Small Cap Value Report (12 Oct 2016) - VTU, PHD

12th Oct '16 by Paul Scott

25 comments 15455 reads

Good morning!

Let's have a day when I don't mention sterling. EDIT: sorry, I didn't manage this. See below.

Vertu Motors (LON:VTU)

Share price: 46.88p (up 1.9% today)
No. shares: 397.3m
Market cap: £186.3m

(at the time of writing, I hold a long position in this share)

Interim results, 6m to 31 Aug 2016 - it looks as if investors are beginning to realise that new car sales are not the be all & end all for car dealerships. Most of the money is made from used car sales and aftersales (i.e. warranty & repair/servicing) - both of which look buoyant for Vertu in today's numbers. Those items combined generate 71.8% of gross profit.

There's a short results presentation video here from BRR Media, very helpful.

Some key points;

New car sales to private buyers, down by 4.2% on a LFL basis.

Profit before tax rose 14% to £18.7m.

Diluted adjusted EPS rose a smaller amount, up by 1.8% to 3.98p. This is because the company issued more shares during the period, to finance growth.

Net cash is reported at £12.9m, but bear in mind there are huge liabilities from manufacturers to finance Vertu's stocks of cars, so I'm sure this figure would move around a lot in the normal course of business. Remember that a balance sheet is only ever a snapshot on one particular day, so may not be typical.

Net assets are £238.4m, less intangibles of £96.4m, results in NTAV of £142m. The shares therefore trade at what seems a fairly modest premium of 31% to NTAV.

The bulk of fixed assets are valuable property assets - freeholds & long leases, which amounted to a net book value of £124.8m at end 2015 (note 18 to the last Annual Report here), so this is a soundly financed group in my view.

The all-important outlook comments are reassuring;

The Board anticipates that the Group's full year results will be in line with market expectations.

Current trading sounds fine;

September is a key month for the Group's profitability in the second half of the financial year, being a registration plate change month.

Profit in the month was ahead of prior year levels on a like-for-like basis and recent acquisitions further bolstered the Group result.

The Group's service and used car performance continued to demonstrate strong underlying growth trends in September.

Like-for-like new car private volumes…

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Trident

12th Oct '16

aiminvesting

a vote to disapply pre-emption rights, is a vote to suspend the rights of existing shareholding to be first in the queue of being offered new shares. New shares may be issued, say to raise placing monies.

It means the Company can quickly go to institutions to raise the money without consulting or waiting on shareholders.

The Company usually votes on this in parallel with a vote on the limits of new share capital it can raise. Typically this is about 10% of the issued share capital, but can be higher.

So a vote against disapplying pre-emption rights, generally means the company must first offer new shares to existing shareholders.

Both these powers have to be voted on every year, as they time out after a stipulated period.

JohnEustace

I think they like to have their cost base roughly in the same ratio as their sales, so if they sell 25% of their output in the U.K. they will have 25% of their costs in £GB. This gives them a natural hedge and some stability in doing business.
That said I expect there will be some tweaking in favour of UK supply if the drop in the pound looks likely to persist.

Re Vertu Motors (LON:VTU) The Altman Z score at 0.69 is a concern to me also.

dominic higgins

Paul, I hold Telford Homes and I'd love to hear your thoughts on today's update in your own usual and welcoming 'say it as it is' way! :-)

jpsc01

It may be a mistake to assume that car companies based in the UK are not under as much pressure to raise prices as EU companies. It rather depends on the metric of the business and the consolidation currency.

For example if the KPI is ROCE and the CE is already set, in let us say Yen, then the R will need to increase almost as quickly as the £ falls against the Yen to maintain the KPI.

Equally if you are measured in profitability per vehicle and that is consolidated into a single currency for international factory comparators, let us again say Yen, you are going to need to raise prices by the amount sterling falls to compete with sites in Spain etc.

So only if you are a genuinely British owned and headquartered firm is a fall in the currency not a measurement issue when you talk to your boss.

I accept that there are a lot of nuances to this. But in the world of international motor manufacturing I do wonder whether the figures are looking as +ve for the UK as some like to think.

Flackwell

The manufacturers have supported volume for the last few years - with cheap finance deals. Whose to say that they now won't support the volume through accepting a lower margin.

But the key point in the article for me which then seems to have been forgotten about - is that 72% of the margin came from repairs/servicing/used car sales.

One thinks you've missed the thrust of that message

ExpectingValue

Re: the 'fall' - the shares are trading ex-rights today. Up until yesterday, if you bought a John Menzies share, you also received a right - a right to buy another portion of a John Menzies share at a discounted price (£3.43) in the rights offering. Clearly the right to buy a share at a discount has a value.

As of today, the shares now trade ex-rights... so the 'embedded value' in those rights that were attached has now fallen off of the share price.

It's just an optical thing - the market hasn't changed its mind on the value of the company.

Trident covers the pre-emption rights nicely.

aiminvesting

Thanks for this very thorough explanation Trident! The big fall in the share price is still a bit of a mistery to me. I guess the no-vote shows some break of confidence between shareholders and management, but it looks like a side issue with no impact on the profitability of the business...

At least now I know exactly where pre-emption rights are!

Nice. Thank you for the explanation!

Proactis (£PHD)

To me some of the forward looking value of PHD revolves around the much trailed income they think they may be to get from their supplier chain. This would derive from a fee the supplier would (circa £50) to have a limited version of the Proactis software loaded on their systems, so that they can provide electronic invoicing to their main supplier. This saves costs of admin for the main supplier, and also gives transparency on the tracking of their due payments.

This gives further opportunity for them to asses their cashflow, and get invoice finance from a Proactis sponsored finance house (from which Proactis presumably gets a small cut). So two potential bites of the revenue cherry.

Given the size of the Customers supply base (Screwfix etc) the potential revenue boost is large.

Its very early days, and Proactis haven't opened up how much revenue is currently coming from this revenue source, but is promising more information in the near future.

Most of that income will go to the bottom line, I guess, so that is a big potential. However, at this stage there is not much visibility of it.

iwright7

Paul,
I hold some Proactis too, but am more bullish. The reason for this is their substantial order book increase and their hefty 82% GM, (up from 80% GM last year). Most of the Proactis costs are fixed and the overhead costs are virtually identical for 2015 and 2016, despite +13% sales increase during 2016.

The current broker consensus is for a 24% sales increase in 2017, which if achieved should enable operational gearing to kick in and push much of the increased sales revenue to the bottom line. Strikes me that Proactis could be on the cusp of a substantial EPS jump.

Threepeat

Hi Paul,

I know this is off topic but I wanted to ask you last night at Brighton but the event was cancelled. The landlady sends her greetings btw

Can you comment on the seemingly inexorable fall in Staffline (LON:STAF) share price. All the indicators are good there seems determined selling - today down to 800p. Is there a big profit warning in the offing or is it the thought a 2017 brexit induced recession?
Every day seems to start strongly only for the SP to fall and end lower

I have a small toehold in this and will look to average down if I can figure out when it will stop

Regards

Steve

orisoulfulsoul

Hi Paul,
Bit off topic but do you use Level 2 in your trading?
Cheers

Wimbledonsprinter

Steve

I also hold Staffline (LON:STAF).

I guess the main reason why the stock is falling again is the perceived focus on "hard Brexit" and limits on immigration. Indeed, sell-off seemed to gather speed following Amber Rudd's speech proposing naming and shaming companies employing large numbers of non-British staff. (Admittedly the stock still is falling after the Govt rowed back on this proposal.). A high % the 45,000 workforce that Staffline provides for its clients are EU Eastern Europeans.

Staffline management have appeared confident they can adapt to changes on immigration law - but it looks like some adaptation will be needed. To me this, and any changes to Work Programme renewal, are the key points for the stock. Since 70% of revenues come from the domestic food sector, Staffline might be less exposed to a general recession than you might think.

AnonymousUser252054

On a general note, I think the fall in sterling could prove to be one of the most beneficial consequences of the Brexit vote in all sorts of ways, and particularly in starting to alleviate the dire trade imbalance. It had proved impossible to devalue previously.

As regards pricing of imports I would expect manufacturers to price according to markets. You already see this if you are buying a Nikon D750 on Amazon Germany where you pay more than if buying on Amazon Spain (€1,999 versus €1,699). The British customer has always been expected to be a top end payer, perhaps not for much longer.

jraitt

I hold Staffline.
I thought that the fall was fear that the government would no renew the Access to Work scheme which is very profitable and STAFF is a market leader, Andy Hogarth say no chance.- too profitable to gov.also.
Seems very strange that STAFF is down because of a perceived fall in the employment of immigrant labour when it is the one Company who would greatly benefit by the substitution of British workers (oxymoron??) through this scheme. Surely it is in a win win situation.
Judging by SP I am alone with these thoughts.

Paul Scott

13th Oct '16

I'm relaxed about Staffline (LON:STAF) .

The jobs they service are not going away. Also, nor are Eastern Europeans - they're going to be allowed to stay here, so I'm not really sure what all the anxiety is about.

Regards, Paul.

gus 1065

Re. Staffline (LON:STAF) , recruitment agencies in general seem to be out of favour as a sector at the moment (and have been post the Brexit vote). I hold Gattaca (LON:GATC) (formerly Matchtech) which has decent fundamentals and a good market position but whose share price has also been heading south for the past few months.

Gus.

schober

Can anyone suggest why CAMB has diverged from LOOK or VTU?

Chart.aspx?Provider=History&Code=look&Si

Or why VTU and ITV have performed so similarly?

Everyone especially wimbledonsprinter et al. Many thanks to those who replied about Staffline (LON:STAF). The got schemes to get people into work will surely not go away. If they do they will be announced (as per norm with govt) as a new initiative. As long as the economy holds up there will be people going for coffee.
waiting to average down with a second toe at 750p

Steve

Small Cap Value Report (12 Oct 2016) - VTU, PHD

Vertu Motors (LON:VTU)

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Paul Scott

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