Small Cap Value Report (Fri 17 May 2019) - STAF, MNZS, FUTR, CHH

Good morning! Another short, but early report today.

EDIT - actually, it's BOGOF day! Graham and I got our wires crossed, and we've both written a brief SCVR today, with some duplication, but actually it's quite good to have 2 possibly different views. Graham's SCVR today is here. End of edit.

I have to speak at Mello at 2pm today, so am having kittens about my (still not finished) presentation slides.  NB. Don't ever ask me to organise anything important, as it will go disastrously wrong, almost guaranteed!

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Early 7-8 am comments

Staffline (LON:STAF)

Trading update - this is an interesting comment re employment, which actually sounds rather good for the country (more secure, permanent jobs for people has to be for the social good), but bad for STAF;

The ongoing Brexit uncertainty is impacting the UK labour market and led to a number of customers transferring a significant volume of their temporary workforce into permanent employment to mitigate the risk of that labour market tightening. Typically, this reaction to uncertainty tends to reverse over time, but we expect it will continue to impact temporary worker demand throughout the current year. 

New contract wins slow, blamed on delay to publishing 2018 accounts. Really? That doesn't sound realistic to me. Do customers even check the accounts of a temping agency? I'd be surprised if they do;

There has also been a slowdown in new contract momentum in the current financial year, which the Company largely attributes to the impact of the delay in publication of the 2018 Full Year results.  The key outstanding matter in finalising the results relates to the Group's historical compliance with National Minimum Wage Regulations 2015. This is a complex area and management, in conjunction with HMRC and supported by an independent advisor, are assessing the significant amount of historic data and transactions, which will then be subject to audit.

So a complex problem is ongoing.

Some signs of hope, buried in this management-speak!

Notwithstanding these current headwinds, the Recruitment division is beginning to see the definitive benefits from the Company's market-leading approach to worker engagement and digitally enabled candidate attraction. Management expects this strategy to result in increasing differentiation and to support future growth.

Incidentally, I've just googled "management-speak", and I'd like to pass on this gem, to use when you need a duvet day;

I don't have much bandwidth today so I'm going to stick to collaboratively promoting key differentiators in an ever changing marketplace by delegation.

(NB, this is NOT from Staffline, it's from @managerspeak on Twitter)

People Plus division is struggling in 2019, but sounds more confident about outlook for 2020.

Full year outlook;

The Group experiences seasonality in its trading and typically earns only approximately 15% of its earnings in the first quarter of the financial year. The April performance is therefore a key initial indicator as to the full year turn out, and with visibility of that trading, and as a consequence of the broad range of factors highlighted above, the Board now expects the Group to deliver adjusted EBIT in the range of £23 million to £28 million for the financial year ending 31 December 2019.

Broker research - to save me crunching the numbers, I've glanced at a new note just published on Research Tree. Key points;

• EPS forecast - down a whopping 46% for 2019, but only 17% for 2020
• Net debt estimate up from £52m to £85m
• Bank covenants possibly under pressure, STAF may seek a waiver

My opinion - I don't hold, but if I did, I would sell on the opening bell.

I'm not keen to own any share where bank covenants are potentially an issue. Also, with business seemingly declining in a tight labour market, this doesn't look a good sector to be in. Could be read-across for other staffing agencies perhaps?

Now we know why the former CEO sold out, perhaps?!

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John Menzies (LON:MNZS)

A solid-sounding update.

In line with expectations.

Looks cheap on a PER basis, and with a decent divi.

However, note the weak balance sheet. Here is my last comment on the company from Nov 2017, which is still relevant today;

My opinion - I reviewed its last interim results here. For me, the very low operating margin, and its horrible balance sheet, rule this one out. However, trading does seem to be going well, so my worries may not be pertinent right now.

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Future (LON:FUTR)

• Fantastic headline figures - e.g. adj. diluted EPS up 92% - very much a sit up & take note figure!
• Growth mainly from acquisitions. Organic revenue growth of 14% is also good though.
• Adjustments to profit include a large £5.2m share payments figure.
• Balance sheet looks horrible, with large negative NTAV, but that may not matter to investors when the business appears to be performing very well.
• Note the large contingent consideration liability.

My opinion - none really, as I haven't looked into the share closely enough. But it seems to be doing well - well done to holders!

EDIT at 08:45 - apologies I missed this important point somehow on the first trawl;

We have seen the strong momentum continue as we enter the second half of the financial year, with acquisitions performing well and continued positive organic growth in the Media division. While the backdrop of an uncertain economic outlook remains, the Board anticipates the Group's performance for the full year to be ahead of its previous expectations.

Apologies for the omission, I should have spotted that first time around. (end of edit)

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Churchill China (LON:CHH)

Trading update - it's trading well, in line with expectations.

That's unlike Portmeirion (LON:PMP) which warned on profit recently.

CHH shares have had a great run recently, and look priced about right to me, on a fwd PER of 20.8

A very nice business.

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That has to be it for today. I'll definitely be at Mello today (couldn't make it yesterday due to flare-up in chest infection, yet again). Putting finishing touches to my slides for my 2pm talk today.

People who cannot attend Mello will be able to see the (many) sessions which are being filmed online. I think David wants some payment for that, as otherwise nobody would go to the physical event! But please don't feel you're missing out because I'm having to desert my post here, to prepare my Mello talks for later today.

Best wishes, Paul.