Small Cap Value Report (14 Dec 2015) - NXR, WTM, TRB, WGB, CHRT, BOOM

14th Dec '15 by Paul Scott

16 comments 21724 reads

Good morning!

Firstly, a couple of announcements from Friday which I omitted to comment on last week:

Norcros (LON:NXR)

Share price: 194p (up 1.2% today)
No. shares: 61.0m
Market cap: £118.3m

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

S.Africa politics/economics - the share price of this bathroom fittings group is volatile at the moment, reacting to events in S.Africa, and the consequent volatility of their currency. Most of the profits come from its UK operations, so personally I'm not going to react at all to these events - which have a habit of sorting themselves out over time anyway.

The problems seem to have been caused by the country's Finance Minister being fired last week. This BBC article updates with the appointment of the third Finance Minister in a week! Interestingly, Norcros shares have not recovered much of the dip last week (yet).

Waterman (LON:WTM)

Share price: 91.6p (up 0.1% today)
No. shares: 30.8m
Market cap: £28.2m

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

AGM statement - an upbeat statement from this group of engineering & environmental consultants was issued on Friday last week. It details work on particular large projects, and concludes by saying;

"We have experienced continued growth in our markets during the first five months of the current financial year. The Board looks forward to announcing further progress when our half year results are issued in February 2016."

"I would like to take this opportunity to thank all our staff and shareholders for their continued support and valued contribution during the last financial year. We are continuing to recruit and I welcome all the engineers and environmental consultants who have joined Waterman in 2015, during which period we have increased our Group headcount by 11% to 1,339."

The "further progress" comment is a bit of a cop out, as it side-steps making any reference to market or management expectations, which is the information that is needed. However, the overall tone is clearly positive, so I think it's safe to assume that the company is probably trading in line with expectations, although it's always better when a company specifically says so.

My opinion - I like this sector, as it is clear that the UK is experiencing something of…

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Graham Neary

14th Dec '15

Re: South Africa. The minister who just got sacked wasn't reinstated, but it was indeed a previous finance minister who was put back in!

herbie47

Paul, Re Waterman (LON:WTM), their margins look very low and large contracts, I thought you did not like those sort of companies as if anything goes wrong they are in trouble?

Paul Scott

Hi Graham,

Thanks for that, I'll amend the article. I only read the news headlines, didn't dig into the detail.

Regards, Paul.

Hi Herbie,

The margins at Waterman (LON:WTM) are better than they look at first sight, because it has one loss-making division, which is now expected to breakeven this year. So once you adjust for that, the margins are lowish, but not desperately low.

Also, as Waterman is basically a people business, I think there is less contract risk than there would be for other contracting businesses which provide physical goods.

I'm not saying I want to hold WTM shares forever, just that this looks to me the right point in the cycle to be long of the shares for perhaps a couple of years.

Regards, Paul.

simoan

Paul,

RE: Norcros, I'm with you and would never sell a share for currency reasons alone. Apart from anything else, the proportion of profit from SA has decreased as a result of the Croydex acquisition. The sell off makes no sense to me especially since the rand has recovered more than it lost on Friday today.

RE: Walker Greenbank, I'm not sure I agree. Even with insurance cover making any losses recoverable the loss of operational growth has to be a problem on a PER of 18 - the insurance company are not going to bake in any growth in profits are they? Also a large proportion of profit was from contracting fabric manufacture for other companies (Ted Baker et al) and they will have to go elsewhere in the interim. So competitors may profit from lost business.

I believe people have been pretty pragmatic about the flooding until today's announcement. I think the reason for the fall is that reduction of 15% in pre-tax profit is larger than expected... this is roughly how much the fabric manufacturing contributes in a full 6 months, so how has this been lost in only 7 weeks? It points to issues in other parts of the business and so is a veiled profit warning.

I like the company and hope to buy in again, but not right now as there could be delays in getting the full fabric manufacturing up and running and outsourcing will surely generate lower margins.

All the best, Si

BTW This is what Walker Greenbank had to say in the interims on 14th October:

Brand sales in the first ten weeks of the second half are up 7.5% in reportable currency (7.9% in constant currency) compared with the same period last year. This is an encouraging performance ahead of our key Autumn selling period and reflects strong trading in the UK, where Brand sales are up 7.5%, and in overseas markets, where Brand sales are up 8.5% in constant currency. Manufacturing also continues to perform strongly. The Board remains confident of meeting expectations for the full year.

How has the flood in one factory last weekend resulted in this position changing to...

Disruption to the factory is expected to have an adverse effect on the Company's trading performance in the current financial year ending 31 January 2016, with pre-tax profits expected to be approximately 15 per cent lower than current market forecasts before exceptional items.

IMHO it sounds like the "key Autumn selling period" has maybe not gone as well as expected.

AlanJenkins2

Paul,I am puzzled by your purchase of Tribal.Even if the rights issue does help with the balance sheet,it will have to be at a discount to the share price then.Given that the stock is unlikely to be popular,that may have to be quite a substantial discount.

Brothersinarms

Simoean, you're forgetting operating leverage. They will have incurred 7 weeks of costs (factory + staff) with no revenue generated, so the effect of that loss on the PBT will be much larger than foregoing the normal profit contribution. Hence the 15% reduction and most probably a significant H1 reduction as well. However, those losses and the foregone profit will be recovered from the insurance settlement next year.

Yes, good point about the operational leverage. I guess they won't comment on overall trading until January so I'm trying to look beyond the flood damage (assuming the insurance will payout in full) and have tried to read too much into today's announcement. I like the company and it's products (lord knows there's enough of them hanging around our house!) but won't invest until things are clearer. If that's at a higher price than today, then so be it.

Cheers, Si

cig

It is counter-intuitive, but the price of a rights issue doesn't matter for an existing shareholder who takes it up: you own X% of the existing business and the £Y cash raised per share both before and after the issue. The only change is that the cash moves from direct (your bank account) to indirect ownership (your claim on the company's cash via your shareholding). So the price of the issue is a technicality, which should be set to whatever it takes to minimise underwriting fees.

Cig,what you say is true as far as it goes.However,a rights issue [assuming it succeeds] makes the market stump up for shares when it really doesn't want to,leading to disgruntled shareholders and an effective stock overhang.

Beginner

Just a wee comment on Tribal (LON:TRB) . I have had experience of the company on two occasions, and my friend's wife is a former employee of theirs. Their software offerings are not particularly innovative or user friendly, and equivalent packages are available free of charge from some American educational institutions. Where Tribal (LON:TRB) have succeeded they have done so by having and extremely aggressive and persistent salesforce. I would not touch this with someone else's bargepole.

drvodkaquickstep

Herbie - I echo Paul's comments that Waterman's margins are improving and they have a 6% target. If you look at most (well performing) Consulting Engineers they typically have margins in the mid to high single figure area. ATKINS (ATK) and some other competitors are also trying to improve margins by reducing back-office costs and / or moving into higher margin areas such as nuclear / energy and the like.

Paul is also correct that Consulting Engineers do not have the same contract risk exposure that contractors such as Costain, ISG etc do although that does not mean there is no risk; typically the risks lay with having clients who want to change things but dont want to pay for it. Contractors typically just dont do the work in those instances - not so easy for Consultants. Waterman have a great client list and very strong (forged over many years) relationships that help mitigate such risks. The move out of the UAE also mitigated lock-up / debtor day issues caused by some clients who thought paying you for the work you have done was optional!

It is very easy to see Waterman's share price continue to re-rate with continued strong performance and I have had a circa 150p target since this time last year. Even with the big movement in the share price over the last 12 months they are not highly rated and someone wanting to buy the company in this market would be getting a bargain at under 200p.

Waterman £WTM shareholders might also like my write-up here updated for 2015....

http://boards.fool.co.uk/waterman-wtm-a-slinky-13140560.aspx?sort=whole

15th Dec '15

Thanks for the information, I will look into Waterman (LON:WTM) further.

tjones180

Re TRIBAL (LON:TRB) It's a brave man that places money on anything related to Education these days. School/Higher Education budgets in my county are envisaged to be reduced by 13% over the next three years.
Since the emphasis will be on maintaining teaching staff levels the spending on support materials will inevitably decline sharply.

Small Cap Value Report (14 Dec 2015) - NXR, WTM, TRB, WGB, CHRT, BOOM

Norcros (LON:NXR)

Waterman (LON:WTM)

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Paul Scott

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