LON:CSSG | Croma Security Solutions - The Long Story

7th Nov '19 by Effortless Cool

18 comments 2305 reads

Croma Security Solutions (LON:CSSG) is a security services provider operating in the UK. It seeks to differentiate itself from rivals through a strong ex-military ethos, reflecting the military backgrounds of its top management. In their own words, from the recent full year report: “Croma personnel have a market reputation for being smart, punctual, professional and courteous on a consistent basis which is in stark contrast to the average security guard.”.

The business operates through three divisions, as set out below.

Vigilant

Croma Vigilant provides manned guarding for assets and individuals and now employs over 750 security personnel throughout the UK. It is by far the company’s largest division, generating 82% of 2019 revenues, but is also relatively low margin, delivering an underlying operating margin (before unallocated central costs) of 4.9% in 2019.

Revenues have been climbing quite rapidly year-on-year, although an unusual level of high margin project work in 2018 caused revenues to shoot up that year and makes the prior year comparisons for 2019 look relatively poor, with revenues falling slightly and profit falling significantly as operating margins fell back towards more normal levels. Critically from the perspective of sustainable earnings, however, contracted business generated 88% of 2019 revenues, versus 82% in the prior year.

My revenue forecasts for Vigilant over the next two years assume reversion to the growth trend excluding the 2018 spurt.

Security Systems

Croma Security Systems provides a full range of electronic security solutions from CCTV, high security locks to FastVein biometrics technology for high speed human identification. It is the smallest division, contributing just 8% of 2019 revenues, but has a relatively high underlying operating margin of 12.8% last year.

Revenues had been on a steadily rising trend, but fell back somewhat in 2019, mainly due to lower sales of the FastVein product. There are good reasons to expect growth to continue as locksmith premises are converted to market security systems too (more below), and this is reflected in my projections.

Locksmiths

Croma Locksmiths comprises ten retail outlets in Southern England. They have been building this chain through acquisitions and it has been the fastest growing division in the Group. In 2019, it contributed 12% of total revenues at an underlying operating margin of 14.0%, the highest margin of all three…

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Effortless Cool

8th Mar '20

This is a tricky one. Accurate revenue forecasts underpin my valuation, and I overestimated H1 revenue by £1.6m; not very good. After normalising for this, more encouragingly, all my other financial statement forecasts were broadly correct, except payables and receivables, which were both about £1.2m above my modelled projection.

Croma Vigilant generates most of the revenue. The interim report is hard to interpret here. "Contracted sales [were] at a similar level to the prior year", meaning, most likely, they were slightly down. Clearly non-contracted business (project work?) was by implication down much more significantly. However, with 79% of Vigilant's revenue now contracted for one year or more, we have pretty good visibility of revenue here going forward. The PROception concept seems to offer good growth prospects too.

Croma Systems and Locksmiths, by contrast, improved revenue by 11% over the prior period. This compares to a 0.1% reduction in the previous full year comparison (3.5% increase if you exclude Biometrics, which looks a dead duck to me) and 8.4% the year before (9.6% excluding Biometrics). This acceleration in growth is hugely encouraging, especially when you factor in that this division delivers a much higher gross margin (c. 3x) than Vigilant.

I look at recent flaccidity in revenues as reflecting a catching up on the extraordinary acceleration in 2018, which came mainly from Vigilant and was project driven. To put this into perspective, revenue growth in for the 2016 year was 20.2%, 2017 was 15.9%, 2018 was 59.2% and 2019 was -1.5%. 2020 H1 is -3.5%. Although the three most recent periods look disappointing as project revenue has fallen back, the compound average growth rate over those 4.5 years is a highly respectable 16.8%.

For my projections, I have assumed 5% future growth, which I hope will prove prudent. My valuation on this basis is 105.7p, 28% higher than the current price. This is based on an adjusted PE ratio set at 80% of the market average prospective ratio, and thus reflects a downwards adjustment due to the recent sharp fall in the market.

Stress testing this by assuming flat revenues but administrative expenses unchanged (reverse operational gearing) gives a valuation of 76.2p, indicating that downside is limited.

An upside test, assuming 10% growth in revenues but holding operational expenses at the base case level, gives a value of 135.8p per share, demonstrating the potential for upside surprises.

The problem now is that we are likely to have along wait for any more information. There are no broker forecasts in the market and there is typically one erratically timed trading statement each year, so there is quite possibly no news to come until the finals. this is reflected in the 80% multiple I have applied to the market average PE ratio, when a profitable business with secure cashflows like this would normally command a higher multiple.

13th Aug '20

Croma Security Solutions (LON:CSSG) have just announced that the impact of COVID has been"light", that they have ended their financial year with "record levels of cash", that they are reinstating their 0.75p interim dividend and that they have won a new 3-year contract that will produce revenues of £1.3m p.a..

Overall, a very satisfactory update.

https://www.investegate.co.uk/croma-sec--sol--grp--cssg-/rns/dividend-reinstated-and-contract-win/202008131100020651W/

Tortoise investor

18th Aug '20

Thanks Effortless Cool, this is a really interesting summary and was a good starting point for me to do some further research. By the way, looking at your profile: well done on your long-term portfolio gains even if this year isn't shaping up so well for you.

Croma looks interesting. Especially the cash position (which looks about 15p per share now) and the fact that the directors are large shareholders. Based on his linkedin profile, the CEO who owns about a quarter of the company is approaching the age at which he might start to think about retirement which may lend weight to this being a takeover target over the next few years.

Do you have any sense of how good their client retention is? I can't see any figures and would like to see this as a KPI.

One nervousness I have is they had some big contract wins in 2018 which gave rise to a large increase in revenue - which you've pointed out in your article. One of these was for £27m and lasts for six years as of Dec 2017 (or, confusingly, 5 years according to their subsequent results update a few months later). That gives a bit of time for other big contracts to come through before then - and I note they recently won a £5m per annum contract which is good - but I would really like to know what their client retention is like.

Going into a recession I would have thought security services are an area businesses would cut back on so maybe the immediate growth outlook isn't great?

I'm tempted to pick some up but I don't think I'd be willing to pay much more than 10x PE in the current climate, without knowing how successful they are at retaining customers.

Hi Patrick,

Glad to find someone else showing some interest here.

Regarding client retention, Croma don't give much away. Their preferred KPI seems to be contracted revenue, by which they mean revenue contracted over a period of more than one year. This is only relevant to the Vigilant division. For 2018 FY, contracted revenue was 72%, rising to 79% for 2019 FY. It was still 79% at the recent interims, but expected to increase during H2. Most of this contracted revenue is likely renewable, but already gives decent short to medium-term revenue visibility. This visibility perhaps provides some relief to your recession concerns.

And well done on your 2020 performance!

2nd Mar '21

In the absence of any broker forecasts, I have set out below my revised projections for Croma Security Solutions (LON:CSSG) based on the interim results.

Revenue ........................ 2021 £33.4m ..... 2022 £35.5m
Reported net profit ..... 2021 £0.53m ..... 2022 £0.70m
Adjusted net profit ...... 2021 £0.65m ..... 2022 £0.78m
Reported EPS ............... 2021 3.55p ........ 2022 4.71p
Adjusted EPS ................ 2021 4.36p ........ 2022 5.25p
Dividend per share ..... 2021 2.15p ........ 2022 2.36p
Net cash ....................... 2021 £3.82m ..... 2022 £3.88m

The COVID-impacted 2020 H2/2021 H1 have demonstrated that Croma can perform profitably even under the most trying circumstances, so downside appears to be limited and the business should be able to reliably keep pumping out enough cash to support a gently progressive dividend. However, top line is the issue here. Revenue showed strong growth up to 2018 H1, but then came to a grinding halt. The business is on the cusp of gaining substantial benefits from operational gearing, if and when they are able to resume a meaningful top line growth trend. If they cannot do that organically, which recent years indicate may be the case, then acquisitions are an alternative route. Encouragingly, in this regard, the interim statement notes the "interesting opportunities which have emerged as a result of the pandemic".

My projections assume that revenues recover to historical peak levels by 2022 H2. With these assumptions, and assigning Croma a target adjusted PE ratio set to 75% of the market average, my valuation increases to 89.5p per share. At 22% above the current price, this represents a BUY under my methodology.

I won't be adding to my holding, however, until I see definitive evidence that revenue is increasing at least in line with my projections. I do believe that the Croma business model presents a real opportunity to grow in a fragmented market and the lack of delivery here in recent years has been disappointing. If management cannot achieve at least £18m of half-year revenue by 2022 H2, then I would advocate that the business be put up for sale.

28th Jun '21

Croma Security Solutions (LON:CSSG) issued a very encouraging pre-close trading update this morning, advising 2021 EBITDA will be at least £18.5m (2020: £17.5m) and net cash stood at £5.5m (2020: £4.1m).

It is hard to incorporate this information into an updated valuation, however, since we still lack two vital pieces of information; we don't know revenue, beyond the fact that it is ahead of last year, and we don't know what how much of the EBITDA is due to "other income", i.e. furlough payments, during H2.

Notwithstanding the above, I have had a go and my revised projections are as follows:

Revenue ........................ 2021 £33.9m ..... 2022 £36.5m
Reported net profit ..... 2021 £0.91m ..... 2022 £1.04m
Adjusted net profit ...... 2021 £1.03m ..... 2022 £1.12m
Reported EPS ............... 2021 6.08p ........ 2022 6.99p
Adjusted EPS ................ 2021 6.90p ........ 2022 7.53p
Dividend per share ..... 2021 2.00p ........ 2022 2.15p
Net cash ....................... 2021 £5.51m ..... 2022 £4.65m

Note that my 2022 assumptions are deliberately intended to be prudent, with the furlough income falling away but only being replaced to a limited extent by additional revenue.

Maintaining my target PE ratio of 75% of the market median. This gives a target price of 125.3p, some 60% above today's closing price. Thus, I believe that there is material upside here, and more besides if my estimates do indeed prove to err on the prudent side. Also, even after the strong rise seen today, it is pretty much impossible to come up with a set of plausible assumptions that value the company at its current market cap, so downside would seem very well protected.

At the half year results they listed 377k as other operating income - could this be furlough monies perhaps? I'm not clear what else that is - nothing record for 2019

Yes, I'm assuming that is furlough. I am assuming another £450k in H2.

Apologies I replied to the wrong comment (a bit fiddly on mobile) so re-pasting: At the half year results they listed 377k as other operating income - could this be furlough monies perhaps? I'm not clear what else that is - nothing recorded for other operating income in 2019

22nd Oct '21

Copied from the SCVR, as relevant to this specific thread.

Effortless CoolYesterday 10:46 am

Solid results to end-June from Croma Security Solutions (LON:CSSG) [I hold] today, with revenue up 4% and pre-tax profits up 26% (excluding impairment from prior year comparative). Given the nature of the business - security services, reception services, security systems and locksmiths - it has been heavily impacted by lockdowns but has come through the pandemic in surprisingly good shape, albeit with some help from furlough.

With EPS of 6.6p, DPS of 2.0p, net cash at £5.4m against a market cap of £13.3m, I continue to believe there is huge value on offer here. Growth has been the problem, with revenues going nowhere over the last four years. However, the have a solid base to build from, post-lockdown, and have reported a strong start to the new year. Additionally, bolt-on acquisitions are likely to be imminent.

Paul ScottYesterday 10:45 pmIn reply to Effortless Cool

Hi EC,

I know you like Croma Security Solutions (LON:CSSG) and when we discussed it recently I could see some merit in your points (mainly about the strong balance sheet, with £5.4m cash - and that's a solid cash pile, not due to reverse working capital).

I've had a quick look at the FY 6/2021 results out today. This is my view:

Profit before tax of £1.2m has come mainly from £0.8m taxpayer support (furlough & grants). So the track record of negligible real world profits continues. Why is this company listed on the stock market? Where's the growth?

2.0p divis, a poor yield given the 90p share price, and only slightly up.

Outlook comments sounds quite positive.

Lovely balance sheet, including £5.4m cash, which looks real to me, i.e. not offset by creditors.

£13.3m market cap.

My opinion - there's nothing to get excited about. It looks like a private company with a (pointless) listing.

I think it needs a new strategy, and more aggressive management, and needs to do something with the £5.4m cash pot.

I wouldn't want to buy any shares myself, because it's been poor historically, and the danger is that you end up in a lobster pot, if you can get a decent size position at all, where once you're in (having provided an exit for someone else) you can't get out, and then have to watch in frustration, as better & more liquid investments pass you by, as you hold something like this for many years.

You could get lucky though! Risk seems low, with that lovely balance sheet. Market cap is modest. So overall, it's not a bad punting idea. Have you got the patience to hold for maybe years though, with nothing much happening?

Good luck with it. I need more liquidity & more obvious upside personally.

Thanks for flagging. I enjoy looking at everything, especially when people put up logical & interesting comments, like yours.

Best wishes, Paul.

Effortless Cool8 minutes agoIn reply to Paul Scott

Hi Paul,

Thanks for the feedback on Croma Security Solutions (LON:CSSG) . I don't necessarily disagree with anything you say, although I am confident that the furlough income can be replaced with profitable revenues now all their security centres and locksmiths are open properly again.

And, yes, I'm happy to be patient. This is part of a (currently) 13 share portfolio and I don't expect them all to move up at once. Indeed, I have been building a position in Croma Security Solutions (LON:CSSG) for two and a half years for a princely IRR of 2.4%, so far.

What I like about this investment is that I see it as a bet with the odds stacked in my favour. It has a rock solid balance sheet, is generating a reliable profit stream (even under the stresses of the last two years), sits on a very low multiple, pays a dividend and retains more cash each year. Downside, in my opinion, is very limited.

Upside, however, is very material. If they can start to generate some decent growth (and, based on the latest statement, I believe they are poised to do so). Not only would I benefit from the operational gearing but also from multiple expansion. So long as the story stays intact, I am comfortable waiting for years, if need be.

31st Oct '21

New projections following 2021 FY results:

And an updated valuation:

Updated projections following the FY results:

Note that there is no real insight behind my revenue forecasts. I would normally calibrate my revenue projections to broker forecasts, on the assumption that they have been informed by the management. However, since here are no broker forecasts, I have simply made what I would hope are prudently low growth assumptions and let the rest of the valuation flow from that.

12th Mar '22

Updated projections following the HY results.

Lower valuation than previous, mainly due to the fall in the wider market (lower median PE ratio).

19th Mar '22

Always appreciate your helpful insight and analysis. How did you reach your EPS figures for H1 22 given the company reported basic and diluted earnings of 2.97p for H1?

Duh - good spot, thanks. I was originally showing post-tax profit in the rows above and, when I changed to pre-tax, neglected to change the earnings calculations. I also noticed a slight error in the half-yearly adjusted PTP figures. All corrections included below (the valuation calculation has not changed).

13th Nov '22

Still sticking with this dog, even though it has cost me a small fortune to date. I am valuing it at 75p, 40% above the current price.

Zipmanpeter

28th Jan

Re Croma Security Solutions (LON:CSSG) - Really like this company's ambition & strategy of creating a national brand for 'Croma security centres' based on on buying and modernising old fashioned locksmiths.

I like obscure retail niches which I think can now be undervalued where there is a reason for physical stores and a modernisation opportunity (typically consolidation of purchasing and back office and creation of a brand vs individual stores - I hold Angling Direct (LON:ANG) on a similar basis and held £Dignity until the niche was discovered by price comparison sites and the regulator).

Adding a comment here to follow Croma Security Solutions (LON:CSSG) more closely over time. Lack of liquidity makes this a 5 year investment - very expensive to trade in and out, plenty of time to decide.

Bull points

* Strategy makes sense - lots of slow moving physical stock to centralise but a value in a trusted local store to get keys cut. We are moving to digital IDs/passes but a lot of metal key operations remain. No national brand but lots of single site operators. Buyers market for retail operations, especially as retirement looms for owner-operators.

* Opportunity to add online B2B/B2C if brand is created ie go omni-channel with security of local collection of keys for example

* Key cutting is easy to move to a centralised operation - big cost saving/chance to focus retailer on selling/customer service ie de-skill the instore 'manufacturing' part; lots of ex-retail staff around and tech products may attract some

* Really focused - very happy it sold out of Vigilant

* Got cash/cash generation to support growth without dilution

* Tiny volumes/awareness - one is getting in on the ground floor if successful (but extreme patience required. It still needs to grow to reach even the bottom range of the SCVR !! So arguably a bear point as well).

Bear

* Ultimately, no big barriers to entry

* Longevity - given trends to digital (with security sold on line already). The bull case reflects the case vs small locksmiths but the market size includes the much bigger/more modern security industry

* Scale - company is tiny vs AIM listing cost (so de-listing risk, years before any divi as if successful can grow for years but will need to re-invest etc)

* Execution risk - Lots of companies go badly wrong as they scale up operationally; in practice there are diseconomies of control and complexity in managing many retail operations

* Hugely concentrated ownership (42% with CEO & family)

* Skills of Directors/Key team - not obvious the team is there to grow - need to invent a regional mgr structure - but will it be able to attract the people who do have the skills and experience to rapidly accelerate a buy and build rollout?

* De-listing risk. Elsewhere Effortless Cool on SCVR states investing in paid research and IMC presentations to indicate it intends to build in this space but this looks a great private company at the moment.

Net, wait for next trading update/strategy update and look to see how quickly it is promising t to reach £30-40Mn ie a rate of growth to attract significant PI and PE interest.

Croma Security Solutions - The Long Story

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Effortless Cool

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