Small Cap Value Report (17 Sep 2015) - AVAP, SOM, IND, TFW

Good morning Paul, may I ask about Laura Ashley Holdings (LON:ALY) is the change in accounting dates a cause for concern.

Hard to argue about the deteriorating cash position but on the positive they have debt facilities of £4m so even given a deteriorating position they have lots of room to move in. The main issue with them is getting any size in sales or purchases.

With regard to IND should the normal caution with regard to companies that are relying on a strong second half still apply?
With regard to pipeline of orders for large second half being better than the first 6 months - i should b***** hope so seeing as sales were down $9 mill dollars in H1 compared to comparatives - i would have hoped they would have confidence to say orders would be return to prior levels rather than being better than the awful just delivered - poor choice of wording used

ref "profitability in the second half is expected comfortably to exceed first half losses."
Excuse my stupidity here - is it 100% certain that the company is saying they will have profits higher in H2 than the losses in H1 - the alternative reading would be that they are expecting to simply be more profitable than the first half - i guess we will soon find out with any new broker guidance - if they are on track for £0.5 mill profit for the year (although i wouldnt expect brokers to go much above breakeven at present)

It's a shame they didn't have the confidence simply to say awful 6 months next 6 months we will make £1 mill + and going forward we are are confident of ongoing profitability.

Having said that if brokers confirm they are back on track for future EPS amounts of 20-25p+ per year next year then at 220p this would seem a goo entrance point from my point of View - IND has traditionally shown good bouncebackability over the years unfortunately they never cut the elastic when it does bounceback.

Avation (LON:AVAP) Not being in UK makes it impossible for me to attend Sharesoc meetings etc. One question that AVAP ducked in a question that I emailed them a while ago is what call, if any, do they have on accrued Operator Maintenance Reserves. I suspect none because tiddly airlines are highly unlikely to accrue maintenance reserves in practice and if they go bust then AVAP will be on the hook for making up those reserves before placing the aircraft with a different customer (or lease them at much lower rates to reflect the maintenance reserve loss). If they place numerous aircraft with one customer and they go to the wall then maintenance reserves could cause large problems for AVAP. I would like to know how they mitigate against this, if they can.

I would also like to know, especially for the Airbus aircraft, if their customers participate in a 'Power By The Hour (Or in Rolls-Royce equivalent; 'TotalCare') programme whereby an operator pays the OEM a monthly flat/usage fee and the OEM effectively guarantees aircraft serviceability no matter what the actual cost of rectification is. If so, then its normal that such monies are transferred to the lessor or next customer. This protects the leasing company to a large degree; but I don't know if such programmes are available for ATR's and if so, whether their customers participate. The problem with new airlines with new equipment is the desire to minimise cashflow in the early years by not taking such programmes or if they do, paying a rate that is low in the early years and increased with time (AirAsia X are a notable example of this).

Although AVAP talk about lease rates they were not forthcoming to me about whether there is a fixed monthly rate plus an additional aircraft usage rate and if so how that formula is derived. Additionally, again, new airlines would not want to deploy cash in lease payments in the early years because it is better used to expand the business overall. No point having shiny aircraft of there is no marketing budget! It is in leasing companys' interests to allow low initial payments that are stepped up every year so that over the term of the lease they get their claimed average monthly $. Doing stepped payments provides a meaningful incentive for the same airline to be capable of ordering additional aircraft to the benefit of AVAP

But as I say, I'm unable to attend such meetings.... ;-)
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Laura Ashley Holdings (LON:ALY) - IMO no concern.

Paul,

A real pleasure to meet you at the ShareSoc event last night.

Somero - I did a lot of research, and financials from last few years fantastic, and underrated by market. But as you have pointed out before, that is probably due to the cyclicality. As someone who intends to be a long term investor, lumpy returns because of downturns shouldn't matter to me. But in the last downturn, revenues fell by half, yet shares fell about 80 or 90%, wiping out all the previous gains - much more than just a setback.

I was impressed with their honesty regarding the fact that next downturn inevitable and will just have to cope with it. But I had really been hoping that there would be some detail last night about micro factors that exacerbated the macro effect last time, and therefore why next time would be easier to handle - debt, a specific customer problem, lack of international markets, whatever. There was not. I wonder if I have been kidding myself about the ability of the company to avoid having market value slashed in next downturn. Last time they reacted really quickly (cutting 70% of workforce), but it still took 3 years for shares to start recovering properly. Their proportions of international business have not really changed, certainly not enough to offset a 75% reduction in US revenue (which happened last time). Summary: I think they are great, but worry that the market will be equally harsh next time. Anyone any re-assuring thoughts for me?!

Ref IND

Ok the updated Broker note is available on the company website (well done IND for prompt assistance in this regard)
This new Broker note reads vary well - it confirms revised expectations for the current year of 0.5 mill Dollars - this confirms the second half profits should be more than enough to cover the first half loss with soemthig left over.

Better still they are going with EPS of 37.9p for 2016 - this will very soon be the current year - if the company can remain on track to hit these Targets i see no reason why the shareprice can't get back up to the 380p to 400p level once the Market has confidence that these are not Pie in the Sky Figures (i can understand anyone who doesn't believe the hype - but it is a level of profits that IND have managed to churn out in the past).

With regard to the downside protection despite the appearance of debt i would still say its a semi Bullet Proof Balance sheet - if we take the view there is no funny business going on with regard to the increasing Inventories. I always get twitchy when Inventories continue to expand up to multiple months sales.

Add in the fact that IND must have some very good IP and a skilled employee base and i always feel if profits continue to be elusive i would still expect a trade sale to be at above book value if that was deemed to be in the long term best interests.

So i have decided to add some of these for the first time with the upside potential seeming much better than the downside - lets hope that's a sign that IND are done with their profits warnings for the next 2 years :)

In reply to post #106654

"This new Broker note reads vary well - it confirms revised expectations for the current year of 0.5 mill Dollars - this confirms the second half profits should be more than enough to cover the first half loss with soemthig left over"

Thanks for the heads up on the note. Doesn't read well to me. FY profit expectations reduced from $2.3m to $0.5m. Also it says much of the activity in H2 is expected in Q4, so if I was a holder I'd be feeling very nervous about orders being "pushed back" further into the next financial year.

As for forecasts for 2016 - whats the point? Management have shown themselves to have zero clue about future earnings so analysts/investors have no idea either.

rmillaree

Is the 37.9p EPS estimated for 2016 based on anything tangible please?

Cheers, Martin

In reply to post #106656

Hello darlocst

I can't argue with any of your points - i have followed IND (on the sidelines) for Ages and they haven't delivered any consistency whatever long term - but they have always had good patches of trading - this being the case i am happy to take the risk with the decent NTAV cover and good IP - but i can't argue with anyone who feels that its more jam tomorrow - only time will tell.

As far as the Broker note reading well or bad - i am purely concentrating on the 2016 expectations - i was expecting these to be much lower - so on the basis that the company has some hope things will be better going forward i take this as a positive sign - if they only expected to do 20p EPS next year that would be a worse sign would it not ?

In reply to post #106658

Hello shanklin

I have just realised that the forecast EPS quoted is in cents and not dollars - doh - that makes them look quite bit less rosy but the quoted profit of $3 mill is roughly what they expect to do H2 this year on a pro-rata basis so presumably its pretty much business as usual.

Re Indigovision (LON:IND) - I'd followed this one for a while. It looked like it was doing a bit of a Richard Crow on the chart and an curve forming on the upside. I kept watching, I'm glad I did given the results - as Paul says - broker forecasts may well be revised down from here.

Still on the watchlist though.

Regards,

Sully.

In reply to post #106663

Thank you rmillaree,

Cheers, Martin

My latest thoughts on AVAP!

Avation (AVAP.L, Main market. Market capitalisation: £76m, 135p and 3.0% of JIC Portfolio

I attended a presentation at ShareSoc last night given by Richard Wolanski, Finance director.

Conclusion: I think this is good growth story, 50% growth in the balance sheet over the next 10 months, but accept that there are risks with a leasing company that prevent some people from investing at all. My view is that the valuation is more than pricing in these risks on a price earnings ratio of just 6.6x June 2016 consensus earnings forecasts. Someone said to me that you should value it just like a bank; on that basis it is currently at a small discount to book value; book value is expected to grow by 50% over the next 10 months, so perhaps that should lead to 50% upside! On Monday my concluding thoughts were “aircraft leasing is never going to command a premium valuation but at this stage in its development, I think a rating of 4.7x June 2017 consensus earnings looks good value; if it was re-rated to just 7.0x that would see a 50% uplift in the share price. I would love to add to the holding but think, given the aforementioned risks that 3.0% is a large enough holding. Happy Holder!” I am happy to stick with that conclusion.

I have written on this holding before, the last time only on Monday, so this is just a brief update following last night’s presentation and the announcement this morning that it has delivered into operation a new ATR72-600 aircraft to be operated by UK commercial airline Flybe.

This morning’s goes on to say: The delivery is the first of a series of new ATR72-600 aircraft which will be progressively delivered new to Flybe during the course of 2015 and early 2016. This arrangement was initially announced on the 23rd of February 2015. The lease rate and terms are typical for leases of this type: the initial duration of the leases is six years with the client options for further term extensions.

Avation Plc Executive Chairman, Jeff Chatfield said: “We are satisfied with the financial outcome of owning over 20 ATRs we have flying today in the liveries of several airlines in a variety of countries and environments. We are pleased to be associated with two major European aviation operators like Flybe and SAS, and we are confident that the introduction of these new ATR 72 -600s may bring us additional opportunities to place additional new ATRs in Europe as airlines start replacing their earlier generation aircraft.”

Last night’s presentation:

First, Richard has a style which does not appeal to everyone; it is a little too salesman like and second there are some people who will just not consider investing in a leasing company due to the risks of being exposed to a highly leveraged business. You sensed he was up against it! It is true, that if a number of factors come together all at once then a leasing company can find itself in trouble quite quickly. The main risks are its airline customers going bust, ceasing to pay the “rent” and the leasing company being landed with planes that it cannot then lease out and perhaps even have to write-down on the balance sheet.

Wolanski attempted to answer these concerns by first pointing out the underlying growth of the airline industry, despite setbacks over the last 15 years such as 9:11, Ebola, Bird flu, and the 2008 credit crunch. He argued it would take a lot to stop the growth in passenger numbers which is forecast to continue growing at twice global GDP. From Avation’s point of view, it mitigates the risk of aircraft being returned to it by picking strong airlines, with good credit ratings, as customers; e.g. Air France; by focusing on aircraft that are in demand e.g. ATR’s which are the workhorse of regional airlines and by having long term fixed debt against which the typical 12 year lease is fixed. It is also expanding geographically, increasing the number of customers and across aircraft types.

One question I heard was “what would happen if all ATR’s were recalled because of a technical problem”? To be fair that wouldn’t be great news but it has been in service for around 30 years and with well over 1200 of the two variants delivered, it is not something that concerns me very much.

In my post of 14th September I mentioned that “it is adding 10 planes on top of its existing 29 in the current year, so that’s 35% growth.” In fact it is more like 50% growth in the balance sheet because of the larger more expensive planes, such as the Airbus A321 to Air France, it is starting to lease. With improving margins as its cost of financing and admin costs drop, this should mean a monthly run rate in profitability up over 50% by June 2016 compared to June 2015.

Paul,
I have been through the new FW Thorpe (LON:TFW) numbers this morning and can find very little not to like, with exception of the 20 PE (ttm). Indeed the Quality Rank as been unrated +17 points to 97 this week which is what has got me interested.
Its a boring LED type lighting business but what they are doing they are doing well. Good SP momentum too. So bit the PE bullet and brought a small holding this morning. Ian

Oceanwood is building its position in Avation, now at over 28%.

http://www.investegate.co.uk/avation-plc--avap-/rn...

Oceanwood is a highly-rated hedge fund that specialises in takeover or buyout situations.
In this article, in Spanish, they are described as a "CazaOPA" which translates as "takeover hunter" and then further down as being "especializado en tomar posiciones sobre empresas candidatas a convertirse en objetivos de fusión", specialised in taking positions in companies candidates to become merger targets". Note that this article is about a different company, Liberbank, in which Oceanwood have taken a position in Spain.

http://valenciaplaza.com/el-cazaopas-oceanwood-se-hace-fuerte-en-liberbank-a-traves-de-derivados

This is also of interest:

Oceanwood Capital Management (award for Best Fund Manager in "Event-Driven and Distressed"):


http://hf.efnevents.com/shortlist/best-fund-manager-in-event-driven-and-distressed/

Disclosure: I am a long-term holder of AVAP.

In reply to post #106668

Is it "'50% growth in the balance sheet over the next 10 months" or "book value is expected to grow by 50%"? It can't be both (the balance sheet is gross, the book value is net). Surely the planes have to be paid for.

In reply to post #117063

Hi CIG, You are of course correct; my slip. I meant total 50% growth to the total assets on the balance sheet. This was on the basis that 10 aircraft would be added to the fleet during 2016. I understand it is ahead of schedule when I posted last September and that growth in fleet assets will be closer to 85% in the year to June. Book value will of course grow at a slower pace.
I know that the risks of investing in highly leveraged leasing businesses is not to everyone's taste but I'm happy to have some exposure given what looks like an undervaluation relative to peers. It is valued at around 0.8x book value compared to 0.9-1.3x for, admittedly its much larger, competitors. As Jane pointed out, last week Oceanwood went over 28%. I suspect they think that the undervaluation compared to its peers will be noticed by the market and perhaps even a competitor. For what its worth, WH Ireland has a target price of 260p based on competitor valuation metrics.