Small Cap Value Report (26 Mar 2015) -SAA, SFE, POS, TMMG

26th Mar '15 by Paul Scott

8 comments 16718 reads

Good afternoon. Lots of results today, so I'll get through as many as I can.

M&C Saatchi (LON:SAA)

Share price: 349p (down 3.8% today)
No. shares: 70.7m
Market Cap: £246.7m

Final results - for calendar 2014 are out today, for this well known PR group.

Profit & loss account - doesn't look too good at first glance, but I see from the cashflow statement that there were about £7m in non-cash charges for impairment of goodwill, and amortisation of intangible assets. So there's a big difference between statutory profit before tax of £6.2m, and headline profit before tax of £17.1m.

Note 3 to today's accounts gives the reconcilation from statutory profit on the left, working through the various adjustments to adjusted or "headline" profit on the right. These seem reasonable adjustments to me, to arrive at the underlying performance of the business in the far right hand column below.

Growth - having established that I am happy with the company's definition of headline profits, there is impressive growth in headline profitability - EPS rose 28% to 15.88p (slightly ahead of broker consensus of 15.5p)

Valuation - at 349p per share the PER is too high for me, at 22 times. Although it depends what future growth is going to be like. If the company can carry on growing EPS at 28% p.a., then a PER of 22 would be justified.

The narrative today talks about a lot of impressive, big name client wins, such as Land Rover, John Lewis, Foot Locker, BMW, and Douwe Egberts. From what I can gather, the growth in profits seems to be mainly organic, rather than by acquisition - one acquisition is mentioned, Lean Mean Fighting Machine Ltd (good name!)

Balance sheet - here's another one where the company says it has a strong balance sheet, but actually doesn't. Its net assets of £35.9m reduces to only £6.8m once intangibles are removed. The current ratio is 1.01 - only a whisker above my cut-off of 1.0 for companies which don't carry inventories (I use 1.2 for companies that do use inventories).

Year end net cash was £5m, but I reckon that's probably window-dressed for the year end, as the balance sheet shows cash of £23.4m, and financial liabilities of £18.2m, so if you had that as a permanent position, you would pay off the financial liabilities using the cash. The…

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grout123

26th Mar '15

Paul. Ref Plexus and your previous comments on Chinese companies being on your barge pole list etc etc are you not a little concerned at the tie up?

Paul Scott

Hi grout123,

My main issue is with Chinese companies that list on AIM.
After all, why would you go to the other side of the world, to list a small company, on an essentially unregulated market? There's one main reason, which I don't need to spell out.

However, more substantial Chinese companies, that are not seeking an overseas listing, would not necessarily be a problem as a partner, providing they are reputable. After all, much of the consumer items we buy are manufactured in China, e.g. iPhones, etc.

My understanding is that the main risk from outsourcing production to China (or anywhere really) is that the producer makes a lot more of the product than they tell you, and they sell the excess product on the quiet, thus by-passing agreements for royalties, revenue sharing, etc. So Plexus will need proper safeguards in place to ensure the arrangement works correctly. So if the Chinese co plays fairly, then presumably this could be a lucrative arrangement. That they are taking an equity stake in Plexus is surely also a sign of good intent?

There have been widely reported problems with getting Chinese companies to respect intellectual property rights. So that's certainly the biggest risk here.

Regards, Paul.

thanks Paul.

DLG12

Hi Paul. Just wondering if you are commenting on results of SCISYS (LON:SSY). Thanks.

ACounsell

Hi Paul, re-iterating DLG12 question - any thoughts on £Scisys results?

I'm just watching Coach Trip, then it's dinner time. So I'll add some comments on Scisys later this evening. Will Tweet when article is complete, as usual.

@paulypilot

imranawan

Hi Paul

The link to the M&C M&C Saatchi (LON:SAA) Final Results doesn't work. Don't know whether this is a browser issue specific to me (I'm using Chrome) or whether this was a deliberate to check whether Stocko readers actually click on links.

Best wishes,
Imran.

Ignore my last msg, as I think they issued a replacement RNS early this afternoon, and this was the reason the link didn't work. The revised RNS link is: http://www.investegate.co.uk/m--38-c-saatchi-plc--saa-/rns/final-results-2014-replacement/201503261302555904I/

valueman

22nd May '15

SFE
I was the only PI at the AGM yesterday .I like it -a tortoise not a hare !
Good solid management ,CEO has £5m invested so aligned with us ,long term thinking ,increasing market share and potential for either small acquisitions or extra divis .

Small Cap Value Report (26 Mar 2015) -SAA, SFE, POS, TMMG

M&C Saatchi (LON:SAA)

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Paul Scott

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