Small Cap Value Report (Thu 5 Apr 2018) - AIEA, WGB

Thursday, Apr 05 2018 by

Good morning, it's Paul here.

Just a quick reminder that it's the last day of the tax year. So the last chance to add up to £20k into our ISAs for the 2017/18 tax year, and any other tax planning measures that you might wish to undertake.

Airea (LON:AIEA)

Share price: 59p
No. shares: 41.4m
Market cap: 24.4m

(at the time of writing, I hold a long position in this share) 

Possible takeover bid

Interesting news for shareholders here. Floorcoverings distributor, James Halstead (LON:JHD) has announced that it is in the early stages of considering a bid for Airea;

James Halstead plc ("James Halstead") notes the recent movement in the share price of Airea plc ("Airea") and confirms that the Board of directors of James Halstead (the "Board") is at the very early stages of evaluating making an offer for Airea which could lead to an offer being made for the entire issued and to be issued share capital of Airea (the "Possible Offer").
As a consequence of this announcement, an "Offer Period" has commenced in respect of Airea in accordance with the rules of the City Code on Takeovers and Mergers (the "Code").

There was an excellent results statement, with lots of positives in it, which I reported on recently here, on 21 Mar 2018.

The big pension scheme (which is now quite well funded) could be an obstacle to a bid. Although in some cases, agreement can be reached with pension fund trustees whereby an acquirer injects a one-off cash sum into the pension scheme, in order to get the green light for the acquisition.

I've got mixed feelings about this. On the one hand, it's always nice to get a portfolio boost from a takeover bid, if the premium is sufficient. On the other hand, Airea has already committed to a 6p special dividend, and looks to be on a roll (geddit?!) operationally. It would be a shame to have the upside whipped away from us, before the big surge in profitability comes through (from closure of its heavily loss-making carpets business). Its commercial flooring operation is highly profitable.

Anyway, I'm writing this just before the market opens, so don't know how much the share price will rise today. My…

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Airea PLC is a United Kingdom-based specialist flooring company. The Company’s primary activities are focused on manufacturing, marketing and distribution of floor coverings, through its brand burmatex. Its burmatex brand is a designer and manufacturer of contract carpets and carpet tiles. It offers a product range spanning fiber bonded, structure bonded, loop pile, cut pile and textured loop pile carpet in sheet, tile and planks, as well as specialist barrier and entrance matting products. It also focuses on the designing and manufacturing of products to meet needs of architects, specifiers and contractors for the education, leisure, commercial, retail, residential, healthcare and public sectors. The Company also exports its products to Europe, the Middle East countries and to Asia-Pacific regions. more »

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James Halstead plc is a United Kingdom-based company, which is engaged in the manufacture and distribution of flooring products. The Company manufactures a range of brands in commercial, contract and consumer flooring. The Company has presence across China, Russia, Australasia, Europe, Scandinavia, South Africa and Canada. The Company has a portfolio of brands, which includes Polyflor. The Company exports its products across the world, for schools, hospitals, transport and public buildings. The Company's subsidiaries include Polyflor Limited, Riverside Flooring Limited, Polyflor Australia Pty Limited, Polyflor New Zealand Limited, Polyflor Canada Inc., Polyflor India Pvt Limited, Objectflor Art und Design Belags GmbH, Karndean International GmbH, James Halstead France SAS and Falck Design AB. more »

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Walker Greenbank PLC is an international luxury interior furnishing company. The principal activities of the Company are design, manufacture, marketing and distribution of wall coverings, furnishing fabrics and associated products for the consumer market. It operates through two segments: Brands and Manufacturing. The Brands segment is engaged in the design, marketing, sales and distribution, and licensing activities of Sanderson, Morris & Co, Harlequin, Zoffany, Anthology and Scion brands operated from the United Kingdom and its foreign subsidiaries in the United States and France. The Manufacturing segment is engaged in the wall covering and printed fabric manufacturing businesses operated by Anstey and Standfast. It sells in approximately 80 international markets. It operates through its subsidiaries in the United States and France, and its own sales operations in Holland and Dubai. The Company has showrooms in London, New York, Paris and Dubai. more »

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

20 Comments on this Article show/hide all

Reacher 5th Apr '18 1 of 20

Hi Paul, Wey Education (LON:WEY) has released a company update providing some positive details on its recent acquisition which seems to be integrating well and trading ahead of last year. I know it's a company you were interested in a while back and wondered what your thoughts are now with the recent share price self-off?

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MrContrarian 5th Apr '18 2 of 20

My morning smallcap tweet:

Adept Telecom (LON:ADT), Airea (LON:AIEA), Fastjet (LON:FJET)

Adept Telecom (ADT) guides slight FY beat in underlying EBITDA and rev.
Airea (AIEA) James Halstead considering making an offer.
Fastjet (FJET) Underlying FY trading broadly in line with expectations. Also buys three ATRs with shareholder loan of $12m at higher of LIBOR + 6.45% 8% until 30 June 2019 then higher of LIBOR + 8.45% or 10%. And this is for a secured loan!

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daveinthelakes 5th Apr '18 3 of 20

Would be pleased if you covered Adept Telecom (LON:ADT) following their positive YE trading update.

Please note in what could be described as a reverse Ronseal moment it is not a telecom company albeit the market appears to continue to rate it as such. The vast majority of it's business is in managed IT services and a few months ago it applied to drop Telecom from it's name and presumably is still awaiting formal appproval from the powers that be. It has already dropped Telecom on it's website.

As a capital light company growing rapidly through acquisitions using it's strong cash flow and relatively low net debt it does tend to always refer to underlying EBITDA rather than a speific net profit range which is somewhat annoying.
Clients include Oxford, Cambridge and many more Universities , over 4000 schools, 100 Council's, The Houses of Parliament and they servicice over 1M Office 365 users.

I hold.

Thanks Dave.

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Graham Ford 5th Apr '18 4 of 20

Hi Paul. You’ve a small typo. You’ve put in a link to Headlam rather than James Halsted by mistake.

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Paul Scott 5th Apr '18 5 of 20

In reply to post #349793

Hi Graham,

Hi Paul. You’ve a small typo. You’ve put in a link to Headlam rather than James Halsted by mistake.

Thanks, I've just corrected that, as a friend emailed me . Sorry, not enough coffee yet!  ;-)

Regards, Paul.

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daveinthelakes 5th Apr '18 6 of 20

A request for Castleton Technology (LON:CTP) which I hold. The company came to my attention via a PI World presentation and in the boring world of providing IT services to housing associations, councils and the PRS sector I think could be a strong growth story. The company has been around for  20 years but the two guys at the helm have only been there a couple of years and are making rapid progress with a very large market relative to the size of the company. I think around 90% of their clients only use one of the six services they provide and so the potential for cross selling is enormous. I always found it was easier to get business off an existing client rather than chase prospets.


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alterego 5th Apr '18 7 of 20

Walker Greenbank (LON:WGB) final results today show large increase in profits and dividend in part due to a full year contribution from Clark and Clark but outlook statement is unsettling and talks about a difficult market and falling revenues in first nine weeks of current year. SP down about 4% in early trading

Paul, I believe you were a holder back in January so your views would be appreciated.

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tic_tac_toe 5th Apr '18 8 of 20

Walker Greenbank (LON:WGB), keen on any thoughts:
full year results to 31 January 2018 looks good to me, but caveat is the year ahead may not match the prior years' growth.

· Sales up 17.7% to £108.8 million (2017: £92.4 million)

· Total statutory profit from operations up 78.6% to £14.0 million (2017: £7.9 million) due to a full year's earnings contribution from Clarke & Clarke

· Adjusted underlying profit before tax* up 20.2% at £12.5 million (2017: £10.4 million)

· Licensing income up 21.6% in constant currency at £3.1 million as a result of range extensions into new product categories

· Underlying profit from operations** up 25.8% to £12.4 million (2017: £9.8 million)

· Adjusted earnings per share* up 6.2% at 14.52p per share (2017: 13.67p per share)

· Final dividend up 20.3% to 3.68p per share (2017: 3.06p per share), giving a total dividend up 21.1% at 4.37p per share (2017: 3.61p per share)

· Direct business model launched in Moscow in February 2018, including a new showroom, with Germany to follow in H1 2018

All sounds great, but ends with a cautious look-ahead statement:

In the first nine weeks of the current financial year, Brand sales were down 8.3 per cent in the UK and down 3.8 per cent overseas in constant currency, down 6.1 per cent in reportable currency. 

trading to date in the current financial year makes us cautious about the outlook; as a consequence, the Board expects that profits for the full year will be ahead of last year's but below current Board expectations. We will provide a further update on trading at our annual general meeting in June 2018."

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matylda 5th Apr '18 9 of 20

In reply to post #349803

I second Castleton Technology (LON:CTP), to me it's the share of most interest out there today.

Trading Update is basically in-line and optimistic for future growth.

Blog: Briefed Up
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mrosbiston 5th Apr '18 10 of 20

In reply to post #349753

Wey Education (LON:WEY)

probably not enough information in the update for any real insight - certainly positive noises about the A21 acquisition integration and the new FD seems a safe pair of hands.

Think we will have to wait until interims on 8th May for any real insight.

With the interim results, Wey will give an update on the encouraging progress being made on the various initiatives previously announced including international expansion

This seems to be what has got the share price moving. although on only 9,000 shares so not taking too much from it. My view on the decline is that it has been post good news drift - and moderation of over exuberance in the valuation. You can see there has been hardly any buying volume since November 2017, some modest selling volume but nothing major - the crux has been there has not been enough buying to support the share price - so not enough interest at this valuation. That could change with some stellar results in May, i will hold until those results.

(disclosure - i hold)

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Damian Cannon 5th Apr '18 11 of 20

Inline trading statement from Watkin Jones (LON:WJG) today. Student accommodation looks strong with marketing now taking place for 2019/20 and 2020/21 academic years. Build to rent also seeing a lot of activity with a ramping up in the number of development sites. Steady as she goes.

Blog: Ambling Randomly
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DJCP 5th Apr '18 12 of 20

Re: Conviviality (LON:CVR) - you mentioned yesterday "When I've got time, I'll revisit the numbers, and see if there were any warning signs in the previous figures."

Only had a very brief glance at this, so can't comment on the quality, but may save you some (or a lot of) time

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jesseowens 5th Apr '18 13 of 20

Hi Paul , interested in your views on Treatt. Good quality business historically beginning a big expansionary capex cycle . If not sure if this is something to be afraid of for future ROCE, or welcomed for EPS growth ?

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doublelutz 5th Apr '18 14 of 20

With regard to Watkin Jones there seems to be a number of companies getting in on the idea of building student properties, Empiric Student Properties among others. There must be some sort of limit to the number of blocks of apartments that are needed for students. Is it perhaps just a temporary demand that is being filled?

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dealtn 5th Apr '18 15 of 20

In reply to post #350018

Watkin Jones Watkin Jones (LON:WJG) isn't just about "building" (and onward selling) student properties, but attached to that business is the happy side effect of a cashflow receipt from managing those properties once completed and occupied. Even if the growth in new projects is encumbered with reaching a "limit", the underlying property management business cashflow is to be considered.

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mrosbiston 5th Apr '18 16 of 20

In reply to post #349958

thanks very much for this link - great reading.

some of these are difficult to spot without a deep-dive. however, there are some simple ones we could all apply.

Red Flag one: Falling operating cash flow
The obvious sign of distress is when Operating Cash Flow fell from £7.3m to £528k

Red flag seven: Lack of cash in the company’s balance sheet
A business with higher credit sales in proportion to cash sales should hold more cash on the balance sheet. That led to cash as % of total assets falling from 10% to 1.5%.

Red flag nine: No Assets and lots of goodwill
When you have increased net debt, it’s wise to have sufficient levels of REAL and LIQUID assets to prepare for periods of lower profitability. With less than £3m in freehold assets and over £200m in goodwill

Red flag ten: Paying dividends with external borrowings
You know management cares about appreciating their share price when they’re paying increasing amounts of dividends. Who is actually paying the dividend to who? Since 2013, it paid a total of £34.9m, at the same time it asked £200m in shareholders cash.

Thanks to Walter Hin for highlighting these red flags

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mrosbiston 5th Apr '18 17 of 20

i ran this test on a few of the struggling names out there (manual work, unable to create a screener for this)


only takes a couple of minutes to check each name

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jonthetourist 5th Apr '18 18 of 20

For those requesting Paul's view on Castleton Technology (LON:CTP) he didn't like the balance sheet in November.


Balance sheet - this is where it all goes wrong for me.

NTAV is negative, at -£16.0m. That's a lot for such a small company.

Current ratio looks very weak, at only 0.47. As with Ideagen above, the business is being funded by up-front payments from its customers. Deferred income is £6.3m.

Note that non-current liabilities are also substantial for the size of business, at £11.0m. This includes £2.8m in borrowings, £2.4m in convertible loan notes, and other items.

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Gromley 5th Apr '18 19 of 20

In reply to post #350163

mrosbiston - It might be just my screen, but I can only see 6 1/2 of the companies you reviewed - any chance of reposting the graphic?

Anyway it will be interesting to see how these companies pan out on the basis of these tests, and whether there is in fact any relevance at all in the rations considered.

To be honest, my initial view of the walbrockresearch article was that it was a flimsy piece of rear-view mirror analysis. Certainly all of the items mentioned can be construed as "poor" (although some of them were subjective) but there was no evidence provided as to whether statistically they lead to companies going bust or on the other hand whether they cause the market to take an unjustifiably negative view and therefore actually provide a contrarian buy signal.

It's certainly something worth tracking, but given the lack of evidence provided it would imho be impossible to call it instructive.

I was tracking 3 of the 6.5 companies anyway, 2 with an expectation to buy if and when there is clear evidence that the wheels haven't come off, so it adds a little to me here.

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mrosbiston 6th Apr '18 20 of 20

In reply to post #350298


last company was RTN - only 1/4. It does appear to have the strongest balance sheet of the seven, positive NTAV, could be a possible candidate for a turnaround rather than permanent decline (would need to look into it in greater detail than my cursory look).

i agree there is a fair amount of 'rear view mirror' analysis, we can say that with pretty much every bankruptcy (Enron, Worldcom, Globo etc - take your pick). If we are investing in turnarounds or anything contrarian, then you are going to be picking the odd disaster here and there and we accept the risk. Agreed it is very difficult to objectively analyse.

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 Are LON:AIEA's fundamentals sound as an investment? Find out More »

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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