Small Cap Value Report (7 Apr 2016) - FLYB, UBI

Good morning!

A slight misunderstanding has arisen over what is, and what isn't acceptable in the comments section after these reports. It's really just common sense, but for the avoidance of doubt, here is the memo.

Stockopedia is my sensible space. Other social media - arguably not so much. We don't mix the two.

As if my patience wasn't already wearing thin, Flybe has put out a trading update - that's usually a bird-strike for the share price.

Flybe (LON:FLYB)

Share price: 59.5p (down 7.1% today)
No. shares: 216.7m
Market cap: £128.9m

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

Trading update - actually, it seems alright to me, with the key part being an in line update:

Results for the full year to March 2016 are anticipated to be in line with market expectations.

Various other details are given. The load factor of 68% seems low to me, down 2% on last year - possibly due to surplus planes being used for routes that probably wouldn't otherwise be operated. That's a lot of empty seats on an average flight - almost a third.

The terrorist attack in Paris gets a mention - although these days I don't think many people give any thought to terrorism - it's a risk when you get on a plane, same as many other risks that we face every day in life. If you're in the wrong place, at the wrong time, then that's that. It certainly won't stop me, or millions of other people from flying.

In fact, we're flying more than ever, due to lower fares:

Against the background of the highest level of market capacity growth for six years driven by low fuel prices, we continue to be disciplined in deploying our capacity, focusing investment on routes where airport partners provide cost mitigation and those which adhere strictly to our business model. We are also continuing to reduce unit cost, which provides margin resilience, as well as reviewing our capacity growth rate beyond this summer.

Note the strong balance sheet here, with cash (from customers paying up-front) considerably exceeding the market cap:

In March 2016, Flybe took ownership of three Q400 aircraft, previously on operating leases, for a cash consideration of USD34m. This is in line with Flybe's strategy of rebalancing its aircraft fleet away from reliance on operating leases and towards outright ownership which brings the associated margin uplift. Flybe's cash position remains strong with total cash of £171.3m at 31 March 2016.

Valuation - tricky one, as the share is always in turnaround status. This is wearing a bit thin now. The PER is over 20 on current year estimates, but drops to under 6 on next year's estimates. The trouble is, the company has tended to undershoot forecasts in the past, so we'll have to wait and see on this.

I'm fed up with it, but you can't let emotions drive business decisions, so I'll continue to hold. It's a lot of business for the money, in my view.

There's not much else in the way of results today, which is handy as I'm shortly heading into the City for a company meeting. Am trying to get round to meeting more management - as good management is so key to a business/share succeeding or not. Trouble is, it's completely subjective. Some management can appear brilliant giving powerpoint presentations, but are useless at running a business, and vice versa.

A few snippets before I head into town:

Ubisense (LON:UBI) - it's so annoying when companies release results or trading updates at any time other than the norm of 7am. Ubisense released results at 10:33am today. The figures are awful, and there's some really worrying stuff about the banking covenants:

The Group is required to meet certain financial criteria agreed as covenants for the bank loan as laid out in note 18 to the Financial Statements. The financial measures are regularly reviewed against covenant requirements to ensure the Group's obligations can be met.

The Group notified HSBC of a breach of the covenants relating to adjusted EBITDA as at 31 December 2015 and as at 31 March 2016, against which HSBC provided Reservation of Rights letters indicating that they do not intend to take further action.

With a covenant test based on a rolling 12 month adjusted EBITDA calculation, the Group anticipates further covenant breaches in the next 12 months until the full effect of the restructuring actions taken in 2015 are delivered and the disappointing results of 2015 no longer have an impact on the calculation. The Group is engaged in constructive discussions with HSBC on a multi-year repayment loan with business appropriate covenants as a replacement of this facility.

That's a very dicey position to be in.

It makes another Placing, probably at a deep discount, a racing certainty. Therefore why would anyone in their right mind buy the shares now?

My consistent scepticism about this company from c.200p, all the way down to 36p, has proven correct. This business needs to shed costs, and move into profit asap, as I think time is running short. Shareholders, and definitely not banks, will not continue funding losses forever.

EDIT: Many thanks to the reader who flagged up a subsequent announcement today about a discounted Placing at 25p per share. That's a nasty 30% discount to the share price of 36p, when I wrote the above section. As usual, private investors holding the stock get diluted. That's the way it goes with distressed fundraisings - the company can't hang about, or have the uncertainty of an Open Offer, it just has to dilute existing holders by issuing new, cheaper shares to whoever the broker lines up for the Placing.

I see that the share price has since fallen to 30.5p, down nearly 23% today. Private investors can only look on, in dismay. If they are so inclined, then investors in today's placing can flip the stock for an instant profit. Therefore the share price is likely to gravitate towards the 25p placing price.

So, a shambles really. However, when you run out of cash, it's all about survival. This situation perfectly highlights why I try to apply such strict balance sheet screening rules, so that I don't usually end up in situations like this.

Losses like this are easy to avoid - a few simple checks of the accounts, taking less than a minute of your time, can identify whether a company has sound finances or not. OR, let me do the work for you, and just read my reports every day, or search the archive here by ticker or company name.

Intermediate holding companies

The more I think about it, the more I feel that so-called "Value Creation Plans" are simply an elaborate form of theft. Company Directors are already paid lavish salaries, bonuses, other perks such as company cars & pension contributions which dwarf anything provided for other staff.

On top of this they are usually also "incentivised" with share options schemes which give them free, or cheap shares, just for doing their job.

Now the most grasping of the managerial class are also trying to typically steal 15% of the company from its shareholders, through a mechanism whereby an intermediate holding company is created, with 15% of its shares being hived off to management - with a fig leaf of performance targets, and delays of several years, being used to disguise what is straightforward theft.

I strongly urge all shareholders to vote against all such proposals, and do everything you can to sack all Directors and advisers who set up such schemes. They are morally wrong, and the perpetrators have no shame in my view. Totally despicable.

White collar crime comes in many forms, and at this rate I'll be voting for Jeremy Corbyn, and get some of these morally bankrupt people put in prison. It's long overdue.

On that bombshell, I have to fly. See you tomorrow.

Regards, Paul.

(usual disclaimers apply)