Small Cap Value Report (2 Aug 2016) - STAF, FLO, LAKE

2nd Aug '16 by Paul Scott

13 comments 14812 reads

Good morning!

A deluge of 30 June interim results has appeared today, so I'll spend the whole afternoon working my way through them. Might have to switch into bullet points mode if it becomes too onerous.

It's particularly interesting that some beaten down stocks are only reacting gently to fresh profit warnings. This suggests to me that, in some sectors anyway, maybe the potential bad news from economic slowdown is already baked into the price? That could present opportunities perhaps, because if a share doesn't fall much on bad news, then after a while the most likely direction from that point on is probably upwards.

Once shares start going upwards, as we all know, that often sucks in more buyers. People love buying shares that are going up, and quite often with small caps the moves can be very rapid.

Even Indigovision (LON:IND) (in which I hold a long position) has been going up. I don't know why - but presumably the company should benefit from having its overheads in sterling, whilst buying & selling product mainly in dollars.

Staffline (LON:STAF)

Share price: 950p (up 1.6% today)
No. shares: 27.7m
Market cap: £263.2m

(at the time of writing, I hold a long position in this share)

Meeting with management - I attended the private investor meeting yesterday laid on by this outsourced staffing group at Buchanan Communications, and it was a terrific success. About 30 investors came along, as well as a few city types (broker/analysts I think). Good quality sandwiches/wraps were provided, with crisps & cakes, etc, and soft drinks (so clear heads all round, which was probably a good thing!)

Management gave a detailed presentation, with slides, and there was also plenty of time for Q&A. So the session over-ran, ending up being not far off 2 hours. Despite having come down with a cold, the CEO was excellent I thought. I'm hoping to interview him over the phone for my interviews website at some point.

I last met management of STAF almost 4 years ago, and my article from that meeting is still on the internet, on my (no longer updated) old blog. It makes interesting reading, and a lot of it is still very relevant today. What is striking is that, in the last 4 years, management has done exactly what they said they would do. Plus the share…

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rpmeurope

2nd Aug '16

Any thoughts on £LAKE? Another trading statement suggesting more trouble to come. I was actually ready to pull the trigger a week ago, but then they rocketed with the appointment of the new CEO. The debt is a concern and the trading environment isn't great, but if the new CEO can be trusted, then there is a huge potential upside here.

Anyone know anything about the CEO, would he be someone you partner with?

Paul Scott

I'll get on to Lakehouse (LON:LAKE) next! Leave it with me :-)

P.

shanklin100

Hi Paul

Re STAF, did the topic of share-based payment charges come up please? As I see it these are a key element of STAF’s business model in terms of staff retention and motivation. As such I do not believe it is appropriate to treat them as exceptionals.

For the years, 2012—>2015, they were £426k, £2.154m, £3.665m and £8.95m respectively...
...on adjusted PBT numbers of £10.7m, £12.5m, £18.6m, £28.3m, and...
...adjusted EPS of 37.9p, 46.1p, 59.7p, 92.4p

The effect is not as significant as I had thought, but certainly quite significant in 2015. It would be interesting to know what they expect the situation to be in future years?

Best wishes, Martin

Devlishcunning

Hi Paul,
I suppose the 2.88 million shares sold at 920p at 12:41 today should help clear a bit of the overhang.

jonesj

Just checking how they did in the last recession, Staffline shares hit about 24p in March 2009 and as much as £16 in November 2015.
I don't have financials going back that far, but the Digital Look EPS graph shows just over 10p at the time.

So that's another value stock that got away.

FREng

I don't hold Lakehouse (LON:LAKE) - I sold mine ahead of the EGM to oust the NEDS, fortunately.

There may be a viable business here but I'm uncertain how exposed LAKE is to any further delays in Smart Meter rollout or to changes in Government policy. The full meter specifications (SMETS) are still changing, the UK variants on the communications protocols are significantly new and complex, and there is a lot of testing to be done to gain confidence that the whole system will be secure and reliable. Moreover, until the meter rollout really gets underway, no-one knows how many customers will reject the meters and how many repeat visits will be needed to get access to premises to install them. 43 million meters is a lot of installations across the UK; will BREXIT mean that it is hard to recruit enough staff to do the installations? Who carries these risks?

Trident

I was quite shocked to see that Staffline business derives 75% of its placings from east Europeans.

I like the look of Staffline, but have to admit this worries from the uncertainty of the Brexit position. I suppose it is easy to say that UK people will fill the gap, if it comes to this, but suspect that for most UK employers an East European placing is representative of a hard working, reasonably well educated and motivated individual. Sadly probably not the case for UK staff, but hope that is changing.

JohnEustace

All good points and enough to make it a bargepole job for me even if the Lakehouse price looks a bargain. I will be amazed if any smart meter roll out goes to plan - it's been a complete *** of a project. Shows what happens when you elbow the engineers aside and give the job to the well meaning eco folk.

andrea34

Thanks for previous write-ups of STAF, am happily sitting in profit already having only bought last week :-) I think they are valued far too low (as market seems to be indicating)... and echo the comments of Trident above, Eastern Europeans they may well be, but they do tend to happily hoover up a lot of jobs that UK people can't be bothered to do.

Bought TPT too at 99.99 only a couple of weeks ago, and they are now 118.00ish :-)

Can't understand why anyone still holding LAKE though - looks a total catastrophe, one pile of bad news after the next... you lot must have nerves of steel!

aflash

Two points on FLO:

1) It imports what it needs to make its widgets so the Pound Sterling's drop increases costs.
2) It is so thinly traded that a 77 000 share purchase mid July pushed the price to 117.

I sold then, having bought at the early July LO s but have bought back in today. Maybe a third point is that coming out of Private Equity it is unlikely to be taken over.

Aislabie

I have tried to stay interested while LAKE has gone through some turbulent months but it puzzles me why, when there are dozens of more straightforward companies to choose from, does this one attract so much attention even as it requires endless patience?
It appears to have made acomplete horlicks of a low tech business with a doubtful post brexit growth prospect.
Why so many column inches?

dscollard

LAKE's intraday reversal does look bullish: lots of 50K clips getting bought today. I am long btw but with a low entry price

On smart metering, we had ours installed by British Gas in Feb: took all of 20 minutes and offered very granular online data analysis of usage as well as in -home display. We live in a rural part of South Devon but the cellphone modem can use any of the available mobile carriers to transfer data. Worked very well

One very clear outcome was how much British Gas were charging; Result: switched to GB Energy who don't use smart metering on-line but we still have the in-home metrics and display. Now it's more of a dumb meter that a smart meter!

The control and regulation of energy has such enormous political capital that I reckon it will be pursued. The benefits and transparency to consumers will help overcome the adoptive barriers to technology

Strategically, given the recent paucity of investment in electricity generation. better metering and control of national resources gives a strategic importance to the roll-out for better managing future demand and consumption (dynamic pricing, off-peak discounts etc)

Sure there are issues on interoperability, protocols and and but 'twas ever so in any technology roll-out.

Post Brexit we may well be able to keep the coal fires burning and therefore all that electricty generation capacity the EU kiboshed

tabhair

There's no doubt that LAKE has been a disaster. Before you even get into the problems, you have a low margin, mediocre quality business that is impacted by seasonal/cyclical factors. Then you get the profit warnings, the management upheaval, and the shaky balance sheet. Indeed, looking at the company by itself and you would certainly wonder why anyone would ever touch it. However, if you take a step back and examine it alongside a peer like Mears Group, then the situation becomes much more interesting...

Small Cap Value Report (2 Aug 2016) - STAF, FLO, LAKE

Staffline (LON:STAF)

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Paul Scott

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