Small Cap Value Report (1 Aug 2016) - STAF, WTM, BON, TNI, AVN

1st Aug '16 by Paul Scott

17 comments 18533 reads

Good morning!

I'm looking forward to the private investor lunch which is being organised by Staffline (LON:STAF) (in which I hold a long position) today, via Buchanan Communications. It's great to see more companies reach out to private investors. After all, it's us who create the liquidity in smaller cap shares, and our trades which predominantly determine the share price.

If there's anything interesting from the STAF investor lunch today, then I will report back. Although regular readers will know that this is currently one of my favourite shares - I think the share price just looks wrong at the moment (i.e. too low). In my view a price of 1200-1400p is justified by the recent good results & positive outlook. As always though, that's just my personal opinion, not a recommendation. I may have missed something, so it's vital that investors always DYOR, as I don't particularly want to be blamed in the instances when I do get it wrong! (my average win:lose ratio is about 60:40 currently, but am striving to improve on that).

In a similar vein, Dillistone (LON:DSG) has announced an interesting-sounding investor access event, at the Tower of London, on 26 Sep 2016. Details are here.

Companies routinely spend a day or two meeting & talking to Institutions & brokers after publishing results. So it really should become routine to include meeting(s) for private investors in that schedule too. Webinars are also an excellent initiative, as many investors can't make it into London, so appreciate a web presentation with Q&A.

So lots more of this stuff please, brokers/Nomads & PR people!

Waterman (LON:WTM)

Share price: 82.7p (up 10.2% today)
No. shares: 30.8m
Market cap: £27.1m

(I do not currently hold a position in this share)

Trading update - shares in this group of engineers, serving the infrastructure & commercial building sectors, got whacked heavily post-Brexit. The same was true for lots of construction-related shares, as the assumption seemed to be that activity would decline considerably.

For the year ended 30 Jun 2016, Waterman has traded well;

Waterman has experienced a successful trading period. The Board expects to report results which exceed its previously declared financial objective of tripling adjusted annual profit before tax to £3.3m over the three year period to 30^th June 2016.

I wouldn't get too excited about…

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andrewdb

1st Aug '16

On TNI
I know this is a bit 'bloodless' - but
Basically most people who buy paper newspapers are old - primarially retired, or like smokers - likely to carry on despite everything.
So, imo the decline in print circulation is likely to by a bit more than their rate of death
There is a v.v. interesting chart here
https://www.themediabriefing.com/article/youth-audiences-newspaper-old-demographics-advertising
(see chart 2)

So, I go for predicting a decline slower than you think - at least more than 3y as long as they can manage their costs.

Also as a potential upside, Alexa says mirror.co.uk ranks 64 in the uk
In context
16 - guardian, 17 - mail, 28 - telegraph, 44 - independant 50 - xhamster.com (*caution - NSFW, included to indicate how popular porn is* - and I have never heard of it before) 64 - mirror 87 - express 122 - metro 138 - the sun 336 - the times (paywalled)

extrader

Hi andrewdb,

Thanks for the link ! An interesting aspect re The Mirror's readership demographics paints a less than gloomy picture . Re the 'millenials', ie under 34

The Daily Mail and The Telegraph fairly predictably have the lowest percentage of millennial audience make-up, at just 14 and 15 percent respectively. That’s to be expected given the number of older readers they attract and the sort of content those papers produce.

Millennials make up around a fifth of both The Times’ and the FT’s audience however, which isn’t too bad, but the Guardian, The Mirror and The Sun take home the bacon, with 28, 29, and 29 percent of their audiences constituting those in that millennial age range, respectively.

ATB

Ajay_Gajree

Paul, did you see the Article on French Connection (LON:FCCN) in the Times Business section today? It quotes Gatemore Capital Management (8% holders) calling for Mr Marks to split his roles as Chief Exec & Chairman and also called for plans to improve margins, reduce it's product range and ramp up the closure of its loss making stores. Any thoughts?

Samsgrandad

All good stuff as usual, thanks Paul. I posted a link on the end of Fridays blog but as it was well into the weekend it might have been missed, I think you'll enjoy it (and everyone else). It's about how the no 2 computer company 20 years ago lost the plot, lots of lessons for today's rising stars.
One of my favourite corporate cock-up stories was when VW beat BMW in bidding for Rolls-Royce Cars. They didn't spot the licence to use the R-R name ran out a couple of years later and this was sold to BMW. BMW make Rollers and VW make Bentleys.

PhilipHanson

Re Trinity Mirror (LON:TNI), I estimate that FCF this year will be around £120m, that is after a full year's pension contribution of £36.5m. So that's a FCF yield of 53%!

I understand the risks posed by the pension deficit, but I think the death of the newspaper industry, much like the physical book industry, are greatly exaggerated. In any case, digital is growing well and Trinity Mirror (LON:TNI) has excellent brands, both nationally and now locally too.

I believe the market is completely mispricing Trinity Mirror (LON:TNI) and ignoring the massive cash generation that the company provides. This is much like the situation when Paul initially flagged up the company in 2012, at that time at the much lower price of 25p. But things have moved on, in particular the very high net debt of that time has been reduced and I see today's entry price of 80p as heavily weighted to the positive on a risk/reward basis.

Graham Fraser

Thanks Andrewdb,interesting charts and I would agree with you that newspapers will go on for a lot more than three years. EPS at TNI has been constant for the last 10 years,they have scope to cut costs if necessary by merging or closing titles,and although digital revenues are still relatively low they are growing.
I think it is worth more than 2x earnings (incidentally there has been/is an extremely large seller of the shares)
Graham.

Hi Graham,
AIUI, the large seller is Aviva (8 > 7%), which also per the May RNS had another 1.6% out on loan.....
ATB

Paul Scott

Hi ragehammer,

Thanks for the hat tip re my original articles on TNI at 25p, here's a link to my original article flagging up the value in TNI at 25p per share - the scenario I plotted out (debt repaid, dividends then coming) has indeed played out:

http://paulypilot.blogspot.co.uk/2012/06/trinity-mirror-tni-key-points.html

The big issue that has changed is this - in 2012 we all thought that interest rates would normalise. Now in 2016, none of us know what the hell will happen. This matters, as TNI's pension deficit is ballooning.

I have an open mind on this one. Maybe an opportunity. My instincts say, not yet. Last time I thought it was cheap at 60-70p. Then it dropped to 25p. I put 60% of my SIPP into it (i.e. bugger all!!) at 25p, and hoped for the best. Then it multi-bagged. I sold, with relief, at c.37p, missing the really big move to 200p.

I think you can get so scared at the lows, that you give away the really big upside on the rebound.

Things don't always pan out as we all think. Live & learn.

This time around, I'm waiting for 25p again - screaming bargain. Then, and only then, will I back up the truck. Well, maybe sooner, who knows? It's not close but looking interesting at maybe 40p. Not yet, IMO.

Regards, Paul.

2nd Aug '16

Hi Paul

Regarding the pension, do you think there is an issue where the value of the assets measured at 30 June (right after Brexit) is causing some of the problem? My occupational pension (a DC scheme) is up 6% since end of June and I note that 48% of Trinity Mirror (LON:TNI) pension assets are in equities. A very quick back of the envelope calculation suggests that £40m could be added back to the deficit just from July equity rebound.

Obviously the major issue is bond yields. It looks like inflation in the UK is on the increase (from a nil base admittedly!) with the fall in Sterling since Brexit. If this continues through the year and interest rate expectations increase, then possible yields will be higher by the end of the year when the triennial valuation is done?

I know I sound like I'm clutching at straws, but even in the case of the pensions deficit not improving, I still think that the stonking free cash flow is more than enough to cope with it. £120m est. this year (again, this is after £36.5m of pension contributions) so even if pension contributions were to double after 2018, very much a worst case scenario I would have thought, that still leaves £80-90m of FCF. Compared to today's market cap of £225m.

shipoffrogs

Ragehammer

equities have done quite well since June 23, bonds have done extremely well as have overseas assets (with the fall in GBP), so it's been good for pension scheme assets.

But the fall in long dated bond yields has likely moved liabilities up more than the increase in assets for a lot of schemes. So, overall not so good for the funding shortfalls.

I guess the key question here is - at what bond yield does the deficit go away?

Splode

Paul, I just want to repeat something you wrote (edited slightly) because on reflection it is a very important lesson:

I bought in after it collapsed to 60-70p. Then it dropped to 25p. Then it multi-bagged but I sold, with relief, at c.37p, missing the really big move to 200p. I think you can get so scared at the lows, that you give away the really big upside on the rebound.

PJ0077

Shipoffrogs

Yesterday's Trinity Mirror (LON:TNI) release included the following table:

So a rise of 1.2% in their discount rate would eliminate the £426m liability, other actuarial assumptions held constant.

NB TNI's discount rate is currently 2.8%

That's interesting PJ. Thanks
Makes TNI look interesting too.

grout123

Its in some ways a shame to see the demise of Avanti. I must admit to being a bulletin board moron a few years back when AVN was a story stock and I had loaded up and fortunate;y had done really well when it launched Hylas 1. I made a packet but then struggled to re-enter as I wasn't sure what level to do so. the lesson I learned and has been told many times by others far more intelligent than me) was that story stocks when they have captured the investment communities collective imagination are a good ride but getting off the roller coaster can be hard. Since giving up my bulletin board moron credentials ( he says posting here) I have learnt so much about whats worth a punt and what isn't (mainly through Stockopedia if I'm honest) that I feel its mandatory not to listen to the boards. Making things as objective as possible in my systematic approach has helped me to win more than lose. Quality always counts!

The discount rate that Trinity Mirror (LON:TNI) have used (2.8%) seems very low to me for AA rated corporate bond yields and down from 3.8% in the prior period. Interesting to note that Norcros (LON:NXR) which Paul reported on last week which also has a large pension deficit uses a discount rate of 3.55%. If Trinity Mirror (LON:TNI) had used a similar rate, it would have knocked £270m off the deficit, per the table above.

There is a bunch of actuaries near me. I asked what a reasonable range is, and have been told as at march '16, if mostly pensioners possibly 2.2%, if mostly actives possibly 5% - also depends on funding position and other things too

That TNI have used 2.8% indicates the scheme membership is mostly pensioners and deferred - few actives (most probable) - or the actuary is cautious - or there is actually a good funding position and they do not want to make that too clear (probably not given the comments above)

Thanks andrewdb, very helpful info!

Small Cap Value Report (1 Aug 2016) - STAF, WTM, BON, TNI, AVN

Waterman (LON:WTM)

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Paul Scott

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