Small Cap Value Report (Thu 8 Feb 2018) - OTB, RBG, ESCH, SEE, DSG, DFS, CRL
Hi, it's Paul here.
I'm not convinced that the recent US market volatility is over yet. So personally I'm braced for potentially another lurch down at some point.
To get you started today, I've added a new section on the profit warning issued by Gattaca (LON:GATC) to yesterday's article, here.
Fresh forecasts for GATC have just come through this morning, from commissioned research company, Equity Development. The beauty of commissioned research is that it's freely available online to investors - very important now that MiFID has bug***ed up my access to other research notes. As with all broker notes, I ignore the recommendation and price targets. However, it's very helpful to get the best guess from a capable analyst. I've updated yesterday's report to include the revised forecasts. Given its poor track record of repeatedly missing forecasts, I think it's wise to factor in an additional level of caution with the latest forecasts.
On to today's news;
OnTheBeach - just a quick mention in passing, as it's now too big to cover here (market cap of c.£654m). There's an in line with expectations update today from the company, which reads very well. This online travel company (mainly UK) is remarkably profitable, and growing nicely. International expansion is underway, albeit at an early stage. I'm kicking myself for selling this one far too early, and think it might even be worth revisiting at the current, higher price. The valuation is far from aggressive, considering it's turning out to be very successful. They're clearly doing something right. I should own this one, but don't.
Revolution Bars (LON:RBG)
Share price: 162.5p (unchanged today)
No. shares: 50.0m
Market cap: £81.3m
(I hold a long position in this share)
A new CEO has been appointed, Rob Pitcher - a very appropriate name for a bars operator. The RNS today gives a few details of his track record, which is 25 years in the hospitality sector. I'm very pleased the company has appointed someone with lots of industry expertise, and not a financial engineer. I just hope they don't offer him a ridiculously generous "incentives" package. Such arrangements seem totally discredited in my eyes, particularly after the obscene payouts for Persimmon (LON:PSN) management, who just happened to be in the right place at the right time.
I see that Mr Pitcher's most recent job was Divisional Director Restaurants at Mitchells & Butlers (LON:MAB) - this is interesting, because I feel that there's a relatively easy win to be had at RBG, by revamping its lamentable food offering. Even the old CEO mentioned at a meeting that there is potentially good profit growth to be had from improving the food offering.
I do on-site research regularly with this company, and am impressed every time with the friendly & well-trained, knowledgeable staff, at various branches I visit. The cocktail menu has been slimmed down, and is now much better in my view - excessive number of options is too confusing. So less is more I feel. Food needs to be sorted out next.
Overall, I remain strongly bullish on this stock. Why is it priced at 162p when a competitor tried to buy it last year at 203p cash, but was rebuffed? The valuation just looks wrong to me, and I think an exit at c.240p is the most likely outcome. Recent trading has been good, and the bars sector is enjoying strong consumer demand, much to many people's surprise.
Escher LON:ESCH
Share price: 185p (up 21.4% today)
No. shares: 18.8m
Market cap: £34.8m
Recommended cash offer at 185p
Matthew Peacock's Hanover investment vehicle has agreed with management to take the company private at 185p cash per share. That's not a great premium - only 21% above yesterday's close.
Irrevocable acceptances (including Hanover's stake) are only 45.38% at the moment - suggesting that this is not necessarily a done deal. Bidders usually have to get 75%+ in order for force through a deal.
In my view this is a good opportunity for shareholders to grab a clean exit. This company is too small, its performance too erratic, and liquidity in its share too poor, to justify it being listed on a stock market. For these reasons, I would accept the offer if I held this share.
The danger is that Hanover could get nasty if they end up with some acceptances, but not enough. Look at what happened at Interquest (LON:ITQ) - when unscrupulous Directors were rebuffed in a low-ball bid, they've since tried to find a way to undermine minority shareholders and take it private by the backdoor. I see a similar risk here.
Seeing Machines (LON:SEE)
Share price: 5.6p (down 0.9% today)
No. shares: 2,240.4m
Market cap: £125.5m
(I no longer hold a long position in this share)
Seeing Machines Limited (AIM: SEE) ("Seeing Machines" or the "Company"), an industry leader in computer vision technologies which enable machines to see, understand and assist people, is today publishing a Fleet, Rail and Off-Road Update for the period ending 31 December 2017.
The company has a 30 June 2018 year end, so is today reporting on H1.
Seeing Machines' Group trading for the current financial year remains in line with expectations.
That might sound OK at first glance, but the trouble is that forecasts are for the company to lose money heavily this year: A$25.5m net loss, on A$39.9m revenues. Note that both these numbers are very much worse than forecasts a year ago.
Revenue is forecast to more than double to A$80.7m next year. Based on past performance, I imagine that forecast might be revised down heavily at some point.
Fleet total contract value ("TCV") signed with customers, but not yet delivered nor recognised as revenue, has increased from A$21.5 million at 30 June 2017 to A$36.4 million at 31 December 2017 ...
The Company expects to report Group revenue for the six months to 31 December 2017 in excess of A$14 million (unaudited).
So if H1 delivers at least A$14m revenues, that means H2 needs to achieve A$26m revenues - a big increase. It's not clear over what period that order book will be delivered.
Funding - a big equity raise has been completed recently;
The Company successfully raised £35m through a placing with institutional investors announced in December 2017 and a further £2.4 million through an offer to existing shareholders.
These proceeds will enable further investment in the ongoing development of the FOVIO driver monitoring platform technology and continued product improvement across all industry verticals to scale the Company's global footprint and meet increased customer demand.
That's a decent lump of cash, which means that losses can be funded for the time being.
My opinion - as regulars here will know, I've always liked the potential for this company's technology. However, a couple of recent quite bearish comments from the excellent tech analyst at Cantors, Kevin Ashton, have been a bit of a wake-up call for me. He pointed out that, in the one sector where SEE has achieved decent sales (big trucks for the mining sector), it probably didn't produce an economic profit, once we take into account years of expenditure on product development.
Bulls in this stock like to believe that there could be massive upside from adoption by mass-market applications, e.g. trucks, coaches, and cars. That could happen, but the question is over what timescales?
Overall, I've decided that the market cap is probably too high for something that, for years, has been jam tomorrow. It's well-funded for now, but I think the probabilities might be leaning towards a profit warning at some point later this year. The forecasts look too aggressive, and that could mean disappointment to come. Or it might not, they might land huge orders. The key point is that I have no idea what is going to happen, hence it's impossible to accurately value this share.
I was too tired to write any more on Thursday, so am now writing the rest of this report on Friday morning.
Dillistone (LON:DSG)
Share price: 76p (up strongly on 8 Feb 2018)
No.shares: 19.7m
Market cap: £15.0m
(at the time of writing, I hold a long position in this share)
The Board of Dillistone Group Plc, the AIM quoted supplier of software for the international recruitment industry through its Dillistone Systems, Voyager Software and GatedTalent divisions, is pleased to provide an update on trading.
This relates to the financial year ended 31 Dec 2017.
Key points from today's update;
- H2 better than H1
- Dillistone Systems & Voyager divisions both profitable - however the start-up venture of Gated Talent was pre-revenue, so will have (not disclosed) losses in 2017
- Gated Talent - strong orders, ahead of expectations, but revenues not quantified
This bit drove a sharp upward share price movement yesterday;
... operating profits for 2017 will be considerably better than current market expectations of 200,000 of operating profit, prior to acquisition related items and any adjustment related to the previously announced contract termination.
Hooray, great to see a company commenting on market expectations, together with quantifying it. Investors need this information in all trading updates, post MiFID II.
The house broker has increased its operating profit forecast from £200k to £300k. It has left 2018 forecasts unchanged at £200k, and £0.54m for2019.
Gated Talent - this sounds an interesting new product, but I am rather wary that the company has now twice said that it is "too early to say" what response rates are like. That suggests to me that response rates (from candidates) have possibly been low!
My opinion - I'll take a look at the figures, when they're published in late April 2018 - which seems very late for 2017 results.
I picked up a small position in Dec 2017, but am reluctant to buy more until there is more clarity on how material Gated Talent is likely to be. The existing business is only marginally profitable, so I think the current price already factors in some upside from GT.
Also please note that this share can be very illiquid. The previously generous dividends have stopped, I seem to remember - due to the loss of a large & profitable client.
Overall, I'm happy to keep a toe in the water here, but will wait to see what the figures look like before deciding whether to buy more, or to ditch them.
DFS Furniture (LON:DFS)
Share price: 196.8m
No. shares: 211.66m
Market cap: £416,5m
Half year trading update - covering the 6 months to 31 Jan 2018. This is a furniture retailer.
I like the summary at the start of the announcement, which says;
On-plan trading performance despite continued challenging market conditions
Strategic development continues with strong online channel performance and five new DFS showrooms opened
Expectations for full-year financial performance remain unchanged
The only thing missing is a footnote to explain what expectations are for the full year.
Sales look rather soft. Once the acquisition of Sofology is excluded, gross sales fell by 3.5% in H1, versus H1 prior year. However that includes online growth, and I think also includes the 5 new showrooms, so it's not a LFL figure. This implies that store LFLs are probably well below -3.5%, hence why the company is coy about disclosing the figure directly.
H2 outlook - seems to be improving;
With the like-for-like trading momentum for the Group strengthening during the first half of the financial year, we continue to expect the second half of the financial year to demonstrate a stronger year-on-year gross sales trend than the first half.
We don't usually like H2-weighted trading comments here at SCVR, so this is a risk factor.
Acquisitions - note that the company bought Sofology, and MultiYork (when it went bust last year).
Outlook - a bit more detail here;
We recognise that the living room furniture retail market is likely to remain challenging in 2018, given current consumer confidence levels.
However, with the benefits of strategic investments feeding through, our expectations for the full year are unchanged.
We continue to expect modest growth in EBITDA in the 2018 financial year (excluding the impact of acquisitions), driven by the annualisation of product margin and operating cost efficiencies over the second half of the financial year.
Forex might be starting to help now, with sterling having recovered somewhat against the dollar, possibly?
Balance sheet - this is the elephant in the room - DFS has a dreadful balance sheet. Here are some stats;
NAV £245.1m - sounds fine, until you realise that includes £491.8m intangibles. Remove that, and you arrive at negative NTAV of -£246.7m.
Working capital is poor, with a current ratio of only 0.69
Long term creditors are large, at £274.8m, which includes £198.8m in interest-bearing debt.
Overall then, this company fails my balance sheet testing by a considerable margin. It's totally reliant on bank support, which is fine in the good times, but may not be quite so fine in a recession, or a future credit crunch. So it looks precarious to me.
Dividends - given this weak financial structure, I'm astonished at how generous the company's dividends have been, even including special divis funded from debt effectively. This is not prudent at all, and I think the high dividend yield here should be regarded as unreliable - the divis would certainly have to be cancelled in a downturn.
My opinion - the debt laden balance sheet makes the PER look low, but once you properly adjust for debt, the PER is not low. Divis look unsafe. It looks a good company, but with a terrible financial structure, which makes it uninvestable for me.
This share would probably make a good short, if credit conditions tighten up at some point in the future. Not only would it suffer reduced profits, but also its bank debt could well prove problematic. In the good times though, these things arguably don't really matter.
Creightons (LON:CRL)
Share price: 25p
No. shares: 60.6m
Market cap: £15.2m
Trading update (profit warning)
Creightons plc is engaged in the development, marketing and manufacture of toiletries and fragrances.
Bad luck to shareholders here, as the company has run into some operational problems;
The board of Creightons plc has undertaken a review of this year's performance to date and concluded that sales growth for the year is expected to remain positive at approximately 12%, driven by an increased demand in all divisions of the business; owned brands, contract manufacturing and private label.
That sounds quite good actually, as sales were up 7% at the interim stage. There's no problem with customer demand.
Much of this growth in sales has arisen from significant and unexpectedly higher order intake in the last few months. This has resulted in demand out-pacing capacities in our factories ahead of planned expansion in manufacturing capacities. Therefore, to ensure consistent and uninterrupted supply to our customers the group has outsourced supply of some branded products lines. This has impacted upon the profit margins of these lines.
Whilst disappointing, this is actually quite a good quality problem to have. In time, production capacity can be increased, so this looks to me like a temporary, fixable problem - which is the best type of profit warning to have, if you must have one.
Therefore, the board has concluded that the full year profit before tax is likely to be marginally lower than last year. Profit after tax will also be impacted by the first full year of full corporation tax charges on profits.
The Corporation Tax was already known, so no issue there.
Last year the company made £1,489k PBT, so a similar figure looks likely for this year - hardly a disaster.
Forecasts - I can't find any broker research on this. Perhaps the company should consider producing commissioned research, to keep its investors informed?
Last year saw 1.88p diluted EPS, on what looks like a fairly normal P&L tax charge. So maybe this year might be heading for, say 1.75p? At 25p per share, that's a current year PER of about 14.3. That's probably about right for now.
My opinion - I like the balance sheet here, which looks solid. Today's warning isn't a disaster by any means, and should be temporary, fixable problems. For that reason, I'm feeling quite positive about this share. Providing no more problems emerge, then I could see this share recovering somewhat from the heavy recent falls. So if you like the company already, then this setback could possibly be a buying opportunity?
The best thing is that there appears to be decent customer demand. Quite an interesting company, and possibly a buying opportunity, if production problems are fixed. Although it doesn't strike me as amazingly cheap.
There's more detail in the RNS, which I haven't covered above. Outlook comments sound quite upbeat.
I didn't get round to looking at Elektron Technology (LON:EKT) in the end, sorry about that.
Have a lovely weekend!
Regards, Paul.
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53 comments
Connect (LON:CNCT) - The p/e ratio is P/E 4.38 and the divi yield is 15.6%
(Sold awhile ago so unaware if the divi has been suspended, cut or whatever)
- Isn't there a rule of thumb somewhere that says "beware" when a stock shows a dividend yield higher than the P/E ratio number?
There’s also a maxim about buying when everyone else is fearful. I was thinking to put Connect (LON:CNCT) on my watch list and bide my time until there’s clear evidence of some recovery in the SP.
But is there a chance of an opportunistic bid coming in while I’m waiting?
--- reg hedging / market corrections
To Paul, Simoan, threeputt, mammyoko and Cisk -
Thank you very much for taking the time and your very helpful comments. Really appreciate it!!
Re: Connect (LON:CNCT)....Business in terminal decline, dividend looks tempting but is actually a red flag because it’s so high.
Eps trend continually heading down.
It is in decline, and probably terminal, ultimately. But the rate of decline is low. It is most definitely not a growth stock and won't appeal to many. However the prospective dividend is 15% at current prices and covered 1.5 times. It would be no surprise to see a cut, but a 10% dividend would probably be covered 2x probably for quite a few years if nothing much changed.
The Aurelius situation is obviously a mess, but it will probably sell in time, likely at a lower price, but it is a relatively small part of the group business, and not apparently been contributing much to profits recently.
It's hard not to see some improvement in the SP, and good dividends, over the next couple of years if things pan out as currently forecast.
I don't assume that it's impossible to make money on shares in declining sectors if the price is right, any more than I would assume that money can be made with low risk on growth stocks with are highly priced.
Peter
IQE (LON:IQE)
38 million shares traded in IQE today.
And?
IQE (LON:IQE) evidence of the heavy trading this afternoon.
So Michael - are you providing it or asking for it?
Or maybe explaining it?
I'd like to think that part of your post went missing?
It seems a reasonable observation that IQE (LON:IQE) sold-off heavily on almost twice its daily volume. It might be a directional tell and if nothing else, sums up the current sentiment on IQE (LON:IQE).
That might be uncomfortable reading if one is long but equally might be cheering if one is short. If one has no position then it is a data point, nothing more.
Let's not descend into bulletin board style emotional sniping and cat-calling. Stocko is above that and is a refuge for those who have suffered the slings and arrows of outrageous outrage.
Sometimes data without bias or opinion is useful.
Revolution Bars (LON:RBG) - perhaps they'll use their sleepers to run the company down and then pick it up out of administration? Worked a treat with Bramwell
Creightons (LON:CRL) have released an afternoon trading update. Having to outsource some branded lines so will affect full year profit.
I am in agreement with Paul. I think sentiment has changed here. Sentiment has been driving the market higher not fundamentals. Few people on the street are advising to buy the dip this time round. This could lurch lower again very soon
The four key things to look out for are
1. This for the pin that pricks the bubble
https://www.bloomberg.com/quote/USGG10YR:IND - ten year treasury yield
2. This for the bubble bursting
https://www.bloomberg.com/quote/SPX:IND
3. This for the scale and velocity of the fall (and for the potential repercussions)
https://www.bloomberg.com/quote/VIX:IND
4. This for the driver of inflation that will cause the pin in 1. above
https://www.bloomberg.com/quote/USDCNY:CUR
I just moved all my DC pension money into money market funds. Could be wrong but think the risk reward of another 10% upside this year vs potential 30% downside is moving towards the latter.
UK small caps won't be spared.
While I know the major bent of these discussions is fundamental, I like to pre-screen prospects based on their techncials as the trend in price will articulate many of the problems in the fundamentals. Mark Minervini's books are doing wonders to illustrate that technical and fundamental analyses are not mutually exclusive but are rather different lenses to help structure thinking and analysis.
ON IQE (LON:IQE), as well as the short interest (now currently at 11.35% making it the 5th most shorted share in the UK), its price action is heavily correlated to cable which has recently had a great run. That makes sense given 70% of IQE (LON:IQE) earnings are dollar-denominated
It is also heavily correlated to $AAPL price action, again sensible given its reliance on $AAPL as a major supplier (see comparison below).
I reckon there is an unholy trinity of events that are combining to make IQE (LON:IQE) unattractive in the short term: the GBP strength (relative dollar weakness), relative Apple weakness and the short interest. Of course correlation doesn't equal causation and most correlations break down eventually .
I am very keen on the potential and it is on my watch list but I am waiting for a bit of a capitulation-sell and a better entry price. I hope to get a nibble around the 80-85p mark where there is a nice gap in the price action. Certainly won't be buying when the price remains below the 200DMA : it is worth noting that the price wasn't even near the 200DMA between July 2016 and mid Jan 2018... now it can't sustain a rally above it.
I'll watch for more of the shorts to come off and a few closes above the 200DMA but prefer a spike-down sell-off to signal the reversal
My 2p's worth , neither short nor long but patiently awaiting a buy signal or catalyst.
Re IQE (LON:IQE),
Perhaps we ask Paul to comment but wait to interpret the next RNS IQE must surely issue in response to further share declines today based on new public shorter report (Muddy Waters) and pubic accusations. He was especially prescient in timing his own exit at the almost exact peak of the shareprice exuberance. Personally, I still hold with some purchases under water and some (just) dry but am now fearful.
However, FWIW, the investing question now is not whether dodgy/questionable accounting was done to present IQE better in 2015-16 by using JVs, aggessive acconting etc (whether for immediate personal gain or not!). Ditto 'friendly' valuations. Little shocks me and Mgt often do have to push the envelope to get results. Although I would also say that rarely do complex accounting structures signal good news for ordinary shareholders or employees. I have worked in Nigeria and Thailand. Perhaps Wales is the same!
However, the key question is as Graham mused upon at 103p, is : is its future fairly valued at 95p or whatever it is when you read this note? Right now the risk seems very high vs reward - if it survives it may drop much, much lower. But at present, no issue seems so big There seem to be no signs it will completely go under. However, if its future is truly bright and the Forward revenues and profits are real, then eventually the price will recover (or it will be taken over at some sort of premium to today).
Certainly, the guys who paid 140p at the Nov equity raising (thank you, saviours all !!) will be angry and reopening files and (quelle surprise !) Cardiff Uni 'pork barrel' money may not have been commercially well spent to bring jobs home.
We might also see some personnel casualties if the Board elect to shed blood for the greater good even if technically all is OK ....which might bring in (at higher salary cost) some more professional / smoother managers for the next phase in its growth. It is moving beyond entrepreneurial to big corporate (if things go well!)
Net, I think (thought ?!?) that it was well placed to make great money in 3-5 years time but that the path would be very rocky. Their combination of technology and practical experience learning curve should make them a great manufacturer of a rising class of products. That remains my view....but the rocks have come sooner than expected.
Let's hope they don't sink the boat entirely. Does anyone see signs of that?
"I have worked in Nigeria and Thailand. Perhaps Wales is the same! "
And England?
I've read now read the Smokey Waters paper on IQE (LON:IQE) and although it claims :
"Our research has been independent of ShadowFall, and ShadowFall’s report does not address the vast majority of the issues with IQE’s accounts we have identified."
It actually strikes me as much ado about nothing in terms of the extra value it brings over and above the Matt Earl piece, certainly it goes in to more detail than Earl did (despite being half the length) but to be honest I don't find that it raises anything new to be concerned about.
The major arguments seem to be that the creation of the JV with Cardiff Uni (CSC) created one off benefits during 2015 & 2016, this is true and has been somewhat done to death imo. The JV was created by Cardiff Uni putting in cash and IQE putting in equipment and IP (some of which had appreciated over book value).
They then try to make capital of the fact that many of the JV employees seem to regard themselves as IQE employees. Having been part of a JV in the past (between two commercial entities) people tended to still associate themselves with the original parent and in many roles the JV was acting as an agent on behalf of the parent(s) , generally in this context any given individual would generally only be an 'agent' of one of the parents.
If you look back to the aims of this JV from the original notice of formation you can see :
So in other words it is an IQE R&D "facility" that is jointly owned by IQE and Cardiff Uni.My reading is that the commercialisation will be done by IQE and it is not therefore surprising that the soft branding is IQE.Smoky then highlight that CSC has continued to rack up costs/losses -er yes that is how R&D goes until you get the big commercialisation - AFAIA the technologies that IQE is currently selling into the market have not yet come from CSC.
Maybe they are right to ask whether Cardiff Uni were shrewd enough in the deal, who knows, although I'm not aware of them complaining.
Finally, Smoky sings says : "In the meantime, shareholders should ask whether IQE’s financial performance since 2015 can be sustained."
Alluding to the similar nonsense that Earl came out with , that IF 2015 & 2016 profits were "inflated" by the creation of the JV then we should discount the value of IQE accordingly.
However over the last couple of days we've seen analysts at both Barclays & Stifel (and possibly others) confirm that JV licencing revenue does not really feature in their forward forecasts - on which the valuation of IQE is predicated.
IQE (LON:IQE) meanwhile have issued a further rebuttal mostly refering back to the reponse to Shadowfall, but providing a bit more of some of Smoky's "new" claims.
"Information in the Muddy Waters report is either factually inaccurate or has previously been disclosed in IQE's annual reports and financial statements."
Any other "independent" analysts who want to publish regurgitate the same thing had better get a move on as the credibility of these reports largely swing on the fact that the last published FY results are from 2016 when the JV business was a significant part of profits. Pretty much everyone except for Shadowfall & Smokey already know this was not the case for 2017 (or beyond) - from the December TU, but once those figures are formally published it won't be so easy anyone to conveniently overlook them.
Of course I'm long and could just be "talking my own book" , but I honestly don't see any foundation or merit in these arguments. As ever though I really welcome thoughts to the contrary.
Gromley,
"I've read now read the Smokey Waters paper on IQE (LON:IQE) and although it claims :
"Our research has been independent of ShadowFall, and ShadowFall’s report does not address the vast majority of the issues with IQE’s accounts we have identified."
It actually strikes me as much ado about nothing in terms of the extra value it brings over and above the Matt Earl piece, certainly it goes in to more detail than Earl did (despite being half the length) but to be honest I don't find that it raises anything new to be concerned about.
The major arguments seem to be that the creation of the JV with Cardiff Uni (CSC) created one off benefits during 2015 & 2016, this is true and has been somewhat done to death imo. The JV was created by Cardiff Uni putting in cash and IQE putting in equipment and IP (some of which had appreciated over book value)."
I did think this might happen:
Posted on LSE, IQE board, under subject "goooba" on 24 Jan '17
"... do you remember what drove it up so high in 2010, and why it fell so hard in 2011?"
From about 2008 the sp was driven up by the news of moving to Singapore and the potential for further production on plant that had to run 24/7 was unlimited, all extra contracts went to bottom line. It was darling of tip-sheets and IC. It peaked in early 2011, ?Feb, it then fell off a bit before precipitous drop on 26/10/2011 on a profits warning because of "de-stocking" by its clients. I suspect they were being undercut by competitors but have no evidence for my speculation.
For some reason I can find no record of an RNS on 26/10/11 nor is there any discussion in annual report to yr end Dec 2011 so all this from a geriatric brain. Make of it what you can. For the sake of all posters who are invested I hope my fears are unfounded. If I were to predict the basis of my hypothetical profit warning it will be unexpected support needed for new CSAC in Cardiff.
Regards,
Seadoc,
Still short IQE (LON:IQE) and if anyone wants the smokey waters (sic) report look under MuddyWaters:
http://d.muddywatersresearch.com/tou/?redirect=/content/uploads/2018/02/MW_IQE_02082018.pdf
Thanks Seadoc,
Oops went off piste and referred to smokey waters - not an attempt to be clever or disparaging, just a senior moment I'm afraid.
Anyway, I agree that the need to provide more funds to CSC (together with the Uni) is one of the risks and certainly at the current frisky time that would be significantly shareprice impacting (probably far beyond the investments involved).
Clear cash generation (and the ability for Capex to deliver over it's full lifespan) remains an unproven for IQE (LON:IQE).
Interesting point about 2011 too - the RNS is here
That would explain some of the negativity towards the recent mentioned of inventory reduction in Wireless - in this case though AIUI that was at IQE's behest so that they could focus capacity at VCSELs.
Given that IQE still seem to be the majority player for CS wafers for wireless, having not read back that far previously I find some encourgement that they have retained that position over 7 years or more.
Anyway you've sparked my interest there, I will look back at 2010,11&12 now - Thanks, it's not like I have anything else to be doing !!! ;-)
--- Reg Hedging
Paul - thank you very much for your post regarding hedging !!
I tend to sell or part sell positions when markets fall, just to protect profits and to be able to sleep at night, but that can be very costly as you pointed out. I will now try to figure out a way to short which works for me, so I can offset some of the losses next time. Thanks again!
To All -
If anyone else got some tips what to do during corrections or wouldn't mind sharing how they dealt with falling markets over the last few days (or prepared for a fall), it would be greatly appreciated! Thanks in advance!
To All -
If anyone else got some tips what to do during corrections or wouldn't mind sharing how they dealt with falling markets over the last few days (or prepared for a fall), it would be greatly appreciated! Thanks in advance!
It completely depends on your personal circumstances. I don't know Paul's but I suspect a lot of his income derives from his small cap investments, so his use of hedging makes complete sense to protect his capital and his future ability to generate income from it.
However, I'm still in full-time employment which generates all of my income. Although capital is still important to me, it is less important because I constantly have new cash to invest. So in my situation, taking out a hedge is a bit like taking out car insurance when I don't own a car.
All the best, Si
I have used etf shorting day trades regularly this past 6 months while the market has been at or near highs, I aim to get a feel of how the ftse100 is coping with trying to beat the days high and if I feel it's struggling I may slap on an SUK2 short with the intention of closing it out if I get it wrong and taking some gains if I get it right, all in all it's been rewarding and adds up. I also did a MIDD long on the ftse 250 on the santa rally too that came up trumps nicely.
These etfs can be dangerous to hold for too long if they are to be used for hedging as the maths dont pan out how you would necessarily expect, http://monevator.com/short-etf-maths/
Anyway these etfs are tools that can assist with hedging but always bear in mind they should be only short term when you are expecting a big fall from a market high and can easily close for a small loss if market leeps making new highs, for example suk2 is a short UK100 x2 (you get double the winnings !), luk2 would be a long, I believe there is a uk3s (3x) also, midd is a ftse 250 long. I have personally only restricted myself to these so far but there are many others available, all sgould be available with your broker on the search facility
Personally I missed out on the Big Drop as I bottled it for a small profit but I did make some on the bounce
Hope that helps with the query anyway
Sunny, personally I have avoided looking at my portfolio page like the plague since this correction began.
Although I'm not geared and add to my positions automatically each month so I'm less concerned with daily movements (although the value of the portfolio is far, far greater than the drip feed).
How I handle it:
1. don't look at your portfolio value declining each day. It's only money and not real until you sell.
2. Ignore all market commentators, and esp. analysts. If they could predict the future you would have never have heard of them, as they would never tell anyone and be living on a private island.
3. Ignore people who say this time it's different. It's not.
4. Look at what happened last time, and the time before that etc. If my (poor!) memory serves the stock market wobble was a precursor to house price collapse.
5. review your holdings. sell anything you're not 100% comfortable with. use those proceeds to add (drip feed) with those that you are comfortable with. Have the strength in your convictions and hold your nerve.
6. Call up an old friend or family. They're more important than stressing over the market.
7. It will rebound. It's juts a question of when. Rubbish companies won't, quality will and will grow stronger.
8. And don't fret over the macro picture e.g. N Korea etc and its impact on your portfolio. If the worst happens and a factory owned by a company you have shares in gets destroyed, I think you'll be worrying about something far more important than a single company.
As I write (from west coast USA) the Dow tumbled 0ver 4% so there's bound to be a rocky opening. Oh and ignore anyone who says that it's different for the UK, UK market isn't as overvalued as US etc etc - that may be the case on fundamentals but the markets always move together (at least in the short term).
Apologies this wasn't supposed to be as long as it turned out - I'm actually self-counselling ;-)
Cisk- Excellent advice struggling with point 6 though lol!!!
Hi joules. Have you ever made a loss on a share or bought a share that had issues or had a difference of opinion to the market? If so I assume you are including yourself in this daft suggestion. If not, forgive me for being daft.
Ta
No position in IQE
ds1980, oh, more often than you know. I'm a crap trader but less bad since I subscribed to Stocko. if you have no position in IQE (LON:IQE) possibly you aren't so daft. I've held it from 109p up to 179p and only sold a bit on the way down. Personally I think it has massive potential but has always been the plaything of short-sellers and the funds that are holding them. A real hot potato, not one for the inactive investor.
Paul, I doubt if anyone else is daft enough to still be holding IQE (LON:IQE) but if you have time, it has come under another aggressive short attack from 'Muddy Waters', pretty much repeating the same claims about bad accounting. Leaving aside whether it's overvalued or not, it would be great to hear from the man who discovered the Globo scandal whether you think there is anything in these claims.
Also, thankyou for tackling Seeing Machines (LON:SEE) - looking forward to that one!
Re Escher, wasn't Matthew Peacock behind the underperforming Blancco company?
Re Gattaca, Net Fee Income is contract revenue less associated payments made to contractors, or just permanent placement revenue on the permanent side of the businesss ie the equivalent of permanent revenue is NFI for the contract side of the business. Not sure if that is what you meant by pass-through revenue-apologies if so!
Revolution Bars (LON:RBG) - I wish Mr Pitcher well but was slightly concerned by the note at the end of the RNS:
Until 28 May 2013, Rob was a director of Bramwell Pubs and Bars Limited, which subsequently went into administration on 31 October 2013. There is no further information which requires disclosure under 9.6.13R of the Listing Rules of the UK Listing Authority.
Stonegate bought 78 of the Bramwell sites off the administrators. Bramwell went into administration because of 'cash-flow issues'. He was only at Bramwell for a year as Ops and HR Director so probably bears little responsibility for that particular car crash.
This is the first CEO role for Mr Pitcher. Previously he has held Ops Director roles. He was at Stonegate for 5 years prior to Bramwell so clearly has some contacts there. My view would be that this is a step up for him and that he would need a good Finance Director to support him. Mike Foster appears to be a safe FD - he set up and sold intertain to Stonegate. Mr Pitcher and Mr Foster may well be acquainted through both having worked for Spirit Group. Anyway, Stonegate now seem to have tow of their men on the inside.
Stonegate can have men on the inside but still doesn't mean they'll acquire the business. The last CEO supported the bid and had to fall on his sword when it wasn't passed by the shareholders.
Persimmon (LON:PSN) Redrow (LON:RDW)
Even the Persimmon's boss' peer slams the bonuses. Redrow CEO & founder Steve Morgan calls them ‘very, very wrong’.
"Everybody in the industry is as peed off with this Persimmon thing as the people outside it."
https://www.theguardian.com/business/2018/feb/07/redrow-chief-huge-persimmon-bonuses-very-very-wrong
Paul, do you think that the short-selling screens on Stockopedia have any value? I see that On The Beach (LON:OTB) only qualifies for one Stocko screen and that is James Montier 'Cooking the Books'. Should that be a cautionary sign?
Hi Gus,
I'm not an accountant either, but a number of my investments have pension deficits so it's something I have looked at - as far as I know they are all accounted for in broadly the same way now - ie that the net 'value' of the pension fund is held on the balance sheet ( just checked and that is true for Qinetiq (LON:QQ.) )
You can therefore look at payments into the fund a bit like capex, they convert a cash asset into another form of asset on the balance sheet - so no P&L impact.
Revaluation of the scheme however however does produce a gain or loss for the company, although this would normally go through "other gains and losses" rather than P&L. (Although I know from 600 (LON:SIXH) that for them, part of the gains go through P&L and part through other).
Interestingly the 2017 Qinetiq (LON:QQ.) accounts already showed a surplus of £156m (up from minus £38m in 2016 - a big swing !!!) but I think this will have been on a different basis than the triennial review that confirmed they can stop paying.
In fact you'll see that +183.3m gain on revaluation was shown under : Items that will not be reclassified to profit or loss:
So not P&L affecting, but nevertheless interesting and possibly will throw up opportunities I suspect.
It's nice to know that those of us who have felt that pension deficit concerns might be overblown in most cases are likely to be proven right. - And it will only have taken a little over a decade :-0
EDIT : I do agree though that pension surpluses are very hard to crystalise - and certainly not at par, although perhaps they are a useful hedge against the discovery of the cure for old age.
For the balance sheet gurus if and as more funds move out of deficit, it will be an important to think about excluding the values from Balance sheet analyses.
What's annoying about On The Beach (LON:OTB) is it's clearly a leaky ship. Share price jumped around two weeks ago on no news, now we get the update..
On The Beach (LON:OTB) issued an AGM TU this morning showing revenue growth of +23%. Little other financial information is given although the tone of the update is confident.
At a market cap of £650m I am hoping it might still squeeze into the SCVR for your thoughts?
Thank you
Disc: I hold
Hi AstonGirl - also interesting to read the 1Q trading update for Thomas Cook (LON:TCG) . It talks about strong demand for Eastern Med destinations which On The Beach (LON:OTB) also confirm. Thomas Cook (LON:TCG) have shifted capacity out of Spanish islands to accommodate this and face margin pressures there.
On The Beach (LON:OTB) state there has been "substantial growth of revenues" in Sunshine.co.uk along with "strong growth" in international markets. It does sound positive.
I'm thinking of buying more Connect (LON:CNCT) - can somebody please stop me?
Why?
PER = 4.7
PEG = 0.38 (probably out of date)
Operating cash flow steady
Yield = 15%(!!!!!!!)
Things haven't changed that much since it was trading at 110 a few weeks ago. Ultimately the core business is in decline, but it could be a very slow and profitable slide into the abyss!
Very tempted myself! (which is a very bad sign!)
(The dividend is payable tomorrow, so reinvestment will mean the price rises, even temporarily).
EDIT by Paul - I think he's talking about Connect (LON:CNCT)
Managed to talk myself out of buying Connect (LON:CNCT) by buying a big tree shake in Versarien (LON:VRS). Don't tell me it'll all end in tears, they've already come! I did put on a small Sept s/b though.
I don't know whether this press release from Aurelius has been posted here on Stockopedia. It seems there was a marked shortfall in December's business from the figures that had been supplied previously by Connect (LON:CNCT) .
http://aureliusinvest.com/en/press/press-releases/aurelius-omega-limited-wird-erwerb-von-connect-book-voraussichtlich-nicht-vollziehen/
"Munich/London February 1, 2018 – Aurelius Omega Limited (“AOL”), a group company of AURELIUS Equity Opportunities SE & Co. KGaA (ISIN DE000A0JK2A8) refers to the proposed acquisition of the books division of Connect Group PLC (“Connect Books”) pursuant to a share purchase agreement dated 20 December 2017.
Very shortly after signing of the transaction, we were informed that there was a severe under-performance of the Connect Books business for the month of December 2017, which led to a significant decrease in forecasted EBIT for the financial year 2017/2018. This was a marked deviation from the forecasts provided to us by Connect Group before signing of the transaction. As a result of this change, our banking partners confirmed that they could no longer provide financing for the proposed acquisition.
We have made several attempts to find a mutually satisfactory solution with Connect Group and the banking partners, but it now appears unlikely that the transaction will proceed."
Connect (LON:CNCT) ought perhaps to issue an RNS on this matter.
(I mean to comment on the alleged downturn in business that the Germans give as the reason for non-completion).
(Not a holder. Interested but cautious)
I imagine the matter is with the lawyers. It'll probably be covered under a force majeure clause, something around lack of investment: i.e. the transaction was conditional on Aurelius being able to raise the funds, and the underperformance of the books division has led to the bankers pulling the money. That would be standard in any situation where the funds have to be raised from a third-party once terms have been agreed.
If that's right then Connect's chance of getting the cash rest on proving that Aurelius can raise the funds but don't want to. Given that this is what Aurelius do for a living I would weight the probability towards Connect being left holding the baby.
timarr
Connect (LON:CNCT) - completely agree that's how it will pan out
Equally I have been buying Connect (LON:CNCT) as it appears from Director speak that the divi is secure and the company has a fantastic monopoly / oligopoly. Its certainly a very interesting turnaround story and I have been buying into the declining (increasingly attractive....) valuation.
Hopefully we got to you in time runthejoules!
Re: Connect (LON:CNCT)....Business in terminal decline, dividend looks tempting but is actually a red flag because it’s so high.
Eps trend continually heading down.
It’s possible you are some sort of contrarian share dealing genius and you have picked the low point but more than likely you will feel better about yourself if you sell (once you bank the dividend to offset the loss you already have) and buy something with a better stockrank from your watchlist.
Easier said than done of course, But i did do some similar pruning this week from my portfolio and it helped me.
Hi Paul.. Would be interested in any comment on On The Beach's (OTB) AGM trading statement. Growth is continuing notwithstanding worries about Brexit, terrorism and collapse of Monarch. OTB's share price has been amazingly strong over the last year despite fact that OTB's private equity backer has sold most of its remaining stake over the last year and several of the top people have been selling shares.
Hi Paul - you mentioned yesterday that your hedging strategy worked very well. Could you please let us know more about it and also what you did during the sell off this week. I find it very hard to keep cool or buy in these circumstances, ie any strategies would be very much appreciated. In case you have already explained it all, could you please point me to the articles/comments. Thanks!!
Hi Sunny350,
My hedging strategy was very crude, but ended up working well, perhaps more by accident than design?! I just shorted the Dow at 26,000, before the sharp correction, as it looked a bit like 1987 to me - a parabolic rise, with no pullbacks, which could end with a bang.
It looked a disaster initially, as I went 700 points offside, incurring a heavy loss. Why didn't you put in a stop loss, I hear people cry? Because it was a hedge. Anyway, then the fun & games began, and the Dow plummeted. I waited until the dust was settling, and it started to rebound, and banked the gains. Then I did some reckless overnight trading, which resulted in a heavy loss. Then I recouped the losses by trading the 300-500 point swings in the last few days.
The trouble with my hedging strategies is that they start out as genuine hedges, but end up punting. So I'm probably not the best person to ask about this.
The bottom line is that, overall things have been fine. I'm actually nicely up in portfolio value, since the short positions chucked out a lot of profit when the market tanked. This more than absorbed my losses on individual shares.
I can't do any hedging in BMUS, so that's had a lousy time in the last month, but I'm not concerned about that. The fundamentals of most positions are absolutely fine, so eventually the prices are likely to recover.
For most people, I think hedging is a mistake. It's necessary in my case, as I use gearing on my longs. So having some hedging in place when the market goes wobbly is vital. My small caps are generally too illiquid to sell in a hurry. Therefore when using gearing, some kind of hedging is vital for me personally. Also, the spreads are too wide to move in & out of many small caps, even if you can find the liquidity to do so.
None of this is relevant to most people here, who don't use gearing. Ungeared portfolios I think should just ride out market volatility. Providing you've picked decent companies, on reasonable valuations, then they should mostly go up in value over the long-term.
Regards, Paul.
It’s not a small cap, market cap of about £1.1bn, but interesting footnote in today’s Qinetiq (LON:QQ.) trading update that their pension fund is now in surplus and they will cease making recent £10m p.a. payments to top up the pension fund.
———-
Pension surplus
Following the latest triennial valuation and discussions with QinetiQ's pension scheme trustees, the Company has a confirmed actuarial pension surplus of 140.5 million as at 30 June 2017. Consequently, the Company will cease making cash deficit recovery payments of approximately 10.5 million per annum from March 2018.
————-
Presumably this drops straight through to the bottom line so on its current p.e. of 11x does this potentially add about 10% to the share price? (I’m sure it’s not that simple!) Unsure whether it is a function of company specific circumstances or the impact of a broader factor such as rising UK interest rates which might have a positive read across to some of the pension liability addled small caps ( Norcros (LON:NXR) springs to mind).
Gus.
Surely not, wouldn't the pension deficit payments have been just moving value from one place on the balance sheet to another - so no P&L impact at all?
Will of course improve cash-flow though.
Hi Gromley.
Re. Qinetiq (LON:QQ.) , I’m by no means an accountant so I defer to your knowledge. In simple (simplistic) terms, I interpreted this as a potential future allocation of earnings from one set of stakeholders (pension scheme members) to another set (shareholders). If shareholders now get an extra £10m per annum of the ongoing pot I’d hope that would help the share price. In the meantime, pensioners can be happy that they now have an excess of value in their pot for future benefits without requiring more from the company for the time being. Personally, I’m not sure I’d ever ascribe much value to a company’s pension fund (it’s not a realisable asset) and only see it as a potential liability to the extent there is a shortfall that needs topping up. Happy to be corrected on my ignorance!
Gus.
Vey interesting to hear about £QQ pension fund going into surplus. Interest rates are the game in town now, as the world starts to normalise from a protracted low rate environment.
Something which Graham has already touched on in his newsletter, with regards to the Bond market in the US, and the possible macro effects this will have.
Would make a fascinating 'overview' document for company opportunities from Graham/Paul.
My morning smallcap tweet:
LMS Capital (LON:LMS), Dillistone (LON:DSG), Escher Group (LON:ESCH)
LMS Capital (LMS) asset sale bumps NAV up 3p to 78p/sh.
Dillistone Group (DSG) guides FY adj op. profit 'considerably better' than current market expectations of £200k. New product GatedTalent sales remain ahead of expectations.
Escher Group (ESCH) recommended offer of 185p.
Requesting Seeing Machines (LON:SEE) which has a trading update on its driver safety face-scanner 'fleet' - I know Paul has covered before. A potential takeover target? I hold. https://www.seeingmachines.com/wp-content/uploads/2018/02/SM-FleetUpdate-Feb2018-v7.pdf
This may be old news but Revolution Bars (LON:RBG) announces the appointment of Rob Pitcher, who will join the Board of Revolution Bars Group plc as its new Chief Executive Officer. The joining date will be advised in due course
Rob has over 25 years' experience within the hospitality sector, most recently as a member of the Executive Committee of Mitchells & Butlers ("M&B") as Divisional Director Restaurants responsible for the Harvester, Toby Carvery and Stonehouse brands.
I hold for my old Mum
Prior to joining M&B, Rob held senior positions at many other leading hospitality companies including: Bramwell, Stonegate [!!!!], Town & City, Laurel, Spirit and Scottish & Newcastle Retail.