Small Cap Value Report (Fri 6 Mar 2020) - TENG, KIE, DLAR, WEY

Good morning, it's Paul here, with Friday's SCVR.

As usual, this is initially a placeholder article, to allow subscribers to add comments from 7am, as I gradually write the main report throughout the morning. I have to stick to the official 1pm finish time today, due to travel plans.
Edit at 11:19 - today's report is now finished.

I hope you're all coping alright with the current very difficult market conditions. It's a gruelling time, so I sympathise if your portfolio is getting knocked about as much as mine.

In case you missed it, I wrote a new section late afternoon about Hostelworld (LON:HSW) in yesterday's report. The key issue with travel companies, is whether they can survive the sudden drop in passenger numbers. I focused on this in my report on HSW, and it's a good template for looking at other travel companies too.

As Flybe showed, airlines that are already in trouble, are likely to be pushed over the edge with recent developments. I'll focus on that here, and try to steer readers away from companies that could go under, as usual.

There's an interesting article here in today's Telegraph showing that half of Flybe's routes have already been taken up by competitors. With about 80% likely to be taken up within a week. This seems to confirm that the Govt made the right decision, not to prop up Flybe with taxpayer money. Capitalism can be brutal, but re-allocating resources to more efficient competitors is ultimately the best thing.

It's all very well people saying that coronavirus is just a temporary blip, but operationally geared companies (high fixed costs) may not be able to survive even a few months of disruption. I think we could see large numbers of independent cafes/bars/restaurants go under, because many are already on a knife-edge financially, due to over-capacity in the sector. Hence a sudden, and large drop-off in customer numbers, which is probably imminent if not already happening, could be the final straw for lots of small businesses. That could tip our services-based economy into recession, in my view.

The head of the IFS says that the UK could experience a technical recession (2 consecutive quarters of negative growth), triggered by coronavirus, in Q2 & Q3 of this year.

Please see the header above, for the companies I intend covering today. Only TENG reported today, the others (Kier, De La Rue, Wey Education) are backlog items on my notepad, that I didn't get round to looking at previously, but want to look at. There won't be any time for reader requests today, sorry.

---

Ten Lifestyle (LON:TENG)

Share price: 75p (down 10% at 08:20)
No. shares: 80.65m
Market cap: £60.5m

Trading update

Ten Lifestyle Group plc (AIM: TENG), a leading technology-enabled global lifestyle and travel platform for the world's wealthy and mass affluent provides a Trading Update and notice of its half-year results, for the six months ended 29 February 2020, which will be announced on Thursday 14 May 2020.

As you would expect for anything travel-related, this share has been beaten up in recent weeks, due to coronavirus:

.

For anyone not aware, the dotted horizontal red line above is the current share price. In this instance you can see that it gapped down a bit this morning - suggesting this is probably a mild profit warning.

Key points;

Trading at adj EBITDA breakeven in H1 - said to be in line with mgt expectations, and an improvement on last year. Although to my mind, it's really still loss-making, since adj EBITDA is the softest profit measure possible.

Still burning cash - which is down £2.8m in 6 months, to £9.5m - enough to keep going for now.

This period would have been barely affected by coronavirus, so the outlook comments are more important that what is now historical performance.

Coronavirus update -

Ten's revenue substantially derives from service delivery rather than the conversion of bookings such as a travel or event ticketing stand-alone business.

This sounds ambiguous. I think what they're saying is that revenue is subscription-related, not commission-related. In which case, why didn't they just say so?

This bit is also unclear;

We experienced some disruption in our APAC region in January and February and during this period we have been able to support our members in relevant ways, mitigating the financial impact on our business.

Clarity doesn't improve much with this next bit either;

Currently, service activity and member engagement levels remain as expected on a group-wide basis and we are successfully supporting our members with both 'business as usual' requests and other requests related to the Coronavirus

There's another paragraph of waffle, so let's ignore that and cut to the chase:

As a result of the above, the Board expects a reduction in Net Revenue growth for FY20 compared to expectations. However, the Board expects continuing operational efficiencies to mitigate the impact on adjusted EBITDA and net cash for the year.

Broker updates - nothing available for private investors, so I can't take this any further.

My opinion - what a useless update, it's almost entirely just waffle!

All it really tells us is that there is some unspecified impact from coronavirus disruption, and that they're mitigating it with some cost-cutting.

This business has been loss-making in the past, although it was bearing down on breakeven before this crisis erupted. The only logical conclusion is that the current crisis must be bad for business, hence it's likely to remain loss-making. As such, it doesn't interest me at all. I'm looking to buy great businesses that are taking a short term knock, which this is clearly not.

Note that optimistic broker forecasts were slashed almost a year ago. Therefore I would take current forecasts of a big rise in profit next year with a pinch of salt.

.

---

Kier (LON:KIE)

Share price: 111p
No. shares: 162.1m
Market cap: £179.9m

Interim results

Kier Group plc (the "Company" or the "Group"), a leading construction and infrastructure services company, announces its results for the six months ended 31 December 2019 (the "period").

I've covered this group a couple of times here, concluding that its finances are nothing like as bad as basket case Carillion, which of course went bust. Hence, despite widely reported problems, my view was that Kier looks salvageable, although too risky for me to want to get involved personally. The trouble with these large construction & contracting groups, is that there can be any number of problems lurking under the surface. So many have gone bust in recent years, that the whole sector terrifies me. That said, of all the problem shares I've looked at in this sector, Kier looks the most likely to come good, as it's still profitable, and has a half-decent balance sheet compared with others which went bust.

Key points from interim results -

• Pre-exceptional operating profit of £46.7m - on £1,866m revenues, a low margin of only 2.5%
• Exceptionals take it to a -£41.2m statutory loss before tax
• Net debt of £242.5m, average month-end net debt of £395m is a more realistic figure. Well within bank facilities. Although renewal of facilities & bonds will be a key issue in future
• HS2 proceeding is good news for Kier, and lots of recent big contracts won - huge forward order book of £7.9bn
• Very complicated turnaround plan underway - many moving parts - disposals, cost-cutting
• Going concern note - no bombshells in it that I could see
• Balance sheet weak - NTAV is negative, at -£355.2m
• Pension schemes, am just flagging this, as not got time to delve in that today

My opinion - there are so many moving parts here, it's an incredibly complicated situation. I remain of the view that it looks a potentially survivable situation, providing nothing else goes wrong. Would I want to get involved? No, it scares me too much! That said, if things work out well, then this could be a potential multi-bagger from £180m market cap. Or if something major goes wrong, existing equity could get wiped out. I cannot predict how things might pan out, it's too complicated & uncertain.

.

---

De La Rue (LON:DLAR)

Share price: 124p
No. shares: 104.0m
Market cap: £129.0m

Turnaround and trading update

2019/20 is for the year ending 31 Mar 2020.

This announcement was issued on 25 Feb 2020, caused a brief surge in price, as you can see below;

.

I went through the interim results in some detail, here in Nov 2019, and re-reading my notes, it's already putting me off! There would need to be something very special in the latest update to induce me to buy shares, especially in the current chaotic market sell-off.

Current trading -

Trading during the second half for both divisions has been satisfactory, and the Board reconfirms the current guidance for adjusted operating profit for FY2019/20 of between £20m and £25m.

That's encouraging, because it only made £2.2m adj operating profit in H1. Therefore, the hoped-for big turnaround in H2 performance, which previously looked very optimistic, does seem to have happened.

Bank facility/covenants -

The Group expects to operate within its banking covenants for FY 2019/2020, including the net debt/EBITDA covenant of ≤3.0 times and maintains a good level of liquidity headroom under its £275m revolving credit facility which expires in December 2021. The covenant ratio excludes the pension deficit liability.

That's a huge bank facility, which I imagine is likely to be reduced in future.

Also, bear in mind the above statement only applies to covenants to end March 2020. What happens after that?

Cost reductions - significant proportion by Aug 2020. £10m p.a. already done, with another £25m p.a. in the pipeline. Those are large savings. Will there be any reduction in revenues from these cuts I wonder?

Other developments - there's more detail, which I won't regurgitate here, but it sounds positive.

My opinion - on a brief review, I think this is starting to sound a credible turnaround. Although see my previous article (link above) to see the full extent of the balance sheet issues, so there's a lot to overcome. Overall, I think there could possibly be speculative upside here, but it's risky.

---

Wey Education (LON:WEY)

Share price: 17.75p
No. shares: 138.2m
Market cap: £24.5m

Trading update

Wey Education plc (AIM: WEY), the online educational services group is pleased to update the market on current trading.

WEY has a 31 Aug 2020 year end date.

• Trading ahead of expectations
• Revenues expected to be £7.5m, up 25% on LY, and significantly ahead of market forecast - great stuff!
• Profit - will only be in line with forecast, because extra revenues are being reinvested in marketing & more staff

My view - this is a pretty decent growth company. Small, but with a good product offering, which I've checked out in quite a bit of detail before.

I think investors should be pleased that the company is re-investing for growth, rather than chasing short-term profitability.

The valuation looks a bit aggressive now, particularly in current market conditions, but once things settle down then it should be OK.

Home-based internet schooling is obviously a hot topic right now, given the coronavirus situation - which might trigger a more permanent upsurge in enquiries for internet-based teaching, perhaps?

---

Sorry, but I have to leave it there for today & the week - a week that I'm sure we'd all like to quickly forget!

Best wishes, Paul.