Small Cap Value Report (Fri 23 Aug 2019) - GDWN, ESL, ETO, STL, D4T4, SPE

22nd Aug '19 by Paul Scott

29 comments 7419 reads

Good morning, it's Paul here.

I had a few technical problems getting yesterday's article to update, so have decided to start with a new article today, with the backlog from yesterday.

Timings for today - I'm not sure at the moment. In all likelihood the remaining backlog from yesterday might have to wait until this evening, or tomorrow morning.

Goodwin (GDWN)

Share price: 3480p (up 1.5% at close yesterday)
No. shares: 7.2m
Market cap: £250.6m

Final results

This is an engineering group. Several readers asked me to look at it yesterday. Unfortunately, the section I wrote yesterday disappeared when I updated the article, so am having to write it up again now.

Results for FY 04/2019 look solid:

Revenue up 1.8% to £127m
Pre-tax profit up 11% to £14.7m - note the decent profit margin of 11.6%
Diluted EPS of 150p - giving a PER of 23.2 - that looks very pricey compared with Castings, which I looked at yesterday, on a PER of about half this level.

Outlook - this is the exciting bit. There's been a huge increase in the order book, with more in the pipeline:

Furthermore, I am also delighted to confirm that we have seen a significant rise in the level of sales order input within our Mechanical Engineering Division. Whilst some individual elements would not be notifiable the aggregation is significant for the Group. With this exceptional input, I am able to confirm that, at the time of writing, the Group order input since the start of the new financial year stands at £93 million and the total forward order book stands at a record £165 million (July 2018: £85 million), a 94% increase from this time last year, with yet more large long-term contracts, that we have been targeting over the past few years, still to be placed.

That sounds tremendously positive. I wonder what's driving it? At a guess, cheap sterling must be boosting things. Weak sterling is reported on the news as being something terrible, but of course it's positive for UK producers & exporters, making them more competitive.

Here are my notes from reviewing the results today;

Very positive commentary & outlook
Capex heavy
Capitalised development spend of £1.5m - not very much
High inventories - but £5m due to unwind. Still high though
Balance sheet OK, but weaker than Castings (CGS)
Big fall in cash generation compared with…

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GTrader

23rd Aug '19

Agree very odd, no news and unclear downside. Thin vols but now 11% off

rmillaree

Henry Boot (LON:BOOT)
I share your positive vibes here jonno.
Other than construction and brexit this share ticks all the boxes , i think their decent landbank pipeline of projects and conservative accounting (no Burford style booking of profits based on notional increases in value) - should seem them fine unless land prices take a material knock - i just can't see that happening with the lack of housing in this country.

iwright7

Paul,

Thanks for the Goodwin (LON:GDWN) analysis, whose outlook does seem to be transformational. There appears to be a differentiator with Castings linked to production of larger castings and US orders. This overview from the end of last year, by Richard Bennard.....

....Goodwin took the opportunity to install bigger and more sophisticated plant capable of casting even larger products weighing up to 35 tonnes – a size that relatively few foundries around the world can match. Goodwin completed the lengthy approval process required to supply the US Navy last year, and has secured the first of what the company believes will be many orders supplying its shipbuilding programme. It is also targeting the US civilian and military nuclear industries, which also require huge high-integrity castings for nuclear reprocessing and propulsion systems.

andrea34

I read on Twitter re Character (LON:CCT) that the Peppa Pig licenses will be up for renewal in two years, and the fear/assumption is that they won't be. Price now down over 20%, 400-416.

hagon

So the big question is how reliant is Character (LON:CCT) on the Peppa Pig licence? Does anyone know?

Glaws2

CCT - Peppa Pig 21% of sales in 2018.

GavSmith01

Hi Glaws - what is your source for that please? I've been trying to find out myself.

CCT - it was their presentation at Mello in April

davidjhill

Character (LON:CCT) two years is a long time to be able to pivot so the fall is overdone in my opinion. It is also not a particularly long period to develop a new set of toys given that none of that work would start until after completion of the deal. Large organisations have to plan well in advance, so even if licence wasn't extended I'd expect a run off period.

Anything from Co yet? % exposed would be useful.

abtan

Held Character (LON:CCT) until this morning.

Whilst I agree with you that it will take a long time for Hasbro to make their own Pepper Pig, Paw Patrol, etc... toys, they probably will make them eventually.

Long term I agree that Cattles (LON:CTT) will be fine and it is one that I will keep a close eye on, but market sentiment will, IMHO, most likely push the share price further down in the short-term on the expectation of reduced revenues.

So why stay in? Why risk anything when you can sell, wait until the dust has settled and then buy back in when things look rosier?

A

BarrieLomas

Hi Paul... SPE was on yesterdays to do list for reporting but NO COMMENT so far any chance we may hear from you on SPE.

JohnEustace

You seem to be saying that Hasbro can't develop and launch new toys in two years, but that Character can even though they start now from behind without a replacement franchise? There aren't a whole lot of Peppa Pig equivalents out there.

I would say Hasbro are much larger with greater resources and are more aggressive.

MichaelFBS

“With so many bids occurring, for decent-sized companies, it's difficult to avoid concluding that UK listed shares might be too cheap. Or at least some of them.”

In Dollars or Euros but probably not in pounds!

24th Aug '19

SPE …. was on your list for Thursday … what are your thoughts on SPE

Paul Scott

Barrie,

My comments on SPE are now in today's article.

I got locked out of Thursday's report due to some unknown technical glitch, and I lost all my updates. So am having to reconstitute them in Friday's report. I was busy doing some charity fundraising on Friday afternoon, hence catching up Saturday morning.

Both Graham & I are part-time, freelance writers, so we have to fit things around doing other stuff.

Regards, Paul.

????? I'm saying nothing of the sort. Character (LON:CCT) already have the products and the licence and will continue to sell them exclusively for at least the next 2 years.

Hasbro first need to complete the deal which will take several months and it is unlikely that they will spend the time from now to deal completion on what would be relatively low level merchandising plans and development.

Once the deal is complete then they will need to decide whether to bring the licence in-house or leave it with Character (LON:CCT) ; they get royalties on it either way. Assuming they decide to bring it in-house it is unlikely that Character (LON:CCT) would then give them the product they develop in-house. Thus Hasbro will need to stick that into their design team, toy manufacturing plans and marketing/distribution. Again for a big company like Hasbro that takes time. All of that whilst integrating Entertainment One (LON:ETO)

My point is that whilst long term I agree that it is likely that the Peppa toy merchandising goes in-house it is relatively small fry to Hasbro and probably nowhere near top of the list of their priorities, especially as Character (LON:CCT) does a good job of distribution and Hasbro will receive royalties anyway. Therefore it is not beyond comprehension that actually the licence gets extended.

Peppa accounts for approx 20% of Character (LON:CCT) sales and the share price has fallen 20%. Thus the market is saying it is nailed on guaranteed that the Peppa licence is lost. Not only that but it is saying that it is lost today and not in 2 years time. Further, it is saying that Character (LON:CCT) cannot replace any of that revenue with something else ever in the future..........really ??? They have a pretty good track record of diversification over the years. Whilst for Hasbro Peppa toy merchandise isn't going to be top priority for Character (LON:CCT) replacement of Peppa is. Therefore management focus will be different.

Lastly I note that Entertainment One (LON:ETO) is trading above the offer price. That also says market potentially expects another bidder, so not guaranteed that Hasbro will even win the race to take over

thirty fifty twenty

Hi David - I mostly agree with all your caveats re Character (LON:CCT) and the licence implications.

However for me the starting point is that Pippa Pig is 23% of sales but that the impact on profits would be much larger - prob 30% to 35%. Of course CCT can take cost cutting if their business is smaller but that is possibly a CASH cost. Just a negative to offset the facts you present.

I think also that Peppa Pig gave CCT a gravitas which enabled them to add other global brands around that. If the future scenario is without PP , it does make the whole group profits slightly more volatile, and the medium term profit growth slightly less attractive, both of which means I would attribute a lower rating to whatever level of profits CCT has.

Thus for me a c.20% fall is a reasonable market reaction being a mixture of 30% profit loss in 2 years on a lower rating if the licence is removed, and the much more likely scenario that the excellent mgt team at CCT are able to mitigate the impact.

I am a long term holder but not adding yet
CCT is in my top5 hldgs

Trevor47

25th Aug '19

I have Eddie Stobart, and fingers crossed. I was keeping them as good dividends and balanced risk rating. The share price was recovering too.

ttjs4

By freak chance, I had a look at Eddie Stobart last week. One thing that stuck out was how the companies cash generation dropped off a cliff in 2018. Operating Cash Flows/Net Operating Cash flows (before CAPEX) were:

2014: 37.1m/30.2m
2015: 32m/16.0m
2016: 29.7m/17.7m
2017: 29.2m/18.9m
2018: 7.5m/-3.3m

This is despite operating profit and EBITDA increasing over the period. Debtor days also took a significant jump with trade receivables going from 149m to 231m having grown steadily and roughly in line with revenue in previous years. Made no sense to me at the time but I didn't investigate any further. Without further research, it looked like a smoking gun.

Small Cap Value Report (Fri 23 Aug 2019) - GDWN, ESL, ETO, STL, D4T4, SPE

Goodwin (GDWN)

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Paul Scott

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