Small Cap Value Report (7 Sep 2015) - BRY, AVAP

Monday, Sep 07 2015 by

Good morning!

It's a public holiday in the USA today apparently, so their market will not open. This is likely to mean a quieter day here in the UK.

Brady (LON:BRY)

Share price: 98.5p
No. shares: 83.3m
Market cap: £82.1m

Interim results to 30 Jun 2015 - this software company has a tendency to give an upbeat commentary with poor figures, and that's certainly the case today. Really upbeat narrative, but the figures are not very good at all.

Revenue fell nearly 10% in H1 to £14.1m, and recorded a pre-tax loss of £389k (vs. £1.4m profit in H1 of 2014). The company blames reduced turnover on forex movements, and "the timing of licence sales".

The narrative says that these results are "in line with market expectations for the full year", which will require a dramatically better H2 performance, since the market is expecting a full year profit of £4.7m, meaning that H2 will need to deliver over £5m in profit, which looks a tall order to me. Although the company says;

Anticipated strong performance for H2 2015 with visibility on 80% of revenues for the full year.

Valuation - the StockRank is 76 - so upper medium.

It's looking fully valued on most metrics below;


Balance sheet - reasonably good. The net cash of £6.2m is mostly money received up-front from customers, as is often the case with software companies.

Note there is a pension deficit of £2.4m, which has risen from £0.9m a year earlier.

My opinion - there's lots of positive-sounding stuff in the narrative, about new contracts, etc., but the H1 figures look disappointing. So personally I would be very cautious about wanting to buy shares at an £82.1m market cap, when it has just reported a loss for H1.

Companies which need to strongly out-perform in H2 to hit their full year forecasts very often struggle to do so. Therefore I suspect there is an elevated risk of a profit warning here if they don't manage to deliver the anticipated strong H2.

I'll check out the full year figures when they are published in the Spring of 2016, but for me anyway, risk:reward doesn't look attractive right now.

Another issue to consider is that Brady has a strong focus on energy & commodity markets. So they could at some point possibly suffer fall-out from the chaos in that sector. Maybe that is the underlying…

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Brady plc is a United Kingdom-based provider of trading and risk management software to the global commodity and energy markets. The Company combines integrated and complete solutions supporting the commodity trading operation, from capture of financial and physical trading, through risk management, handling of physical operations, to back office financials and treasury settlement for energy, refined, unrefined and scrap metals, soft commodities and agriculture. The Company's business units are Commodities and Energy. Its clients include various financial institutions, trading companies, miners, refiners and producers, scrap processors, tier one banks, various London Metal Exchange (LME) Category 1, 2 clearing members, and other European energy generators, traders and consumers. It offers commodities solutions, energy solutions, credit risk, cloud services, and client services and support. more »

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Avation PLC is a United Kingdom-based company engaged in leasing of aircraft. The Company is a commercial passenger aircraft leasing group managing a fleet of 47 aircraft, which are leased to airlines globally. The Company's fleet includes Airbus A220, A220-300 A320 and A321 narrow-body jets, Boeing 777-300ER and Airbus A330-300 twin-aisle jets, Boeing 737-800 NG, ATR 72 twin engine turboprop aircraft and five older Fokker 100 jets. It supplies regional, narrow-body and twin-aisle aircraft to the airline industry. It serves the commercial airlines. It owns, through its subsidiaries, a range of commercial passenger jet aircraft, which are leased to various airlines in Europe, Asia and Australia. The Company's subsidiaries include Avation Capital S.A., which is engaged in financing, and Capital Lease Aviation Limited and MSN429 Leaseco Limited, which are engaged in aircraft leasing. more »

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

19 Comments on this Article show/hide all

imranawan 7th Sep '15 1 of 19

Hi Paul

I'd be interested to get your thoughts about Avation (LON:AVAP) who published results this morning.

Best wishes,

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Paul Scott 7th Sep '15 2 of 19

In reply to post #105956

Morning Imran!

I'm working on Avation (LON:AVAP) right now, so that will be up shortly.

Regards, Paul.

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imranawan 7th Sep '15 3 of 19

In reply to post #105959

Thanks Paul. I think its a real marmite stock, especially amongst the private investor community. I first came across them at Mello 2014 in Derby last year. The share price performance since then has been disappointing, but I think the growth should come through over the next year. As always I look forward to getting your take on the results.

Best wishes,

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FREng 7th Sep '15 4 of 19

Tracsis (LON:TRCS) have announced a small acquisition today, which made me take a look at them. They are in the (currently) sexy business of data analytics for the transport and smart cities sector and profitable, with a reasonable free cash flow. I liked what I saw and bought some.

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janebolacha 7th Sep '15 5 of 19

Paul, thank you for your write-up on AVAP.

The exposure to the commodities business is from the very start of the business when they took on leases for small Fokker aircraft operated by SkyWest and serving mining routes in Western Australia. The business has now grown so much in other directions that the WA business now represents only a very minor part of revenues.

AVAP's main customer in Australia is Virgin Australia, mainly for their routes on the Eastern seaboard, in NSW, Victoria, Queensland and South Australia, using ATR72 aircraft.

AVAP is expanding fast into an international lessor, now with Thomas Cook, Flybe, Air France and Air India Regional as clients. increasingly leasing Airbus planes rather than the ATR72.

I've really spent ages going into this company and have asked quite a few questions of both the Chairman and the CFO. They seem to be very open and I have found no skeletons. To me, it seems like one of those companies simply overlooked, perhaps with a legacy perception (just as it stuck in your mind about the WA/commodities exposure) that is out of date and which the market will wake up to.

An SP some 12% below Tangible Nett Book Value gives an additional safety margin, imo. Avolon, a bigger aircraft lessor based in Ireland, has just been taken over at about 25% above TNBV and aircraft lessors probably do have attractions as fairly secure good-yield investments in this era of yields elsewhere that are close to zero, for pension and insurance funds and the like.


Best wishes,

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Carcosa 7th Sep '15 6 of 19

Avation (LON:AVAP) I do not have easily accessible data for US companies but using Google Finance the following similar companies sport P/E's as below:

AerCap Holdings N.V.(NYSE:AER) P/E 7.0
Fly Leasing Ltd(ADR)(NYSE:FLY) P/E n/a
Air Lease Corp(NYSE:AL) P/E 14.6
Aircastle Limited(NYSE:AYR) P/E 9.4

So AVAP are in the 'ballpark'. However if anyone could dig out the P/NTAV's of the above that may prove useful

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BrianGeee 7th Sep '15 7 of 19

Jane, I had also thought the Avolon premium to NAV wasn't so high, but then it was pointed out to me by another AVAP holder that the premium to NAV was closer to 70%.

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ridavies 7th Sep '15 8 of 19

Re AVAP, Im as surprised as you are Paul at the market valuation.

Additionally, the report says that they already have customers for 8 out of the 10 aircraft to be bou8ght this next year. So they are not going to be sticking around.

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janebolacha 7th Sep '15 9 of 19

Brian, where did your friend get that from?

The Stockopedia figures show:

Price to Book Value 0.86
Price to Tang. Book 0.88

PS: Brian, sorry, I now see you were referring to Avolon.

Wow, a 70% premium, even better.

| Link | Share | 1 reply
tads 7th Sep '15 10 of 19

Hi Paul

Did you finish that book and is it worth buying?


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simoan 7th Sep '15 11 of 19

In reply to post #105973


I assume Brian was referring the the PTTBof Avolon being at a premium, not AVAP. From memory the recent bid for Avolon assumed a PTTB of ~1.5.

I have been building a bit of a holding over the past week or so and like you have found no nasties whilst doing my research. I agree the price weakness is down to misconception and general lack of interest with bored PI's dumping the shares in the recent market turmoil as it's been on low volume. Like Paul, I have no idea why the share price at such a discount to book and can easily see it back at 150p in the next twelve months. 


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paraic84 7th Sep '15 12 of 19

I've yet to do proper research but Avation sounds like it could be another Fairpoint where a company has changed the focus of its business and the investment community is yet to catch up.

My own reservation in investing in a company like this is that it has high net debt (for the reasons Paul explains) so I wonder if that results in depressed valuations for the sector? Interesting to see that it seems to be priced below other similar companies though.

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Stegrego 7th Sep '15 13 of 19

A lack of exposure to PI's isn't a problem AVAP has as they present at every show and seminar going.

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Aislabie 7th Sep '15 14 of 19

I don't know whether it holds back investment in Avation (which I hold) but I have wondered about the relationship with its 96.6%owned but separately quoted subsidiary Capital Lease Aviation.
CLA appears to be continuing its own parallel plans for leasing and, peculiarly, has a Stockrank of 87 against its parents 34.
Does anyone understand what role this company plays in the group, why it maintains a separate quote and why all business does not run through the favourable tax regime of the parents Singapore residence. From a governance point of view I also get a bit concerned about how expenses get shared in these instances.

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Ramridge 7th Sep '15 15 of 19

Re. Avation (LON:AVAP). I have been a holder of this stock since Oct last after reading Mark Slater's piece in This is Money:

He pointed out many of the attractions that Paul and others have discussed here, and in addition talked about the stock being a takeover candidate.

The sp has done its gyrations since and has landed more or less at the price I paid. The investment case is as strong as it was then, so I will continue to hold for the medium term.
Regards, Ram

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shipoffrogs 7th Sep '15 16 of 19

In reply to post #105985

"A lack of exposure to PI's isn't a problem AVAP has as they present at every show and seminar going."

Isn't that a red flag?

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simoan 7th Sep '15 17 of 19

In reply to post #105988


He pointed out many of the attractions that Paul and others have discussed here, and in addition talked about the stock being a takeover candidate.

Of all the things going for Avation any potential takeover is way down the list of reasons that I hold. IMO I think this is being a bit overplayed, particularly of late as a result of the Avolon takeover. 

Avolon was only IPO'ed last December and was already a much bigger player than Avation with about 250 aircraft and now with a $2.6bn market cap, so about 10x bigger all round. Avation is a real tiddler in terms of leasing companies and it's difficult to see why one of the bigger players who have ready access to capital and aircraft would take it out at this point. That's not to say it would not look a bit tastier once it has fully deployed the proceeds of the bond in a couple of years time. Having said that I'd take 200p now ;-)

All the best, Si

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Ramridge 8th Sep '15 18 of 19

In reply to post #105991

Simoan - Re. Avation (LON:AVAP) The aircraft / airline sector is not my patch but going by Mark Slater's view in October last, AVAP needs to scale up to at least 100 planes before it can be seriously considered as a takeover candidate.
Well, the number of aircraft it owned last year were 25, and in the latest interim report in June 2015, the fleet is said to number 29. Hardly a racy growth rate to a 100. So yes I agree with you that today the company's takeover potential is remote to say the least.

ps. A bit of trivia. Reading the interim results, it mentions several times "the number of aircraft". I thought it was a typo and that it should read "the number of aircrafts". However after googling, it appears that both forms are correct. The plural of aircraft can be aircraft or aircrafts. One to add to my list of useless knowledge.

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janebolacha 14th Sep '15 19 of 19

Here's a report from Beaufort Securities on AVAP:

It's a bit sloppy in the notes on page 4, where they seem to be laying stress on "Asia"
as a market when it's Asia-Pacific and principally Australia where the greatest amount
of business in that region actually is. Apart from that, they summarise the
investment case fairly well, imo.

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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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