Small Cap Value Report (25 Apr 2014) - HVN, AUK, ROL

Friday, Apr 25 2014 by
14

Good morning! The dreaded lurgy is in full retreat now, as I decided on kill or cure yesterday, finally pulled up my roots from friend's sofa, and cycled from Islington to Victoria, and jumped on a train back to Hove. The diesel fumes through Piccadilly Circus behind a German coach must have done the trick, as almost back to normal today! Anyway let's crack on.

Quindell (LON:QPP) have announced that they are still working on their detailed rebuttal statement of the "Gotham City" dossier, so that should make an interesting read later today. Please don't ask me anything about Quindell in the comments section, as I am barred from giving an opinion here on any share where I hold a short position.

EDIT: for anyone interested, here is the link to the QPP rebuttal statement that has just been issued lunchtime today.

 

 

 

 

Harvey Nash (LON:HVN)

This is a Fully Listed recruitment group, with a market cap of £88m at 120p per share.

Preliminary results for the year ended 31 Jan 2014 have been issued this morning, and look OK, although there's not much in the figures to get the pulse racing. Adjusted operating profit is only up 3% to £9.7m, and adjusted profit before tax up 4%. Given the strength of the UK economic recovery, I would have expected more. Although I note that the largest region for this group is mainland Europe, so that could expain why, as operating profit actually fell 4% in that region, masking a 17% operating profit gain in the smaller UK division.

However, the outlook statement is a bit more interesting, pointing towards further recovery in market conditions;

 

The momentum generated in the second half of the year under review has continued into the new financial year. The Board is encouraged by the improving market conditions and is, therefore, confident that the Group is in a strong position to make further progress in the year ending 31 January 2015.

 

It seems to be a very low margin business, so I'm not sure whether sales growth will feed through into much profit growth, unless they are able to increase profit margins somehow. On…

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Harvey Nash Group plc is a United Kingdom-based recruitment business company. The principal activity of the Company is the provision of professional recruitment and offshore solutions. The Company's segments include United Kingdom & Ireland, Mainland Europe and Rest of World. Services provided by each segment are permanent recruitment, contracting and outsourcing. The Company provides executive search, interim management and leadership consulting services. Its leadership services include board evaluations, management development, audits, assessments and strategic human resource (HR) consulting. Its professional recruitment services include technology recruitment business and recruitment solution business. Its offshore services include projects and software services, which provides application development, third party software maintenance and outsourced software services to clients across the world, and managed services/business process outsourcing. more »

LSE Price
128.5p
Change
0.8%
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a

Aukett Swanke Group Plc is a professional services company, which principally provides architectural design services. The Company specializes in master planning, interior design, executive architecture and associated engineering services. It operates through three geographical segments: United Kingdom, Middle East and Continental Europe. The Continental Europe segment includes Turkey, Russia, Germany and Czech Republic. It provides architectural, interior design and related services to a range of clients, including property developers, owner occupiers and governmental organizations, both in the United Kingdom and overseas. It operates over 10 studios. It has operations in areas, such as office headquarters and business parks; hospitality and mixed use leisure; retail shopping malls and bespoke retail; education and healthcare; industrial warehousing, and telecommunication industry. Its projects are located in areas, such as Istanbul, Moscow, Berkshire, Birmingham, Bristol and Dubai. more »

LSE Price
1.55p
Change
 
Mkt Cap (£m)
2.6
P/E (fwd)
n/a
Yield (fwd)
n/a

Rotala Plc operates commercial and subsidized bus routes for businesses, local authorities, the public and private individuals. The Company is engaged in the provision of bus services. The Company offers contracted, commercial and charter services. Its contracted operations service two types of customers, including individual organizations and local authorities. The Company offers commercial services in the West Midlands, the South West and the North West. The Company also provides a transport management service to a range of customers. Typically this covers business or service disruption, and event management. The Company operates approximately 600 vehicles. The Company's registered bus services carry over 29,000,000 passengers every year. In addition, it operates a range of corporate transport contracts and private bus networks. The Company's operations are across areas in the United Kingdom, including West Midlands, Worcestershire, South West, North West and London. more »

LSE Price
58p
Change
 
Mkt Cap (£m)
28.9
P/E (fwd)
7.1
Yield (fwd)
5.0



  Is LON:HVN fundamentally strong or weak? Find out More »


5 Comments on this Article show/hide all

NS23 25th Apr '14 1 of 5
2

Paul - those diesel fumes always do the trick, i've been commuting to work on my bike since the Olympics and haven't been ill since! Glad you are feeling more alive....

I wondered if you had time to look over the documentation for the proposed listing of Patisserie Holdings Limited, announced earlier this week. Something different from a blue sky Tech IPO.

Here's the doc - http://investors.patisserieholdings.co.uk/~/media/Files/P/Patisserie-Valerie-IR/documents/20140422-praline-intention-to-float-announcement-v12-final.pdf

I think they are hoping to raise GBP 33m

I'm quite interested in this one, cake shops are quite close to a cyclists heart!

Thanks, Nigel.

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Paul Scott 25th Apr '14 2 of 5
1

In reply to post #82913

Hi Nigel,

Thanks for flagging up the IPO of Patisserie Holdings. I've read the document, and it looks very interesting. Downsides are that the IPO funds are all being used to pay down debt, presumably from PE owners, who will no doubt leave it with too much remaining debt, and will try to sell it at a rip-off price! That's what normally happens, so I am very reluctant to ever buy anything from Private Equity, as you can be virtually certain you're going to be shafted by them in some way or other. Usually just over-paying.

Anyway, I've registered interest with my broker, and will comment further once the pricing has been established - obviously it's all down to the price!

Cheers, Paul.

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NS23 25th Apr '14 3 of 5
1

In reply to post #82914

Thanks Paul.

My first two reactions were along the lines of "Oh, small cap IPO, interesting. Ah, sold by PE, smells bad already."

The Patisserie Valerie brand seems very popular, in London at least. Many of the shops are in good locations and always jam packed. Of course that doesn't equate directly to profit but it's a good sign. The doc says something along the lines of 24 months from opening a new shop to covering those costs, so it seems that there could be potential for growth here, in that brand at least. I know nothing of the other brands mentioned.

As you say, all about the price...

Thanks for the continued reporting... have a great weekend.

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dangersimpson 25th Apr '14 4 of 5
2

Hi Paul,

Re:HVN you are right that it's all about margins but I'm a bit more positive than you given the strength of the outlook statement.

Harvey Nash (LON:HVN) trade at a discount to their peers like Matchtech (LON:MTEC) and even more so to the largest recruiters like Michael Page International (LON:MPI) and the reason often given is their lower margins. However think what could happen if they mange to improve their margins. A move from 1% to 3% would likely also see a P/E multiple expansion of maybe 50% to bring them in line . Add in say 10% revenue growth in line with the market for the coming year and you would see the share price increase by a factor of 5! So maybe they look fairly valued on historic figures but in my opinion they look slightly undervalued compared to their peers and the strength of the current outlook* but crucially with option-like upside if they can improve margins. I'm happy to hold a reasonable amount given the potential upside and little downside short of a global economic meltdown.

[*They are highly diversified across regions and sectors, permanent, temporary and outsourcing so probably deserve a higher rating than some of their peers due to the stability of their earnings rather than a discount.]

Cheers,

Danger

Book: Excellent Investing: How to Build a Winning Portfolio
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Paul Scott 25th Apr '14 5 of 5
3

In reply to post #82916

Hi Danger,

Yes I agree with you, but it's a question of IF they can raise the margins.
In reality, I think that's highly unlikely. They are clearly at the end of the recruitment market where they have nothing to differentiate themselves from the numerous other operators, who will all jockey for business on price.

Bear in mind also that the staff within the business have probably had their salaries held back for years now, so the moment economies start to improve, its the employees who will demand first dibs on higher profits, and in this sector employees are very mobile, and will happily move to a competitor who offers them more money. So wage inflation for their own staff could be a real issue, and not something they can control.

It looks a poor quality business to me. There's probably better upside in a niche recruiter. My favourite in this space on overall valuation is Networkers International (LON:NWKI), which has a much better Bal Sheet than most, and could see good upside from a recovery in its telecoms business.

Recruiters have to specialise in a niche where they are expert, in order to make good margins. It's not good being general, as there's no money in it.

Regards, Paul.

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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