Small Cap Value Report (3 Oct) - NXR, INL, AN., ABM

3rd Oct '13 by Paul Scott

6 comments 16008 reads

Good morning. Yes I'm late, so it must be Thursday! To compound that, tinternet has gone down here in Hove, so my iPhone is currently doing a remarkable job at supporting 17 tabs on Google Chrome - which is great, but it's a shame they forgot to make it competent at actually making phone calls too, that seems to have been overlooked by Apple...

Right, let's get stuck into today's announcements. There's a trading update from Norcros (LON:NXR). It starts out sounding like a profit warning, but gradually improves. By the end I have heaved a sigh of relief, with the last sentence crucially saying, "The Board remains confident of the full year outcome". In a bear market the shares would have been marked down at least 10% just in case, but today the price is unchanged from where it has been in recent days:

Normally I would consider selling if a trading statement says that trading is expected to be more heavily H2 biased than usual, which this does. However, the valuation is sufficiently low that in my opinion it already factors in lacklustre current year trading. Plus, with the UK economy now recovering, one would expect their trading to begin showing signs of recovery in H2 (NB. it's a March year-end).

As you can see from the Stockopedia growth & value table to the right, the forward PER is attractive here (you won't find many cyclical companies on a PER under 10 these days), and the dividend yield is useful at about 2.5%.

Today's statement also indicates that net debt is anticipated to be around £29.5m at the half year end of 30 Sep, which is down slightly from their last reported figure of £31m. It's not a problem level of debt, but personally I wouldn't want to see it go any higher.

Also bear in mind there is a big pension fund here, with a deficit, although the deficit is fairly modest as a percentage of the total fund assets, and in common with other schemes, the deficit should have shrunk recently as Bond yields have risen. Why? Because the impact of a higher discount rate on calculating the present value of scheme liabilities tends to be a positive factor which is greater…

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bobdouglas

3rd Oct '13

Ref. ABM - banks up to their usual tricks maybe, exploiting the situation to try and achieve the maximum benefit for themselves and make it as difficult as possible for their customer to carry on running their business unencumbered - a disgrace in my view. As you say the liquid assets would appear to cover the bank debt not to mention any goodwill that has been built up over twenty years establishing the business which I note now has over 1000 employees and goodness knows how many private investors.

shipoffrogs

ABM:
It shouldn't be terminal it's one of two leading players in a sector that should be thriving in a poor economy, there's a place for it.
And whilst I expect much of it is down to exuberant management over-extending, I think there has been some external factors that has hurt:
1. declining high street rentals has allowed smaller players to encroach on their territory; and
2. the falling gold price will have hurt, but so too a declining supply as people sold what they had when the price was high.

The problem with taking a punt on a retailer which is contracting is the likelihood of the off-balance sheet liabilities (shop leases) pulling it further down: you just can't close non-performing outlets without being hit by hefty termination costs.

And their major shareholder isn't interested in supporting a placing. Why would it, when it could come in later and pick up the pieces for a song.

Hi shipoffrogs,
Take on board the points you make. One question regarding exuberant management over-extending, do you think for example if they had 10M less borrowings it would make any difference to the position they find themselves in regarding the banks, as it is an earnings based covenant that is at risk or has been breached rather than a debt based issue as I understand it?

Bob

I haven't looked at it closely. I was interested in HAT and ABM a couple of years back - but thought there was a risk then of over-extension. I also remember, anecdotally, acquaintances selling gold jewellery, and being aware that they'd sold all they had - and figured that the supply would dry up regardless of the gold price.

Underneath the working capital and leasehold problem sits a good business, I'm sure, and someone should be able to turn it round. Whether existing shareholders do okay - I don't know. I think the key is understanding the leasehold/shop closure exposure.

shipoffrogs

Thank-you for your comments. I have never been a holder of ABM but as you maybe can gather, I do have an aversion to disreputable practises by the banks.

Bob

loudenr

Hi Paul

I opened up a small position at 25p today. Share your thoughts about risk /reward now. the company is making a profit - not sure what year end results will be but brokers are forecasting eps something not that far off current price. Also there is a margin of safety with regard to TNAV so why would the banks force a liquidation?

Lets see what happens.

Small Cap Value Report (3 Oct) - NXR, INL, AN., ABM

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Paul Scott

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