Good afternoon,

I haven't made the final decision about which stocks to cover, so please shout in the comments if you'd like me to mention something. Thanks!

Graham




Conviviality (LON:CVR)

Share price: 260p (unch.)
No. shares: 172.5m
Market cap: £449m

Half-Year Results for 26 weeks ended 30 October 2016

I have written very cautiously about these shares before, and I'd remain very cautious here, after today's results.

The group swings into pre-tax profitability of £7.4 million (up from a loss in H1 last year).

Ne debt is 1.2% below "pro forma net debt" (that will have been a tricky calculation, following on from a series of acquisitions), and is now £138 million.

And how about this covenant situation:

Leverage is comfortably below the Adjusted EBITDA bank covenant of 2.50x at 2.19x  

At 87% of the maximum, it's comfortably below? Really?

Still paying dividends:     

Interim dividend up 100% to 4.2 pence (H1 FY16: interim dividend 2.1 pence), which is currently expected to represent approximately one third of the anticipated full year dividend.

That 4.2p dividend is worth £7 million in total, so it's the entire pre-tax profit figure.

It's a big statement of confidence to suggest that c. £21 million in dividends could be paid out in total this year.

Interest costs added up to £2.7 million in the period. This might not seem much against the market cap or the near-£800 million in revenues.

My opinion: I don't think there is anything comfortable about the leverage here for what remains a low-margin business.

In that context, I don't understand how the dividend policy makes sense - it needs more breathing space for its covenants, in my view.

Management are heavily incentivised to grow EBITDA (contributing to a max 100% salary bonus for the CEO) and to grow EPS on a 3-year timeframe via the LTIP.

The shareholder base has obviously signed off on these policies, so in aggregate it must be content, but it looks to me as if management are incentivised to shoot for the moon -  with all the attendant risk which that involves.

For these reasons, I view the low PE ratio and the dividend yield as value traps.

This Stockopedia table helps to illustrate some weak quality statistics:


588f33df0692aCVR_20170130.PNG




Sopheon (LON:SPE)

Share price: 380p (+13%)
No.…

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