Small Cap Value Report (29 Jan 2016) - ENTU, RTC

29th Jan '16 by Paul Scott

10 comments 12177 reads

Good morning!

Entu (UK) (LON:ENTU)

Share price: 62p (up 10.7% today)
No. shares: 65.6m
Market cap: £40.7m

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

Final results, y/e 31 Oct 2015 - everyone keeps telling me what a terrible company this is, and how silly I was to buy shares in it, but the results today actually look quite good, considering how low expectations have sunk.

Operating profit before exceptionals is in line with guidance, at £8m. We already knew that the feed-in tariff changes by Govt had killed off the group's solar division, so nothing new there.

Divis have been lowered, but a 2.67p final divi is announced.

Adjusted continuing ops EPS is flat against last year at 10.7p, so clearly the PER of 5.8 looks very cheap.

Outlook - Directorspeak sounds cautious, but given the lowly valuation this is probably bullish for the share price in my view, because the market seems to be discounting something far worse;

"The closure of the solar business and the required investment in infrastructure has undoubtedly affected the profit potential of the Group over the next couple of years. Accordingly, the Group is now taking a more prudent view on the outcome for the year than it had previously. The Board currently expects that the results for the year ended 31 October 2016 will be marginally below those reported for the year ended 31 October 2015 for continuing operations.

Balance sheet - looks OK, with a small net cash position. The only item which causes me a little concern is the £4m increase in debtors, which note 16 shows is due to the appearance of £3.5m accrued income, which was nil last year. Also prepayments have jumped, so I'd like a little more colour on what those items are. Overall though, debtors looks a reasonable figure in relation to the size of the business.

My opinion - it's not a share I particularly like, and sentiment around it is still very poor, after the company warned on profits not long after listing - something the market punishes hard, and takes time to forget.

That said, the business has historically been a cash cow, and that looks likely to continue, so at a single digit PER, and paying nice divis, there are worse things out there.

RTC (LON:RTC)

Share price: 80p (up 8.8% today)
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1James1n1

29th Jan '16

Paul,

On Entu, the Admin expenses on continuing operations have jumped from £20.0M to £24.1M. A 20% increase in admin costs looks excessive against the more modest sales growth on continuing operations and I see no notes (on a run through the detail) to explain this. It would be good to understand what caused this increase, what the outlook is, and what actions the company will take to rein in these costs as the increase impacted profitability considerably. It looks like this needs right-sizing.

shanklin100

Hu Paul

Not sure why the latest broker forecasts for RTC are not on Stockopedia.

Anyway, REFS shows PBT, EPS and dividend as follows from WH Ireland in a forecast from 04-Jan-16:
2015 £1.40m 7.40p 2.20p
2016 £1.70m 8.80p 2.70p

So, per today's TS, that means H2 PBT of £900k. Pro-rata, with lower mobilisation costs and the NR contract running at "target levels", hopefully the £1.7m for 2016 is the absolute minimum that will be achieved.

HTH. Cheers, Martin

Tortoise investor

I agree with your assessment of ENTU. Also worth emphasising that dividend is now 5.34p for the year and they said they 'aim to maintain the current level of dividends'. At a share price of 60p that's an amazing dividend of 8.8%.

As someone working in communications, I have to say I think their RNS is very convoluted in places and could be a lot clearer. They could have benefited from a section stating very clearly how they are tightening up costs and putting the business back on track, but instead that sort of commentary is dotted around the release.

There are also some odd comments in the RNS which do not fill me with confidence about the management - e.g. "It is also fair to say that management time has been diverted as we have come to understand our new obligations as a publicly listed company." They also spend far too long in the RNS highlighting all the problems they've had rather than talking about the growth in the other non-solar parts of their business.

Overall though this is cheaply rated at the current share price although the quality of management makes me reluctant to hold this beyond the next 12 months.

xcity

Yesterday, I went in detail through what I expected to see in Entu's results today, bearing in mind the information already released and the fact that the IPO lock-in doesn't end until March. And since the share price had, this time, been rock steady all week, I decided to buy. Upside seemed greater than downside.

Results were as expected. Quite a few substantial numbers I would really like to understand better (accrued income being one), but that's not a total surprise when a company is buying, selling and closing businesses.

Commentary seemed more realistic - either they are now being more honest and open or it was passed through a Zeus Capital plausibility checker. Glad to see them acknowledging the difficulties they have had in getting to grips with the requirements of being a public company, and also the need to tighten financial controls. Administrative costs and systems are clearly out of kilter with the reduced size of the business.

I hope everything is now open and above board, but it will take them a long time to restore their credibility, and the individual businesses, though apparently nicely cash generative, are fairly low quality in stock market terms. Given enough time it is possible that management may be able to demonstrate that Entu as a whole is a higher quality business even though the areas they operate in are not; that would take even longer. That said the rating is very low and the price is likely to rise, assuming no further disasters.

Velo

Was cutting my watchlists down yesterday, because without notes, I was beginning to forget what my reasoning was at the time some of those shares were added to them. I hovered over ENTU but skipped deleting it.

With the results now out my doubts returned. With a PE of 4. odd - that defo (as a rule of thumb) puts the PE ratio into or dangerously close to the edge of being rated as basket-case territory.

But the decider for me is that tiny £1.4m net cash on hand. Admittedly it's a tiny minnow MCap share
- but £1.4m doesn't fill me with confidence and suggests more cash calls to come - and thus the inevitable hit on the SP.

For me personally, ENTU is to be bought and sold ruthlessly on technicals, not fundamentals, until a long term plan is in place that proves to be effective.

With a one day 7%+ rise in the SP it's winking a come-on at TA operatives.

Just look what a difference that's made to the RSI in one day. Defo a technical play before long-terming INMO.

However you calculate the PE it isn't 4. Whatever Stockopedia believe.
And the biggest shareholders didn't sell in the IPO only to put it back in a rights. And no reason to believe it can't still generate cash.
Lots of reasons to be sceptical about company but I wouldn't be worrying about these myself.
Wouldn't be technical with it either. Small market and some very big holders who can decide to trade on their own concerns. And all the really big moves so far have been on news.

Paul Scott

30th Jan '16

As a postscript, and without getting myself into too much trouble, Entu (UK) (LON:ENTU) is certainly not a business that I would want to get too excited about. The whole sector, replacement glazing, doors, etc, is a bit spivvy - high pressure sales techniques, etc. Very cyclical, and competitive, etc.

There are also lots of questions which cropped up from reading the Prospectus - some people don't like the loans to the rugby club, and various other unusual connected party loans, etc, That's fine when a company is private, and it was all washed through on the IPO, but a blurred management mindset of what is personal, and what is company, can linger - eg. Mike Ashley at Sports Direct.

Overall therefore, I think ENTU is a low quality business that should be on a PER of about 8, but could be cheap because it's on a PER of 5.8? Who knows. I see upside to 100p, then I'd want to move on.

Regards, Paul.

1st Feb '16

Completely agree.

Low quality demonstrated by huge solar profit loss when competitor pinched some staff. If that's the whole explanation.

Founders seem to have been so taken by the cash and profit being thrown off by acquisitions that they grew in a fairly ramshackle way. Intended to continue in same fashion after going public. No sign that they understood the requirements of running a public company. And long term success with this approach requires tight financial management, a good understanding of the risks and adequate ability to manage the businesses. Seems likely that key managers spent most of the year fire fighting and learning about running a public company. And some probably proved that they weren't up to the jobs they were given.

I'm glad that the statement showed some lessons learned.
Shares seem more likely to be cheap than dear atm, but I doubt they'll reach 100p in next 12 months.
And will need careful watching, including purchases and sales by larger holders.

garkum01

2nd Feb '16

Dubious rugby club loans throw a spotlight on the quality of ENTU'S management

vik2001

on another note Internet Q shares went up by 60% today. wish I saw that one coming

Small Cap Value Report (29 Jan 2016) - ENTU, RTC

Entu (UK) (LON:ENTU)

RTC (LON:RTC)

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Paul Scott

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