Small Cap Value Report (Weds 11 August 2021) - RST, GDWN, RPS, WBI, HSW

Morning all, it's just Paul here today, with the SCVR for Wednesday.

Today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

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Agenda -

Paul's Sectioon:

Restore (LON:RST) - (from yesterday) - RST has successfully fought off a semi-hostile takeover approach from Marlowe (LON:MRL)

Goodwin (LON:GDWN) - results for FY 04/2021, look good. The valuation has come down to a more reasonable level. Sound balance sheet & cashflows. This share looks interesting to me on a quick review of the numbers, and could be worth readers doing your own more detailed research.

Rps (LON:RPS) - Interim results are nothing to write home about, with increased profits coming from cost-cutting rather than revenue growth. Balance sheet still quite flimsy, although helped by a placing last year which increased the share count by 20%. One for sector experts I think, as there's nothing much in the figures or outlook to excite me.

Woodbois (LON:WBI) - poor interim results from this AIM-listed African timber company.

Hostelworld (LON:HSW) - multiple issues with this share, so I'm steering clear.

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Restore (LON:RST)

490p - mkt cap £669m

Bid talks off

Marlowe (LON:MRL) announced yesterday that it does not intend to make an offer for Restore, as acceptable financial terms could not be agreed. RST mounted a spirited defence of its independence, with most of its major shareholders supporting RST management.

Given that the proposed deal was mostly offering new Marlowe shares, with only a small cash component, then the possible deal was highly dependent on Marlowe shares being buoyant. In reality, Marlowe shares were slipping in price, thereby making a takeover deal funded mainly in Marlowe shares less attractive.

This was certainly an interesting situation, and unusual, in that Marlowe went semi-hostile by appealing above the heads of RST management, to shareholders directly & publicly. That’s very unusual these days, but was more common in the 1980s I think - who can forget the Guinness-Distillers case, where share prices were manipulated in an attempt to get a deal done, leading to jail sentences for the "Guinness Four". Including famously Ernest Saunders, who was released after only 10 months, due to suffering from incurable Alzheimers. He subsequently made medical history with a full recovery [source]. You've got to admire his ingenuity in a way, that must have been a tough thing to pull off convincingly.

RST made the point that whilst superficially similar, there were in reality few synergies between RML and RST. Anyway, they’ve lived to fight another day, there must be considerable relief at RST headquarters! It’s provided a nice boost to RST’s share price, so anyone minded to sell has had a good opportunity to bank an extra 20% from this bid situation. RST looks quite good, but priced about right now I think.

RST seems to be good at making multiple acquisitions.

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Goodwin (LON:GDWN)

3010p (up c.1%, at 08:33) - mkt cap £232m

Final Results

To refresh our memories, here is my review of the last interim results from this engineering group, published in Dec 2020.

Today we have results for FY 04/2021. The company doesn’t seem to put out trading updates between results.

Overall this looks a respectable results, given that H1 saw PBT (profit before tax) of only £5.8m, implying a rise to £10.7m PBT in H2 (although sometimes year end reconciliations, and audit adjustments can muddy the water in H1 vs H2 comparisons) -

The pre-tax profit for the Group for the twelve month period ended 30th April 2021, was £16.5 million (2020: £12.1 million), an increase of 36% on a revenue of £131 million (2020: £145 million). The Directors propose an increased dividend of 102.24p (2020: 81.71p) per share.

Profit margin - £16.5m profit on £131.2m revenues is a healthy margin of 12.6%, so this is a quality business, in a difficult year (impact of pandemic). Note there is a non-controlling interests line, so just under 4% of the profits (£512k) don’t belong to group shareholders. This is adjusted for in EPS, making EPS the better measure to use for profitability.

EPS - diluted EPS is 164.2p, up 59% on last year.

This gives a PER of 18.3 - that’s much improved (i.e. a lower multiple) than when I last looked at this share, when the PER was nearer 30. So providing this higher level of profitability is sustainable, then the valuation is now looking much more attractive to me, and I like the fact that the company has delivered a strong H2 & overall decent full year result.

Divis - that’s a yield of 3.4% - not bad. I’ve checked the Stockopedia dividends summary page, to see if they pay interim divis too, but no, it’s just final divis. As you can see below, the divis were rebased upwards significantly in the last 3 years, which looks like a strategy decision, and it’s impressive these have been sustained despite the pandemic. Also note occasional special divis previously.

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Order book - down on last year, but still referred to as “healthy”. I assume that “workload” is the same as order book?

...the Group's workload as at the time of writing remaining healthy at £165 million (2020: £183 million).

Outlook -

Armed with a strong balance sheet and a renewed set of bank facilities we are well placed to benefit from the recovery of the global economy and deliver strong returns on the capital that has been invested to date. The Board remains confident of the Group's ability to continue to develop new and existing activities that will deliver additional sustainable growth in the long-term.

Balance sheet - it’s a fairly capital intensive business, as I would expect for an engineering group, with £77.1m of tangible fixed assets.

I’ve checked note 12 of the 2020 Annual Report, which shows £33.5m of land & buildings. I assume this is freehold property, because leased property is a separate line, Right of use assets. It is not stated whether the land/buildings are included at cost or valuation. Family-run, traditional businesses like this often have a treasure trove of hidden assets, with freehold property often in the books at a lot less than current value, thus providing investors with strong downside protection, which they may not even be aware of.

NAV is £118m, less intangible assets of £24.8m, gives NTAV of a healthy £93.2m.

Working capital looks very good, at a current ratio of 2.11 (anything above about 1.5 is very good, for this type of business).

There’s £34.7m in bank borrowings, partially offset by £15.2m in cash, so net debt of £19.5m. The narrative says net debt was £17.4m, so let me double-check what the discrepancy of £2.1m might be. No, I’ve drawn a blank on that, there’s no breakdown of the net debt figure, but they’re in the same ballpark, so let’s move on.

Overall, given the freehold property assets (which I usually offset against net debt), the liquidity and overall financial strength of the business looks very good. I have no concerns about the balance sheet at all, it passes with flying colours. I can’t see a pension deficit either, which is good. Double-checking by doing CTRL+F for “pension” produces zero results. So it looks clean in that regard, apparently no pension deficit, which can often be a big problem for this type of traditional business.

Cashflow statement - is impressive, for both years, this is a decently cash generative business. Although note just over half of cashflow was spent on capex. This seems to include building a new freehold facility, which was transferred from assets under construction, into property. Hence that temporarily inflates capex, which should be lower in more normal years.

Note also it capitalised development spend of £1.4m (£1.1m LY) which is fine, as it’s not excessive by any means.

Dividends paid were more than covered by the free cashflow, which is good to know, as that suggests divis are sustainable at this level.

My opinion - please remember that in the time available, and the large number of companies covered in the SCVRs, we’re only really reviewing the numbers. It’s not feasible for us to go into detail about the company’s products, markets, and hence future outlook. That’s your job!

Overall though, I’m impressed with the numbers, the valuation looks reasonable, and think this share looks worth a closer look by readers, if you like the sound of it.

I seem to recall we had a good discussion about this company last time it reported, and it might have been Rhomboid, who posted comments saying that he’s done detailed research, and believed the outlook for new business (e.g. nuclear decommissioning containers, I think?) looked very good.

I’d like to hear more about this company, from readers who have researched it in depth. From my brief review of the numbers, I think Goodwin looks potentially interesting.

See the long-term chart below, which I've zoomed out to show the spectacularly good long-term track record. A decline in the oil & gas sector, on which Goodwin used to be very reliant, is the driver of the dip from 2015, but new markets have since been expanded into. Also the price of oil has been rising more recently.I wouldn't be surprised to see the share price working its way back up to former highs, if current good performance continues.

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Rps (LON:RPS)

108p (down c.2% at 10:24) - mkt cap £295m

Preamble - I’ve only ever reviewed this company once, just before the pandemic began in Feb 2020, reviewing RPS’s calendar 2019 results here. They weren’t great, with 2019 adj profit before tax (PBT) of £37.3m, down 26% on 2018. So something seemed to be deteriorating even before the pandemic struck in 2020.

I also noted that the balance sheet showed negative NTAV, and net debt was also a concern to me at end 2019.

Looking quickly at FY 12/2020 results, adj PBT fell heavily, to £13.4m, down 64%. Exceptional costs were heavy at £39.2m in 2020 (mostly goodwill write-offs), and £23.4m in FY 2019, as a reader points out in the comments section. Exceptionals are minimal this time, in H1 2021, pleasingly, so it looks like restructuring is out of the way now.

Cashflow in 2020 was strongly positive, due to squeezing working capital, and paying down debt.

A placing was done in Sept 2020, noting that some of the favourable working capital movements would unwind in future. £20.2m in gross proceeds were raised by issuing 45.88m new shares at just 44p (price now 108p), so they raised at a really bad time, and enlarged the share count by 20%, which obviously detracts from the % upside in future, per share. That’s the trouble with running a lean balance sheet with too much debt - it can force the issue of new equity, at the worst time & price, when something unexpected happens - as we saw for many companies in 2020.

That’s set the scene, so clearly the attraction of this share is whether it can recover to pre-covid trading, or better, in recovering economies around the world?

Interim Results -

RPS, a leading multi-sector global professional services firm, today announces its interim results for the six months ended 30 June 2021 ('H1 2021').

Company summary -

'Strong financial performance, proven ESG credentials, significant opportunity, and reinstating dividends'

Revenues unchanged at £232.4 (up 0.5% to be precise) for H1

Adj PBT up 128% (from a low base) to £9.8m - achieved by cost-cutting

Adj diluted EPS 2.54p - only up 25%

Net debt reduced considerably from £57.8m at 06/2020, to £27.8m at 06/2021 (helped by the placing of course)

Commentary says H1 trading was in line with expectations

Interim divi reinstated, of 0.26p - very small, so nothing to get excited about

Contracted order book up 7% in last 6 months, but no figure given

Outlook - a couple of key excerpts (there’s more detail in the RNS) -

The good momentum achieved in the first half of the year has continued into H2 2021...

We remain focused on building a business that can deliver mid-single digit rates of organic revenue growth and a double-digit operating margin in the medium term and are confident in our ability to do so.

Balance sheet - NAV £348.2m, less intangibles of £343.2m, leaves a sliver of £5.0m NTAV. Still not great, despite a fundraising last year.

Cashflow statement - not good, it consumed £15.2m cash in H1 2021.

My opinion - I’m not impressed overall. The recovery so far seems quite slow, maybe that’s because providing consultancy on capex projects has a time lag?

Outlook comments don’t sound particularly exciting either.

Overall, I think this is one for sector experts, who have a better handle than me on the longer term prospects. Even before covid, profitability at RPS was too erratic for my liking (see graphs below).

On the upside, there was a spate of takeover bids in this sector a while ago, and with UK companies being bid for left, right, and centre, that could be an outcome here too maybe?

Overall then, I’ll just say I’m neutral. It could rise further, as the recovery in business hopefully gathers steam?

The valuation looks quite reasonable, based on an update note from Liberum (many thanks!) this morning. Forward PER of about 15-16 looks about right, but holders must be hoping the company can beat fairly undemanding forecasts? Although bear in mind there are 20% more shares now, compared with pre-covid. There looks to be an H2-weighting to profitability.

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Woodbois (LON:WBI)

5.0p (unchanged) - mkt cap £93m

Half Year Results

I’ve not looked at this share before, but have had a quick skim through its interim results today for the 6 months to 30 June 2021. It seems to be a timber company, listed on AIM, operating in Africa. Probably not much more needs to said, given AIM’s track record on speculative overseas companies - it seems to be a magnet for duds. There’s always the slim chance this could be a needle in a haystack though.

I can’t see anything of interest in the numbers -

H1 revenues only $8.2m (down slightly on LY H1)

Very weak gross profit margin (20%), only $1.7m gross profit, albeit better than even worse figures last year

Loss making every year, apart from a prior year profit which came from revaluing its assets upwards

My opinion - why take the risk? How is it worth £93m? Maybe the story is all about future growth, and biological assets maturing over time? It’s just not the sort of thing I would go near, having seen so many speculative, loss-making overseas stock promotions on AIM go horribly wrong over the last 20 years.

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Hostelworld (LON:HSW)

96p (up c.1%, at 12:34) - mkt cap £112m

Interim Results

Travel-related shares are obviously in varying degrees of mothballing, or stop-start operating, so the only reason to look at the figures is trying to work out the recovery potential, and how solvent the company is. In that regard I would have thought internet businesses like HSW should have an advantage, in having a flexible cost base.

Key numbers for H1 (HSW reports in Euros) -

Negligible revenues of E2.9m (down 76% on H1 LY) - not a surprise given travel restrictions

Marketing costs also slashed, from E7.5m H1 LY to E2.4m H1 this year

Administrative expenses down 43%, but still substantial at E13.5m

Adj EBITDA loss of E9.7m for the six months - that strikes me as worryingly high

Is it likely to go bust? Liquidity looks OK, with E33.7m gross cash, but that’s come from taking out borrowings. Old facilities were repaid, and a new facility of E30m, a five year term loan, with E28.8m drawn down on 23 Feb 2021. This is an unusual, and expensive, borrowing facility, carrying interest at 9.0% + EURIBOR (floor of 0.25%. This facility also has covenants which kick in, in 2023. The lender has also been granted warrants over 3.3m effectively free new shares, 2.85% potential dilution - not a disaster, but it needs to be factored into calculations.

This looks a sensible deal to ensure survival, but it does reinforce that HSW is probably too high risk for conventional banks to get involved at the moment (and I don’t blame them, given the uncertainty).

It also raises the question of whether HSW tried to get equity funding, and didn’t see much appetite from shareholders?

Anyway this deal has largely avoided dilution, so if the business does recover strongly post pandemic (a big “if” - will enough people want to stay in hostels, where distancing is near-impossible?)

Overall then, I think the debt arrangements are clearly unusual, and a very important point for investors to properly research before investing. You can argue either way, bull or bear, on this point. Non-standard debt facilities tend to worry me though, it’s a warning flag. Risk factors are often glossed over by investors (guilty as charged!) so I’m trying to train myself to read them. Here is the one about the new loan facility -

Our term loan facility contains repayment obligations and covenants, reporting to the involved brokers and lenders and requires constant monitoring of the Group's leverage position and liquidity metrics. Without a return to growth it is not certain that the Group can meet the minimum liquidity covenants set out under the terms of the term loan facility agreement.

The risk warnings about competition & search engine algorithms are also worth noting.

Balance sheet - given the current level of cash burn, I do have concerns about balance sheet weakness. NAV is E81.0m, of which E79.7m is intangible assets. Leaving only E1.3m in NTAV. That’s not enough, for a company that’s currently heavily cash burning. Even when travel returns, the cash burn probably won’t stop immediately because increased marketing spend will be necessary to re-start the business.

Hence I suspect a placing might be needed at some stage in 2022, depending on how things pan out.

Note 11 shows some creditors look stretched, especially payroll taxes. That would eat into the cash pile when they normalise.

My opinion - I’m wary of this share. The finances are now totally dependent on an expensive borrowing facility. Also I think overheads look too high, and in my opinion maybe were not cut enough over the pandemic. Although it has dragged on a lot longer than most of us imagined, so it’s difficult to criticise judgements made on whatever information was available at the time.

Probably my biggest concern though, is how much recovery potential is there, given that the business has almost been shut down for 18 months? HSW was losing ground to competitors in 2018 & 2019, pre-covid, with the previous bumper profits under pressure. Add onto that the impact of the pandemic, which could carry on internationally for a while, who knows? Hostels might not be people’s first choice once travel does normalise.

Put all that together, with a share price that seems to be factoring in recovery already, and HSW shares look distinctly unappealing to me, on my personal assessment of risk:reward. I think there are much better, and safer ideas for travel resumption. Although actually many of them look to have already overshot on the upside, so it’s really not a sector that draws my attention at present for new investments.

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