Good morning!
I'm a little bleary-eyed today, as my flight home last night after the Northamber (LON:NAR) AGM was delayed (please note that I no longer have a position in NAR).
Today, I will provisionally cover:
- Northamber (LON:NAR)
- Focusrite (LON:TUNE)
- Westminster (LON:WSG)
- Bilby (LON:BILB)
- XLMedia (LON:XLM)
- Trackwise Designs (LON:TWD)
- Goodwin (LON:GDWN)
There was a power outage at my office building, while I was writing up Bilby, and I am now aiming for a 5pm finish.
5.30pm: report finished for today, I got as far as XLM.
Cheers,
Graham
Northamber (LON:NAR)
- Share price: 52.6p (-4%)
- No. of shares: 27.3 million
- Market cap: £14 million
I've written about this IT distributor recently, both here and elsewhere.
It's a classic "cigar butt" investment, with an old and unprofitable business attached to a very rich asset base consisting of cash, property and working capital. It has been unprofitable for nine years. A classic value investment, in other words.
I bought into it recently, at 51p, which I believe represents a discount to its cash balance. I think the shares would be worth 88p at a minimum, possibly 100p or more, from a simple liquidation and disposal exercise.
But before I go any further, let me echo what Paul said yesterday: "it seems crass to be talking about investments when someone has tragically died".
Northamber is a company in mourning, as its founder, Mr. David Phillips, passed away two weeks ago.
AGM Day
I went along to the AGM to understand the thought processes of the current directors. The Northamber office is in an industrial part of Chessington, only two miles from the famous "World of Adventures" (owned by Merlin). I got there via taxi from Gatwick.
The meeting was well attended, by microcap standards, and was much more crowded than the previous ones I attended. I estimate that there were 7 shareholders present, including the son of Mr Phillips (Mr Phillips had a 63% stake). And there were a few spouses and a crying baby, too! We all sat in swivel chairs while the Board, along with the Company Secretary, had the top table.
The makeup of the Northamber Board is very different now, compared to the previous Northamber AGMs which I attended. It consists of an NED who has been promoted to Chairman, a new NED, and the Operations Director.
The opening statement was a tribute to Mr Phillips by the Chairman. Mr Phillips was much-loved by everyone who knew him, according to all reports.
The opening statement also included a commitment by the Board "to support and continue the pursuit of Northamber's success".
All resolutions put to shareholders were approved, and the Q&A began. What follows is from memory, so is incomplete and may include errors.
Change of auditor
One substantial shareholder, who is a regular at these meetings, questioned the audit report - why did it not include a reference to the loss of the previous auditor, Grant Thornton, who had apparently resigned?
The Chairman and Company Secretary responded that it had already been disclosed appropriately and that the loss of GT was not a reflection on Northamber. It was put to the Board that the audit report should be more forthright about something like this in future.
New director
The same shareholder asked the new non-executive director, Colin Thompson, to introduce himself.
It emerged that Mr Thompson lives in the US, but visits the UK every six weeks and is taking an active approach to improve the business. He was an employee of the company in the 80s (almost from its inception) and has been on this Board before.
Go-private
The same shareholder said it was "nonsense" that Northamber was still publicly listed, and that he would be happy to facilitate a transaction to take it private. This was acknowledged by the Board.
Tax on warehouse sale?
The tax hit from the recent warehouse sale (for £16.4 million, i.e. more than the company's market cap) would not be very bad, although we weren't given any numbers.
Sell the business?
Another shareholder asked if the Board had considered the sale of Northamber's operating business, or the acquisition of other businesses.
The answer was No to the sale of Northamber's business, although the Chairman thought it would be valuable to rivals.
On the other hand, they might consider acquiring other businesses.
Return of capital
I asked if a return of capital was being considered. The Chairman said that it was possible, depending on what transpires in the next few months. I couldn't draw him any further on this.
Later, I asked him to think strongly about the opportunity cost of having so many assets tied up in the business. He replied, "we are".
Use of cash
I asked what the company planned to do with its very large cash balance.
The answer was that it would be used to "grow the business", although this was somewhat contradictory as it was immediately followed up by an acknowledgement that the company's use of space and its business lines needed to be rationalised further.
Chessington office
The AGM took place in the 20,000 square ft. office which Northamber owns. I asked what percentage of the building is currently being used.
The initial answer I got was 50% (which is what I expected), but Board members then said that other space was being used for training, meeting rooms, etc. They acknowledged that the building was designed for more employees than Northamber's current needs, and that the building is under review all the time.
Son's role
I asked what was the role of Mr Phillips' son in the business. They said that he was an employee, not on the Board.
I probed further, not getting much of a response, and in the end I bluntly asked what was his job title. They replied that he was Director of Strategy, but that this was a non-Board role. They said he had been in this role for about 5 years.
This came as a surprise to me. I knew that Mr Phillips' son had previously been the Director of Strategy, but I thought that he must have moved on, since there was no mention of his salary under "related party transactions" in the Annual Report (he had previously been mentioned in this footnote).
I asked about this, and was advised that it was not necessary to include adult offspring under related party transactions. Under IFRS, we have the following definition:
Family member. The party is a close family member of a person who is part of key management personnel or who controls the entity. A close family member is an individual's domestic partner and children, children of the domestic partner, and dependents of the individual or the individual's domestic partner.
According to the Board of Northamber, "children" does not include adult offspring. This is something we should all be aware of, I think!
I asked if the meeting might hear a few words from the Director of Strategy, who was in attendance as a shareholder, but this was not on the agenda.
Strategy for profitability
The Chairman had already said that the company was focusing on higher-margin products, in order to return to profitability. In addition, we had learned that the recent purchase of a warehouse in Swindon would help to cut costs, which could "possibly" save the company hundreds of thousands of pounds each year.
According to the Chairman, if only a number of retail accounts had not been lost in FY 2019, then profitability might have been achieved. He agreed with shareholders that making losses over a very long period of time was not an acceptable position for the company to be in.
The company has indeed made slow progress when it comes to boosting its gross margin, but I asked for a more detailed explanation. I asked if the Chairman could give us reasons to leave the meeting with a stronger belief that profitability might be achieved.
At this point, I was met with an objection (I believe from the Company Secretary) that nothing could be disclosed to a select group of shareholders that was not disclosed publicly, i.e. that all information needed to be revealed to all shareholders at the same time.
I wasn't happy with this response. I replied that this was a public meeting which all shareholders could attend, and that the reason shareholders attend AGMs is to get more colour on company strategy.
But it was to no avail.
Conclusions
Before I left the room, I had decided that I should probably exit this position. And about an hour later, I did indeed sell out entirely.
I had money tied up in this share before, for about three years, when it was at 30p. If I had only held on for another three years, I could have enjoyed the increase to 50p.
Maybe it's my fault - maybe I don't have the patience or the temperament for this sort of thing.
What I was looking for at the meeting was a sense of urgency to create value for shareholders.
While I do believe that the Board are trying their best, I came away from the meeting fearful that the company will remain loss-making for the foreseeable future, and that value might not be unlocked for shareholders any time soon. The Board seemed determined to carry on with the core of the existing strategy, for the foreseeable future.
Post-script
Shortly after I sold out, I learned via RNS that Northamber is in "advanced discussions" to acquire an audio-visual distributor. AV had been mentioned as an area of interest in the AGM.
...if the Potential Acquisition proceeds, it will assist in enhancing and expanding Northamber's specialist AV division which focusses on driving higher margin profitable growth for AV and IT resellers in the areas of Professional Displays, Projection, Audio, Video Conferencing, Visitor Management and Room Booking Systems.
The timing of this announcement, an hour after the conclusion of the AGM, is worth commenting on.
A cynic might think that the Board didn't want to field questions about this at the AGM.
Is there a better explanation? I cannot think of any!
If I hadn't already sold my Northamber shares, there is a good chance that I would have done so, on reading this announcement.
The terrific value that was crystallised by the £16.4 million warehouse disposal is being rapidly converted back into illiquid assets.
Firstly, we had the £3.2 million purchase last week of the Swindon warehouse. And now we have the possible purchase of a company with net assets of £1.7 million and profits last year of £200k (Companies House). So maybe we have £5 million out the door already, depending on the price of the acquisition.
I'm glad that I went to the meeting. It served its purpose of helping me to understand something about the Board of Directors and the direction of the company. Without it, I might not have had the conviction to sell out so promptly.
General conclusions?
Let's see if I can figure out some lessons which might have broad applicability:
- Go to AGMs! They give you colour which RNS statements and annual reports can't.
- When you go, ask simple questions about the things that are bothering you. It's better to look stupid by asking a simple question than risk missing the elephant in the room that nobody wanted to talk about.
- Read the small print, but don't trust it. Even the annual report might not tell you something that is potentially important (e.g. that the company was sacked by its auditor or that there is a family member in a key role).
- Value investing is hard and frustrating. Even when it seems obvious that something is good "value", there is nearly always a problem with it, or a reason why value can't be unlocked.
I think I will hang up my deep value investing boots at this point. In my view, it requires too much work to find a company which has great value and where value can be unlocked with some degree of certainty.
Northamber might prove to be terrific value at current levels, and I wish it well. But I am not going to be around to find out - there are easier ways to invest than this.
Focusrite (LON:TUNE)
- Share price: 611p (+2%)
- No. of shares: 58 million
- Market cap: £355 million
Acquisition of Martin Audio Ltd
Focusrite is "the global music and audio products company supplying hardware and software used by professional and amateur musicians".
This is quite a large acquisition: Martin Audio is being bought for £39 million, or £35 million if you exclude £4 million of cash it holds. The deal requires shareholder approval.
Focusite is known for its musical interfaces (among other things), while Martin Audio's main categories are:
- Concert Touring/Production
- Portable Sound Systems
- Installations
I know very little about the music industry, but it's not too difficult to imagine that there could be synergies between this and Focusrite's activities. Martin will continue to use its existing office and factory, and existing management team.
Both companies are based in High Wycombe:
- the Martin MD says "we know the team at Focusrite very well"
- The Focusrite Chairman says "we have known and admired the Martin Audio group for many years".
That's good - it increases the chances of positive culture fit and good relationships between everybody who will be working together in future to maximise their cross-selling opportunities.
Valuation: Martin's EBIT over the 12 months to October 2019 was £2.9 million. So the valuation looks average (EV/EBIT = 12x).
My view: this gets a cautious thumbs up from me. The strategic fit sounds reasonable, the valuation is nothing out of the ordinary, and it's nice for the companies to be geographically nearby - nobody will have to move house to make it work!
Note that TUNE shares remain extremely expensive on a PER basis, despite a recent lack of organic growth. Therefore, I remain priced out of them, as I'd be reluctant to pay a large multiple for growth that is being generated via acquisition. The current multiple is 28x, according to Stocko.
Westminster (LON:WSG)
- Share price: 12.7p (-1%)
- No. of shares: 145 million
- Market cap: £18 million
Trading update and exercise of warrants
I suggested that "extreme scepticism" was the right approach, when I mentioned this one back in May.
Since then, the share price has made great gains from c. 7p - maybe I was too sceptical? But the financial track record here is truly terrible.
It provides support services to large organisations, including governments, with a focus on security, transport and infrastructure.
It's not the type of thing I would invest in, so let's keep this brief. Trading update highlights:
- FY December 2019 to show double digit growth in revenues, "leading to a much improved EBITDA".
- Strong numbers from West African airports
- New operations in Ghana going well
- Diplomacy going well in Saudi Arabia:
Our JV partners are Hazar International who, under their impressive Chairman, Sheikh Salman Bin Mohammed Bin Khalid Bin Hethlain, are strong and influential partners.
Outlook
We enter 2020 with increased confidence underpinned by an order book of around £2 million and several million GBP in contracted revenues already in hand from our port, airport, guarding and maintenance contracts. Coupled with healthy enquiry levels and numerous project opportunities at various stages of development we anticipate 2020 will be another year of significant growth.
My view
No change to my view on this. Lots of activity and good revenue growth in recent years but the long-term prospects for profitability are impossible to judge.
Bilby (LON:BILB)
- Share price: 26p (+28%)
- No. of shares: 59 million
- Market cap: £15 million
This is "a leading gas heating, electrical and building services provider".
Even after today's strong gains, it remains far below its highs (it reached 135p last year). One of its subsidiaries had a disastrous 2018, involving "operational failings the resulted from governance failings". This subsidiary has been restructured.
H1 underlying operating profit is down 25%, compared to last year. H1 net income falls to £540k, from £1.1 million.
Net debt creeps higher, to £11.1 million (prior to a £2 million fundraise). The bank "remains supportive of the Board and the ongoing operational and financial review".
Key points:
- new CEO
- closure of a problematic gas division in the bad subsidiary
- ongoing "standardisation and centralisation of operating systems, policies and controls"
- new contracts secured and no major contracts up for renewal in this financial year
Outlook
The Board remains confident of at least maintaining underlying revenues of £59 million with an underlying EBITDA of not less than £4.5 million.
..the Group has now conclusively resolved its legacy issues relating to P&R and the underlying business remains solid. With our bolstered management team, spearheaded by a CEO who is dogged and impressive, I am confident Bilby can return to the rate of growth of previous years.
My view
This isn't a sector which I invest in. For what it's worth, I reckon that it's around fair value at current levels. While EBITDA of £4.5 million would be a great result, the enterprise value here is really c. £24 million when you take the debt into account.
And then you have to consider the uncertainty surrounding contracts and margins in this industry.
In the last few months, Bilby has been extracting itself from contracts which didn't work out. It achieved:
Conclusion and closure of the resolution proceedings relating to the two severely loss-making contracts with Carillion Amey and East Kent Housing with nil settlement to all parties
It is cheap for the right reasons, in my view.
XLMedia (LON:XLM)
- Share price: 42.3p (-28%)
- No. of shares: 207 million
- Market cap: £87 million
Commiserations to anyone who held this overnight.
It's a stock we covered many times in the SCVR. Tt has appeared very tempting from a quantitative point of view.
But it's an Israeli tech company, incorporated in Jersey. Like most foreign stocks, listed on AIM, things can and do go wrong.
Its founder and long-standing CEO, Ory Weihs, moved up to a NED position a few months ago. He has been buying back shares for his personal account, around 50p-58p.
And the new CEO has been reviewing things.
His conclusion: "the Group will require increasing expenditure in 2020 in order to support sustainable growth in the medium term. These new initiatives are aimed at strengthening the Group's core business, mitigating ongoing regulatory headwinds and better positioning the Group for growth."
Increasing expenditure = reduced profit expectations in the short-term.
Trading update
Trading for FY December 2019 is "broadly consistent" (i.e. a little worse) than previous guidance.
Revenue will be c. $78 million and adjusted EBITDA c. $32 million.
According to the forecasts visible to me, the previous expectations were for revenue of $84 million and EBITDA of $34.5 million.
That means we have a material profit warning, not something I'd describe as "broadly consistent" with previous guidance.
Outlook
Higher costs are going to have an impact next year:
...despite revenues for the year ending 31 December 2020 expected to remain broadly stable versus 2019, adjusted EBITDA is anticipated to be materially lower than previous management expectations.
My view
It's absurdly cheap, if you believe the numbers.
The trailing EV/EBITDA ratio is c. 2x. Things don't get much cheaper than this. Can we trust it?
The new CEO also comes from a "performance marketing" background, and hopefully he will be able to steer the ship in a reasonable direction.
Cash and short-term investments were $43 million at June 2019. That's nearly 38% of the market cap ($113 million).
There is a chance that a lot of the cash could end up being used in acquisitions - the group today says that is "actively seeking" them. Regulation of online gambling is hurting the core business, and I get the impression that acquisitions might be seen as a way to prevent the business from shrinking.
Might be worth a look, but be aware of the risks.
I've run out of time for today, but will circle back to Trackwise Designs (LON:TWD) and Goodwin (LON:GDWN) tomorrow, if possible. Things are usually quiet on a Friday.
Have a good evening,
Cheers
Graham
See what our investor community has to say
Enjoying the free article? Unlock access to all subscriber comments and dive deeper into discussions from our experienced community of private investors. Don't miss out on valuable insights. Start your free trial today!
Start your free trialWe require a payment card to verify your account, but you can cancel anytime with a single click and won’t be charged.