Small Cap Value Report (6 May 2016) - IRV, CTO

6th May '16 by Paul Scott

18 comments 12506 reads

Good morning!

Chinese tourists

Amazing statistic for the day - Chinese tourists spent $215bn on outbound travel last year, up a remarkable 53%. Let's hope the UK authorities have ditched the expensive & bureaucratic visa requirements previously in place. We need to get a decent slice of that tourist revenue, even though it will make it easier for spies to visit us alongside the tourists.

So the outlook for London hotels is probably good.

Holiday

Talking of overseas travel, I am off to Abu Dhabi tomorrow morning, for a week of sunshine, swimming, good food, reading, and partially-relaxing. These reports will continue as usual. As it happens, the time difference is ideal - 3 hours ahead of the UK, so I'll be able to get up at 10am AD time, which will be 7am UK time. So these reports might even improve whilst I'm away! I'm really not a morning person, and my brain is usually only fully operational by about 10-11am.

Yesterday's report

I reviewed a few more companies yesterday evening, being:

Best Of Best (LON:BOTB)
Robinson (LON:RBN)
Costain (LON:COST)

So if you wish to see my thoughts on those, here is the link to yesterday's full report.

I also briefly looked at the acquisition made by Portmeirion (LON:PMP) but didn't write anything about it. The deal seems entirely sensible to me, as expected from sensible management. I'm regretting having sold my shares at around 1100p, and might buy them back on any dips in future.

ISA millionaire - new eBook

Probably the best article ever written on Stockopedia was from my friend Leon Boros, explaining how he had built up his ISA to over £1m.

Leon has now published an eBook through Stockopedia, updating everything. I haven't read it yet, but it's on my reading list for next week, on the beach. Here is the link to download Leon's new ebook.

There are lots of commentators on shares, but the best ones to listen to are people who have actually made a lot of money over the long term.

Not much news today, but let's look at what there is:

T Clarke (LON:CTO)

Share price: 87.25p (up 3.3% today)
No. shares: 41.8m
Market cap: £36.5m

(at the time of…

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Gostevie

6th May '16

Hi Paul,

I only bought into Interserve (LON:IRV) less than a month ago so it's a bit annoying to have been hit with a profit warning after such a short period. I sold out fairly quickly because I bought the shares primarily for the dividend and I don't see how that can possibly be sustainable now.

One thing you may have missed is that two days ago the shares fell by 10% for no apparent reason other than a mildly bearish broker note, and the question being asked on the bulletin boards was: "Why? Is there something we don't know about that they aren't telling us, but which has prompted insiders to start selling?"

I think we now know the answer to that one.

Thanks as always for these reports and have a great holiday.

Steve

Wol

Thanks for the pointer to Leon Boros's new e-book. I was in the audience at one of his talks at a recent Mello event. His theme then was quality at a reasonable price investing (QARP). My impression then was that he was sane, sensible, serious, successful and completely honest. One of the shares he talked about was Bioventix. I went off to do my own research and bought some shares. I am sitting on a 33% profit after less than a year. Thank you Leon.
I have downloaded Leon's book onto my iPad. It will be a good companion for the next few train journeys.

rmillaree

Ref IRV

Yeah i had some great timing picking up some IRV after the recent drop (before the bigger one today) - i have this horrible feeling that the bad news had leaked and that i was the only person who didn't have an inkling that something was wrong, well other than Numis who came out with a really positive Broker note this week (coincidence??). Nowt worse than buying just before biggie profit warning - and it seems like the bods in charge no longer have the confidence of Mr Market - for my sake i hope there is not worse to come - i have gone from Bullish to semi Bearish in the space of one day despite the price drop fully reflecting the bad news if there are no more nasties - altho it looks like it has bounced back somewhat since fisrt thing although that too may be dead cat type - sigh.
With regard to debt with forecasts before today of £120 mill pre-tax profit for 2017 and the non immediate need for repayment i was very comfortable with that level of debt - it was for semi genuine reasons that the debt came about as they bought out Initial Facilities for £250 mill a couple of years ago and up until the profit warning tis looked to be ramping up profits. It does all go out of the window though when the bods in charge can suddenly lose 70 mill down the back sofa.

simoan

Paul,

Great call on T Clarke. I held a few years ago but sold out when they had troubles with a couple of contracts. In hindsight, I should maybe have held on because it's a well managed company and so it's no surprise things have been been turned around.

Re, Chinese tourists. I know where they were in February! I was really surprised by the number of independent Chinese travellers on my visit to Western Australia. Lord alone knows how many Chinese coach parties there must have been in Sydney. I've been to Oz several times but never encountered so many Chinese tourists before. I guess Oz is relatively close, warm in the Chinese winter, and there's no time difference - their equivalent of Tenerife but a damned site bigger!

Re: Portmeirion. IMO it looks a very good value and a quality acquisition. The margins of Wax Lyrical look good and it adds some useful diversification to the main pottery business. It's always good to see the management staying on to ensure continuity in these situations too. I'm a happy holder.

Have a great holiday! Si

Richard Cockbain

I was looking at IRV and was encouraged by their trend toward new deals with some respectable clients. Thank my lucky stars that I hesitated to click buy yesterday.

Looking at the deals I am now wondering if they are buying in business to generate marginal return but just enough revenue to service the debt. That would be unsustainable and when a contract goes South then the performance follows.

The other aspect here is that a good management team would ensure there are clauses in the contract to manage any down-side or changes to cost overheads (e.g. increased minimum wage).

Despite the significant revaluation today I still think this stock is over-valued as the PE will be affected by the overhang from the Glasgow contract.

Flackwell

Would agree with the chinese tourist vias position especially as

I'm having to pay £186 odd myself to visit there this year (and hopefully a quid pro quo would be negotiated), and

given Obama's threat to the UK over a potential Brexit - are they really our special friend and should we not put them to the back of the queue (as he threatend us) and put China at number 1 instead?

Cisk

After horrendous experiences with Connaught, ROK & Silverdell I'll never, ever, invest in a services company like these again. That includes Interserve.

Far too much to go wrong - and as history has shown, it usually does.

JohnEustace

The Americans are pretty much over being angry with us for burning down the White House. Not so the Chinese with the Opium Wars and the sacking of the Forbidden City - at least not to judge from the guide that showed me around back in 2000.
I think it was Palmerston who said Britain doesn't have friends or enemies, just interests. I think the Chinese would take a similar view. It's our dreadful balance of payments deficit that leaves us dependant on others.

Rusty2

Yes looks like some insider dealing at Interserve (LON:IRV), glad I sold mine a few weeks ago.

MichaelFBS

Surely we should make visa applications for everybody wanting to visit on holiday and spend money here in the UK as easy as possible?

TangoDoc

I'm a long term holder of Interserve which, as one of its retired employees (my one-time brother-in-law) told me, had its SP lifted by the then CEO by having its Sector designation shifted from Construction and Engineering to Support Services and Construction. Does the market have a negative view of Construction in general? Did that change of designation make a difference? Whether that story is true, I don't know, but it is a company that has a lot of fingers in a lot of pies. Until it lost the contract with Leicester Royal Infirmary to provide cleaning and catering, Interserve was, simultaneously performing that task and building a much needed multi-storey car park within the grounds. I was not phased the slightest by the loss of that contract which always seemed to me a "poisoned chalice" in any case.

Recently, in company with most building construction companies it has suffered a dwindling of price from £660 a year ago without much obvious reason and in the face of a well covered dividend. I'd submit that 6.4% more than twice covered ought to be reasonable return. It is hard to see how far sentiment appears to be against the building industry even when by common consent, we have a housing crisis and the government is bending over backwards to push planning consents and get themselves off the hook. I see no absence of building work. Are builders sitting on land? Is there a shortage of skilled workers in the building industry? Are banks holding back on lending to build?

Interserve's price went below £4 during that silly, chilly nonsense we endured in January but has been more or less stable above £4 once it recovered. On April 19th, an insider sold £156,000 worth but nobody reacted as far as one can tell. Indeed, on April 20th, J P Morgan marked IRV as "overweight", with a target of £543. Berenberg dropped its target from a silly £730 to a more realistic £645 some weeks ago. Then, yesterday morning, something odd happened. The price fell by over 9% but, search as I might, I found no reason anywhere online other than Liberon Capital flagging it as a "Sell". No statements, gossip. Zilch. All has become clear overnight. At 7 am today we find out that problems in a plant in Glasgow mean a net £35m loss. In context, I note that the 2015 net annual profit of just less than £69m was expected to rise this year to about £94m. This in a £621m business. Before I slag off the management, I need to find out how far they were responsible for the Glasgow cock-up and how much was outside anyone's control.

In a flash, 26%, more than a quid a share was wiped off the value this morning. OK, so it rallied a bit later in the day and it will be interesting to see what Monday brings. As it happens, I like this company and, by inclination, I am a "buy and hold for income" man so I shan't be selling. More than that, I may well scoop up some more when the dust settles. I'd just love to know the timeline of all this. Who knew what and when?

jonesj

In principle, visa applications should be made easy for people from any country where their people are likely to both go home at the end of their trip and not do us any harm whilst they are here.
Considering the development of China, I expect most people who can afford to come here on holiday will intend to exactly that. So it could make sense to simplify visa applications.
One obvious way to increase visitor numbers could be a simple web based application, where anyone with a Chinese passport plus a valid Shengen visa could get a British visa overnight for a very modest fee.
Such an arrangement should of course only be offered to a select list of countries.

back2value

I don't own CTO, but I'm hoping what the update indicates about the sector in general will be reflected in Waterman's next report. If WTM keeps going well, I think it could be an ideal bolt-on acquisition for a bigger group. The SP has slipped back a little recently, but as far as I can tell, nothing has changed.

IRV - cue much soul-searching from HYPers! I was starting to look as well, but fortunately I moved too slowly to make that particular mistake. Tough luck on those who did, as you couldn't have known at the time what was going on. Clearly, the management should have reported this major problem sooner.

Enjoy your trip, Paul, and if you take a few days off next week they'll be well-earned. No complaints from here.

B2V

Paul Scott

7th May '16

Hi B2V,

Thanks.

I think high yielding shares with weak/geared balance sheets are very often an accident waiting to happen. Often CEOs feel obliged to keep paying out big divis, because their Institutional shareholder base demands it. I've heard this from the horse's mouth of several companies.

This can leave companies in very poor financial shape when problems do arise - laden with debt, and hence having crisis talks with the bank at the worst possible time - when investor confidence has been shattered by a profit warning.

Bear in mind that we are in strange times, when banks are not calling in loans because interest rates are so low. My experience back in the 1990-92 downturn was that things were carnage - highly indebted companies just got put into Receivership without a qualm. So that's always at the back of my mind now.

Look at Sepura (LON:SEPU) - too highly geared - ran into problems, and there's nothing to stop the share price falling. Instis can just name their price for the next Placing. Same with ST Ives (LON:SIV) too.

"Gear today, gone tomorrow", as a wise man once told me.

Regards, Paul.

kenobi

>>Bear in mind that we are in strange times, when banks are not calling in loans because interest rates are so low.

But when will this change ?? low rates in tandem with the various schemes that make things even worse have driven the housing market back to ridiculous levels, when will they understand, prices are driven by affordability, if you cut rates and hold them low, prices rise to compensate. if you give out free 20% deposits, prices again rise to compensate, if you subsidise interest rates for the first x years, prices rise to compensate, and when you withdraw these "perks" as inevitably you will have too since they cost a lot of money and don't work, then you cause an almighty crash. If you want to discourage buy to let, put rates up, pensioners are gettitng sucked in as reluctant landlords just to try to make a return on their savings. The bank of england is wary of a property bubble are they ? goodness me how bad does it have to get before they act ?

K

8th May '16

Couldn't agree more. The bullet should have been bitten a long time ago to normalise interest rates and end the crazy scenario we're in. This would end the situation where anybody buying property can just buy it, sit on it and turn a handsome profit for doing nothing. Meanwhile in London, for example, few young people can even afford to get on the ladder, despite earning reasonable salaries.

This 'profit' is not real, it just gets recycled into the system to support what in effect is a government-led ponzi scheme to support the banks. When people sell, they buy somewhere more expensive and so the cycle continues, until retirement that is.

So as usual QE benefited the banks and institutions, and this hasn't been passed on to consumers.

I must check out company debt levels and ensure that they aren't too highly geared - because the time will come when rates do go up, and it's bound to be when we least expect it.

davidtianjin

9th May '16

Regarding Chinese tourists. I'm a Brit working and living in China. I'm currently assisting my Chinese wife and her parents with their visa application to come over for a visit this summer.

It's really not as simple as it should be. Property ownership documents, bank statements, detailed holiday itineraries all have to be provided for each person. Plus they have to apply for two visas, one for mainland Europe and another just for Britain. So all these things need to be provided twice. Its a lot of bureaucratic hassle.

And of course if they come all this way they don't just want to visit Britain, they want to go to Paris, Spain etc as well. I personally know quite a few Chinese who have decided to skip a visit to Britain and just go to France Germany, Austria, Italy instead.

That's my point - along with equality of treatment

Small Cap Value Report (6 May 2016) - IRV, CTO

Chinese tourists

Holiday

Yesterday's report

ISA millionaire - new eBook

T Clarke (LON:CTO)

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About the Author

Paul Scott

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