Small Cap Value Report (15 Mar 2017) - MANX, MMH, SOM

15th Mar '17 by Graham Neary

33 comments 26132 reads

Manx Telecom (LON:MANX)

Share price: 196.5p (+0.5%)
No. shares: 113m
Market cap: £222m

Final Results

Fairly stable results at Manx, the main broadband/communications company on the Isle of Man.

Revenue up 1.5%, £80.8 million.
Underlying EBITDA flat at £27.7 million.
Underlying PBT flat at £16.3 million (reported PBT £8.8 million).

The profit result is flat on an underlying basis, but on a reported basis, quite a few elements have hit the result:

revaluation of interest rate swaps (£1.2 million loss)
Transformation programme (£4.3 million)
Property revaluation (£1.3 million)
Acquisition costs (£0.2 million)
Impairment of equipment (£0.5 million).

Last year, the company's reported PBT was higher than underlying PBT, lending credibility to the argument that the deductions above are indeed one-off events.

The Transformation Programme is "aimed at improving competitiveness and the customer experience" - I can understand why companies internally will set budgets for these sorts of programmes and will want to look at them separately to the underlying profit result for the year. But from an investor point of view, programmes like this do tend to crop up at many companies from time to time, and it's hard to think of them as truly exceptional.

Final Dividend: 7.2p, up from 6.9p. Combined with the prior interim divi, the yield is 5.5%.

My opinion

Seems a very reasonable proposition to me, as far as utilities go.

It has 95% market share in the fixed line network, despite having opened its fixed line product on a wholesale basis to competitors.

Turnover is gently increasing with a variety of non-core and potentially UK-wide services offering some opportunities for growth and innovation (data centre revenue is declining, but special SIM card revenue is growing and offsetting this).

The exceptional costs are worth studying, in particular the Transformation Programme which is set to cost £10 million in total over two years (of which £4.3 million already charged to profits).

Utility shares are never going to be 100-baggers, but are just a relatively safe source of income for investors - they have more in common with high-yield bonds and REITs than conventional equities.

Heavy investment requirements and predictable revenues make them the perfect borrowers, and indeed Manx has net debt of £52 million, which looks manageable.

Possibly worth looking at for long-term income, in my book.

Marshall Motor Holdings (LON:MMH)

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MikeBrenner

15th Mar '17

Not correct - Have just spoken with them direct as booking a table for this weekend to check them out as up in North Yorks! They are open and doing well!

mercury61

back to Manx Telecom (LON:MANX)
I LIKE the social responsible side too ''World's first medical technology trial to help those with hearing loss through the use of software to fine tune phone calls''

ricky65

I'd also appreciate Graham's and Paul's views on FXI. It's a big data company that looks similar to WAND which Paul has covered before. Results look decent to me but the market reacted negatively.

Note, I hold a small long position.

Graham Neary

Covered SOM for you, cheers for reminding me.

Graham

Henchard

ricky65, Fusionex International (LON:FXI) is another company where P&L profit is flattered by "capitalisation of development costs" (cf. £TCM). Something to be aware of but I don't know much else about it.

gus 1065

My (only) gripe with Somero Enterprises Inc (LON:SOM) as a relatively small shareholder was the practical issue of fielding semi annual dividend cheques denominated in US$ that incurred substantial FX charges (in the context of the dividend amount) as well as form filling and a trip to the bank to pay them into the account (First World problem, I know). Got so fed up dealing with this that I sold out last Autumn - just in time for the Trump bump in US construction stocks.

Back in a few months ago via the ISA which deals with dividends via the account. Still an FX cost but less hassle. Would be nice if a UK listing required companies to at least offer dividend payments direct in Sterling.

Gus.

iwright7

Graham,

I have no 1st hand experience Somero Enterprises Inc (LON:SOM) competition, but a 2016 report here suggests that SOM currently has a strong business moat...

http://www.linclund.com/wp-content/uploads/2016/11...

....The Somero CFO John Yuncza points out that the main competition comes from substitute products. When comparing to similar companies with similar technology, Yuncza points out that there is barely competition, as Somero’s business model of in-depth industry expertise, training and knowledge, and around the clock service for customers is difficult to replicate. E.g. Somero acknowledges by providing 24/7 customer service (in 65 languages) that when working with concrete there is a time-limit before concrete is wasted and it becomes a significant cost for customers if not dealt with in time.

&.... Global competition within the industry remains low. There are only a few minor local competitors which hold small market shares. Primary competition comes from substitute products such as hand-used tools. In the U.S., the largest direct competitor is Ligchine with revenues of ~$1.8m. In China, the size of the construction industry poses a threat for new competitors to emerge. Somero is in a unique position of leading the market, but if a significant first-mover advantage is not obtained in China it could diminish the revenue growth potential.

john bradney

manx telecom
about 6 months ago i think i saw a report that said manx had become the telecom of choice for chinese visitors.
that was expected to push volumes and profit up.
did anyone else see this article or know about the contract ?
or was i halucinating?

john bradney

bestace

Ligchine certainly see themselves as a competitor for Somero Enterprises Inc (LON:SOM) if you look at their website:

https://ligchine.com/screedsaver-max/screedsaver-m...

They ended up in a US court last year as Somero claimed Ligchine were infringing their patents. Not sure if that's been resolved yet.

I don't think Ligchine are listed so it's not possible to compare their financials.

rouleur1

I'm not surprised the Bar and Grill is shutting (as opposed to RdC) The prices are bonkers.

Aislabie

According to Somero the market that Ligchine built growth on for a while was in the smaller areas such as farm buildngs and SOM had not appreciated how much business was available at this lower level. This omission was recognised and apparently been corrected with their own newer offerings in this space.
One of the keys to Somero's position as they face up to cheaper knockoffs is that they train their operators to cover as many problems as possible on site as well as providing a high quality machine. This benefit is readily apparent in that should a large concrete project get stopped for a machine problem there may be a couple of dozen cement trucks already on their way. If the problem is not solved in 2/3 hours the contractor has the very expensive problem of having paid for a couple of dozen loads of liquid cement and now has to pay again to get rid of it and to return the trucks to the owner without damage. The highest quality machines and operators then start to look very affordable!

Henchard, thanks for the insight. The Telit Communications (LON:TCM) analogy is interesting though from the chart I can see that investor sentiment is a lot more favourable for Telit Communications (LON:TCM) than FXI!

I get the impression there's a negative bias by some investors towards FXI because it's Malaysian.

jonesj

gus1065, if you hold via a low cost broker with nominee accounts, they usually sort all dividend forex out. They might take 1.5%, but 1.5% of (say) a 3% dividend is about 0.045%, which I can accept. Losing the 1.5% when buying the stock is harder to take.

In the case of my TD Direct non-ISA account, any dividends from non UK listed stocks are credited in the foreign currency and sit there in that currency. For the ISA account, it's all immediately converted back to Sterling. I suppose USD dividends from UK listed companies have similar treatment.

Hi JJ.

I used to hold Somero Enterprises Inc (LON:SOM) in my trading account at Charles Stanley. This was a Crest member account, hence my being directly on the share register and receiving dividend cheques in the post. I had to process these and was incurring something like £20 in transaction charges (on about a £100 dividend). My ISA account is on a nominee basis as you describe so dividends are processed within the account into £ at a much lower cost.

Best,

Gus.

mikemorris

Hi Graham.
The mail on Sunday ran a share tip on Somero Enterprises back in 2016. Good overview of the company which you might find useful

http://www.thisismoney.co.uk/money/investing/article-3402875/MIDAS-SHARE-TIPS-high-tech-construction-machine-maker-s-doing-level-best.html

Kind regards,
Mike

VegPatch

16th Mar '17

I have met the company a few times and I asked about competition. The CEO Jack Cooney told me that the company has a 99% mkt share in laser guided screed machines. He also mentioned Ligchine, but they are really a regional, rather than national player. Based in somewhere like Wisconsin. https://ligchine.com/screedsaver-machines. Not sure if I the 99% market share number, especially as Ligchine also claims to be the world's largest manufacturer of screed saver machines.

Somero does aim to introduce one new model each year and in recent years has spent c2-3% sales on Engineering but in 2013 this only amounted to $900k, so it wouldn't be insurmountable for a competitor to spend say $5m over a couple of years getting up to speed.
The company does have a direct sales force with experienced sales people, in both N America and in a small number of offices around the globe eg Shanghai, UK. It also has invested in a new HQ in Fort Meyers and is about to build a new training facility, so they are definitely reinvesting some of the cashflows to build further barriers to entry, which is good.

here is my write up from March 2015 which goes into the company in more detail for those that are interested
http://www.stockopedia.com/content/somero-good-portents-from-ashteads-q3s-and-only-on-a-pe-of-10x-growing-topline-40-93646/

Dennis Ayling

Paul, Graham would appreciate a look at Stadium Group (SDM) if possible. The results look fine to me and suggest that last year's hiccup due to loss of a large contract was hopefully just a one-off. The recent aquisition of Cable Power look a good fit too.

Regards.
Dennis.

Thanks Mike!

John36v

5th Apr

Am alone in thinking this Manx Tele is being sold too cheap?

eggbaconandbubble

7th Apr

Way too cheap. Good steady and reliable come earner. Plus the new audio gizmo with huge potential. Robbery at present offer. Will someone else step into the fray please. Pretty please!

Small Cap Value Report (15 Mar 2017) - MANX, MMH, SOM

Manx Telecom (LON:MANX)

Marshall Motor Holdings (LON:MMH)

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Graham Neary

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