Small Cap Value Report (26 Aug 2016) - LVD

26th Aug '16 by Paul Scott

22 comments 14564 reads

Good morning!

There's only one share that interests me this morning, Lavendon (LON:LVD) , so let's crack on with that.

Lavendon (LON:LVD)

Share price: 134p (up 7.2% today)
No. shares: 169.9m
Market cap: £227.7m

(at the time of writing, I hold a long position in this share)

Interim results, 6m to 30 Jun 2016 - this is an equipment hire group, operating in UK, Europe & M.East. Its niche is powered aerial access equipment - the website is quite interesting, showing all the different types of product which Lavendon hires out. It claims to be the market leader.

What interests me is that the valuation seems compelling, compared with other hire companies;

Forward PER is only about 6.5
Dividend yield is almost 5%, 3-times covered.
It has a strong balance sheet.
Equipment hire companies are often on a rating of about 2x NTAV. In this case, the latest NAV figure announced today is £237.9m. Deduct goodwill & other intangibles of £51.7m, arrives at £186.2m NTAV. So 2x NTAV (a fair rating, in my opinion), would give a valuation of £372.4m, or 219p per share - which is my reckoning of where the shares probably should be now. That's a very attractive 63% potential upside, if I'm right about this.
Consistently meeting market expectations, yet share price has fallen considerably - this doesn't make sense to me. The market is clearly expecting a big downturn in earnings, but there doesn't appear to be any evidence at all to suggest that is happening, or likely to happen.

Looking at today's interim results, the only surprise is a big increase in the dividend - up 18% - so clearly management are confident.

Forecasts - Peel Hunt is forecasting 18.7p for 2016, and 19.4p for 2017. However, there is possible upside on these figures, because they have not factored in favourable forex movements. Over half of revenue, profit & cashflows are generated outside the UK.

Outlook - there is more detail given, but the key part says;

Trading since the half year has continued to be in line with our expectations and, whilst mindful of the recent increased economic uncertainty, the Board remains confident of making further progress in the second half and delivering on its expectations for 2016.

That sounds reassuring. I wouldn't be surprised if they deliver full year results ahead of forecast, given the forex tailwind. So…

Unlock with Email

Unlock with Google

Already have an account?
Login here

cig

26th Aug '16

If low interest rates create an over-supply of things (the argument should apply broadly), then aren't they there to stay? (High rates follow inflation, and inflation can only come if there is a shortage of things.)

Laughton

Scorching already today in Brighton - as it has been for most of this week.

Going on a small motor boat?? Remember to slap on plenty of sun tan cream (even if you have got the beginnings of a nice tan already).

Trident

Paul. Sounds like you have got the ideal set up there, No doubt thoughts of having a Greek retreat during the summer are swimming through your mind.

Was looking Ashtead the other day, and noting their perameters for debt relative to EBITDA. I was going to take a punt, then thought about their US exposure, and the seemingly endless tease by the FED of interest rates going up in the US. I wondered if this would set off sentiment against heavily indebted companies, and in the end I put myself off.

dfs12

I agree that the Blackrock reduction is possibly not a problem. Main thing is that the selling looks largely over as they are now under 5%. Share price may start going up consistently now the big seller is cleared. Similar thing happened with Lookers (LON:LOOK) about a week ago. Fidelity had been selling and depressing the share price. As soon as they got to less than 5% the share price started going up.

Richard Goodwin

High inflation can also follow a supply shock (eg oil supply) or a sudden increase in the amount of money in circulation which chases a less elastic supply of assets (eg QE and the stockmarket)

Mark Simpson

Glad you are enjoying your break Paul. Seems the ideal life - Investing in the morning, family, sun & sea for the rest of the day!

Good to see some positive reaction on Lavendon (LON:LVD). I think unless the valuation anomaly to the rest of the sector closes in the market soon then a PE or trade buyer will close it for us. 18% Dividend increase is certainly a confident signal that they believe that trading will continue to be good.

Restaurant (LON:RTN) half year also out today:

http://www.investegate.co.uk/restaurant-group-plc--rtn-/rns/half-year-report/201608260700071890I/

market reacting positively - probably because speculation of a dividend cut proved to be unfounded.

I'm still undecided about this one. Underlying cash flow is still good but with costs and a lot of work to do to turn the brand around this may already be in the price.

warmerjo

Lavendon's activities in the Middle East could be in for a hammering with the oil price staying low?

Modform

Paul, you need to look at SPE, from 65p to 315p since March, and still on a current PER of less than 12

rhomboid1

They've covered the ME situation in detail in their RNS over the last 18 mths or so, in essence Saudi has slowed with debtor days increasing so they've reallocated capital elsewhere in ME where business is brisk. Remember even at $50 oil most oil producer's budgets make EU states look like spendthrift paupers.

...and oil can go up as well as down.

Paul Scott

Hi Modform,

I've missed the boat on Sopheon (LON:SPE) now. Well done to everyone who spotted it before the big move up.
Annoyingly, 2 friends did flag it to me a while back, but I never got round to buying any.

Tried to buy some yesterday, but only got a partial fill, for a little scrap of stock, so I'm not chasing it higher now. I think the big move has happened now, so I'll not participate any further at this late stage. I like to spot things at the start of a massive move up, not near the end of it!

Regards, Paul.

actsofvolition

Re Lavendon (LON:LVD).

Having a quick look back over the last 5 years, the operating cashflow from increased profits has been almost entirely consumed/reinvested into renewing/expanding the rental fleet, so much so that over the last 2 periods some borrowing has been necessary.

Nothing wrong with that per se but the amounts have grown steadily each year from 17mln in 2011, 55mln in 2013 to 91mln in 2015. I'm a little suspicious of this recurring 'investment' because these are large and growing sums over 4+ years that are explained away as being necessary to expand and renew the fleet in the Middle East. Surely the expansion of the Middle East fleet, highlighted in the report of 2012 would have concluded by now? And could/should we expect a larger return on top and bottom line accordingly?

It's not just the ME , major investment in the UK to meet customer demand, specialised kit so record 68% utilisation needs to be viewed in that context. Average fleet age is static at 7 years which is young for what is a lightly worked asset. More detail here;

http://www.lavendongroup.com/Lavendon/media/Lavendon/Interim_Presentation_2016.pdf

steviano3141

Hi Paul, think market worried about Saudi receivables collection with DSO nearly 290 days! Middle East closer to 230 days vs. 40-60 days for Europe. Not sure the exposure related to Saudi of the £90m receivables sitting on the balance sheet. they've had to stop expanding there given the tardiness of payment. Maybe market worried over a bad debt impairment.

FREng

Concurrent Technologies (LON:CNC) interims today. I'd welcome opinions. I'm long.

deadly

Paul, does it not concern you that the net cash used (rather than generated) by operating
activities is £5.1m?

DSO figures for Saudi are high , but ROCE in Saudi is double group average, what matters is the ultimate counterparty and whether the resultant payment occurs or drops out as bad debt. Lavendon (LON:LVD) have been active there for years and I'm guessing they've learnt how to operate successfully even in the current oil price environment. ME cash collection improved 10% YoY so I'm happy that they're on the right path. When the AR comes out I'll be turning straight to the relevant sections though!

PJ0077

There's a great amount of segmental detail provided in today's results... always welcome.

The DSO numbers are shockingly high in the Middle East segment. As rhomboid1 mentions, the ROCE in this region is double the group average. Using the company figures, it becomes clear that the group ex-Middle East earns a ROCE of just 8.5%, clearly below their WACC.

I don't therefore share Paul's optimism that Lavendon should trade at a large premium to it's NTAV. Such a rating is surely deserved only by businesses capable of sustaining ROCE >> WACC. Interesting that Speedy Hire today disposed of it's large mechanical plant fleet at less than (as opposed to twice) gross book value.

JohnEustace

I bought some Sopheon (LON:SPE) yesterday and I'm up 9% at end of trading today. Yes I wish I had bought sooner but it's future that matters. It's been going up strongly for good reasons as far as I can tell.

I think you'd find the WACC would be far lower if lenders were looking at a purely UK business with smaller offshoots in France & Germany, so if you remove their contribution you need also to allow for their impact on the WACC.

Given that VP (LON:VP.) http://www.vpplc.com/~/media/Files/V/VP-Plc/company-presentations/preliminary-results-31-march-2016.pdf has a WACC of 7.5% and is a similar company in terms of spread I'd look at that as a more realistic figure.

I hold VP (LON:VP.) in size as it is a better quality business on most metrics but there is no doubt in my mind that at current prices a very strong case for £Lavd , I can enjoy the higher dividend as I wait for them to fumble their way to the sunlit uplands of VP's rather better metrics!

janebolacha

8th Sep '16

I don't know whether this company, Saudi Oger Construction, is one of the debtors of Lavendon (LON:LVD) in Saudi Arabia, where LVD have the difficult receivables position referred to in some of the comments above.

"The Saudi Arabian government has ended talks aimed at saving construction giant Saudi Oger, which is now facing the prospect of a multi-billion-dollar debt restructuring to stave off collapse, according to sources aware of the matter."

"The numbers are stark: the government owes Oger about 30 billion riyals ($8 billion) for work it has completed, according to a Saudi-based source with knowledge of the matter, in a sign of the strain on state finances."

"A collapse of Oger could also trigger a wave of defaults among its huge network of sub-contractors and suppliers, which are also Oger creditors"

http://www.reuters.com/article/us-saudi-oger-restructuring-idUSKCN11E153

I hope not since this looks like an upcoming bankruptcy.
Perhaps LVD ought to be asked if they would be affected.

Small Cap Value Report (26 Aug 2016) - LVD

Lavendon (LON:LVD)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

22 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...