Small Cap Value Report (Thu 8 July 2021) - AIR, MPAC, RWA, EQLS, RNO
Good morning, it's Paul & Jack here with the SCVR for Thursday.
Timing - today's report is now finished. Sorry I didn't get around to looking at Avingtrans.
Disclaimer -
A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).
A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!
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Agenda -
Paul's Section:
This podcast with Andy Haldane of the Bank of England is excellent - particularly focusing on the outlook for inflation, economic recovery, and bitcoin. It's really helped me clarify my macro thinking (which is always guesswork mainly), but is a necessary framework for investing. I only flag things here if they're good.
Mpac (LON:MPAC) - in line trading update today. This looks a good company, on a reasonable valuation. Need to check the situation with the large pension scheme though.
Robert Walters (LON:RWA) - from yesterday. A notably strong Q2 (Apr-Jun 2021). Note this is now a mainly overseas business. Broker forecasts look far too low still. Recent strong rises in share price look fully justified to me.
Renold (LON:RNO) (I hold) - breaking news. Delayed accounts due out next Friday, 16 July. Confirms results, and current trading are in line. A big sigh of relief for shareholders here.
Jack's Section:
Air Partner (LON:AIR) - positive momentum continues at this air charter services company and the shares are up. Prudent broker forecasts and strong current trading suggests scope for upgrades, assuming trends continue. Air Partner has benefitted from lockdowns in certain departments though, so how it fares in the year ahead requires some thought.
Equals (LON:EQLS) - good revenue growth at this financial services company and a resumption in travel should provide an additional boost in future, but shareholders have been diluted in the past and the group says top line progress does not change EBITDA guidance.
Paul’s Section
Mpac (LON:MPAC)
477p (y’day close) - mkt cap £95m
Preamble - like so many other shares, this packaging machinery maker has had a terrific run. It’s amazing how the charts look the same for so many companies. Lots of shares have doubled or tripled from the pandemic panic lows of March 2020 to now. Although with many, the pattern seems to be a peak c. March 2021, then profit-taking since. It seems to need fresh, positive news, to bolster prices, or drive further gains - much harder to come by these days. We need to wean ourselves off the drug of automatic daily increases in our portfolios.
It’s easy to slip into bad habits in a bull run, and start buying things on tips without researching them, lowering quality standards, and buying purely because shares are going up. Those bad habits don’t usually end well - corrections can be fast, and unexpected, and you may not even be able to exit, if you take big positions in small companies - which greatly damages risk:reward in my opinion. That's what screwed up things for me in 2008 - the financial system shook itself to pieces, and I couldn't get out of my geared positions in micro caps - no buyers in any size. Disaster followed, that took about 8 years to recover from.
I do like MPAC - it seems an impressive company, with a decent StockRank of 79. For more background about the company, there are some good video webinars & research notes here at Equity Development.
The share price has fallen back a fair bit from the recent peak, is it time to start buying back in, I wonder? To get up to speed on the accounting situation, here are my notes from 30 March 2021, covering the results for FY 12/2020, key points being - large pension scheme, underlying EPS of 31.4p in a covid-impacted year. Balance sheet is OK, but cash was flattered by stretched creditors. Acquisition of Switchback going well.
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Mpac Group plc, a global leader in high-speed packaging and automation solutions, issues a trading update ahead of the release of its unaudited results for the six months ended 30 June 2021.
Continued momentum and strong order book
- Strong momentum from LY has continued into 2021
- Order intake (all regions, US particularly good) significantly above H1 2020 - to be expected, since LY was impacted by covid
- Order book up in last 6 months, but we’re not given a figure, other than that it’s above opening order book of £55.5m (probably not up by much, or they would have trumpeted the figure!)
- Comfortable with current market expectations for FY 12/2021
- Switchback (acquisition) trading ahead of expectations
- Systems were amalgamated in H1 successfully (I recall them talking previously about installing new ERP software, and that it had gone well)
- Travel restrictions problematic, but mitigated by digital alternatives (they’ve told us this before, e.g. setting up machines remotely, holding meetings on Teams or Zoom, etc, nothing earth-shattering, it’s what we’re all doing now!)
- Diary date - 2 Sept 2021 for H1 results to 30 June.
Outlook -
"I am pleased to report a strong start to 2021 across all regions. The outlook is positive based on trends in new prospects and customer investment discussions, and we enter the second half of 2021 with both a strong order book and a developing prospect pipeline and we remain confident that we can leverage the One Mpac operating model to deliver sustainable profitability".
Valuation - the latest forecast from Equity Development (i.e. effectively from MPAC) for FY 12/2021 is: revenue £95.0m, adj PBT £7.5m, adj EPS 32.3p, rising to 36.3p in 2022, and 40.0p EPS in 2023.
At 477p per share, the forward PERs are therefore 14.8 (12/2021), 13.1 (12/2022), and 11.9 (12/2023)
The forecasts don’t look particularly demanding, and in strongly recovering economies, I’d say there should be scope for forecasts to rise possibly, hence lowering the future PER.
MPAC shares look good value, in a generally expensive market.
My opinion - this seems a decent investment proposition to me. A good company, which also seems to know what it’s doing in terms of acquisitions (Switchback having gone well). It’s performing in line with expectations. The valuation looks modest. More acquisitions seem likely, which could help drive up the share price, providing they don't mess up.
One thing people do need to check carefully, is the pension scheme, which I recall was quite large, but the company was trying to de-risk it, so that would be my main line of enquiry if Q&A comes up.
Other than that question over pensions, this share looks good, and reasonably priced.
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Robert Walters (LON:RWA)
756p - mkt cap £577m
Trading Update for Q2 (ended 30 June 2021)
This is from yesterday.
About Robert Walters Group
The Robert Walters Group is a market-leading international specialist professional recruitment group with over 3,200 staff spanning 31 countries. We specialise in the placement of the highest calibre professionals across the disciplines of accountancy and finance, banking, engineering, HR, IT, legal, sales, marketing, secretarial and support and supply chain and procurement...
STRONG SECOND QUARTER.
PROFIT EXPECTED TO BE SIGNIFICANTLY AHEAD OF EXPECTATIONS
Net fee income for Q2 is 25% ahead of LY - hardly surprising since Apr-Jun 2020 was the worst of lockdown 1.
Business improving within Q1 2021, June being “particularly strong” - although this growth mainly in overseas market (UK fee income only up 9%)
Half year net fee income is up 8%, indicating a poor Q1, and big recovery in Q2
RWA will increase its headcount in regions with strongest growth
International - is now 80% of net fee income, with Asia Pacific the largest region at 46%
UK improving - this bit is interesting, and could augur well for a recovery in London’s economy maybe? Also it’s becoming increasingly clear that the “catastrophic” damage to The City (and everything else, for that matter) predicted in many quarters re Brexit just hasn’t happened, so far anyway, and doesn’t look like it’s pending either. Makes me wonder what all the fuss was about? Of all the c.500 companies I cover here, I can’t recall any of them saying Brexit has done serious damage. Minor problems yes, but little more than that. People and businesses have proven particularly adept at adapting - think about what we've coped with in the last 18 months - Brexit, a pandemic, and yet for most people life & the economy has continued largely intact, apart from a couple of days when we couldn't buy loo rolls.
Candidate and client confidence continued to improve across the UK market, with recruitment activity levels highest in London across commerce finance, legal and technology.
As an aside, on a recent call with management of Various Eateries (LON:VARE) they blamed staff shortages mainly on the furlough scheme. Apparently large numbers of Europeans have, perfectly legally and within the rules, returned home whilst being paid furlough by the UK taxpayer, and thus possibly receiving two incomes. Hence there is no incentive to come back to the UK until the furlough scheme ends. This is evident particularly in the hospitality sector, and truck drivers.
So it will be interesting to see if labour shortages in those sectors sort themselves out gradually when furlough ends? That passes the common sense test to me. Bear in mind also that c.6m Europeans have applied for the right to live in the UK. Of course, it’s a red herring to say that number are currently living here, many will have gone back home, but clearly have an appetite to possibly return in the future, or why bother filling out the forms?
Hence my layman’s view on this, is that we’ll still have ready access to plenty of labour, once the pandemic & furlough schemes end, although maybe at higher cost than before, as recovering European economies compete to attract labour.
It’s important to think about this issue, because it’s a key factor in assessing whether labour cost rises at the moment are going to be transitory, or continuing. The evidence suggests to me it’s probably a transitory thing for this year, and maybe into next year, who knows? Andy Haldane says something similar in the podcast I refer to above (well worth a listen), which helped steer my view.
As always, the most important point is to watch the facts like a hawk, and change our minds if things are not turning out how we thought they would (which is most of the time!). Forming & holding on to a dogmatic opinion, despite evidence proving it wrong, is the ruin of many investors. It amazes me how many commentators seem absolutely certain in their views, yet are nearly always wrong! As Superforecasting (one of my favourite books) points out, pundits just need to sound certain, tell a compelling story, and people take them seriously. No one ever checks back to see if their predictions/views were actually correct or not! It's crazy.
Back to RWS, sorry I’ve rambled off the point a bit.
Liquidity - sounds strong -
Strong balance sheet with net cash of £112.8m as at 30 June 2021 (30 June 2020: £119.0m). The Group also has a £60.0m committed loan facility which expires in 2024.
Outlook - cautiously optimistic for H2 -
"The Group is benefitting from operational gearing and due to a very strong close to the quarter, I am delighted to say that profit for the full year is expected to be significantly ahead of current market expectations.
No footnote to say what those expectations are.
My opinion - lots of detail in this announcement.
What a pity the company didn’t give any specific profit guidance (there’s no footnote), which is best practice these days. “Significantly ahead” is good, but too vague.
Look at where brokers forecasts were pre-pandemic (see below). There has been no dilution during the pandemic, I’ve checked that the number of shares in issue currently (at the bottom of the StockReport) is the same as before, which it is.
So if EPS gets back up to say 50-60p predicted pre-pandemic, then put it on a PER of say 15, and we get to a target of 750-900p. The current share price is 756p, so I’d say the share price has already factored in economic recovery. Therefore anyone holding this share must be assuming that a higher PER is justified, and/or that earnings could exceed pre-pandemic levels - perfectly possible, as many companies have restructured in the last year, becoming more efficient.
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Overall, I think the current share price stacks up, and the big rise in the last year or so is justified. Note the high StockRank too, so Stockopedia’s computers have given it the once over, and like it too.
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Renold (LON:RNO)
(I hold)
22.25p (unchanged at 11:07) - mkt cap £47m
Notice of results for year ended 31 March 2021
Renold shareholders can breath a sigh of relief, after a rather concerning delay (twice) in publication of its results for FY 03/2021, due to audit delays.
At 09:47 today the company updates us -
The Group will publish its results for the year ended 31 March 2021, on Friday 16 July 2021.
The Board confirms that trading for the year ended 31 March 2021 was in line with its previous expectations and that expectations for the current year are unchanged.
Crystal clear, that's how it's done! (take note Gateley Holdings (LON:GTLY) which put out a muddled statement yesterday on the same issue of delayed accounts)
Investor presentation - well done to the company for making this open to all -
Chief Executive, Robert Purcell, and Group Finance Director, Jim Haughey, will provide an online investor presentation on Monday 19 July 2021 at 5.30 pm BST.
The presentation is open to all existing and potential shareholders. Those wishing to attend should email renold@investor-focus.co.uk and they will be provided with log in details. There will be the opportunity for participants to ask questions at the end of the presentation. Questions can also be emailed to the above address ahead of the presentation.
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Jack’s section
Air Partner (LON:AIR)
Share price: 88.2p (+8.89%)
Shares in issue: 63,562,601
Market cap: £56.1m
Founded in 1961, Air Partner is a global aviation services group providing aircraft charter and aviation safety & security solutions to industry, commerce, governments and private individuals, across civil and military organisations.
The group has two divisions: Air Partner Charter and Air Partner Safety & Security (formerly Consulting & Training).
While most companies exposed to air travel have had a dire twelve months operationally speaking, Air Partner’s charter services have actually been in high demand as a result of evacuation activities and sports & government business. In its last update, the group described this as a record year with trading ahead of expectations.
I had assumed that the shares would rerate and remain at higher levels but interestingly they have come back a bit.
It looks to be a well managed company, albeit one with choppy revenue. The StockRank has remained elevated since November 2020 so clearly something has turned for the better.
The Quality Rank of 98 is particularly notable - this is probably the most long term rank (see more on its calculation here).
Air Partner, the global aviation services group, is pleased to report that it has enjoyed strong trading over the first five months of its financial year and now expects to surpass management expectations for the year ending 31 January 2022.
The group says it is now trading ‘well ahead’ of pre-Covid levels, driven in part by the ongoing high levels of activity in US Private Jets. Here the large domestic market has enabled HNWIs to continue flying.
Trading is also strong in Group Charter, with business coming from government, sports and cruise sector work.
Momentum is also building in UK Private Jets, with business now back at pre-COVID levels, and this is expected to continue as the vaccine roll-out drives the return of business and leisure travel.
Freight was busy at the start of the financial year, delivering COVID-19 test kits and vaccine raw materials, but this activity has now reduced. As a region, Europe remains challenging, and the Group does not currently expect to see a material recovery until 2022. That’s surprising given that so many companies are reporting troubles in sourcing parts, but air freight is quite a lot more expensive than ocean. So perhaps companies would rather sort out ocean freight issues than turn to faster air solutions? It must also be far less practical in terms of the scale of imports that are possible by plane compared to large cargo tankers.
Private Jets continues to benefit from the JetCard programme, which allows clients to buy private jet flying 'hours' in advance, while offering fixed rates and the ability to change booking details at short notice, without penalty. It is proving popular as it gives travellers the ability to fly in safety the moment travel restrictions are lifted.
New JetCard sales in the current financial year, as at the end of June 2021, are up 36.8% versus the prior period and JetCard deposits now stand at £18.9m, up 6.2% on the year-end balance.
The Safety & Security division continues to improve as airports scale up operations in anticipation of increased passenger numbers. Following the successful conversion of many of its safety training courses from classrooms to virtual delivery, Baines Simmons is seeing a strong recovery with the military sector, with customers including the UK Military Aviation Authority, Leonardo and the Royal New Zealand Defence Force.
Work with commercial aviation organisations remains subdued as a result of government restrictions but Air Partner notes ‘strong potential going forward’.
Government restrictions have also led to a slower recovery at Redline on account of low airport movements.
Outlook - the group expects to see the ongoing recovery of the aviation industry drive strong demand for Air Partner's Safety & Security services, and previously mothballed operations will be brought back into action.
The group remains debt free with cash of around £11m.
Conclusion
Having covered Air Partner a few times now, this looks like one of the better managed companies out there. A lot of airline and similar companies are naturally risky due to high input costs, often low margins, and weak balance sheets.
This is a different model though and Air Partner has remained profitable through the lockdowns. The 2020 £7.5m share placing looks to have been unnecessary in retrospect but it does add to the group’s financial strength.
It’s worth remembering that the net cash position of £11.1m (excluding JetCard) gives the company an enterprise value of around £45m on annual revenue of £71.2m and FY21 net profit of £5.63m.
FY22 forecasts are more modest though, with expected net profits of £1.2m. That’s a sizable difference. As with other stocks that have experienced Covid tailwinds, there’s the likelihood that at least some of Air Partner’s momentum will revert to previous levels over the next year or so. But there are other parts of its business that have suffered and will recover. Understanding what a ‘normalised’ level of trading is, and how that is split between its various operations, is uncertain.
On that note, brokers appear to be conservatively forecasting a return to less than FY19 levels of profitability in FY22. Given that the group is trading ahead of its own expectations and with various parts of the business exceeding pre-Covid levels of trade, there’s a fair chance of upgrades here in my opinion so it’s worth looking into a little more deeply.
Equals (LON:EQLS)
Share price: 46.4p (-0.22%)
Shares in issue: 178,741,807
Market cap: £82.9m
Equals Group is a challenger in the financial services sector. Its e-money licence allows it to provide various products to small and medium-sized enterprises (SMEs). These include international payments, expense management, current accounts, credit facilities, multi-currency cards and travel cash.
The subsidiary, Spectrum Payment Services (SPS), gives access to real-time settlement accounts with the Bank of England and is a member of the UK Faster Payments Scheme (meaning customers can transfer and receive funds with immediate effect). SPS is also approved by the FCA to provide credit facilities acting as a broker.
It took me a second to connect the dots this morning (slow start - apparently there was a football match last night) but Equals used to trade as FairFX. Performance so far has been extremely volatile so caution is advised. There has also been consistent and material shareholder dilution over the years so the upside is ever reducing.
That’s a compound annual growth rate (CAGR) of 20% from 72m shares in FY15 to 179m shares in FY20.
Following a precipitous fall in share price value there has been renewed buying activity, however, so perhaps now is a good time to take a look.
21% Y-on-Y revenue growth; record quarter in Q2-2021; benefits of cost restructuring now coming through in cash returns.
H1 revenue was up 21% to £16.7m despite the continued absence of travel-related activity. There’s an improving trend here, with revenue also up 11% on H2 2020. Q2-2021 was a record quarter for the group, driven by International Payment transactions, record activity on the Spend platform and buoyant revenues from banking-style products.
Usually, travel-related activity is around 30% of business but it was less than 5% of revenue in Q2-2021. There’s potential for increased travel money revenues as Covid restrictions are relaxed.
‘Broad-based’ growth in the Equals Money product suite for corporate customers.
International payments - the group is trying to attract more sophisticated B2B customers and there is a resulting increase in dealing in forward contracts, which are higher margin. The number of forward transactions rose by over 200% and the average order size rose from £90k to £114k.
Revenues from forward contracts now represent 45% of the total International Payments' revenue stream. The group’s own-name multi-currency IBAN capability also fared well, as did its white-label business, Equals Connect.
Banking - Equals opened just under 1,600 new B2B accounts in H1-2021 across traditional channels and a further 1,600 new B2B customers were added through the new Equals Money portal. Deposits from B2B customers (an indication of revenues to be earned when the funds are spent) was up 60% year-on-year at £337m.
Spend platform - this is now achieving record levels of loads and is set to accelerate further if travel restrictions are relaxed. New customer acquisition was strong with 574 new business customers being added bringing the active customer total on the platform to 5,644.
Equals B2B Solutions - larger companies with complicated and high-volume international flows use Equals Solutions. This could be a good source of higher margin growth. The group reports strong revenues and a robust pipeline here, although it’s light on numbers.
Cost Base - Equals has been reducing headcount and reshaping its cost base throughout 2021. Headcount remains the same but with a significantly lower cost footprint - now around £0.9m of base pay per month compared to £0.96m in June 2020, and £1.2m in January 2020. So does this mean employees have effectively taken a permanent pay cut?
The increase in revenue will most likely not translate into higher profits as the group will invest in additional product development and marketing to drive further growth. It has also strengthened its internal control environment and ‘provisioned for a greater frequency of external audit requirements in the highly regulated space which Equals occupies’. I wonder whether the need for this increased cost has been flagged previously, or is news to existing shareholders.
Cash position - Equals became operationally cash break-even in Q4-2020 and had £9.2m of cash at bank as of 30 June 2021. An important point, given the track record of dilution.
Conclusion
Beneath all the bells and whistles, for a long time now, what Equals has needed to do is prove it can break even, generate cash, and stop diluting shareholders.
The group might be approaching an inflection point in this regard now that it has reached cash flow breakeven after some tough work over the past twelve months. It’s worth bearing in mind that the company has raised £57m of cash from shareholders to get to this point though, and the current increase in revenue will likely not drop through to profits.
Yes, companies that invest for long term growth at the expense of shorter term profits can end up being fantastic investments - but arguably not when they are diluting existing shareholders to such an extent at the same time.
There could be a real opportunity for Equals though - the 5Y revenue CAGR of 31.2% is a good clip, and the FX markets it operates in must be substantial. Trading is good when you consider Travel has basically stopped and will come back at some point in the near future. I would expect that to revert from c5% of revenue back up to 30%. It will be a material tailwind.
So, clear progress on the whole with the potential for further good news, but I remain wary given the levels of dilution in the past, its history of losses, and the fact the increased revenue will not translate into any change in EBITDA guidance.
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56 comments
On Surface Transforms (LON:SCE) the valuation is definitely eye-watering for a £2-3m annual rev company... but big growth is promised.
I do note that there's been a slippage to construction of Cell One production. Was initially slated to be ready in Q2, but looks like "will be ready for Q4 orders" now.
Also it is unclear whether the £3m deposit for equipment order in Jul&Aug is for Cell One or Cell Two. I assume the former. So not sure how much more capex going to be spent if £3m is just the deposit... out of the £17m cash pile they currently have.
That cash pile also needs to pay for Cell Two build which was estimated at £9m.... as well as increased working capital... and fund loses for another 12 months IMO...
(I don't hold)
Hi Paul
"We need to wean ourselves off the drug of automatic daily increases in our portfolios. It’s easy to slip into bad habits in a bull run, and start buying things on tips without researching them, lowering quality standards, and buying purely because shares are going up. Those bad habits don’t usually end well..."
This is a good reminder. I started the year with only about 20 down days up until the end of March. Now since the 14th June (Best Of The Best (LON:BOTB) TU) every days seems to be a down day and I have not experienced such a long losing streak, which I am finding quite tough. Am now up 0.38% YTD having been up about 12% at one point.
I would certainly concur in my own portfolio with
"lots of shares have doubled or tripled from the pandemic panic lows of March 2020 to now. Although with many, the pattern seems to be a peak c. March 2021, then profit-taking since."
Most of my holdings are showing significant declines from their one year high.
On Mpac (LON:MPAC) which I hold, I trimmed 10% of my holding at an end of quarter tidy up but remains a 5% holding and is showing a nice 77.7% return on my initial purchase which was exactly a year ago today. As you have said before Paul I am not sure how worried we need to be about the pension deficit. And of course, these will "shrink" when interest rates rise and by then we may have other more important things to worry about!!
What p... me off in the release was the "Comfortable with current market expectations for FY 12/2021". This was the twin of Best Of The Best (LON:BOTB) "However, in contrast to the summer 2020 period, we have experienced somewhat of a reduction in customer engagement since the latest easing of lockdown restrictions on April 12, 2021". [My emphasis]
Do phrases such as "somewhat of a.." and "comfortable with ..." have any place in a management report to the owners of a business? I don't believe you would hear Next (LON:NXT) management or Warren Buffett using such phrases. I think that this should be addressed by regulation if companies do not back up "forward looking" statements with figures. As in "we believe that we will be + or - 5% of current market expections of £x million of post tax profit or ebita or other relevant metric".
As an additional aside I am reading Terry Smith's Investing for Growth where he emphasises that we should be investing in companies with at least 20% ROCE and not be too focused on EPS. £MPAC's currently showing 4.72% which should increase to 16.9% (I think!) assuming that the figures they are "comfortable with" are hit. So is Mpac (LON:MPAC) a high enough quality company?
I would highly recommend the book and the other book I am reading Buffett: The Making of an American Capitalist by Roger Lowenstein is just unputdownable!
Sorry rant over.
Regards
Michael
Now since the 14th June (Best Of The Best (LON:BOTB) TU) every days seems to be a down day and I have not experienced such a long losing streak, which I am finding quite tough. Am now up 0.38% YTD having been up about 12% at one point.
I feel your pain as I am in a similar position! Its been down hill since June and I am getting close to the point where I'll dip in to negative gain territory for the year (I'm also a Best Of The Best (LON:BOTB) holder and have a large position in Boohoo (LON:BOO) etc). I'm holding on with a long term view (and trying not to be a Rabbit :-) )
Same here, I am well down on my April highs and maybe I should have sold in May and gone away. I would be considerably better off now if I had done so. However, 'time in the market' not timing the market may be applicable in this instance!!!
In 11 years of investing I have only had one small up June, all the other June months have been down, May is actually my 6th best month. So in my experience the market seems to sell off in June not May.
You may be right...
February and June my worst months; down five times in seven years. September also bad, down four from six. April the star month; highest average and never down. "Sell in May and go away ..." for me would mean missing out on July, which has been good to me.
Not convinced any of this is statistically significant, however.
The sell in May thing was raised on Twitter back in May and I did a quick bit of analysis using Sharepad and I am definitely better off over the eight or nine years I have been investing in having stayed invested in May thru October. And we still have four months until October, anything could happen.
Yes I am trying to figure out whether I am being a rabbit or a rational long term investor!
I don't disagree that it would be more helpful to include revenue comparisons but Mpac (LON:MPAC) always focus on order book rather than revenues. This is not a new phenomenon and if you go back a few statements that comes across quite clearly. Obviously at half and full year results revenues are stated in standard way but even in these results the outlook focus is always about order book. Clearly management think this is the right metric to use in terms of how revenues play out during the year so it doesn't concern me that they might be hiding something as people on here seem to be alluding. That said I'd prefer to know how order book translates to revenues from a timing perspective and be given these figures in trading statements too.
If they focus on the order book normally that is ok but I still think that the phrase "Comfortable with current market expectations for FY 12/2021" has no place in a trading update. It should read
"Inline with current market expectations for FY 12/2021"
OR
"Be +- 5% of current market expectations for FY 12/2021"
or omitted which of course they would probably get flack for as well
Regards
Michael
Thanks all for sharing, finding myself in a similar position to many of you. Was up at 35.56% start of June.. took profit on a couple of decent stocks which seemed to have been the right decision so far, but my new positions did not perform well at all, and my existing positions also got hammered! Some I held, some I ditched, some I increased. The end result was a highly unbalanced portfolio with a lot more risk than I'd like to be exposed to sitting at 2.86% YTD - And I certainly fell into those bad habits described by Paul! A learning experience for sure, and the best educations are rarely free.
Mpac (LON:MPAC)
Paul - re pension. If memory serves me correctly the company put a plan in place which I think means the actuarial pension deficit is eliminated in 2024. That obviously has a couple of impacts in that FCF goes up considerably at that point and they have many more options for managing the pension going forward.
Question: Is there a a metric to filter or sort screens/lists by their level of liquidity?
I have used the spread as a variable that I believe usually has a close relationship to liquidity.
Regarding a test for liquidity in share dealing - I don't know of any one metric - I think it is one of a number of things you have to look at yourself and form your own judgement:
1) are there a good proportion of 'A' trades each day? - if yes then usually no problem.
2) in a period between announcements are there very few trades each day?
3) in lists of trades what is the value of those trades done outside the spread?
4) play around with dummy trades yourself on different days. See what size comes well within the spread and at what point it goes to negotiation only.
5) check the major holdings to see what proportion of shares is in public hands.
Interesting reply sharw, you have given me food for thought!
The spread sometimes isn't accurate, as you could get much tighter in the market for some shares.
What I do is take the Average Daily Volume and share price, and my finger in the air threshold is anything more than £200k/day of volume is acceptable for me. Anything less than that, and I then limit my max position to only one-fifth of that.
So if a share had £50k/day volume, then I would limit my max position to £10k. That way I know if I need to exit my position all in one go, it should be relatively easy.
The evidence suggests to me [that labour cost rises are] probably a transitory thing for this year, and maybe into next year, who knows? Andy Haldane says something similar in the podcast I refer to above (well worth a listen), which helped steer my view.
Andy Haldane doesn't really say that. He agrees it's possible, when prompted, but notes that it's not inevitable - and points out that there is a trend of a reducing UK labour force over the last ten years. And we know that at least some of the EU workers who have left won't come back, so there's going to be a net reduction even when the pandemic, furlough, etc unwind.
It's also important to remember that one of the key promises of the Leave campaign, targeted at the lower paid, was higher wages. So I don't think businesses struggling to find unskilled or low paid workers should be expecting the government to come to their aid - they'll need to raise wages which means either reduced margins and profits or higher prices. Which is probably not where we want to be as investors.
timarr
Paul, the sharing of your insight when estimating Mpac (LON:MPAC) in your preamble today has been a great help in firming my own investment strategy so a big thank-you to you! My activity has almost reached standstill and consider my holdings in shares carrying a dividend to currently be of the most value. Being somewhat of a risk-taker though, what I have done this morning is sell Norcros (LON:NXR) and buy Caledonia Mining (LON:CMCL) with the proceeds. Those who are interested are invited to do some DYOR and find reasons why. For myself, making some swaps is better than taking profits for a holiday I probably wouldn’t enjoy.
Silver
Amusingly, or not if you hold it, the Quality rank for £VLX has supposedly fallen by 42 points…to 72!
Martin VT, Thanks for the signpost, but I think the fall is 17 points in 30 days - it was 89 on 6 Jun 21. Update Edit. Just read the earlier comments - there would appear to have been some gremlins at work earlier.
I am happy investing in Mpac (LON:MPAC) with its pension deficit which looks manageable. I would be wary of investing in other companies with large deficits at the same time----would increase the potential for contagion risk in my portfolio.
Another two large franchise reacquisitions announced by Water Intelligence (LON:WATR) today [I hold]:
https://www.investegate.co.uk/water-intelligence--watr-/rns/reacquisition-of-las-vegas-and-phoenix-franchises/202107080700055447E/
With that following on from another franchise reacquisition a week ago:
https://www.investegate.co.uk/water-intelligence--watr-/rns/reacquisition-of-northeast-florida-franchise/202107010700057532D/
and yet another national insurance account win in between:
https://www.investegate.co.uk/water-intelligence--watr-/rns/significant-insurance-national-account-win/202107060700082447E/
this has already been a very busy month for the company, and we're only eight days in!
This latest announcement has finally prompted some response from the brokers (WH Ireland and Dowgate Capital), with consensus revenue increasing to $47.2m for 2021 (was $45.5m) and to $55.6m for 2022 (was $49.9m). Similarly, consensus normalised EPS is now 28.8c for 2021 (was 27.4c) and 34.2c for 2022 (was 29.6c).
I consider the broker projections remain on the conservative side.
Morinng EC,
Doesn't the frequent re-acquisition of franchises by Water Intelligence (LON:WATR) suggest that the franchise model doesn't work very well? If so, do we have a handle on why that is?
I know the shares have done very well, but I find the valuation very toppy now. As you imply, it's priced to exceed expectations, and does seem on a roll.
Regards, Paul.
That's a fair challenge, but I do actually think that the franchise model works very well for Water Intelligence (LON:WATR). There are, I believe, two key considerations here.
Thanks for your reply EC, very interesting.
I think you're using the wrong term, just to be pedantic. Google says -
What is difference between franchisee franchisor?
The “franchisor” is the person or corporation that owns the trade-marks and business model. The “franchisee” is the person or Corporation that owns and operates the business using the trade-mark and business model system licensed from the franchisor. ...
Thanks, Paul. I got in within the hour and have corrected the original post.
Morning Paul & Jack
Any thoughts/comments on the collapse in Volex (LON:VLX) metrics on in the past few days?
Many Q ranks are being calculated incorrectly today. Which metrics are you referring to?
Volex (LON:VLX) Both the Quality and Stock Rank have fallen sharply in the past few days.
Apparently, there was a glitch in the calculation of some f-scores. About half the companies in my portfolio were affected. The quality rank has now reverted to yesterday's value for all of my affected shares. I think this applies to Volex as well. It is quite alarming when errors like this occur.
Bizarre - the Stock Report for Volex (LON:VLX) now shows the Piotroski-F score as "end of year TTM unavailable". Well it has gone down because we have just had full year figures. This score rates heavily in the composition of the QR..
Looking back to before the 17/6 results Volex had a P-F score of 7 but is 5 now. That means 4 fails - I don't know which are the new ones but here they are:
Is it making more cash than it's reporting as profit?
Details ↓
Testing for: CFROA > ROA
Volex Details: CFROA = 16.0 , ROA = 16.1
Is the company's long term debt reducing or stable?
Details ↓
Testing for: LT Debt / Avg Assets % <= Long Term Debt/Assets PTTM
Volex Details: LT Debt / Avg Assets % = 15.3 , Long Term Debt/Assets PTTM = 3.29
Is it increasing its ability to pay short term debts
Details ↓
Testing for: Current Ratio > Current Ratio PTTM
Volex Details: Current Ratio = 1.47 , Current Ratio PTTM = 1.67
Is it more productive than last year?
Details ↓
Testing for: Asset Turnover (Piotroski) > Asset Turnover (Piotroski), 1y Ago
Volex Details: Asset Turnover (Piotroski) = 1.08 , Asset Turnover (Piotroski), 1y Ago = 1.62
Volex (LON:VLX) The scores earlier today were in the 40s now back up to the 60s. Re results, they were better than forecast and the main Q scores of ROC, ROE and Op. margin have improved. Seems the Piotroski-F score has a large influence. Debt has increased that was due to an acquisition. seems the fall in SR scores is mainly due to this acquisition. The share price has pulled back but that is fairly common in the last month or so.
The large falls today seem to have been a glitch in the system.
I do hold, I'm not concerned, I may even top up.
Something weird is going on with Stockopedia as the scores for Volex (LON:VLX) have just shot back up again. Now back in the 60s instead of 40s.
More gremlins?
Some weird is going on with Stockopedia as the scores for Volex (LON:VLX) have just shot back up again. Now back in the 60s instead of 40s.
More gremlins?
I don't use the StockRank system but occasionally glimpse at the "StockRank Movers" bit on the Home page. I've never noticed so many new "Superstocks", "High Flyers" etc. before so I would assume there has been some kind of glitch.
UPDATE: the number of StockRank Movers now seems more normal, so there must have been a glitch. When I looked first thing this morning there were 24 SuperStocks and 27 High Flyers, including Glaxosmithkline (LON:GSK) god forbid!
All the best, Si
God forbid Glaxosmithkline (LON:GSK) simoan, yes, looking down memory lane I note I held from 2013 to 2017 when I finally shook the dog off at profit. Never will I hold it again.
No idea why Volex (LON:VLX) metrics would have changed. Nothing has changed fundamentally.
Hi Paul,
Any thoughts please on what Mpac (LON:MPAC) H1 revenue might be?
For whatever reason the company provides no useful information on this other than the "strong momentum" "continued" comment. Is this enough to indicate that H1 22 sales are similar to H1 21 sales?
For whatever reason, Mpac (LON:MPAC) focus on the order book and how bits of the business are doing well but provide zero firm guidance on sales. This is quite a contrast to the H1 2019 TS in Jul-19, https://www.investegate.co.uk/...
Maybe I am just being overly-cynical but if a company is not being open and honest about something, I assume that they have good reason not to share it.
I agree Shanklin, Mpac (LON:MPAC) trading statement makes me nervous. When a company says good things are happening but can’t/won’t produce any numbers to illustrate that, it certainly makes me feel suspicious. Paul’s campaign to, as minimum, get companies to state what the forecasts are, that they expect to meet, beat or whatever, seems to have passed them by as well.
On Mpac (LON:MPAC) I agree and as Martin VT writes, it makes me nervous. Please see my other comment but why oh why cannot they gives hard figures.
If things are looking uncertain then say so, this may impact the share price but it will eventually come out in the wash so why not be transparent the owners of the business you manage and the market?
Innovaderma (LON:IDP) Innovaderma Update this morning.
"We have made strong progress in rebuilding our gross margin, delivering a substantial H2 improvement of over 700 basis points versus same period in 2020".
The new management appear to be getting a handle on the business. No big improvement in turnover to previous guidance but it looks to be the start of a turnaround. The equity raise has provided them with enough cash to navigate the current environment.
"The Company's positive cash position is further improved by access to a CBILS loan of £0.95 million, which at year end remained undrawn. The Directors believe that the Company has more than sufficient working capital to return the business to profitability"
The company turned down an offer from Creightons (LON:CRL) last year and Mark Ward came in as a significant shareholder.
Not sure if you will have time to cover this one Jack & Paul but an interesting situation.
Not a holder in Innovaderma (LON:IDP) but this morning‘s RNS seems dominated by a lot of adverse revisions to the historic accounts. May just be a kitchen sinking exercise by the new management but paints a pretty grim picture of how things have been done/recorded in the past.
Gus
Not really Gus, I think that's being unfair on previous mgmt.
What this relates to is a debate around the purchase of customer databases being capitalised or expensed. It was well highlighted and discussed at the time, both by stakeholders and management. In essence management argued that because direct customers were regular buyers (ie not one off consumption) that the databases amounted to an asset they can monetise over time without the need for further spend.
Others argued that it is marketing spend and should be expensed and was over inflating profitability.
Both answers have merit & consequence - the former inflates short term profits at the expense of later years, as the depreciation drips through. The latter hurts short term profits but all the benefit of those databases comes through in later years.
For me the new management clearly doesn't want the multi-year depreciation coming through and masking the cash profitability of the business, so the simple way of doing this is to reverse the decision not to expense, take a non cash hit to this years profit which would be rubbish anyway and that allows them to show a nice clean set of heels for next year.
I'm not saying it is the wrong thing to do, just that it should be looked at with a pair of cynical glasses on, rather than assuming management did the wrong thing previously. in my view.
Innovaderma (LON:IDP)
davidjhill
"Not really Gus, I think that's being unfair on previous mgmt. "
"Both answers have merit & consequence"
Do both answers have merit though?? - if it was simply a difference of opinion then i doubt very much the current management would go out of their way to say the previous treatment was "wrong" - is it not more likely the tone being used confirms previous management and the auditors both got it wrong end of? I have seen plenty of changes in accounting policy where they simply say we are using more cautious approach now and are restating prior figures without directly saying the previous treatment was wrong by both the board and the auditor. What is more galling here is that if it was the wrong treatment it's not really something that would or should have happened by accident - obviously the auditors job here is not to agree something that was obviously wrong and this must have been a red flag isue to the auditor unless they are thick as two short planks - so really it is a sorry mess that this was all wrong.
Well done to the bod(s) here who pointed out the wrongness of the wrong un at the time.
Here is the text from today that clearly "assert" the orginal treatment was wrong - lets hope they don't have to do an RNS next week apologising to the old auditors toning the language down if it wasnt actuallya given that the original treament ws wrong - i think that is unlikely to happen
"As part of this, the new executive management team have reversed the accounting treatment incorrectly adopted by the previous executive management team and their auditors in relation to the capitalisation of internally generated intangible assets"
Note this is all IMHO and i am not an expert in auditing so it might be me thats as thick as three short planks here if my presumptions of what went wrong are wrong.
I spoke to management at the time on this and if I recall correctly it was done at the behest of the auditors who considered that the most appropriate treatment. Management should be able to rely on their accountants or professional advisors advice, hence why I think it is somewhat unfair to blame it on ex mgmt.
Also, as I recall (but again may be wrong - hazy memory...) the capitalisation didn't relate to direct marketing costs, but database acquisition costs....ie purchase of an asset, which is why they were told to assess future value use of the asset and account accordingly.
There was also discussion on here about what was right or wrong and no conclusion drawn with a debate entering around the merits / demerits of both treatments. Management also addressed and discussed the issue publicly. So, I am somewhat cynical of any categoric statement like "incorrect" and think it more likely loose wording. However, my accountancy days are long in the past so I am equally open to being corrected on that.
I think my point though is that this wasn't unknown or without scrutiny/debate. The accounting treatment was openly discussed by management with investors and auditors.
Call me cynical but it happens to be quite convenient that this depreciation charge that would have reduced profits for a couple of years in the future can now be completely eliminated by new management through non cash adjustments under the auspices of "incorrect" previous treatment, with the very obvious benefits of completely writing off the historic cost of the database acquisition, whilst simultaneously benefiting from it in future.
Innovaderma (LON:IDP)
davidjhill
I think my point though is that this wasn't unknown or without scrutiny/debate. The accounting treatment was openly discussed by management with investors and auditors.
I think the issue at the time was that the treatment resulted in the company showing up as being more profitable than was actually the case with the "correct treatment applied". My inference is that the incorrect treatment really did create a false market with the company overegging its case as to how much profit iot was making - probably the worst of all worlds other than as you say it was well flagged up here so we could make our own judgment as to how to treat that expense. Others that bought on the basis that the company was making the profits that were not real would rightly be royally peeved now to find out those profits didn't reallyexist. As far as the company has told us today that is what it was and i will give the prior management a poor mark for that even if it was an honest or naive error or by being led up the garden path by hopefless auditors forcing them to capitalise stuff they weren;t convinced should be capitalised (cough).
Call me cynical but it happens to be quite convenient that this depreciation charge that would have reduced profits for a couple of years in the future can now be completely eliminated by new management through non cash adjustments under the auspices of "incorrect" previous treatment, with the very obvious benefits of completely writing off the historic cost of the database acquisition, whilst simultaneously benefiting from it in future.
On this point i 100% agree its ridiculous that it so often goes from aggressive to ultra cautious - i am not really for point scoring or revisiting the past too much - all i would say in defence of new management would be that if it was obviously wrong before they do have no option but to correct. I will certainly be wary of accepting this years or next years if they look like they are being flattered by the reversal out of stuff to a prior year. At present my PCF (LON:PCF) investment is being destroyed probably daily by a very similar spat where the new bods seem to be doing things so by the book that its taking forever and a day to agree what the figures should have been way back when.
For me there's no sign of new management successfully turning around the company.
This is what I took from the announcement today:
While there was nothing bad announced about trading, nothing good or exceptional either, and its usually what's not said that is more important...
(Have held in the past but no hold now)
I have held Avingtrans (LON:AVG) for quite while and have seen slow but steady growth in it's SP. It has put out a bullish HY statement, and I feel the company is gaining a good bit of traction. Any thoughts?
I was along standing investor in Nviro which morphed into Specialist Energy Group and then Hayward Tyler who were doing brilliantly until they ladened themselves down with debt to buy Peter Brotherhood.
They had some fantastic patents which included the proven recycling of MDF board into furniture. Their debt mountain and share price collapse eventually led to an opportunist purchase of the Hayward Tyler business by AVG, who then improved the business and divested themselves of Peter Brotherhood at a substantial profit.
AVG have some valuable land that they have planning permission for and I have also continued purchasing AVG shares for the last few years on weakness. They are fairly thinly traded and have a wide spread so in the event of any hiccups going forward I might have problems exiting my fairly large portfolio position. I am encouraged and view this as one of my coffee can investments along with MPAC and VLX that I have also held for many years through thick and thin.
"Having covered Air Partner a few times now, this looks like one of the better managed companies out there".
I'm not so convinced by management here. There was a big accounting problem a few years back and a string of acquisitions seemed to have added little if anything in the way of profit contribution.
Grafton (LON:GFTU) has a strong TU & upgrade this morning which has a good read accross for the sector e.g. Sig (LON:SHI) , Sigmaroc (LON:SRC) , and CMO Gp, (Stocko has yet to recognise that the latter has listed this morning!).
Paul,
I wonder if you could have a look at Air Partner which is reported today to be trading well ahead of pre-COVID levels but which has stubbornly refused to recover to a pre-COVID share price.
Homosap
I hold Air Partner (LON:AIR), my phone recommended an article to me yesterday that seems relevant regarding demand for Private jets in the US where Air partner are growing their market share:
NetJets puts Phenom 300, Citation XLS jet cards, shares, leases on waitlist (privatejetcardcomparisons.com)
They do have 20% more shares in issue which takes their EV up to where it was in 2019.
Also interesting to see latest video interview / Q&A with Air Partner (LON:AIR) CEO Mark Briffa
My morning smallcap tweet:
Equals (LON:EQLS) Avingtrans (LON:AVG) Innovaderma (LON:IDP) Air Partner (LON:AIR) Surface Transforms (LON:SCE) Active Energy (LON:AEG) Deltex Medical (LON:DEMG) Mode Global Holdings (LON:MODE), Diaceutics (LON:DXRX), MPAC (LON:MPAC), Yu (LON:YU.), Hyve (LON:HYVE)
Equals (EQLS) H1(June) rev up 21%. "Highly confident about the revenue prospects." [SP=46.5 Cap=83m]
Avingtrans (AVG) guides FY(May) at least in line with market expectations. [SP=421.88 Cap=135m]
InnovaDerma (IDP) guides FY(June) rev at least £10.2m, broadly in line with expectations. Trading EBITDA before accounting changes also broadly in line. CItes poor weather in April and May. [SP=38.5 Cap=11m]
Air Partner (AIR) expects to beat mgmt exp for FY(Jan 22). Now trading well ahead of pre-COVID levels. [SP=81 Cap=51m]
Surface Transforms (SCE) guides H1(June) rev up 34%, exceeding managements' original (when?) expectation. Co still expect to announce significant further contract wins with both new and existing OEM customers this FY. [SP=59 Cap=115m]. I hold.
Active Energy (AEG) AGM stmt "The level of new customer enquiries, both from within North America and internationally, within the last month is extremely encouraging for the future commercial prospects of CoalSwitch." [SP=0.65 Cap=25m]
Deltex Medical (DEMG) guides H1(June) rev £1.1m (£1.2m). "Given the subdued state of the Group's core elective surgery market, combined with ongoing challenges associated with Deltex Medical's clinical educators visiting key accounts, we are pleased that overall revenues held up reasonably well in the first half." [SP=1.6 Cap=10m]
Mode Global (MODE) has now formally signed with THG. "Mode will be available to use when paying at THG brands starting from the end of Q3 2021, enabling shoppers to make instant payments using QR codes or the "Pay with Mode" button and earn Bitcoin rewards." [SP=42.71 Cap=39m]
In line: Diaceutics (LON:DXRX) MPAC (LON:MPAC) Yu (LON:YU.) Hyve (LON:HYVE)