Small Cap Value Report (2 Feb 2015) - FLYB, AMO, ETQ, ISG, MUR, QRT

Monday, Feb 02 2015 by

Good morning! 

Flybe (LON:FLYB)

Share price: 60p
No. shares: 223.1m
Market Cap: £133.9m

Sunday Times article - I note that there was a very unbalanced article in the Sunday Times yesterday about Flybe (LON:FLYB) which suggested that things were going terribly wrong there. I've noticed that where an individual or company refuses an invitation to be interviewed (which the CEO of Flybe apparently did in this case), then the journalist concerned seems to regard it as open season to do a hatchet job! (possibly aided & abetted by "helpful" PR people from competitors?!)

Having gone carefully through the facts myself, the S.Times article seemed to greatly exaggerate the problems the company has - which are mainly due to 9 surplus aircraft (pending disposal, but accruing considerable costs of c.£26m p.a. while they are grounded), and stiffer competition than expected on some routes. A fuel hedging policy has back-fired, since it has inadvertently locked in high priced fuel for the next year or so.

Given Flybe's strong balance sheet, none of these things look likely to affect the company's solvency, in my opinion. It has net tangible assets of £167.5m, at the last balance sheet date of 30 Sep 2014. An additional provision may well be needed against the surplus aircraft though, although I am told they are modern planes, so it's only a matter of time before they are disposed of.

As you can see from the trading update from 26 Jan 2015 (below), the company's underlying trading is around breakeven, after one-offs of around £16m relating to an EU compensation ruling, and the sale of their loss-making Finnish operation. So in other words, the underlying business is at a run rate of about £16m p.a. profit, with the temporary issue of 9 surplus planes being an additional cost of £26m p.a.. So even if they cannot dispose of the surplus planes, then the run rate is currently a loss of about £10m p.a. - which is a very different picture to the one painted in the S.Times yesterday, where the journalist included very little in the way of figures, but speculated that the company might struggle to raise fresh cash (not seeming to realise that it doesn't need to).


My opinion - Flybe is in a 3-year turnaround, and so far a lot of positive things have…

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Flybe Group PLC is a United Kingdom-based company. The Company is a shell company.

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Amino Technologies Plc (Amino) is a provider of media and entertainment technology solutions. The Company works with over 250 operators in around 100 countries. Using Internet protocol (IP)/cloud innovation, it enables operators to meet the challenges they face as broadcast television (TV) and online moves to an all-IP future with managed over-the-top (OTT) offerings. It also helps operators to provide the features and functionality that the consumers are looking for in a multiscreen, multi-device entertainment world. Amino’s products include Amino TV, Amino OS and AminoVU. Amino TV is a multiscreen video platform designed for the subscriber segmentation. Amino OS is the software solutions for deploying and managing connected devices. AminoVU is the Company’s media server suite with home networking features for simultaneous streaming of live and recorded TV to a multiple of TVs, tablet and smartphones through the home using any combination of wired and wireless technology. more »

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22 Comments on this Article show/hide all

janebolacha 2nd Feb '15 3 of 22

Paul, it isn't going to be easy to dispose of those E-195 aircraft.

About half of the units in service seem to be with one Brazilian airline, while very few are now being bought. Embraer has only 7 units on firm order and it's the least popular variant in that family of aircraft, as shown in the "orders and deliveries" section of this Wiki page:

That's why the "temporary issue" is taking years to resolve, imo.

(Btw, good call on ISG several months ago. You were spot on!)

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jetstar 2nd Feb '15 4 of 22

In reply to post #91218

My sentiments entirely, the surplus aircraft will remain a problem for some time yet.
Paul Cant

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Heisenberg 2nd Feb '15 5 of 22

This seems a fair and reasonable assessment. Market reaction has been harsh and rebuilding confidence will take more time.

Also highlights how investors need to be careful about what they read in the press - often extremely unclear what the agenda is behind an article and with selective drafting most situations can be portrayed as much worse than they probably are. On the Flybe restructuring itself quite a lot of progress has been made and this was never going to be straightforward. However where the CEO seems to have gone astray is in his communication of expectations to the market. For example, I read somewhere that the Liberum analyst was assuming that the grounded jet issue would be solved in the current financial year at no net additional cost. Given the uncertainty around timing of Project Blackbird the company could have done a more professional job, in my view, of making sure that market expectations were much better aligned to the reality. The fuel hedging also seemed to be a surprise to many when it really should not have been - again perhaps the communication of expectations from the company could have been better.

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Ramridge 2nd Feb '15 6 of 22

Hi Paul -
Re. Flybe (LON:FLYB) My analysis on 26/1 was like yours that the fall was overdone and this was a buying opportunity, at least for a quick trade. So I picked up a few @69p. I have an iron cast rule that I do not average down.

The balance sheet strength and other financial factors show that Flybe can withstand the knock and the net impact appears that it has at worst pushed back the recovery plan by one year.
However my main concern is that doubts have been raised about the strategy itself. It comes from the Sunday Times article and some bulletin boards. It basically boils down to this.
- running profitable regional operations on a sustained basis is a flawed strategy, Can't be done, and
- aggressive moves by competitors such as EasyJet and Ryanair are eroding margins to the point where it will hurt Flybe badly. Given their superior scale and strength, competitors are basically muscling out Flybe.

If this is true, then Flybe is not an investable proposition, irrespective of current difficulties. I am not an expert in the airline sector, so I would be interested to hear what others have to say.

Regards, Ram

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bsharman 2nd Feb '15 7 of 22

Hi Paul,
I read the article in the Times yesterday and wasn't unduly worried because it is all information which was publicly available and there were no new insights. The market has been relentlessly punishing Flybe (LON:FLYB) for the profit warning and i'm sure that news leaked out on the Friday before the statement (when the shares lost over 10%). Who took part in the fund raising at £1.10? They must be pretty annoyed! Can the management team turn it around?? I don't know but what I do know is that the market is pricing in the worst case scenario now. They need to get rid of the 9 planes ASAP and this has to be top priority for the CEO (and I hope it keeps him awake at night!) - If they manage this relatively soon, I think we will see some sort of recovery in the share price. However I do note the change in tone from 2014 to the recent statement and it does appear that a potential solution didn't happen when expected - perhaps someone walked away from a deal? Who knows. What we need is a few more bigger director purchases and a statement to calm nerves along the lines of: we are working tirelessly to find a solution to 'project blackbird' and also set out the turnaround strategy in more detail. I know nothing about hedging, but perhaps other readers do - so, how long does an airline normally hedge the the cost of fuel? Is it 12 months, 18 months, 5 years?? Ideally they want to start hedging now for the long term future whilst the price of oil is $50/barrel? Can anyone enlighten me about hedging strategies?!

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iwright7 2nd Feb '15 8 of 22

I have just spent 20 minutes this morning booking a £200 Glasgow Flybe flight - What a nightmare. Blatant add ons which annoy and a website that decided to take me back to the beginning several times. As a customer I would not put £5 into this company's shares, nor have any confidence in its recovery plan.

They are only wishful traveling, if this is the best they can do. Ian

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underscored 2nd Feb '15 10 of 22

Energy Technique (LON:ETQ) has been popping up in my screens for a while. Seems the catalyst for their rise has been the inclusion of their products in the high end property developments in London over the past two years. Based on future PCL supply of high end units quoted by the FT, I will not be investing in Energy Technique (LON:ETQ).

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purpleski 2nd Feb '15 11 of 22

Hi Paul

Flybe (LON:FLYB) I have never known a journalist allow the facts to get in the way of a good story!

Anyway you should be pleased, as Warren Buffett would say, all this story has done is make your bargain stock even more of a bargain.

Your figures stack up assuming they can get rid of these planes and with another 10% off this morning Flybe (LON:FLYB) is now 63% off 12 month high and is even beginning to tempt me. I think I will dip my toe in the water at these levels and see what happens

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james8 2nd Feb '15 12 of 22

Re Flybe hedging.
Ryanair have cautioned today that its forward hedging will lessen future profits.

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Splode 2nd Feb '15 13 of 22

Paul - I fully agree with what you say about Energy Technique (LON:ETQ). I think companies with a cap of <£10m are really too small to be listed. They are inherently volatile and illiquid, a situation often exacerbated (as in this case) with a very small free float which raises the risk for public shareholders further. It has been buying back shares quite aggressively which is interesting for a minnow. Since it does not need to raise capital this would be a great private company!

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Glaws2 2nd Feb '15 14 of 22

In reply to post #91227


Regarding your point "aggressive moves by competitors such as EasyJet and Ryanair are eroding margins to the point where it will hurt Flybe badly. Given their superior scale and strength, competitors are basically muscling out Flybe".

On about 80% of their routes FLYB has no airline competition - its rail and road. This is largely down to them flying smaller planes so that they are uneconomic for Easyjets etc to use their jets. Hence the need to dispose of the E-195.

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janebolacha 2nd Feb '15 15 of 22

From Ryanair's statement today.
Imo, it strikes a cautionary note for shareholders in airlines (including Flybe) expecting the lower oil price to bring a profit bonanza:

"We would counsel shareholders and analysts to temper expectations for FY16. While we are still finalising our budget, we believe that any growth in profits will be modest as our fuel is hedged at $92 pbl whereas some competitors (whose weak balance sheets rendered them unable to hedge forward) will be significant beneficiaries of lower oil prices and this may lead to downward pressure on airfares in 2015/16. Ryanair's over-riding strategy remains, to be "load factor active - yield passive" so it is important that analysts are mindful of this likely increased price competition when revising their forecasts. As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to our rapidly growing customer base in the form of lower fares and therefore our profit growth expectations will be modest in FY16."

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janebolacha 2nd Feb '15 16 of 22

Paul, any thoughts on RM's update?

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Sully8786 2nd Feb '15 17 of 22

In reply to post #91260

Hi Jane,

I saw them this morning. I hold and don't like them adjusting things here, there and everywhere!

The things I saw that caught my eye were....

  1. Pension Deficit - Up despite work to address!
  2. Dividend announced but no dates - sloppy!
  3. Cashflow to be less than profits going forward.
  4. No special dividend and high dividend cover - should be bought into line more quickly in my book.
I'll have a proper look tonight and my a decision from there.  As an aside they only present to institutional investors - raises a red flag for me straight away.



Company: Dave Sullivan - Talking Stocks
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jonesj 2nd Feb '15 18 of 22

Flybe wants to offload 9 surplus Embraer E195s.
For this model, Wikipedia shows there have been 145 orders and a backlog of only 7, so this is not a heavily in demand plane.

The much newer Bombardier CRJ1000 claims better efficiency and lower costs (they would claim that). This has had 70 orders, of which 31 are outstanding. I guess that's the plane customers want.

Presumably Flybe will have to offer a very good discount to offload their planes.  Perhaps the equivalent of trying to move on 9 nearly new Alfa Romeos?

(Meanwhile Boeing have over 1600 outstanding 737 orders).

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cyberbub 2nd Feb '15 19 of 22

Paul, do you have any comments on the Lightwaverf (LON:LWRF) year-end results from this morning? It's a bit below your usual limit of £10M, but the company does appear to have a bit of a head start in a rapidly growing market, and some major international sales partners. It appears to be on the verge of moving into profitability (so again perhaps not your usual 'value' stock), but IF it starts gaining traction (and that is certainly a big IF) in its markets, then the current market cap will look ludicrous IMO. But I would welcome your opinion. I do hold a few. Cheers, Cyber

PS I know you don't do evening reviews LOL, my thought was that maybe you could have a look tomorrow?

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Paul Scott 3rd Feb '15 20 of 22

In reply to post #91290

Hi Cyberbub,

I had a very quick look at Lightwaverf (LON:LWRF), and thought it looked potentially worth a deeper look, but the market cap is too small for me - I've been let down so many times by sub-£10m micro caps, that the occasional 3-4 bagger doesn't even make up for the losses. Trouble is, you can't get out if something goes wrong, unless you're willing to take a hideous haircut on price - the quotes indicated by MMs are often largely fictitious for micro caps, as they won't deal in any more than about AMUNDI SP 500 ETF (LON:500)-worth of stock! The real price (to sell) can be 20% lower than the quoted price.

It's just a minefield in the micro cap space, so I only buy now if I have pretty much 100% conviction that I'm onto a sure fire winner, otherwise it's not worth it.

Regards, Paul.

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Munday 3rd Feb '15 21 of 22

Having used Flyb as a passenger I am not impressed. No compensation for a four hour delay and then a cross country trip to Birmingham airport and a further delay before our flight to Glasgow. I could haved driven there with less hassle.

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cyberbub 3rd Feb '15 22 of 22

In reply to post #91302

Fair enough Paul. I agree the illiquidity on microcaps is always a concern! I personally don't put a lot in companies like that, but think if there is a clear risk/reward (it's hard to see this being too adverse at a market cap of £4M), then it's worth an investment with a 2-year timescale. But I can understand how it doesn't fit your usual profile for a 'value' stock....

Thanks again for your always informative postings.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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