Small Cap Value Report (26 Jan 2015) - FLYB, PRV, TMMG

26th Jan '15 by Paul Scott

28 comments 24093 reads

Good morning.

The Greek election doesn't seem to be worrying markets unduly, with the FTSE100 down only 13 points at the time of writing. I suppose it will just mean more wrangling within the Eurozone, and eventually everything will muddle through somehow.

I spotted this interesting chart on Twitter (posted by Jonathan Friedland, of the Guardian - well, we all have our crosses to bear!) which is worth pondering. No wonder the Greek people are desperate for change. It remains to be seen whether change will be for the better or worse. In situations like this, getting in extreme socialists to sort it out is usually about as sensible as inviting a serial killer to babysit.

I can't help feeling Greece would be better off in the long run by defaulting & devaluing. Then see an economic recovery built on a tourist boom from low prices.

Anyway, let's look at some companies.

For anyone interested I recorded another audiocast yesterday, talking about small caps with expert investor/analyst Paul Hill. The link is here (it's long, so best to have a listen when you have spare time).

Flybe (LON:FLYB)

Share price: 67.6p (down 22% today)
No. shares: 223m
Market Cap: £150.7m

Trading update - bad news obviously leaked out last week, with the sudden share price plunge on Friday looking very much like some insider dealing was occurring. It might also have been stop loss orders just below 100p being triggered, possibly?

The market has done its usual thing today of shooting first, and asking questions later, with Flybe shares savaged this morning by 22%, coming on top of a c.10% fall on Friday:

This seems a rather extreme reaction to me, given that Flybe is a turnaround situation, and the issues are already known about.

The headline points for Q3 show an improvement in key metrics such as average revenue per seat (up 2.4% against prior year), and the load factor is up 68.7% to 74.3%. Aircraft utilisation has improved from 7.3 hours to 8.0 hours (this is positive, because the problem with short haul flights is that the planes are not actually flying for much of the time).

Fuel hedging - unfortunately, as the company has forward hedged the majority of its fuel requirements, it will not benefit from lower fuel prices in the current year (ending 31 Mar 2015), and…

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Ramridge

26th Jan '15

Flybe (LON:FLYB) Interesting. At the time of writing the share price 69p has dropped below book value of 77.6p

Edward Croft

Probably not a time for crass quotes... but when airlines warn I can't help but be reminded of Warren Buffett's classic line...

"How do you become a millionaire? Make a billion dollars and then buy an airline."

I'm biased, but I can't help though think that there have been safer, better bets amongst UK airline industry stocks in recent years - all with far higher StockRanks... Dart (LON:DTG) , easyJet (LON:EZJ) , Ryanair Holdings (LON:RYA)

ChangFai

I would have thought, they were expanding in Aberdeen, at completely the wrong time, considering the price of oil.

Mark Carter

The problem with Flybe (LON:FLYB) is that it seems to be constitutionally incapable of generating profits.

Comapre and contast: easyJet (LON:EZJ): operating profits from £49m to £581m over the last decade. Dart (LON:DTG) 14m to 31m, Ryanair Holdings (LON:RYA) 227m to £540m. International Consolidated Airlines SA (LON:IAG), not so good, from £540m to £631m, but at least it's making a profit.

Maybe short haul domestic flights is just not the place to be.

apad

To my mind the aspect of PRV that distinguishes it is that it's products are safety and value critical (and patent protected) so they are not potentially subject to cheaper competition. Also their customers are regular buyers. This is what justifies PER of this order. In other words they are in that set of companies that includes the likes of ROR and RSW. Their small size does make them more vulnerable, however.
I had picked up the conservative booking policy (such a change from some software companies). Nice point about the intangibles - but their technology is protected and valuable……….
apad
Disclosure: 6% of my portfolio.

Whitbourne

Hi Paul,

Re. the Porvair Chief Exec's comment that "The Group has a strong Balance Sheet" this reminded me of the rule, which you yourself formulated I think (at least I read it here first), that if any company feels the need to assert that it has a strong Balance Sheet then you can be sure it has a weak Balance Sheet. It's not 100% infallible, but whenever I see that statement it rings a warning bell.

I would say the same if a company states that it is "well within its banking covenants". Mention of bank covenants means they are a concern; for most companies these shouldn't be an issue.

Francis

Paul Scott

Ed,

Yes that's true. The attraction with Flybe (LON:FLYB) shares was specifically that it's a turnaround.
So the company had problems in the past, which it is gradually resolving. So the investing case was that it had multi-bagger potential, once new mgt (ex Easyjet) had stripped out costs & legacy issues. So it should be seen as a special situation, rather than a regular investment - higher risk, but higher reward.

So far obviously it's not exactly been a rip-roaring success, but once the surplus aircraft have gone, then we could be looking at a share price of double where we are now, in my oipinion - so it's not one where I would throw out the baby with the bathwater.

Regards, Paul.

Delpher

Thanks Glaws2 for putting me straight. You are quite right. I still want clarification and am waiting for that phone call. You don't happen to have the CFO's number?

PRV
"Strong balance sheet" can either be a boast or a smokescreen.
Current Assets £36m
Current Liabilities £26m
Net cash up by x10
I can't get too worried about intangibles with this company.
apad

Glaws2

Delpher - you are welcome. I don't have a phone number but have had a sensible reply from the the email address investor.relations@flybe.com in the past.

bsharman

Thinking about HSBC and Flybe (LON:FLYB) again, can somebody explain how a neutral rating with a target price which is 10% higher be possible?! Broker targets seem quite insane at times - I have seen buy notes with target prices lower than the current price and I have seen sell notes with target prices much higher than current price!?! Surely if the target price is higher, it should be a BUY; If the target price is lower, it should be a sell and it should be neutral if it is say within 5% of the current price...

MichaelFBS

Yes but I think that is pinched from the man who said "How do you make a small fortune producing wine? Start with a large one".

I prefer his quote where he says "I have a 800 number that I call whenever I think about buying an airline and I call it and I say my names Warren and I'm airolic.......and finally I get over it" at 3m 50 at http://goo.gl/oAvzeg.

I love it. I would be at least £1,100 richer if I had followed his advice but still Air Partner (LON:AIP) might turn around!

I hold Dart (LON:DTG) and Air Partner (LON:AIP) and both have been rollercoasters which I would rather not have experienced. I much prefer boring stocks.

jonesj

I've always operated a "no airline stocks" rule, but might just reconsider if a compelling opportunity comes along. This one has me thinking, but thinking is probably as far as it will get.
Have invested in airports, but never airlines. I even sold Planestation (the old Manston airport company) after they bought an airline. Sure enough, they eventually failed (if I remember correctly).

johnrosier

Well you have missed out on making more than 4x your money in easyJet (LON:EZJ) over the last 3 years and that does not include dividends, both ordinary and special. Look at South Western Airways in the US, the pioneer of low cost airlines. easyjet and Ryannair have been great disruptors in an old protected market. The incumbents struggle to compete and new entrants also struggle because of the cost benefits of scale as easyjet gets larger. There will of course be a time to sell but I think not yet; benefits of lower fuel costs have not been priced in yet imo and more special divs to come! Trading statement tomorrow!

portugull

I hold 30,000 shares in Flybe. Added 10,900 today. In my book it is a 3 year turnround. I hope I am right!!

Article very well informed. 3 weeks ago I wrote to Flybe about Fuel derivatives. They passed my email to a public relations firm who replied but did not answer my question.

New CEO knows the industry and I feel he will turn the business around given time.

Hi John,

Indeed, easyJet (LON:EZJ) has done very well, we hold some in my local share club.
It's still quite reasonably priced even now too.

Flybe (LON:FLYB) emerged as a good possible turnaround last year, with new mgt - ex Easyjet - so the point is that they know how it's done, so are making Flybe more like Easyjet, but focussed on regional routes.
They've done a lot of positive things so far, but the turnaround is taking longer than expected, and as we saw today, some issues (such as surplus planes, fuel hedges, etc) have knocked the turnaround back by about a year. That's been reflected in the share price unfortunately! From here though, at this price, I think risk/reward looks good - the catalyst is the disposal of the surplus planes, as that's such a material excess cost, at £26m p.a. The figures should look good once that is resolved.

As I said before, it's not a regular investment, it's a special situation really.

Regards, Paul.

That's a big investment. I assume you have several 100K in you portfolio!!

I must say it does look tempting at this level (now where's that 800 number). Looking at the cash and FA I am surprised the Valuerank is not higher.

But doesn't the fact that you wrote "3 weeks ago I wrote to Flybe (LON:FLYB) about Fuel derivatives. They passed my email to a public relations firm who replied but did not answer my question." put you off?

AlanJenkins2

Where does one find out about pension deficits ? Are they always included in liabilities ?

27th Jan '15

Correct.

Flybe Chairman bought a large holding yesterday which gives me confidence.

Flybe did not reply to me direct because I had spotted what they could not discuss at that time namely the fact that due to hedging the airline is not benefitting from the dramatic drop in the oil price.

Future hedging at much lower fuel prices is critical for profitability.

29th Jan '15

Obviously hope it works out for you but I am going to leave this one alone. I definitely think Dart (LON:DTG) offers a better investment case with less risk,pays a divi and has a record of dividend growth.

I will watch both with interest!!

Small Cap Value Report (26 Jan 2015) - FLYB, PRV, TMMG

Flybe (LON:FLYB)

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Paul Scott

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