Small Cap Value Report (9 Jul 2014) - CHRT, SRT, BEG, STVG, THT

9th Jul '14 by Paul Scott

7 comments 17725 reads

Good morning!

Cohort (LON:CHRT)

The market has given a thumbs up to an £8m acquisition announced this morning, by defence contractor Cohort, of a company called Marlborough Communications. I've been saying for a while that Cohort should do something with its surplus cash, so this is an encouraging move. As they are paying cash, then naturally it is earnings enhancing, as cash is currently yielding virtually nothing just sitting in the bank.

The RNS today quotes turnover and EBIT figures for the acquired company, with 2012 figures of £12.4m turnover and £1.9m EBIT said to be typical. I can't determine whether it's a good acquisition or not, without knowing the proper profit figure! EBIT is not a proper profit figure, as the company could be capitalising a whole load of development spending and other capex. So I would have liked the announcement to refer to a proper profit figure.

EDIT: I've spoken to the company's advisers, and am happy to correct this point. They say that the EBIT number is quoted because they want to report profit on a cash/debt neutral basis. I was thinking of EBITA or EBITDA as being inflated figures, but of course thinking about it more clearly after my second cup of Aldi colombian coffee, the EBIT figure is perfectly fine, as that includes depreciation charges. So my mistake on this point, which I'm happy to correct. Apologies for the earlier misunderstanding.

Note that the deal is for 50% plus one share, so Marlborough Comms will become a subsidiary, with its full numbers brought into the consolidated group accounts from the date of acquisition, but there will be a significant "minority interest" line on both the P&L and Balance Sheet, to reflect the part of profit and net assets that is not owned by Cohort. The EPS figure adjusts for this though, so is usually the easiest number to focus on in (relatively unusual these days) situations where subsidiaries are not 100% owned.

As regards the other 50% (minus one share) part of Marlborough Comms, there is an unusual but quite interesting way of dealing with that;

Cohort has agreed to acquire the remaining MCL shares following the end of the year to 30 September 2016 at a price determined by MCL's order book and EBIT performance for the years ended 30 September 2015 and 2016. Cohort's obligation will lapse in the event…

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shanklin100

9th Jul '14

Hi Paul,

Is there any possibility you could comment on STVG's pension-related announcement today please? I see Edison havesubsequently issued what is IMHO a very bullish e-mail including a statement that the announcement was very much as expected despite there, at least that I have yet to find, never having previously been any indication that the pension deficit was anything like on this scale.

Thoughts welcome. Best wishes, Martin

Gostevie

Hi Paul,

This bit of the Outlook Statement from the Begbies Traynor (LON:BEG) results gives weight to your suggestion that "...Government policy of ultra-low interest rates, and political pressure on banks to allow insolvent zombie companies to continue trading, has massively distorted the usual creative destruction of a recession":

A sustained rise in rates would result in a less benign financing environment, with the possibility of an increasing number of insolvencies and restructuring assignments.
With the benefit of our reduced cost base, a strong financial position and committed medium and long-term bank facilities, the group remains well-placed to take advantage of opportunities to develop and enhance the business, both organically and through selective acquisitions. We also retain the capacity and expertise to handle an increase in activity levels should they arise, which would result in improved profitability due to the inherent operational gearing in the business.

Happy to hold shares in this company, which with the total year's dividend maintained at 2.2p gives a yield of around 4.8% at the current price of 45.5p.

Steve

maillotàpoisrouges

Hi Paul
regarding BEG, i did some research on this a few months ago. It's the only company i have ever looked at seriously with book value per share above the actual share price. Is this significant?
Thanks
Hederz

Paul Scott

Hi Hederz,

Most of Begbies Traynor (LON:BEG) book value is goodwill on acquisitions, which in my opinion should always be written down to zero. The net tangible assets then become only £7.5m, so it's not an asset play. It's a cashflows/divis play. With the potential for growth thrown in for free.

Regards, Paul.

marben100

I'd just like to make one further point about Begbies Traynor (LON:BEG) . I wasn't overly impressed with the results this morning, especially following a strong run since I purchased last November, with a top-up in January, so was in two minds whether to take my profits & run. However, it occurs to me that an investment in Begbies is a natural hedge against rising interest rates, as the announcement and Paul's commentary points out. As other parts of my portfolio (especially fixed interest investments) may suffer when interest rates eventually rise, I concluded that holding on adds some sensible balance in my portfolio, so I will remain a holder.

Cheers,

Mark

makw61

Hi Paul,

It would appear that STV have only just agreed the 1 January 2012 actuarial valuation. Therefore the accounts figure will have been based on the 1 January 2009 actuarial valuation rolled forward for changes in asset values and with the liability recalculated for e.g. changes in discount rates. However, other actuarial assumptions will not have been reassessed, of which the most significant will likely be the mortality assumption which feeds into the liability side of things. As life expectancies will have increased since 2009, and revised actuarial tables issued, this would tend to increase the liability side of things but I can't really understand the quantum of the change as the report states a 1 year increase equates to a 3% increase in liabilities, or c.£9m by my calculation. I would think an increase of 2-3 years possible unless they were using some very old tables previously!

Triennial valuations do take some time to prepare and for the trustees to agree, but I would think 12-15 months would be closer to normal practice. Perhaps there have been some difficult discussions around the recovery plan?

For me, DB schemes are a bit of a "red flag" as the risks always seem to be on the downside. The asset side of the equation is factual, but the liability side of things can be quite subjective and human nature seems to tend to overly optimistic assumptions. The presence of a DB scheme wouldn't put me off if everything else looks good, but I tend to avoid where possible.

Best,

Mark

10th Jul '14

Hi Paul

Thank you for your comments on the STVG pension-related RNS. I too am at a loss as to why the SP did not suffer more albeit Edison did issue a note suggesting the pension payments going forward are less than they expected. Just a bit of a surprise (to me) that this was not IMHO fully reflected in any previous RNSes.

All IMHO, DYOR.

Regards, Martin

Small Cap Value Report (9 Jul 2014) - CHRT, SRT, BEG, STVG, THT

Cohort (LON:CHRT)

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Paul Scott

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