Small Cap Value Report (Mon 17 June 2019) - STAF, KIE, PTGS | Paul Scott

17th Jun '19 by Paul Scott

30 comments 9748 reads

Good morning, it's Paul here!

7-8am comments

Staffline (LON:STAF)

An update is given today.

Key points;

Results for FY 12/2018 due out on 27 June 2019 - cutting it fine for the 6 month deadline - due to detailed investigation into compliance with minimum wage regulations
Increasing related provision from £7.9m to £15.1m (a cash cost in 2019) - another example of how the initial assessment of accounting problems is usually the tip of the iceberg
Total exceptional costs for 2018 now £32.6m
Possible breach of bank leverage covenant - will require a waiver
Operating within bank facility limit & expected to continue so
Placing to raise £30m + £7m open offer
No final dividend, which shouldn't come as a surprise to anyone
On the positive side - underlying performance for 2018 in line with expectations, and same for 2019 - EBIT in range of £23-28m, and y/e net debt also expected to be in line (previously guided up sharply)

My view - Placings are normally done on the sly, and the first private investors know about it, is when the deal is announced. It's a terrible system, because information often leaks out, thus creating a false market in the shares.

What should happen is that shares should be suspended when a fundraising of any kind is taking place.

Pre-announcing a placing, as in this case, is an open invitation for traders to short the share. Emergency fundraisings like this can be done (if at all) at a deep discount, as new funders demand their pound of flesh. It all depends on the strength of the broker & its contacts, plus how convincing management are in the meetings that take place with possible funders. So this is a very uncertain situation until the deal is done. In an ideal world, existing institutional shareholders step up and support a fundraising, in order to defend the value of their existing shares.

For me, it's uninvestable until the placing & open offer complete. After that's done, I think it could be worth taking a fresh look at the refinanced company.

It's perfectly reasonable for the bank to require an equity raise, of a similar size to the exceptional costs.

I think shareholders will need to prepare for another potentially ugly day today. Let's hope the broker can get the placing done & dusted quickly - as the price…

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pka

17th Jun '19

Woodford's funds own 15.9% of Kier, according to this article:

https://www.thisismoney.co.uk/money/markets/article-7143061/Bitter-blow-Woodford-Kier-crashes-again.html

As Woodford's funds have to sell stocks they own in order to raise money for redemptions by their holders, this might put further downward pressure on Kier's share price.

Paul Scott

Good point, thanks pka.
I knew that Woodford holds Kier, but forgot to mention it in the main article, so thank you for reminding us!
A forced seller can bring a much more attractive price for buyers.
Best wishes, Paul.

bobsandy12

Thank you Paul Your point on Balance Sheet and Cashflow prompts me to dig out t and go back over the notes from Graham’s excellent day on this topic........clearly worth more than every penny BUT how do we treat PER? Ignore even when it is in the 20 to 40 range??

doublelutz

With Kier (LON:KIE) there are also substantial short positions and that is something that always stops me buying. Of course they get it wrong sometimes but I work on the basis that they know more than I do!

InvestorJohn

Hi Investornot1

RE Filta Group (LON:FLTA)
I don't know what is happening but I suspect that people read into the second half weighting that there is more risk now that they don't achieve their expectations and so are moving on...

I had made a mental note on friday to sell today if they fell any further after the weekend and they have so I got out at 1.75 loosing 23% overall so disappointed but afraid of it going further than this...

To me they should have good prospects after buying over Watbio and with all the recurring revenue and year on year growth but I want to preserve my capital at the same time so for now I am out and will probably never return in case it becomes an attempt at revenge that doesn't work out!!

Investornot1

Thanks InvestorJohn

I'm in some ways in the opposite situation to you on Filta Group (LON:FLTA). I don't currently hold but profit warning looks like a soft one and Filta Group (LON:FLTA) have previously had a H2 weighting so I will monitor and may be tempted to buy once the dust settles.

LongValue

When it comes to shorters, it's very telling if they appear as a group. In the case of Kier (LON:KIE), some five funds are shorting the stock as of today. So five separate funds are reaching the same conclusion. Whether this is statistically accurate in predicting the direction of the stock, I am unsure. But it certainly is something that I am very wary of. The breadth of the shorters is, in my view, just as important as the depth.

Howard Marx

There are plenty of UK stocks with more than 5 institutions shorting.

There may be trouble ahead.

5d07bbe725df4SHORT_TRACKER_MORE_5_FUNDS_

Some of the five large shorters of Kier stock today might be shorting Kier because they know that Woodford's funds are likely to be forced sellers (in order to raise money for large redemptions by the holders of Woodford's funds). That might also be the case with other stocks that are held by Woodford's funds.

Graham Neary

That's a very stark admission by Kier that it made net debt look good at reporting dates.

mojomogoz

On short sellers....

I love fundamental short sellers and think they are often the best business and financial analysts out there (having met, interviewed and analysed loads of them including the famed ones)

However, most shorting today is a sort of mirror world to factor and momentum (inc narrative) investing. With Kier (LON:KIE) I think all 5 are rather factor and momentum based (note that Kuvari is a TT spin out): Blackrock, Kuvari, TT, Marshall Wave, Squarepoint.

Hard to be too sure with Blackrock as so big and so many independent teams. But all (probably including Blackrock) are basically running and trading portfolio against a long portfolio. There is an absence of highly committed fundamental short sellers picking on Kier.

Screen stocks on high debt, cash vs reported earnings, earnings downgrade and negative price momentum and you have the universe of high short interest stock

I have no view on Kier fwiw. My point is simply short interest isn't what it once was as a signal (back in the 80s it was a great predictor)

Desanj

Hi Longvalue,
How do you determine who is short a stock?

rmillaree

Kier (LON:KIE)

Graham
That's a very stark admission by Kier that it made net debt look good at reporting dates.

I would guess that's par for the course with many listed plc's - not really something they can deny if factually correct - basically it says plenty about the morals of the bods in charge - ie they don't have any. I remember years ago is was common that listed housebuilders would simply withold part of payments due to subcontractors in the last month of the reporting period and then add the payment onto the next month, basically this probably enabled them to make debt/cashflow whatever they wanted it to be. Its the most ridiculous form of playing with the numbers as you then have really strong comparatives at the next reporting period end which cause the same problem next time and then some.

looking at the last annual report for Kier they comment

(a) Trade receivables and trade payables

Given the varied activities of the Group it is not practicable to identify a common operating cycle. The Group has therefore allocated receivables and payables due within 12 months of the balance sheet date to current with the remainder included in non-current.

Does that read that they are saying its not practicable to age their trade payables? - - pretty staggering as i have to presume all their suppliers must have had agreed payments terms that are presumably mostly much less than 12 months ignoring retentions. I guess they have the choice of choosing what is practicable and what is not.

Ok so where does this all end up ? - as ever it seems that the number that generally takes a hammering from such shenanigans is the trade and other payables. Looking at the current trade and other payables the balance per the last annual report is £1.5 Billion - one can see why the credit insurers are getting a little twitchy in this regard as the bods owed the £1.5 billion will deffo be at the bottom of the foodchain - especially when they don't have enough assets to cover their liabilities (negative NTAV as confirmed by Paul)

It may be a bargain but i see zero downside protection if things don't go as "hoped for" - so deffo in the basket case bucket im afraid - as we should probably expect with the price being down over 90% from its peak - ie the smarter money looks like it has left the building some time ago.

Neil Williams

Hi Sanj,

I download the Notification and disclosure of net short positions excel spreadsheet on this website https://www.fca.org.uk/markets/short-selling/notification-and-disclosure-net-short-positions for UK shares.

Neil

Mojomogoz, looked at cynically, with the right information it's probably a lot easier to pick a stock that's likely to tank rather than a stock that's likely to soar. The problems are very much in the here and now. The potential upside is largely unknown. I suspect that few serious shorters act without some form of inside knowledge – such as a tip-off from a management consultant. And I would suggest that many simply work backwards from the information they have obtained. Having been given the inside track on a company with serious problems, they build a shorting thesis around it. Add some plausibility (Expensive offices, secrecy, PhDs, MBAs, etc.) and there you have it.

Be careful not to catch a falling knife... I would much prefer a share that is pushing new highs

Thank you Neil.

Gromley

profit warning looks like a soft one and Filta Group (LON:FLTA) have previously had a H2 weighting so I will monitor and may be tempted to buy once the dust settles.

The key phrase though was : "and profits will be skewed slightly more than is usual towards the second half" I vented my scepticism here .

It is though a bit surprising to see a further stark fall three trading days later, I would if a "tip" was updated or rescinded over the weekend. (Was it perhaps a Small Company Share Watch publication weekend?)

c. £90k worth of trades on the day - slightly less than on the date of the statement, but significantly more than an average day - Not very liquid then given the c. £55m market cap.

Soft network stuff is important particularly if you're, say, Kynikos and running a 30 stock fundamental stock picking short. In the UK, someone like the well known Odey is towards this sort of approach (bit more macro and technicals going on too). But the 5 on Kier I reckon are fairly short-ish term and data driven in their shorts generally (I know TT, Marshall Wace and Blackrock well historically) with a perspective that it's as much about permitting some leverage into long ideas too.

Having tried short selling myself on a personal (non professional) level I disagree with the statement that its easier to find a stock that tanks rather than soars. I can take a lot of volatility and be patient but there is no escaping the fact that volatility in shorts is particularly trying plus the world inc management are working against you. With shorts its much easier to cut in and out with the price and narrative momentum in a trader sort of way.

The most public short seller in an ongoing accessible way is Marc Cohodes (ex Rocker Partners and CopperRiver) - @AlderLaneeggs. I knew David Rocker but not Marc at Rocker but I got to know him well (professionally) at Copper River his own shop. It blew up in the 2008 crisis - a bit of a fishy one and Cohodes says its as GS pulled his borrow on him and squeezed him out of business (probably true IMO but unverified). He does the full network and forensic investigation thing. Its truly amazing stuff...but its painful and hard work...not normal to TBH. Real short selling IMO and what I would pay for.

Buffet Margin

19th Jun '19

Thanks for that Sanj

Small Cap Value Report (Mon 17 June 2019) - STAF, KIE, PTGS

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Staffline (LON:STAF)

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Paul Scott

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