LON:SUR | Lakehouse Plc - Divisional Operational Challenges Increasing!

14th Jul '16 by Dearg Doom

2 comments 4066 reads

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Lakehouse (LON:LAKE) Share Price 25.5p

Market Cap Circa £40 million

Lakehouse plc is one of those companies that investors who like falling knives look to catch on the way down in anticipation of a quick reversal in the company's fortunes. The best time to pick up a falling knife is when it is on the ground. Has the Lakehouse's share price reached that floor level price?

About the Company

“Lakehouse is an asset and energy support services group that constructs, improves, maintains and provides services to homes, schools, public and commercial buildings with a focus on the UK public sector and regulated markets.”

(Source: Lakehouse Website)

Interim Results

“Like for Like revenue and profits for the six months ended 31, March 2016 were below both previous expectations and the corresponding period last year.”

Structure of the Business Lakehouse plc delivers services through four divisions:

Financial Results 6 months ending 31 March 2016

Division T/O %Change *Ex Acquistions % Overall Change

Compliance 43.2m +123% 16.1m (16%)

Energy Services 41.0m +51% 31.4m 16%

Regeneration 63.2m (20)% 63.2m (20)%

Construction 21.7m (41)% 20.7m (34)%

Total* £169.1m 4% £131.4m (16)%

Intercompany £(1.3)m £(1.3)m

Total £167.8m 4% £130.1m (17)%

*Revenue excluding acquisitions & businesses exited in the 6 months ended 31 March 2016

Points to Note

Three out of the four divisions are trending negatively in turnover. The recent acquisitions have added to sales revenue particularly in the Compliance Division. However Lakehouse's overall total sales in the four divisions appear to have fallen 17%. The recent acquisitions have just helped the business just to stand still in its turnover.

As reported in the Trading Statement on 1 February 2016, Regeneration division faced much more difficult trading conditions during the period than expected at the start of the financial year. Clients looked to cut their costs, in part because social landlords are now required to reduce their rents by 1% each year for the four-year period to April 2020

The Board estimates that the year on year impact of changes to carbon prices on the Group will be around £3.0m for the year ending 30 September 2016, of which £2.0m arose in the first half.

insulation contracts are being bid at lower margins and they expect this to impact particularly during the second half of the year.

Some Construction and Compliance work has been pushed back into the second half of the year particularly…

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alan000@yahoo.com

14th Jan '17

According to Stocko, the brokers forecast for year to Sept 16 is 7.9p, with a divi of 3p. Given that equates to a p/e of 4 and a yield of 9%, you would ordinarily think that meant "the market doesn't believe those forecasts can be achieved".
However, with a year end in Sept 16 and the prelims due later this month, I note there has not been any sort of "pre close statement" to say the Analyst view cannot be met. It is a legal requirement to update the market if there is a significant variance (generally assumed to be more than 10%).
Any company would broadly know its profit number for the year very soon after the year end, and then go through all the formalities of preparing accounts, audit sign off etc before issuing their prelims 2-4 months after year end. In my long experience of profit warnings, they have always come in a pre (or immediately post) close statement, rather that the Prelims themselves.
Does this imply that the forecasts must have been broadly hit?

Dearg Doom

15th Jan '17

Lakehouse (LON:LAKE)

Share Price 34p (up 3.8%) Market Cap £61.3m Bid/Offer 32.5p - 34p

Lakehouse plc only listed on the main market back in March 2015. In such a short period of time the company has been both controversial in its actions and has fooled many investors on the company's real prospects.

Full Year Results Due 24th January 2017.

The share price collapsed last year from above the £1.00 mark to a lowly 23p. More recently the share price has perked up in anticipation of full year results for the year ending 31^st September 2016. A few pennies added to its low share price gives a large percentage increase. We are just over a week away from the full year results, so time to look at the company once again.

The one profit forecast from Peel Hunt is most likely out of date. I do not notice any recent updates or slight alterations to that forecast in the last three months which may be a concern. My other concerns include…..

Increased Debt

The company has gone from a positive cash position to a debt position due to acquisitions which look to have been poor.

“As at 30 June 2016, the Group's net debt was £30.6 million, comprising £28 million drawn from its £45 million revolving credit facility, together with an overdraft of £2.6 million drawn from its £5 million facility.”

Increased Training Costs

“The Contract will mobilise during the remainder of the current financial year to 30 September 2016, with the Group making an investment of approximately £1.5 million in the current financial year to mobilise and train more than 100 dual fuel engineers. In accordance with the Group's accounting policy, all mobilisation and training costs will be expensed as incurred.”

Redeployment and Further Training Costs

“The Group has been successful in securing further contracts with three leading utilities for domestic meter installation and negotiations are ongoing with another two. This diversification will involve a rapid transition of the business into Domestic meter installation services, which the Group expects will involve a cost of £1 million in the current financial year, as we redeploy and retrain existing staff.”

Regeneration Division Challenges

This division makes up around a third of the company’s revenue.

“Elsewhere in the Group we are making progress and taking action on a number of operating challenges in the Group, especially on contract settlements within the Regeneration division.”

Investment Returns

Even before the company got into difficulties there seem to be very little left each year for shareholders by way of earnings. The company has been badly managed in an industry which is cut throat with minimal margins.

The company likes to throw up high sales revenue, but in reality the sales revenue gave the illusion of profits. The company was paying a dividend of 1p while making losses at the interim level of £1.5 million.

The company has little asset backing with almost £85 million of goodwill and intangible assets on its books. Some of the debtor figures could be open for dispute given contracting difficulties

Profitability Ratios

Return on Capital	1.27	%
Return on Equity	0.24	%
Operating Margin	0.43	%

Stock Ranks

Stock Rank for Quality is 72 and Value is 94 which is at odds with my analysis. Momentum is low at 28 but you would expect that given the crash in the share price. Peel Hunt forecasts of £19.9 million net profit and 7.9p earnings per share for 2016 don't look feasible given the challenges.

Final Comment

Most investors have a few dog shares. Investors appear to have been sold a pup with this particular share in the past. Investors may have lost the run of themselves gazing at the high sales revenue which while growing, was bought with increasing debt levels. The future than became bleaker with poor management oversight and the business working on ever lower margins of profitability.

Was there a real successful business model here in the first place given the management structure? Was Lakehouse plc always likely to under deliver on shareholder expectations?

Regards

PS (I have no position in this company. No advice intended)

Lakehouse plc - Divisional Operational Challenges Increasing!

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Dearg Doom

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