Daily Stock Market Report (Wed 11 June 2025) - TENG, WPHO, RCDO/SAG, FDEV, CGS, IIG, FSTA, IBST, VP.

Good morning! We'll have the agenda up for you as soon as we can.

Spreadsheet that accompanies this report: link.

1.20pm: we are finished for today, cheers!

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Companies Reporting

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Graham's Section

Ricardo (LON:RCDO)

Up 25% to 418.4p (£260m) - Offer for Ricardo Plc - Graham - PINK

Ricardo has jumped before it was pushed, finding a buyer for the entire company which will end the ongoing friction with Science (LON:SAG).

The offer comes from WSP, a major global engineering/professional services firm with over 72,000 employees.

The price: 430p, a 28% premium to yesterday’s close and a much higher premium against the average price of recent months:

The rationale: nothing too out-of-the-ordinary.

WSP Group believes that the integration of Ricardo into the WSP Group will accelerate the implementation of Ricardo's strategic objectives and provide additional opportunities for cost savings and revenue synergies through increased scale and complementary offerings.

They specifically praise Ricardo’s “EE” business (a recent acquisition that attracted some criticism for the price paid).

The Ricardo directors recommend the bid and will vote their 0.19% of shares in favour of it.

Other major shareholders have promised to vote their 44.9% of shares in favour of it, too. This does not include Science Group, although Science Group also supports the takeover.

Timeline: expected to complete in Q4 2025.

Comment by Ricardo’s Chair (emphasis added by me):

"Ricardo has made significant progress with its strategy to transform the business into a world leading environmental and energy transition consultancy, with its prospects underpinned by global mega trends supportive of long-term growth.

However, while good progress has been made, there are further steps required to complete the transformation which bring some execution risks against the background of short-term market challenges and the uncertain geopolitical and macroeconomic backdrop.

Against this background, WSP has made a compelling offer which represents a highly attractive premium to recent average trading levels and provides certain value in cash today for Ricardo shareholders.

Graham’s view: I was overly sceptical on the value of Ricardo, putting it AMBER/RED (see here and previous comments). But I must be honest that I still struggle to see the value in it.

A recent update from Panmure suggested that the company would have net debt of c. £85m as of June 2025. I knew it would be high, but not that high, when I turned AMBER/RED on the stock in January.

Panmure’s EBIT forecast was only £20.8m, rising to £24m the following financial year.

In my experience, debt-ridden consultancies or professional services businesses can be toxic investments and even in the absence of debt, I wouldn’t want to put them on high earnings multiples - they are people businesses, at the end of the day!

At 430p, Ricardo is being valued at £267m or an enterprise value of over £350m if we add in net debt.

The implied P/E multiple is 17x if I apply a 25% tax rate to the EBIT forecast for this year. I get the same 17x multiple if I calculate EV/EBIT.

That’s not a multiple I’d wish to pay, but WSP will presumably be able to strip out some costs and maximise the growth potential of these earnings within a much larger organisation.

I should also note in passing that WSP’s Canadian-listed shares (here) trade on a forecast P/E multiple of 27x.

So it’s yet another example of a North American company finding a relatively cheap acquisition target in London.

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Science (LON:SAG)

Up 9% to 505p (£225m) - Ricardo Investment Realisation - Graham - GREEN

Science have done extremely well in a short timeframe:

Between 16 February and 27 May 2025, Science Group acquired 13,537,623 shares in Ricardo plc ("Ricardo"), equivalent to approximately 21.8% of the voting rights, at an average price of 239 pence per share (including brokerage fees).

Selling up at 430p will mean profits of c. £26m on a £32m investment.

They’ve agreed to sell 12.4m of their shares in a standalone agreement, and the funds from this are expected “before the end of June”, which is very nice for them - an accelerated timeline for them vs. the expected takeover which is not expected until Q4.

This concludes the spat between Science and Ricardo, with an outcome that I imagine all parties are satisfied with.

I can now turn GREEN on Science again, as my only reason for turning AMBER/GREEN on it in the first place was the risk surrounding their Ricardo investment - it drained their cash and, I’m sure, management’s attention. I was concerned that this saga could drag on indefinitely - perhaps for several years.

But soon their cash balance will be very full once again, and Executive Chair Martyn Ratcliffe will be free to move on and focus on other matters. Well done - I should never have doubted him!

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Frontier Developments (LON:FDEV)

Up 13% to 304p (£120m) - FY25 Update - Graham - GREEN

I upgraded my stance on this recently thanks to an ahead-of-expectations update, which hinted that this troubled company might be on the cusp of a rebound.

That was on 28th May. Now we get the scheduled full-year update from FY May 2025, with more details on the company’s improved performance.

Some key points:

• Revenue up 1% to £90.6m.

• Within that, the company’s flagship “creative management simulations” games grew 25% per year, providing 77% of total revenues (previous year: 62%).

CMS games are once again at the heart of the company’s strategy, seen as providing the route for the company to restore its fortunes.

Continuing with today’s update:

• Adj. EBITDA of £8 - 9m (previous year: £0.9m), including a £3.5m one-off gain on the sale of a game.

• Cash £42.5m (previous year: £29.5m).

Thanks to the strong cash position, we have:

£10m buyback (subject to shareholder approval):

The Board is confident in the future cash position of the Group, and that this can adequately fund future growth plans, which remains the Group's core capital allocation priority…

After considering the Company's balance sheet position and prevailing share price, the Board believes that it would be beneficial to return capital to shareholders through a share buyback.

This makes good sense to me. It seems reasonable that even after spending £10m on a buyback, the remaining funds, plus future profits, should be sufficient to fund future development spending.

Game franchise headlines: revenues from Planet Coaster saw very strong growth thanks to the release of a sequel in November, Planet Zoo was stable, and Jurassic World Evolution fell slightly.

In an RNS on Monday, the company announced that JWE 3 will be released in October, and is available to pre-order now. Here’s the trailer (YouTube).

Outlook:

Having achieved growth in revenue, profit and cash in FY25, the Board is confident in Frontier's ability to deliver further annual growth in FY26 through nurturing and expanding our genre-leading game franchises.

Estimates

After the unscheduled May update, PanLib had an FY25 revenue forecast of £90m, an adj. EBITDA forecast of £7.4m and a net cash forecast of £37.9m.

These have been beaten and are lifted again to £90.6m, £8.1m and £42.5m, respectively.

For FY26, they lift the EPS forecast in light of the planned buyback (fewer shares means higher earnings per share!).

The new FY26 underlying EPS forecast is 19.9p, rising to 28.6p in FY27.

(Previous forecasts: 17.5p in FY26, 26.6p in FY27.)

Graham’s view

This is a stock where I’ve had some difficulty in the past. I’ve wanted to be GREEN on it fundamentally, due to its strong balance sheet and the potential for future flagship titles to meet with success.

However, I’ve also needed to respect the negative momentum and the uncertainty that goes with investing in turnarounds.

Now, however, the turnaround appears to be in full swing as the company has returned to its original CMS strategy.

Stockopedia categorises it as a Super Stock:

I think I can go fully GREEN on this with a clean conscience.

There is a major uncertainty, which is more elevated than you might get in other industries: I can’t guarantee that JWE 3 won’t be a flop. Game developers get it wrong sometimes - and Frontier have got it wrong about as often as they’ve got it right in recent years. And even when game developers have done everything right, the reaction of audiences is unpredictable.

While acknowledging this major uncertainty, I think that the risk:reward is positive here now, and I’m happy to be fully positive on it again. The P/E multiple is 15x for the financial year that has just begun (FY May 2026), without making any adjustment for the cash balance or buyback.

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Ibstock (LON:IBST)

Down 12% to 170p (£672m) - Second Quarter Trading Update - Graham - BLACK (RED)

Ibstock Plc ("Ibstock" or the "Group"), a leading UK manufacturer of a range of building products and solutions, today issues a trading update.

Unfortunately, it’s a profit warning.

The RNS starts out well:

Activity levels in the Group's markets have continued to be well above the prior year period, reflecting increased demand in residential construction markets. Accordingly, we continue to expect first half sales volumes in the core business to be materially above the prior year level.

The problem: building back up capacity at Ibstock’s factories has created some additional fixed costs. There seems to be a lag between incurring these costs and getting the factories back up to higher productivity.

On top of that, it has been “challenging” to pass on cost inflation to customers, due to the sales mix and to “a more competitive market backdrop”. As a result, clay and concrete pricing in H1 is “broadly in line” with H1 last year.

The result of higher costs and weaker revenues than needed: full year adjusted EBITDA is now forecast at £77 - 82m (so it should be in the region of last year’s £79m result).

I believe that this is a miss of about 14% against expectations.

More positively, various organic growth projects are said to be on track.

CEO comment:

"Despite ongoing uncertainty, we are encouraged by signs of recovery in the UK housing market. As such, we remain committed to taking steps to ensure we are well placed to support customers and benefit from the recovery as it gathers pace. Notwithstanding the margin headwinds encountered in 2025, we remain confident that our recent actions alongside our strategic investments leave us well positioned as activity levels continue to pick up."

Graham’s view

It should perhaps come as little surprise that a brick manufacturer should meet competitive pressures - this meets the definition of a commoditised product!

Historically, Ibstock’s performance has been highly variable, which makes sense given its exposure to various macro factors beyond its control. While it usually posts a profit, its return on equity has ranged from excellent to mediocre.

Before today’s profit warning, the StockRanks weren’t too impressed. I note the following momentum score;

Consistent with Stockopedia’s view that profit warnings tend to follow other profit warnings, I’m going to take a RED stance on this, temporarily.

I’d like to lift this stance as soon as possible, but I think it does make sense to be cautious - in the results for FY December 2024, I see that the company finished the year with net debt of £122m, and a leverage multiple of 1.8x.

While that debt load was at the lower end of the company’s prior expectations, and the leverage multiple does not suggest that it’s suffering any distress, it creates an extra risk factor when we combine it with today’s profit warning.

Readers may have noticed that I’m often AMBER/RED on companies that have just issued a warning. But in a case like this, where there is significant debt involved, I think it makes sense to be RED in the short-term.

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Mark's Section

Castings (LON:CGS)

Down 4% to 262p - Final Results - Mark - AMBER

There’s no results table, but the comparisons here are pretty unfavourable. Revenue is down 21% to £177m, Operating Profit plummets by 76% to £4.8m, EPS is now just 9.6p. Strangely, this appears to be a fairly sizeable beat on revenue, but a miss on PBT. Their broker, Zeus, say:

Revenue decreased by 21.1% to £177.0m in FY25 (6.5% ahead of our estimate due to higher-than-expected Foundry volumes)...Because of the inherent operational gearing in the Group, EBIT decreased by 75.8% to £4.8m, broadly in line with our £5.0m forecast.

Although Zeus notes that Castings has played with a very straight bat when it comes to adjustments and and not classified the £1.5m penalties enforced on forward purchased electricity volumes or the £1.3m losses from the first nine months of the Scunthorpe acquisition as exceptional.

Outlook:

This is what the company says we can look forward to:

The schedules from our heavy truck customers suggest that the current lower levels of demand will continue in the short-term with improvements in the autumn.

This is undoubtedly a cyclical business and we can expect this year’s trading to be at a nadir. However, the market never likes a H2-weighting as it introduces considerable uncertainty over the next period’s results. Zeus make only minor revisions to their forecasts and introduce FY28 estimates. Here is a summary:

Cannacord’s numbers are very similar. They represent a big recovery in EPS versus the results released today. However, these are rather uninspiring. The forward P/E of 15 looks high in current markets, especially as the H2-weighting adds to the risk.

Dividends

For many investors, the long-term dividend track record is a big attraction:

So income investors will be pleased with this:

The directors are proposing a final dividend of 14.19 pence (2024 - 14.19 pence) per share totalling £6,166,700 (2024 - £6,166,700). This dividend has not been accrued at the balance sheet date.

This gives a very slight increase for the year (excluding the special dividend paid last year), and with further small increases forecast, the yield is around 7%. However, this was uncovered by EPS in FY25 and forecast to be uncovered again in FY26. This means that they have been using their cash balance to fund the payout.

Net cash has fallen by £17m during FY25 to £15.6m. The main reasons are the uncovered dividend and that the capex of £19.8m has exceeded the depreciation of £8.9m. The payment of the £6.2m final dividend will presumably reduce the cash balance in the short term. Zeus forecasts £16.6m of operating cash flow for FY26 and capex reducing to £8m, meaning that this cash balance should start to grow modestly again, barring any mishaps.

It is worth noting that this increasing dividend has not driven up the long-term share price, which is largely flat over the last 20 years:

Valuation

Zeus include a DCF calculation in their note, which seems a good way of valuing a business which is essentially a mature, slow-growing one. This assumes a 2% terminal revenue growth outside their forecast window, 90% conversion of EBITDA to Operating Cash Flow and £8m capex growing with inflation. With their 10% discount rate, they come up with a 343p valuation. Personally, at £100m market cap size and given the issues the company has had, I’d want a slightly higher discount rate than that. Although I don’t have my own DCF, one of the most interesting things is to work out what discount rate the current share price implies, and I’d imagine it was around 14% from extrapolating their sensitivity chart. So the current share price looks around fair value. Logically, this is what holders can expect to receive for holding over the long term. As in the last 20 years, I expect the bulk of the returns to be from the dividend payment. So this is a 7% yield, rising at around 5% in real terms and a share price tracking inflation. This may be attractive to some investors, but I struggle to get excited by it.

The other way of looking at this is based on the assets of the business. I make the current P/TBV from these results as 0.87. This highlights potential undervaluation. However, I doubt that their Property, Plant & Equipment has significant alternative use. There is £26.8m of freehold property, but there is little sign that this in excess of the business needs. So it really comes down to what returns they can generate from those assets. The recent past is not very promising on this front:

Nor is the future, by my calculations:

These firmly single-figure numbers suggest that the current modest discount to tangible book value is likely around fair value.

Mark’s view

Whichever way I look at this, I come to the conclusion that the current price represents fair value, given the history of the business and current forecasts. While there may be some conservatism in these medium-term estimates, there is also the risk of a near-term miss due to the weak current trading conditions. Some investors may be attracted by the 7% yield, which will probably rise slightly above inflation. However, I struggle to get excited by that prospect. Hence, it is an AMBER for me.

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VP (LON:VP.)

Up 1% to 606p - Final Results - Mark - AMBER/GREEN

These results to 31st March this year are very similar to the previous year, on an adjusted basis:

The revenue looks like a small miss and the adjusted EPS a small miss versus the Stockopedia consensus, but not enough to really move the needle:

Despite looking a bit better than last year on this front, there is a big gap between adjusted and statutory EPS. Here are the details:

These strike me as not very exceptional. Restructuring appears to be fairly normal over the last couple of years. While the acquisition-related costs are more of a one-off, they don’t break out the revenue or EBITDA impact of the acquisition on the results elsewhere. Meaning there is a bit of having your cake and eating it here, in my opinion. They provide some more details of their impairment charges in the narrative:

Impairment charges against property, plant and equipment and right-of-use assets, alongside the impairment of intangible assets (see below), have been recognised against assets held in the Brandon Hire Station cash generating unit (CGU), where challenges in the general construction sector continue to impact performance. These non-cash impairments have been calculated by comparing the carrying value of the CGU against its recoverable amount. Restructuring costs mainly relate to branch closure costs in the Group's Brandon Hire Station and UK Forks divisions.

While having to write down the value of equipment in one go may be non-cash, it suggests that their depreciation policy has not matched the reality of operating this part of the business. Ongoing depreciation would, of course, be non-cash but booked to the income statement as a cost and reflected in EPS. These differences are probably behind the difference between what the company considers their adjusted EPS and the figures provided to Stockopedia by Refinitiv.

One nice aspect about the company is that they quote ROCE as their third metric in the table. This shows an unusual focus on this for the sector. That marks them out amongst peers for caring about the returns their assets generate, not just growing at any cost. However, again, adjustments matter here, and the average figures in Stockopedia are less impressive:

Net debt excluding leases is up by £13.3m. However, £10m went on an acquisition and £15.4m on paying dividends, so this doesn’t seem unreasonable. This excludes around £3m of provisions that are on the balance sheet, and their lease liabilities currently exceed lease assets by £7.6m.

Outlook:

They say performance for the new financial year is expected to be in line with current market expectations, and helpfully give those:

Vp compiled analyst consensus for 2025/2026: Revenue of £383.2m, Profit before tax, amortisation and impairment of goodwill, trade names and customer relationships and exceptional items of £37.3m and pre-IFRS 16 net debt of £137.2m.

These are pretty much flat on the current year. However, this is worse than it seems as the acquisition they made in October last year will have had a full year of trading. This means that LFL revenue and profits are forecast to decline.

Valuation

If we accept the company’s adjustments, this is modestly rated going forward:

This is undoubtedly still a tough market for the sector, and there is scope for results to improve further as construction markets recover. The P/TBV is rated as green compared to the market but only amber versus the sector. It is worth noting that other plant hire companies, such as Speedy Hire, trade at a discount to TBV. This certainly reflects VP’s higher average long-term ROCE, but may mean that there is greater upside elsewhere if the sector enters a new boom.

The dividend increase is modest, but still represents over 6% yield on current prices, so investors get paid to wait for a market recovery. When the accounts are muddied by adjustments and large capex and depreciation charges, the payment of a reasonable dividend gives confidence that the underlying business is cash-generative.

One factor to consider is that this can be a very illiquid share for its size. The stock is tightly held, including by a controlling shareholder. While the spread doesn’t seem too bad today and can often be traded inside the published bid-ask, it isn’t always this tight:

The Exchange Market Size (which is the minimum market makers have to make available to phone traders at their published bid/ask) is only £3k, which doesn’t seem much for a £200m+ company.

Finally, the major shareholder put the company up for sale in 2022, but clearly didn’t get acceptable offers. This may mean that the business has undesirable characteristics. After all, its top-line growth has been mediocre over the last few years. However, that may also mean that the current UK takeover boom may finally make its way here, as it seems there is a deal to be done at the right price.

Presentations

VP commit one of the faux pas I particularly dislike. They talk to analysts immediately but wait a few days to present to the likes of us:

Analyst Briefing: 9.30am BST Today, Wednesday 11 June 2025

A live briefing for sell-side analysts…at 9.30am BST today. After the briefing has finished, an audio webcast of the presentation will be made available on the Group's Investor Relations website here.

Presentation with Equity Development: 10am BST, Friday 13 June 2025

Vp management will host an online presentation for retail investors via Equity Development at 10am BST on Friday 13 June.

At least they provide the audio of the analysts call. However, at £200m market cap, with Jeremy Pilkington holding 51% of the shares, individual investors probably set the price here and may be more engaged than the analysts. (I also don’t like the term retail investors as it suggests a certain naivety that is often not there, certainly amongst Stockopedia subscribers.)

Mark’s view

There’s a lot to like here. A modest rating if you believe management's adjustments, and a decent yield. However, management have rather blotted their copybook in my opinion by being a bit aggressive on the adjustments they make. Current trading may be in line, but on a like-for-like basis, this looks to be a decline in revenue and profits. However, this is a cyclical business, and there is the potential for organic growth once their end markets improve. When Graham looked at this last year, he just about kept it as a GREEN but was sitting on the fence heading towards AMBER/GREEN. Having seen the scale of the adjustments in these results, and the not particularly inspiring StockRank:

I’m going to make the jump to AMBER/GREEN. However, if there are signs of good organic topline growth in the future, I think I could be persuaded to jump back.