Small Cap Value Report (16 Dec 2016) - BILB, TNI, UCG, FUL, SEPU

16th Dec '16 by Graham Neary

44 comments 20776 reads

Good morning,

Paul is away today, so I'm holding the fort here!

Bilby (LON:BILB)

Share price: 42.5p (-10%)
No. shares: 39.7m
Market cap: £18.7m

Interim Results (for the six months to 30 September 2016)

Comparisons with last year are somewhat pointless, since Bilby has been transformed by two acquisitions for aggregate consideration of £12.7 million.

There are positive noises on this front:

Both acquired businesses have been successfully integrated, met their initial earn-out performance conditions and, along with Purdy, have continued to trade ahead of expectations.

The shares are still down by about 70% year-to-date, however, as investor confidence was knocked by the loss of a local authority customer.

As previously announced, a long-standing and major public sector customer of the Group changed the processes by which it manages its outsourced building services work. This has resulted in significant work being taken in house by the customer. This situation has not changed and, combined with commencement delays to other contracts and slower than anticipated revenues from the SEC and Fusion frameworks, will further impact revenues and profitability for the full year.

That major customer loss resulted in a reduction in EBITDA forecasts for this year of c. 25%, and the above paragraph doesn't suggest that there is going to be any form of consolation in terms of this year's performance.

As a service provider to the public sector housing market (gas heating, electrical and general building services), Bilby has obvious similarities to Lakehouse (LON:LAKE), another recent flotation which has perplexed investors!

Restatement: I am finding Bilby quite perplexing, too.

The 2016 accounts have been restated to show PBT of £0.7 million rather than £1.4 million, caused by a disputed invoice and also:

£556,000 understatement of subcontractor costs due to changes in the terms of trade with subcontractors and a delay in subcontractor costs. The adjustment was made to cost of sales and trade and other payables.

Material restatements are one of those things which tend to have a disproportionate impact on valuation, and combined with the company's apparent vulnerability to the loss of a single customer, I am not surprised to see investor sentiment so low here.

The balance sheet is in negative tangible net equity. £16.7 million…

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Trident

16th Dec '16

Thanks herbie47. I will seek out those Roland Head articles.

Paul Scott

Thx Graham - I agree that Fulham Shore (LON:FUL) looks interesting. Although, as with all roll-outs, it looks expensive.

P.

Mike Rawson

Hi Paul,

I agree with you about Franco Manca - they're good cheap pizzas - but have you tried The Real Greek? That's not up to much.

Mike

Hi Mike,

No, I've not tried The Read Greek - I'm valuing that at nil. Looked at their menus online, etc, it's not of any interest. Going nowhere I think.

The interest with Fulham Shore (LON:FUL) is the Franco Manca roll out. That's it.

Regards, Paul.

shipoffrogs

Edmund - I thought recent studies were showing a decline, although, of course, it could be a blip. One possible explanation that I've heard is that those growing up in the post war years and healthy childhoods - real food, and they had to walk everywhere.
You may well be better informed than me though.

FREng

Will the move next April to CPIH as the official inflation measure have any effect on pension deficits?

tads

Thanks for the opinion on United Carpets. Enjoyed your reports.

bestace

Given that CPIH is currently running 0.2% ahead of CPI, the move to CPIH is bad news for pension deficits, but the impact will vary between pension schemes as some will specify in their trust deeds which inflation index has to be used (i.e. the change to CPIH will have no impact) whereas others will specify that the government's preferred inflation measure should be used.

Either way, if the pension trustees and the employer are in agreement, they can choose to change which index to use.

Thanks. Do you know what the accounting rules state about how future liabilities should be valued?

Discussion here has been that higher inflation will reduce stated deficits.

melody9999

If you want to see an example of a company growing by acquisition as well as orgnaically just look at RST. Can be done very succesfully if you have the right management resulting in increased turnover and improving margins based on scale.

IAS19 is the technical accounting standard if you really want to find out the minutiae, but I wouldn't recommend trawling through it unless you're suffering from insomnia!

As pensions in payment are typically subject to annual inflationary increases, a higher rate of inflation means a higher liability, i.e. a higher deficit.

Don't confuse that with interest rates, which is where the correlation to the pension deficit is inverse, i.e. higher interest rates means lower pension liabilities because future pension payments are discounted back to calculate their present value at a higher rate (technically it's the market rate on "high quality corporate bonds" which have to be used, per IAS19)

Of course, interest rates and inflation rates are themselves positively correlated, so the 2 effects I've just described above will offset against each other to an extent.

On Fulham Shore (LON:FUL), I've had a look at today's update and the balance sheet looks a bit weak to me - net current liabilities of nearly £8m, net debt and I'm not sure they have sufficient cash to fund their roll out plans.

Someone else upthread mentioned Patisserie Holdings (LON:CAKE) and I'd tend to agree that they make for a more attractive retail roll out prospect.

Mark Simpson

Trident,

Re: Pan African Resources (LON:PAF) - the brokers notes haven't caught up with the fall in the gold price and the slightly disappointing production figures - 195koz guided for FY17 vs 200koz previously. If you correct for these then you see that they are trading at the same P/E at 14.5p as they did at 24p just the projected earnings have fallen with the gold price

That P/E has always been around 7 though and I think that undervalues the company given that:

- Evander is one of the highest grade mines in the world making it profitable at very low gold prices.
- they have long life of mines
- they have very little gearing.
- they have very low risk, medium term growth prospects from the Evander tailings re-processing.
- Their earnings convert to cashflow well and they are committed to paying out 40% of underlying OCF as dividends.
- Management seem strong and have done a number of earnings enhancing corporate transactions so far and added diversification.

Long term I think we could see a re-rating on P/E as they deliver on their medium term growth prospects, short term this will simply follow the gold price. In the long term if it doesn't re-rate I could see one of the larger companies deciding to mine Pan African Resources (LON:PAF) 's reserves in the market.

doug2500

I have held Pan African Resources (LON:PAF) for a few years, and topped up at 17p recently.

As well as the strengths you've pointed out, it's on a stonking yield. Would I be right in interpreting the dividend policy to mean that payouts will be volatile, depending on annual results?

Tortoise investor

17th Dec '16

Thanks very much to Graham for covering Fulham Shore (LON:FUL) today. Franco Manca is amazing and I also like Bukowski Grill which they have an interest in (try their chilli cheese chips!). So I have been trying to assess whether the shares are worth buying for some time.

I am finding it a bit difficult to crunch the numbers though and justify the £100m market cap - but I wonder if this is because of my inexperience in understanding balance sheets and results. I note the headline operating profit figure looks good but the figures for post-tax profit don't look so promising. It made just 0.3p EPS. Am I wrong to focus so much on EPS at this stage?

I note that it says the EPS was the same for 6 months ending 2015 and 2016 which I am also struggling to understand when the headline profit is quite different and the underlying number of shares pretty similar. Why is that? Apologies if I am being v thick - I'm still learning!

It already has 30 Franco Manca restaurants - by comparison Pizza Express has 400. To reach Pizza Express' level would take some time and yet the share price seems to be pricing in a heck of a lot of growth already. I also note others' comments about debt.

I would really appreciate hearing comments about why the EPS figures for six months ending 15 and 16 are the same as I am struggling to understand.

As Fulham Shore (LON:FUL) is still relatively early stage in their roll out plans, EPS is probably not so relevant right now, but in answer to your question about why there is no apparent increase in EPS, note 5 of the RNS is the relevant bit to focus on as that's where they've explained how the figures were calculated.

For 2015, the diluted headline EPS was £1.496m profit / 592.891m shares x 100 = 0.252p

For 2016, the diluted headline EPS was £1.982m profit / 600.136m shares x 100 = 0.330p

They've then rounded both these figures to one decimal place, i.e. 0.3p each year which makes it look like there has been on change, but by doing the calculation to 3 decimal places you can see that their rounding hides the fact that headline EPS actually rose by 31%.

jamesmus

Back in 2003/4 Clapham House Group were trying to roll out this brand and were unsuccessful. Here we are 12 years later, and there are only 12 TRG outlets. "Going nowhere" is a fair assessment, I think!

18th Dec '16

Thank you that's very helpful - I didn't spot that.
I still think the business looks on the expensive side! I'd be interested in hearing any holders' calculations about why it's worth buying.

Bushranger

19th Dec '16

Any thoughts on Trinity Mirror (LON:TNI). share buyback? Is this helping to lift the SP.

alpha2

20th Dec '16

From an ex operator's and holder's point of view there are a couple of relevant points to make.

The team running Fulham Shore/Franco Manca are the team that in the main rolled out Pizza Express during its rapid expansion phase.

To my eyes they have an excellent business model in that they are the cheapest chain to eat at as well as the trendiest. They do not add a service charge and hence charge the staff an admin fee which most other chains do, so are not vulnerable to future legislation. This also has the effect of making the bill seem cheaper than you expected when it arrives as there is no weaselly "optional service charge". It is made clear that any tip is a direct reward to the staff and the restaurant do not take a cut. Following the Michel Roux debacle last week I think this is likely to be a soft target that this govt may go after. Costs little and very popular with the voters.

The main threat is probably the rates re-valuation coming up in April but as the cheapest they perhaps have the most scope to put up prices without alienating the customer base.

They have a small menu of mostly low priced ingredients and seem to me best placed of all the fast casual chains to expand providing they can access the sites and cash. With the operating teams CV and the bank of sites in The Real Greek some of which could be sold and some converted to either FM or Bukowski I doubt they will find that a problem.

If funds are difficult to come by then the fashionability of the brand should ensure that they are a juicy morsel for the much bigger fast casual restaurant companies with worn out brands.

Small Cap Value Report (16 Dec 2016) - BILB, TNI, UCG, FUL, SEPU

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Graham Neary

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