Small Cap Value Report (23 Jan 2017) - FLO, STHR, PPB, PHTM, BMS, MYSL

23rd Jan '17 by Graham Neary

33 comments 21465 reads

Good morning!

Today, I'm planning to look at Flowtech Fluidpower (LON:FLO), SThree (LON:STHR) and Paddy Power Betfair (LON:PPB), and anything else that seems worth covering. Paul is traveling at the moment.

When he returns to London, Paul will be meeting MySale (LON:MYSL), and I am also planning to cover their trading update from last Friday, later today.

Regards

Graham

Flowtech Fluidpower (LON:FLO)

Share price: 124,6p (-7%)
No. shares: 43m
Market cap: £54m

Trading, Acquisition, Strategy & Notice of Results

There's a disconnect between the tone of this announcement (positive) and the share price reaction (negative), because I think the profit guidance is actually a miss against market expectations.

Somewhat strangely, the company says that it is planning a 5% dividend increase, which is "in line with current market expectations" - but it doesn't say that the profit guidance is below market expectations!

Against difficult trading conditions the Group has delivered a solid performance.

Group revenue was c.19.9% up on 2015 at approximately c.£53.7 million (c.19.3% in constant currency)

The GBP devaluation looks to be culpable:

"...some margin contraction was experienced in H2 while prices were managed upwards on products sourced in Euro and USD and sold in GBP markets.

Checking last year's annual report, I see that Benelux revenue was c. €5 million, versus £30 million in UK revenues. And the underlying operating result from Benelux was less than 10% of the UK result. I'm not sure how this has changed since then, but there is a lot of GBP exposure here.

Significant investment in central and sales resources aimed at optimising cross channel opportunities, and future acquisition integration programme underpinning long term growth.

As a result of these investments and the gross margin contraction in H2, the Board expects underlying* PBT will be in the range £7.0m to £7.2m.

According to the forecasts available to me, £7.6 million was the consensus forecast here. So it's a miss.

The company also announces the acquisition of a Shropshire-based hydraulic equipment distributor for total consideration (including debt assumed) of £2.65 million. There are said to be "several acquisition and product opportunities being actively pursued".

My opinion: More important than the valuation here, for me, is…

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Rusty2

23rd Jan '17

Graham, I think other countries have already gone down that route, I'm reading about Germany and Ireland.

http://www.dailymail.co.uk/travel/travel_news/article-2929980/Travellers-submit-SELFIES-use-new-international-passport-cards-trout-pouts-belfies-not-recommended.html

The US is not happy about number of fake passports and has warned 5 EU countries to clamp down on it, I can see this becoming more of an issue.

peterg

Concerning PHTM my inclination is to agree with Graham, as logic suggests that Governments will err on the side of caution and increased security regarding the integrity of important documents such as passports, given the proliferation of international terrorism.

Though given that they have recently relaxed the rules I'd think that may be an optimistic view. Do PHTM have any business that is not heavily dependent on photo booths? What else does anyone use them for in the age of the selfie? The only time I've ever had anything to do with PHTM has been for passport photos and similar. It looks quite likely I'll never use them again.

If this really works itself through I can't see PHTM having much chance of surviving in current form at all.

Peter

JohnEustace

Re Photo-Me International (LON:PHTM), people are assuming that a photo booth is more secure than the system that the Home Office has rolled out, but I think not. On the contrary Photo Me will have to upgrade their systems to match the security offered by the new Home Office system if they are to remain accepted and even then the home taken photo will erode their market share as it is free for the technologically literate to use.

ds1980

Also biometrics will be implemented instead of passports by the sounds of it. Fingerprints. Retina scanners. Boat recognition etc. People will still need a passport I think though? No position

pgs501

Regarding PHTM I have to agree with peterg. It looks like a business where there is an effectively free and far more convenient alternative. If I am right the value of the business falls to nearly zero bar any dividends they can pay out in the next 5 years.

True the government may require a certain standard of photo but if so both
a. PHTM will need significant upgrades to security and the fact these machines seem to be often in run down and scabby ends of stations would be somewhat worrying, would they need to replace almost their whole current stock of machines, would they need to install security cameras outside the machines? and
b. suddenly this area becomes much more attractive to potential competition; I do not believe PHTM has any particular patents on photo machines and if there were to be a government required type they cannot exactly patent it can they (At least not without government price restrictions which the current government will not want)?

All in all this would need to be a seriously cheap proposition for me to get interested; print newspaper level cheap.

Metatron

With gambling companies like Paddy Power/Betfair there is always a risk from govts.Ironically although Trump has made his money in gambling his VP is a Born Again Christian and the Republican Religious Right are the clowns who in 2006 banned Americans from gambling online and as such the share prices of all gambling companies who allowed Americans to gamble were hammered .Betfair were rightly cautious before 2006 but that was with a different management and before they became an IPO .
At this moment there are people in the UK regulation industry worried about the way that gambling companies are maximising short profit by banning any regular winning smalltime punter.I`ve been a regular small time punter for 25 years and have had 6 online betting accounts closed in the last 2 years. in the previous 23 years none
3 that have closed my account are listed on the stockmarket:Bwin.Gvc (Sportingbet) ,Ladbrokes
There used to be a view by the bookmakers that allowing small time winning punters was a smart long term policy.
If the word can get around that one cannot win with a bookmaker why bet with them?

Hot Socks

I'm not so sure the Braemar balance sheet is rock solid. The biggest asset is £77m of goodwill, followed by £60.5m of receivables (compared to six monthly revenue of £70m so it is taking over five months to get paid on average).

There's not much debt, but the stockreport says it had negative free cashflow in 2014 and 2015. 2016 better but free cashflow not quite enough to cover the dividend. Also there's a (admittedly smallish) pension deficit. So burning cash and the balance sheet doesn't give it much staying power?

Roger Lawson

Re Paddy Power , really hate these stories about bookmakers suffering from the punters winning. It should not matter who wins or loses if their "book" has been constructed based on the weight of money wagered. I wrote an article on this about William Hill claiming the same - see https://sharesoc.wordpress.com/2017/01/10/how-bookmakers-lose-money-william-hill/ . It's just nonsense in my view, unless they are betting against their clients, which they should not be doing. Comparing bookmakers to insurance companies is inappropriate.

AlanJenkins2

I suppose the unspoken subtext is that those punters are likely to plough most of that money back in the near-future.

You've obviously not been a bookie rog. Margins are wafer thin. Yes books balance but that's only for individual races / events it's the accumulators that can't be balanced and this is the majority of where losses occur. Bookies can't lay off everything. If you make a book at 120% round but everyone backs the winner it don't matter what your percentage is! Take a look at the bookies who went to the wall when frankie got 7 up. With all the offers (money back second, money back if thistlecrack wins the King George etc then it's impossible to balance books sometimes. Long term of course the bookies will always win ( well not from me ;-)) but short term there will always be these stories you hate. Long may it continue.

BlueFrew

Surely the issue for PP was that they paid out on a Hillary win early. Ended up as very expensive "free" publicity.

back2value

24th Jan '17

In shipbroking business, much of the revenue is fixed "forward", for example the brokers conclude a time charter but the revenues are a commission on charter hire paid monthly for the duration of the charter, which may be years. Very seldom are commissions paid up front. In the case of shipbuilding contracts or shipsale transactions, the commission is usually paid only upon successful delivery of the vessel, which again may be months or years ahead. As a result you have to adjust your evaluation of receivables in the case of a company which derives a significant proportion of its income from shipbroking.

B2V

Mikkiggy1

PHTM. All very helpful to one, who was a long term shareholder; bought at 40p. Dividends and special dividends have been excellent. Successful laundry business to diversify. Now, "sitting on the fence", awaiting future news of Governmental action. Michael G

ds1980: As I pointed out in my blog post, for individual large risks bookies can "lay off" the risk (I.e. reinsure it with others), or they should not be taking them on. The really amusing thing in the case of Paddy Power Betfair is of course that in Betfair there should be no risk at all - this is what their web site says: "Betfair is a betting exchange - an online marketplace for punters to bet against themselves on sporting and cultural events around the world . Customers bet against each other not against Betfair".

I suspect that with public bookmakers they are now adjusting the odds in reaction to what their competitors are offering so as to maintain volumes and profits, with the result that they are now losing big time on certain events.

It certainly raises a lot of questions about their management when they continually trot out the excuse of "unlucky/unforeseen" events.

Roger. Sorry didn't read your blog but its nowt to do with management betair and paddy power have the best in the game bar none and are head and shoulders above the rest bar 365. As I said single events kind of look after themselves generally as the books balance but that doesn't mean the books will win as the amount of money wagered isn't equal. A bit like a horse handicap. All the horses are meant to finish in a straight line ain't they? A book of 8 horses will often have two losers and 6 winners. That's before mentioning best odds guarantees, price promises, enhanced place terms when that book could easily turn into 8 losers!!. You've also got to remember the odd compilers are humans which is what us punters prey on. if they get it wrong then it won't matter how much the shorten or lengthen the odds they can't win. Take the kinloch/coral case currently happening. All of this squeezes their tiny margins and some books will run at a loss it's just how it is. Bookmaking in this day in age is simply a turnover game. Punters have never had it so good.

You only need man city, Arsenal, Man U, Chelsea, Rangers, Celtic all to win on the same weekend and no bookie could cover his liability. They're happy to lay these bets because they know long term that won't always happen but imagine it happens 4 weeks on the trot. It's not an excuse it's simply bad luck and is IMHO a completely viable excuse when we're talking about a business that relies on good and bad luck!!

The exchange you are talking about is exactly right. They make 5% on every book but that makes up a small percent of the betfair paddy power business and is completely different to normal bookmaking but remember the exchanges now dictate the markets on course. In the olden days bookies could send money to the track to shorten up a horse if they needed it to. That simply can't happen now so add that in to the fray and you should be able to see why bookies don't always make money.

thanks that's interesting and not something I knew.

Tortoise investor

Thanks so much for covering MySale (LON:MYSL), much appreciated. Can't wait to hear about Paul's meeting with the management.

Graham Neary

You're welcome Paraic, thanks for being a regular reader & commenter

I see MySale (LON:MYSL) are now down 8% according to Stockopedia. Can't see any reason for the fall.

Ardipithecus

I have been following PHTM off and on on for years. The threat of obsolescence was,an ongoing concern particularly when the rapid shift to digital photos happened and again with the rapid take up of smartphones, However the company seemed to innovate fast enough to stay ahead and the financials were pretty good so I bought in a couple of years ago. Maybe this time they really are heading for obsolescence but the demand for security compliant imaging is not going to go away. Probably PHTM will be adding on biometrics and holographic imaging next. So I shall hold wait and see.

Small Cap Value Report (23 Jan 2017) - FLO, STHR, PPB, PHTM, BMS, MYSL

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Graham Neary

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