Small Cap Value Report (1 Jul 2015) - SDY, HSS, TPT, QTX, VLK

1st Jul '15 by Paul Scott

34 comments 30222 reads

Good morning!

Today's report will be equipment hire themed - as I report below on the profit warning today from Speedy Hire (LON:SDY) and I'll also circle back to the profit warning from HSS Hire (LON:HSS) a couple of days ago. Is something funny happening in equipment hire? Or are these two companies just executing badly? Let's have a look!

Speedy Hire (LON:SDY)

Share price: 48.7p (down 31.1% today)
No. shares: 521.9m
Market Cap: £254.2m

Profit warning - today's disappointing trading statement has come completely out of the blue. Checking the archive here, I last reported on 15 Apr 2015, when SDY reported positively, that it would be "slightly ahead of market expectations" for the year ended 31 Mar 2015, at the adjusted profit level. I concluded that at 73p the share was too expensive, being on a PER of 20.4, and with a lousy yield too.

The trouble is, if you pay up - a PER of 20 seems to be the norm at the moment for reasonably decent companies - then you've got no safety margin if something goes wrong. So as in this case, holders who cheerfully paid a PER of 20 are now nursing a 31% loss, that could take a long time to recover. Risk:reward just isn't good when you pay a full price for a share, if the company is only an ordinary company, as seems to be the case with SDY.

Looking further back in the archive, I didn't report on the profit warning in Mar 2014, but I did report on the accounting irregularities & resignation of the CEO in Nov 2013, here.

So all in all, shareholders must be feeling pretty cheesed off with what seems to be an incredibly accident-prone company. So it's difficult to see this share regaining its previously toppy rating any time soon.

What's gone wrong this time then?

The company flags a "slower than expected start to the current financial year" (i.e. Apr-Jun 2015, inclusive), giving the following reasons:

Furthermore, the disposal of their M.East business has now fallen through, with discussions terminated with the potential buyer. It's operating at breakeven now, so a setback rather than a disaster.

CEO resignation - the CEO has fallen…

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Paul Scott

1st Jul '15

David,

Well said, I couldn't agree more. It sickens me that so many company Directors ruthlessly strip out costs from their companies (usually sacking people, and holding down wages for those that remain, and using agency temps to replace better paid permanent staff), whilst at the same time absolutely robbing the company blind themselves with crazy salaries, bonuses, pension contributions (when the workers don't have any pensions!), and then on top of all that, they dream up greedy ways to further feather their own nests like the one announced today by Vislink (LON:VLK).

I don't rate the Exec Chairman of Vislink at all, and that's why I sold my shares. He's addicted to doing deals, and it was only the Pebble Beach acquisition which saved Vislink's bacon at the last set of results.

The balance sheet is filling up with goodwill of course, and often acquisitions go wrong after a while.

I think this type of greedy, self-serving management are a scourge on corporate Britain, and should generally be avoided, as they usually screw things up in the long run.

Whereas I know we both like conservatively run, family controlled businesses, which are run for the long term, like James Latham (LON:LTHM) and others.

I really hope shareholders reject this awful incentive plan at Vislink.

Directors should be paid a sensible salary (say £100-200k p.a. for a business the size of Vislink), and do the job to the best of their ability. There's nothing wrong with a few share options either, to give them say 1 or 2% of the company if they do a great job, but that's all that's needed and justifiable, in my view.

Regards, Paul.

cycle

Agreed 100% Paul. The previous share incentive scheme at Vislink was very generous, perhaps too much, but at least the criteria was based on EPS growth. As you say, Pebble Beach saved their skin and shareholders have had a decent run in the past two months as a result.

However, just basing it on market cap for a company that has announced that it intends to make more acquisitions (historically around 1 per year) is disgraceful and very anti-shareholder IMO.

As Warren Buffet points out, directors incentive schemes are really like options - all the benefits of the updside but none of the downside that shareholders have to worry about. This fits the bill as an extreme case in that the company doesn't even need to generate further shareholder value but only bolt-on acquisitions of sufficient size.

What do you think is the best way for this to be challenged? I suspect a few people emailing them will have no effect. I'm seriously considering selling the remainder of my holding. VLK was my biggest position a few months ago.

cyberbub

PeterRussell, I have no knowledge of GTS and it may be that it is a rare 'kosher' Chinese AIM company. But in my experience you have to assume that EVERY Chinese AIM company is a fraud. Even if it is audited by reputable British accountants, and pays a hard cash dividend, this is far from a guarantee of being legitimate, as Naibu Global International Co (LON:NBU) Naibu holders found to their cost! Also worth considering that even if you believe their accounts and it is on a P/E of 6, then given the high risks in this type of company, it might never make it much above a P/E of 6... Anyway up to you of course, no advice intended, and good luck with GTS.

PFhunting

That is the crux of the issue really, how do Private investors actually get to challenge these incentive schemes? There seem to be more and more of these getting slipped out recently with very low hurdle rates that will give rewards and only require mediocre management to achieve , I would lump the recent Sprue Aegis LTIP into the same mould. The best inventive plan in my opinion is one where management have a decent stake in the business and thus get rewarded in exactly the same way as all other investors.

PeterW

2nd Jul '15

Hi Paul,
I was appalled when reading the Vislink announcement yesterday. In my view the NED's should be taken to task over this and the Chairman of the remuneration committee, Robin Howe, should be asked to leave. The rest of the NEDs should be scrutinised to ensure they are fit for purpose. Obviously I also think the award scheme should be abandoned.
One implication of this award is that John Hawkins has undue influence on the board due to weak NEDs.
If anyone has good connections with the press I think this would be a very good way to put pressure on the company and a very good story.
Regards,
Peter
(I have a holding in Vislink)

carmensfella

Any shareholders who agree with Paul and I regarding VLK should make contact with either of us and provide their email contact details as I suspect this one will need looking at very carefully as a test case for private shareholders and what exactly can be done to protect and utilise our very limited rights. If it is clear that a significant number agree and we have over 5% of the company then there will be lots of campaign options open to us.

Camtab

I think society should be responsible for limiting excess and not small share holders. Small share holders will argue they are getting a return for their risk if one of their investments multi bags. A Manager invests their time and some get good pay and some don't. In Mr Hawkins case if you don't ask you certainly don't get. I think we can all see his game which is one of the great steps forward in our society - increasing transparency and rules to force disclosure. So is it for small share holders to influence this? I don't think it is their function, we invest or not which depends on our judgement on many aspects of the company in some cases this one included. Anyway you will never get them all to agree and so it falls to Fund Managers to make the case. "A case of the pot calling the pan grubby bum" if you'll excuse my expression. Anyway the average duration of most fund managers is quite short.

So it falls to us to educate our children at school in our duties to others in society. At the moment I cannot see this at my boys school which I assume is the same for others. Until we do Gordon Gekko's "greed is good" line will remain salient. Our society rewards those with money regardless of how they got it. Shakespeare taught balance perhaps he should be compulsory reading in our board rooms. Sorry guys my rant for the day!

underscored

There needs to be a legal mechanism to enforce this - via the owners - the shareholders.

bsharman

I totally agree with Paul regarding Vislink (LON:VLK) - it's a complete disgrace!

Just for the record Mr Hawkins remuneration at Vislink is already in the top 10% on AIM and for the size of the company it is in the top 2%. I do not think he is unfairly remunerated and has received very high salary over each of the last four years. This level of reward on top is sheer greed IMHO but others may differ in their opinion.
I think such awards should be voted on by the owners as we are handing out huge numbers of shares in the company and there is no long term guarantee just a market cap hurdle !
Announcing this just AFTER the Agm is disrespectful IMO and happens at nearly every company so a general stance on that is required also.

I've sold my Vislink (LON:VLK). Cannot be doing with management who are just in it for themselves. Good riddance! There are plenty of better businesses out there IMO where the management and shareholders interests are truly aligned!

Just for clarity I essentially agree with you all. These people are perverting a very good system, I love Capitalism - it works. But you have to remember it is based on competition. The way we measure your success in this competition is through the wealth you make, not necessarily the wealth you create. My point is really how you deal with it and them. Small Shareholders are not the answer. I don't agree with more laws to tell people to stop being greedy. I remember the beginning of compliance after the 1987 crash and the reems of regulation that have followed. "Bad uns" always find a way around these things and 2007/8 still occurred. All I am saying is until we all (and I mean we all) despise this sort of greed, it won't go away. People flock to the money, they don't ask where its come from or how it was made simply you have it so you must be cleverer than everybody else. Change that.......

johnrosier

3rd Jul '15

Vislink (LON:VLK) ; I have posted a letter to one of the non-executive directors and member of the remuneration committee this morning:

Dear Oliver,

I have enjoyed my profitable investment in Vislink since first acquiring shares in April 2013 but as a shareholder, I have to voice my concerns over the recent grant of Executive Directors’ Awards under the 2015 Value Creation Plan.

Whilst not being against rewards for exceptional performance, in this case I have some serious reservations:

The reward is too easy to achieve; if the share price goes up by just 7% per annum then they are in the money
It pays out too much; if the share price went up 20% per annum they would share roughly £5m between them
Where is the downside? I could just about stomach this type of reward if the participants put in some capital at the start which could be lost if the share price was to fall over the period, which would at least align them more with their shareholders, and finally
I think the benchmark/hurdle is flawed; the AIM All Share could go up 25% per annum for the next three years, the Vislink share price could under-perform, going up only 12% per annum for instance and yet the scheme would pay out handsomely. I would prefer a hurdle that is linked to real value creation; perhaps a combination of total shareholder return, (share price and dividends), improvement in ROCE and cash flow per share. I am keen that the temptation to make decisions that might boost the share price in the short term, perhaps to the longer term detriment of the company, are minimised.

I think this is the type of plan that gives the City a bad name, making the participants look excessively greedy. I would very much appreciate it if you would voice my concerns, which I know are shared by many others, to fellow directors and I urge the board to reconsider the terms of this incentive plan. The Exec Chairman should be offered a new and better structured incentive scheme that rewards exceptional performance from the business over the longer term.

Yours sincerely

John Rosier

I considered selling my holding but not for very long! it is better to try and force some change through communication. Also, I suspect the shares are cheap and that the new award has been timed to make sure the participants get on board before the share price resumes its next leg upwards. Hopefully, interim results due in early September will show further progress from Pebble Beach and its link up with GoPro. “Disappointed with the Board” Holder!

loudenr

I sold out of Vislink (LON:VLK) a few months back but one of the things that made me nervous was the pay of the Directors. Way to high in my view for a company that size

But on that basis you would never have held WPP which has been a fantastic investment. I think directors' pay is something to take into account but I wouldn't base my whole investment decision on it. As I say I think Vislink is probably going to do very well over the next few years; my beef is with the management taking out too much for not enough value creation!

marben100

PeterW,

ShareSoc has an excellent and extensive database of press contacts, and I know members of the press are keen on the topic of excessive/unwarranted executive remuneration. If any ShareSoc member would care to draft an accurate but hard-hitting press release on the Vislink case, I will do my best to get it issued to the press.

It may be best to liaise through Carmensfella who, of course, is a fellow member of ShareSoc's Board. I believe David has his own thoughts on how best to tackle the "Vislink problem". Contact us through Stockopedia's messaging facility (click on our Stocko usernames & select "msg")

Best,

Mark

In broad terms, I agree with you John, but a couple of things to note:

a) It is much harder for directors of a largecap, like WPP to screw over minority shareholders.
b) The way directors treat themselves gives a good indication of how their are likely to treat minority shareholders. This is a much bigger risk in smallcaps, where the opportunities for stuffing minorities are greater, e.g. by dilution, taking a substantial proportion of profits for themselves etc.

An interesting case in point was last week's AGM at Telit Communications (LON:TCM) , which I attended. As it happens, I think it's a super company with excellent prospects, but the AGM and remuneration report was one of the worst examples of CG I can recollect! The only director to show up for the AGM was the CEO. When asked, he felt that he couldn't justify the cost of the US based remcom chairman flying to the UK for the AGM, which obviously made it very awkward to raise questions about the CEO's pretty huge package. Irrespective, I did ask why he felt it necessary to pay himself $3.5m last year, when he already owns 20% of the company anyway! [makes the Vislink package pale into insignificance].

Nevertheless, I am not selling out of TCM: a) as mentioned, I think the prospects are excellent; b) apart from short-term pay, the CEO has put his money where his mouth is, by raising his stake in the business (borrowing money to do so), hence his interests are closely aligned with those of shareholders, and he has done a phenomenal job of building the business.

Coming back to Vislink, the track record there has been very patchy & I think Paul is right that the whole edifice could come tumbling down so, combined with poor CG, not one for me. Best of luck with it anyway!

Cheers,

Hi Mark, I guess time will tell but I think the market is underestimating and undervaluing the impact of the Pebble Beach acquisition on margins, profitability and cash flow. I think using phrases like "the whole edifice could come tumbling down" is a bit over the top!

Sorry did not make ShareSoc last night; did not get back from Bath until after 9:00 pm. Hope it was a success.

John

You are quite right I would miss out on some excellent investments and I would never use it as the sole reason to make an investment decision or not. I just thought it was excessive. Particularly so given the share price was not really moving forward (until the last 3 months or so). You could well be right that the share price will rise well in the short to medium term and I wish you and other holders well. However, you cannot ignore that the Executive seem to put themselves first.

I also think that Vislink capitalises a lot of cost.

4th Jul '15

Thank you to so many of you who have responded by email and not a single one has been complimentary of this scheme and there has been a massive number of private and individual shareholders providing comment, thoughts and background information that I really think is good to share amongst all our group.

Alun at FreeShareData has kindly set up a campaign page to register your interest so that we know when we are ready to go to the Press and Media with a significant part of the shareholding adding the weight behind our cause. You can find the page here and if you click on the blue link titled 'Shareholders: enter your holdings and opinion' you can put all the comment you may wish to add...

http://www.freesharedata.com/vislink-poll

I am sure the Board and advisers will be going to this website too so do not hold back as this is your opportunity to tell them...they did not give us any opportunity in advance as announcing it as a done deal nor did they let us discuss it at the Agm so total disrespect for PIs IMO.

You can put just your Stockopedia or online nickname if you prefer or just your first name and initials but the important thing will be to have your shares ready to be counted and voted on in a couple of months or so after the Summer holidays when we have the maximum PIs available back from their holidays and aware of this greedy scheme.

This campaign will grow and grow and I am sure that you will all know more shareholders who want to back it.

Well done to all of you for showing backbone and the steel that is needed to stand up to such schemes....if only the City and larger institutions were not incentivised by fees and common structures that seem to make them support these things in the first place. We may be small individually but together we are huge....

Do go to the website now and enter your views. I have a feeling this will be a winning campaign and there will be egg on faces !

Small Cap Value Report (1 Jul 2015) - SDY, HSS, TPT, QTX, VLK

Speedy Hire (LON:SDY)

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Paul Scott

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