Small Cap Value Report (29 Feb 2016) - WTM, RTC, DX.

Wednesday, Mar 02 2016 by

I'm posting this article 2 days late, as I was unwell on Monday, so apologies again for the delay. Let's catch up!

The main company I want to report on is this engineering & environmental consultancy;

Waterman (LON:WTM)

Share price: 95p
No. shares: 30.8m
Market cap: £29.3m

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

Background - regular readers here will know that I've been positive about this consultancy group for a while now. It's not a madly exciting company, but the economic cycle has been working in the company's favour, and it had turnaround potential due to having one division making heavy losses, thus diluting overall group profitability, which management were focused on sorting out.

For further background info, see my archive of articles on this company (as with any company, just find the company's StockReport, then click on the "Discuss" tab, to see a list of all mine, and other peoples' articles which relate to that company). Incidentally, I was really pleased to see one reader comment that when researching a company, he first looks at the StockReport, and if he likes that, then his second step is to click "Discuss", and read my views on the company. He reckons that saves a lot of time when researching companies, to decide whether or not to then continue to do his own in-depth research.

To give investors a chance to ask questions, and to get a flavour for the person running a business, I also try to interview CEOs of my favourite companies - so this link (audio and transcript) is my interview with Waterman's CEO, Nick Taylor, on 15 Oct 2015. He seemed fairly upbeat about the outlook for the next couple of years, and strikes me as a grounded, sensible CEO - the best type, in my view. With small caps, I don't want visionaries, I want hands-on, motivated, honest, and competent manager/entrepreneurs.

Results for y/e 30 Jun 2015 were good, and the shares moved up from around 70p to c.90p after the results were published in Oct 2015. The share price had been held back somewhat by a selling overhang, although the seller (Ruffer) seems to have stopped selling now, and Hargreave Hale took a decent chunk from them (c.6% of the company) - see Holding in Company RNSs in Nov 2015.

Interim results, 6m to 31…

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Waterman Group plc (Waterman) is a United Kingdom-based holding company that offers a range of engineering and environmental services. The Company, through its subsidiaries, is engaged in the provision of design services and advice in the fields of civil, structural, mechanical and electrical engineering together with environmental, and health and safety consultancy. Its segments include Property, and Infrastructure & Environment. The Property segment consists of the United Kingdom structures and building services consulting businesses, which are involved in development projects both in public and private sectors. In addition, this segment includes its overseas business in Australia, Ireland and Poland. The Infrastructure & Environment segment comprises Waterman's civil, transportation and environmental consulting business, which trades as infrastructure and environment consulting and Waterman's highways and transportation outsourcing business, which trades as Waterman Aspen. more »

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

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RTC Group plc is engaged in engineering and technical recruitment business. The Company focuses on white and blue collar recruitment providing temporary, permanent and contingent staff to a range of industries and clients in both domestic and international markets. The Company's segments include ATA, Global Staffing Solutions (GSS), Ganymede Solutions Limited (Ganymede) and The Derby Conference Centre Limited. ATA Recruitment Limited (ATA Recruitment) provides recruitment solutions to the engineering and technical sectors. It has two core operating units, which include projects and branches. Ganymede supplies labor into safety critical environments, and supplies and operates contingent labor within the rail industry. GSS is a staffing solutions and resource provider. GSS works with clients across the globe that are focused on delivering projects into a range of sectors, such as aerospace and defense, ports, mining, and oil and gas. more »

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  Is LON:WTM fundamentally strong or weak? Find out More »

31 Comments on this Article show/hide all

dahokolomoki 3rd Mar '16 12 of 31

In reply to post #122999

I've been thinking about this too. At some point there should be further consolidation in this market. Also big players have had a reasonable Christmas, so his year probably moving from firefighting mode to business building and expanding.

But at what price? Valuing DX is beyond my area of expertise.

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Beginner 3rd Mar '16 13 of 31

In reply to post #123011

I cannot see the point of taking over DX (Group) (LON:DX.) . The only assets are some rented premises and some hired vans. Even management admits the core business is in decline. It may disapper entirely within a decade. DX (Group) (LON:DX.) picked up some cagework from Citylink, but not really any business. I hold here, but am in two minds whether to depart.

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JDW72 3rd Mar '16 14 of 31

With regards DX group, having met with the management yesterday, I closed my position.

It seems to me that the document exchange business is the profitable part of the business but with high fixed costs (it costs pretty much the same to exchange 1000 packages as 5000 packages), as the volume and usage ebbs away those profits will decline rapidly. They said they would continue to run it at much lower volumes but I can't see it having more than 4 - 5 years at the very most. I suspect that there might be costs associated with exiting the business as well (leases, redundancies etc.).

With regards the rest of the business, logistics is highly commoditized and highly competitive (CityLink bust, TNT struggling etc.) and the things that the CEO was highlighting as differentiators just don't matter to me as a consumer of logistics services. I don't care if the driver is vetted or not to be honest. If it wasn't the case Amazon would be all over it, and they're not, preferring to consume logistics services than own and run logistics services.

So, we have a profitable part of the business that is in systemic and rapid decline with a high fixed cost base and what appears to be an unprofitable part of the business that's in a growing market but one that is highly crowded and with wafer thin margins...

Overlay all of this with what will be a majorly disruptive new hub build, fit and migration (and I don't really understand what that gives them except some efficiencies and you can't cut your way to growth ever) and there's risk and downside all over this.

I have sent the CEO an email with a load of questions to try to find a way to understand the way through this for them and if I get a good response I will circle back and update this but until then, it's not one I like the look of.

All my own opinions.

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JDW72 3rd Mar '16 15 of 31

With regards Waterman Group, I am deeply impressed with the CEO and CFO of this organisation. They have a superb understanding of the market, their clients and competitors and their business. The culture, the forward thinking with regards geographies and types of activity is clear and logical and has proven to be far sighted over the past few years (getting out of Russia just before they invaded Crimea - smart move).

I am happy holder here. The one cloud which prevents me from loading up is one of principle. It is the presence of the LTIP which I don't like.

In my opinion the CEO's salary and bonus of £373k in 2015 is toppy/fairish for the complexity of the organisation and the value that he clearly brings to it. However, I don't think he really needs 640,000 extra shares for getting the share price to 150p does he? Is he going to work any harder due to the LTIP? No, of course not. He's not poor by any definition and has another 8 years of profitable employment ahead of him. The CFO gets 320,000. Why?

In total, I think the LTIP would award approx. 10% of the overall share capital if the price reaches 150p by the end of 2019 so be aware that by owning these shares you are agreeing to give away about 10% of your stake in the company if it does well.

In a way you could say that if the share price gets to 150p, it's really only worth 135p to us ordinary folk as you'll be handing 15p a share over to the CEO, CFO, COO and management. It's not on, it's not necessary and it's not fair. That's about 25-30% of the upside from this point handed back without us really having a say in it....

So, on a point of principle, I will not invest in this company as fully as I would if the LTIP did not exist. We need to take a stand or it will carry on.

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adamsid 3rd Mar '16 16 of 31

I am inclined to keep my position in DX open. I agree that the DX Exchange can become even nastier if the decline in volumes is not accompanied by a proportional (or preferably greater) reduction in costs (it appears that it has not been so to date). Although I like the fact that they are working on building profitability elsewhere (there was a 14% growth in the courier service and there is a mention of a new contract with Ikea), I do not like comments such as increased volumes led to higher sortation costs - to my ears it does not warrant for any improvement in margins and just puts a question mark over these more positive statements.

On the other hand, I quite like the idea of the new “DX Parcel Exchange”. The order online self-pick up service seems to be gaining popularity and InPost + Doddle should offer DX decent coverage.

All in all, I think, at least in my case (in around 21-22p), there will be a better time to exit but no major excitement ahead.

Naturally, just my raw thoughts.

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cig 4th Mar '16 17 of 31

I'm long DX too. In addition to being relatively cheap for the size given even modest prospects as others have said, market psychology seems to be a tailwind mid-term: the precipitous fall made everyone look for problems, and here it doesn't take much imagination to find some, so I'd expect people on average to overestimate the problems for a while (underprice the stock), in a mirror image of the usual story stock behaviour.

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cig 4th Mar '16 18 of 31

In reply to post #122999

I don't think DX would be a match for a big group, neither the specialist segment nor the legacy lawyers business seem good fits. Probably too small to matter as well (management is not going to spend time to buy a competitor worth 0.1% of their own market cap).

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Mark Carter 4th Mar '16 19 of 31

£DX "There seems to be an H2 weighting to profits"

Kiss Of Death.

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PhilipHanson 5th Mar '16 20 of 31

In reply to post #123047

Re Waterman (LON:WTM) LTIP, I don't think those numbers are right. The LTIP is over 1.2m shares (CEO 640k, CFO 320k, COO 320k) and WTM have currently 30.8m shares in issue so the dilution is less than 4%. Also the share price when the LTIP plan was approved was 56p so the 150p target envisaged an almost tripling of the share price over a three year period. So to me the LTIP programme does not look outrageous.

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JDW72 5th Mar '16 21 of 31

In reply to post #123197

The LTIP is 3m shares in total. The rest are for senior management which I object to less. The dilution is pretty much 10%.

The share price is utterly irrelevant in my opinion. Why should we have to give our stake in the company away to individuals who we also pay decent 6 figure salaries to?

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PhilipHanson 5th Mar '16 22 of 31

In reply to post #123200

Yes you're right, I missed the other staff element (who will earn probably considerably less than the execs) so overall looks like a 10% dilution, if the full target (150p share price for 25 dealing days) is met. The performance criterion for full vesting from the point of approval was high and would deliver significant returns to shareholders if achieved, even with this dilution. However I do accept that the closer the share price gets to the targets, the worse the deal looks for new shareholders, although this simply reflects management's success to date for existing shareholders. In any case, well worth pointing out the details here, so thanks.

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herbie47 5th Mar '16 23 of 31

In reply to post #123200

I'm not keen on these types of schemes but when I looked into it a few months ago I was surprised how many companies had them, it was well over 50%, less so on the Aim. Its something to consider when buying maybe these could be flagged up somewhere? One scheme that upset many investors was Vislink (LON:VLK), since then the share price has halved. Another company I have never seen any mention of their LTIP is Finsbury Food (LON:FIF), 2 directors get 2x their salary in nil cost share options, they now have over 7m share options. IMImobile (LON:IMO) is another company with excessive share options. I hold both Finsbury Food (LON:FIF) and Waterman (LON:WTM), I sold IMImobile (LON:IMO) when I found out about the share options. Vislink (LON:VLK) I had sold before the LTIP was announced.

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JDW72 5th Mar '16 24 of 31

Private investors are key to the share price and liquidity of many AIM companies. If we got our act together collectively we could put a stop to this by simply selling the shares of any company that announces an LTIP. Vislink have really suffered as a result of PI's selling and others would too. VLK are truly shameless though. I think there are three concurrent LTIPs (or similar schemes) on the go there although hopefully they won't pay out.

Once there was downward movement in the share price, the institutions would investigate why and perhaps start to pressure the boards to remove these schemes to get PI's back on board and support the price.

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herbie47 5th Mar '16 25 of 31

In reply to post #123209

Re Vislink (LON:VLK) the share price fell on 16/9/15 because its announced a loss due to restructuring costs. I thought most PIs held onto their shares so they could oppose the management? PIs have small holding in most companies, believe VLK its under 5%.

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rhomboid1 5th Mar '16 26 of 31

In reply to post #123047

I think the issue here is related to the history of Waterman and many property related businesses ie they all started as partnerships and as such all profits were divied up to the equity partners. Many of these Equity partners had an enviable lifestyle as a result and many of them have remained private partnerships and thus their financial structure is well known to WTM directors. What they've not quite nailed is the fact that the Partners at flotation shared the proceeds and the quid pro quo is the new equity holders - us - want a fair share of the profits going forwards. I don't see the Waterman scheme as too egregious but it is at the top end of what I feel comfortable with, if it weren't for the reasonable and growing dividend payout I'd be very unhappy about this balance of rewards. As the target hoves into view for Directors it will no doubt concentrate their minds wonderfully , but I'm equally sure that until the LTIP vests we are not going to get any special dividend if surplus cash is sitting on the balance sheet!

Anyway as a significant holder I'd quite like them to overshoot their target

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JDW72 5th Mar '16 27 of 31

Not saying that the only reason for the VLK share price falling was PIs selling due to LTIP anger. You are right, the poor results did trigger a fall. Since then I personally know PIs who between them held more than 5% have sold due to not trusting the management and NEDs and the way they were structuring the reward schemes which must be contributing to ongoing weakness.

There are many PIs who hold notifiable holdings in many AIM companies, some significantly more than 5% is also the PIs who provide liquidity as the funds tend not to change their positions often. e
Even if only 5% of a small company shares were suddenly sold, it would make a mess of the share price as it would trigger all sorts of related selling.

Anyway - we agree that LTIPs and option awards etc. for senior leadership are not a welcome thing!

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gus 1065 10th Mar '16 28 of 31

I note that DX (Group) (LON:DX.) put out an RNS this morning stating that the CEO and CFO (well, his wife) have jointly purchased about Stg750,000 worth of shares. Quite a sizeable vote of confidence albeit at pretty depressed price following recent mediocre earnings report. Shares are up about 9% today on the back of this.


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gus 1065 10th Mar '16 29 of 31

.... Offset by subsequent announcements that two of DX (Group) (LON:DX.) 's principal shareholders Unicorn and Hargreave Hale have reduced their combined holdings by about 10 million shares.

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TheWatchmaker 11th May '16 30 of 31

Positive interim statement from Waterman this morning. Revenue up, operating margin up, in line with market expectations.

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vik2001 11th May '16 31 of 31

In reply to post #130971

just as well was close approaching a 20% loss on waterman, and would have had to exit.

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 Are LON:WTM's fundamentals sound as an investment? Find out More »

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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