Small Cap Value Report (Thu 26 May 2022) - PURP, BOOT, MORE, SUS, ADF, RAI, NWOR

Good morning, Paul & Jack here.

Agenda - 

Paul's Section:

Purplebricks (LON:PURP) (I hold) - from yesterday. A gloomy trading update. Market cap isn't much above the company's own net cash, but it's loss-making, and instructions are down. Looks like some cost-cutting is necessary. Not really a regular investment, so this is only of interest as a special situation (possible takeover target?)

Hostmore (LON:MORE) (I hold) - a very predictable profit warning, which I've been expecting. It's not as bad as I feared, and the roll-out of new sites (on attractive rents) continues. Medium to long-term, I think this share should do very well. In the meantime, profits are down, but not horrendously by any means. Although sceptics point out that competitor RTN has recently issued a much more positive update - a fair point.

Facilities by ADF (LON:ADF) (I hold) - strong results for FY 12/2021. It floated at 50p in Jan 2022, and is currently 36% up on IPO price - remarkable in a bear market. I like this company a lot on fundamentals. It's in a lucrative niche, and raised £13m net at IPO to expand its fleet of TV/film production vehicles - a booming sector in the UK. Looks attractively priced too. Thumbs up from me.

National World (LON:NWOR) - I've previously liked the figures at this small newspaper group. Today's update is reassuring, in line with expectations. Valuation looks about right on a PER basis, but that ignores a substantial cash pile. Hence it's cheaper on an EV/EBITDA basis. Overall, I can't get excited about this share at the moment.

Jack's Section: 

Henry Boot (LON:BOOT) - solid trading so far this year and the outlook is buoyant. Henry Boot is a good operator that has been around for a long time, and there is value in that kind of track record. But the shares have held up well amid a wider cyclical sell off, so I wonder if at some point we might be presented with a better entry point.

S&U (LON:SUS) - I hold - performance is ahead of budget here and, while issues such as the cost of living, low consumer confidence, and inflation could have an impact, the group is investing for sustainable profitable growth. The forecast PE ratio is less than 9x and the forecast yield is approaching 6%, so I think there’s good value here given the track record, management, and profitability.

Ra International (LON:RAI) - a big loss before tax as the group reports $31.5m of non-underlying charges related to its Mozambique project. The company helps deliver humanitarian projects in areas of need, so I wish the group well, but I think there is significant operational risk here as part of the business model.

---

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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 are analysing the company fundamentals, not trying to predict market sentiment.

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).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

---

Paul's Section:

Purplebricks (LON:PURP) (I hold)

17.8p (down 3% at 12:34)

Market cap £55m

This online estate agent is a special situation these days. The price is bombed out, and the cash pile is of key significance, supporting most of the valuation.

Although widely publicised legal cases, on employment status of staff, and a potentially expensive administrative problem re tenant deposits, are open sores, and likely to burn some of the cash to resolve.

Trading has been poor for a while, and the hopes for recovery on a change in pricing policy doesn’t seem to have worked. So is it a great business? Absolutely not, no arguments there! Although with such big brand recognition, and a still hefty cash pile, there could be value here. That’s why I picked up a tiny position a while ago, just as a cash-backed punt.

This is the latest -

Purplebricks Group plc, the leading UK tech-led estate agency business, today announces a trading update for the 12 months ended 30 April 2022, a year of significant transformation for the business.

Not much to celebrate here -

Since the announcement of our interim results in January, we have seen a continuation of lower volumes of new instructions coming to market1.  

These market conditions have impacted the level of net2 instructions which for the full year ended 30 April 2022 were 40,141 (FY21: 58,043).  

As a result, our revenue is expected to be approximately £70.0 million for the full year and Adjusted EBITDA3 is expected to be approximately £(8.8) million.  

Our cash balance at 30 April 2022 was £43.2 million, reflecting the lower instruction volumes and exceptional costs in line with guidance.

Still plenty of cash left, and at least the exceptional costs are in line with guidance.

With demand reducing, cash also falls, as customers pay up-front, plus operational cash burn.

Clearly the business needs to cut costs, as running up heavy losses isn’t sustainable.

My opinion - it looks pretty bad. There’s still plenty of cash though, at £43m, versus £55m market cap. That’s the only reason that I’m holding a small position, and the high level of brand recognition from years of heavy advertising.

Maybe a private equity bidder might take a look?

Note that the share count has remained at c.307m since about 2019 (the period of the 3 year chart below), which in theory leaves scope for a share price recovery. Although, as the comments section from yesterday showed, there's a lot of competition). Although with venture capital/ private equity funding possibly drying up, then I wonder if weaker competition might fizzle out, leaving cash-rich PURP in a last man standing situation? Who knows?!

. 

---

Hostmore (LON:MORE)

50p (yesterday’s close)

Market cap £63m

Trading Update

I’ve been waiting for a profit warning here, due to all the news about people cutting back on discretionary spending. The relentless fall in share price has also been indicating that the market expects a profit warning. In fact it’s blindingly obvious, in current conditions.

Although competitor Restaurant (LON:RTN) recently surprised with an in line update, which did absolutely nothing for the share price (in the short term anyway). There’s clearly a buyers strike, as my broker is telling me.

The problem, and opportunity with hospitality businesses, is that they’re highly operationally geared (gross margins typically 70-80%). So when that works in reverse, then it can be brutal to profitability, but great on the upside, when sales are growing strongly in an economic recovery.

Obviously right now, with so much bad macro news building, then markets anticipate a plunge in profits in the shorter term.

PR headlines -

Trading update for the 20 weeks ended 22 May 2022 and revised guidance for FY22

A challenging consumer environment but well positioned with a strong and resilient balance sheet

I don’t like being told that companies think they have a strong balance sheet, as it’s often not true! So I've double-checked the FY 12/2021 balance sheet. It's adequate I would say, and dominated by intangibles and IFRS 16 lease figures. Stripping all those out, I get to adj NTAV of only £6.4m. Not much.  There again, it has plenty of cash, almost offsetting the bank debt, so that looks fine. Overall then, I think the company's description of "strong and resilient balance sheet" is over-egging things! Although it's tons better than the heavily indebted Restaurant (LON:RTN) which has a worryingly weak balance sheet. So in comparison, MORE is the much stronger financed business vs RTN.

Revised guidance today sounds like a profit warning.

Remember this is not just TGI Fridays (in the UK), but also a new roll-out of 63rd+1st cocktail bars -

Hostmore plc (the "Company" and, together with its subsidiaries, being the "Group"), the hospitality business focused on American-themed casual dining brand, 'Fridays', the cocktail-led bar and restaurant brand, '63rd+1st', and the fast casual dining brand 'Fridays and Go' announces an update on trading for the 20 weeks ended 22 May 2022.

Revenue, on a like-for-like (LFL) basis is down c.6% on 2019 pre-pandemic.

It says dine-in revenue are in line with industry data.

“Limiting impact” on margins (due to price rises, and hedged utilities)

New sites - 2 “successful” openings done, and 3 more planned for FY 12/2022 - the Dundee site is key, as it’s a test site for a fast food takeaway concept branded as TGIs, with potential for a large number of smaller sites, if it works -

The new store openings in Dundee (Fridays & Go) in March and Chelmsford (Fridays) in May have both since traded ahead of expectations…

Subject to an improved trading environment our ambition is to almost double the number of site locations from the current 89 over the medium term. This growth will be self-funded and achieved through a combination of our core Fridays portfolio, further roll-out of 63rd+1st and, in particular, the development of the recently launched town centre concept Fridays and Go which allows low capital brand penetration into previously inaccessible but attractive geographies.

Growth - this is interesting, and I don’t think the stock market has priced-in the roll-out of new sites, which in more usual market/economic conditions would attract a premium PER. Also, there are many sites available on very attractive terms from landlords, hence this is an ideal time to be expanding, with so much competition biting the dust. An opportunity for a re-rating of the shares, in due course, I reckon. But obviously sentiment is currently very negative. We need to get ahead of the curve, that’s where the opportunities lie in the future, but clearly in the short term things remain tough.

Continued cash flow generation, balance sheet strength and liquidity headroom provides a base to almost double the estate in the medium term.

Inflation - costs are under control, which has been mentioned before, so nothing new here, but it does reassure -

Furthermore, early hedging of gas and electricity costs, both volume and pricing, and success in limiting food and beverage costs increases, has limited the impact on margins…

Food and beverage input cost inflation impacting the sector is currently approximately 10%. We have partially mitigated the impact of this cost inflation by fixed utility and supply contracts

Bear in mind that high gross margins means that higher food/drink input costs don’t make that much difference. For example, if your gross margin is 75%, then cost of sales is 25% (the raw materials, not including wages or overheads). Therefore a 10% rise in raw materials, would only reduce the gross margin to 72.5%. By my calculations, that would need only a 3.4% increase in selling prices to customers, to fully recoup the 10% higher cost of materials. There's also increased wages to consider of course.

Outlook - all important right now - this sounds sensible, guiding down expectations -

The challenging consumer environment means that we are taking a more prudent view on trading for the remainder of year, including the assumption that LFL dine-in volumes, as compared to FY19, may reduce by 8% for the rest of FY22.

Note it says volumes. With selective price rises, that could mean actual revenue might not fall as much as 8%. Indeed, next they confirm this, saying -

… appropriate pricing adjustments, in line with broader sector announcements, to mitigate approximately half of the impact of the lower volumes now anticipated.

Profit guidance - or rather I should say EBITDA guidance -

… the combination of cost increases and lower volume will result in an EBITDA margin (pre-IFRS) in low double digits (%) for the current year compared with our medium-term targeted level of mid-teens, which is retained.

To me, that’s actually fine, and I was expecting much worse. Note this is pre-IFRS 16, so it’s a realistic number, not the inflated EBITDA figure after IFRS 16.

Liquidity - I’m not keen on companies taking on debt right now, for obvious reasons. What if the consumer squeeze gets a lot worse, and sales plunge in a recession?

The Group is highly cash generative and maintains a strong and resilient balance sheet with significant liquidity headroom, providing the flexibility for disciplined expansion. This will be focused around our organic growth and new store openings from our existing stable of brands.

We now expect to be at the mid-point of our previously communicated target net debt to EBITDA range of between 0.75x and 1.5x EBITDA (pre-IFRS) at the end of FY22, taking into account the investment in new store openings.

My opinion - could easily be influenced with subconscious bias, because I hold this share personally, so do take that into account (that’s why we disclose if we hold shares personally).

However, for me this update is glass half full. I was half-expecting a disastrous update, due to consumers apparently drawing in their horns. However, I walk past my local TGIs several times per week, and it looks the same as normal, always doing steady, or busy trade in the evenings, because it's below a big Odeon cinema. Obviously it’s dangerous basing investments on just one site, because it may be atypical. Also many retail/hospitality businesses have a small number of super sites, which generate a high proportion of the profits. I seem to recall from the IPO slides that this is indeed the case with Hostmore. Most sites trade OK, but they’ve got some amazing top performers which generate multiples of the profit of regular sites. Also, hardly any loss-making sites, which is another key plus.

Overall, I’m pleased to see guidance for this year moved down to more sensible levels, and it’s a given that when some consumers struggle with disposable income, they’ll cut back on eating out. Or will they? Some data seems to be suggesting they’re cutting back on buying things like furniture, to prioritise spending on leisure experiences, like holidays & eating out, after several years of pandemic restrictions making such experiences that much more enjoyable. Another key point I'm hearing from sector newsletters, is that consumers are still happy to spend on hospitality, but value for money is key. I'm not convinced that TGIs offers value for money - the product seems expensive for what it is, in my personal opinion, so I rarely visit now. Although I think TGIs is more of a special occasion destination, as you often see families, and birthday parties in my local site. Plus, remember that many middle class households are achieving big pay rises, and so won't be feeling the pinch much, if at all. This bout of inflation is hurting mainly the poor, who spend so much % more on energy & food, the big contributors to inflation right now.  

Ultimately it’s all about valuation, and at c.44p (down 11% today, which isn't bad at all on a profit warning) currently, I reckon MORE is an absolute steal, taking a long-term view. It’s a good business, and today’s update reinforces to me that management seem on top of the issues. It seems clear to me that the share price is almost certainly now nearer to the bottom than the top. Hence potential big future upside, if you can stomach current market conditions. I've been through a few bear markets, and it's bold buying decisions when sentiment is clapped out, and valuations on the floor, that are the big profits of the next few years.

Hence with patience, I reckon this share could double or triple from the current level, once consumer demand has returned to normal. It's a self-funding roll-out, which would usually excite investors in normal market conditions.

There again, I’ve been saying this share is cheap all the way down from 125p, so it may be best to ignore me, or do the opposite to what I do! That said, we just look at the fundamentals here, and it’s up to you to decide what price is attractive to you personally. Your money, your choice, as always. It might be too early to buy, I don't know where it will bottom out, as I can't predict the future. So traders might want to hang back, until it's formed a base, possibly?

.

.

---

Facilities by ADF (LON:ADF) (I hold)

68p (down c.2% at 09:26)

Market cap £51m

This is an interesting little company, hiring out TV production vehicles for outside broadcasting. Completely by accident, on a slow news day, I spotted ADF on the day it listed at 50p, reviewing it here on 5 Jan 2022, which is a good starting point for your research, even if I say so myself!

The 50p listing price looked a bargain, something that I rarely (if ever) say about new listings - which are more usually rubbish companies, or overpriced companies, and often both!

The main risk looks to be very high client concentration (IPO document said top 2 were 65% of revenues in covid-impacted FY 12/2020, with one being Netflix - so a risk of them retrenching maybe?). We might have seen peak streaming, who knows?

EDIT: I've done some more digging on client concentration, and am reliably informed that the top 2 clients are historically 35-40% of total revenues. So the spike up to 65% was a one-off in covid-impacted FY 12/2020. Netflix is still an important client, but growth from other streamers is reducing its % of ADF's total revenues). End of edit. 

On to today’s news.

Final Results - for FY 12/2021 - it’s very late to be reporting 2021 figures at the end of May 2022! 5 months to produce results is ridiculous, especially for small caps, where the figures should be quite easy to produce. They’re not even audited yet!

Although to be fair, there was a trading update on 11 Feb 2022 which gave guidance -

The Board is pleased to confirm that following a strong close to 2021, and subject to audit, it currently expects the Group to report FY21 revenues of c.£27.8 million and adjusted EBITDA* of not less than c.£7.5 million, ahead of current market expectations.

Actual adj EBITDA figures today are £0.2m ahead of guidance, and as you can see below, 2021 was a fabulous year, with a very strong rebound from covid-impacted 2020, and way ahead of pre-covid 2019 -

.

Strong pipeline of films and TV shows “for the coming year” - does that mean calendar 2022, or a year from now? Not clear.

Outlook - this all sounds great, so I’m not sure why the share price has dipped today -

.At IPO, we were also able to demonstrate a substantially sold-out 2022 order book and a significant order book for 2023. This continues to progress and means our new trailers, which increase our capacity, can be booked out in advance. Around 100 additional vehicles will become part of the ADF fleet in 2022, bringing the total number of vehicles to 600, with similar volumes ordered for 2023.

…We have made significant progress in our first six months as a listed business which reflects the hard work and dedication of our staff across the Group. With an excellent customer base and a supportive market backdrop, I am confident this positive momentum will persist as we continue to deliver our growth strategy in the year ahead.

Visibility - this is a key strength of this business & sector -

Production companies are unlikely to change provider once they know the facilities and service levels meet their requirements, given the bespoke set of requirements for each production. The length of planning time has increased in recent years due to the rise in both demand for content and scale of productions. As a result, ADF is receiving some enquiries between 12 and 18 months before a production is filmed, with the average lead time of seven months, and its orderbook is mostly filled for 2022. This level of revenue visibility is rare in any business and allows the Group to accurately plan.

Industry expansion - the commentary contains a lot of very interesting stuff about how UK TV/film production is expanding, helped by large US corporations setting up facilities in the UK, e.g. -

… Major US streaming companies have now set up permanent bases in the UK, with the UK now being Netflix's third largest operation after the USA and Canada. Throughout the year there has also been unprecedented levels of investment in UK studio space and content, which bodes extremely well for our growth ambitions.

That doesn’t sound like a flash in pan to me.

Balance sheet - is pre-IPO, so doesn’t take into account the £13m (net of fees) raised in the IPO. So NTAV reported at £5.4m, should rise to £18.4m, plus retained profits generated since 31 Dec 2022. Therefore the current balance sheet as of today should look really strong, c.£20m I reckon.

Dilution - note that potential dilution looks unusually high, with share options potentially expanding the share count by c.6.5m shares -

.

The current share count (post IPO new shares issued) is 75.5m, so 6.5m options would be 8.6%, which is just within the generally accepted reasonable maximum of 10% dilution.

Valuation - many thanks to analyst Andrew Renton at Cenkos for making available an update note today on Research Tree, it's a massive help to me, and private investors generally. After all, if we can access decent research, then we're more likely to buy/hold the shares, something which some other brokers  still don't seem to understand.

Forecast adj EPS is 4.6p (PER 14.8) for FY 12/2022.

Forecast adj EPS is 5.9p (PER 11.5) for FY 12/2023.

The increased revenues & profit look credible, as the substantial extra cash raised at IPO is enabling ADF to order a lot more new vehicles, and with strong demand, those new assets should be generating increasing revenues, at good margins, from day one.

My opinion - this looks excellent to me, ADF has clearly found a lucrative niche, in which it is the UK market leader. Operating in a sector that is experiencing strong growth & demand.

Valuation looks reasonable, hence I’m sitting tight on my ADF shares. With a bit of patience, I could see this share being at least 50% higher, once more normal stock market conditions return. That’s based on the forward PER being only 11.5 for FY 12/2023, whereas I’d say a PER of 15-20 would be more appropriate.

I wonder if demand might soften, as streaming giants feel the pinch? That’s probably the main risk. Also, competitors might see the margins being made, and also expand their fleets too?

Although positive outlook comments, and forward visibility of bookings being so good, there don’t seem any clouds on the horizon so far.

Nice balance sheet too, post IPO, so there’s a lot to like here.

Previously ADF has talked about expanding into Europe, via acquisitions. In a way, I would prefer them to stick to a lucrative niche in the UK, and not get distracted with overseas expansion. But that depends on management bandwidth, skills, and experience. Have they done acquisitions before? If not, then maybe best to stick to the UK, and organic growth?

.

.

---

National World (LON:NWOR)

22p (up 11% at 12:19)

Market cap £45m

Trading Update

National World plc issues the following trading update for the 21 week period to 28 May 2022 ("the period") ahead of its Annual General meeting on 26 May 2022.

This is a newspaper group, being mainly the assets from failed Johnston Press, later refloated without the baggage of debt or pension schemes, as NWOR.

I know a lot of readers like this value share, and I’ve previously reviewed it positively a couple of times here too.

Today it says -

We have had a robust start to 2022. Despite a more uncertain trading environment…

Pursuing acquisition opportunities.

Revenues YTD (year to date) up 4%, split +5% in Q1, falling to +1% in April & May - that doesn’t look right to me, so I tested it assuming equal weighting in each month, and I come out at +2.8% YTD. So there must be monthly differences to arrive at +4%.

Digital - much stronger growth, at +38% YTD (slower at +28% in April & May) - with stronger yields, and c.100% growth in video advertising. Sounds good, but with no numbers, I can’t assess the significance of this.

War in Ukraine has created volatility in audience numbers - eh? Why would that be?!

Print revenue (selling newspapers) down 2% - split +3% ad revenue, and -7% fall in circulation revenues.

Online-only newspapers are expanding into new regions, under Metro World brand.

Inflation - newspapers have been battling to reduce costs for many years now, as revenues fall. Today it says “careful cost management continues”, and “helps mitigate” increased cost of newsprint.

Cash of £25m at end May, very sizeable for a £45m market cap company. There is £1m of loan notes, and £2.5m deferred consideration to come off that, so still very healthy.

Outlook - sounds fine, being in line -

The trading environment is challenging with market expectations of a significant slowdown in the UK economy impacting consumer confidence, driven by rising inflation and interest rates. However, the Board remains confident that investment in and development of our digital business together with careful management of the cost base will support profits and cash flow. At this stage, the Board expects performance for the year to be in line with the Company's expectations

Valuation - many thanks to Dowgate for providing an update note today.

Unchanged forecasts are Adj EPS of 2.3p this year, rising to 2.4p next year.

At 22p per share, the PER is 9.6, falling to 9.2 - why would I want to pay more for a declining newspaper business? Answer - because about half the market cap is cash, and there could be growth potential in the digital business (shares in larger competitor Reach (LON:RCH) [I hold] went on a mad tear last year, when investors got over-excited about the digital side of the business, which subsequently unwound).

Hence the EV/EBITDA numbers look a lot more attractive, at about 4 times this year, dropping to 3 times in 2023.

Balance sheet - Is the cash real, surplus cash? Checking the 1 Jan 2022 balance sheet, I’d say mostly, yes. Current assets (including £23.0m cash) were £36.0m, and current liabilities were only £18.7m, giving a net current asset (ie. working capital position) of £17.3m - very healthy.

A strange feature is that inventories were only £0.1m. Is that because production is outsourced perhaps, I’m not sure, but that seems likely. Can any shareholders confirm this in the comments below please, if you know.

Overall then, it’s probably got up to about £15-20m available for acquisitions, which could be interesting, providing they don’t do a bad deal. Management is experienced though, so hopefully would not screw up.

My opinion - I can see some value here, but it hinges mostly on what they do with the cash pile. A good acquisition could add value. On a PER basis though, it’s not a particular bargain, probably priced about right.

Remember that this business is probably now up against headwinds on advertising revenue, as well as structurally declining circulation revenues.

I could do with more information about the digital side of the business.

Very recently, I have dipped my toe in the water with a small opening position in Reach (LON:RCH) which has a PER of only 3.6, and a divi yield of 6.4%. There is the huge pension fund to worry about, which NWOR doesn’t have of course. Higher bond yields do seem to be reducing pension deficits though, so maybe it’s less of a worry than previously at RCH?

I’m not massively drawn to either RCH or NWOR though.

There's not been much interest in NWOR since it floated. Why would that change, especially in this current bear market?

---

Jack's section

Henry Boot (LON:BOOT)

Share price: 327p (+1.24%)

Shares in issue: 133,384,574

Market cap: £436.2m

AGM trading update

Henry Boot was established over 135 years ago and deals in property development, land promotion, and construction. It is based in Sheffield.

The group is trading in line with expectations after a ‘strong’ start to the year, with robust demand across its three key markets (Industrial & Logistics, Residential and Urban Development). As with most companies right now, the main challenges are supply constraints, cost inflation, and increasing economic uncertainty.

But Henry Boot has a good financial position and it says forward sales across all business lines are also strong (a word it uses multiple times in today’s announcement).

To date, the Group's performance has been supported by land disposals and property development completions, with all three key markets, Industrial & Logistics (I & L), Residential and Urban Development performing well. In addition, the Group continues to make good strategic progress towards the medium-term targets previously identified, leaving the business well placed to achieve its growth aspirations.

Hallam Land Management (HLM) has sold 3,477 plots, reflecting buoyant demand and competitive bidding for sites from housebuilders. The number of plots is stable at 92,569 plots (2021: 92,667). HBD remains on budget and on time and is currently 73% pre-let or pre-sold with continued high demand from industrial occupiers. Stonebridge Homes (SH) has now secured 93% of its 2022 delivery target of 200 units. The housing market continues to experience high demand, which has resulted in sales values offsetting cost inflation.

Both Banner Plant and Road Link (A69) are now trading ahead of budget.

Outlook

Boot notes ongoing buoyant demand that is allowing it to preserve margins against build cost inflation and supply constraints by passing through sales price increases.

There will be some first half weighting this year.

Due to a number of significant transactions, 2022 performance is expected to be weighted to the first half of the year and it is anticipated that whilst levels of activity will be high in the second half, this will primarily be contributing to the Group's performance for 2023 and beyond.

The group helpfully adds that market expectations are the average of current analyst consensus of £47.8m profit before tax. The share price has bucked the trend over the past year, outperforming by nearly 10% and retaining an 11.5x forecast rolling PER.

Operating margins of around 15% are better than a lot of competition and I think there’s a good company here an it’s reasonably valued, but there are a lot of outright cheap cyclical stocks around at the minute that might appeal more to contrarian investors on valuation grounds.

Solid results and the outlook seems encouraging. A safe pair of hands. But the macro concerns that have crushed some other stock prices are still there for this company, so I would be hoping for a single digit PE ratio - perhaps it won’t happen, but that seems to be the going rate right now for a lot of other cyclicals.

---

S&U (LON:SUS)

Share price: 2,350p (unchanged)

Shares in issue: 12,145,260

Market cap: £285.4m

AGM trading update

I hold

This is a specialist motor finance and property bridging lender.

Profit before tax for the period was above budget for both Advantage Finance (motor division) and Aspen Bridging (property bridging division). Current net receivables stand at £340m, up year on year from £295m and are also above budget. Although there the well covered macro challenges, S&U is doing a good job of winning business.

… despite actual and anticipated pressure on household budgets due to cost of living and tax increases, credit quality remains very good.

Strong cash generation leads to current borrowings of £125m, well within medium term facilities of £180m.

Funding headroom for anticipated growth is fine - current borrowings stand at £125m against £180m of medium-term facilities, and group gearing stands at 59% against 60% on 19 May last year.

Advantage Finance - for the first time, Advantage's live collections have averaged over £13m per month in the quarter. Income, gross margin, cost control and profitability have all beaten budget.

The used-car market remains supply constrained and values are strong. Against this backdrop, Advantage has seen sales volumes growing steadily and current net receivables are now £268m (19 May 2021: £243m). Collection quality remains excellent at 93.7% of due. Payment arrears are below budget and falling, and progress has been made on the marketing strategy.

Nevertheless, prudence dictates that potential pressures on customer incomes are reflected in Advantage's historically conservative underwriting standards. Credit score cards are continually reviewed, and affordability buffers have been put in place to help ensure that new customers will continue to comfortably make the repayments.

Aspen Bridging - after a record FY22, this division continues to grow and current net receivables now stand at £72m against £64m as at 31 January 2022. Record fees and total income for the period.

Happily, reports of the demise of the residential property market in the UK are proving grossly exaggerated. Supply remains restricted, prices remain strong and, despite higher interest rates, re-financing remains readily available. In response to this and to service its record pipeline of new deals, Aspen has recruited additional staff who will prove themselves necessary in providing excellent customer service as the business grows.

Conclusion

With price inflation in the UK at around 9% per annum, consumer confidence at near 50 year lows, and geopolitical hostilities, the group says its progress ‘is inevitably marked by prudence and caution’. That’s fair, but it’s also fair to say the company is doing well regardless.

Demand for both housing and motor vehicles, and their resulting values, remains strong and with unemployment rates the lowest levels since 1975, rising prices, particularly for energy and interest rates, may persist. Hence, although we currently expect to meet growth targets for this year, S&U remains focused above all on maintaining the excellent quality of its own books and service to its customers. This will ensure a firm base for faster expansion when the macroeconomic skies brighten. That balance between quality and growth has always served S&U well.

I do think that both Advantage and Aspen could be affected by weaker consumer confidence and cost of living pressures. That’s a risk for many companies right now, and business is not always plain sailing. But S&U is a profitable, cheap stock focused on sustainable growth, one which pays out a near 6% in forecast dividends, so I’m quite happy to hold at these levels.

---

Ra International (LON:RAI)

Share price: 21.15p (-11.88%)

Shares in issue: 171,791,843

Market cap: £36.3m

Final results for the year to 31 December 2021

RA International provides remote site services to Humanitarian, Governmental and Commercial organisations globally. This is an interesting company on the face of it, but that doesn’t always equate to a good investment opportunity.

The group is clearly struggling to translate revenue into profit.

And it seems to be a very capital intensive business.

This quote from today, while good news insofar as it’s a business win, does back that up.

Maturity of the USD 10m MTN debt programme has recently been extended to 2024 and additional working capital facilities are available as required to support implementing material new project awards

It all translates into a rather bumpy ride so far for shareholders.

Results:

​​Revenue of $54.6m (2020: $64.4m) and underlying EBITDA of $6.7m (2020: $14.2m). Statutory loss before tax of $32.2m includes $31.5m in non-underlying charges relating to the Mozambique project, of which $5.9m relates to cash costs and $23.4m is a provision to impair the carrying value of assets.

We are pursuing opportunities to dispose of USD 7.2m of project related assets located in storage and remain confident that development works will restart in Mozambique, although timing is difficult to predict

Government and humanitarian clients represented 95% of 2021 revenue (2020: 92%), with government an increasing proportion of the mix (47% of 2021 revenue). These are stable, high-value clients that support our strategy to diversify geographically through customer-led growth.

Reflecting the Board's cautious view on the operating environment in the near-term, the Board is not recommending a dividend for the FY21 financial year

So that 7% dividend yield on the StockReport can be ignored.

Conclusion

Given the capex and geographies at play here, I’m not comfortable with the stock. It provides much needed services though, and I can see how the group might grow its operations. Covid has been a big hindrance but, as understandable as that is, it still points to a lack of earnings visibility and scope for significant operational disruption.

You’d never know what’s around the corner here.