Small Cap Value Report (Thur 20 June 2019) - PTSG, BWNG, LSR, LPA, BOTB

20th Jun '19 by Graham Neary

23 comments 8242 reads

Good morning!

Today we have a bombshell offer for Premier Technical Services (LON:PTSG) at 210.1p. The stock closed last night at 87p.

Premier Technical Services (LON:PTSG)

Share price: 205p (+136%)
No. of shares: 126 million
Market cap: £259 million

Recommended Cash Acquisition

PTSG has been covered very recently in this report.

According to the archives, most of the commentary around these parts has been thanks to Paul. I've not said too much about it, though like Paul I've been sceptical:

March 2017 (107p) - saw a lot of complexity in the accounts, and negative net tangible assets. Thought that the company had a lot to prove to justify a high earnings multiple.
7 Aug 2017 (144p) - wary of valuation relative to the quality of the business.
21 Feb 2019 (119.5p) - explained that it was not the type of thing I would invest in personally, but also guessed that the recent, sharp deterioration in the share price was probably nothing more than short-term noise.

It turns out that I should have been more interested. The acquisition is priced at a:

145% premium to yesterday's closing price
72% premium to the volume-weighted price over the last twelve months.

There is a wall of text which I won't bore you with - basically, the CEO and MD plan to reinvest some of their sale proceeds back into the company, after the takeover. Rather than disposing of their shares and retiring, they will stick around to run the company under its new owners.

48% of shares eligible to vote the deal through have promised or declared an intention to vote in favour of the deal. It is therefore very likely to be voted through.

The Buyer

The buyer is Macquarie Principal Finance. They will use a combination of their own cash and debt financing (typical for private equity deals).

The Macquarie Senior MD has summarised it on LinkedIn today:

Deal announced! Pleased to announce a…

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hayashi22

20th Jun '19

Think you are missing the point simoan..it's like your neighbour winning the lottery despite you having spent a load of dosh on tickets. when they tell you of their luck you congratulate them.....

SundayTrader

Paul's latest commentary on Premier Technical Services (LON:PTSG) indicated a few red, or at least amber, flags, particularly the high level of receivables (90 days). I think I have seen other negative comments on the level of working capital. Clearly this hasn't fazed Macquarie - and in fact the stated rationale for the bid is that they will be putting a lot more capital into the business. Does anyone know what people have been missing here? I have the impression that Premier Technical Services (LON:PTSG) has a lot of annual fee revenue, so that there is an element of insurance in the business model. Is this what is inflating working capital requirements? And is there a read across to others in the sector, e.g. £MRL?

andrewdb

I went in to PTSGabout a month ago on the theory that this should be a nice business that (as regulatory-HSE) and if they are paying a dividend it cannot be subjec to a guangdong level of fraud.

The offer, if you thing the per should be 10 to 15 is not generous.

Graham Neary

Yes, even if they are lucky rather than skilfull, people get congratulated when things go nicely for them! PTSG maybe more skill than luck involved?

G

fwyburd

HI Sunday Trader,
I attended a Mello City meeting last year where Premier Technical Services (LON:PTSG) presented their half year results. They claimed 88% renewal rates and 14% YOY organic growth. Whilst much of their business is in a different space to Marlowe (LON:MRL) (Electrical, Access and Safety and Building Access) they were excited about the prospects for their relatively new Fire business (similar to Marlowe) and its growth prospects.

Both these businesses enjoy high visibility of earnings and low attrition rates resulting from the regulatory necessity of the services they provide customers. The high receivables are a consequence of having public sector and large private sector contracts but the upside is that they are very 'sticky'.

I think it's hard to make too much of a comparison between the two as Marlowe is a younger business and has not yet reached the scale it wants across its three sectors (Fire, Water and Air) . But its recent entry into risk management services with its William Martin acquisition opens up higher margin and organic growth opportunities and the Clearwater acquisition gives them market leadership in the Water business.

If it helps, I posted Marlowe (LON:MRL) updated broker forecasts here earlier this week.

I am (very) long and an enthusiastic supporter of Marlowe (LON:MRL)

cheers

Francis

PS: Oh, and many congratulations to all holders of Premier Technical Services (LON:PTSG) - a great result for those brave enough to hold during the last few months

davidjhill

Graham - I agree with you on N Brown (LON:BWNG). This looks like it has much more value than the market has given credit for. Once the legacy offline drag on sales is resolved it appears as though their online brand presence is growing at a sensible pace. As a niche player in the larger size market one would assume that they can further expand in wholesale at some point maybe.

Anyway as a pure online play with EPS of 20p+ and core debt of circa £50-70m one wonders why they wouldn't now trade around 10* earnings. I can only assume past woes still haven't worked their way through investor confidence and that patience over next few quarters may be required.

simoan

Graham,

I am always reminded of the "four quadrants" diagram of process vs outcome in Montier's "Little Book of Behavioural Investing". It is perfectly possible to get a good outcome from a bad investment process. If we don't acknowledge the luck in such outcomes then we are fooling ourselves and our investment process will never improve.

Paul and yourself have been quite right to point out the issues with Premier Technical Services (LON:PTSG) and the vast majority of the time you are proved correct. If you develop a good investment process you only need concern yourself with two of Montier's quadrants and the results will follow. That's what we should be concerning ourselves with IMHO.

All the best, Si.

Snoo

I too agree with Graham on N Brown (LON:BWNG), clear decisive action unlike Dixons Carphone which seems intent on pushing square pegs through round holes in its mobile phone shops.

Macroeconomic trends seem to be to saying lower interest rates are more likely than higher ones. Their finance income is a lucrative business (borrow money at single digits, loan out at 25% APR), and they are not even the worst in this (Very charge something closer to 40%). I do wonder if this type of thing might be impacted one day.

IMO the Jacamo site does not bear any relation to what it was. I am sure this started as a mail-order thing specialising in plus-size clothes. Nowadays it retails everything, clothes in regular sizes from all brands. You can buy a Playstation or a TV from Jacamo now, or even a sofa. Was that part of the strategy? I would say no, but I would think carrying these products costs them nothing as they are drop-shipped and the company profits on both the product and the credit.

To me, the business is more of a loan book masquerading as a clothing retailer. Not that there is much wrong in this, but as a result I think they have lost some interest in what made Jacamo/SimplyBe successful, and this niche could easily be attacked from ASOS/Boohoo.

I think the business is viable enough if the brands stay relevant and I think the shares are good value.

jwebster

N Brown (LON:BWNG)

Not much detail in the trading update, so looking at the full year result reported 2 May

Key customer group is older generation and larger-sizes in the sub-prime segment, buying clothing on credit with a gross margin on lending of 59%. The rep APR on the site is 24.9% so they must have higher rates as a down sell to get to 59%.

Product line made a gross profit of 320m but there were additional costs for Warehouse & Fulfilment 84m and Marketing & Production 158m so less these costs (I assume all Product related) Product delivered 78m and also NBrown had an additional 128m of Admin & Payroll costs which would be shared in some proportion across Product and Finance.

The point I’m making here is NBrown sell the clothing at a loss and make all their margin on the lending.

There’s no real problem with this, Littlewoods ran this model for years through their catalogues. Issue is, this works for the older generation as a convenience purchase, but perhaps the younger generation is a bit more savvy - I.e. it’s cheaper to get credit on-line first through a personal loan or credit card, say APR 29-39 then shop wherever you like with the money.

Their growth prospects look dim on the surface. Active customer accounts down 12.4% to 3.9m. Also, I wonder can firms really be good at both fashion retail and sub prime lending? Quite different skill sets.

On the positive side, the sub-prime lending sector has contracted under tighter regulations e.g. Wonga closed down. So Brown probably have a nice run way on their finance for a while yet.

With 3.9m customer base and 59% margin financing I suspect Brown will continue on for a while but businesses like this can fade under competition from more focused retailers and lenders alike.

Having said all that the PER ratio is very undemanding, so an upside surprise always on the cards.

AnonymousUser576244

Graham, I would welcome your view on RDL Realisation (LON:RDL) (I have a long position). Do you still hold? Shares are back in action after the accounts publication this week and Oaktree Capital Group Holdings has increased their holding from 19.24% to 26.61% this week (assuming I read it right).

Investor1942

I'm feeling rather smug having doubled my holding in April. Having been in construction for several decades and being aware , particularly after Grenfell, of the ever increasing need for H & S , and looking at the note by Liberium on Reasearchtree I thought they were unjustly oversold.

Zipmanpeter

Re N Brown (LON:BWNG) which I have held (to my loss !!) for some time believing there is a good business trying to get out. The Q1 trading update confirms:

Strategically, a lot of simplification is going on which is very good news. In addition to quitting stores as mentioned and finally settling the disputes with inland revenue, N Brown (LON:BWNG) is also:

1. Quitting international ambition (excl Eire) - US was a big dream but they never had the wherewithal to win there so this is a blessing
2. Focusing on just 3 Powerbrands (JD Williams/Simplybe/Jacomo) with Ambrose Wilson called out when they switch to segmenting by Womenswear and Menswear key brands. The balance "Brands" are now being formally downgraded to mere Product brands. Cumulatively, the latter are large and will drag revenue down for a couple of years and ultimately will be closed I think. But then that will allow a simple story to be told to the city
3. I also presume Ambrose Wilson will be used to target the OAP segment and customers that the JDWilliams "lifestore re-invention for 45+ women left behind. This smart as there is a much older demographic that probably is genuinely underserved with less energy to shop around. (Only watch out being admin costs; my Mum caused a lot of Customer Service cost in her later years with her mail order purchases I request but equally bought a lot and paid a lot of interest. But phone calls to customer service are flagged at 13p/minute so may be morally suspect but profitable in sum, I expect!)

Finally, and perhaps most importantly, 2 things for the future:

1. I have seen a noticeable improvement in the Trustpilot reviews on the product/customer service in P6M. These were truly dire and in totality are still very poor (Simplybe and JDWilliams are ranked 229 and 306 of 382 womenswear brands for ave. review score) but they are improving. More recent comments are much better. There are still dreadful reviews but it seems as if this is being fixed with the IT system previous mgt introduced being patched internally. If online sales growth continues with better products and good customer service, then we get back to be a leader underserved markets. Overall, the company claims to be a UK top 10 digital retailer in its addressable markets.

2. The (claimed) quality of the debtor book is improving. If this is for real, then the market may be over-stating the risk from rising impairments if there is a downturn in the economy. This will also be helped by fewer product/customer service issues. To me this resembles the improvements in (poor quality) debt books that the Home Credit companies Provident, Morses Club and Loans@Home (NSF) have done in the last few years. Note this means they will still have very high bad debts (10% provisions) vs say a Next (4%) but these are now appropriately priced with the worst of the debtor book dealt with. Hence financial services revenues going up faster than product.

The new CEO (Steve Johnson, ex Finance background) is not as showy as the former (Angela Spindler) but may be worth backing. A smaller but more profitable business may emerge in 12-18months time that can get back on a decent rating.

Thank you for this helpful information.

Aislabie

It was only June 5th when I complained here that Premier Technical Services (LON:PTSG) was not treating its shareholders properly, so it is only fair to tip my hat in thanks to the management for securing such a favourable exit for us as they take the company private.
I believe that there is good long term value in this company but to reach it may require the company to be managed with the greater flexibility of being private.

abtan

Some thoughts on the Best Of The Best (LON:BOTB) results today (I hold).

I see a lot of positives in the next few years, based on online revenues being up whopping 32%. If they can maintain the momentum going forward, then in theory gross profit margins should improve from the current level of 56% (as increasing ticket sales does not actually mean more money spent on prizes.)

Remote Gambling Duty (RGD) went up from 15% to 21% in April 2019, but based on the only time they published RGD figures, I can't see this having a material detrimental impact on gross margins going forward (RGD was £0.7m on H2 2017/18 revenues of £7.4m).

Marketing costs are another thing that have only been mentioned sparingly in the past. The last note I have is marketing expenditure would be £2.0 in 2017/18 and 40% higher in 2018/19 (I actually think they increased marketing spend by <40% in 2018/19)

Factoring all this in, and again keeping in mind that 32% YOY increase in online revenues, should mean a significant increase in the bottom line in future years.

The only negative I saw from today's results was that Operating Cash Flow, before the net£2.6m boost from HMRC,actually fell YOY from £1.8m to £1.6m. One to keep an eye on.

Cheers

N Brown (LON:BWNG) there is a good piece from Shore Capital on Research Tree today, that's worth a read. As house broker they should have a decent handle on expectations.

Seems we are looking at 23.4p EPS which is a PE of 6. Core debt of circa £50m with EV/EBITDA of 3.3* and dividend yield exceeding 5%.

Richard Goodwin

Premier Technical Services (LON:PTSG) . Paul and Graham might still be correct. It is just that at present the bidder either disagrees or thinks they can get in and out before it implodes!

Gromley

To be fair, I think Graham and Paul were "unconvinced" by PTSG rather than outright negative (although there was apparently a shorting campaign going on). However your comments do remind me of the situation with Countrywide (LON:CWD) back in 2007.

At the time it seemed that pretty much all rational thinkers were hugely negative on the stock, but nevertheless it was taken out at a premium valuing the company at over £1bn. I have no idea what cash flowed into or out of the business in the meantime, but it came back to the market 6 years later in 2013 valued at £750m.

Since then the share count has trebled, so presumably lots more cash injected, but the company is now valued at less than £70m.

Twelve years on an rationality appears to have settled in. One of the reasons I don't do "big conviction shorts".

back2value

21st Jun '19

Now if only someone would buy out French Connection at a hefty premium...

B2V

Hi sp, I will update my view on that in today's report, cheers. G

Small Cap Value Report (Thur 20 June 2019) - PTSG, BWNG, LSR, LPA, BOTB

Premier Technical Services (LON:PTSG)

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Graham Neary

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