Small Cap Value Report (Mon 3 Feb 2020) - FUTR, BUR, FA., DISH, QRT, PRV, WTG, ARDN, LDSG, SAL, NAR
Morning! Graham here.
There seems to be a problem with Investegate, so I'm on londonstockexchange.com today.
The RNS feed is actually very busy, with all of the following companies making announcements that could potentially be covered:
- Future (LON:FUTR) - trading update
- Burford Capital (LON:BUR) - update
- Fireangel Safety Technology (LON:FA.) - trading update
- BigDish (LON:DISH) - operational update
- Quarto Inc (LON:QRT) - open offer
- Porvair (LON:PRV) - preliminary results
- Watchstone (LON:WTG) - update
- Arden Partners (LON:ARDN) - results
- Spaceandpeople (LON:SAL) - trading update
- Northamber (LON:NAR) - completion of acquisition
Timings: finished at 2.50pm.
Future (LON:FUTR)
- Share price: 1360p (-16% on Friday, +6% today)
- No. of shares: 98 million
- Market cap: £1.33 billion
This publishing company was the target of a short attack on Friday by Matt Earl's fund, Shadowfall. Future owns websites and magazines such as T3, Gizmodo, TechRadar, PC Gamer, FourFourTwo, and many others.
Today's update neatly sidesteps the bear report, instead focusing on Future's allegedly good performance over the last four months.
Thanks to strong momentum, the outcome for the full year (FY September 2020) will be "materially ahead of current market expectations, despite some uncertainty in the macro-economic environment".
No numbers are given, so I won't bother pasting the rest of the update here.
Bear report
I've been reading the Shadowfall report, so I now have some idea where the bears are coming from.
Their findings are worth a look, especially if you happen to be a Future (LON:FUTR) shareholder or if you find short-seller reports interesting!
There is no "smoking gun". Instead, there are a variety of unrelated charges levelled at the company, namely that:
- real organic revenue growth is probably lower than the company says that it is.
- Future's stock market valuation is much higher than the valuation it pays for the assets it acquires
- Future's M&A strategy is building a collection of independent assets, without any network effects, despite its attempt to create a "platform" business. This makes the private-to-public valuation gap hard to justify.
- Future's management have been generously paid by inconsistent remuneration policies, and have cashed out.
- Future's top management are allegedly connected to each other through family ties and their prior careers, and have created a poor work culture (based on Glassdoor reviews)
- Detailed analysis of Future's acquisitions throws up many questions about the quality of the assets being acquired.
My view
I've written a little on Future (LON:FUTR) in the past. It has generally been in my "too difficult" tray, thanks to its acquisition-fuelled strategy. There were too many pieces of the puzzle, so I felt that the risk/reward of studying it in detail was poor.
Why do a lot of work on a company, if it's probably not the sort of thing that I would ever invest in, anyway?
Since I respect the views of Matt Earl, his bear report helps to confirm that my instincts were correct: it would have been a waste of time trying to make sense of the company, because the rabbit-hole would have led me to many more questions than answers.
That said, I would not want to join Mr Earl & Co. in shorting this stock. The reason is that I don't see any mention of a near-term catalyst which would all but guarantee the collapse of the stock.
Shorting is difficult at the best of times, and I wouldn't bother doing it without a near-term catalyst. This could be:
- looming insolvency
- the prosecution of fraud
- proof that the business does not have anything like the scale which investors believe that it does.
Without these catalysts, you are left with what I'd call a valuation short - a short based on the belief that the company is overvalued by the stock market.
And while that belief might be well-founded, it can take a very long time for the market to agree with you.
In the meanwhile, your funds are locked up in a trade which is costing you various fees and preventing you from doing something more useful with your money.
This can make sense for some funds and some portfolios, e.g. as a hedge against a leveraged long portfolio, but I would say that for most people, it is best avoided.
Future is not alone in being (probably) an overvalued, acquisition-fuelled media stock with excessively paid management.
The NASDAQ 100 is on a trailing multiple of 30x, and a forecast multiple of 22x. Shadowfall thinks that Future is overvalued at a PBT multiple of 29x - it's right, but many other overvalued companies are currently out there.
Side note - Google
One little piece of Shadowfall's report which I found interesting was this excerpt from Future's 2019 annual report:
“Future is very exposed to Google to the extent that its websites are reliant on ‘search’ (i.e. a user navigating to one of Future’s websites via a search engine such as Google).
Any unforeseen change to the Google algorithm, its nature or business model could significantly impact the Group’s revenues.”
As a shareholder in Alphabet ($GOOGL), it amazes me how often I am reminded of its power. You'll remember that XLMedia (LON:XLM) recently suffered when its websites were demoted by Google, and many other businesses rise and fall based on their ability to win good search results from Google.
This is not a tip, but shares in Alphabet might be a good hedge against the failure of many other companies. Think about it!
Burford Capital (LON:BUR)
- Share price: 617p (-2%)
- No. of shares: 219 million
- Market cap: £1.35 billion ($1.76 billion)
Update on 2019 trading performance
This is another large, complicated company that has been the target of a bear attack (in Burford's case, by Muddy Waters).
The formula for a bear attack is:
- find a company with a large retail following, i.e. lots of liquidity and possibly having a fragile, short-term orientation.
- find a company with very complicated accounts and inadequate disclosures, where it's possible to sling a lot of mud. Complexity makes it easier to sow fear, uncertainty and doubt.
- find a company with lots of overseas revenues (relative to where the shareholders are). This makes it harder for anyone to verify what is going on.
Burford, a large litigation finance company, ticked all of these boxes. Its share price has still not recovered from the short attack last summer.
Today's update is a profit warning for 2019, but the company tries very hard to assure investors that it is purely a timing issue and that the company's long-term prospects are as bright as ever.
The company first focuses on its cash returns for the year, before revealing that the income statement won't be very pretty:
...Burford expects net realised gains to be approximately $20-30 million lower than in 2018. It is more difficult to forecast the outcome of the valuation process on fair value gains, but Burford expects to book approximately $50-70 million less in net unrealised gains than in 2018. Thus, we expect our income and our profit to be lower than in 2018.
It's a bit cheeky to focus on cash returns first in the statement, before revealing that profits will be down - it wouldn't do this if profits were up and cash generation was down!
Some large wins are said to have occurred in January 2020, and the company says it is unconcerned about the lack of success on the 2019 income statement:
We are entirely unconcerned about that, and as January 2020 has proved, circumstances can change quickly in our business. We focus on cash, and the best value outcome for shareholders from our investments, rather than managing realisations to an accounting year-end.
Elsewhere, it says:
Burford is not a business for those focused on short-term profits or for those who eschew volatility and seek predictability. We finance large, complex commercial claims. Our cash flows come from their resolution. There is no "normal" for such claims; they are inherently idiosyncratic. We have had cases resolve in less than a week, and we have matters from 2010 still going strong..... If litigation were predictable as to outcome and duration, banks could finance it; there would be no need for Burford.
That's very clear! If you want predictability, you should go elsewhere.
My view
I'm tempted to open a small, speculative long position in this share, given how far it has fallen. But I will wait for the next annual report, so that I can have the updated figures.
Net assets at the time of the interim results were $1.57 billion. The present market capitalisation is only a 12% premium to this.
Before the short attack, Burford was trading at 4x or 5x book value. Those valuations looked excessive to me, despite the company's excellent ROE of c. 30%.
But if we can buy it around book value, then it doesn't even need to generate an above-average ROE, to justify the price paid.
In summary: so long as the whole thing isn't a house of cards, then I think it could offer good value around here.
There are some legitimate governance concerns. Note that the company is incorporated in Guernsey and operates primarily out of North America.
So I wouldn't bet the house on it, and I'd certainly like to wait until the full-year results before dipping my toe into it, but I'm definitely interested at these levels.
Fireangel Safety Technology (LON:FA.)
- Share price: 14p (-8%)
- No. of shares: 76 million
- Market cap: £11 million
This accident-prone developer of "home safety products" (fire alarms etc.) reports that its underlying loss for FY 2019 will be in line with expectations.
On top of that loss, there will be exceptional charges of £5.3 million, up from £3.7 million last year.
Exceptional charges related to warranties, restructuring, and fundraising were in line with expectations, but more charges need to be recognised, relating to:
...stock provisions and the impairment of intangible development costs as a result of a thorough review of product lines and future development plans in line with the Group's evolved strategy to become a more technology-led connected home solutions provider.
This could be interpreted in different ways. In simple language, the company has wasted £3.2 million in various ways, and has decided to acknowledge this on its balance sheet.
It's giving up on previous plans, and going for a narrow strategy by "developing and promoting those products and services which give the highest and quickest returns".
Net debt at year end was £4.9 million.
My view: I see no reasons for optimism and would have to give this bargepole treatment.
BigDish (LON:DISH)
- Share price: 3.15p (+9%)
- No. of shares: 349 million
- Market cap: £11 million
This is a "yield management platform" for restaurants - an app where restaurants can offer discounted meals, depending on how busy they are at that particular time.
It had 177 restaurants on the platform in mid-November. This has now jumped to 351, plus another 91 that have agreed to join - excellent growth.
Today's update includes a strangely-worded paragraph suggesting that the company will be able to make money from "marketing partnerships", and that these could turn out to be more lucrative than the company's existing core activity:
Building a national product with increasing restaurant numbers will enable BigDish to leverage national brands for large-scale marketing partnerships in order to drive consumer acquisition which is integral to the strategic marketing plan. It is anticipated that some of these deals will be monetised and that going forward the sums involved may be more significant than future transactional revenue. BigDish is aware that currently such a positive scenario may not have been considered by its shareholders or observers of the company.
Anything is possible, but there is a lot of blue-sky speculative guff on AIM and I can't distinguish this paragraph from all the rest of it. DISH would need a huge active user base to make money this way, which will be expensive and/or difficult to achieve.
At the half-year report, DISH reported £1.3 million in cash, with sufficient funding to Q3 2020. Today it says:
The Company will continue to monitor its budget forecasts which may result in extending the funding runway beyond Q3 2020.
This unhelpful management-speak means that DISH might run out of money in Q3, but it might not.
My view
The app is an interesting concept which sounds like it could work, but it will be expensive for the company to achieve its goals. It looks under-funded relative to its ambitions. I have no reason to argue with Stockopedia's categorisation of DISH as a Sucker Stock.
Quarto Inc (LON:QRT)
- Share price: 72p (unch.)
- No. of shares: 20.4 million (pre-Open Offer, which creates 20 million new shares)
- Market cap: £15 million (pre-Open Offer)
Paul covered book publisher Quarto's open offer earlier this month.
It has had a rocky balance sheet for some time, and this is its first attempt to plug the hole with fresh equity (perhaps not the last). The £13.9 million in fresh funds should help to calm down the bank for the time being.
My view - the balance sheet is bad enough, but the business itself has been loss-making in recent years as the market for books remains "soft". The company previously guided that H2 2019 would be "particularly challenging".
To me, these shares are still options over the bank debt. I'd rather be the bank, collecting guaranteed interest and fees, than the shareholders.
Porvair (LON:PRV)
- Share price: 766.84p (-2%)
- No. of shares: 46 million
- Market cap: £351 million
Preliminary Results & Board Changes
This large filtration company has produced a decent set of results. The share price had already been bid up over the last two months, in anticipation.
The CEO makes a very strong comment:
The Group's fundamentals are robust. Over the last ten years, Porvair has delivered revenue growth of 162% (10% CAGR). The Group is positioned to benefit from global trends: tighter environmental regulations; growth in analytical science; the expansion of air travel; the replacement of plastic by aluminium; and the drive for manufacturing process efficiency. These trends offer opportunities for which the Group develops differentiated products. Trading in 2020 has started well, order books are healthy and investment plans are on track.
The company clearly lays out its business model, and it all sounds incredibly sensible.
Even better, the company has the financial track record to justify what it does.
It calculates its return on capital employed as 14% - I'd prefer if this was higher, but too few companies bother to make the calculation in the first place.
The secret is out that this is a decent company. At a forward P/E multiple of 30x, it is surely up with events for the time being.
Watchstone (LON:WTG)
- Share price: 142.15p (+5.5%)
- No. of shares: 46 million
- Market cap: £65 million
Update re: the sale of healthcare services business
The Quindell story is finally coming to an end, with the confirmed sale of its Canadian healthcare businesses.
The only remaining business is Ingenie, a small telematics brand.
The prospective cash balance here must be very large. From the half-year report:
As at 31 August 2019, the Group had cash and term deposits of £37.9m (with a further £50.3m remaining in escrow pending resolution or determination of the Slater & Gordon claim).
Of that £50 million in escrow, £39 million was released back to Watchstone.
And the Healthcare businesses are being sold for £22 million.
A large cash distribution to WTG shareholders should be on the cards. I don't know for sure if there are any outstanding legal problems which might prevent this - as of the most recent half-year report, an SFO investigation into the legacy matters was ongoing.
Arden Partners (LON:ARDN)
- Share price: 15.5p (-3%)
- No. of shares: 29 million
- Market cap: £4.5 million
This boutique investment bank has seen better days.
Revenues have fallen by £0.8 million to £6.6 million, and the pre-tax loss is only a little better than the previous year, at £2.6 million.
Since these results only go as far as October 2019, let's skip ahead to the outlook:
The current financial year has started well with the completion of a number of transactions including a number of equity fundraisings. The decisive result of the UK General Election in December 2019 has removed some of the uncertainty...
Revenues generated in the current financial year are well in excess of those achieved in the same period last year and we are trading profitably in the year to date.
Balance sheet at year-end is not terrible: net assets of £6.1 million, "liquidity" of £6.9 million, and cash of £2.5 million.
I don't think it can afford another £2.5/£3 million loss without putting itself under serious pressure, but on the basis of the outlook statement, it should live to fight another day.
Does it make sense to be listed at this size? I doubt it!
Spaceandpeople (LON:SAL) - this is another company that is probably too small to be listed.
Lots of people have talked about the shrinking small-cap market. With companies such as this still floating around (market cap £2m), I think it's fair to say that there are still too many and that the shrinking could have further to go.
Northamber (LON:NAR)
- Share price: 53p
- No. of shares: 27 million
- Market cap: £14.5 million
Northamber completes the acquisition which it elected to announce after its recent AGM.
Comment by the Acting Chairman:
We believe there is a strong opportunity for AVM to develop within the Northamber Group. The Acquisition reflects our determination to grow our revenues, broaden our product offering and improve our margins. We remain committed to returning Northamber to profitability and will look to evaluate further opportunities for acquisitive growth.
"Further opportunities for acquisitive growth" - a clear warning that the company's assets might not be returned to shareholders.
This "cigar butt" share, which I've owned twice, is a perfect example of a value trap. There is lots of value inside, but whether it will ever be released to shareholders is highly uncertain.
Out of time for today - cheers!
Graham
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26 comments
Burford Capital (LON:BUR) is a much loved and despised stock.
Following the Muddy Waters short raid I re-engaged a half position in the high 700s following the announcement of corporate governance changes (i had owned prior to MW and then traded very big around the volatility buying 2 for every 1 share I had in the 500s and then selling all in the high 800s in days after...not my normal approach but I felt the MW thing provided a chance to trade the emotions and allowed me to put an effective loss floor in at approx 1350p).
So I believe there is value in BUR both pre and post MW.
On today's update for H2 19 I decided to sell a bit ahead of the 11.30am call at 650p level. Why sell?
1) This has turned into an issue of whether BUR has the right capital structure. I could always see this and pointed it out as the weakness...however, its reflexive and if its believed in the capital structure is good and if its not then its bad....its somewhat like a bank...a money printing machine when confident in it but potentially insolvent if not due to asset-liability mismatch.
Subsequently, on the call with mgt most of the questions from brokers and institutions focused on this underlying capital structure issue. What's the BUR response...
2) CEO says as there's such a big opportunity ahead of them it would be 'imprudent' to not raise the funds to take the market share as otherwise other people would. This was directly in response to whether they would buy back shares as muted in peak throes of MWgate). IMO he did not like being asked this question at all.
3) Given the amount of capital they have deployed into cases in last few years and their claim that the duration of case resolution is sub 2 years the slowdown in realised cash and earnings write up gains in H2 19 is close to a financial heart attack. It is at least partially true that timing of returns is an act of God (well the courts and legal process), but...
4) I can't help speculate that their may be an underlying connection between the heart attack and a relative lack of free cash to finance the large commitments they have made in last few years. I'm not an expert in litigation and other legal processes particularly as this sort of scale but I strongly suspect that speed of resolution is partially a function of depth of pocket and how quickly and readily cash is applied. Pre MW it was my supposition that the company would raise equity to fund ongoing investments. That's obviously less attractive and MW have effectively laid a trap as to raise equity post MW is to sort of give credence and kudos to the MW take down....
5) So in the rns and the call they mention that they will raise cash from bond issuance. Interestingly, the old CFO was keen to stress that they wanted to be very cautious on leverage whereas today CEO was keen to emphasise that debt finance is the ideal as it maximises return to shareholders...hypothetically true but then reality is not a capital structure financing model.
6) In addition, its noticeable that the value write up down more than the cash returns. This could be new CFO being more conservative and/or a response to the transparency needs of US listing. Surprise potential in that obvs
7) Today's rns was real smoke and mirrors stuff and smells bad....leading with new commitments is exactly wrong when there's a big profit warning in the tail of it. Its a total irrelevance! Also, the mixing of fund and balance sheet figures was obfuscating. The $1bn casn return sounds super...but only $500m goes to the balance sheet (ie the funds etc take the rest). This is a significant decline on 2018 where there was £630m proceeds from realisations.
8) What has happened to significant contribution from performance fees on funds? 18-24 mths ago these were nearing ready to cascade over their fee waterfalls and into income statement. But its gone quiet. Given the reported short duration of payback (less than 2 years), the high returns the business enjoys and the amount of capital in the funds this should be flowing! Mgt have gone quiet on this. This would be a great model proving point to make now. This is odd.
Burford is now a coin toss on near term cash-flows from existing cases. If there's a stress whereby they slow funds to ongoing cases as they need to fund newer commitments (including their end of a very big sovereign wealth deal) then it may be that some surprising turn of events unfold to reshape the capital structure of Burford including a take private at low valuation....which I suspect mgt motivated by ego will prefer to a dilutive equity raise at low prices as they get to blame dumb/malicious outsiders and get to strike enriching earn outs in a non public context...there's a risk this occurs ahead of US listing as a more 'optimum' outcome for 'stakeholders'.
It basically turned into a sh1t or bust situation. This will play out before the US listing IMO....which I think they will pull unless they have a very big strategic partner taking a stake as why would there be great demand for their equity in the US given the current horlicks?
Marathon effort today Graham, thank you!
I would be interested in thoughts on Nahl (LON:NAH). I luckily sold out on profit warning on 23rd Dec. 2nd one today and stock down >40%. What is interesting is that Stockopedia was still showing a rating on stock as of yesterday close of 95, with quality of 87.
Is there not an adjustment factor (to quality I would argue) that knocks a share following a profit warning? Or at least a flag that trading under a profit warning?
I believe that the stocko algorithms could do a lot better in assessing quality. A recent similar example was XLMedia (LON:XLM) which was discussed on this board. It suffered a substantial fall after it announced the latest in a seemingly long run of problems (Google demoted it as Graham mentioned).
I was surprised at the time to see it rated so highly by stocko and just checking today it still has a stock rank of 96 with a quality ranking of 91. Just to pick one example in contrast, Prudential (LON:PRU) has a quality rank of 30. To stocko, XL Media is in the Champions League and Prudential is in the Vauxhall Conference. I'm sorry, but I would suggest that Prudential is very obviously a higher quality business than XL Media and in my view the data is there to support that statement.
I would suggest that Prudential is very obviously a higher quality business than XL Media and in my view the data is there to support that statement.
Yes, but "Quality" in the Stocko sense doesn't mean what you mean by the same term.
"Quality" in the Stocko world means something fairly precise in terms of data that has been shown by research to be predictive of a statistical likelihood of outperformance. It has nothing to do with whether the PRU is a better company than XLmedia (it is, by a very long distance which is why I own the former and wouldn't touch the latter).
In this case the problem is worsened by the fact that most of the Stocko numbers are only updated when there's an actual set of results. So, there's not a lot of data for the algorithms to use to drag down the Quality ranking - yet.
In the end it's not hard to check why any company has a particular ranking, just need to click through and analyse the underlying data that's used to generate it. But, as ever, if people are going to use Stockranks to pick individual stocks they need to recognise that they need to check both recent news and the underlying data: they're meant to be used for portfolio construction, not stockpicking.
timarr
timarr
You raise a number of points, but just to respond to 3:
1. I understand your point about factor research, but Stocko doesn't fully reflect the factor research as it was actually conducted. One key point is that certain financials are inappropriately punished for the industry that they belong to, which is a major reason that Prudential's score is so low.
2. There are other quality metrics that could be included and are not. Take the issue raised here - profit warnings. Stocko have done their own excellent research on this issue which isn't reflected in the ranks. In its pure form that would be difficult to do, but there are proxies that could be created. The momentum factor captures part, but not all, of this information. The risk rating captures another part, but this information isn't refelected in the stock ranks.
3. I don't think there is a meaningful distinction here between stock selection and portfolio construction. At the end of the day, you construct a portfolio by picking stocks and you're not looking to diversify between high quality and low quality stocks. Look at how Ed sees it being used in NAPS for example. He diversifies by industry and uses the stock rank to select stocks.
cmpeckham
Good points:
1. Yes, you're right: Stockopedia apply their own algorithms to the data. Whether that reflects the research more or less is arguable - I suspect it depends both on sector and market status. But therein lies opportunity.
2. Correct. There is selection bias in the metrics taken (and presumably how they're combined) and there's not enough longitudinal data to provide any real evidence either way - especially as the market has been on a tear ever since Stockopedia launched. But I don't think the profit warning evidence (which I have taken on board personally) is sufficiently robust to be used to change the ranking algorithms. You'd need a lot more data over a longer period of time to show that it's not a blip. And the ranks would somehow need to incorporate non-regulatory trading updates rather than regulated reported numbers.
3. Here I disagree. The appropriate approach to using Stockranks is to randomly pick a portfolio of stocks with high ranks and then rebalance at an appropriate interval - annually, I suppose. NAPS and other selection mechanisms that involve human interaction will - if the theory behind factor analysis is correct and implemented correctly by the ranking mechanism - simply degrade performance. I wouldn't want to invest in a portfolio purely driven by Stockranks though - e.g. look at the top 30 current Stockranks and consider sinking all your funds in them (*).
NAPS was a good marketing tool while it worked. But it's not really a serious investment proposition, surely ... :)
timarr
(*) Actually I hold 5 of them, so maybe ...
Regarding the Stocko ranking system, I think part of the problem is that we are encouraged to think bigger is better. But in fact it is just an objective percentile ranking for a particular mix of metrics. For Q and M bigger generally is better, although Q is weighted towards five year performance so it is slow to respond to changes in current performance.
For V though the percentile position is not a simple big=best relationship. Above 95 and below 5 are definitely high volatility riskier stocks. They might shoot up or collapse and both outcomes are likely!
This is where the StockRank which combines everything is rather misleading. It is safer to treat QM and V separately in assessing a stock.
Hi Graham,
BigDish (LON:DISH) is highly speculative, but it's a fantastic service, that's why I bought shares in it.
A small correction - it's not AIM listed, it has a full listing.
It raised about £2m in a placing last year, at 7.2p per share - more than double the current share price. Cash burn is rather higher than I would like, and it will need refinancing this autumn. I don't see that as a problem, because the new telesales strategy is starting to work very well indeed. They only launched this strategy in Jan 2020, so it's started strongly, more than doubling the number of restaurants on its platform. Shareholders can monitor progress by counting up the number of restaurants on the app. I've seen it grow very rapidly in recent days.
Therefore within 1-2 years, BigDish should have thousands of restaurants using the platform, which would make the market cap higher than the current £10m, in my view. A bid approach would then be quite likely, in my view.
The service is an easy sell to restaurants (to precisely manage the day, time, and number of covers that they offer discounts to), which is a far better offering than old style discounts (which cannot be so readily controlled in real time).
The service is also fantastic for consumers - I use it extensively. It's free, and has enabled me to find a lot of excellent restaurants that I never would have otherwise found. Typically a 50% discount makes you try out a new restaurant, then you'll return and are happy with 25% in future, to eat at off-peak times.
I think this app could become very successful, despite management shortcomings, and mis-steps in the past, to me the upside potential is worth the risk. Raising more money is not likely to be a problem now that growth is really taking off. Last time, management proved very adept at raising money at a high valuation.
Definitely not for widows & orphans! Although I think today's news of very strong growth in restaurant numbers has greatly reduced risk.
Regards, Paul.
Graham: An interesting appraisal of the shorting attack by Matt Earl on Future (LON:FUTR) . As ever its difficult to untangle fact from fiction, but the bear attack will create doubt which is likely to hold back significant price gains. This aspect has been enough to make me decide sell my holding this morning and to go fishing elsewhere.
Hi - thanks for the feedback re: Future (LON:FUTR). Good luck with whatever you choose instead! G
Just possibly, Fireangel Safety Technology (LON:FA.) might at last be putting its problems behind it. The further problems listed in the update look historic, and their revenue forecast is in line. So you have a company with an EV of £15 million, and revenue of £45 million or thereabouts. 2021 figures could be looking better. As against, capex looks excessive against revenue, and fire alarms remains a competitive business, despite the best efforts of BSI to boost sales. I don't hold.
Personally, I've gone 40% into cash - I usually stay pretty much 100% invested and add every month. My pot isn't huge, but I think Q1 CY 2020 is a write off. I can't work out if the virus is something we in the West need to be worried about, but China pretty much being closed down will, I think, cause a flood of profit warnings down the line.
Of course I could be wrong, but I rationalise it like this; if I am wrong, I still have my capital. If I am right, I have enough capital to rebuild and won't be as worried holding onto positions I can't get out of.
I've taken the axe to anything that relies on electronic components, is on a racy multiple, is based in a cyclical sector like advertising or requires heavy investment. It's been painful as I've had to cut some companies I really like, such as Solid State (LON:SOLI), S4 Capital (LON:SFOR), a big chunk (not all) Sosandar (LON:SOS), Gresham Technologies (LON:GHT) and On The Beach (LON:OTB).
The rest I'm hoping can ride this thing out but I won't hesitate to get rid if it starts looking like a general sell of. As PIs, protecting capital is critical as it's bloody hard earning more!
I have does the same IGotPoes. This morning I sold my £g4m position (which was doing quite nicely) on concerns regarding electronic components. I closed a lot of other positions last week. No doubt I’ll regret it, but just feel more relaxed in cash at the moment.
Just looking at BigDish (LON:DISH) one might think this is a new company but it turns out it is a rebrand of an app called Tablepouncer that’s been around for several years already. It could be that they have now arrived at a business model that will gain traction, I.E. yield management/dynamic pricing offers for restaurants on the fly. I note that Paul got in when the price was low and is enthusiastic, so it would be good to have Graham’s view too if that’s possible with the long list today.
My own feeling is that it’s somewhat of a lottery ticket stock. They may get traction under this reincarnation but if they do will they not need to raise more funds and will they not attract cut throat competition from the likes of Opentable, Bookatable and so on? The hope is that it is the next Justeat, but Justeat had little to no competition initially whereas with restaurant bookings there are already many booking services. The other issue is are Bigdish really filling a need that exists? Don’t most restaurants already know when their quiet periods are going to be and so can run promotions to increase traffic at those times via the existing booking apps and loyalty schemes like Tastecard or Gourmet Card?
£wtg pleasing to see the sale approved which means the shares are trading at a significant discount to cash on the balance sheet, with further sales to come. This continues to look like an attractive very low risk special situation to me.
My morning smallcap tweet: FireAngel P/L jiggery on w'tee claims.
Pennant International (LON:PEN) NAHL (LON:NAH) Fireangel Safety Technology (LON:FA.) Safestay (LON:SSTY) Spaceandpeople (LON:SAL) BigDish (LON:DISH) WYG (LON:WYG) Corero Network Security (LON:CNS), Starcom (LON:STAR)
Pennant (PEN) guides FY £20m (as F/C). U/L EBITDA £2.4m. NAV: impairment of £0.8m on certain properties and an increase of £0.4m against others. Gross amount taken off BS, £0.4m credited to reserves.
NAHL (NAH) warns FY 7.5-10% lower than mgmt expectations while within the range previously announced. Residential Blames Property division making a small loss and competition in Personal Injury div. Outlook poor: co will slow the deployment of working capital in the PI business and suspend the div. Outlook for 2020 performance is now significantly lower than previous expectations. I hold.
FireAngel (FA.) guides FY rev £45.5m (looks in line), U/L op loss (before the impact of the change to straight line amortisation, previously described) £2.9m (£2m). Will make further exceptional non-cash charge of approximately £3.2m due to stock writedown and impairment of intangible development costs. CO "proposes to narrow its focus to developing and promoting those products and services which give the highest and quickest returns. This focus should, in the Board's opinion, make the Company less complex, less cash consumptive and support its gross margin improvement plans in both the short and medium term. Warns of further provision for battery warranty claims of £2.7m over 3 years. Blames "error in the assumptions on which the warranty provision was modelled when the issue was first discovered in 2016. It is therefore expected that the charge may be recognised as a prior period adjustment in the Company's Report and Accounts for the Year, rather than impact the Income Statement for 2019." Guides FY20 in line.
Safestay (SSTY) guides FY rev £18.3m up 25%. F/C is £17.6m. Adj EBITDA up 11%. Does not say it's a beat. Q1 bookings very encouraging,
SpaceandPeople (SAL) guides FY rev £7.7m, lower than expected, but due to lower direct costs pretax broadly in line with market expectations. Final div 0.75p (0.50p).
BigDish (DISH) no of restaurants on system up 150% since Nov RNS. Deals offered much better. Cost cuts means co may extending the funding runway beyond Q3 2020. Shows how useless prev CEO was.
Watchstone (WYG) sale of Healthcare services business should complete around 7 Feb.
Corero Network Security (CNS) $1m contract wins.
In line: Starcom (LON:STAR)
superstock NAH down 43% today! ouch!
A trading update from Burford Capital (LON:BUR) which is a first. A lot of focus on increased commitments, increased cash on balance sheet, lowest level of losses ever. On the other hand, 2019 net realised and realised gains are expected to be lower than 2018, though an exceptional January 2020 produced gains of more than $150m across the group and $100m from its balance sheet. Given that its last results operating profit for 6 months was $271m, to have produced more than $100m profit in a single month shows how lumpy revenues are, and also that, contrary to allegations, they don't seem to try to massage figures to meet year end. I hold.
Sold the small holding I had recently acquired in Burford Capital (LON:BUR) this morning (given my current form it will be a mistake)
Was quite happy with the TU until:-
"Burford's financial statements are still in preparation and our valuation process is not complete. However, given what we have previously discussed about timing and portfolio activity, Burford expects net realised gains to be approximately $20-30 million lower than in 2018.1 It is more difficult to forecast the outcome of the valuation process on fair value gains, but Burford expects to book approximately $50-70 million less in net unrealised gains than in 2018. Thus, we expect our income and our profit to be lower than in 2018. "
Therefore, it would seem fair to say that Burford Capital (LON:BUR) first TU was presumably a forced profit warning.
Using Stocko figures I did a quick calculation. Operating profits 2018 $343.7m, operating profits H1 2019 $246.4m. Burford is saying it's realizations will be between $70m and $100m down and worst case scenario is forecasting $243.7m for 2019 which would imply an operating loss in H2 2019 - that was too scary for me even accepting Burford Capital (LON:BUR) profits could be lumpy.
That was my logic - contrary views welcome as I'm still interested.
Phil
I think Burford Capital (LON:BUR) is less able to sell cases in the secondary market, following MW's attack and the political uncertainty in Argentina. Hence the lower realised gains. There was also a strong hint at the need for more cash to either fund growth or shore up the balance sheet.
This is an important point, and you are wrong. They have never been able to sell cases other than Petersen in the secondary market for a simple reason. Most cases can only be evaluated if you see the documentation between lawyer and client. This is normally privileged, but that can be waived, but if you waive it for someone you have to waive it for everyone. So if Burford Capital (LON:BUR) tried to sell cases in the market everyone would be able to see the strengths and weaknesses of the case and that would materially prejudicial.
The reason why they can sell Petersen is because the facts of the case are not disputed. Really, it is just a bet on whether Argentina will pony up and if so how much of the $9bn they are on the hook for. And people can take their own view on that.
They did say they may seek more cash through the bond markets to fund growth: is it really a problem that demand for their services continues to grow?
DP - I think you'll find that their historic reports make something of trying to build a secondary market for cases in progress. If you're saying that's all BS, then you're better informed than me.
Ive been in meetings where Bogart has discussed it and basically the privilege point means that there can only be a secondary market either after the case has been to court or where the buyer is willing to buy without seeing the legal advice that has been given in the case. So while there would like to be a secondary market, other than in Petersen, which is an open and shut case, privilege is an insurmountable obstacle.
Bond financing for a company with very lumpy, uncertain cash flows that has just issued a profit warning is not usually a good idea.
You need risk capital and a long time horizon for the skewed case returns to be realised.