Small Cap Value Report (Mon 10 Dec 2018) - IRV, debt

Monday, Dec 10 2018 by

Good morning, it's Paul here.

Markets remain grim. I've been taken aback by the speed & severity of recent falls in many small caps. Market timing isn't my thing, and I take a long-term view. So it's really just business as usual from my point of view, painful though it is.

Interserve (LON:IRV)

Share price: 12.8p (down 48% today)
No. shares: 149.7m
Market cap: £19.2m

Deleveraging plan

This yet another outsourcing group to run into trouble. The share price has been in freefall recently, with a further plunge of 48% today on news of major dilution on the way for shareholders.

Today it says;

Interserve and its lenders are engaged in constructive discussions regarding the agreement and implementation of a deleveraging plan which would deliver a strong balance sheet with Interserve targeting leverage of approximately 1.5x net debt/EBITDA.

These discussions also involve proposals to amend the Group's current financing agreements, including the extension of the maturity dates and repayment profiles of the existing facilities.

What's interesting about that, is that it echos a comment I made in one of last week's SCVRs, that banks are reducing credit in difficult sectors. In the previous few years, banks seemed comfortable with debt up to about 3 times EBITDA. Note above that they are seeking a reduction to only 1.5x EBITDA for Interserve.

Maybe at some point, the banks might realise that using a multiple of EBITDA really isn't very sensible at all. It's the wrong measure. Bank debt surely be based on a measure which accurately shows how it can be paid off - free cashflow would make sense as the starting point.

Here's the dilution coming;

Although the form of the deleveraging plan remains to be finalised, it is likely to involve the conversion of a substantial proportion of the Group's external borrowings into new equity, an element of which may be sold to existing shareholders and potentially other investors.

If implemented in this form, the deleveraging plan could result in material dilution for current Interserve shareholders.

A debt for equity swap usually all but wipes out existing shareholders, but that depends on how brutal the lender wants to be, as they're now calling the shots (debt ranks ahead of equity).

The one glimmer of hope is that existing investors (and potentially others)…

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Interserve Plc is a United Kingdom-based support services and construction company that offers advice, design, construction, equipment, facilities management and frontline public services. The Company provides a range of integrated services in the outsourcing and construction markets. It operates through three segments: Support Services, Construction and Equipment Services. The Support Services segment focuses on the management and delivery of operational services to both public and private-sector clients in the United Kingdom and internationally. The Construction segment offers design, development, consultancy and construction services for building and infrastructure projects. The Equipment Services segment operates globally, designing, hiring and selling formwork and falsework solutions for use in infrastructure and building projects. It provides outsourced services in sectors, such as hospitality, leisure, education, defense, retail, and oil and gas across the Middle East region. more »

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

20 Comments on this Article show/hide all

Fishcake 10th Dec '18 1 of 20

Interesting to look back on your own investments. I sold one lot of IRV in late 2015 at a profit when the share price was over £6 thinking it a bit pricey but liking the divi. I sold the remainder after the profit warning in May 2016 after a fairly vitriolic write-up from Paul at around £3.20 which has proven entirely justified. Now it's at 12p! That's impressive value destruction...check out .

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InvestedGeordie 10th Dec '18 2 of 20

Good Morning Paul,

Hope you had a good weekend. I wonder if you'd mind looking at Spectra Systems (LON:SPSY) ? I see WH Ireland (through Research Tree) have upped Revenue by 4%, Profit by 10% & see fair value at 145p.



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JohnEustace 10th Dec '18 3 of 20

Nice to see some good news from Spectra Systems (LON:SPSY) but they don't quantify the benefit in the RNS. Maybe they have told WH Ireland?  It is their second upgrade this year.

Spectra Systems Corporation, a leader in machine-readable high speed banknote authentication, brand protection technologies, and gaming security software, is pleased to announce that it has received unexpected additional orders for its high performance phosphours used by a G7 central bank. These additional end of year orders are expected to result in a significant increase in Spectra's profits above market expectations for 2018.

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FREng 10th Dec '18 4 of 20

Spectra Systems (LON:SPSY) is the unrestricted class of shares. There is also the cheaper Spectra Systems (LON:SPSC) which get the same dividend and which have been gradually converted in tranches into SPSY. I have no idea what triggers the occasional conversion to the higher-priced shares, nor what the restriction on SPSC actually restricts, as both classes seem to be freely tradeable.

They both look like a decent and safe investment, with a decent yield. They also provide some hedge against a collapse in the pound. I hold both classes.

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MrContrarian 10th Dec '18 5 of 20

My morning smallcap tweet: IRV D4E to smash holders.

Pressure Technologies (LON:PRES), PCI- PAL (LON:PCIP), Interserve (LON:IRV), Big Sofa Technologies (LON:BST), Kromek (LON:KMK)

Pressure Technologies (PRES) sells Greenlane Biogas for £11.1m, though only £5m cash up front, rest paper and promissory note.
PCI-PAL (PCIP) has signed a reseller agreement with a major UK based payment service provider. "This partnership has immediately resulted in winning an enterprise sized customer within the UK Government." Initial value of £0.85m in year 1.
Interserve (IRV) responds to report of imminent crash. Talks on debt to equity swap or "deleveraging plan" in PR drivel.
Big Sofa Technologies (BST) guides FY rev up 31% at £1.7m. F/C is £2.3m. Cost savings will "have a reductive impact on the cost base for 2018" and £1.4m in 2019 vs 2017. Reductive impact! That's a new one.
Kromek Group (KMK) wins first biological contract from DARPA, worth $2m over a year. Could be extended to a multi-year contract.

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JakNife 10th Dec '18 6 of 20

Banks use EBITDA as a proxy for free cash flow (pre capex) and partly because it's better defined internationally than "free cash flow".

The theory is that if you set a debt to EBITDA multiple of say 1.5 * EBITDA (as proposed here) then the bank should be able to take control of the business, turn off the capex tap and get enough cash back in 1.5 years in order to pay off the debt.

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Howard Adams 10th Dec '18 7 of 20


For anyone interested in Photo-Me International (LON:PHTM) (I do not hold) with regard to there RNS today.

The Downing Monthly Income Fund included Photo-Me International (LON:PHTM), in their Mello presentation.

The presenter highlighted that although Photo-Me International (LON:PHTM) had suffered a setback in a recent Japanese rollout, which they were writing off (£3m I think). Another roll out into Laundries was going well and is proving to be cash generative. They summarised Photo-Me International (LON:PHTM) on this slide (see about 11:19 mins in).


I found the video useful for thoughts on small caps in general and for insights into other stocks also covered Duke Royalty (LON:DUKE) (I hold),  AdEPT Technology (LON:ADT), Maintel Holdings(LON:MAI) & Lok'n Store (LON:LOK) (I do not hold any of these three).



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Snoo 10th Dec '18 8 of 20

The market seems to dislike Photo-Me International (LON:PHTM) results, down c.10%.
Debts seem to have gone up from £14m to £27m to £45m over the past year, in part financing the dividends.

The obvious concern is that its primary product is in structural decline. Nowadays a visit to a photo booth is unnecessary, as you can submit a passport photo online. Biometric applications could also be replicated by phones, as they can read fingerprints and recognise faces already.

Some of the photo booths I see are extremely rarely used. On average they seem to be taking £3k a year each (revenue of £79m on 28,421 units), under £10 a day for a unit. It might be very low yielding for the location owners, and if something better came up for them in the future that might threaten the positioning of the machines.

I do have my concerns about the laundry product. In the longer term I would think these would require more maintenance and there seems to be a natural cut-off point for how much can be charged for a wash.

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tomps3 10th Dec '18 9 of 20

In reply to post #425998

Howard, thanks for the overview of the Photo-Me International (LON:PHTM) coverage in the Downing Monthly Income fund presentation at Mello London, November 2018.

For everyone's interest, we've now published (on piworld), 9 company video presentations from Mello London, I've complied them all on one page here: and will continue to add companies to this page, as we publish them.

Further, over the weekend, we published the Eagle Eye Solutions (LON:EYE) Capital Markets Day:

And last week, we published the H1 results presentation and strategy update for Park (LON:PARK) who have just upgraded estimates, and gave this presentation to analysts:

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Howard Adams 10th Dec '18 10 of 20

In reply to post #426008

Hi Tamzin

These videos are all great. I've been glued to each and every one. I feel like instead of getting two days at Mello I have got at least four days, if not more. Deep joy :)

But seriously, I would recommend others to watch any or all of the vids even if at first the company does not seem to fit with your investing objectives.

I have found that every one of them has surprised me and made me rethink about my own investing thoughts as well as the nature of the company I am watching at the time.

For example watching the Frontier Developments (LON:FDEV) vid also led me to look at Codemasters Group (LON:CDM) (another vid on piworld).

This in turn led me to ponder the gaming sector world wide leading to thinking about £TTWO, £EA, £ATVI, £PDX and Ubisoft Entertainment SA (UBI). I had no idea that the gaming sector is larger than the movie sector. Furthermore it is clearly on a convergence of 5G, esports, cult communities (e.g. £GAW), publishing of regular releases, enhancing user communities and thus retentions, the creatives sector, and so on. And of particular interest hoe the sector is really on a journey to monetization of recurring revenues.

Completely differently watching Park (LON:PARK) opened my eyes to an extension of retailing via the gift carding sector then into considering the digitisation of transactions within retailing.

Yet a further engaging insight offered by Sigmaroc (LON:SRC) into cement and hyper localisation and hubbing of rather 'chunky' assets in order to improve efficiencies and ROIC.

MY list could go on but I'll stop there and simply recommend again.

Do go take a look for yourself.

(Disclosure: of EPICs listed I only hold Games Workshop (LON:GAW), but will be looking more deeply into several more of the others.)


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rpmeurope 10th Dec '18 11 of 20

It's all kicking off over at Local Shopping Reit (LON:LSR) today. The largest shareholder Thalassa Holdings (LON:THAL) have dug their heels in and are set to prevent the liquidation of the company. Strange situation, any thoughts?

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threeputt 10th Dec '18 12 of 20

Just got home, was going to request Nexus Infrastructure (LON:NEXS) but this there was no placeholder to add the request to (tsk !)
Interesting quiet one and I dont think it's been researched here before:

Increase in profit +25%
Increase in divi 5%
Cash up 7%
Order Book up 43%
In line with expectations

Looks ok to me just in an unfavourable sector (construction), I'd be grateful of a gander

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ISAallowance 10th Dec '18 13 of 20

Afternoon RNS from B.P. Marsh & Partners (LON:BPM) (I hold) with results for investee company LEBC Holdings Ltd that all sound very good. Also a further RNS with a small director purchase.

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dangersimpson 10th Dec '18 14 of 20

In reply to post #425983

The theory is that if you set a debt to EBITDA multiple of say 1.5 * EBITDA (as proposed here) then the bank should be able to take control of the business, turn off the capex tap and get enough cash back in 1.5 years in order to pay off the debt.

It's a nice theory but not very realistic (which I'm sure you know Jak), some capex is always required to keep the business going, taxes can't be avoided, and a lot of the covenants seem to allow the companies to exclude exceptionals from their Net Debt to EBITDA which are often real cash costs to the business.

For example, in other companies in the sector:

- in the notes to their accounts to 31 March Mitie (LON:MTO) state their EBITDA as £63m and Net Debt of £193.5m which would be a ratio of 3.07, but in the accounts they state they are at 1.98 comfortably within their debt covenants of 3x.

- Serco (LON:SRP) are allowed to add back onerous contract provisions to their EBITDA for covenant testing purposes. Although in this case it wouldn't take them above their 3.5x covenant.

Both companies have moved to negative working capital in the recent past and I can't see other creditors being happy that the bank sees their money back but they continue to take the credit risk so they would want faster payment terms on any change of control in the business.

Realistically I think that it would take at least 5 years for the banks to get their money back if they took control of either business, despite a reported Net Debt/EBITDA of under 2 for both companies.

If your bank owned the debt of either of these examples would you really be thinking that there is absolutely nothing to worry about because they met their recent covenant test?

Book: Excellent Investing: How to Build a Winning Portfolio
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abtan 10th Dec '18 15 of 20

In reply to post #426033

FYI re Nexus Infrastructure (LON:NEXS)

"Several other specialist contractors have been added to the list, including specialist concrete contractor Tamdown, which takes an average of 62 days to pay, with 24% of invoices not paid within agreed terms."

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john652 10th Dec '18 16 of 20

In reply to post #426003

Hi Snoo,

Where are you seeing this information : 'Debts seem to have gone up from £14m to £27m to £45m over the past year, in part financing the dividends.'


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Gromley 10th Dec '18 17 of 20

In reply to post #426063

Hi john652,

Where are you seeing this information : 'Debts seem to have gone up from £14m to £27m to £45m over the past year, in part financing the dividends.'
Photo-Me International (LON:PHTM) is not a company I think I have looked at, but I think I can see where snoo is looking :5c0eefc33dd12phtm-debt-annotated.png

Of course that is not actually the total Gross debt, which  in fact goes : £17.5m->£33.3m->£56.7m

It should though be noted that they actually have net cash, so in principle the debt should not be an issue, although if I were interested here, I would want to understand why a cash rich group would need to go to the hassle and expense of also having debt.

There is nothing really in the numbers that makes me want to prioritise this for further research at this time however. But hopefully at least that quick view is of some use.

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Reacher 11th Dec '18 18 of 20

In reply to post #426073

Hi Gromley

The debt position at 30/4/18 relates purely to EUR currency. I believe it arising in the way it performs in FX hedging process; it would sell its EUR debtor amounts when invoices are raised in order to lock in the GBP rate and thereby eliminate any FX volatility that may arise. The selling of EURs in advance of cash receipt results in the EUR debt balance.

Under IFRS accounting rules, cash requires to be disclosed gross on the Balance Sheet unless a netting arrangement exists.

Hope that helps.

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Snoo 11th Dec '18 19 of 20

That makes sense, thank you.
I do like the way they generate cash, after all, people pay up front. A lot was spent on capex though, and of course the divis.

For these washing machines it seems that the big investment is in the locations as opposed to the machines themselves. I remember looking at their mock-ups and thinking it would be quite expensive to get a location in a high-footfall area. Then there is the throughput, a photo machine could serve customers quickly, in that if you really needed a service and it was busy you would just wait for the person in there to be done.

By contrast, a washing machine might take up to an hour in real terms (loading, wash, unloading). For the standalone models, Imagine taking all your clothes to one and finding it busy.

Just can't imagine the 'laverie' model working in the UK. It might do in some places in Europe but living styles can change over time, it seems unlikely that any new development of residential flats would not provide the facilities for a washing machine to be put in. In real terms there seems to be nothing new about the product.

The best opportunity for them would be in Asia, plenty of densely populated high-rise blocks where space is at a premium.

Couldn't quite say they have gone all-in, but they have spent a fair amount of their chips on this, a rather low-tech business in my opinion a declining market. I would have rather more investment alongside futuristic lines. For instance, a photo booth could be adapted and a customer could be verified (ie retina, fingerprint) bringing up a face-to-face video conversation with a company (like banks, government).

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wildshot 11th Dec '18 20 of 20

Looking forward to your review of Photo-Me International (LON:PHTM) Paul if you get chance to catch up.

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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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