Small Cap Value Report (Wed 31 May 2017) -STY

31st May '17 by Paul Scott

27 comments 12163 reads

Good afternoon! It's Paul here.

There's not much news today, so I might circle back to some of the reader requests from yesterday.

What a crazy market this is! Growth companies in particular seem to be roaring ahead almost every day. Stretched valuations don't seem to be an impediment for further price rises. It's all beginning to feel a lot like 1998-9 again, and that didn't end well.

There again, the companies that are roaring up in price generally seem to be proper businesses, and not the blue sky nonsense that went bonkers back then during the TMT boom & bust.

With major economies around the world generally doing quite well, it's not clear what catalyst there is to trigger a sell-off. So for the time being, I'm minded to keep my long positions running (as opposed to moving into cash).

Of course we do have the worry of the possibility of a Jeremy Corbyn victory on June 8th. As his approach would undoubtedly be anti-business, and lead to higher taxes, then I imagine it would absolutely smash share prices. How likely is it though? Very unlikely, in my view, but you never know. My feeling is that the closer the polls get, then the more motivated the Tory vote will be - turning out in force to stop Corbyn.

The politics of it doesn't really matter for the purposes of these reports, it's the impact on the market that worries me, so is worth flagging the risk. Cautious people might take some money off the table, just in case? I've decided not to take any action, as I think it's so unlikely that the Tories won't win a workable majority. Sadly, there really isn't any alternative, as the choices range from bad to diabolical, in my view.

Styles and Wood (LON:STY)

Share price: 366.5p (up 4.4% today)
No. shares: 8.7m
Market cap: £31.9m

AGM statement (trading update) - this company describes itself as "the integrated property services and project delivery specialist".

This sounds reassuring;

"The Group's trading in the year to date has been in line with management expectations.

The Order Book for the year ending 31st December 2017 now stands at £136.6m, some 36% ahead of prior year, with a traditional seasonal weighting towards the second half of the year.

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janebolacha

31st May '17

That article certainly would make me reluctant to invest.

Howard Adams

Hi all

Any holders of Air Partner (LON:AIR) might want to read this.

http://www.airpartner.com/en/press-releases/air-partner-supports-clients-through-travel-chaos/?utm_medium=social&utm_source=twitter&utm_content=press-release

I hold & added to today.

Regards
HOward

ambrosia

Paul can I make request, next time its a slow day without much to report can you tell us more of the process you go through when analysing a company, whats the 1st thing you look at, is there an organised check list etc

mortimer

paul 2screens say style&wood want shorting not buying and one screen thinks its manipulating the accounts whats your view on this

Richard Cockbain

Interesting thought.

I would suggest that in a low interest rate environment that people are drawn to other forms of gaining a return on their money and the ISA etc. route is a perfect example of how to do so in a tax free envelope. With reasonable dividends and a stock market at record highs it looks too good to be true.

(which means it probably is!)

Trident

£IG Group have had some upswing following a trading statement showing 7% uplift to comparable prior year.
Share price still below levels when the possible new regulatory issues were outlined for cfd trading etc.
There was no profit warning at the time but had similar effect.

Howard Marx

IG Group (LON:IGG) have rallied around 30% from their December lows.

The new FCA Retail CFD guidelines have yet to be published, hence too early to accurately assess the impact on IG Group.

The timetable for publication had been 'in the Spring' but my recent communications with the FCA suggest a delay, possibly due to the 1000's of submissions they received in the consultation period.

Skweeka

Hi Howard,

Thanks for that I have been holding since late 2015 and I believe the Slater Growth Fund which I also have in my SIPP has a holding. Initially I didn't see the 'I hold & added to today.' before I clicked through and was expecting some bad news, pleasantly surprised.

Regards,
Ian

Gromley

"Hi Paul Re. Styles and Wood (LON:STY)

I am borrowing your phrase to describe this one as a 'snakes & ladders' stock.

Reliance on big contracts combined with thin net margins makes their earnings quality too low and unpredictable for me."

Whilst generically for this sector this is true, in fact there's a fairly good picture here for STY.

Revenues have been incredibly consistent over the last 7 years (in the range £94m to £115m) - on the flip side though this does mean there has been no growth to speak of.

Gross Margins have been in the range 7%-12% and improving over the last 4 years (there's mention that they are being a bit more discerning over prioritising higher margin business).

Operating margin is certainly pretty thin (1% to 4%) but again with an improving trend.

Revenues collapsed fairly heavily over the period 2007-2010 on the back of the crunch - at the time they indicated that they had retained clients but they just weren't spending. I'm puzzled therefore that revenue hasn't picked up more since - Anyone have any insights?

As far as revenue stability and predictability goes 76% of revenues came from existing customers with framework agreements. The recent bolt-ons give them a more diverse offering which should provide some shelter in the event of a retail slowdown.

All looks pretty good from that perspective IMHO.

I was interested in mortimer's observation that one of the screens shows the accounts as potentially cooking the books - Anyone know what that screen looks for? Personally I can't see anything fishy.

Profits seem to convert nicely into cash.

Although there was a major reduction in working capital in 2015 , improved on slightly in 2016; neither debtors nor creditors look out of order.

Certainly they capitalise some software costs (which I know is often frowned upon) but in fact capex is generally less than depreciation and amortisation (probably reflecting that the business is smaller than 10 years ago).

So I can't see any inherent nasties - anything I'm missing, anyone?

gus 1065

I took a relatively small position in Styles and Wood (LON:STY) towards the end of last year based primarily on the very strong Stocko score card and a look into the company background that didn't show up any obvious horrors. Seemed to tick along quite nicely for the first six months or so.

In April 2017 they came out with a trading update and then final results on April 4th and 27th respectively. The commentary in both was pretty upbeat (albeit with slight delays on a few contracts) but the actual numbers seemed to be a bit lack lustre. This seemed to be borne out buy the market reaction (share price fell 31% from 467p to 320p high to low) and a precipitous drop in the Stock Ranks at the start of April from Q V M SR of 82 95 79 98 to the current 48 86 30 54.

I read the AGM statement today with a slightly sceptical eye - long on optimism but not much meat on it. Still holding but with a reduced position and more likely to sell than buy more.

Gus

HollandSmith

Just a quick question everyone - when looking at a company, do people take into account the number of employees a company has? I wish it was possible to screen this.

deucetoace

Why would this matter? Some industries are very people intensive others are not. Of itself it seems to me to be a meaningless statistic.

tic_tac_toe

djsdanny - you can filter for this in sharepad (just checked)

rain forest

as usual well writen and informative as for styles and wood short term buy posibley but contracters in general are always one bad contract away from disaster as iknow only to well why take the risk

Dieselhead2

Hi Paul/Graham, any chance you may be able to have a look at OPG Ventures? They are an Indian power generating company on AIM. They had a trading update out today. It is a company whom I have been watching for a while and are looking to start paying dividends. They certainly don't appear to be another Fusionex!

Thanks for the info tic

1st Jun '17

Hi Gromley.

In answer to your question about earnings manipulation risk, you can drill down into the detail on the specific company stock page. Click on the Earnings Risk ticker on the main screen and it should switch to the Baneish M score. Click on this again and it brings up a further screen that shows the component parts that are OK or at risk. Click on the individual components (either fail or pass) and this compares a reference base score with the company's own score.

As with most things Stocko, the more red indicators the bigger the risk although worth looking closer to see if these are "near" or "far" misses. Also, bear in mind that a fail is often tripped if there is no or inadequate historic data. Styles and Wood (LON:STY) at face value looks at risk to inflated receivables levels and possible impaired asset quality. I suggest you don't take these results as gospel but use them to direct your own research.

Gus.

Thanks for that Gus.

I presume that the primary factor then that the screen is responding to is that Receivables increased from £26m to £37m.

At face value this does not seem an inordinate amount and in fact Receivables were £35m at the end of 2014, so not an unprecedented amount.

However, if you dig around in the notes to the accounts you find that the £11m increase results from two main factors :

An £8m increase in the "Amounts recoverable from contracts" from £13m to £21m (essentially for 'projects' the difference between the staged payments and the value of chargeable work completed). The ratio of value paid vs value recognised was 80% from 90% the prior year. So that could reflect more aggressive accounting, but actually I don't think it does as again the ratio was 80% in 2014 also.
Actual trade receivables (ie invoiced but not yet paid) were up £2m to £14m, again nothing obvious to be worried about there.

BUT, when you dig further, receivables more that TWO months overdue, rocketed from £1.5m to £4.4m. Which is potentially a scary number (representing the whole trading profit). They took a provision of £1.1m (up from £800k) but that's still a £3.3m potential risk.

I cannot find any comment on this in the R&A, which is disappointing.

If I had a larger position here I'd be seeking clarification on this point from the FD, but as it stands I'm going to work on the principle that as these invoices are now 7 months old if they were not paid and presenting a risk there would have been an obligation to disclose in yesterday's statement.

So there I think is the potential risk; not quite the issue that the screener flagged but nevertheless shows the value of taking a view like that.

Thanks Gromley for the feedback.

I agree the large increase in the 60 days past due receivables is of concern. Given the nature of the business, I wonder if it relates to a dispute with a single customer over the amount of an invoice/particular project (a won't pay rather than can't pay situation). These kind of retention disputes are quite common with large projects and the public sector can be a notoriously slow payer. Nevertheless, quite a material amount and I would have expected some comment.

As per my earlier comment (#17), I'm intuitively becoming a little wary of some of the information flow from the company which is making me slightly nervous. Like you, not a large position held here so it may be simplest to sell and move on.

Gus.

pineapplefritter07

Interesting you say that Mortimer, I was thinking that if the Paul Bell shares (see previous post) have to be sold because they are deemed POCA then a large percentage of shares may be dumped on the market at once which could cause a price fall, it just all looks a bit circumspect to me.

Small Cap Value Report (Wed 31 May 2017) -STY

Styles and Wood (LON:STY)

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Paul Scott

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