Good morning!
I'm not going to waste my time responding to the tripe in yesterday's comments section (I can't anyway, as Ed has closed the thread). Incidentally, I suggested to the boss that Stockopedia restricts the thumbs down facility to paying subscribers only. He agreed, and that's been implemented now. So if readers want to demotivate the writers here with a thumbs down, then you have to pay up for the privilege!
I think more generally that dishing out thumbs downs is a very negative thing to do. It upsets the recipient, and achieves nothing worthwhile. If you don't like something, then just ignore it. Readers who leave comments below, which get thumbs downs, often tend to post a second, aggrieved, response.
Let's make an effort to be a bit more positive with our interactions here, and return to being a happy, mutually supportive, place!
Patisserie Valerie
A post-script to this scandal. An announcement today says that Patisserie Valerie and Philpotts have both been sold, to management (backed by an Irish fund) for a measly £13m, of which £3m is deferred.
It's beyond astonishing that Luke Johnson's flagship company turned out to be a fraud. Whether he was aware of the falsified accounts or not, I still think he has to shoulder a good deal of the responsibility. That is because the company very much rested on Johnson's reputation, and of course its impressive (but fictitious) profitability.
It doesn't seem right that management have been able to buy it for a song, and now have the opportunity to re-build the company, minus its loss-making stores, which will probably make them rich. Other potential buyers (e.g. Mike Ashley) complained that they have no meaningful figures to work on, so would be buying the company blind. Whereas management who have bought it, are probably the only people who are likely to know what the real trading figures look like.
Meanwhile shareholders are left with nothing. The whole thing is absolutely scandalous. I certainly won't ever grace this company with my presence, as a paying customer, in future. Pity, as their English Breakfast tea, and strawberry gateau make a delicious interlude when trudging around the High Street. So once the fuss has died down, I might forget about boycotting Patisserie Valerie!
Which brings me on to;
Directors selling
I met the management of a micro cap in the city yesterday, and afterwards headed to the pub with my broker, and another investor. Conversation turned to the various accounting scandals, and major share price collapses in recent times. One stand-out feature, present in all these situations, is that major selling (i.e. 7 or 8 figure, by £ value) by Directors happened beforehand.
- CAKE - very substantial Director selling. Group went bust, amazingly - this was one of AIM's top companies, remember, which looked a very safe investment, but wasn't
- STAF - founder exited. A year later, problems identified in the accounts
- UtilityWise - massive Director selling. Has since gone bust
Those are just the examples that spring to mind. I'm sure there are many more.
The logical conclusion is therefore to be extremely wary of major Director selling. It certainly increases the risk that something might be starting to go wrong. It's also worth considering whether founders cashed in at the IPO. Many floats which go wrong in the first year or two, seem to be ones where the founders sold a substantial amount of their holding at the time of the float, as opposed to floating to raise new money for the company. QUIZ (LON:QUIZ) (in which I have a long position) springs to mind, but there have been many more.
Maybe investors should only buy IPOs if the proceeds are deferred in some way, for say 2 years, and only released in stages? It seems wrong that brokers can pump up the valuation of the company on floating, maybe after a couple of years' unusually good trading. The founders then walk away as multi-millionaires, whilst investors only realise some time later that they've been sold a pup.
It certainly makes me extremely wary of newly floated companies.
WYG (LON:WYG)
Share price: 23p (up 4.5% today, at 12:27)
No. shares: 73.3m
Market cap: £16.9m
Trading update - profit warning
This is a project management consultancy. I've never really understood what these consultancies actually do. A bit more detail is given on the StockReport, including this;
The Company offers an array of services, including aquatic ecology, brownfield regeneration, climate change adaptation, development management, energy management, flood risk assessment, health and safety management, intelligent transport systems, landscape planning, management training, nuclear decommissioning and asset care, outsourcing, planning applications, rural and agricultural development, and social and civil society development.
It serves sectors, such as defense and justice, energy and waste, environment, mining and metals, transport, social development and infrastructure, and urban and commercial development.
Profit warning - I missed all the excitement of this yesterday, as I was out & about in the city. The company put out an intra-day profit warning (very bad form). This triggered a collapse in the share price, which spiked down from c.38p to as low as 12p, before bouncing somewhat.
This is an absolutely crazy way of doing things. I really do think that it should be a stock exchange requirement to suspend shares for perhaps an hour, to allow everyone to read & digest a profit warning. Or perhaps a share should be suspended just before publication of a profit warning, then trading could resume at 8am the following day. This is something we should be writing to the stock exchange, and to our MPs, to get the rules changed & improved.
Summarising the announcement, which relates to FY 03/2019;
- UK division is seeing delays to new, and ongoing projects
- Q4 expected to be slow, as usual seasonal uplift won't happen
- Hence H2 profit will be below H1
- Brexit-related political uncertainty is blamed - as some businesses unwilling to commit to major projects until position is clarified
- FY 03/2019 profit will be "materially below current market expectations"
- International division is doing well, but its margins are lower than UK
- High bidding costs, before revenues achieved, in Intl division
Clearly that's disappointing, however there's something much more serious in the announcement;
Breach of bank covenants - the company expects to breach two covenants when tested at 31 March 2019;
- Net debt to EBITDA (i.e. debt compared with cashflow/profitability, is too high)
- Interest cover (i.e. profits are too low compared with interest charges on the debt)
The company is speaking to its lender about getting waiver/deferral of the covenants.
It is also trying to reduce debt in the meantime
Net debt is expected to be c.£10m at year end, which seems to imply that it might be higher now? It was £13.2m at 30 Sep 2018.
Read-across - as far as I'm aware, this is the first announcement which seems to genuinely indicate that the Brexit stalemate is now causing delays to big projects. In a way, that's hardly surprising.
Therefore, this is certainly a time where, if you haven't already done so, to be reviewing our portfolios for any potential exposure to reduced capex by big companies.
Off the top of my head, the sectors that might be at risk could be: other consultancy firms, equipment hire, building contracting companies. I wouldn't want to be holding shares in anything like that, at the moment.
My opinion - I tend to keep well away from any share where bank covenants are, or could become, a problem. This is why it's so important to have good discipline on checking balance sheet strength.
When I last looked at WYG, in Dec 2018 here, the balance sheet weakness ruled it out for me. It's true that avoiding weak balance sheets can mean missing the occasional big winner. However, it also helps avoid the biggest losses - which is actually more important, long-term.
With a weak balance sheet, and too much debt, now combined with poor trading, the risk is that the company might need to do an equity fundraising, in order to retain the support of its bank. If investors are reluctant to support such a possible fundraise, then the price might have to be deeply discounted, if it can be done at all.
For this reason, I can only conclude that this share is too high risk, and is therefore uninvestable as far as I'm concerned.
Filta Group (LON:FLTA)
Share price: 231p (unchanged)
No. shares: 28.9m
Market cap: £66.8m
Filta Group Holdings plc (AIM: FLTA), a provider of fryer management and other services to commercial kitchens, provides its trading update (unaudited) for the financial year ended 31 December 2018.
A clear & simple explanation of what the company does, is always welcome.
It's in line with expecations, hence the share price being unchanged today, which is logical;
The Group expects to report revenue, from continuing operations, in excess of £14m, up c.£2.5m on the prior year (FY 17: £11.5m, which excludes the revenues from Filta Refrigeration). We expect to report improved gross margins at approximately 50% across the Group and that EBITDA and net profit will be in line with expectations.
The group seems to be quite active, in acquisitions & a disposal, so I can't tell what the organic growth is like. Growth also seems to be coming from franchising - that should probably be seen as organic.
Outlook - the Directorspeak sounds positive;
"2018 was a year of significant progress for the Group. Following the acquisition of FiltaGMG in August 2017, we are pleased to report that business has been fully integrated into our Company-owned activities.
Our move into Europe has been very encouraging with 8 new franchises sold, and the North American business continues to attract high levels of interest.
We completed the acquisition of Watbio at the end of the year and since that time, we have been very encouraged by the opportunities this business brings to the Group. With Watbio expected to add over £10 million of revenues to the Group and with the existing businesses performing strongly, we look forward to the progress seen in 2018 continuing through this year and beyond."
I like all that, it sounds very good.
My opinion - the concept here seems to be based on acquiring businesses dealing with unpleasant & dirty (but recurring - hence lucrative) things, like cleaning off cooking fat from commercial kitchen appliances.
As you can see from the valuation metrics, it looks rather expensive, but seems to be generating strong EPS growth;
I'd want to see the full 2018 accounts before considering an investment here, in particular to better understand the split of growth between organic, and from acquisitions.
Trifast (LON:TRI) - this industrial fastenings group seems to be shrugging off macro issues (so far anyway);
Despite the macroeconomic backdrop impacting the outlook for industry as a whole, we are pleased to announce that the Group continues to trade in line with our expectations.
Furthermore, recent contract wins, and a strong pipeline gives us confidence as we look to the future.
Interesting Brexit comments;
Our cross-functional Brexit team which has been in place for the last two years has completed its contingency planning. We currently consider that both the operational and financial impact of any Brexit scenario will be manageable in the short term. Longer term implications for the wider UK economy are less easy to predict.
Restaurant (LON:RTN) - unexpected departure of CEO today has rattled the market, understandably.
Share price is down 11% to 130p. I feel that the acquisition of Wagamama was a rather strange decision. It doesn't inspire confidence that the CEO has left shortly after this deal was done.
That's me done for the day! See you tomorrow.
Best wishes, Paul.
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