Small Cap Value Report (28 Oct 2014) - TEG, UTW, MACF, FITB

Tuesday, Oct 28 2014 by

Good morning! Another quiet day for small cap news, which is handy as that gives me time to properly research Avation (LON:AVAP) ,whose FD is visiting my Brighton Investor Group tonight to give a talk about the company. We're fully booked, although I suppose one or two more could be squeezed in, although it's awkward because our usual section of the restaurant comfortably seats about 25, and when we go over that we get into a halfway house situation, where we over-spill, but not enough to have the entire restaurant to ourselves. Ah well, I'm sure it will be fine. It's really good that we've managed to generate enough interest to establish an investor group on the south coast, so thank you to everyone who supports these evenings.


It's bad news for shareholders here I'm afraid, as the shares have been suspended today, with the dreaded phrase highlighted below;

The Group has requested the suspension of trading of its shares on AIM pending clarity on its financial position.

As @MrContrarian correctly said this morning on Twitter, "Companies rarely recover from this stage."

It's usually a good idea to look at companies which go bust (this hasn't yet, but it looks on the verge of it) to check whether you spotted the warning signs. In this case, it's obvious that things were going badly wrong. The narrative to the interim accounts published on 30 Sep 2014 made it clear that the company needed additional funding.

Also, the Balance Sheet shows that cash had almost run out, plus there was debt on top of that. Yet again though, the big "tell" is excessive debtors, which we discussed yesterday. In this case, debtors of £8.5m (compared with only £5.6m turnover for the six months to 30 Jun 2014) clearly indicated that something was badly wrong - if customers can't or won't pay for goods/services that have been billed, then you run out of cash, which seems to be what's happened here.

The cashflow statement also shows a worsening position.

I see that Peter Gyllenhammar owns 20.1% of the company, so maybe he'll sort out some kind of rescue refinancing? It's difficult to imagine that shareholders would be prepared to stump up more cash, without agreement first being reached with customers over the disputed contracts. Some sort of compromise deal…

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Utilitywise plc is a United Kingdom-based business energy and water consultancy. The principal activity of the Company is of an intermediary for energy supplies to the commercial market. Its operating segments include Enterprise and Corporate. The Enterprise segment is engaged in energy procurement by negotiating rates with energy suppliers for small and medium-sized business customers throughout the United Kingdom, the Republic of Ireland and certain European markets. The Corporate segment is engaged in energy procurement of larger industrial and commercial customers, often providing an account care service and offering a range of utility management products and services designed to help customers manage their energy consumption. It provides energy management services, including procurement, energy reduction and audit, carbon offsetting, smart metering, water brokerage, design, manufacture and supply of timers, controllers and building management systems, and the Internet of Things. more »

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Macfarlane Group PLC is a United Kingdom-based company, which is engaged in designing, manufacturing and distribution of packaging products. The Company's segments include Packaging Distribution, which is engaged in distribution of packaging materials and supply of storage and warehousing services in the United Kingdom, and Manufacturing Operations, which is engaged in designing, manufacturing and supplying of self-adhesive labels to a range of fast moving consumer goods (FMCG) customers in the United Kingdom, Europe and the United States. The Company's business operates approximately 18 Regional Distribution Centers (RDCs) supplying customers with a range of packaging materials and services. The Company's Macfarlane Packaging Distribution serves in various sectors, such as Internet retail, third party logistics (3PL) and aerospace. Its Macfarlane Labels serves in various sectors, such as health and beauty, food and household goods. more »

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18 Comments on this Article show/hide all

DGW 28th Oct '14 1 of 18

Paul - When looking at AVAP and Co's like it - aircraft leasing - the problems arise when the indistry goes into recession, its said when a national economy catches a cold aviation gets flu'. Thats when aircraft are thrown back to the lessors - AVAP et al - by struggling airlines and airports are littered with unemployed aircraft known as "white tails". it was just such a scenario that took down one of the biggest leasing companies - Guiness Peat Aviation based in Shannon in 1998 just before a planned flotation.

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jamacdo 28th Oct '14 2 of 18

I haven't heard of the company before, so I don't have an opion. I'm glad I don't own shares in it though. I shall save my pennies for a better prospect.

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Paul Scott 28th Oct '14 3 of 18

In reply to post #87258


Yes that's right - a very cyclical business, is aircraft leasing. Also, depreciation policy is critical - get it wrong, and you suddenly find aircraft bouncing back on you that nobody wants, but are still on the books at £millions.

Regards, Paul.

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martinthebrave 28th Oct '14 4 of 18

Macfarlane has over 20k business customers and specialises in protective packaging. It is also looking to grow the proportion of trade it does via the internet from 22% to 30% over the next 2 years. ASOS is a big customer and one that should benefit from todays announcement. Their market is fragmented and earlier this year they secured a £20?million bank facility, giving them the firepower to buy up small businesses. One announced so far....

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purpleski 28th Oct '14 5 of 18

Re Teg (LON:TEG) surely in normal circumstances debtors (if the company offers 60 day terms) should be in the region of 1/6th forecast turnover and if not then turnover (and hence profit) is either being manipulated or the company is controlling its debtors?

Surely either is a red flag? Can on screen for debtors as a percentage of turnover in Stockopedia?

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mortimer 28th Oct '14 6 of 18

macf such a small profit margin there is fatter fish in the sea any innovation in the packaging would soon be copied as they say if in doubt leave it out NEXT!

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bsharman 28th Oct '14 7 of 18

I may be a little cynical but unless Macfarlane (LON:MACF) have found an ingenious way to alter physical matter or dimensions in space and time, surely whether the item will fit through the letterbox will depend on the item and not the packaging! It would make a interesting demonstration at an investor event - and for our next act - how to get a kettle through a standard letterbox - our new super physics altering packaging! I'm being silly, sorry, but haven't Amazon been doing this for decades?

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betjeman 28th Oct '14 8 of 18

...........GPA's problems were not on income side of P&L - were on their expense side - and more particular the liability side of their BS - particularly their funding where they had a mismatch of short-term debt financing long-term assets which was meant to be sorted by a large equity flotation .....................they then hit a liquidity crises post the Oct 97 stock market crash. That business still exists today and has been very successful.


having worked in aircraft leasing - a few questions to help with your Avation research:

1) What have your asset utilisation rates been for the past 5 years i.e. % of aircraft on lease or in reverse what is your assets off-lease %.
2) How does this compare with your direct competitors:
3) What is the average period of remaining lease terms
4) What is your average MRF ( Monthly rental factor - being Monthly rental income/total asset cost. Compare this to direct competitors
5) The Dep'n policy point is more precisely defined as over what period to you depreciate your assets and how does this compare to industry norms?
6) What is your current all in cost of debt finance for the past 12 months? How does this compare to the last three years?
7) What is your current leverage %?
8) Are you match funded? i.e. it is industry standard practice to fix your major cash expense - Interest - for the period of the associated lease income. So if you have a 5 yr lease ( rents are generally fixed during the lease term) you should take out a fixed rate loan/swap for a similar period thus hopefully locking in a fixed profit and eliminating interest rate risk. You want to know that this business is a play on leasing aircraft successfully and not a punt on interest rate movements.

In general there is a real opportunity for leasing companies at present because of record low long-term interest rates. Lease income is reasonably fixed - interest rate environment impacts rental levels but not on a one for one basis - so if leasing companies can lock in low interest rates ( which are currently available i.e. 10 yr USD swap rates are 2.5%) then you can increase your profit margins.


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Soundbuy 28th Oct '14 9 of 18

'but haven't Amazon been doing this for decades? '

Aye, that crossed my mind - always looking for packaging feedback etc, do they not carry patents on certain forms of packaging (none at hand to check)?? Heathspan (supplier of vits/supplements) have invested heavily in this area too (tubs to blister packs) to ensure delivery (and economies) rather than a trip to the P.O. Flat bottles (HDPE) are readily available too........

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intuitive6191 28th Oct '14 10 of 18

In reply to post #87266

And there is no such thing as a standard sized letterbox either.

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JTG 28th Oct '14 11 of 18

And check out, which we use for all our washing detergents, because they sell the concentrates in plastic tubes that melt when you put them in a bottle and pour hot water over them and, guess what, the tubes are sent to you via regular mail, precisely because they are robustly packaged but designed to fit through any standard letterbox!

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dasv 28th Oct '14 12 of 18

Paul further to your bearish thesis on UtilityWise, there are a number of worrying reviews online suggesting that the model is based on duping customers into taking contracts with uncompetitive rates using hard sell techniques.

Also it seems UTW is attempting to bury negative reviews by paying customers (bribing customers) to write positive reviews.

Please see

It's hard to know what is truthful or not online but this comment to the article would be worrying for me if I was a holder.

"Nicky January 14, 2014 at 9:40 am
I currently work at Utilitywise and am horrified by what goes on at this place!
Here are some examples
80% of the time we are told to push the deal that makes us the most money and not the deal that we should be pushing, namely the one that saves the client money
There are 2 or 3 main suppliers who (household name energy companies) that are quite happy in providing pricing that is in some cases uplifted by 2 to 3 pence per kWh, a competitive uplift would be in the region of 0.2 of a pence per kWh, you do the maths in terms of a company with a 2gig (2 million kWh usage per year), its obscene how much money these people make!
The place is riddled with inadequate managers, and I use the term manager loosely here, from team managers to ops directors, what a joke they are.
Make no mistake, EVERY deal that is put through where a client has been known to be ripped off is authorised by one of the so called managers at Utilitywise.
Even though I work for Utilitywise, not for much longer though, I truly despise the way this company rolls along looking like it is saving clients money, when all the time they simply rip clients off and process business which is bordering on being fraudulent.
I want something done about this company, im leaving in 3 months as I simply cannot be a part of this SCAM

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lightningtiger 28th Oct '14 13 of 18

Fitbug is also sold on Amazon, so that could boost the sales before Christmas. I would like to know what profit margins they are running on. 77 million shares were traded today. This is also a global market too for them, with downloads available to mobile phones. An exciting share to say the least. Not many like this about. I got some yesterday.

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Hutch_Pod 28th Oct '14 14 of 18

Dasv - it's kind of hard to take that particular comment seriously given its tone. And as you say it's hard to tell what's truthful online, spiteful or glowing.

With that caveat in mind, looking at ReviewCentre, there are roughly 1000 good/very good reviews, and 19 poor - which seems pretty good (esp compared to utility companies), and i note the poor reviews have UTW replies in some cases, offering some kind of resolution.

The business model, in my understanding, grew out of the lack of SME focused in-house sales teams within the energy companies, and their preference to use intermediaries like UTW. This coupled with SMEs not having the resource to scan the fairly complex non-domestic market of 24 ish electric and 30 ish gas suppliers (source Edison), has allowed UTW to develop.

It seems UTW does more than find the best price, as perhaps evidenced by the growth in corporate revenues (£9.9m 2014 ) which seem to be more consultative around energy efficiency and management rather than procurement. UTW also aggregates demand across its customers to achieve better prices.

I know that the CEO & director sales generated a red flag, but the green flag was also waved by Woodford becoming the largest shareholder (by picking up a good chunk of those shares), with the CEO still second largest and River and Mercantile third.

But I do take comfort in you Paul finding the actual valuation for forecast growth reasonable, and i guess it is up to people to judge on the sustainability of the business model.

Good point on the £1m increase in loan when the cash is of course stated at a very healthy £15.8m.

FWIW, UTW was given AIM company of 2014 award. Although maybe someone more knowledgeable than me can tell me what actual significance that has...


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Bonitabeach 28th Oct '14 15 of 18

In reply to post #87275


"There are 2 or 3 main suppliers who (household name energy companies) that are quite happy in providing pricing that is in some cases uplifted by 2 to 3 pence per kWh, a competitive uplift would be in the region of 0.2 of a pence per kWh, you do the maths in terms of a company with a 2gig (2 million kWh usage per year), its obscene how much money these people make!"

Quite frankly, if you are in business, using 2 million KWh per year; and don't know the competitive price; you deserve everything that is coming to you.

"The place is riddled with inadequate managers, and I use the term manager loosely here, from team managers to ops directors, what a joke they are."

I wish more of the companies I invest in were as humorously managed.


Disclosure: Long: LON:UTW

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Leven 29th Oct '14 16 of 18

Many thanks for the heads up on Utilitywise - the last time I read similar reviews was for Blur Group and look how that turned out!

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Dendyver 29th Oct '14 17 of 18

Hello Paul

With Utilitywise are you suggesting Net Assets of £36m should be reduced by £13m or £26m?

Thanks for arranging the BIG event last night

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herbie47 26th Jan '15 18 of 18

Looking at UTW again, sp down to 220p, Woodford has been buying now has over 16%, I also believe directors have bought on 15/01/15, however they did pay around 245p.
I'm tempted to buy some if they drop a bit more.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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