Small Cap Value Report (28 Mar 2014) - KMK, JPR, RNWH
Good morning! Just a brief skim of a few announcements this morning, as I have a full day of meetings from 11am until 6pm, so fancied a lie-in before that gets started. Apologies for any inconvenience.
Kromek (LON:KMK)
This is the biggest faller of the day, down a stomach-churning 48%. This company does colour X-ray imaging for the security & defence markets. I looked at it briefly when it floated last atumn, but decided it was too speculative for me - with the valuation hinging entirely on projections of future profits.
It has issued a profit warning today, with the key bit saying;
Despite strong revenue growth year-on-year, the Company expects revenue for the period to be significantly below current market expectations. The shortfall for the year is due to a delay in a number of large contracts.
They do dangle some upside in front of investors by saying;
The pipeline includes substantial new orders that we hope to announce in the near future, which could materially impact our growth expectations going forward.
It sounds as if the cash position is OK though;
Whilst the Company had anticipated breaking even in the current financial year, it does not now expect to be profitable, however cash balances at the year-end continue to be strong and the Directors believe that the business has sufficient capital required to execute the business plan and deliver growth in the years ahead.
They also warn on the following financial year today (year ending 30 Apr 2015), saying;
These combined factors will also impact the performance of the Company in the next financial year
If orders are delayed, then surely they would benefit next year? So it sounds like the existing forecasts were far too aggressive. Management credibility looks shot - you can't warn on profits five months after Listing, that's just a no-no. Companies that come to the market need to start with realistic forecasts that they can achieve/beat, and thereby build a track record that gives investors confidence. That clearly hasn't happened here.
I think this is an example of companies that are being brought to the market too soon. Perhaps the rules need to be tightened up so that companies need to prove up business plans with more track record & firm orders before they are allowed to List?
Johnston Press (LON:JPR)
Having had a quick look at these results, my previous view that the company has too much debt to survive as things stand, looks very much correct. Results for 2013 are out today, and whilst the operating profit of £54.9m is impressive, most of that is swallowed up in finance costs, leaving just £13.9m in profit before tax (before huge exceptionals).
Net debt only dropped £17.3m in the year, to remain at an insurmountable £302m.
The only solution here would be for a substantial equity fundraising, to pay debt down to levels where normal financing charges can be negotiated. Otherwise the bank will just continue to swallow up the cashflow in interest charges. Remember that it's a declining business too, in newspapers, and the floundering attempts of newspaper groups to develop digital divisions can I think be pretty much fully discounted - it's not old companies that triumph in new technology areas, it's start-ups that grow rapidly & slay yesterday's giants in the long run.
That Balance Sheet is horrific, with net tangible assets negative to the tune of around £450m!
Hence I wouldn't touch the equity with a bargepole, as in my view, it is worth zero, for the above reasons. The company might survive if they can raise fresh equity, but why would anyone pour fresh money in, to bail out the Banks? I'd be more inclined to insist on the Banks doing a debt for equity swap before asking investors to inject any more money. Why would anyone want to put in money into a declining print business anyway? We are in a bull market though, and I'm told that management here are very persuasive, so who knows, they might pull something out of the hat. However, as things stand the equity clearly has zero fundamental value, unless something radical changes, so the shares are just a Call Option on there being some value in the equity after a restructuring, in my opinion. That does not justify anything close to the existing market cap of about £165m at 23p per share, that is lunacy in my view. You do wonder sometimes if investors even look at the Balance Sheet of companies?
There might be some upside on freehold property values here, in which case the company needs to revalue them & get them on the Balance Sheet.
Renew Holdings (LON:RNWH)
There's a positive trading update from Renew today.
The shares have gone up very nicely, but they are very high risk - because the Balance Sheet is very weak here, and the whole business is reliant on up-front payments from customers.
As long as people are aware of that, then you can make up your own mind about whether you think reward outweighs the risk. So far so good anyway, as they say;
Trading for the first half of the year has been strong and well ahead of the comparative position last year, in line with the Board's expectations. Performance is being driven by growth in all of our Engineering Services markets but particularly so in Infrastructure where our Rail business is continuing to experience record levels of activity. Specialist Building is performing in line with expectations.
The Board also anticipates reporting an increased forward order book and strong cash generation.
Right, got to dash. Have a great weekend, and see you back here on Monday morning!
Regards, Paul.
(of the companies mentioned today, Paul has no long or short positions)
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16 comments
Paul
Johnston Press (LON:JPR)
A couple of years back, I looked at the low ratio of price to historic earnings of JPR, thought about it a bit, and gambled on it. I wondered about the proportion of advertising decline that was about change in the market and how much was due to the (double dip) recession and thought (wrongly) that much of the decline was due to the recession. I had also speculated about new routes of using the internet. I’ve noted the rise in sp. JPR is now my largest holding - I’m still ‘hopeful’ about the internet part - this is harder to assess.
I’m not an accountant. The recent statement said, “The auditor’s reports on the statutory accounts for the 52 week periods ended 29 December 2012 and 28 December 2013 were unqualified, however the report on the 52 week period ended 28 December 2013 did include an emphasis of matter regarding a material uncertainty in relation to going concern.”.
In your experience how serious is the latter part of this statement?
Thanks
UGC
Woops another error from me with Plus500.The average revenue per employee stands at about $2Million, not $2 as I previously stated. This is mainly because of automation built into the business. They are hoping to go to the main market from AIM currently. They also fit William O' Neil's screen, having just read his book 24 essential lessons for investment success where it ticks all the boxes! With revenue growth from $56.1M in 2012 to $115M in 2013 & net profit from $17.1M in 20012 to $50.6M in 2013.
The tick boxes for William O' Neil investment screens:
1. Annual EPS 30%+ for 3 years.
2.Sales +25% on previous year.
3. ROE 20%+.
4. Superior product or service.
5. Volume of shares traded goes up.
6. Relative price strength 80+
7. Buy stock when it is breaking new higher ground.
Sorry for the error, Lightningtiger
1st purchase 22/10/13 @ 173.25p
2nd purchase 29/10/13 @ 200.5p
3rd purchase 10/12/13 @ 312p
4th purchase 13/3/14 XD @519p
Paul. You are working late/early! To answer your question. A dangerous combination of hope, expectation and dare I say greed occasionally trumps reason
KMK did not even get past my most basic investing screen.
So the question you should ask is, why did it get past any of yours???
P.
Hi Ramridge, not all IPO's are the same. I am very happy with Plus 500 from last year. This has been my best stock pick so far to date from Stockopedia.
Since the flotation in July 2013, the share price has more than Quadrupled. First quarter results for 2014 will be published on 2nd April 2014. New customers grew by 53% in 2013 while the average revenue per customer grew 38%.With only about 55 employees the average revenue per employee stands at about $2 According to Investors Chronicle March 20th tipping them as a buy @ 600p.( Last I.C view 19th Feb 2014 recommended a buy @401p) I reacon it has a lot more firepower to come!
Cheers from Lightningtiger
KMK- my finger is pointing firmly at the Finance Director. It is his job to rein in the CEO and make sure market expectations are matched by reality. Lumpy deals are no defence - if that is the nature of the business then forecasts should be appropriately cautious. If I were a NED I would be making changes.
Well I bought a few KMK today. I got a recommendation for them a few weeks back and didn't do anything about it although I liked the story. It looks a lot better at this price although it will require a bit more patience. Anyway will tuck them away for a while and see what happens.
Roger
Recent IPOs are now definitely in the dot.com bubble cloud cuckoo land, Take for example yesterday's IPO, Horizon Discovery (HZD). Last audited reports for 2013 show revenues of £6.6m and losses of £3m. The SP today is around 205 and market cap £137m. So market value / revenue = 20 + !!!.
A back of an envelope calculation tells me that , if we assume the company doubles its revenue year on year, it would take around 4 -5 years before the PE settles down to around 25. Admittedly it operates in a sexy area of genomics research. But as an investment it requires an awful lot of blind faith and optimism.
Lately I have decided not to bother wasting my time looking at IPOs. There are other less risky shares worthy of analysis.
Regards, Ram
Blimey Kromek (LON:KMK) , what a car crash. I went to a presentation by the company a few months back, and was impressed to come away thinking 'I must buy some of those'. Thankfully never got round to it so lucky escape!
Hi fek47,
Yes, I was at (probably) the same presentation at the end of November and came away thinking exactly the same. The CEO, Dr Arnam Basu was so charismatic and scholarly I think anybody would have been impressed. Just goes to show how careful one has to be when being charmed by enthusiastic presenters at these things. Thankfully I never got around to buying either.
Steve
I went to the same presentation and thought the same. I also didn't buy any... A lucky escape!
Thanks Paul, personally I hate debt and run my own business debt free as I just don't trust banks ever since the bank manager cut my gold card up in front of me 25 years ago when he found out I had gone from being employed at a reasonably paid job to self employed in a "life style" job and asked how I was going to pay back the overdraft even though my family had banked at the same branch of the bank for about 70 years!
I do pay attention to debt not because I have any great insight but because you go on about it, Jim Slater does and the naked trader also looks for no more than 3 times profits. All good advice in my opinion. If a company is debt free it is really going to have to work hard to go bust!
Thanks as ever for a great report.
Stockopedia would like to apologise for the late arrival of the sleeper from Hove: This is due to an unexpected delivery of bargepoles in the IPO area. We anticipate the return of the Flying Scottsman from Monday.
Quite agree on Kromek. Have taken my loss!
My posting this morning;
Kromek (KMK.L)(Market capitalisation; £73m, 68p and 0.9% of the JIC Portfolio). A disappointing trading statement from the Company this morning. It says that “despite strong revenue growth it expects revenue for the year ended 30th April 2014 to be significantly below market expectations”. It puts the shortfall down to a delay in a number of large contracts and that it has taken longer than expected to set up distribution channels for nuclear radiation products. Unfortunately it says, “These combined factors will also impact the performance of the Company in the next financial year”. Finally and maybe not surprisingly, it warns that “whilst the Company had anticipated breaking even in the current financial year, it does not now expect to be profitable, however cash balances at the year-end continue to be strong”.
Conclusion: I have not had one of these stinkers for some time but that does not make it feel any better and it is ruining my breakfast. The Company has committed the cardinal sin of coming to market, only last October, with high expectations, following this up with a number of bullish investor presentations and then missing targets by some distance. I’m afraid the market will not be very forgiving. This was always a higher risk, “blue sky” story, (hence only 1% of the JIC Portfolio and its smallest holding), which, if the strategy was successfully executed, could have been very rewarding to shareholders. It may still be one day but for now I will look to take my loss and watch from the side-lines!
Johnston Press (LON:JPR) looks like a car crash waiting to happen but if so why did the share price double from early Jan to early Feb?
purpleski,
It's amazing how many smart people I've spoken to, who are not really aware of how bad the debt is at Johnston Press (LON:JPR). I think there is a widespread fault with many (most?) investors, both PIs and Institutions, where people fail to properly consider insolvency risk, and barely even look at the Balance Sheet, nor consider how debt is going to be repaid. This could be because the Banks have been so forgiving to Listed companies in recent years, under political pressure.
There again, as demonstrated by Thomas Cook, you can have a hopelessly insolvent Balance Sheet, but everyone will ignore it & give you fresh equity if you come up with a convincing turnaround plan. There's an outside chance that might happen at JPR too - people are throwing money at anything at the moment.
Regards, Paul.