Small Cap Value Report (Thur 2 August 2018) - GETB, PMP, WGB, CWD, NSF

2nd Aug '18 by Graham Neary

38 comments 10616 reads

Good morning!

A couple of things today:

GetBusy (LON:GETB) - response by CFO to my comments yesterday
Portmeirion (LON:PMP) - interim results
Walker Greenbank (LON:WGB) - half year trading update
Countrywide (LON:CWD) - half year report and fundraising
Non-Standard Finance (LON:NSF) - interim results

GetBusy (LON:GETB)

Share price: 52.5p (+2%)
No. of shares: 48.4 million
Market cap: £25 million

In yesterday's report I looked at Getbusy, a document management business. I mentioned the company's use of adjusted earnings numbers and certain points raised by its auditors in the company's 2017 annual report.

Paul Haworth, Getbusy CFO, has kindly responded with additional detail and explanations, which I am glad to share.

Paul Haworth: Thank you for taking the time to comment on GetBusy’s results today; I know that this column is followed by a good portion of our UK retail investor base. I thought it would be helpful, if you’ll allow me, to provide some context to some of the points you’ve raised in your column.

Firstly, I wanted to provide some more information about why we quote “adjusted EBITDA” and what it means to us. As with any growing business that is cash absorptive, we need to closely watch our cashflow and ensure we’re making very deliberate, evidence-based investment decisions. It’s important to us to track a profitability metric that most closely matches what cash is doing. IFRS measures of profit rarely do that. So we take our IFRS operating profit and make the following key adjustments:

• We make sure all development costs are expensed. Why? Because development capitalisation is one of the most horribly used and abused tricks up a naughty CFO’s sleeve. There is so much judgement involved in capitalisation, and it is such a difficult area for auditors to really get a grip of, that it is often used to manipulate earnings in the short-term. That’s wrong, and it certainly doesn’t help with cash management. So all of the development capitalisation that the accounting standards require us to do is done “below” Adjusted EBITDA. We think that’s transparent.

• We remove the impact of any share-based payments. These are non-cash and the…

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jonno

2nd Aug '18

Given their dependency on brands and that they broadly operate in the same area of the market I have occasionally thought that a merger of Portmeirion (LON:PMP) and Walker Greenbank (LON:WGB) would be interesting, albeit I have no idea as to whether such a combination would be commercially viable. Both have great brands that don't overlap.

Just me being whimsical!

Zipmanpeter

Genuine thanks for feedback - I wanted bear thinking and you have certainly delivered :)

In response
1. Morals - unarguable in sense you think this is OK or not. Like you I will not dwell here (but clearly and respectfully disagree....and at worst, feel NSF are relatively good lenders to non-standard customers with most of the loan book in the branch based EveryDay Loans
2. Intangibles - Like you I always write off before considering investment but they must have a real value since they were once paid for. So really, we should argue what they are worth today. My feel is that NSF have developed positively all 3 businesses (tending to build intangible value). Everyday loans was arguably bought under distress vs seller (they needed a business and had cash on hand); GB was bought from a distressed seller (P2P funding had dried up for the business); and Home credit was half and half - the original business was maybe bought from an advantaged seller but Provident's mis-step gave them almost the same size of business for just about 7Mn all in.
3. Liquid cash and Funding - given the extremely short loan durations, cash is always quickly cycling and they have access to more cash as required. Rate on cash borrowed is about 9% which is high (reflecting risk/NSF newness) but low given risk adjusted margin of >30% (38% EDL, 30% GLD, 110% L@H)

That leaves the risk from a major deterioration in the impairment (caused by anything hitting collections - economic downturn, sudden regulation, mgt cock ups as with PFG). Here I agree the risk but see no sign of it eventuating in the short run (as impairment fell in the key branch based lending although I noted the increase in Home Credit). All other things being equal (I am an optimistic ex-economist), I hpe the balance sheet will strengthen over next couple of years as the retained earnings increase at an accelerating rate and I feel the price (plus dividends offered) compensate me.

Certainly a risky investment but the risk/reward feels good to me and I felt the risk came down substantially today (with no issues mentioned from major expansion of branch network and expansion of guarantor lending whose value is revealed by the recent Amigo IPO.

As ever, time will tell.......

rhomboid1

I’m interested in Walker Greenbank (LON:WGB) because it looks extremely good value. Qualifying for 11 screens no less ..however I did a brief check on social media ..& they’re pretty awful, their Zoffany landing page on Instagram informs you that they’ve got an 80% off sale of old stock every Saturday in Milton Keynes ..cash & credit cards accepted

This is supposed to be a luxury aspirational brand so that is unforgivable..especially as it’s a global business...they’re actively distressing their own brands..no wonder they’re going backwards as social media is a huge part of curating & building a brand ...and they haven’t a clue

ezlifeme

Not the only Luxury brand in the news about old/over stocked items Burberry (LON:BRBY)
https://www.bbc.co.uk/news/bus...

But doing it responsibly apparently!

rmillaree

Ref Tesla (can i autolink yank stocks)

The results last night were a bit of a relief outlook wise, there is now a clear path to profits (jiggery pokery no doubt included) in the next 6 months. So i am more hopeful than not that the more fanciful theories the shorters have had will be laid to bed.
Quite an impressive feat the announcement yesterday that they will be dropping the Nvidia chips and using their own hardware - i think there was mention of increasing frame rates from 200 per second to 2000 per second. That will be pretty handy (necessary?) as currently the cars have a tendency to dive into stuff and kill the driver if they are too busy watching harry potter films.

Finally they are up to 50% market share in the premium mid size sedan sector with the model 3, and they seem to be convincing bods to upgrade from all sorts of rivals some of which are much more modest cars - if they can replicate Apple in being able to charge bods extra for something similar (car is a car - like a phone is a phone) happy days. All it needs now is a decent authentic version of Defender to play while you are waiting for the damn thing to charge and a UK release date for the model 3.

jonthetourist

"Charging 39% for a loan with a guarantor is awful, surely these poor people can get a better deal elsewhere?"

The answer lies within the question. If they could, presumably the company would not be reporting quite so positively. You pay more for your car insurance if you are young and drive a fast car. You pay more for your borrowing if you have a high likelihood of default.

Jon

lyndhurst25

Walker Greenbank (LON:WGB). The surplus stock clearance sales are pretty well hidden on the main company websites so I don't think that they devalue the brand. Not sure about Instagram: don't use it. Is it a thing that potential customers would seek out? In any case, I'd rather they sell the surplus stock for 20% of its original price than burn it like Burberry do.

43% increase in licensing income sounds good but how big is that side of the business? After all, 43% of sod all is still sod all.

simoan

Perhaps it's just me and my other half but when we buy curtains (normally from JL) we have no idea what brand the material is and the purchase decision is made entirely on whether we like the pattern and it goes with the other room furnishings.

I agree that publicising an 80% off sale on social media is not good for image but OTOH I really don't think brand awareness has much bearing when it comes to choosing curtains and wallpaper. I don't believe it's the same as clothing, for instance, and so not as important.

With regard to Walker Greenbank (LON:WGB) I just don't trust the management any more, so game over, and it is no longer in my "investible universe". You have to remember that a lot of the Stocko screens are based on historical data and so I ignore them for companies that have just started a very obvious nosedive which is not yet reflected in the data.

All the best, Si

HornBlower

in terms of share based payments being real costs are not, surely if they didn't grant options to staff they would have to pay them cash instead. Also they could have sold the same options to third parties so they are giving away value. Option valuation might not be an exact science but there are well established models. Finally, Buffett things share based payments are a real cost which seems convincing enough.

Trident

Just a note on the somewhat small increase in Bank interest rates today. I recall a discussion many moons ago with Paul (late of this parish) which suggested that a steadily increasing interest rate environment would push down the deficit accounting for a number of company pension schemes, and could expose greater value.

Norcross was one of the companies under discussion, I believe.

wildshot

Sorry to hear of your computer problems Graham, was it by any chance Windows based? I used to always buy cheaper Windows computer but found their life span to be limited. A few years ago I moved to a Macbook Air, a costly upgrade. However I swear by it. It is definitely more stable and seems to have a much longer life. I highly recommend them if you are ever looking for a long term, sustainable replacement.

Such a shame I have to use Windows for work :-(

Walker Greenbank (LON:WGB). Answering my own question. From the 2018 Final Results -

UK revenue £62.8m
International revenue £42.8m
Licence revenue £3.1

so licensing, even after a 43% increase, is not a very big part of the business at all.

Funderstruck

Graham; Thanks for your daily forensic reports.
Re a new computer. Depending on how many programs you have on your current system it can be a pain reinstalling it all. No doubt yourself and your computer refurber are aware that one can buy a high quality Clone program to Image your whole current system and drop it into your new system. Saves a huge amount of time. I have done this in order to install a larger SSD in one of my systems.

Graham Neary

Hey wildshot. You're not the only person who has recommended a MacBook Air. It sounds like an awesome product. But I find it difficult to justify the additional expense. I've gone for a big and powerful tower PC with all the trimmings! G

Interesting idea, thank you Funderstruck. Fortunately, my software requirements are low. G

Lion Tamer

Hi Graham

In case you did not know, you can extend the life of an ageing computer with a free upgrade to Linux (Mint is a stable and user-friendly option for a Linux new comer https://linuxmint.com/. Other varieties are available to suit your taste). When I left work and had to give back my company laptop I purchased from PC World (due to one of their regular pricing anomalies it was a much better deal than available via Amazon etc) then straight away updated it with a solid state disk and Linux Mint. It boots and shuts down in seconds (about 5 secs), and is still very fast after two and a half years. Worth consideration next time you need a performance boost.

Thanks for your hard work on this column, essential reading!

Yes, I agree with this. Paying shares is an alternative to paying cash. Either way, it's shareholders who are paying for it. So we should leave them in, even if the underlying calculations for share-based payments are tricky.

stevenhume

28th Aug '18

About 3% !!!! As per annual report

mkowalski

4th Sep '18

I think the problem with Walker Greenbank (LON:WGB) share price is the adjustment they made to the FV of consideration they owe an acquired business. Looks serious. Looking into it.

5th Sep '18

Walker Greenbank (LON:WGB) issued 8.9m new shares (14% of the shares outstanding) raising £17m (190p each) in 2016 to fund part of the purchase of Clarke & Clarke (total consideration was £25m cash and £17.5m contingent consideration). C&C hit the first of 4 annual targets on 31 Jan 2017 and the seller was awarded 1.1 million shares in June 2017 (worth £2.3m at 206.25p each). These had a lockup period of 1 year expiring a couple months ago. However, in the 2018 report it was revealed that the 31 Jan 2018 target was missed and the remaining two were unlikely to be met, so the remaining contingent consideration of £4m was added back to income.

I am not experienced enough in business combinations to make sense of the Note. I note that the cash consideration was increased by £5.4m from £25m on account of working capital adjustments. This seems like an excessive amount of "extra" working capital found in the business. What did the seller do to drive up the price? Also, I would bet that once the seller found out their future consideration would not vest they would be lining up to sell their shares at the lock-up expiry.

Can anyone with experience comment on this?

Small Cap Value Report (Thur 2 August 2018) - GETB, PMP, WGB, CWD, NSF

GetBusy (LON:GETB)

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Graham Neary

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