Small Cap Value Report (26 Oct 2016) - OTB, AVAP, PVCS, EPO, FLYB, CAU
Good morning!
I had a late surge yesterday, and added several more sections to yesterday's report - so here's the link for that, to get you started whilst I'm busy writing today's report!
I added sections on;
Braemar Shipping Services (LON:BMS) - good reasons to expect earnings to recover somewhat, but not strikingly cheap. Divis look unsustainably high.
Pendragon (LON:PDG) - very good update. Looks dirt cheap, but what impact will price rises have next year?
M P Evans (LON:MPE) - unsolicited bid approach.
OTB - On the Beach
Unfortunately, the technical gremlins struck, and the section on OTB vanished. However, to recap, all I said was that it's worth a look. The company (an online travel agent, specialising in short haul beach holidays) delivered 12% turnover growth, but increased profits further by restraining its marketing spend.
The valuation of OTB looks quite appealing, although as with most retail or travel-related companies, the market is naturally worried about the impact of weaker sterling. I've put OTB back onto my watch list, but am holding back on buying shares right now, as the price/chart look rather weak.
My feeling is that Brits will still want our summer holidays abroad again next year, despite stronger sterling. We just might trade down to a cheaper destination, and perhaps trim back on luxuries such as eating out - e.g. I often take a few packets of noodles (18p each from Aldi) with me in my suitcase, when holidaying.
So bombed-out holiday company shares might be worth considering, who knows? Especially something like OTB, which seems to be gaining market share from conventional travel agents. Anyway, I'll give it some more thought, haven't made my mind up yet about that one.
Avation (LON:AVAP)
Share price: 161p (up 5.9% today)
No. shares: 58.9m
Market cap: £94.8m
Possible sale of aircraft - an intriguing announcement this one.
Here's an edited version, of the key points;
Avation PLC (LSE: AVAP), the commercial passenger aircraft leasing company advises that it has received an expression of interest for the purchase of its current portfolio of ATR turbo prop aircraft. The company will evaluate the expression of interest in due course and emphasises that discussions are at an early stage with no decision having been made...
The Company has 24 ATR72 aircraft with two currently under finance leases; the size of the portfolio the subject of the expression of interest is 22 aircraft...
The Company's Executive Chairman, Jeff Chatfield, said: "As a matter of policy, the Company is willing to sell aircraft and reinvest the proceeds in order to fund the equity for purchases of new aircraft. If this proposed transaction is to progress, the net proceeds would need to deliver shareholders significant value above book value...
I'm not quite sure why anybody would want to buy these aircraft at above book value?
Still, it sounds an interesting potential deal, which has the potential to enhance shareholder value, by the sounds of it.
PV Crystalox Solar (LON:PVCS)
Share price: 20.7p (up 1.4% today)
No. shares: 160.3m
Market cap: £33.2m
(at the time of writing, I hold a long position in this share)
Arbitration / mediation - I flagged up this special situation in my report here on 25 Aug 2016. I hope some readers jumped in (as I did at the time), because it's risen 53% in the 2 months since then. It's a nice each-way bet - already asset backed, but with a free kicker of a potentially very substantial windfall from terminating a customer contract with compensation, that is very heavily in PVCS's favour.
This is the latest;
Further to the announcement of 21 June 2016, PV Crystalox Solar plc has been advised that the evidentiary hearing of the arbitral tribunal has been postponed until the end of March 2017. This hearing which was scheduled to take place in Frankfurt in November 2016 has been delayed following a request from our customer.
Meanwhile in an attempt to find an amicable solution both parties have agreed to follow a mediation process led by an external mediator. This mediation will be conducted without prejudice to the pending arbitration.
It sounds like the customer is playing for time, requesting delays to arbitration hearings. You can't blame them, that's the commercially sensible thing to do if you're on the hook for a gigantic legal claim.
A mediation process has now been agreed, running in parallel to the arbitration process. This might help speed up a resolution, but it would probably mean PVCS having to agree a reduced amount, to incentivise the customer to cough up more readily than the alternative of repeatedly delaying arbitration.
My opinion - this could drag on for a long time. Therefore, I've banked half my profit, and will let the balance run until things are concluded.
Earthport (LON:EPO)
Share price: 15.75p (down 3.1% today)
No. shares: 477.0m (taken from RNS dated 21 Jul 2016)
Market cap: £75.1m
Results year ended 30 Jun 2016 - yet another lousy set of loss-making accounts under its belt. This is a payment processing company. I visited them about 8 years ago, to do some due diligence for an investor friend who was considering investing in the company. Much to my amazement, one of the Directors took me to one side, and said, "I just can't believe that people keep pouring more money into this".
Now admittedly the company has grown considerably since then, on the top line anyway. Trouble is, it chalks up a loss somewhere between £5-10m every year. Over many years. So the accumulated losses now stand at a staggering £140.3m. There's no sign of this being a viable business yet either!
The adjusted operating loss for FY16 more than doubled from £5.0m a year earlier, to £10.4m this year. The figures are in stark contrast to the upbeat narrative, which talks about stupendous growth, gaining traction with various banks, etc. Basically, it's the same old flannel that the company has churned out every year since it joined AIM in Jan 2001, moving up from OFEX.
Actually, it's worth having a look back through the pages & pages of upbeat RNSs that Earthport has issued over the last 15 years. Here is its original statement on joining AIM. The numerous contract win & relationship agreements with many big name banks & technology companies. The never-ending optimism about the future, and being close to achieving breakeven (which never happens). Talk of shareholder value, despite this company actually having been a bonfire for investor funds.
This is the latest outlook statement from Earthport;
We are committed to meeting market forecasts for the 2017 fiscal year and achieving our target of becoming cash flow positive during the fourth quarter of the financial year."
I'll believe it when I see it.
Cash - has reduced from £30.2m a year earlier, to £14.4m at 30 Jun 2016, so the money is running out fast - again.
My opinion - this company's track record has been a sick joke, as evidenced by the massive destruction of shareholder value over the last 15 years.
I suppose there's a chance that it might eventually become a viable business - after all, if you spend 15 years, and £140m trying, then there's a possibility something positive might come from it.
Flybe (LON:FLYB) - as a reader points out below, it's been announced today that the CEO, Saad Hammad has stepped down "by mutual agreement".
It's therefore fairly unlikely that things are going well.
I gave up on this one at about 40p per share, and for a few weeks it looked as if I'd sold right at the bottom. However, the price has since fallen back to 39.5p, valuing the company at only around £85m.
It's interesting as a potential special situation, since the valuation is well below tangible book value. Who knows, an acquirer could buy the business, to restructure it further, and maybe achieve some synergies?
The core problem seems to be that Flybe simply cannot get enough bums on seats, so it's flying aircraft below capacity, on short haul routes, thus planes are spending too much time on the ground, and not enough in the air.
That said, the business is in much better shape now than it was a few years ago, with legacy problems more-or-less resolved, and its finances look OK. I'll keep a watching brief on this one, but am loathed to get involved again, having had such a bad experience with it before.
Centaur Media (LON:CAU)
Share price: 44.5p (up 1.7% today)
No. shares: 144.8m
Market cap: £64.4m
Trading update - covering Q4 of 2016, and with outlook comments for calendar 2016.
I last looked at this share about 18 months ago, and concluded in my report here of 13 May 2015 that the share looked too expensive at 78p. Also I had reservations about the weak balance sheet, and sustainability of dividends. Good job, as it's come down 43% in price since then, to 44.5p.
The company description is;
...business to business information, insight and events group.
The three divisions seem a mixed bag, in terms of performance;
Digital revenues across the Group showed steady growth of 10%, with digital premium content revenue growing strongly by 22%. Progress across the portfolios was encouraging with Legal up 20%, Marketing up 10% and Home Interest up 9%.
Live events revenues were up 20% on an underlying basis. Within this, Exhibition revenues increased 19%, and revenue at the London Homebuilding Show also grew by 19% with visitor numbers up 10%. The Festival of Marketing at the start of October showed delegate growth of 9% with sponsorship levels maintained.
Advertising revenue was down 12%, continuing the Q2 trend, with print advertising being particularly challenging, down 21%. Digital advertising was more resilient, down 4%.
Overall, it says;
The Group currently expects to deliver full year adjusted earnings in line with market expectations and a net debt/ adjusted EBITDA ratio of approximately 1 times by year end, pre consideration for the Oystercatchers acquisition.
Although it should be noted that cost-cutting has played a part in this;
The Group is making good headway with its cost reduction programme and is on track to deliver £2 million of annualised savings.
Cash collection & net debt - cash collection has been very good, with year-to-date cash conversion running at a very high 206%, reducing debtors, and net debt. Mind you, this looks a bit of an aberration, as cash conversion in 2015 was unusually low, at just 32%. So it looks as if there was some unusual factor last year, which is reversing this year.
Net debt was £13.6m at the end of Q3, which sounds OK.
Valuation - the forward PER is about 8.6 - quite attractively low. Although note that it has a weak balance sheet.
Dividends - this looks very good, with a yield approaching 7%. Although I'm always wary of indebted companies with weak balance sheets paying big divis, as the divis can very easily end up being reduced or cancelled if the company hits any trading problems.
My opinion - it looks to have a good spread of activities. However, the declining ad revenues from the printing side of things (trade magazines, I suppose) is a concern. It has the look of a business that is trying to move conventional operations into the digital space, with mixed results. This is confirmed in the Directorspeak today;
Andria Vidler, Centaur CEO said: "We remain focused on building high value, premium digital content and events whilst reducing our exposure to print advertising. We're making steady progress on that journey. Cash collection, cost cutting and debt are on track and we expect Centaur to meet market expectations for the year".
Overall then, I'm wary of getting into anything that is battling against headwinds, unless it's ridiculously cheap - which this isn't, yet. I'd rather pay more for companies that are roaring ahead in growth niches.
All done for today! It will be a shorter, but earlier report tomorrow, as I have to travel to an investor lunch in Reading, so time will be short.
Regards, Paul.
(usual disclaimers apply)
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18 comments
Flyb look attractive with so much cash, they can become very profitable very quickly with the right actions. BUY
Isn't most of the cash coming from fares already paid for booked flights?
AVAP has been unable to get the stockmarket to reflect the earning value of their business and I am sure it is deeply frustrating - in fact the CFO said as much in the recent round of briefings.
But lessors know the real value and by letting one demonstrate it they get a proper value for shareholders and a chunk of cash to decrease borrowing (which in this case with matched earning assets should never have worried the market anyway) and move their business further into higher value jets.
One point that also came out of recent presentations was that institutions were holding back until AVAP had a $100milion market cap. I suspect at that the sale will reveal much more than a 10% uplift to book value and pull up their market cap
It seems to me Avation (LON:AVAP) have a funding problem. Their loan to value ratio is at 75% which is probably the maximum they can get away with. Their share price is derisory so a placing is probably out of the question. Interestingly at the start of October they did a very small placing of about £5m. I wonder of they tried to do a larger one and didn't get enough takers? That puzzled me.
So perhaps the only solution is to make more effective use of the capital base they already have. At 30 June they had $48m in the bank, which when you are buying aircraft probably isn't a lot.
The EPO market cap is wrong on Stockopedia. More like £75m so with £14m of cash just now, this is £60m EV and if they do £30m of transactional revs next year, this would put it on 2x revs. Q1 has 2.3m transactions at the average £3.12 per tx, so revs of £7.8m ish which seems to support a decent uptick in revs for 2016/17. EPO is the only player in the end-to-end processing of global small payments and is increasingly winning business from decent banks and also e-commerce companies in a huge market. I appreciate they have never done their numbers, but as a former professional VC, I wd attest to the fact that no developmental stage company ever does do aspirational numbers. Management have asserted in their plan that getting to cash breakeven by late 2017 (I think their year not calendar) with £10-11m left over is sacrosanctn (per today's analyst conference) so I don't see that a further equity raise is likely. What is this company worth when nit gets past cash breakeven with £30 or £40m of highly valuable transactional revs? In the US, where there a lot more comps in SaaS and transactional business modesl, the answer is 5-10x revs. So today's £75m could be worth £200-400m down the track. So 3-5x from here in a business model which is increasingly performing, doesn't require more financing (I hope) and is the sole real player in this part of the payments processing world? I appreciate that this is a VC type analysis (ie growth focussed) and not your typical "value" analysis but you need a bit of both in a portfolio and there aren't many 3-5x ers around on the London market.
Hi pierotlunaire,
Points taken. However, my main gripe with Earthport (LON:EPO) is that it has been promising great things, with essentially the same narrative now for 15 years! It's never achieved anything worthwhile in the past, and every year they tell us why it will be different this time, but it never is!
Re the number of shares in issue being incorrect, it looks like you're right, I've amended the article. Also, I've raised a support ticket so that Stockopedia can flag the data error with Thomson Reuters & get it corrected. Thx for pointing it out. Apparently we at Stockopedia are one of the top customers for cleaning up Thomson Reuters data errors. Maybe they should be paying us, not the other way around?!
Regards, Paul.
Paul
It's been a bumpy ride with some not very good directors during this period. I think I also had to put money into a cram down round here to avoid being wiped out. However, you shd not tar the current CEO with a 15 year brush. He has built a much stronger team around him and won lots of pretty fine clients. He has of course also missed his numbers but has raised enough capital(at 42p) to get through to cash breakeven and with a 70% gross margin, if they do £30m revs, the extra £8m will reduce losses by £6m etc etc. Having sold in the 40ps when Oppenheimer recapitalised the company, I'm in the unusual position of being able to replay the game with a much stronger team.
Flybe's pricing has always been high, but the good thing is you get from some out of the way place to another. Trouble is the market is always limited. So wrong business model for the times
Like I said, vain hope.
The problem is who would actually want to buy FlyBe?
Surely not Ryanair or EasyJet who have built their strategy around 1 type aircraft fleets? Why would they want to take on smaller aircraft types serving routes which are not viable on their larger aircraft (often not viable on the DHC-8-400).
If you take a look round the aviation industry who would want to buy them?
Thanks Paul, no not good at all. Wonder if we're into takeover territory now (he says in vain hope).
Re AVAP, Paul as an (ex) CA you ought to remember that net book value need not necessarily equate to market value! :-)
Does the company have any delivery slots that would also add to its residual value after the ATR fleet has been stripped out?
grumnmy5:
Avation (LON:AVAP) have nine new ATR72's for delivery between 2017-2019 plus options for an additional 27 aircraft. There is some discussions that two new production slots, will be sold before year end. Although the value of sold production slots can be highly variable I estimate a typical 'profit' is circa $345k plus the return of a deposit of around $100k for the production slot. However in the past they have realised a profit far in excess of $1m on occasion but I think this is unusual.
Although AVAP are committed to various production dates, ATR are generally very flexible for anything 6+ months ahead.
The market value of the aircraft would likely be increased if the China market is cracked (ATR are currently marketing the aircraft there) and in the shorter term if Iran get the American Export licenses and finance sorted out then there order for 40 aircraft asap will make those production slots more valuable.
Re Avation (LON:AVAP), the aircraft are potentially worth more than book value if Avation use a conservative depreciation policy. From memory of one of their presentations the planes will continue to produce income for some years after Avation have fully depreciated them. If that is the case and Avation have a bid significantly above book value then that could be an argument for them to sell, or if not adjust their depreciation policy to reflect a longer asset life and therefore a higher current book value.
The aircraft are a type that is much in demand in the industry.
Edit: I agree with Carcosa that it would take out the heart of the company. I might support a full bid at the right price but not this approach.
Going back to yesterday, I took a quick look at Carpetright (LON:CPR) this morning. It's a share I never really looked at previously due to the eye-watering valuation that it commanded. That's obviously changed a lot as the price has crashed below £2. I can't say the collapse is surprising, or even unjustified. Their fall in like-for-like sales in the UK when competitors like SCS (LON:SCS) and United Carpets (LON:UCG) are both increasing their own LFL sales indicates that there's something going wrong operationally at the business.
At this point, I think it's all down to management and can we trust their turnaround plan. Has anyone got their ear close to the ground on this one? Are management credible, are they doing the right then?
Hi Paul, seen the RNS about CEO stepping down at £FLYB?
Hi Mikelevie,
Yes I saw the RNS about Saad Hammad stepping down from CEO role at Flybe (LON:FLYB). That was next on my list to write about - have added a short section above. It doesn't look good, does it?
Regards, Paul.
Avation (LON:AVAP) Am guessing it may be Nordic Aviation Capital that want to acquire the ATR turboprop fleet because it will then give them a great deal of pricing power especially when they start to make sales into China for the first time (and also maybe the Iranian deal). When you become effectively the only lessor with an in demand aircraft it makes sense (to me). However nearly all of those AVAP ATR aircraft are on 6+6 year leases so any lease increments are years away but nevertheless there different accounting policies may make it sensible for them to acquire the aircraft above book value.
However, for AVAP to get rid of their ATR fleet is something I am not entirely comfortable with (and it will go to a shareholder vote). That reliable income stream will disappear, relationships with financiers will change, I guess the corporate GMTN bond risk increases somewhat and may make it more expensive for AVAP to raise future capital?
According to my own figures the ATR fleet in question has:
So the substantial premium would have to be 10-20%? giving Net cash of ~$100m. Not bad for a ~$115m market cap.
I find it hard to imagine anyone paying that sort of premium; maybe 5-10% but not much more. And then we are left with AVAP with its heart cut out holding very valuable A320 assets which makes the company more risky.
AVAP would end up with 12 x A320/321's and not much else (F100's and ATR finance lease aircraft) generating ~$45m annualised revenue compared to around ~$100m otherwise.
If AVAp can secure a large premium to the NAV then they are going to have to explain it's longer term impact before they get my vote. Prior to this deal the shares are ridiculously cheap and today's announcement would have to increase the share price by 50%+ before they would get my shareholder vote; and that ain't going to happen.