Small Cap Value Report (21 Nov 2014) - HRN, ZZZ, EBQ

21st Nov '14 by Paul Scott

9 comments 13436 reads

Good morning! Another exciting morning, with a lot of price volatility in some more speculative stocks.

Hornby (LON:HRN)

Share price: 73p
No. shares: 39.2m
Market Cap: £28.6m

Interim results - for the six months to 30 Sep 2014 are published this morning. A modest improvement in underlying profits is reported, on turnover up 8% to £24.2m. See the excerpt below from today's results, for a reconciliation of statutory and adjusted profit. These adjustments look reasonable to me, so I'm prepared to accept the £245k underlying profit figure as representing the true performance of the business:

It's not clear what the seasonality of the business is. I note that turnover was weighted towards H2 last year, but profit was only slightly better in H2 than H1. One would expect more buoyant trading in the H2 period, as that includes Christmas & the run-up to it - this type of product must be popular as a seasonal gift, maybe not so much for children, but older customers who seem to now be the market for this kind of product - as a nostalgia for their youth thing perhaps?

Outlook - as this is a turnaround situation, the outlook statement is vital for signs of progress, so here it is;

The final results for the year as a whole depend on the success of the Christmas trading season and current indications are that it will meet the Board's expectations. As a consequence, and despite the additional costs of the ongoing investment in the future of the business, the Board currently expect to meet market expectation for the year as a whole in terms of sales and profits.

Valuation - broker consensus is for 2.8p EPS this year (to 31 Mar 2015), so the market is ascribing a PER of 26.1 times, based on the 73p share price. Clearly that is too high a valuation, were earnings to plateau at that level, so the market is effectively pricing in a future doubling of profits from this year's expected level of profit (since a PER of about 13 would be the right ballpark valuation once the turnaround is complete).

Balance Sheet - net tangible asset value is £19.3m, which I'm happy with. The current ratio is satisfactory at 1.32. However, this company has £14.8m in inventories, which is too high in my opinion. That compares with cost of sales (on…

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Ramridge

21st Nov '14

Hornby? we are talking about model railways for hobbyists? granddads wearing flared trousers, kipper ties and railway guard's hats? kneeling down and playing 'choo-choo' with their grandchildren?
Please tell me this is a serious business with a future. :)

rick

Paul,

Any comment on Future (FUTR.LON) finals. It is a complex one (increasing move to digital media, debt reduction and asset disposals etc.) and I would value your opinion.

ln1sof

That would be snoozebox accommodation for Premier Oil. Sadly, Enterprise Oil is no more as it was taken over by hell in 2002. But yes, a year long contract for the old units does bode well.

Paul Scott

Hi In1sof,

Thank you for pointing out this error in today's report. I have replaced the incorrect "Enterprise Oil", with the correct "Premier Oil". It will forever remain a complete mystery as to why I wrote Enterprise Oil originally, I can only put it down to inadequate caffeine, and tiredness. Just one of those brainstorms where you occasionally type something completely wrong by mistake.

My apologies & thank you again.

Regards, Paul.

Hi Rick,

I've had a quick look at results from Future (LON:FUTR) - the figures look absolutely terrible!
Turnover reduced 20% to £66m for the year to 30 Seo 2014, and the pre-exceptional operating loss was £10.3m. Add on £7.5m of exceptional costs & £16.88m impairment of intangibles, and the loss balloons to £34.6m!!

The Balance Sheet is weak, with negative net tangible assets, I can't see anything here to even remotely like. Does Future have a future? On the basis of these figures, I would say, probably not.

I see there is a going concern section in the narrative, which is worrying.

There was net cash of £7.5m, obtained from disposal of non-core titles of £21.3m.

The company says that a heavily reduced overhead base will benefit the current year. It also says that in Q4 of last year it moved into EBITDAE profit.

It seems to be a declining printing business.

What do you like about it?

Regards, Paul.

Mark Carter

Future (LON:FUTR), revenues are down and operating losses have widened. It has moved into net cash, but how long will that last? I find it puzzling that the share price is up nearly 29% today.

cig

Future (LON:FUTR) looks in a much better shape than last time I looked at it, perhaps a year ago, when it looked like a train crash in progress with a half baked digital strategy. Sounds much better now. And it's much cheaper too.

Revenues are down but they have also halved staff count, and kitchen sinked/disposed some of the (presumably loss making) print elements, as well as making the print editions more like printouts of the websites, which is the way to go if the digital transition is to work at all -- before it seemed the other way round, dump the magazines onto the web, which hardly ever works well. Online content wants to be free so it's not going to be easy, but then they're focusing on segments with sizeable advertising budgets and were at least some of their sites have some traction. Also impressed they got £20m+ for the sports/craft magazines, seems good value for something that is in structural, if slow, decline and where going digital seemed hopeless.

As for negative tangible assets, a media company's desks are rarely going to be worth much. Would be interesting to see what was the tangible book value of the magazines they sold -- I'd expect it to be a small proportion of the sticker price.

Big price moves seem unsurprising for an option-like share (it's worth zero or a multiple of the current price).

(No position, but back on the watchlist.)

Thanks Paul,

Thought you might not like it. Only redeeming feature is move to digital publishing (titles for Xbox, PlayStation and Nintendo - possible growth areas now accounting for 40% of revs.) but I take your point about the balance sheet (not good, problematic). Low valuation but a long shot at best.

Thanks cig,

A good overview "option-like share (it's worth zero or a multiple of the current price)" sums it up perfectly. It is still on the naughty step, but see if it improves next term.

Small Cap Value Report (21 Nov 2014) - HRN, ZZZ, EBQ

Hornby (LON:HRN)

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Paul Scott

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