Small Cap Value Report (26 Jun) - WGB, ALLG, KENZ, RGD, KBC, CRW, HAYT

Good morning. It's a fairly quiet day today for news announcements, which is good as it gives me more time to prepare for my Webinar on using the StockReports here on Stockopedia. The Webinar will basically be an online live chat between Ed & myself, talking about how I use the StockReports to quickly ascertain whether companies are worthy of further research. It starts at 12:30, so hope to see some of you there. The software is really neat, and allows you to not only hear audio of both of us, but also see what is on Ed's screen live, as we talk through various items. It can take a couple of minutes to set up, so best to login a few minutes early.

There will also be time allocated for me to respond to questions submitted by listeners, so if you would like me to quickly run my slide rule over a particular stock, then this is your chance. I hope people find it useful.

 

 

 

A share that I like, but unfortunately sold too early at about 90p, is Walker Greenbank (LON:WGB). They make luxury interior furnishings, and were an absolute steal at around 50p when I first bought some early last year. They are now up to 123p, which is a market cap of £72m.

As you can see from the valuation table on the right, where we're looking for as much green as possible to indicate value, the forward PER is fairly reasonable at 12.5, and good EPS growth of 23.2% is forecast.

However, the dividend yield looks unexciting at 1.36%, and the other valuation measures are less favourable.

They have issued an upbeat AGM statement this morning, detailing strong sales & margins. They conclude that "we remain confident of the outlook for the full year".

So it's possible that broker forecasts might be revised upwards perhaps? Although that's not entirely clear from this statement. Consensus forecast of 9.5p EPS already includes a sizable uplift on last year, so I probably won't be going back into this one, as there probably isn't enough % upside, although it wouldn't surprise me to see the shares continue rising to say the 150p level in due course.

 

 

 

FTSE 100 futures are set to open up 23 points, after another good day in the USA. Central bankers seem to be succeeding in calming the panic over potential rises in interest rates, saying they are some way away still. Although I see that Gold has once again taken a battering, and is now down to $1,250, so one wonders how many gold producers are uneconomic at that level? I'm starting to worry that my foray into this sector has been a ghastly mistake? (I picked up some MML and ABG a couple of weeks ago).

 

 

 

Accident-prone mini cruise ship operator All Leisure (LON:ALLG) gives an update on the mechanical problems with one of its ships. It all sounds a bit messy, so I'm steering clear.

 

 

 

Kentz (LON:KENZ) issues an encouraging trading update today. H1 trading is in line with expectations they say. The backlog has increased 9% to $2.8bn, cash position is expected to strengthen throughout the year, and they "remain confident of delivering double digit earnings growth in 2013".

I hold a few shares in this, and remain of the view that it looks very good value on a forward PER of just 8.3, not bad for a business that is trading well, and has a balance sheet with plenty of cash on it. The dividend yield is 3%. Sentiment is very down on this sector, but so far anyway Kentz seems to be doing just fine. I might buy some more today, as I love up-to-date trading statements, they greatly improve risk/reward for an investor.

 

 

 

Next I've been looking at results from Real Good Food (LON:RGD). I've never liked these shares before, because it's a big turnover, low margin business (hence little pricing power). Also the balance sheet has looked overloaded with debt & a pension deficit doesn't help.

However, it's starting to look a bit more sensible now - adjusted EPS seems to have come in ahead of expectations at 7.8p (7.2p fully diluted, which suggests there are quite a lot of options in play). So at 45p that puts them on a PER of 6.3 times diluted EPS, which looks cheap at first glance.

The market cap is now £31.3m, but they also have £25m in net debt, so on a cash neutral basis the PER is probably in the 10-11 area. Of course one should deduct interest charges, and adjust the tax, to get a revised earnings figure when working out the PER on a cash neutral basis. However, I find it adequate to get a rough & ready approximation by just adding back debt, to arrive at a ballpark figure for the PER on a debt/cash neutral basis.

They state that net debt has reduced from 3.3 times EBITDA to 2.4 times. I'm not happy with using EBITDA for a capital-intensive business, as they will have ongoing capex requirements. There's precious little free cashflow, so it's difficult to see how that debt will be reduced unless trading performance improves further.

The pension deficit looks to be fine, with over-payments small at under £200k p.a. Increased bond yields might well be reducing pension deficits going forwards too, so that doesn't look a significant problem here.

There might be some hidden property value here, but if they need the property for operations, then so what?

Also, including fixed assets within their headline "working capital" figure of £42.6m is just plain wrong. Working capital is current assets, less current liabilities. You can't include fixed assets in that figure to make it look better!

Overall then, I just can't see the attraction here as a potential investor. It's a low margin (profit before tax is only 2.5% of turnover) business, which is capital intensive, supplying customers who will squeeze out any excess profits, with still too much debt, and not paying a dividend. That just seems deeply unattractive to me as an investment. It's not even particularly cheap when you factor in the debt, although I do acknowledge that their trading performance has improved year on year. So I'll pass on this one.

 

 

Heavy and repeat Director buying can be a good sign, and I note that a Non Exec Director of KBC Advanced Technologies (LON:KBC) has been buying heavily for some time now, through a vehicle called Kestrel Opportunities, in which he is a founding partner. So it's not clear to what extent these should be seen as Director purchases, or just purchases by a company connected to a KBC Director. Anyway, they have accumulated 11.6% of KBC in repeat buying, so that's a pretty big vote of confidence.

I can't make my mind up on KBC. They seem to be winning some massive contracts, but whenever results come out there always seems to be some sting in the tail. Last time it was a big tax charge, as they seem to have profitable subsidiaries in high tax jurisdictions, and cannot offset losses elsewhere. Something like that anyway, and it has resulted in a very inefficient tax structure for the time being. I've kept a few shares in it, but would ideally like to see some more up-to-date accounts before deciding whether to increase my position size here.

 

 

I've had a quick skim through the results from Hayward Tyler (LON:HAYT) but can't see anything much to get excited about there. Trading EPS of 3.68p puts them on a PER of 8.4, which seems low until you consider that net debt of £8.5m still looks high, and is pretty material to the valuation, since net debt is about 56% of the market cap. So adjust the PER for debt, and it's not cheap.

There's no dividend either. I might revisit this company once they have brought debt down further, and started paying dividends.

 

 

Craneware (LON:CRW) has issued a mild profits warning, saying that they have failed to close a large sale in time for the 30 June year-end. So results are expected to be flat to modestly ahead of last year, but below market expectations. Doesn't sound too bad, and this is an interesting company, which supplies software into the huge USA health-care market.

Watch out for the fact that their accounts are in US dollars though. It's easy to overlook a currency difference, and get to the wrong valuation if you forget to convert into sterling.

 

 

Gold is relentlessly dropping again, down another $44 to $1,233 today. I've bitten the bullet and halved my positions sizes in AGB and MML. Should have stuck to what I know, instead of playing around in this sector. The fundamental problem with all resources stocks, is that not just the valuation, but the viability of all these companies depends on totally unpredictable market prices for the relevant commodity, metal, or whatever.

Given that there are huge speculative forces pulling these commodity prices all over the place, how can you really value the producers (let alone explorers) with any sensible degree of certainty? The goalposts are constantly moving.

Whereas manufacturing or service companies can usually predict with a fair degree of accuracy what the end user will pay for the goods or services. These might be subject to price erosion from competitive factors, but planning is easier, and hence valuing the company is easier.

Perhaps this is a warning to me, to just stick to what I understand and can make money on, rather than getting sucked into more speculative areas like Gold.

 

See you tomorrow, and/or at the Webinar in a couple of hours' time today.

Regards, Paul.

(of the companies mentioned today, Paul has long positions in KENZ, MML, AGB, KBC,  and has no short positions).