Small Cap Value Report (1 Sep 2015) - LTC, AGA, ENTU, ZZZ
Good morning!
Just when I thought it was safe to go back in the water...! Markets have taken another tumble this morning, with the FTSE 100 down 115 points at the time of writing at 6099, and the US futures off heavily. I'm not entirely sure what reasons are being given by commentators - probably the usual - China worries, when will interest rates rise, etc. Sometimes markets just get nervous about future earnings, and sell-off.
I've got my limit orders in with my broker, to automatically buy some US large caps, if there is another disorderly open with bizarre price aberrations. I'm not selling any of my UK small caps this time, because they held up so well last time (the prices were marked down, but on very little volume, and things very quickly bounced).
China
I've been thinking a bit more about China. A lot of us have disregarded the slowdown there as not affecting small caps we hold in the UK. I think that is true for consumer-facing UK small caps.
However, some comments in last week's results from Xaar (LON:XAR) made me ponder this more. Xaar manufactures print heads which are mainly sold to Chinese ceramic tile manufacturers. However, this is not necessarily reflected in their international sales statistics, because Xaar products might be sold to European manufacturers which incorporate them into products which are ultimately sold to China. This will be recorded as a European sale in Xaar's books, but ultimate demand for the end product actually comes from China predominantly.
I wonder how many other companies are in the same boat? What about Trifast (LON:TRI) ? They've done very well selling fastenings to European car manufacturers, but a lot of those products end up being bought in China. So Trifast is probably more dependent on Chinese demand than its accounts might suggest.
So I'll certainly be thinking much more about where the end products go to, rather than where a product is assembled. This might reveal more China-dependency in my portfolio than I realised was there perhaps?
Anyway, on to specific company news for today.
Latchways (LON:LTC)
Share price: 1068p (up 48% today)
No. shares: 11.2m
Market cap: £119.6m
1100p recommended cash bid - this looks a cracking deal for Latchways shareholders. As you can see from the chart below, Latchways (a maker of safety equipment, e.g. retractable safety lines for overhead workers) has struggled in the last couple of years, with disappointing results. So being offered a healthy 53% premium, all in cash, giving a clean exit for all shareholders, should be seen as a generous offer, and accepted.
The deal seems very likely to proceed, with irrevocable acceptances already received of 38.2%.
What is particularly interesting is that this is another example of a larger American competitor buying a British company. This now seems an established trend, and I think we're likely to see lots more such takeovers. With US companies generally looking expensive, and organic growth hard to come by, buying up cheaper overseas competitors is a logical strategy for the Americans.
The buyer of Latchways is MSA Safety Inc, which is listed in America, and is valued at about 10 times the size of Latchways, at £1.1bn.
I'd be delighted with this deal, if I were a holder of Latchways shares, as the price being offered looks generous.
AGA Rangemaster (LON:AGA)
Share price: 201p (up 9.7% today)
No. shares: 69.3m
Market cap: £139.3m
Possible bid by Whirlpool - a very interesting turn of events is unfolding at posh cooker maker, Aga. A takeover deal from the Middleby Corp is underway, but Whirlpool seems to be gatecrashing the party, and has made an initial approach regarding a possible cash offer for Aga, subject to due diligence.
For the moment Aga is continuing to recommend that Middleby deal, and is pressing ahead with that. The timescales look imminent, so Whirlpool are going to have to move very fast tabling an offer in days rather than weeks, in order to stop the Middleby deal going ahead.
This comment from Aga today is interesting, as it's leaving the door open to a higher competing offer;
Assuming AGA Shareholders approve the resolutions to be considered at the Court Meeting and AGA General Meeting, the Board of AGA will consider whether to proceed with the sanction of the Middleby Scheme on 16 September 2015 in light of the situation at that time. The Board of AGA retains the ability to adjourn the sanction hearing if it receives an offer from Whirlpool prior to this deadline which it would intend to recommend to AGA Shareholders or if it otherwise considers an adjournment necessary.
Checking their Stockopedia pages, Middleby has a mkt cap of £4.06bn, whilst Whirlpool is even bigger, with a mkt cap of £8.59bn. There's a striking difference in rating, with Whirlpool being on a relatively modest forward PER of 11.7, but Middleby much higher rated at a fwd PER of 24.6. Both companies have net debt.
What a great situation for Aga shareholders - having two large caps fighting to bid for the company. This could get very exciting if an increased competing bid from Whirlpool happens (and who knows, maybe then an even higher offer from Middleby?!)
So two situations where UK companies are being bid for by larger American companies. This could prove a rich seam of potential winners, if we can correctly predict the next companies to be bid for - let's see if we can as a group come up with some ideas!
Note also that AGA and Latchways are a similar size - just over £100m mkt cap, so I wonder if we could run a screen to identify companies of that size that might have takeover bid potential?
Entu (UK) (LON:ENTU)
Share price: 65.3p (down 29% today)
No. shares: 65.6m
Market cap: £42.8m
(at the time of writing I hold a long position in this share)
Profit warning - this company has only been listed since Oct 2014, and is doing a pretty remarkable job of destroying its own reputation amongst investors!
The share price started falling in June, on worries that a change in VAT might affect them. At the time I concluded that, since most of Entu's products are already charged at standard 20% VAT, then the impact would be limited. The company confirmed this limited impact, in comments with its results on 20 July.
The share price really began to tank in July, in what seemed unrelenting, and frankly rather suspicious selling - it was starting to look as if people in the know were selling in advance of bad news. They were. The bad news came out on 20 Jul 2015 - poor interim results, and a commentary which struck me as being odd - poor interims were brushed aside as being expected (something they hadn't told the market before!), and an emphatic statement that orders were strong & full year expectations would be met.
Being perhaps too trusting, I believed management assurances that the full year results would be in line with expectations. We have been told today that results will now be below expectations. However, the problems all seem concentrated in one division, solar.
Solar division - whilst the update today is infuriating, it's important to let your blood pressure subside as quickly as possible, and think it through rationally, in order to make the right decision.
Rather shockingly, the company has announced today that it is closing its solar division altogether. This seems rather drastic action, with the reasons given as follows;
...the Board expects the market environment for Solar to become increasingly difficult as a result of speculation about a possible increase in VAT for its solar products from 5% to 20% and uncertainties concerning the future level of feed-in tariffs, in particular a recent Government proposal for a substantial reduction in feed-in tariffs with effect from January 2016.
I don't see how speculation over a VAT rise would affect demand. Quite the opposite - if I were a potential customer, and I thought the VAT rate was going to rise, I would buy them now before the increase!
The comments on feed-in tariffs looks the more important factor. Even so, it's surprising that demand has dried up so suddenly, and that the division can't be down-sized. Shutting it down completely seems extreme. There again, the company knows its own figures best, so better to kill off a problem part of the business, than have continuing losses I suppose.
It does make you wonder about the sustainability of profits at the company generally though, if a division can just suddenly cease to be viable in this way. There again, artificial feed-in tariffs, a backdoor subsidy effectively by the Govt, don't affect Entu's main product lines such as double glazing, conservatories, etc. They're standard rated for VAT, and not subsidised.
The company does helpfully quantify the scale of the problem;
The Company now estimates that it will lose in excess of £2.0 million during the current year from its Solar activities against a budgeted contribution of £1.6 million. The Board does not believe that its Solar business is likely to make an acceptable return on investment in the medium term and therefore, after fulfilling all current obligations, Entu will discontinue its retail Solar activities in a controlled manner, and re-train and re-deploy as many staff as possible into its other activities.
My opinion - obviously I'm livid about the chain of events at this company, as set out above. However, it's important not to throw out the baby with the bathwater, and the share price has already more than halved, so these problems are already baked into the price, possibly excessively?
The problems are ring-fenced within the solar division, and the rest of the business is trading alright (if this assurance can be believed);
Following the developments in Solar, Entu now anticipates that its full year results will be below market expectations. The Company expects that its continuing activities will report an operating profit of approximately £8.0 million for the year ending 31st October 2015.
Difficulties in its Solar business notwithstanding, the Board remains confident of the future prospects of the Company's continuing activities, comprising home improvement products, insulation products, boilers and repairs and renewals cover plans, which continue to trade in line with management's expectations. As previously announced these activities have the benefit of a substantial forward order book in excess of £30 million.
Given that the shares have dropped from a peak of about 145p to only 65p today, then this is a savage mark-down by the market, for problems that appear to be concentrated in one division only. The company has taken decisive action to close that division, so I suspect it won't be long before the stock market starts looking at this share more positively.
Basically, we can buy a company with net cash, which has core operations making £8m operating profit, for a £42.8m market cap. If we assume profit after tax of say £6m, then that gives a PER of only 7.1 at the current price.
Sure, there will be some exceptional costs this year for shutting down solar, but I think the market will look through that in due course, and value the share on the company's continuing activities.
Dividends - note that the company has reduced its dividend guidance today, saying the final divi will not be 5.33p (as they reassured it would be, in July), but instead will be "not less than 2.67p", giving 5.34p minimum for the full year total divis. That's a yield of 8.2% on the reduced guidance, and they are saying that's a minimum, so there could be upside on that potentially?
My opinion (cont.) - I think this is a buying opportunity. Sure the company has done serious damage to its reputation, and has handled the newsflow very badly this year. So I can fully understand why some shareholders will just want to ditch the shares and move on. That's a perfectly valid stance to take.
I've done the opposite, and bought more today, because I feel that the problems are ring-fenced at one division, and the rest of the business is doing fine, and now looks cheap on fundamentals. So providing there's no more bad news, I think this share could recover in time.
EBIT: New broker forecasts - I've got revised forecasts here (from the house broker), which exclude the Solar division, and show £100.9m turnover, and £8.1m PBT for the current year ending 31 Oct 2015. That equates to 9.7p EPS.
Therefore at 65.5p per share, the PER is just 6.8 for the current year (pre-exceptionals). I would say that is a very harsh rating, but given the sequence of events, I think the market is justified in being harsh towards the company. Management have screwed up, and need to rebuild market confidence.
Furthermore, this company joins the ever-lengthening Hall of Shame of companies which warn on profit in their first year on the market. Entu was floated by Zeus Capital, who also floated BooHoo, which also warned on profits fairly soon after floating. So this says to me they're probably being too aggressive in valuations for companies they float.
Snoozebox Holdings (LON:ZZZ)
Share price: 9.88p
No. shares: 211.8m
Market cap: £20.9m
Interim results to 30 Jun 2015 - I think it's clear from these figures that this portable hotels operator is still a million miles away from profitability. Turnover of £2.36m created only a £654k contribution to central overheads. The trouble is, the ignores the depreciation charge of £814k, which really I think should have been deducted, so really it's loss-making even before central costs of £2.2m for the six months.
It seems to me the central costs are just way too high. This business would be better suited to being a lean, privately-owned, owner/managed business, with very little in costs. It might work then, but I can't see it making enough headway to become profitable, based on these numbers. Admin expenses are £2.2m for the half year. So turnover would have to quadruple just to reach EBITDA breakeven.
Moreover, it's using a lot of capital, to generate a negative return. So to grow the business, they would have to keep adding on more units, at considerable cost.
Directorspeak sounds upbeat, but confirms that the company is still a long way from profitability;
With greater visibility, clear growth prospects and an executable event model, the focus in the second half of the year is to establish a robust platform on which to build the brand and scale the business.
As a consequence, there will be further expenditure in operations, service delivery and on the blueprint forexecution of the brand experience. In the short term, while revenues continue to grow strongly, the Company does not expect to be EBITDA positive in the second half of the year.
I don't like the sound of this. It seems that, rather than cutting costs, they intend doing the opposite.
My opinion - it's a great concept, but I think it's becoming clearer that this company looks very unlikely to become a commercial success.
All done for today.
Regards, Paul.
(of the companies mentioned today, Paul has a long position in ENTU and no short positions.
A fund management company with which Paul is associated may also hold positions in companies mentioned.
NB. These reports are just Paul's personal opinions, not recommendations or advice, so please DYOR)
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49 comments
Yup, dasv, PDX is the one. Complete fraud based on a bought Australian patent. Vicious bulletin board. It'd make a wonderful case study for Winnifrith. An engineer friend was interviewed for a job - he was laughing for a fortnight.
There are so many examples of investors not standing back and looking at the business from a common sense viewpoint before plunging into balance sheets.
apad
Snoozebox's latest development is the Snoozy, which looks more like a tent than a hotel. I'm not sure how much of a defensible moat tents have. As a business.
Maybe there's a good franchise business in there, based on the excellent design and branding, but without the heavy metal?
I looked at the Snoozebox product at Mello and was impressed, but spoke to the management and swung the other way.
They seemed not to grasp that utilisation was the key metric for their business - i.e. nights sold, requiring rapid breakdown and recommissioning at new location. No sense of urgency. In my youth I worked for a temporary grandstanding outfit and there were very few days in the summer when the kit wasn't earning, with the staff working through the night on transitions.
Jon
It's nice to see that I've managed to avoid another car crash with Entu (UK) (LON:ENTU)
It had some of the hallmarks of Shoe Zone (LON:SHOE) - both recently listed, both show management to either be incompetent or dishonest.
Spaceandpeople (LON:SAL) was a similar situation, I remember speaking to the CEO and thinking do I trust this individual with my capital? The answer was not really. Accordingly I sold and put the money to better use.
Bottom line is do you trust management? If not, move on.
Regards,
Sully.
I think there is potential trouble lurking for the continuing business at Entu too. There were two broker forecasts prior to today's update available for FY15:
- Zeus Capital (25-Aug, EPS 13.8p, Operating Profit 11.05m)
- Edison (31-Jul, EPS 12.7p, Operating Profit 10.60m).
The trading update today said that discontinued activities (solar) had a budgeted contribution of 1.6m previously, and of course in the H1 results they said they were in line to meet market expectations - which implies to me that the remainder of the business should have been hitting 9.0m-9.45m operating profit based on the range of broker forecasts.
Hitting therefore only 8.0m for this business is a big miss and would be a profit warning in its own right - but I think they've buried it within the larger issues with the solar division.
I still don't think we're getting the full picture here, and this today was the straw that broke the camel's back for me, so I no longer hold.
Current forecast profit 8.0m
Add back the 2.0m+ loss = 10.0m
Add back the previously expected 1.6m contribution = 11.6m
So the rest doing what is expected - if you believe the statement.
Not sure how they are all differentiating operating/pretax/posttax etc though.
No, I misread it. It is going to be 8.0 - 2.0+. As you say, other divisions must be underperforming too. Wouldn't have made more than 9.6 if solar had performed as expected.
I agree with your final line. I, too, had overlooked the 'continuing operations' phrase in the operating profit estimate when I first read it.
Current forecast profit 8.0m from continuing operations (assume this excludes solar which will be discontinued)
Therefore, actual operating profit for 2015 will appx 8.0m - 2.0m for solar losses = 6.0m.
This will probably convert to earnings of 4.5 to 5m . . . if you can believe any figures they quote.
These figures are well short of the broker forecasts - appx half.
A particular ENTU take from a blog on one of the financial magazine's website this afternoon.
Does anyone know if there is any truth in the individual companies being brought out of administration and packaged?...
Entu is a can of worms; the Entu group is no more than an umbrella for various low quality businesses/brands cheaply assembled at minimal cost as several companies that constitute Entu were bought out of administration (doubt the founders have invested much at all in forming this group). Strategy of the founder shareholders was to package all of this into one corporate vehicle and sell as much in an IPO as possible; they sold 50% of the group on the IPO at what was deemed to be a low valuation; not looking so cheap now anyway. Not the actions of owners that genuinely believed in the future prospects of the Entu group.
Yes it does appear to be true, Entu did buy several companies in administration: http://www.thisismoney.co.uk/money/investing/article-2955828/SMALL-CAP-SHARE-IDEAS-Soaring-sales-solar-panels-help-Entu-solid-start.html
Also Astley which is their latest acquisition was loss making last year, they bought it for £200,000.
I never could spell 'engineer' and now I are one.
The dichotomy between what is an engineering and an accountancy judgement about a company is beautifully depicted by the likes of ENTU. They surf a moral panic in society and its attempts to fix a market for a golden future.
Bloody nonsense if you ask me. Anyroadup, if you don't understand the core activity of a company, balance sheet gymnastics are meaningless.
apad
ps there was a company that was selling what was essentially a perpetual motion machine. Started off as an outboard motor engine in Australia and ended up stirring chemicals in the UK have consumed millions of 'investors' money through several incarnations. Can't remember the name!
Pursuit Dynamics? PDX?
The key Investors Champion link between Entu and Epwin is below.
The Admission Document for Entu reveals the following in respect of the latter:
For the year ended 31 October 2013 approximately 68 per cent. of windows, doors and conservatories were supplied by Indigo Products Limited which is a wholly owned subsidiary of Epwin Group plc in which Brian Kennedy, a Selling Shareholder of the Group, is a 15 per cent shareholder. On 11 July 2014 the Company entered a five year exclusive supply agreement with Epwin Group plc to supply the Group with certain products, primarily windows and doors. The Group is committed to purchasing 75 per cent. of its PVC-U windows and doors and 100 per cent of other products in the first year and 100 per cent. of all products thereafter from Epwin Group Limited and its group companies. The Directors believe that this supply agreement will provide the Group with continuity and security of supply in addition to better forward visibility on product supply costs.
I certainly do not trust Entu and sold my Entu shares back in July. Today have sold my Epwin shares because I do not trust their linked dealings.
Too much smoke and mirrors involved here. Ian
Paul, why compare with SAL?
Are the circumstances really similar?
The SP of SAL recovered 25% in one day but simply because of their being the preferred bidder on the Network Rail deal. Otherwise, it could well have been at the same level today as after its results announcement.
Yes, SAL had two profit warnings but it is, nevertheless, in a growth market niche and has a strategy and distinctive product offerings, hence its success with Network Rail.
I really don't see that with ENTU nor do I see, really, what is the "moat" or market advantage that ENTU has.
Yes, it may well be oversold but as a long-term holding, well, I think there are much better.
Sorry but this is where I have tremendous problems with investment decisions made on the basis of published figures and statements by the company itself.
The market and business strategy matters just as much or, for me, rather more.
I would not compare ENTU with SAL, in fact I rarely compare any one company with another since I find that circumstances are only rarely comparable.
Each and every company is unique.
Best wishes,
Jane.
Hi Jane,
I know that Spaceandpeople (LON:SAL) and Entu (UK) (LON:ENTU) are not comparable in terms of their business models, that wasn't what I meant.
The reason I compared them is the sequence of events is the same;
1) Company says everything is fine.
2) Shortly afterwards a shock profit warning is issued, based on specific problems which are fixable.
3) Investors believe the company should have issued the bad news earlier
4) Investor confidence crashes, and people ditch the shares whilst ignoring that the company remains profitable, still pays dividends, has a credible recovery plan, and is very cheap.
5) Everyone hates the company and its management
6) After a few months, the company reassures with a stable trading update, and shares begin recovering strongly, giving an excellent profit to investors who did the opposite to the herd, and bought at the lows instead of selling.
This is what played out at SAL, and I believe is what is likely to play out at ENTU. Hence my comparison of them.
Incidentally, SAL's recovery was not triggered by the Network Rail contract. That gave it an extra boost, but the shares were already clearly in an up-trend when that was announced.
Regards, Paul.
Paul, re your last para, sorry, you're wrong, in fact this is from your own SCVR of June 26:
"Share price: 78p (up 25% today)
No. shares: 19.5m
Market Cap: £15.2m
(at the time of writing, I hold a long position in this share)
Award of preferred bidder status - I don't normally comment on contract win announcements, unless they look material. Since this announcement came 25 mins before the market close, and moved the share price up 25% on the day, then it's worthy of a mention!"
- See more at: http://www.stockopedia.com/content/small-cap-value-report-26-jun-2015-tni-tung-ess-sgi-sal-101827/#sthash.sSErK44e.dpuf
The sp movements, including this day's rise, are shown clearly on the sp graph on the Stockopedia site.
Best wishes,
Jane.
Hi Jane,
No, I am correct! Here is the proof (see annotated chart below).
Or rather we are both correct - SAL had formed a base, and was clearly in an up-trend in H1 of 2015, such that it was up about 50% from the lows by the time the Network Rail contract was announced.
Network Rail then gave it an extra boost, as you can see below.
Regards, Paul.
Hi Paul,
The price to book value of ENTU worries me. As more of a novice than some of you guys, should that concern me? I like the PE and some of the other metrics but surely price to book value is important? I will be interested in responses and views.
KR Charles
Never liked ENTU. Various people I respect were bullish but I couldn't see anything unique about them - no moat.
As for China I sold out of equities last week leaving 5% invested.
If the official PMI is now 49 or 48 then the real PMI is much worse.
The commodities complex is collapsing. China makes up > 50% demand for iron ore and is the biggest buyer of copper, also the biggest buyer of crude.
Forget official figures from China - look at the demand for commodities and you have the real picture in China: manufacturing/exports stalling, domestic consumption not making up shortfall. And the small matter of $23 trillion of debt racked up in just 5 years.
I think there will be global contagion as China has a hard landing.
On Latchways (LON:LTC), I think 1100p is fair, but note that - as usual - the institutional "irrevocables" are soft, i.e. the institutions can vote for another bid so long as it is a premium of 10% (or 5%).
Thanks yes. I admit to being one of those sceptical of Space and People. The reasons given for the profit warnings didn't make sense to me.
Similarly, rather than problems "concentrated in one division only", I think the ENTU sell off has more to do with loss of trust in management.
Ps. I don't suppose anyone knows why Investegate didn't email me the Entu update? I received other updates by email this morning except the Entu one, only found out about it from comments here. Did this happen to anyone else?
I didn't get the Entu update email either. I only found it on Investegate's website when I went looking for why the share price had crashed.
Not just me then. Its twice now that has happened to me on a profit warning - the other one was IND when they put out a report in the afternoon. Weird.
I went away and had a think about Entu (UK) (LON:ENTU) following your comments Paul. I looked at the figures and I read over my comments from the interims, I decided the PE looks good and that they probably will hit the min 5p total divi with a current yield of 7+%. But... I don't like the concerns as others have raised and I lacked confidence there was really much med-long term upside, so I decided not to buy and came back here to share my thoughts.
But I see many informed contributors have beaten me to it, lots of good concerns raised. And I also see also you are sticking to your guns... so now I wonder is this contrarianism in action? Are you looking through the fog to see the real value of the company in the future when today's disappointment is forgotten history? Or are you attributing a greater value and optimism to something because you are a current holder?
Well I think you will probably turn out to be right, but I am still unconvinced and going to sit this one out! :)
I will look forward to seeing how it plays out though. Thank you as always for sharing your thoughts and good luck!
Hi Paul -
Re. Entu (UK) (LON:ENTU). Not exactly the cash machine you think it is.
The interim HY report to 30/4/15 shows a negative Free Cash Flow of -£1.2m, even after putting aside the IPO costs as exceptional.
Hi Ramridge,
Entu (UK) (LON:ENTU) is a cash machine if you look at its performance over a number of years, which is what I was referring to.
Working capital movements happen, so it's not unusual for cash generative companies to have the odd 6-month period where cashflow is temporarily negative. Although it is an amber flag to check out why the cashflow was negative in the most recent interims, and if debtors or inventories look stretched (which could be a sign of something being wrong).
Having a look at the interim results, cashflow seems to have been (slightly) negative in H1 this year because of adverse working capital movements, and reduced profitability. Compare that with H1 last year, and the full year last year, when cashflow was very strong.
So it strikes me as being a cash generative business that happened to have a 6-month period where debtors went up a bit, and creditors went down a bit. Debtors of £15.2m look perfectly reasonable, so there's no sign of any Balance Sheet stretch.
I think people are getting a bit carried away with the negativity. Yes the company has disappointed. Yes the Directors have blotted their copybook. However, it's still a good, cash generative business, is still paying (now very high yield) divis, and has a sound balance sheet with no debt.
So this looks a situation which can be rectified fairly easily, and with no risk of the company going bust (as it has no debt).
I thought this one would polarise people, as indeed it has!!
Regards, Paul.
Hi Paul
I think the reason people have become negative towards Entu (UK) (LON:ENTU) is the level of management credibility (or lack of). I can understand the impact of the changes to Solar and FIT have adversely affected them, and this could be a temporary blip that they can recover from but, to issue interims in late July and then warn on profits 6 weeks later means the shares will take some time to recover. The projected divi yield is attractive but based on the SP today.
I see the Investors Champion have also published a brief article covering the results, as well as some narrative about the trading relationship with AIM listed peer Epwin Group PLC (AIM:EPWN): http://www.investorschampion.com/blog/entry/entu-uk-aimentu-yet-again-disappointment-from-a-newer-aim-entrant
Hi Imran,
I completely agree - mgt credibility at Entu (UK) (LON:ENTU) is shot to bits now, and it will take time for that to recover.
But that doesn't necessarily follow that the shares will be a bad investment/trade from here. I like buying things when everyone hates them - more likely to get a bargain that way!
The key things for me are balance sheet strength - i.e. can it survive? Yes it can - Entu has a sound Bal Sht and a capital-light model, and no debt, by outsourcing production (to Epwin mainly, which is its sister company).
Secondly, does it remain profitable & cash generative. Yes, very much so - £8m profit from the continuing business is a pretty good result, so the main parts of the business seem to be trading fine. As Ramridge has pointed out, H1 was not cash generative, due to working capital movements, so that needs monitoring - I would expect to see decent cashflow generated for the full year.
If they had pulled the final divi altogether, then I wouldn't have bought more today, as that would be an alarm bell. But reducing the divi to a more sensible level, seems prudent to me. That's exactly what Spaceandpeople (LON:SAL) did in similar circumstances.
To be clear, ENTU is not a share that I want to hold forever. But I think there will be a much better time & price to sell. I think 100p+ should be achievable inside 12 months.
Regards, Paul.
Entu has been making money while house prices in the UK carried on rising, firstly from silly levels, then to ridiculous levels and then to the ludicrous levels we see today. You only needed to repaint a wall and an estate agent would add 20K to the asking price. The banks were falling over themselves to increase mortgage lending. So home improvements, cars, holidays and whatever else you care to mention went on the mortgage.
But the new Mortgage Market Review (MMR) rules have largely put a stop to that. Somebody has realised that paying for a holiday for the rest of your life, by adding it to your interest only mortgage with no repayment vehicle was foolish in the extreme. The MMR rules The current prices are only being held up by buy to let landlords who are the only people who can still access unregulated, interest only borrowing.
Walk around any area where the property is mainly rented and you'll see that maintenance is very often kept to the bare minimum, or less if the landlord thinks he can get away with it.
So that all means that the group people who might be minded to actually maintain their property don't the same access to debt as they once did. Of course they will have to renew and replace as things wear out over time, but it won't happen with the same vigour as it once did. But anyway the number of owner occupiers (or people who are renting from the bank) has been falling, while the number of buy to let landlords has risen. These are all headwinds for Entu that they haven't had to face before.
It seems rather convenient for Entu to blame the Government's Feed In Tariff changes for having to shut down the solar panel division. But the changes were only announced on Thursday. That doesn't really explain the dire performance during July and August. I think that a lot more is going on here than is admitted to in the RNS. I think we'll see another profit warning arrive in the next few months.
Not for long."The current prices are only being held up by buy to let landlords who are the only people who can still access unregulated, interest only borrowing."
http://citywire.co.uk/money/why-buy-to-let-mortgages-will-be-tougher-to-come-by/a826812
http://www.bis.org/bcbs/publ/comments/d307/coml.pdf
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11816720/Death-of-buy-to-let-landlords-wake-up-to-Osbornes-150pc-tax.html
Still a return to owner occupation would be bullish for companies for Entu long term, as most BTL I have lived in or visited have been less then well looked after?
I think you're right about the tax changes being bullish long term for home improvement companies. I wouldn't be surprised if Osborne had made a political calculation that home owners tend to vote Tory and renters tend to vote Labour. I don't expect the changes in the last budget to be the end of his assault on buy to let.
Trouble is, I'm not entirely convinced that the average buy to let landlord even understands what is coming down the track at them. Since the changes don't start until 2017 and are phased in gradually, it may be a while before they realise. But George Osborne has painted a great big target on their backs for HMRC to aim at.
Until house prices come back into the range of the average MMR constrained owner occupier, I wouldn't look at companies like Entu.
We are in agreement I think. Although I am expecting the knife to be plunged before 2017.
I think people should tread carefully with Epwin (LON:EPWN) , following today's announcement from Entu (UK) (LON:ENTU) . I sold Entu (UK) (LON:ENTU) the day of their half-yearly report on 20th July, and also dumped Epwin (LON:EPWN) on the same day. I suspect £EPWN's net set of result may not be as rosy as the market appears to be expecting.
Francis
I am very upset with HSS and Entu maybe we should compile a blacklist of directors who are serial disappointers! Anyway Paul any thoughts on Snoozebox???
Totally agree, this is long overdue and I consider having such a blacklist would go someway to mitigate the risk private investors face in AIM particularly. More than twice is proper form and I bet if a reveiw was done we would get some surprising results. Suggest a Director Hall of Shame index
Stockopedia customers are by their nature interested in such matters and cumulatively it won't be long before bad reviews here effect the share price & sentiment of firms (if it does not happen already).
To be fair some things were not under their control or known about 2 months ago, yes VAT increase was known and they said it would have little effect. The news about Govt. subsidiaries cuts is new and I think they are correct to close the solar dept. down, if these cuts come in Jan 2016 solar is dead. But I have not impressed with the management since the interim report. However I think the sell off has been overdone so i have bought a few today, with a short term view of recovery.
Perfectly valid comments from you guys about Entu (UK) (LON:ENTU) - I agree that management have made a right mess of things. However, when the dust settles, I believe the market will refocus on the core business being a cash machine - which is precisely how management were able to do crazy things with their money when it was a private company - they owned a business that generated so much cash they could do what they want with it.
In a way, this is the type of profit warning that is the best type - i.e. specific problems in one particular division, with decisive action being taken to fix it. When that type of situation arises, the shares can recover quite quickly, as people shrug off the disappointment within a few weeks, and then focus on the valuation for the ongoing operations, which now looks very cheap.
This situation reminds me of the profit warnings from Spaceandpeople (LON:SAL) last year - everyone hated management, didn't think they were trustworthy, thought the company was a disaster, etc. I bought more, because I could see that the problems were fixable. It's taken a while, but the shares are now up about 75% from the low point when everyone hated them.
I suspect a similar pattern might play out at ENTU, which is why I think the bad news is now so heavily baked into the price, that there's probably more upside than downside from here.
Remember that management still own about half the company too, so I'm sure they will turn it around.
Regards, Paul.
Statement supports my conclusion on the interims that they either weren't on top of what was going on or weren't telling the truth. Also there are more signs of the bad news leaking out. If it is incompetence that has been successfully addressed by new appointment, then today's bottom probably is/was/will b a buying opportunity. The profit forecast is OK if accurate. But you pays your money and makes your choice.
Hi Paul
I sold out of Entu (UK) (LON:ENTU) early this morning for a substantial loss. A couple of points that led me to sell out:
1. The resignation of an NED which was communicated to the market late on Friday afternoon and there was selling into the close
2. The fact that in the interims they said the Solar division had underperformed but that they had taken steps to address this by reinvigorating their sales and marketing function seems illogical to me, given they must have had some idea that they would close down this division at some point if performance didn't improve
3. To be listed under a year and to warn on profits is unacceptable. Management credibility and trust has been shot to pieces.
4. Cashflow generation was poor in H1 and the divi cut is a sign that they are not as confident in other parts of the business going forward
5. They mentioned acquisitions a number of times during the interims, and I seem to recall this morning as well. In order to make these, they are likely to have to do a placing or rights issue, as they simply don't have the resources to make this happen
6. I also think I could make use of the proceeds from the sale (albeit at a loss), better elsewhere. This is the opportunity cost of being invested in a business where you need management to turn it around to exit at a profit or break-even. In my short investing experience this is a drain on resources, as you often have to average down further (like you've done this morning), to accelerate this process.
What I've learned from this experience is the use of a stop loss, would have helped me minimise the downside risk better and more effectively.
Best wishes,
Imran.
Some very good comments here. I still think the sell-off has been overdone in the short-term but I agree about the concerns of 2016+ business given plans to reduce the dividend.
Paul,
I have to say, I think that you are being brave bordering on foolhardy in buying more ENTU.
Given their record to date, how can you trust anything the management tell you?
Further, strategically they are a shambles and the abrupt resignation of an independent non-exec last Friday suggests issues behind the scenes.
For me, these are uninvestable.
Paul, thanks for your update on ENTU today. On your previous post on their last update I said I did not trust their announcement as they had seen profit falls across the board with their recent acquisition of Astley Facades also making a loss, so I had been working on the assumption of a EPS of around 8p for 2015. I do wonder whether the solar division is being used as an excuse for poorer performance across the rest of the business (notwithstanding the 30% increase in the forward order book).
I halved my position then and today's announcement is actually more optimistic than what I was anticipating so I've used the bloodbath this morning to increase my position. 2015 EPS based on today's stated operating profit (which they v usefully state) suggests it should be around 10p.
The two main issues are now: are they expecting the wider business to experience difficulties in 2016 if they are already factoring in a dividend cut (which could have been covered by my above EPS estimate)? Can the management be trusted? It was only a little over one month ago that they were saying performance is in line with management expectations. Can it really turn change that dramatically in a month when some of the things they are citing (e.g. VAT and threats to Govt subsidies) were known about at that time?
Seems suspicious to me. Nevertheless, the sell-off looks overdone so I am sticking with it for now.
Any investment in ENTU at this point in time is basically a punt on whether the BOD can be trusted. They certainly haven't done themselves any favours in that regard in the past few months. And this on top of the dodgy loans that we were written off pre-IPO makes use of the bargepole appropriate in the case. Aimho.
Hi Paul -
Re. Entu (UK) (LON:ENTU).
- On 20/7/15 Interim Report : " We have seen and continue to see increased activity levels in the second half, and we remain on track to meet market expectations for the full year."
- Today, 6 weeks later, and only 9 weeks before the financial year end 31/10/15, we have a profit warning.
That smacks of management being at best incompetent, and at worst dishonest.
In the face of this, how you continue to have faith in the company frankly leaves me speechless.
Regards, Ram
p.s. I have not had nor have a position in this company.
Yes - I'd be interested in your thoughts on ENTU as well.
I don't own any, but nearly did. Lucky escape, I think?
Since Amber Rudd became Secretary of State for Energy and Climate Change in early-May, there has been very extensive coverage of planned significant reductions in the feed-in-tariffs for new solar panel installations, so it would seem likely that any business operating in that arena would be suffering significant falls in demand. By not mentioning how severely this is affecting them more promptly, and arguably they should have done, they have provided an extended period during which shareholders could exit before today's SP fall.
Good morning Paul
Following your comments in July re the interims for Entu (UK) (LON:ENTU), what are your thoughts re the announcements on Friday, about an NED departure, and today about exiting the solar business, with associated profit warning? To say the least, I'm somewhat dischuffed about the way the company has managed its comms. I hope the way the management actually conducts business is better, but my faith is being tested
Colin
Edited to note that this crossed with other (shorter and faster!) posts
Thanks Paul, do you have any thoughts on ENTU profit warning this morning?
Can't wait for your thoughts on ENTU Paul, which I am sure will be well considered as always.