Monday 17 Aug 2020 - COST, CAR, MWE

17th Aug '20 by Paul Scott

46 comments 9440 reads

Good morning, it's Paul here, with Monday's SCVR.

It's very quiet for relevant news in my area today, so hopefully I should be able to get this done by late morning.

Update at 12:51 - today's report is now finished.

Carclo (LON:CAR)

Share price: 10.0p (up 29% at 08:14)
No. shares: 73.4m
Market cap: £7.3m

Update on refinancing and current trading

The Group is a global provider of value-adding engineered solutions for the medical, optical and aerospace industries.

This share is very high risk, because the group is burdened with way too much debt, and a nasty pension deficit. I wouldn't touch it with a bargepole personally. But there's nothing much else to report on today, so it fills the time.

Today's share price rise looks like a "phew it hasn't gone bust" relief rally.

HSBC has extended surprisingly large bank facilities. It's not stated whether any of this is using Govt gurarantee schemes?

The Board announces that on 14 August 2020, the Group agreed revised funding arrangements with the Company's main secured creditors, HSBC and the Pension Scheme, which provide access to ongoing bank facilities as well as visibility over repayment schedules through to July 2023.

As part of this agreement, new facilities have been entered into with the Group's lending bank, HSBC, which comprise a Term Loan of £34.5m and a Revolving Credit Facility of £3.5m.

In parallel to this, the Group reached agreement with the Trustees of the Pension Scheme in respect of both the actuarial deficit and the resultant deficit repair contributions to be made over the next three years; £2.8m (2021), £3.9m (2022) and £3.8m (2023).

Those pension recovery payments look extremely onerous, as does the bank debt, for a company with a market cap of only £7.3m. When debt dwarfs the market cap, you have to wonder if the equity might ultimately be worth little, or nothing? On the other hand, when companies do manage to recover from this kind of situation, then the % upside for equity can be very good. High risk, potentially high reward.

Looking back at previous announcements;

The loss-making problem subsidiary, Wipac, was disposed of by putting it into administration late last year.
Interim results to 30 Sept 2019 show performance on a continuing basis, i.e. excluding Wipac, of £56.1m revenues, and an underlying PBT of £2.1m. So…

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Brookeda

17th Aug '20

You pay a price for a share which you consider reasonable and one in which you can get a return over a period of time. The "spread" means you will get a bit less than you bought if for if the price doesn't go up. I personally wouldn't but something if I thought I was only going to make 5-10% on something so for me its not a huge factor

£BOTB has a similar spread but you won't find many holders complaining at the moment about its spread.

I find the volume a bigger issue than the spread but ultimately the lack of volume leads to the spread.

FREng

IMHO, "recession" is an unhelpful description of an economy because it is a very short term quarter-on-quarter comparison of GDP and tells you nothing about the medium term or longer situation or trend. Undoubtedly we shall be "out of recession" next quarter, even though we may be a long way from getting back to 2019 GDP levels.

Would leaving recession be a "recovery". If so, recovery is also an unhelpful description.

The UK's economic position is too complex and the future is too uncertain for such superficial descriptions to be useful to anyone other than politicians and journalists.

(all IMHO, of course)

Liquidity is a bigger issue than spread, in my opinion. The spread just reflects liquidity and sentiment now - it may change in a minute, or for trades larger than the EMS.

Boon

Not related to today's report, but asking a favour...

I remember in a recent SCVR report, there was a nice bullet point list of key things to look out for in a delisting risk for a small cap. Does anyone have a link to that report? Struggling to find via Google Search.

john652

Batm Advanced Communications (LON:BVC) , pe of 227 thats needs to support some mega growth for years

Byotrol (LON:BYOT) covered here a week ago, tipped in the papers and up 40 % today!

davidjhill

On a more general level on a quiet news day and thinking about stocks we've discussed on here recently there seems to be quite a broad based pick up in a bunch of down trodden stocks today. I'm not really sure why but can only muse that investors are starting to take a view that the economic situation is starting to pivot and that perhaps the chances of a second wholesale lockdown are receding; leading to a re-rate of certain shares where future performance has been too pessimistic?

Purplebricks (LON:PURP) is up 19% at 85p and N Brown (LON:BWNG) similarly up 19% at 62p as a couple of examples. I wonder what sort of read across that has on any other particularly hard hit stocks ripe for recovery. The West end was clearly much busier this weekend and restaurants/bars were doing reasonable trade from what I could see, so perhaps the leisure sector is next to participate. Ten Entertainment (LON:TEG) who reopened all bowling today or Revolution Bars (LON:RBG) perhaps?

I wondered what was up with Byotrol (LON:BYOT) I have been long from around 6p as it strikes me that there is a good risk/reward profile here. Looking through the broker research there is clearly room for some serious upgrades to forecasts if current trading levels hold. Others on here have said they want to see this increased revenue feed into free cashflow profitability, which is certainly fair enough but as it does there could be a fair re-rating.

Paul Scott

Hi dahokolomokie,

I did a search for de-listings, and this came up, which looks like it's what you're after;

https://www.stockopedia.com/content/small-cap-value-report-fri-10-jan-2020-joul-sdry-de-listings-cbuy-ted-jd-bme-545701?order=createdAt&sort=desc&mode=threaded

Regards, Paul.

peterthegreat

Thanks for the comments on Byotrol. I briefly held this company recently which is unusual for me as I am normally a long term investor. I became increasingly puzzled as the company is in a perfect position to benefit from coronavirus pandemic(s) and mentions supply chain constraints, yet it appears to be doing nothing to ease these constraints. It refers to a secular change in its markets but I can not detect any way the company is reponding to this secular change. Perhaps I am being stupid but surely you have to increase capacity and address supply constraints when you are at the centre of a beneficial "perfect storm" which is hugely boosting global demand for your products? Surely it could easily have raised funds to boost capacity or am I oversimplifying the situation? At least the company should have explained why it does not see a need to increase capacity, despite demand oustripping the rate at which it can produce product.

barnetpeter

Housing and associated stocks have certainly been hit recently and I don't really understand that....what with the stamp duty cut and a booming market. Rightmove said that July had been the busiest month ever for sales in ten years.

A bit of a rally today in this sector. Foxtons (LON:FOXT), Countryside Properties (LON:CSP) for instance. Taylor Wimpey (LON:TW.) is still well below a recent placing price and I am adding below 120p. The recent placing was at 145p; CSP raised at 335p and that went below 280p. Meanwhile Galliford Try Holdings (LON:GFRD), with its huge cash pile and numerous contracts recently fell below 90p before recovering a little.

I cannot work out if this sector is cheap and worth buying / adding or if the stock market is warning of bad times ahead.

The Supply chain is so globally interwoven these days that constraints can't just be waved to one side. If you consider the Byotrol (LON:BYOT) sanitiser sits in a heavily increasing regulated sector its product (and that means all of the ingredients as well) need to be approved for quality. Presumably that limits your suppliers somewhat considerably and certainly wouldn't allow you to easily move from one supplier to another in a different part of the world at the drop of a hat. However, that regulated status is one of the reasons for the high levels of demand for the product.

The latest trading update basically said that supply side constraints were now easing and that assuming no Brexit cliff they would expect to be materially ahead of expectations. Broker notes don't reflect that upgrade cycle in my view so I feel they will have some catching up to do later in the year which I suspect will be good for the stock.

The secular change they refer to is the regulated piece. For years alcohol based sanitisers were not seriously regulated but are becoming so. Many products previously on sale have effectively become illegal thus reducing supply at a time when demand is increasing. Further to that alcohol based products are not great for many as there are skin sensitivities. Byotrol (LON:BYOT) has the only non alcohol based sanitiser (patented) that is as effective as the alcohol ones. These are the secular drivers at large in the market.

wildshot

Could £:GFRD be affected by the Costain results?

(Admittedly I was a little confused by no new paragraph in your text as to whether you were including Galliford Try with the house builders deliberately or not? Since it divested Linden Homes to what is now Vistry (and my trigger to sell out) I believe that GFRD is just contract work now.)

Wilbraham

Re Batm Advanced Communications (LON:BVC) there's a 10 min Zvi Proactive out today. Not looked at it, mind you......

A_Private_Investor

As someone who works in the construction industry, you are right.

Paul or anybody, a question related to Costain and construction companies in general. Often when a subsidiary wins a contract, the client wants a parent company guarantee so that can't just close down a lose making division and re-start it with the same people etc.. As I understand it, the full amount has to appear on the parent companies balance sheet (which is one of the reasons they appear so indebted), even though the likelihood of it being called in is low.

Is my understanding correct? And where would it appear on the balance sheet?

ben316

I backed up the truck on BWNG in the low & mid 30’s as looks well undervalued imo. It’s currently seems to be valued as a downtrodden high street stock when in fact it is now a 95% online play soon to be 100%.
After watching the recent investor presentation that confirmed to me that this looks well primed for excellent online growth going forwards.

The debt looks high currently but is well covered and is being paid down at a good rate of knots.

DYOR of course

extrader

Hi Private Investor Blog,

The financial guarantees that you describe are 'contingent' (ie potential, off-balance sheet) liabilities and their existence is acknowledged in fine print Notes to the Accounts.

In Costain's case, the first reference I could find in AR 2019 , p.136/188 states :

"Financial guarantee contracts
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements and accounts for them as such. In this respect, the guarantee contract is treated as a contingent liability until such time as it becomes probable that a payment under the guarantee will be required."

and the second addresses performance, completion, retention bonds and similar thusly :

" As part of its contracting operations, the Group may be required to provide performance and other bonds. It satisfies these requirements by utilising its committed bonding facilities from banks and surety companies. These facilities have financial covenants that are tested quarterly. "

The extent of the Group (collective) liability is described p.171 as :

24 Contingent liabilities
Group
Group bank borrowing facilities and bank and surety bonding facilities are supported by cross-guarantees given by the Company and participating companies in the Group.
There are contingent liabilities in respect of:
• performance bonds and other undertakings entered into in the ordinary course of business and
• legal claims arising in the ordinary course of business.
It is not anticipated that any material liabilities will arise from the contingent liabilities OTHER THAN THOSE PROVIDED "

from p.157, .."The unsecured bonding facilities are set out below

At 31 December 2019, the utilisation of these bonding facilities amounted to £122.0 million (2018: £99.9 million)."

general provisions policy is set out on p.135....but the difficulty in quantifying what these might be is set out disarmingly frankly on p.139 " Significant areas of judgement and estimation", where Costain goes into some detail about its 5 largest 'compensation events'.

'Construction companies in general ', going back to your question, may be different, but if Costain is representative, I'd suggest such 'compensation events' are much more likely to be material to the Group's future than a PCG to a random subsidiary.

HTH and ATB

abtan

Mti Wireless Edge (LON:MWE)

I did minimal research late last year after the Q3 announcement and was put off by:

a drop in gross margins;
the company making their "strong" positive cash flow movement one of their key updates. Looking at the accounts I could see that this was primarily down to very favourable working capital movements (eg payable went up materially vs past comparatives).

I admit to not even reading today's announcement, and that the above could very well be minor issues, but it was enough to put me off looking any further.

No position, and simply sharing my previous notes as so many seem interested in this one.

Harry Hindsight

26th Mar '21

Mti Wireless Edge (LON:MWE) - main controlling board have offloaded 3.65m shares at 80p to 'improve liquidity'. All seem a tight knit set-up. I like the 'story' and has the 'E' in ESG with its water irrigation but not sure about the 'G'. As Mr Taylor says let the 'share price tell the story'.

Monday 17 Aug 2020 - COST, CAR, MWE

Carclo (LON:CAR)

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Paul Scott

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