Small Cap Value Report (13 Jul 2016) - EMR, PLND, BDEV, JDW, SDY, STM

Good morning!

I'm running a bit late today, so will keep updating this article until mid-afternoon.

Empresaria (LON:EMR)

Then at 4pm today, I'm recording an audiocast with the CEO/FD of small cap recruitment group, Empresaria (LON:EMR) . So if you have any questions you'd like me to ask, this is your last chance - please submit questions using this form.

It will be interesting to hear how they see Brexit affecting the UK employment market. Although EMR has a surprisingly wide geographic spread of business, with subsidiaries around the world. I am increasingly coming round to the view that it's a good thing to find investments where there's a broad geographic spread of business - it insulates against unexpected bad news in any one country or region.

Mello Beckenham

Last call for tonight's meeting in Beckenham. David's struggling a bit, so I'll be attending to help bulk up the numbers. These are such enjoyable evenings, very friendly, and everyone with an interest in shares is very welcome. Sign up link here. The Peroni is absolutely excellent too - due to short pipes, regularly cleaned, apparently.

Poundland (LON:PLND)

A recommended cash bid, of 220p + 2p final divi. The buyer being Steinhoff, who have been sniffing around several large UK retailers recently.

Well done to shareholders who held on for the bid. I sold mine too early unfortunately.

Barratt Developments (LON:BDEV)

Another large UK housebuilder reports bumper profits.

The outlook comments are more important right now.

EU Referendum comments - too early to say, but strong market fundamentals;

...Following the EU referendum, it is too early to say what the impact of the uncertainty facing the UK economy will be. The sector continues to receive focused government support, mortgage availability is good and there remains an undersupply of new homes. With a strong balance sheet and forward order book, and industry leading quality and customer service, we remain confident in the positive fundamentals of both the housing sector and our business."

Sounds alright. Although note the London comment;

...some increased uncertainty in the higher value London market...

and some further Brexit comments;

Following the EU referendum, we are mindful of the greater uncertainty now facing the UK economy. Consequently, the immediate outlook for our industry is less clear and it is too early to draw any conclusions regarding market conditions from the short trading period since the referendum. We had contingency plans in place and we have taken appropriate measures to reduce our risk, such as reassessing land approvals, as we continue to monitor the market.

I'm getting a bit fed up with the wishy-washy comments coming from companies. Surely they could give more firm comments about what's actually happening on the ground?

J D Wetherspoon (LON:JDW)

Trading update - From one extreme to the other! Wetherspoon's flamboyant Chairman, Tim Martin was a vocal supporter of the Brexit campaign. He doesn't pull any punches in today's trading update. Much as he didn't pull any punches when a TUC leader criticised his company's employment practices on TV a couple of weeks ago. He set her straight in no uncertain terms!

Sales growth has been good recently, albeit at a lower operating profit margin (which had been previously flagged);

For the 11 weeks to 10 July 2016 like-for-like sales increased by 4.0%  and total sales increased by 3.8%. In the year to date (50 weeks to 10 July 2015) like-for-like sales increased by 3.4% and total sales increased by 5.5%.

The full-year operating margin before exceptional items and before a £3.8m gain on property is expected to be around 6.8%, compared to 7.4% last year.

Here are his comments on Brexit;

"As most people will be aware, an unusual number of forecasts for the UK economy have been made in the run-up to, and the aftermath of, the referendum. Most of the forecasts from representatives of institutions which are normally responsible for financial stability were extremely negative.

"For example, the International Monetary Fund`s Christine Lagarde said in May that a leave vote in the referendum would be "pretty bad to very, very bad."
"An IMF report additionally said that a leave vote would have a "negative and substantial effect".

"Similar comments were made by the Bank of England Governor Mark Carney. H.M. Treasury also warned that Brexit would cost the average household about £4,000 per annum in the future. The CBI, Goldman Sachs, Morgan Stanley, PWC and many FTSE 100 CEOs, among others, supported this negative view.

"The Chancellor of the Exchequer George Osborne repeatedly warned that mortgage and interest rates were likely to rise in the event of a leave vote and threatened an emergency budget to increase taxes and to reduce public expenditure.

"Osborne`s stance was supported by Prime Minister David Cameron, who also forecast an increased likelihood of war and genocide.

"Unbeknown to most voters, one of the "architects" of the Remain campaign, which devised the above approach, was Peter Mandelson ("How the struggle for Europe was lost", Peter Mandelson, Financial Times, 2 July), who worked closely with Cameron, Osborne and others.

"In my opinion, the above individuals and organisations are either dishonest, or they have a poor understanding of economics, since democracy and prosperity are closely linked and the EU is clearly undemocratic. By voting to restore democracy in the UK, I believe the UK's economic prospects will improve, although it is quite possible that the unprecedented and irresponsible doom-mongering, outlined above, may lead to some kind of slowdown.

"In spite of the dire warnings above, Wetherspoon trade strengthened slightly in recent weeks and we consequently anticipate a modestly improved outcome for this financial year. Caution should be exercised in extrapolating current levels of sales growth for future years."

Wow! Powerful stuff. A very good reminder that scaremongering, and dishonesty, were rife in BOTH sides of the debate, in my view.

Speedy Hire (LON:SDY)

Share price: 33.75p (up 8% today)
No. shares: 523.4m
Market cap: £176.6m

(at the time of writing, I hold a long position in this share)

Trading update - this hire company for tools, equipment & plant, has been in a muddle for some time now, but it sounds as if they're getting back on their feet somewhat;

The Group has enjoyed a positive start to the year with revenues in the first quarter ended 30 June 2016 slightly ahead of the comparable period.  The Group is following a disciplined approach to bidding and has retained a number of major framework contracts since the start of the financial year.  Utilisation rates increased to 50% by the end of the period.  As previously reported, overhead costs are significantly lower than in the prior year.

The company has a 31 March year end, so this update relates to Q1 of FY2017.

A 50% utilisation rate doesn't strike me as very good - i.e. equipment being idle half the time.

The concluding paragraph is encouraging;

The Board believes that the Group's strategy and recovery plan provide the platform for full year results to be slightly ahead of the Board's previous expectations.

So expect broker forecasts to be edged upwards as the year progresses, perhaps? Peel Hunt has left its numbers unchanged today, forecasting £10.0m profit this year.

Debt sounds under control, and note that SDY has a pretty decent balance sheet - vastly better than HSS Hire (LON:HSS) for example, which is in a shocking state;

Net Debt at 30 June was lower than the corresponding period last year.  The Group continues to have substantial headroom against its banking facilities, which expire in September 2019.

EU Referendum comments - hooray, some specific detail;

It is too early to assess with any degree of certainty what impact the EU referendum result will have on the Group's end markets but, to date, there has been no deterioration in trading.

That's reassuring - "no deterioration in trading" to date.

If Tim at Wetherspoons is right, then the establishment have merely tried to talk us into a downturn.

My opinion - SDY is a turnaround situation, which appears to be stabilising. It's difficult to value at the moment. It seems a very inefficient business, that needs a good sort-out.

I think the equipment hire sector is a good place to look for bargains at the moment, because the market has priced-in a downturn which, so far, doesn't seem to be happening.

My current sector favourites are Lavendon (LON:LVD) and Speedy Hire (LON:SDY) (I am long of both) because I like their strong balance sheets, and lowly valuations. They're not necessarily the best companies in the sector, mind you. VP (LON:VP.) seems a good collection of businesses too, and well managed.

STM (LON:STM)

Share price: 34p
No. shares: 58.9m
Market cap: £20.0m

(at the time of writing, I hold a long position in this share)

Trading update (profit warning) - I don't normally cover financials, but have taken an interest in this company after my friend Edward Roskill mentioned it a while ago in an audiocast. I also took part in a call with management earlier this morning.

The group's key product is a pension scheme for ex-pats, called QROPS. In a nutshell, the growth rate for taking on new clients has slowed, so STM responded by waiving its initial fee (called an establishment fee, previously c.£800 per client). The commercial logic for this is clear - it should attract a lot of new business, which is then very sticky - generating annual fees of c.750 p.a. for c.20-25 years. However, by waiving the establishment fee, there is clearly a drop in up-front revenues.

As profit warnings go, this is quite a mild one;

As a result of the above, management's expectations for the first half of 2016, is that profit before tax will be approximately £1.2 million (2015 H1: £1.37 million) based on a turnover of £7.9 million (2015 H1: £8.3 million), after restructuring costs and other one off costs of approximately £0.2 million.  As a point of comparison, new QROPS applications in 2015 were particularly strong in the run-up to the 2015 UK pension reforms. Furthermore, management now expect the Group's profit before tax for 2016 as a whole to be comparable with 2015. 

So full year 2016 profit likely to be flat against 2015. Hardly a disaster! Also bear in mind that recurring revenues are steadily rising, even if short term profits are not.

Net cash of over £9m is reported for 30 June 2016 - that's almost half the market cap.

My opinion - this share looks strikingly cheap to me, although I'm nervous about the sector in which it operates, and its very heavy reliance on an introducer called De Vere. So this will never be a large, conviction position for me.

STM shares had already dropped a lot, and today's mild profit warning probably gave a good buying opportunity first thing this morning. Although bear in mind the need to reduce prices came about as a result of pressure from competitors. So there could possibly be more pain to come on fees, perhaps?

Overall though, at this lowly valuation, it looks interesting to me.

I've just spoken to Edward Roskill about STM, and he commented;

"Not a disaster. Focus on the facts - £9m cash on balance sheet, no debt, recurring revenues, low capex, dividends & possible share buybacks.

£21m market cap, less £9m cash = £12m EV (albeit some cash is needed for reg purposes) and say same EPS as last year then PE (ex cash basis) is around 5.2x – too low for a recurring revenue business with good visibility

Let's see how they get on with new fee structure & new IFA relationships, and then re-assess in 6-9 months."

All done for today, and see some of you at Mello tonight hopefully!

Regards, Paul.

Usual disclaimers apply - the above are my personal opinions only, not recommendations or advice. Please always Do Your Own Research (DYOR).