Good morning, it's Paul here with the SCVR for Thursday.
Estimated timings - FRP took up a lot of time, so I'll keep going until about 3:30 pm.
** There's a technical glitch with the comments section, sorry about that. Stockopedia HQ are aware, and techies are working on a fix now. So please bear with them. I'll update this message once it's fixed **
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Today I'll be reviewing the following company announcements;
M&c Saatchi (LON:SAA) - trading update
Frp Advisory (LON:FRP) - Final results
Works Co Uk (LON:WRKS) - Results 52 weeks ended 26 April 2020
Sopheon (LON:SPE) - Interim results
Macfarlane (LON:MACF) - Interim results
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M&c Saatchi (LON:SAA)
Share price: 66.3p (up 8.7% today, at 08:38)
No. shares: 115.4m
Market cap: £76.5m
Update on Trading, Cash and 2019 Results timing
This is the famous name advertising, marketing, PR group. Its financial year end is 31 Dec 2020.
Trading -
Further to the announcement on 28 July 2020 [Paul: my review is here] , we are pleased to announce that the Group has continued to trade well and profitably in the opening few weeks of the second half of 2020.
New business remains strong and since the last update, we have been appointed by the ONS in the UK to handle the National Census to be conducted in 2021, launched both the new season English Premier League on behalf of Coca Cola and UEFA Champions League for Heineken and launched Open House a virtual training programme to accelerate the industry's ambitions to attract more diverse talent.
The last update indicated that H1 would deliver a "small underlying profit before tax", so despite the upbeat commentary, we shouldn't get carried away and think the business is doing a roaring trade. More that it's surviving, and eking out a small profit, in very difficult conditions. Which in itself is impressive, since the services SAA provides are the type of discretionary spending that is often the first thing to be cut in an economic downturn. This is no ordinary downturn though, and it's constantly throwing up surprises for investors.
Another marketing group, Next Fifteen Communications (LON:NFC) , recently announced strong trading. It seems to hinge on the mix of customers & sectors, since covid has smashed some sectors (e.g. travel, retail, hospitality), whilst boosting others (e.g. tech). Note the big name contract wins named above are public sector & sports.
Cash update - looks healthy;
The Group's balance sheet remains strong, with total cash at £56m as of 20 August 2020. The Group has a committed £36m revolving credit facility (RCF) and a £5m overdraft facility with NatWest. The RCF is fully drawn and the overdraft remains undrawn, leaving net cash of £20m.
It looks as if drawing down the whole £36m RCF might have been overly cautious. Although some other companies have told me that they want to sit on a big cash buffer, as an insurance policy against a possible second wave. That comes at a cost of course, since borrowed money attracts interest charges, and cash deposits earn practically nothing.
2019 Results -
They're now talking about these being published in September! I know covid has disrupted everything, including audits, but this timescale is getting a bit ridiculous. This makes me question what level of financial control the CFO has over the business? Taking 9 months to publish results, even during a crisis, looks slack to me.
AIM Regulation gave them a 3 month extension, hence why the shares were not suspended at end June, as otherwise would have been the case.
My opinion - reading my notes from last time, I was worried that SAA might need to do an equity raise in advance of (or parallel with ) next year's bank facilities expiry/renewal. With net cash of £20m currently, on reflection that's probably not an issue.
Overall, I think this share looks potentially interesting. I've not bought any yet, but am tempted. It seems to have got through the crisis without any issues.
As you can see below, the longer term track record is poor, but the share price seems to be forming a bottom for now. The StockRank has been good throughout the last 3 years too.
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Frp Advisory (LON:FRP)
Share price: 124p (down 5.3% today, at 09:24)
No. shares: 237.5m
Market cap: £294.5m
This is an insolvency practitioner & restructuring advisory company. A bit like Begbies Traynor (LON:BEG) but higher up the food chain, getting bigger & more lucrative jobs than Begbies tends to.
It floated on AIM in March 2020. I'm having a quick thumb through the AIM Admission Document, which is 92 pages (quite brief!) but you can skip most of it, there are only a few dozen pages that are important. Hence these things are always worth looking at, and needn't take up too much time.
Key IPO facts - FRP floated at 80p, with 100m shares, split 25m new, and 75m selling shareholders (who banked £57m net of expenses from the float). Partners still owned c.50% of the business after it floated. Lock-ins for 2-3 years after float. There's a long list of selling shareholders on page 78 of the IPO document, so I imagine sales of flash cars and yachts would have received a nice boost from this float. Actually, they probably already had those, given how well paid insolvency work is for partners in these firms.
We don't seem to have covered it here before in any depth, but I have it in my mind as being an interesting-looking share, that I've been meaning to look at properly for a while. So here goes (this might take some time, so thank you for your indulgence).
FRP was founded in 2010, as a management buyout of part of failed Vantis.
The problem with floating businesses like this, which previously operated as a partnership, is that there is a conflict between how the lucrative profits & cashflows are distributed. Previously the partners got everything, but once a listed company, there has to be an agreed split between the partners (salaries, bonuses & options), and dividends to outside shareholders and partner-shareholders. Also once lock-in periods end, then partners might decide to leave, and set up in competition, thus keeping all the fees for themselves rather than having to share them with outside shareholders. Hence it can be a problematic area, and one I'm not generally keen to invest in. That said, with so many businesses needing to restructure, there should be plenty of profitable work around for years to come.
A key point to research would be what the profit sharing arrangements are (see below). We've seen with Ince (LON:INCE) how problematic that can be.
Results FY 04/2020 - the P&L numbers are largely meaningless, because the float changed the business model 10 months into the financial year.
Some noteworthy cases won. No doubt there are likely to be plenty more in the pipeline, judging from the almost daily news of retail/hospitality businesses planning CVAs & pre-pack administrations;
Continued growth in size and complexity of caseloads, with high-profile insolvency appointments including Bonmarché, Carluccio's and Debenhams
Current trading & outlook - is OK -
Trading for the period since year end has been in line with expectations and the Board remains confident of making further progress in the current year ...
With a strong balance sheet and our new remote working environment operating well, the Board is looking to the future with cautious optimism.
Dividends - as stated in the AIM Admission Document ("AIM AD") (section 11, page 21), the company will pay out 70% of net profits in divis, moving to a quarterly basis. That's fine, but I still don't know what profits the partners are going to take out in salaries, so there could be little left for divis, in the worst case scenario.
Partner remuneration - digging deeper, I've found this information in the Aim AD, section 12, page 22. There are 5 elements to partner remuneration;
Partners’ compensation will comprise a combination of
(a) an annual basic income from New LLP,
(b) participation in a discretionary profit-sharing pool,
(c) participation in the EIP (subject to eligibility),
(d) a salary as an employee of FRP Advisory Trading Limited, and
(e) dividend income
My comments;
(a) A risk is that salaries could creep up faster than earnings, over time. Although page 22 does say;
Partners’ aggregate basic fixed income will not change materially post Admission.
(b) The profit-sharing pool is "anticipated" to be 25% of profit before interest & tax. The word "anticipated" seems very loose, and suggests that the percentage could be changed, maybe?
Additional, discretionary profit shares mentioned in section 12 also sounds a bit loose.
(c) This seems to have been set up at admission, and allocated 7.9% of the company to be allocated to employees (presumably free shares), which at some later stage would subsequently be sold, hence this is dilution at the expense of other shareholders. IPO Awards (free shares), are 11.06m shares, 4.7% of the company, I'm not sure if this is in addition to, or included within the EBT shares? It looks like they are in addition to, so rather generous arrangements, but in a people business I suppose the key people need to be locked in.
Overall then, it looks like outside shareholders are along for the ride, and it will just be a question of relying on the integrity of the partners, that profits are split fairly (however you define that) between partners & shareholders. The good thing, is that partners also own 50% of the business through their shareholdings, so interests are at least 50% aligned there.
Balance sheet - of key importance, because several listed firms of accountant have gone bust in the past. Amazing, but true. It feels strange for me to be reviewing & reporting on the balance sheet of a listed insolvency practitioner!
NAV: £20.5m, quite small given the mkt cap of nearly £300m, so there's very little asset backing here. Intangibles are negligible at £0.75m, so NTAV is similar at £19.25m.
This sector typically has very high receivables, because many insolvency jobs are paid out at the end, when assets are sold, so receivables can build up for months, or even years. This is not a concern, providing the company makes proper bad/doubtful debt provisions along the way, which is basic stuff for a firm of accountants. Hence £33.6m receivables is OK in the circumstances.
There's £21.3m in cash, which looks fine. Creditors look to be mainly monies due to partners, so I expect this cash would go out, in settling creditors, and then accumulate again from ongoing profits.
Overall, the balance sheet seems fine.
Valuation - this is the tricky bit! It would have been useful to provide some pro forma results today, as if the company had been listed for a full 12 months. Without that, then broker notes are our best bet. Many thanks to Cenkos for providing an update today via Research Tree, very helpful. This is both a good summary of today's announcement, and provides forecasts.
Adj EPS looks the best measure, which is 5.6p for FY 04/2021, and 6.4p for FY 04/2022. The PER is therefore quite high, at 22.1, and 19.4 - this is clearly anticipating an upturn in business once the Govt support measures are phased out, and more companies collapse.
Divis are forecast at 3.8p this year, and 4.4p next year, yielding 3.1% and 3.5% next year - OK, but not a high enough yield to excite me.
My opinion - people businesses like this, which totally rely on the expertise of highly specialised individuals to generate profits, are always going to have a conflict between rewarding the fee earners, and providing divis for outside shareholders. That's why I think these businesses should remain partnerships, and not list on the stock market.
That said, in this case, it looks well structured, since the partners also own 50% of the equity.
If you want something counter-cyclical in your portfolio, then owning this share, and/or Begbies Traynor (LON:BEG) makes a lot of sense. Personally I don't find the valuation attractive, even allowing for more business wins being likely in the coming few years. So purely on valuation grounds, I'll decline - i.e. it looks too expensive to me.
The other thing to consider, is what happens when lockins expire in 1-2 years? If the share price is high, then there could be a rush for the exit. I worked in this sector (in a junior role) from 1990-93, and saw for myself how incredibly stressful the work is, especially for partners, who manage multiple, highly complex cases, plus a constant round of entertaining & networking, to win new business. Burn-out is a real issue, and other health issues from overwork & intense stress of managing insolvencies, with the obvious unpleasantness & harrowing nature of redundancies, ruined lives, even occasional suicides when people have lost everything when their business collapses. Hence the attraction of cashing in a few million quid's worth of shares, and leaving the profession to do something easier & less stressful. This is why lock-ins are more important in this type of business than others.
Browsing its website, is I see FRP Advisory has its owhttps://app.stockopedia.com/sh...n podcasts, which can be accessed in the usual way through Apple store, or Google Play. I've just signed up, so will let you know either way if it's any good, or a help for insomnia.
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Sopheon (LON:SPE)
Share price: 895p (down 2.7% today, at 13:41)
No. shares: 10.2m
Market cap: £91.3m
Sopheon plc, the international provider of software and services for Enterprise Innovation Management solutions, announces its unaudited half-yearly financial report for the six months ended 30 June 2020 together with a business review and outlook statement for the second half of the year.
These numbers don't provide anything to get excited about. Yes we've had covid/lockdown, but software/tech companies are supposed to fare better than other sectors.
{{{ insert highlights picture}}}
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Sales pipeline - note that the move towards SaaS could be depressing revenue growth, compared with perpetual licence sales;
Total pipeline value and activity has held up with four $1m plus orders signed since the start of the year. The value of new customer sales bookings has doubled year on year, and all new customer licenses were SaaS. Revenue visibility3 for full-year 2020 is now at $25.5m (2019: $25.4m)....
... This also underlines that our SaaS transition is well underway.
Balance sheet - really good, with a nice cash pile.
My opinion - there's nothing in the numbers to interest me, so I'll park it here.
I know this share has a passionate private investor following, who are forecasting great things in future. I cover so many companies here that it's not possible for me to drill down to that level of detail, and be so certain about what the future holds.
Accordingly, I'm neutral on this one. Growth would need to resume to get me more interested.
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(work in progress)
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