Small Cap Value Report (Thur 1 Aug 2019) - CTO, XPP, SEE, SCS, RBGP, PMP

Thursday, Aug 01 2019 by

Good morning, there are quite a few companies making announcements today.

T Clarke (LON:CTO)

  • Share price: 104.5p (-11%) 
  • No. of shares: 43 million
  • Market cap: £45 million

Half-year Report

This sounds fine at first:

  • Revenue +12%
  • Underlying op. margin up to 2.9% (from 2.6%)
  • Dividend increased
  • Full year performance trending in line with expectations

So why are the shares down? A few issues:

Firstly, the Order book (very important for a contractor!) is merely flat.

The CEO comments:

We remain very selective about the quality of the work that we take on and despite some competitive pressures, our order book has been maintained at £370 million

T Clarke helpfully breaks this down, saying that "£182 million is secured for 2020 and £34 million for 2021 and beyond."

I'm not a sector expert, but I do know that revenue visibility in this sector is not great. The revenue forecast for next year is c. £360 million, versus £182 million secured so far. So there is a lot of business which needs to be won over the next six to nine months to help them achieve that. And just as importantly, they need to remain prudent and not bid for low-quality work.

Secondly, net cash has reduced, with the company saying that this reflects "the Group's typical working capital profit and the cycle of our contracts". The company doesn't give us any additional information such as the average or minimum net cash balance. These would be helpful, though it sounds like the company should be fine from a cash point of view (it has £25 million in banking facilities).

Pension scheme deficit increases to £26 million, from £19 million, thanks to lower interest rates.

Outlook - the company very helpfully states what the market expectation are. Good job! Underlying EPS this year is expected to come in at 17.5p.

The Board is "cautiously optimistic". I think we have to price in the increased possibility of a revenue miss for 2020, and that's what the market seems to be…

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All my own views. I am not regulated by the FSA. No advice.

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TClarke plc is a United Kingdom-based building services company, which delivers electrical, mechanical, and information and communications technology (ICT) services. The Company provides electrical and mechanical contracting and related services to the construction industry and end users. Its geographical segments include London and South East, Central and South West, the North and Scotland. The Company's businesses include Intelligent Buildings Green Technologies, Facilities Management, Transport, Mission Critical, Manufacturing Services, Residential & Hotels, M&E Contracting and Design & Build. The Company within its M&E contracting business has capabilities in sectors, including commercial offices, retail, education, healthcare, financial services and media. Its Manufacturing Services business includes in-house precision prefabrication and engineering services. Its projects include Beckley Court, Chiswick Park, Kettering Hospital, Project Nova, Mitie Care Home and Rathbone Square. more »

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XP Power Limited is a United Kingdom-based developer and manufacturer of critical power control components for the electronics industry. The Company provides power solutions, including alternating current (AC)-direct current (DC) power supplies and DC-DC converters. The Company's segment include Europe, North America and Asia geographical. It designs-in power control solutions into the end products of blue chip original equipment manufacturers, with a focus on the industrial, healthcare and technology sectors. Its product categories include high efficiency/convection-cooled, chassis mount/open frame, configurable, external, encapsulated and printed circuit board (PCB) mount, DIN rail, baseplate-cooled, through hole mount, surface mount, light-emitting diode (LED) drivers and distributed power/hotswap. more »

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Seeing Machines Limited is engaged in developing, selling and licensing products, services and technology to detect and manage driver fatigue and distraction, including continued market development to secure sustainable channels to market for the product. The Company's segments include automotive, off-road, fleet, aviation, scientific advance and other. The Company is also engaged in developing driver-monitoring technology to incorporate into passenger cars; entering commercial agreements with partners for the development, manufacturing and sale of products into target markets, and research and development of the Company's processing technologies to support the development and refinement of the Company's products. It also offers driver monitoring system (DMS) technology. more »

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

31 Comments on this Article show/hide all

simoan 1st Aug 12 of 31

In reply to post #499341


The profit warning was i think pretty much solely related to issues in Korea,

I think there was some confusion here at the time of the warning in May of the size of the profit miss in relation to the relatively smaller reduction in sales. Today's RNS makes clear the huge operational gearing involved with the high fixed cost nature of the business that causes this effect, particularly in the traditionally quieter half year. I have held Portmeirion (LON:PMP) previously and hadn't appreciated the operational gearing was quite so high, and as such, it's not a company I would be looking to revisit anytime soon in the current climate.

All the best, Si

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fred9566 1st Aug 13 of 31


Twice in two days !!! I normally read these posts not write them. SCS seem to be  defying gravity !!! The tales of woe in the retail sector are well known to all of us yet here we have a retailer reporting in their latest Trading Statement "We are pleased to report that the Group has seen like-for-like order intake growth of 4.2%, with two year like-for-like order intake growth of 5.2%. The Group expects to report full year results in line with its expectations."

It has a Stockopedia score of 99 with scores of 96 and 92 for quality and value with a score of 69 for momentum reflecting the fact that they are in retail. The stock report shows a PE of 8.4 ; a yeild of 7.84% ; EV/Ebitda of 1.25 ; ROC :33.5 ;ROE : 33.1 . The figures that stand out for me however  are the Market Cap of £86 mill versus an enterprise value of £24 mill - they are sitting on aprox £62 million cash  which on my arithmetic equates to aprox 154 pps .  If you strip out the cash you  could argue that this company is being valued at a forward PE of around 2!!! This from a company that has generated Operating profits of £37 mill in the last 3 years and of that £37 million £26 million has been converted to cash .

Whatever they are doing they appear to be doing it rather well  .

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rmillaree 1st Aug 14 of 31

Portmeirion (LON:PMP)


and hadn't appreciated the operational gearing was quite so high, and as such, it's not a company I would be looking to revisit anytime soon in the current climate.

somewhat strangely i look at the operational gearing as being a positive for this company - overall they have consistently grown and are expected to consistently grow going forward -ignoring banana skins . For a growing company operational gearing is a positive as a higher % of the extra sales should fall through to the bottom line. As you say though if you view that the company wont be growing and will be going into reverse  selling sooner rather than later with higher operational gearing makes complete sense.

The only thing is surprising to me is that you are surprised by the huge operational gearing - they manufacture products as their trade! - it should be pretty obvious that as such  they have very high fixed costs and it will be difficult for them to trim those due to short term sales issues - even things like excess staff levels must cause headaches as once you get rid of trained staff its not easy to get the back.

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rmillaree 1st Aug 15 of 31



they are sitting on aprox £62 million cash  which on my arithmetic equates to aprox 154 pps .  If you strip out the cash you  could argue that this company is being valued at a forward PE of around 2!!!

I lost my shirt on the prior scs many years ago due to the fact they had no shirt (cash in the bank)

If i was holding scs i would want to see a decent cash pile which is what they have.

Note they have £75 mill of trade payable which is a high figure - put them in a  recession with little profits and the shirt having been sold (cash paid to shareholders) -  would any suppliers give them credit and would they be able to keep a decent credit rating for credit insurance  purposes ?- probably  not. That is pretty much the exact reason the prior incarnation went to the wall despite being a fundamentally profitable entity (as has been proven) other than during a nice proper recession. i also guess this is the reason the cash pile exists now, management are currently sensible or know they could get same trade payable terms if they ditched the cash.

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Gromley 1st Aug 16 of 31

Just a small observation on the T Clarke (LON:CTO) order book.

The figures imply that £154m of the order book relates to this year - that represents 91% of the H2 revenue forecast (£169m)

At the half year stage last year they were able to confirm that they had order secured covering the entire of the H2 revenue forecast (£147m based on the FY forecasts I can see at the time). However they ended up smashing the H2 revenues delivering £173m, 18% above forecast.

So whilst I think they are behind, they are not out of sight.

The other thing this figures suggest is that their forward order book (next year and beyond) is actually down nearly 10%. Given that Brexit uncertainty is causing delays to investment decisions, this doesn't seem too surprising to me. If there is a resolution of Brexit in the next 3 months (in any direction imho) I would expect forward order books to start to build.

Now on the watch list for me.

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simoan 1st Aug 17 of 31

In reply to post #499421

The only thing is surprising to me is that you are surprised by the huge operational gearing - they manufacture products as their trade! - it should be pretty obvious that as such  they have very high fixed costs and it will be difficult for them to trim those due to short term sales issues - even things like excess staff levels must cause headaches as once you get rid of trained staff its not easy to get the back

I believe the level of gearing has increased, maybe due to the second kiln they bought on line since I last held? The gearing has always been high but I believe an increase in fixed costs has probably increased it even further.  

You can view this in one of two ways but Portmeirion (LON:PMP) is effectively a play on the UK and US consumer, and we've already seen the damage a comparatively small sales reduction in Korea can do, so I currently view the operational gearing negatively - it's not something I want exposure to.

All the best, Si

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nicobos 1st Aug 18 of 31

Staffline (LON:STAF) hi Paul, I don't know if you are around today but would be good to get your view on the special situation at Staffline (LON:STAF) as I know you have a position?

"Following certain share acquisitions executed today, HRnetGroup Limited ("HRnetGroup") announces that it has acquired 11,671,702 shares of Staffline Group plc ("Staffline") at a price of 180 pence, which increases its total holding in Staffline to 17,154,626 shares. HRnetGroup therefore currently owns 24.89% of the total voting rights of Staffline"

Seems like the main reason for acquiring this number of shares is as they are eying a corporate takeover. HRNet seem successful and acquisitive and have paid a massive premium to acquire Staffline (LON:STAF) shares. Either way, great for shares to move to 'sticky hands' if certain IIs want out.

Sitting tight for now as I reckon risk reward is good at the current price. I understand some will be looking to take quick profits if they bought in at £1 but will be interesting to keep an eye on developments...


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lemonjar 1st Aug 19 of 31

In reply to post #499296

so what's the best approach here - time to cash in your chips or does one wait for this to complete and you get the 140p reward? Sorry not quite sure of the process here if it goes private

Any comments much appreciated

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Asagi 1st Aug 20 of 31

I have held Portmeirion (LON:PMP) previously and hadn't appreciated the operational gearing was quite so high

the problems have come from their market in Korea, which, as I understand, is their highest margin market. In the past, revenues in Korea have been comparable to those in the UK.

Asagi (no position)

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abtan 1st Aug 21 of 31

Re XP Power (LON:XPP)

Ex-holding of mine, but I like to keep a track of things.

I actually think the company has been on a downward trend for several periods now.
Particularly material decreases in revenues for their core Own Design products in 2017Q4 and 2018Q2 were masked by acquisitions.

The fact that the company did not highlight these falls at the time and cherry-picked the "good" numbers to publish will always create a level of distrust for me.

As if to highlight this point, the results published today make no mention of Comdel revenues, despite having announced them in every quarter since acquisition in September 2017...but the positive numbers for Own-Design and Glassman ARE included.

As a result this one is not for me.


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HHR 1st Aug 22 of 31

Sadly today's offer for Sanderson (LON:SND) is not the first time that snd shareholders have been ripped off by a 'recommended offer' for the company by VC.

In 1999 Alchemy got away with an 18% premium.

I don't want to say anything defamatory but personally I find it astonishing to the point of incredulity that any independent director would recommend these offers or any shareholder would accept them.

I got stung a few years ago when Paysafe was taken private for a ridiculous premium.

How long before we get sold back these companies for another merry go round of debt, fees and salaries?

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abtan 1st Aug 23 of 31

In reply to post #499416


Hi Fred

I hold SCS (LON:SCS) and share your enthusiasm for the company even if I am a little confused by your opening comment.

As an aside, I think it's worth making a couple of additional points:

  1. Of the £62.5m cash in the bank @January 2019, £25m related to customer deposits, so the true EV figure is actually closer to £50m. 
  2. I'm expecting total revenues to decrease Year-On-Year due to the withdrawal from House of Fraser midway through the 2019 Financial Year.
  3. This is an incredibly cash rich company, which makes products on order, so one would hope that they have a comfortable safety cushion if the sofa economy heads south.


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sharw 1st Aug 24 of 31

Regarding SCS (LON:SCS) fred9566 comments on the large net cash and rmillaree on high trade payables. In fact a chunk of each balances out. As SCS says on its website "...all orders are tailor-made by our highly-skilled manufacturers...." so at the balance sheet date there was £25m in trade payables which was actually customer deposits balanced by the same amount in the cash pile.

The other thing to note about SCS is how it stands regarding leases - a topic Paul is very keen on. In this case it benefits. It tends to use retail parks where stand empty units once used by Comet, Toys'r'Us etc., putting it in a good position for negotiation. If you look at the last presentation you will see on the profit bridge that the increase in gross profit was totally absorbed by increases in distribution, marketing and payroll costs. The increase in net profit all came from a "reduction in other costs mainly driven by lower property related costs" and another slide shows average lease decreasing from 9.5 to 6.5 years.

See slides 8 and 11 at

Edit - abtan - apologies for overlap - was writing this while you were posting.

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davidjhill 1st Aug 25 of 31

In reply to post #499501

Staffline (LON:STAF) hmm interesting. They need to pay above the price at which they acquired shares in preceding 12 months to take the business over so looks like a minimum of 200p to actually take it out.

They could of course wait for longer than 12 months but then they risk the business getting back on track and having to pay more.

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Trident 1st Aug 26 of 31

There seems to be a trend of 15% ish premiums, which you would think, depending on the circumstances, would get knocked back rather than recommended, but it seems to be the new expectation levels. I wonder if this is the curse of nil cost options etc coming to roost, or whether it signifies the fact that the relevant board never entirely believed in their own growth story, or market valuation?

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Roy Edwards 1st Aug 27 of 31

In reply to post #499516

I usually tend to wait. One reason is costs as no trading fees on my account. Processed as a corporate action. Also potential for further bids BUT unlikely in this instance.

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SundayTrader 1st Aug 28 of 31

In reply to post #499601

To me this illustrates the folly that is QE. I.e. deliberately depressing wholesale money costs enables a highly leveraged owner to pay higher prices for industrial assets than will be paid by people who are not using borrowed money. It cannot end well.

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yellowdog 1st Aug 29 of 31

Re Staffline - I notice the HRnet Group are also building a stake in Gattaca - 5.53% as at 29th July and the share price is up some 11% since that date !!!!

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Just me 1st Aug 30 of 31

In reply to post #499516

Hi lemonjar

I would add that you have the opportunity cost of holding a position for which the take over may not  complete for several months (sometimes longer depending on the size of the deal) in which you could be invested elsewhere. 

I have no opinion on this takeover offer as have not looked at any details but if you are unlikely to get a higher offer then all of your risk is to the downside if the offer falls apart.

if your position is fairly large then selling fees shouldn't have a large % impact on your profits but agree with Roy for smaller positions

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lemonjar 1st Aug 31 of 31

In reply to post #499691

Thanks for the comments,, much appreciated

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

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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