Small Cap Value Report (27 Jul 2016) - VCP, STAF, NXR, FLYB

27th Jul '16 by Paul Scott

25 comments 18061 reads

Good morning!

Just in case you missed it, here is the link for yesterday's report, as I added another section on Victoria (LON:VCP) (in which I hold a long position) after the 1pm email was sent out.

There were also some fascinating comments from readers, about the chronology of how the Chairman managed to take over a sleepy company, and generate enormous wealth for himself - and it has to be said, other shareholders too.

So this is a tricky situation - where an outlandishly lucrative incentive scheme for management (which I would normally oppose vehemently) seems to have actually worked for the benefit of everyone - just look at the share price chart over the last few years! Food for thought anyway.

Staffline (LON:STAF)

Share price: 888p (up 3.2% today)
No. shares: 27.7m
Market cap: £246.0m

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

Interim results - the financial highlights in today's interim results (6m to 30 Jun 2016) look very impressive. Note the prompt reporting schedule too - only 27 days to produce published interim results - to me that demonstrates good financial controls are in place.

Note that most of the growth has come from acquisitions. However, organic growth was still very good, at 14%.

Going through these numbers, I really cannot see any justification for the Brexit-related plunge in share price. It doesn't seem to make sense, so this is looking like a good buying opportunity to me.

Current trading & outlook comments all sound positive;

The second half of 2016 has started well. Our sales pipeline, which remains significant, will support continued growth. As a result, we remain on track to deliver current expectations for FY 2016.

Furthermore, Staffline continues to work towards its longer term growth ambitions. We remain responsive and focused on adapting to new regulations and government change. Whether this is the NLW or the potential changes which the UK's exit from the EU may bring over time, our scale and capabilities mean that organisations increasingly look to Staffline to ensure their access to a flexible and efficient workforce.

Our Employability division, PeoplePlus, is making good progress and we expect the enlarged business to continue to have a significant impact financially and operationally…

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Kevin_T

27th Jul '16

Paul, in the past you commented on Flybe (LON:FLYB) (LON:FLYB). They released a Q1 Trading statement. Have you any comments on it? Seat capacity increased by 15.5%, yet passenger increase only 9.2% and total revenue only up by 5%. Load factor for seats decreased by 4.1% (74.1% down to now 70%).

Rusty2

Yes I had not looked at the market cap., it does seem poorly covered on Stockopdia.

FREng

How will the Living Wage affect firms such as £STAF? Have any recruiters commented on the expected impact?

simoan

On a different note Norcros (LON:NXR) update today is broadly positive although there is a slight concern about the drop off in like-for-like UK sales (though acquisitions more than counteract this). I have worried whether its products are less attractive in the UK market for quality or cost reasons. Would be interested to know if anyone has experience of their products and what might be behind the fall.

Funnily enough I was in my local builders merchants this weekend and they had a display wall of Vado taps. As a Norcros (LON:NXR) shareholder who is doing up a bathroom next month I was genuinely interested in buying some but I can't say I was that impressed with the styling - perhaps square cornered taps are in vogue but they're not really to my taste, so I was a little disappointed by the display. Of interest, was that the builders merchants own brand tap range was made by Vado.

I'm happy to continue holding Norcros (LON:NXR) following the update but the share price performance is very frustrating. At least we get a dividend paid this week. I'm still a little worried by the pension deficit though, which will not be helped by UK interest rates falling to zero.

All the best, Si

Chrisfarrell21

Hi Herbie/John,

I also looked at the Burford Capital (LON:BUR) numbers (I'm long), and they are pretty strong. I'm trying to work out whether I should average up, and I'm looking for someone to tell me what I'm missing (maybe you two aren't the right people):

EPS today for the half year was 25.52 US cents, whereas last year it was 11.30 US cents.
EPS for the last full year was 32 US cents, which gives H2 EPS of 20.7. If you make the same increase for H2 of this year, you are looking at full year EPS of about 65-70 US cents.

Even if you assume a more lacklustre H2 this year, to give c.60 US cents EPS, this comes out at about 45p EPS at today's exchange rate. With today's price (c.395p) that gives a PE for the full year of about 9, and you can throw in a small dividend of about 1.5% to 2%.

With growth rates as shown in today's numbers, that seems a complete pricing anomaly.

What am I missing?? Please point out the basic errors in my maths.

Thanks

Chris

JohnEustace

Hi Chris,
Burford Capital (LON:BUR) is my largest holding and I've topped up six times since buying in 2014, most recently after attending the Capital Markets Day in May, so I've clearly not spotted the flaw if there is one. It's a bigger proportion of my portfolio than normal sensible advice would suggest any single AIM stock should be so if there is a counter argument I agree it would be good to hear it!

Wimbledonsprinter

The earnings numbers for Staffline (LON:STAF) are a bit of messy, as they focus on what they call "underlying" profits (effectively pre amortisation and share based payment cost). These have been significantly above statutory profits (as always). Therefore, with the ratios, you need to be careful which one you are looking at.

However, I think the free cashflow of the business has really started to pick up. As Paul points out the company is saying that net debt is planned to fall to zero by the end of 2017 (despite paying dividends) which means that it should be generating over £50 million of cash in the next 18 months (by my calculations), which is not bad for a company with a market cap of less than £250 million. In the first half of 2016 alone, the company generated £26 million of cash from operating activities (admittedly with the help of some one-off working capital adjustments) and only used £4 million on capex. Therefore the dividend looks very well covered out of cash flow.

shanklin100

Re STAF, as I have mentioned before one needs to be careful in terms of the non-exceptional Exceptionals. Specifically, exceptionals comprise "amortisation of intangible assets arising on business combinations, acquisition costs and the non-cash charge/credit for share based payment costs".

Whilst most of these are IMHO genuine exceptionals, the share-based payment costs seem to me to be a key part of how STAF run their business and the associated hit on the P/L is often pretty major. Whether or not it is because of the recent poor SP performance, these costs seem to be lower this time round than in recent results.

Incidentally, you will see that STAF's historic numbers for PAT and EPS are much lower than the numbers forecast going forward. AIUI this is the case because Stockopedia's data providers include the "share based payment costs" when calculating their results numbers whilst in the broker forecasts, they are (erroneously IMHO) treated as exceptionals.

HTH. Cheers, Martin

Thanks John. Incidentally, I work in law, and people in our firm (not me) deal with Burford regularly and really rate their people and service.

Ta

Chris

Ramridge

FREng - Re. Staffline (LON:STAF) yes, I held this share from March 16 and it just went consistently on a downward slide for no reason that I could work out. Its performance against other recruiters was far worse.
Eventually it hit my (stretched) stop loss and I sold out early June. Switched to Empresaria.

Like you, I'd like to know if the reason for the drift since the start of the year has now been put to bed.

MrContrarian

Every time I was tempted to buy Flybe (LON:FLYB) because it looked so cheap I repeated to myself "Never buy an airline". One of the few rules I have never broken.

Reading Buffett's witty observation years ago has helped: "I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did."

Hi Chris,

My reason for attending their Capital Markets Day was to check their processes before committing any more of my hard earned and I was reassured. They assess all the legal and financial aspects of the cases in-house and I was convinced they have a strong mix of legal and commercial skills. I came away with the view that if they lose one of their cases then the judge probably got it wrong, which can happen clearly. If you are up against them and they take the case on then you just got counsel's opinion telling you are going to lose and your opponent is fully funded to take the case all the way. Logically you should settle quickly.
They are growing fast and admitted they had been too slow to add staff in 2015. As with any fast growing business I expect there will be some stumbles. The limit on their growth currently is their ability to take on new business - they have strong demand and have been readily able to raise funds via the bond market. This has allowed them to pick the best cases to invest in - as they grow the average returns may not keep up.
Also be aware that the nature of their business is changing from case-by-case funding to taking on portfolios of litigation on behalf of corporate clients such as BT so that may produce different returns.
They have also added a business line in recovery - collecting the funds after judgement being not as easy as the winners might hope.

zho

Hi Paul,

Many thanks for your comments on STAF, and those of other contributors.

I see that two directors have each bought about £100,000 of shares:the MD has bought 11,634 at 902p and the CFO has bought 12,000 at 905p.

Trident

Regarding Victoria (LON:VCP) when a CEO does unusual things, and emerges from another country 'out of the blue', would it be wise to know more about their background? I'd like to say him being an ex investment banker filled me confidence, but he has already shown skill at creating interesting financial workarounds, and that got the world in an awful mess before.

Simply googling his name didn't get me very far.

Laughton

On another topic - Trifast - Trifast (LON:TRI) which you've commented on before. Exec Chairman at AGM today had, I thought, some really good things to say:-

"Since these results were announced in June, Group current trading across all regions has remained in line with expectations and the management teams of Trifast plc and its UK and international business subsidiaries confirm that we remain firmly on track with our organic growth performance and capital investment objectives for the current year, and whilst maintaining a high level of awareness, our morale and optimism continues to be undiminished by the ongoing negative macro-economic media preoccupation.

"Clearly, foreign exchange variations, especially given the current volatile conditions, present a constant operational challenge, but our managers within our 17 country global network are focused on flexing the supply chain to mitigate negatives and enhance the positives according to the product transactional sources and destinations by matching currencies on purchases and sales wherever possible.

Staffline (LON:STAF) looking at directors deals, the share options do look exceedingly generous.

Trifast (LON:TRI) I see one director sold quite a few shares yesterday.

I think the risk is if they were to lose several high profile cases then they would lose a lot of money. As they say litigation is unpredicable.

Thanks John, that's really useful.

LW25

Hi Paul,

Would be interested to get your view on Koovs RNS today ahead of their results release? There was no sign of buying momentum slowing down before they came out with it.

Cheers

cig

28th Jul '16

Re "minimum wage in Poland" comments, a couple of issues:

- at purchasing power parity the wage differential is markedly less than nominal
- Eastern Europeans on minimum wage UK jobs may be able to get above minimum wage jobs back home, and some of these countries are doing okay at the moment
- Germany has a shortage of labour at the moment, similar wages as the UK, and is a bit more welcoming

Small Cap Value Report (27 Jul 2016) - VCP, STAF, NXR, FLYB

Staffline (LON:STAF)

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Paul Scott

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