both times struggled to value the company, due to inadequate information in the last two trading statements. Must admit I'm struggling a bit with their interim accounts to 30 Jun 2013 this morning too. It's a software company, so they quote the dreaded (and highly misleading in my view) EBITDA, whilst capitalising some development spending.
The cashflow statement reveals that capitalised development spend of £1,247k in H1 is roughly the same as the amortisation charge of £1,103k for the six months, so that means I'd be happy to consider operating profit as an acceptable measure of performance. It made a small loss on that basis of £151k for H1. Not good.
Judging by last year's figures, it seems to be a heavily H2 weighted year. Adjusted EPS for H1 is 0.91p vs 1.88p last year. Things are further complicated by a cost reduction programme which started in July, which will deliver £2.2m in annualised cost savings from H2 this year, so that should boost performance gradually from H2 onwards.
The outlook statement seems to be warning that some revenues will be deferred into 2014, whilst the earlier narrative is full of positive-sounding commentary, so that strikes me as a bit odd.
Overall I've seen enough to realise it's not for me - far too much guesswork involved in trying to work out how much profit they might make. They talk about a strong Balance Sheet, but it isn't strong at all. Writing off the intangibles, it's negative by £350k! All bar £287k of the cash is up-front payments from customers (i.e. cash minus deferred income), which as far as I am concerned, deferred income should be treated as debt. Other people differ, but that's my view, and it's the most prudent way to value companies, so I'm sticking to it.
The market cap is just under £50m after today's 17% drop in share price to 60p, but I can't get my head round these numbers at all, and it has no appeal to me, I just can't see value here. Although it has paid dividends consistently, and 1.7p is forecast for this year, so that would give a 2.8% yield, which isn't bad.
Think I'll wait to see the full year figures before considering this one again. I'm sure there must be readers who understand the company better than me, so please feel free to post views in the comments section below - it's absolutely fine to disagree with me on anything, debate is encouraged.
A not dissimilar situation is postal service software company Escher Group (LON:ESCH). Their market cap is also just under £50m, but their results today have been better received than Brady's, with the shares up 5% to 265p. I remember seeing Escher at a ShareSoc technology seminar, and being mightily impressed with what this small Irish company had achieved - being market leader globally in providing software to postal services in dozens of countries, including the USA. That is no mean feat to build such a business on a global scale.
Their interims to 30 Jun 2013 issued today show a big jump in turnover, up 48% to $12.87m, and adjusted profit before tax is up 17% to $1.35m. They also have an H2 weighted year, and profits are volatile, since they rely to a certain extent on licensing revenues, which can be non-recurring. Also implementation is lumpy. I just don't know how to value it unfortunately, so cannot decide whether the market cap is good value or not.
You cannot really value a business on a PER basis, when its earnings are so unpredictable. There's nothing much on the Balance Sheet either, with net tangible assets of pretty much zero. Also, no dividends are paid. So it's all too much of a leap of faith for me to value it at £50m.
That's it for today, see you tomorrow morning!
(of the shares mentioned today, Paul has a long position in SAL and no short positions.
A Small Caps Fund to which Paul provides research services also has a long position in SAL)