Small Cap Value Report (24 Jan 2017) - SPRP, FEVR, EMR, PZC
Hi there,
Today brings with it too many interesting updates for me to cover them all, but I'm planning to start with:
- Sprue Aegis (LON:SPRP)
- Fevertree Drinks (LON:FEVR)
- Empresaria (LON:EMR)
- PZ Cussons (LON:PZC)
Sprue Aegis (LON:SPRP)
Share price: 172.5p (-2%)
No. shares: 45.9m
Market cap: £79m
Trading Update (for the year ended 31 December 2016)
(this section written by Graham Neary)
As most readers will be aware, this company had a shocker in 2016, driven by a battery problem, weaker demand, and supply chain issues.
This is a mixed update which describes the company working through various challenges, as it tries to get back to normal performance levels:
Sales are expected to be approximately £57.1m (2015: £88.3m) and the operating profit* (post a £0.2m restructuring charge) is expected to be approximately £2.1m (2015: £12.8m).
The Group delivered an improved performance in the second half with an
estimated H2 2016 operating profit* of £3.0m (H1 2016: operating loss
of £0.9m before share based payments charge).
That sounds like a reasonable H2 result, in the circumstances, but note that it is before share based payments of £0.6m (which increased slightly, compared to 2015).
If paying out share awards was irrelevant to the operating performance of a company, it wouldn't pay them, I think - so share awards should always be included in operating numbers like this. There is nothing special about these annual payments which means that external shareholders can simply ignore them.
So I would argue that a more meaningful operating profit figure would be £2.4 million in H2, up from a £1.4 million loss in H1.
My opinion
Looking forward, I'd like to be bullish on the company's recovery prospects. What I really need to understand is how overstocking in France led to such a large sales collapse there - was management at fault? Were lessons learned? Perhaps the annual report will help to explain.
Cash is now £14 million, leaving the enterprise value (market cap minus cash) at £65 million. Further business recovery is due, and will be needed to justify this valuation.
Fevertree Drinks (LON:FEVR)
Share price: 1190p (+5%)
No. shares: 115.2m
Market cap: £1,370m
Trading Update (for the year ended 31 December 2016)
(this section written by Graham Neary)
An amazing year for Fevertree, as expected, and it continues to go from strength to strength.
The Board is pleased to announce that the strong growth
achieved in the first half of the year accelerated in the second half
of 2016. It is expected that sales in the second half will be ahead of
the prior year period by 75%. As a result, full year revenue is expected
to be circa £102.2 million, reflecting growth of 73% on 2015.
UK: full year revenue up 118% vs. 2015.
Continental Europe: up 39%.
USA: up 55%.
Rest of World: 88%.
Net Cash: ahead of Board expectations at year-end.
The last two months of the year were so strong that the outcome for the full year will be "materially ahead of expectations".
My opinion: Checking back on my notes on Fevertree, I gave it a neutral rating last July, when the shares were 839p. The shares are up 42% since then, in just six months - so I obviously missed something!
To be fair, management missed it too - as results are beating their own forecasts.
Gross margin has tended to be just over 50%, so perhaps the gross margin result in 2016 will be c. £52 million.
Administrative expenses will rise too, so I can see how brokers were previously targeting pre-tax profit of c. £31 million.
The bottom line is that I still don't think Fevertree shares are outrageously expensive, given the current profitability, the growth trend, and its status as a premium drinks brand. I don't own any shares in it, but I wouldn't be in a terrible rush to sell them, if I did!
Empresaria (LON:EMR)
Share price: 122p (+0.4%)
No. shares: 49m
Market cap: £60m
Trading Statement (for the year ended 31 December 2016)
(this section written by Graham Neary)
"Slightly" ahead of expectations:
Adjusted profit before tax growth is expected to be
approximately 23% year on year, representing a record profit level for
the Group. Net fee income is approximately 20% ahead of the prior year
and diluted adjusted earnings per share is expected to be up 12% on the
prior year.
Very nice international progress is reported, along with a few hiccups in the UK and the US.
In the UK:
As announced at the half year, following a short
period of uncertainty in the UK prior to the EU referendum, the UK
region has seen stable activity levels return. Overall in the UK, this
has led to profitability being down year on year, however the Group has
reduced costs and is encouraged by the increased business activity as it
moves into 2017.
Outlook:
"Overall, we are pleased with the record profit the
Group has delivered, once again showing the strength of the diversified
business model and the strategy the Group is delivering on. As such, we
continue to see exciting growth opportunities for the Group in 2017."
One thing which this statement does not mention is the currency effect. At the interim results, PBT was up by 15%, or 10% at constant currencies. That's important to understand how much of the result is due to the company's own success, and how much of it is due to luck.
The constant currency gain in PBT at the interims was 10%, so perhaps the full-year result will be something similar.
That's a healthy growth rate for a business trading at a low-ball PE multiple.
The StockRank is 97, so this is something you might want to look at, if you have any interest in the recruitment sector.
PZ Cussons (LON:PZC)
Share price: 305p (-9%)
No. shares: 428.7m
Market cap: £1,308m
Trading Statement (for the half year ended 30 November 2016)
(this section written by Graham Neary)
These are weak results, hampered by the following exceptional costs worth £15.3 million (see Note 4):
Transactional foreign exchange losses of £12.0m in Nigeria relating to long outstanding brought forward trade payables denominated in US Dollars that have been settled at higher exchange rates than originally recognised due to the introduction of the flexible exchange rate regime on 20 June 2016 which resulted in a devaluation of the Naira of greater than 40%
Costs of £3.3m relating to the Group structure and systems project to realign the organisation design to create a more effective operating model. These mainly consist of restructuring, advisory and IT system related costs
My concern here is that the company reported £19.3 million of exceptional costs last year too. Within that, £11.3 million related to foreign exchange losses on USD payables and the structure and systems project (i.e. the same reasons for this year's exceptional costs).
Maybe the Nigerian naira is going to keep sliding lower, and company spending on its structure and systems is not such a truly exceptional event, after all? Last year, the company also said that a supply chain optimisation project, and a provision against a receivable, were exceptional too.
Although in the case of PZ Cussons, it happens to be a company which deserves the benefit of the doubt - after 43 years of consecutive dividend increases!
Interim dividend: increases by 2.3%, to 2.67p.
If the final dividend increases by a similar percentage, that will take the full-year payout to 8.3p, for a total value of c. £36 million.
The pre-tax profit result for H1 is £25 million, down from £40 million a year ago (the corresponding "pre-exceptional" numbers are.£40 million in 2016 vs. £42 million in 2015).
Even accounting for H1's exceptional costs, the dividend should be well-covered.
Net debt is £191 million, unchanged against a year ago.
The company has suffered from exchange rates and conditions on the ground in Nigeria, its largest market, but it needs a couple of periods now without heavy exceptionals, to avoid giving investors any concern, that the dividend might stop growing.
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23 comments
On the latest REC series there's an interview with the CEO of Empresaria https://itunes.apple.com/gb/podcast/rec-scale-up-r...if anyones interested
We tried to become distributors for fever tree in barbados and could not get anywhere with them even though my hotel clients are all screaming out to stock their product
Very weird as nobody else stocking,
@Laughton shorting a growth stock solely due to valuations metrics is a good way to get smoked.
Fevertree Drinks (LON:FEVR) I like them very much and hold. I am intrigued why Evil Knievil has taken agin them so much.
Master Investor 23/12/15
"I wish I knew how to monitor sales at Fevertree (FEVR), now 595p. This is surely staggeringly overrated. But it’s a bold bunny that shorts it here. After all, lunacy has taken the price up here. Who’s to say the lunatics will not continue hard at it?"
https://masterinvestor.co.uk/evil-diaries/the-evil-diaries-you-could-knock-me-over-with-a-feather/
Master Investor 08/06/16
"I shorted Fevertree (FEVR) at 730p. This is surely ridiculously overvalued. The problem is that it might become even more ridiculously overvalued. I had to pay 2% p.a. to borrow stock."
https://masterinvestor.co.uk/evil-diaries/evil-diaries-2-4/
Master Investor 24/01/17
"Fevertree (LON:FVR) continues to defy gravity and looks like a short nap for 2017 at 1,120p."
https://masterinvestor.co.uk/evil-diaries/magic-can-hang-around-for-longer-than-is-convenient/
That said he wrote today "This enabled me to sell again." So I dont quite understand his perspective.
I happy to hear the bear case but I just can't see it.
Anybody have any thoughts?
Regards
Michael
purpleski - apparently he also shorted Boohoo.Com (LON:BOO) some time ago and is still short. I guess he can't be right all of the time??
Hi Purpleski. Well done again here. I remember having a similar conversation with you when they were pushing £10 a share and I said I'd rather be short at that price / valuation. It it a bonkers valuation but everyones in love with growth stocks at the moment so while the markets remain irrational I'll sit on the sidelines. I can see them getting taken out by a bigger player so a short is dangerous but on a general market sell off I'd expect the growth stocks to take a battering.
As a side note, I was in a bar the other day and ordered a G&T and they asked me which tonic I'd like. I opted for the schweppes out of spite :-) and said I don't like fevertree. I didn't tell the barman it was because I didn't buy the shares at £5 though.
On Sprue Aegis (LON:SPRP), yes the cash balances are healthy but I note they have declined every six months since June 2015, including in this latest 6 month period where they declined by a further £0.4m.
Part of the reason for the decline in cash was explained at the last interims as being due to a purchase of £7m "buffer stock", which they claimed they were confident of being able to sell over a 12-month period. Given that stock balances are still much higher than they were before this purchase and now represent nearly a quarter of last year's revenue, some further clarity on the stock balances and on their recoverability would have been welcomed.
Graham
SPRP - the overstocking in France was by the retail distributors - the collapse in sales is due to the distributors clearing their own inventory and not placing orders to SPRP.
Regarding the share based payments I was led to believe that (in this case) these were notional charges required by accounting regulations and that company was not planning on making any such payments this year. I would be upset if they were rewarding performance in 2016.
I was more concerned over the comments on exchange rates - pretty much all their costs are incurred in USD and have thus gone up but only a percentage of sales are in Euros. Suggests margins are going to thin along with profits.
Thanks Glaws. That sounds very dysfunctional, do you think SPRP could have done anything to prepare for or deal with the actions of their distributors?
If it's true that the share based payments aren't happening, I'll be glad to amend the article. I've just checked the interim results, and they had a share-based payment charge of £0.3 million in that period, too. It may relate to payments for prior service, but it still needs to be deducted from operating profit either in the current period or in the previous period to which it relates, in my view.
Thanks
Graham
It is indeed odd that the French distributors overstocked so much - but obviously SPRP were happy to supply them.
Not that odd. I live and run a small business here in France and the whole need for smoke detectors was incredible hyped/well publicized and I suspect that stockists just got the numbers wrong because a large number of households and landlords simply did not bother installing them and simply ignored the regs.
PS I have fitted them but not Sprue Aegis (LON:SPRP). £AMZN offers a huge choice!!
I would also really appreciate your comments on XLM, looks like the RNS tried to hide the fact that revenues fell in the second half of the year after growing by 39% in the first half, which seems very strange.
I too am trying to tease out what XL Media XLM is saying. I am not sure where your numbers are derived from. It appears to me that with $103mm of Revenue for the year, and $51mm in the first half,the second half has grown - very slightly.
Could you be mixing $ and £ ?
That said, for a professed growth company, these numbers do not show any in the second half and the company does not appear to address this at all. In fact this makes a third straight quarter of revenue at just over the $50mm level. It is making me uneasy
Sorry - third straight half year - not quarter
Re XLM. I read it as no growth in Q2 from gambling but some from other sectors (which are v small ) Pretty significant but no explanation so not a good communication.
I leave aside using EBITDA and excluding share based payments which is not new and for which XLM is not alone.
Re XLM, if you compare H2 2015 with H2 2016 revenues have fallen by approx 2%.
No wonder their FO was a seller late last year.
What can possibly have happened for revenue growth to fall from 39% to -2% in 6 months ?
I see £BT are demonstrating today how much safer household-name blue chips are compared to AIM-listed small caps!
Lakehouse (LON:LAKE) also announced results which were a little less bad than I expected. I wrote about them a few months back as a possible recovery play. They own some viable businesses that are earning lower margins than competitors, which suggested to me that if the right management got involved, things could be tightened up operationally, and this could potentially do very well. I didn't buy then because the debt covenants were close to being violated, but it looks like things are maybe not so bad?
www.tabhair.com/category/lakehouse/
Hey tabhair,
I saw the announcement (£LAKE) and there was one thing I didn't get: a fairly heavy loss, in debt, but still declaring a dividend? Isn't that a terrible time for any sort of div? Are there good reasons for the management to do that?
Disclosure: I owned shares until this morning's RNS.
There's a lot to digest in the Lakehouse (LON:LAKE) announcement and I plan to read over it more thoroughly in the coming days. I note they say Property Services, which is around a third of revenues (I haven't seen whether it says how much profit it makes), will comprise a far smaller part of the Group in the future. So I'd be interested to know whether this is a potential bottom or whether profits could fall further - I'd be interested in others' thoughts. I agree with Inepttrader that paying a dividend is probably not a smart move even if it would be quite nice to receive. I don't currently own Lakehouse (LON:LAKE) but it's on my watchlist. I'd be v interested in others' thoughts including Graham if he has time though I appreciate there's a lot to report on at the moment!
Lakehouse (LON:LAKE) were originally floated as an income stock. I believe Slater invesments have it in their income fund and given the pressure they put on changing management, they are naturally quite keen to retain the dividend.
The debt itself is actually not so bad. From the last trading update, it's actually reduced from £30m to £20m, so I don't think there is any risk of a covenant breach. When you strip out the accounting losses from intangible write-off's, there is actually decent cash flow in the business, especially when you consider that 2016 was a nightmare year. I could actually see this one doing very well in 2017 (assuming some other part of the business doesn't blow up).
Thanks for the info tabhair.
If Lakehouse (LON:LAKE) are under heavy institutional pressure to give dividends even when it might hurt the long-term business (or at least not help it), then I don't mind sitting this one out. But I do hope they do well in 2017, and as you say there is at least potential for a quite big turn around.
Paul, Graham, if you get chance I'd really appreciate your views on XLM's trading update today. Was last covered by Paul in May 2016.
Thank you
Dom