Small Cap Value Report (3 Feb 2016) - WTM, HSS, QRT, PHD, PTCM

Wednesday, Feb 03 2016 by

Good afternoon!

I've managed to find a quiet corner of Vienna Airport, so will have a quick whizz through the day's RNSs before boarding my flight back home later this afternoon.

Waterman (LON:WTM)

Share price: 90.5p (up 1.7% today)
No. shares: 30.8m
Market cap: £27.9m

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

Trading update - a nice clear, in line update today, from this group of engineering consultants, saying;

The Board expects to report Interim Results consistent with market forecasts for the year as a whole, with increases in revenue, profit and operating margin percentage compared to the prior year comparable period.

 Also, the cash position has improved;

Waterman has experienced a successful interim trading period and a continuing emphasis on working capital management has resulted in a significant improvement in the Group's net cash position, notwithstanding the increase in activity.  The Group expects to report net funds at 31stDecember 2015 of £6.5m (£3.8m at 30th June 2015 and £3.6m at 31stDecember 2014).

Valuation - broker consensus is for 7.8p EPS this year (ending 30 Jun 2016), and 10.0p next year. Having done my research, my view is that these figures should be fairly readily achievable, due to turning around one loss-making division (it only needs to reach breakeven to considerably boost full year profits for the group). Also management seemed very upbeat about their pipeline for several years to come, when I interviewed them in Oct 2015 here.

My opinion - I reckon a share price of 120-150p looks achievable over the next couple of years, based on possibly out-achieving on the 10p EPS forecast for 2016/17, and using a PER of say 12-13.

Meanwhile the divi yield of 4.0% is pleasing, and note that the StockRank is 98, so a thumbs up from Stockopedia's algorithms too. It may not be the most exciting share out there, but in my view looks a reasonably decent place to park some money for a couple of years. One has to be mindful of the cyclical nature of what they do, so at some point business is likely to turn down, as it does periodically.

Note that Waterman shares peaked at around 200p before the GFC in 2008, and it looks as if the number of shares in issue then is similar to now - I've checked back to a "Voting Rights" RNS from late 2007, and…

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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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HSS Hire Group plc provides tool and equipment hire and related services in the United Kingdom and Ireland through a network of over 300 locations across the nation. The Company's business focuses on supplying equipment and services to the fit-out, maintain and operate sectors of the market, with its businesses also supplying construction contractors. Its segments include HSS Core, which is engaged in the provision of tool and equipment hire and related services, and HSS Specialist segment, which is engaged in the provision of generator, climate control, powered access and cleaning hire equipment and the provision of cleaning maintenance services, under specialist brands. Its businesses include HSS hire, HSS One Call, HSS Training, ABird Power Solutions, Apex Power Solutions, Reintec cleaning equipment services and TecServ equipment maintenance. It caters to the customer base ranging from retailers and airports to facilities management companies and infrastructure developers. more »

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The Quarto Group, Inc. is an illustrated book publishing and distribution company. The Company is engaged in creating content and publishing books from a diverse portfolio of imprints. The Company operates through segments, including Quarto International Co-Editions Group; Quarto Publishing Group USA; Quarto Publishing Group UK, and Quarto HK. The Quarto International Co-Editions Group segment creates illustrated books that are licensed and printed for third-party publishers for publication under their own imprints. The Quarto Publishing Group USA segment creates and publishes illustrated books in North America and sells co-editions of them internationally. The Quarto Publishing Group UK segment creates and publishes general non-fiction and illustrated books in the United Kingdom market. The Company’s books are sold in approximately 50 countries and in 39 languages. more »

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

11 Comments on this Article show/hide all

ericb 3rd Feb '16 1 of 11

Does stocko have a 'Director Rank' that can show at a glance how reliable or unreliable their past performance has been. Actions speak louder than words, so maybe it would be advantageous to see what theyve done before rather than listen to any spin and bull that is often spouted when they are flirting with investors trying to ramp up their egos.

A good example is Philip Letts of Blur - I saw him in a video interview not long after Blur (LON:BLUR) was launched and the bull and spin was squeamish. A quick research showed he had pumped previous glittering float only for reality to hit like a tank once the true figures were exposed and investor disaster ensued.

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MGinvestor 3rd Feb '16 2 of 11

In reply to post #120350


I would have avoided Blur (LON:BLUR) just because of the Director's name:

Philip Letts Blur

I'll get me coat

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Ramridge 3rd Feb '16 3 of 11

Re. Proactis Holdings (LON:PHD) This is yet another software company that capitalises software development in a material way.
Looking at the FY2015 accounts, software development capitalisation was £2m in 2015 and £1.2m in 2014.

That makes Pre Tax Profit for Yr 2015 : -£0.5m and for 2014 : -£1.1m.

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bsharman 3rd Feb '16 4 of 11

In reply to post #120350

Instead of Director Rank, perhaps it should be Rank Director list.

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ed_miller 3rd Feb '16 5 of 11

In reply to post #120359


Proactis' amortisation charges are not a million miles behind its capitalised costs and its revenue recognition is sufficiently conservative that its net profits are consistently more than covered by free cashflow, i.e. despite some capitalisation of R&D costs its profits are real - they pay out a dividend that is on a low yield but progressing well.

I hold some PHD shares.

Ed Miller

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Ramridge 3rd Feb '16 6 of 11

Ed -
Sorry I don't buy the argument about amortisation charges somehow offsetting current capitalised intangibles. Amortisation relates to previous capitalisation costs. Let's assume PHD had done no development in the year 2015 at all. The amortisation charge for FY2015 would still be roughly the same and the reported net profit would still be roughly the same.. The difference would be lower non-current assets on the b.s.

With respect to FCF for FY2015, net of development costs, FCF stands at £1.2m which is lower than the reported net profit of £2m.

Happy to be corrected.
I have no financial exposure to this stock.

Regards, Ram

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janebolacha 3rd Feb '16 7 of 11

Paul, yes, I agree that Waterman (LON:WTM) seems to be a relatively safe stock in the very uncertain present economic climate. They are focused on UK urban regeneration and redevelopment, transport developments and infrastructure projects, all sectors where good growth of spending seems likely to continue over the next two or three years. Their management seems very grounded and has publicly announced the targets they are aiming for and to which they are committing themselves to be held accountable, demonstrating a very refreshing clarity of shareholder relations.

Btw, they are to be the consultants for the King Alfred Centre project in dear old Hove, to replace that decrepit eyesore on the seafront. As a shareholder, that's certainly one you can keep a close eye on!

Best wishes, I hope you've recovered from the dodgy bratwurst!

(I'm a holder, very nicely in profit).

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janebolacha 3rd Feb '16 8 of 11

In reply to post #120383

Paul, sorry, re the King Alfred Centre project, it's not Waterman (LON:WTM) that's involved as a consultant, it's actually another one of my happy holdings, Crest Nicholson Holdings (LON:CRST) as the builder!

Sorry again, busy and only half-absorbing things.

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smatthews1 3rd Feb '16 9 of 11


With regards to Waterman, as a consultancy company this should have very little in the way of overheads, so im struggling to understand why this has such low operating margins??


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Brothersinarms 3rd Feb '16 10 of 11

Actually Ram, FCF is usually taken pretax because tax payments often pay little resemblance to the tax charge in the income statement (as is the case here). Also, you usually ignore working capital swings as they often fluctuate from year to year.

So pre working capital changes and tax, FCF is 1,955k vs PBT of 1,521k so it's actually 29% greater. This shows that their conservative revenue recognition policy actually outweighs any small advantage of capitalising development expenditure.

I hold PHD.

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drvodkaquickstep 3rd Feb '16 11 of 11

In reply to post #120404


Consultancies sell the expertise of their staff hence always have a relatively high cost of sales and, in the case of Waterman (LON:WTM), property lease committments. Most consultancies have operating margins of less than 10% and Waterman's have been low during the years after the recession but are firmly on their way up to 6%+ which will make a big difference to the bottom line.  If you look back to 2005-2008 their margins were between 5-6% then.

Hope that helps - you might want to try and get hold of the latest Broker Note.

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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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