Small Cap Value Report (15 Aug 2016) - BVS, PEN, LOOK
Good morning!
It's very quiet for company news today, so just a short report.
Also, FYI I'm off on holiday this coming Saturday - to Corfu, then the beautiful island of Paxos, which we enjoyed so much in 2014 we're going back - by we, I mean a gaggle of family, nieces & nephews, etc. So it should be a scream - nice that the young ones want to go on holiday with us oldies!
SCVRs should continue largely as normal, although as I unwind they'll probably get a bit shorter than usual. Am taking my laptop, so the plan is to write my reports in the mornings, then do holiday things in the afternoons and evenings. It worked well in summer of 2014, and in any case I enjoy keeping tabs on the markets, even when on holiday.
I'll be away for 2 weeks in total, can't wait - it's been such a busy year, that a proper holiday is very much needed.
Bovis Homes (LON:BVS)
Strong interim results from this mid cap builder.
I mention it mainly because the outlook/Brexit comments are of interest. It's the latest in a string of builders to say that there's been little to no impact from Brexit so far. Here are some excerpts from today's narrative, which caught my eye;
Whilst it is too early to judge the impact of the EU Referendum and the Bank's monetary policy response on the UK housing market, the underlying market fundamentals for UK housing remain positive. We have been pleased with the resilient level of interest shown by potential home buyers contacting us...
Reservation rates improving after a short term slow down in July...
The demand for homes in the market is strengthened by low interest rates and good mortgage availability. The level of ongoing support from the Government, with the Help to Buy scheme and the overall positive influence of planning policy, remains high at this important time to drive new build activity for the country...
We continue to see robust levels of customer confidence and have been encouraged by the resilient level of prospects generated in what is traditionally a quieter time of the year, with a strong increase on the prior year...
That last paragraph is remarkably upbeat. It seems increasingly clear that consumer confidence has been largely unaffected by Brexit. This, and continued policy of ultra-low interest rates, seems to be what's driving share prices to a remarkable recovery post-Brexit.
Mind you, how much further this current rally has to go, is open to question.
I take the point that nothing has actually happened with regard to Brexit yet, but the market doesn't seem to be worried about the impact. If it was, shares would not be gaining so strongly. A lot of bears must be nursing nasty losses. Certainly my short positions have been heavily loss-making, so I've had to slink away with my tail between my legs on a couple of those! Thankfully I'm mainly long, so overall it's been a good patch lately.
Lookers (LON:LOOK)
Share price: 130p
No. shares: 396.2m
Market cap: £515.1m
(I no longer hold a long position in this share)
Acquisition - I reported on this company 5 days ago, when the shares were 112.75p, on the disposal of its parts division for £120m.
Some of the proceeds has been committed to an acquisition announced today of 7 Mercedes dealerships (trading as Drayton Group) in the Midlands for a total of £55.4m cash. The price being paid looks fairly full to me - it works out at a PER of about 13, by my calculations.
Given that the parts division was sold for a PER of about 12, I don't really see the logic for this strategy. Accordingly, I decided to bank my profit this morning, and move on.
Pennant International (LON:PEN)
Share price: 60p (down 4.8% today)
No. shares: 26.5m
Market cap: £15.9m
(at the time of writing, I hold a long position in this share)
Placing & trading update - there's often a lot of useful information in a fundraising statement, so they're always worth reading, if you own, or follow the particular company. I have a tiny scrap of shares in this company.
Private shareholders have every right to be annoyed with this placing, because the discount is too steep, and there's no open offer. The placing is being done at 55p, which is a 12.7% discount - that's too much.
In section 7 of today's report the company says that there was excess demand for the shares, so the CEO is selling 1m of his shares. Hang on a minute! If there was excess demand for the shares, then they should have been placed at little to no discount to the current market price. Instead a 12.7% discount has been given away - harming the interests of existing shareholders. So this looks like a duff deal for existing shareholders. The deal was done by W H Ireland - I think they've botched it - with excess demand being present, they should have pushed for a 60p price, not 55p.
I don't like companies doing discounted placings, as it steals a little bit of the company from existing holders, and gives it on a plate to new subscribers, who are handed an instant profit. That is not good. In certain, distressed circumstances, fair enough it has to be done. However, we are told that this fundraising was over-subscribed, so there was surely no need for a discount at all?
Interestingly, 1,528k shares are being sold from Treasury, so that reduces the number of new shares being issued.
£500k is being spent on acquiring a freehold adjacent to an existing site, which sounds a good use of some of the funds.
Trading update - big orders mean performance is improving, but is only breakeven for H1;
The results for the six month period ended 30 June 2016 are scheduled to be announced on or around 27 September 2016 and are expected to show a profit before tax of approximately £10,000 on turnover of £6,600,000.
The Company indicated in a statement made on 16 June 2016 that it expects a substantial improvement in trading in the second half based on the level of the confirmed order book. Trading since that date has been in line with market and management's expectations.
My opinion - I'm not happy with the discount for this placing. However, as the company points out, this is the first fundraising it has done since 2001. The level of dilution isn't too bad, and the funds are being raised for a positive purpose - to facilitate big contracts.
I've only got a tiny scrap of shares, so will probably sell them at some point in the next few weeks or months, just to tidy things up & make it one less share to monitor.
All done. See you tomorrow!
Regards, Paul.
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21 comments
PEN
The last time this was discussed in August, there was some criticism about the level of rights issue and the CEO using the rights issue to sell 1m shares.
The Pennant Interim Results were out earlier this week. While unremarkable in themselves, the more interesting points were the confirmation that the Order Book was at a record £46m, with 4 major contract wins secured in the first half. There is no debt and the Half Year End Cash was c£2.5m. This has since been bolstered by a further £3.5m from the rights issue, as the company gears up for the step change in scale. Total Market Cap is currently £21m
The Brokers Forecast per stocko for 2017 is for EPS of 7.9p, putting it on a forward P/E of 8.5. However, given the cash balance, one could argue that the cash/debt adjusted P/E might be closer to 6. Obviously this is for a year forward, and there's many a slip 'tween cup and lip. However, in this case the Broker Forecast of 7.9p of earnings is based on a sales forecast of £17.3m. The Detailed narrative in the Interim Statement confirmed that £18m of the £46m Contractual Order Book was for 2017...so already a little higher than the Brokers Forecast. Clearly there is ample opportunity for further business to be won for 2017 before the end of next year.
Aug 16th: positive update from SCISYS (LON:SSY) and interims from Ubisense (LON:UBI) - what else of interest?
The discount on Pennant International (LON:PEN) alongside the CEO selling 1m doesn't make sense. The rule of thumb is "if it doesn't make sense, they're hiding something."
A cynic might think that the CEO told the broker that he'd like to shift 1m shares in the placing.
Who knows? These placings still operate as though the internet was still a cryptic prediction of Nostradamus. It's so easy to match supply and demand exactly yet the brokers still phone the usual suspects and cook up a cosy deal, with a marinade of scratch-my-back sauce,
An opposing view to your Bovis quote "It's the latest in a string of builders to say that there's been little to no impact from Brexit so far" http://www.hl.co.uk/news/2016/8/15/prices-of-uk-ho...
Paul, I hope you have a great holiday in the beautiful Greek island of Paxos. I've been going there annually for many years, because my wife inherited a half-share with her sister of a house built there by her parents about 30 years ago near the village of Loggos. However, I'm ashamed to admit that I've only learnt about 3 words of Greek in that time!
Hi pka,
Re Paxos - yes, we stayed just outside Loggos in 2014 at this villa. It was just idyllic - apart from the blasted mosquitoes!
This time, we've rented this place, near Gaios, more central for everything. Most importantly, it has WiFi, aircon, and a pool!!
Am so looking forward to going back there - as you know, it's a totally unspoiled island, and the people who holiday there seem to be pleasant - no "proles" as my mother calls noisy/loutish British holidaymakers lol!
Regards, Paul.
Hi Paul, The Gaios villa looks great - much better than Tom Winnifrith's Greek hovel! Plenty of Brits go to Paxos for holidays, but very few of them are "proles"! You'll find lots of Italians there in August.
I know, we saw a massive fist fight between Italians on multi-million Euro yachts, and locals in Paxos, when the Italians parked their boats in the wrong place & refused to move! The Greeks belted them until they moved! Not very nice, but if you get between hard-up people and the one or two months of the year they can earn their whole year's income, they defend it vigorously. So we saw some twat of an Italian designer with a matt black catamaran get his cumuppence from the locals! We cheered the locals, as long as they only used fists, and not knives.
The locals in Paxos seem to hate Italians, as they turn up & think they own the place.
As opposed to my family, who turn up as smiley, friendly. generous-tipping & heavy Mythos-drinking Brits, they absolutely love us!! LOL Even though the exchange rate is a tad adverse this year. I'm packing some noodles in my case this year, to keep costs down & free up more food money for Mythos!
Regards, Paul.
Paul,
That place looks stunning. If it was me, i'd be leaving my laptop at home and not be giving a single damn about the markets! Have a great time and chillax :)
Also happily holding on to my Lookers (LON:LOOK) shares and booked my car in for its MOT and a couple of small jobs to help them maintain profits for this year.
Just purchased some Marshall Motor Holdings (LON:MMH) as they seem to come out on top when compared to most other motor retailers. Their results out tomorrow so not long to wait to find out if that was another foolish decision.
I'm happy to hold my LOOK shares while the price is still going up; have a lovely holiday Paul.
I'm always sceptical when I hear directors are selling at a discount to prevailing market price "due to institutional demand". To be fair, I suppose it must be difficult to dispose of a large block of small cap shares, but it always sounds like "I'm selling to them because they're really nice blokes, and I want them to make money instead of me."
Paul
Agree with your comments about the pricing. Given that the price should be determined by supply and demand it is even more concerning that the CEO has contributed personally to the supply side, which can only have had the effect of reducing the placing price (and thus increasing the number of shares which had to be issued to obtain the funding wanted).
Not sure though why you say: "Interestingly, 1,528k shares are being sold from Treasury, so that reduces the number of new shares being issued."
I think readers may take this as meaning this reduces the dilutive effect of the placing. But the shares sold will now be held by outsiders instead of being effectively owned by the existing shareholders pro-rata. So the effect on existing shareholders in terms of dilution of their effective interest is exactly the same as if new shares were issued. Probably the only difference is that the company doesn't need the same authority to sell treasury shares as to issue new ones. Or am I missing something else?
Hi jdnthomas,
Yes, you're right that shares in treasury being sold to new investors is of only cosmetic difference to new shares being issued. It somehow feels better, but as you point out, there's really no difference from the PoV of existing holders.
Regards, Paul.
And thoughts on SIV from friday's report?
Hi Andyin,
No, sadly not. I looked at SIV a few times, but decided that I can't really add any value, and don't really understand the business, so have left it in the the undergrowth of last week.
Regards, Paul.
Hi Paul. Thanks for the update. Hope you have a great holiday. I am a holder of Lookers (LON:LOOK) and in defence of the acquisition it doesn't look so expensive if you remove net assets from price being paid. Although i thought it looked toppy initially too. Perhaps I'm trying to kid myself!
I too subsequently knocked off the net assets as the PER seemed very high - but knocking £22 m off, the PER become a reasonable figure. WHAT IS THE CORRECT WAY TO CALCULATE THE PER ON THE PURCHASE? Do we deduct the net assets from the price paid? Or not? Anyone know?
With regards valuing the acquisition by Lookers (LON:LOOK) and more generally... My simplistic rule of thumb - for what it's worth. Most core businesses have a balance of debt and assets (and sometimes one broadly cancels out the other) . When buying a business you are not generally buying it with nebt debt - although if there is nebt debt you should add it to the price being paid to see the real price of what you are getting - think of BHS being sold for £1 - it was that price due to debt and pension obligations - so those should be added on. What the buyer is after is the the income flow. So taking off net assets (or adding on debt) is a good idea. When I did this on the parts business that Lookers (LON:LOOK) is selling it looked incredibly cheap. I presume that is because it is a commodity business and not core to Lookers. I see this move towards core (by buying another big dealership) as a vote of confidence in their core strategy. In this post referendum world where car dealers have been hammered into the ground valuation-wise I see this as a bullish sign. If management perceived that the core business was under pressure they would be very unlikely to make this move. Therefore they must be pretty confident. Confident enough to possibly sell the parts businesses at a discount and pay a full price for this new dealership. Just my thoughts as a holder and may well be miles off the mark so DYOR as always.
THANK YOU VERY MUCH FOR YOUR REPLY - much appreciated.
Kind regards.
In the Sunday Times there is speculation that Brexit may not happen until the end of 2019.