Small Cap Value Report (14 Jul 2016) - EMR, WJG, LVD
Good morning!
The biggest laugh of yesterday definitely came from Jeremy Clarkson's twitter account. I can't repeat it here, due to it containing a rude word, but the gist of it was to express his exasperation at the country now being run by May & Hammond!
Empresaria (LON:EMR)
I enjoyed interviewing the CEO & FD of this international staffing group, yesterday afternoon. Here is the audio link. Thank you for the questions submitted by readers, which I managed to ask in a round about way.
This is a good example of a group which has benefited from having a diverse spread of business in multiple countries. This has insulated it well from the chaos caused by Brexit & resultant sharp forex movements.
Watkin Jones (LON:WJG)
Share price: 103.25p (unchanged today)
No. shares: 255.3m
Market cap: £263.6m
Mello presentation last night - I think it was Nancy Reagan who described Ronnie's demise as "the long goodbye". Well, we had an even longer goodbye last night, after the 3 Directors of Watkin Jones had given a detailed presentation + Q&A to a group of investors in Beckenham. We all shook hands, and bid them goodbye in the restaurant, only to bump into them again over the road Beckenham Junction station. We then shared the same carriage into London, and bid them goodbye again, with handshakes all round again, on the platform at Victoria station. Moments later, we bumped into them again on the station concourse, triggering another round of cheery smiles & waves.
So when I spotted them again, 10 minutes later, on the tube platform, at Oxford Circus, I did what any self-respecting Brit would do, when uncertain of how to behave when constantly bumping into the same people - I dived for cover, and hid at the end of the platform, pretending to be engrossed in something riveting on my smartphone, to avoid further embarrassment! The Directors stood out markedly, due to all 3 wearing immaculately tailored suits. They seem good guys though, definitely a backable management team.
Their 2-hour presentation was excellent. We bombarded them with more questions over dinner, so it must have been exhausting for them. The issue arises again, of how companies are launched on the stock market in a very inappropriate way - by brokers who are keen to do as little work as possible for the maximum fee. Therefore the initial shareholder register is all wrong - with large, lumpy institutional holdings, and no private investors involved. So there's an immediate problem with lack of liquidity in the shares, unless & until some institutions start selling down their holdings.
I think the presentation went well, and certainly the PER and divi yield at WJB look very attractive. It's a developer of purpose-built student accommodation. The business model seems really well thought-through, with little commercial risk - the projects are forward-sold to yield-hungry institutional investors. There's a long pipeline of projects, and some recurring revenues too, from managing existing sites. The balance sheet looks solid. Further upside could come from purpose-built rental properties
Aside from student accommodation, so many younger people are now effectively shut out from the property market, in the S.East, due to exorbitant prices, that build to rent type arrangements must surely be the answer to increase the supply of rental properties?
It was interesting to hear that local authorities apparently favour planning applications for purpose-built student accommodation, because so much existing housing stock is freed up once they open - thus helping solve wider housing problems.
As a specialist in this area, I think WJG looks very interesting. Although having been stung on several recent IPOs that turned out to be complete crocks (e.g. Lakehouse (LON:LAKE) ), I'm very cautious about buying shares in any more recent IPOs.
Lavendon (LON:LVD)
Share price: 122.4p (up 6% today)
No. shares: 169.9m
Market cap: £208.0m
(at the time of writing, I hold a long position in this share)
H1 trading update - as mentioned the other day, this is currently my favourite stock in the equipment rental sector - because the valuation seems modest, and it seems to operate in a good niche (powered access equipment), and has a sound balance sheet.
Although as a friend reminded me yesterday, in a long phone call, the operational gearing for hire companies is devastating in an economic slowdown - so he's very bearish on this type of company right now. The seemingly inexorable decline in share price also suggests that there's something wrong.
Despite this, Lavendon keeps churning out positive trading updates, as indeed it has done again today. H1 revenue is up 15%, driven by fleet expansion - although this has impacted margins in the short term.
A fair bit of detail is given, but the upshot seems to be that they're trading in line with expectations;
Given the encouraging trading performance in the first half, together with the degree of resilience provided by our international operations, the Board remains confident of making further progress during the year and delivering on its expectations for 2016."
The international spread of business has clearly helped, although it does mean that debt in foreign currencies translates into a higher sterling figure.
Outlook/Brexit comments;
While it is too early to fully assess the wider economic implications of the UK's decision to leave the EU, we recognise the increased uncertainty in the macroeconomic outlook. We do however believe the Group remains well positioned, with over 50% of its revenues, profits and cash flows being derived from outside the UK.
Should there be a pro-longed period of Sterling weakness, the Group's reported results would benefit from the translational impact on its overseas earnings which offers some mitigation should there be any adverse economic consequences on the Group arising from the UK's decision.
Too early to assess, blah blah, increased uncertainty, blah blah. Who writes these things?!
The geographic spread of activities seems to be a very positive thing - and that's certainly a factor which is much higher on my investment criteria these days.
My opinion - the valuation looks strikingly cheap to me. I really cannot understand why this share price has been so beaten up, despite continued decent updates from the company. The market seems to be pricing in bad news, which just isn't happening, so far anyway.
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27 comments
Like Clarkson last seen punching a BBC producer just because he was rich and famous and because he thought he was unassailable.
All those adverse comments on the appointments made of David Davis and Boris Johnson are woefully misplaced, the idea that Boris is some sort of court jester is patronising drivel. He is a bright firmer Mayor of London and he was excellent in that major very difficult job. He will be an excellent foreign secretary and will publicise the UK is open for business like never before. Okay he will liven up the white nice in the foreign office but so what?
Boris' critical comments on various overseas luminaries will be rapidly forgotten and what will be remembered is he was one if those who extracted us from the EU which shorty will be seen as the best thing this country decided since we escaped from joining the ghastly Euro project that is destroying the economies of S Europe and is creating youth unemployment on an industrial scale.
The UK has just provided a master class to the world in how a mature democracy should be run. The referendum result went against the establishment view and the electorate gave two fingers to the bien pensant view of things. The PM resigned, a new PM took over and a new cabinet appointed and on we go. Thank God for our constitutional monarchy.
What we don't need are morons running down our new government and the Uk
Here's a link to the video of Watkin Jones presenting at Mello:
http://www.piworld.co.uk/videos/2016/7/18/watkin-jones-at-mello-13716
We filmed the Watkin Jones presentation at Mello. We're working on it now, so will probably have it ready to view next week.
Tamzin, PIWorld.co.uk
I also hold Lavendon (LON:LVD) , I bought back in Dec at an average of £1.41 so like you I'm underwater. Since then the business has performed as expected , the share price not so much.
Black Rock have been selling http://www.investegate.co.uk/lavendon-group-plc--l... which has created an overhang .
I think increased H&S awareness and regulations is driving a structural increase in the sophistication of kit required to work at height, the extra demand led £7m investment in the UK is very reassuring, as is the trend in rental revenue. All in all I think this is a great long term proposition for income seekers like me.
Cheers
PS edited as emojis knackered the formatting
Not a lot of comment on Lavendon (LON:LVD), Paul! I also have a long holding. I bought originally on the following comments from one of my favourites, Small Company Sharewatch. If I had just bogutht their portfolio over the last 10-15 years, even at the higher prices after they had bought, I would be quids in. A lesson there.
Not so with their Lavendon (LON:LVD) recommendation - see below (and incidentally they didnt add it to their portfolio!). Of course, quite a lot of water under the bridge in that time, but Lavendon (LON:LVD) is not performing very differently rthan it was then, although perhaps the higher maergin Saudi business is clearly down, onlty partially replaced by woerk elsewhere in the Gulf. Given their forward thoughts at that time, do you see them being a takeover target sooner or later, and / or will the forecast high cash generation likely next year start to be reflected in the SP? I am holding but am suffering with this my worst performing share - and there doesnt seem to be the justification for it. Best regards RID
PS here is the SCSW comment from May 2015 - wouldnt I like the 174p price tag right now!!
'Lavendon - UK trending higher
174p Epic code: LVD
(Sharewatch) A confident Q1 trading update from Lavendon. Despite relatively modest growth in revenues of just 1%, efficiencies mean that Lavendon expects much faster growth in profitability, margins and return on capital employed. Keynotes were the UK trending higher towards the end of the quarter whilst efficiencies have driven profitability; the Middle East has continued to storm ahead (+11%) with the weaker oil price environment not really affecting activity. Other European territories are unchanged on last year.
At current share prices, Lavendon’s days of independence really do look numbered. Additional equipment has recently been added (ahead of schedule, temporarily lifting net debt to £103m) but the wider investment community hasn’t picked up on the fact that the frantic investment programme will start to peter out towards 2017 as a huge chunk of the fleet will have then been refreshed, after which this company will throw off a tidal wave of cash.
Any would-be-predator would be wise to bid now whilst the shares remain so undervalued. Buy.'
Don't read anything into the comments of European commissioners, re the new Government appointments, right now they are feeling very sore and upset and very defensive.
Paul,
It may be a little out of your small-cap remit, but given your retail expertise, do you have any comments on what appear to be positive results this morning for SuperGroup (LON:SGP) and any thoughts with this update on the broader retail environment please?
Completely empathise with Jeremy Clarkson:
"his exasperation at the country now being run by May & Hammond"
The thing is the other May and Hammond would do a better job I suspect
Personally I think firstly that Jeremy is an idiot, and secondly that so far Theresa May has talked a lot of sense and if the can deliver at least some of what she is pledging then the country as a whole will be a happier place.... fingers crossed.
Just my feeble attempt at being witty though I can see now that I am out of touch with readers here (at the time of writing 7 red thumbs down which is a record I think certainly for me, bit upsetting) I wasn't going to get into a political discussion here until I saw the thumbs down. I will make one point here. Talking to friends abroad by appointing Boris Johnson as FS and David Davis as Secretary for Brexit May has a. Shown a singular lack of judgement and b. Made us the laughing stock across the globe.
Ed (Croft) I will make o further political statements here and apologies for this one as this not the right forum.
I think you needed some smilie faces at the end! :-)
Not out of touch with me, but I'm keeping a low profile for the same reasons. ;-)
Just goes to prove don't listen to your friends or those quick to make a judgement!!!
"Talking to friends abroad by appointing Boris Johnson as FS and David Davis as Secretary for Brexit May has a. Shown a singular lack of judgement and b. Made us the laughing stock across the globe. "
Smart move surely.
If it goes wrong May can point the finger at the Brexiteers. If it goes well she loses nothing!
Rather canny.
As to making us the laughing stock across the world - not exaggerating are you?
What's wrong with David Davis? He's certainly capable, as well as experienced.
In reaction to all the down votes, I did get that it was a joke....
Hi Paul - re Empresaria (LON:EMR) Excellent audiocast.
I particularly like the company's business model of devolved near autonomous businesses geographically and sectorially spread with lean central control. This of course works only if each of the business units has skin in the local unit.
I added to my holding immediately after listening to the audiocast.
Thanks for the info on Watkin Jones (LON:WJG), I'm a big fan of these but couldn't get down to London to hear the presentation. Did anyone ask about their corporate jet which is a constant topic of discussion on ADVFN?
Just seen that McColls McColl's Retail (LON:MCLS) have bought 298 of Co-op stores and placed about 10M new shares. Share price is up 17% and still has a 7.5% divi yield. Any thoughts?
Morning Paul,
Off-topic, but going back to what we were talking about the other day concerning retail price margins and impact from Brexit etc.
Since last week, 5 of our 8 largest Chinese suppliers have proactively contacted us and offered an average of a 5% price reduction across the board 'to help us'. We weren't expecting this and thought perhaps we would have to negotiate, but they all (and we are talking about mostly rural, small scale factories for our product types) seem very aware of the Forex situation and keen to help.
This will of course be dependent upon the quality of the relationship between customers and suppliers, but it may indicate that price rises may not be as forced as we might have initially thought. Of course, perhaps we just weren't negotiating good enough prices in the first place!!! This will also be dependent upon product types, but it will be interesting over the next 6 months for people like clothes retailers to read in RNS's and reports whether their suppliers have been more forthcoming with help than was expected, I now wouldn't be surprised.
The other thing to consider is that, if paying in USD as we normally do, the rate for the Chinese to convert these back into RMB has actually improved, so this is offsetting any discount they are giving us and helping them. It's nearly 2% better than it was at the referendum date, and around 5% since January.
Thought it might be interesting!
Edit after I saw the Interest Rate news: Just to add to this, with the base rate being held a few minutes ago, if we manage to get to around $1.35 we will arguably be in a very similar position to pre-Brexit. For most of this year we have been working our costings out at a dollar rate of $1.40 to take into account some risk etc, and for some orders back in Jan/Feb we were having to place forward contracts fairly close to this rate. With the discount now being offered to us by suppliers, and the rate heading up towards $1.35, we will be in a position that is roughly equivalent to, or even better than the situation that we have had earlier in 2016.
Very interesting; thanks will89. I would be interested to read any further updates, if you have a chance to post them. And it's nice to hear a positive story about Chinese businesses.
That's a smart move by your suppliers. It reduces your need to shop round for alternative suppliers to maintain your margins and so helps them retain your business, so mutually beneficial.
It's good to see the benefits flowing to those who maintain proper long term supplier relationships.
Good morning Paul, I see Digital Globe Services (LON:DGS) have issued another profit warning. Also I note this has a high Stockrank of 99 and maybe in some NAPS, certainly I picked it up in my dummy one.
The criticism of the "Too early to tell" comments is getting a bit tedious. What do you really expect responsible Directors to say?
I agree John, considering that the vote to leave only happened a few weeks ago and the fact that UK is still in the EU at the moment, then any alteration in trading is surely likely due to what I see as largely market-driven fear, and possible over-hype, which have swayed people to delay purchase of goods, products, or services, rather than any other factor.
I know the actual stock market mood seems to be largely driven by market fear/optimism/pessimism over the future rather than where we are at the moment, but I find it odd (as per my comment yesterday which nobody liked) that the market dropped like a rock when it thought a Brexit vote was a possibility, recovered when a Remain vote was then being touted as the outcome, and then once the actual vote happened the market dropped again but less so, and yet now it is way higher than before any of that activity happened. Anyway, surely it will only become markedly clearer how a company's fortunes (or otherwise) are being affected once the EU-leave is actually formally triggered, and even more so once UK really is actually out of EU altogether and going it alone...?
Hi Paul,
I hope your stalking of WJG's directors didn't spook them too much - lol.
I very much like WJG and their long history mitigates their recent IPO status but unfortunately on hols and couldn't make Mellow. Were the reasons for WJG coming to the market explored in any detail?
Regards, Maddox
Hi Maddox,
There were 3 primary reasons for the IPO AIUI:
Cheers,
Mark
Thanks Mark,
All sound reasons and the timing is good as the student accommodation development sector is extremely busy. IMHO it should also prosper in the face of Brexit uncertainties - albeit this sub-sector has been hit along with Commercial Property in general - with its greater exposure.
Regards, Maddox