Small Cap Value Report (Thur 21 Feb 2019) - PURP, PTSG, MCB, MACF, IDP, KWS, AVAP | Graham Neary

21st Feb '19 by Graham Neary

36 comments 13494 reads

Good morning!

Lots of updates today, including a shocker from Purplebricks (LON:PURP).

Purplebricks (LON:PURP) - trading update
Premier Technical Services (LON:PTSG) - statement re: share price movement
McBride (LON:MCB) - half year report
Macfarlane (LON:MACF) - final results
Innovaderma (LON:IDP) - half year report
Keywords Studios (LON:KWS) - acquisition

Also, please see comment #7 in the thread below by Carcosa, who is something of an expert on Avation (LON:AVAP) and provides us with analysis of its interims. It's not worth my while studying it for you guys when he has already done the work!

Thanks for the comments - and for all your excellent contributions.

Purplebricks (LON:PURP)

Share price: 123p (-25%)
No. of shares: 303 million
Market cap: £373 million

Trading update and management changes

The wheels have been coming off this online estate agent's growth story for a while - see its coverage in the SCVR archives.

My point of view on this stock has been straightforward enough: the company hasn't made enough progress in the UK to justify a large international growth spree. Aside from poor numbers in black and white, there have been a few red flags:

the company's aggressive treatment of negative reviews and the websites which host them
question marks over how it accounts for revenue

Today's update indicates that the company is struggling in several geographies:

UK: revenue still expected up 15-20% this year despite a challenging market. The UK CEO leaves after two years in the job.
Australia: revenues will miss expectations
USA: revenue will miss expectations. The US CEO leaves after two years in the job.
Canada: set to meet expectations.

In December, guidance for the year ending April 2019 was reduced. This guidance is now reduced dramatically again (bolding is mine):

As reported at the interim results, the Company updated its revenue guidance for the 2018/19 financial year to £165-175 million under IAS 18. Given the reasons noted above, the Board believes revenue for the current financial year will now be in the £130-140 million range under IFRS…

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barnetpeter

21st Feb '19

Just a reminder to all interested that today is the last day for Money am. Started on 22 January 2003 "Our aim is quite simple: we aim to become the UK's leading web-based supplier of shares related content and data".

I think they did but the old technology needed too much support I think and the site is now owned by A J Bell. Thousands of private investors are now looking for a new shares information home with the same range of services ...including me.

Great day for other providers I guess!

timarr

Purplebricks (LON:PURP) would be interesting: UK and US CEO's are both leaving, guidance dropped:

As reported at the interim results, the Company updated its revenue guidance for the 2018/19 financial year to£165-175 million under IAS 18. Given the reasons noted above, the Board believes revenue for the current financial year will now be in the £130-140 million range under IFRS 15.

https://www.investegate.co.uk/...

Which sort of implies that the revenue miss is at least partially to do with the change in revenue recognition policies. Here's what they said in the Interims:

With six months of the year behind us and in light of the above, the Board narrows the range of our previously disclosed 2019 guidance, under IAS 18, from £165-185 million to between £165-175 million, in line with current market consensus.The adoption of IFRS 15 will result in an approximate 2% downward adjustment to our guidance, with a minimal impact on profit and no impact to cash.

Which means, I think, that IFRS 15 has made no appreciable difference to revenue and that this is simply a miss.

Reacher

Purplebricks (LON:PURP) has announced a trading update and some changes in staff. It has helpfully provided updated revenue guidance. Originally revenue expected to be £165-175m and now forecast between £130-140m. This is a result of tough conditions in the U.K., headwinds in the US and a poor second marketing campaign in the US.

https://www.investegate.co.uk/purplebricks-group--purp-/rns/trading-update-and-management-changes/201902210700187150Q/

MrContrarian

My morning smallcap tweet: Red faces at Purplebricks

Purplebricks (LON:PURP), Malvern International (LON:MLVN), McBride (LON:MCB)

Purplebricks (PURP) Once a £1bn co, soon to be a smallcap. Slashes FY rev guidance by 20%. UK and US CEOs to leave shortly. The incentives in the business model never made sense to me.
Malvern International (MLVN) small placing at 4p, an 11% discount.
Mcbride (MCB) H1 rev up 11%, adj EPS flat. Repeats yesterday's FY warning. Why did they RNS on two days?

gus 1065

Three of my small caps out with final results, Vitec (LON:VTC) , Macfarlane (LON:MACF) and Morgan Sindall (LON:MGNS) this morning.

https://www.investegate.co.uk/vitec-group-plc-the---vtc-/rns/final-results/201902210700136768Q/

https://www.investegate.co.uk/macfarlane-group-plc--macf-/rns/final-results/201902210700096741Q/

https://www.investegate.co.uk/morgan-sindall-grp--mgns-/rns/final-results/201902210700096744Q/

All pretty decent reports with improvements in most KPIs although all three are still substantially below share price highs of last summer. Despite the recent partial recovery (dead cat bounce if you’re bearish) plenty of quality companies at reasonable entry levels for those with cash IMO.

Gus.

GrahamF

Wasn’t part of the investment thesis with Purplebricks (LON:PURP) that they could just turn down the marketing spend to achieve wonderful profitability once they had achieved scale? But they are still doing TV advertising in the UK. So not working out as expected there.

Furthermore the business model has changed in the US to pay on completion, which sounds like no sale no fee to me - a polar opposite of their model in the UK.

It may still all come good for them in all their markets but it is looking like the business model is just not working profitably and there has to be doubt as to whether it ever will.

Carcosa

Avation (LON:AVAP)

I have been a relatively long term shareholder of Avation and intend to remain invested for years to come provided they continue to execute their strategy.

Share price 286.5p,
P/E 9
P/TBV 1.0

Avation released their interims today for 31 December 2018

Profit and EPS were doubled as previously indicated in the trading update No doubt the NAV per share of £2.88 will be an important number to many however it should be remembered this is based on an exchange rate of 1.27 at the time. So it is probably a bit lower today. However going forward we have a lot more aircraft due on the books in the near term as discussed in the interims.

Average cost of secured debt 4.1% (was 4.3%)
Average cost of total debt 4.9% (was 5.0%)

It is essential to see, within the confines of the wider interest rate arena) that cost of debt is maintained or preferably reduced. With nearly a billion $ debt a 0.1% saving becomes very material to the bottom line! Of course, in practice this saving gets into an accelerated fleet addition program.

Crunching the numbers I get:

Annualised Gross Yield 11.6% (stable over recent years)
Loan to Value (Net Indebtedness/ Total Assets) = 71% (Avation seem to operate around 70-74% most of the time and other leasing companies go up to 80%. For Avation I suspect this is as high as they can go without breaching covenants or negatively affecting their credit ratings)
Leverage 5.3 (historical range around 4.9 to 5.4)
PAT Return on Equity 5.8% (marginally lower than average)
Cash (unrestricted) $123m - a good proportion no doubt earmarked for the aircraft acquisitions, I guess in theory up to $400m total finance available)

The following are what I have seen written in regard to internal company policy and ratings criteria
Net Debt to Equity < 4 (Company) = 3.6
EBITDA to Interest Ratio >2 (Company) = 2.15*
EBIT Interest Cover (>1.5) (Credit Agency) = 1.22*
Funds From Operations to Debt (> 7-9%)(CA) = 6.7%*

Come the full year figures I suspect these numbers will be more in line with requirements as has been the case in the past. Also, and this is important, I am manually working out these numbers myself and they could very easily be wrong! However over the years it is consistency I am looking for and so far all is good.

The fun part of todays news is finally having an answer to how much they sold one of their VietJet A320's for as this was promised to be substantially ahead of book value. Well it turns out to be 10% above book value.

The implication therefore is that the A320's are worth a lot more than is started on their books. However I think it must be cautioned with the view that VietJet are a significant customer to Airbus and will have acquired those aircraft 'relatively' cheap compared to many other customers. Remembering that nearly all aircraft leasing is a Sale And Lease Buyback (SALB) process i.e. the airline negotiates the price with Airbus, buys the aircraft and then (immediately) Avation buys the aircraft (at the same price) from Vietjet to then lease back to them. This apparent improvement in the value of the A320's may only be read across the other four VietJet A320's at best. That would imply an uplift of around $18m to NAV or around 20p/share. Whether that is reflected in the FY results only time will tell.

I have maintained for a long time that the share price should, overall, be a reflection of the NAV of the company; whether it should be higher than NAV or lower is your call (to me it should be higher due to growth prospects) but centrally it is the NAV driving the share price. Given todays share price and NAV I'd say the company is reasonably priced about now.

Looking forward, seven additional new aircraft expected to be delivered prior to 30 June 2019 so newsflow should be very reasonable.

Edit: Corporate Presentation for the Investor update call (21 February; 1pm GMT):

https://www.avation.net/files/AVAP_HY19Investor_Update_Feb19.pdf

Ramridge

Re. Purplebricks (LON:PURP) Share price is hovering around 100p , -39% as I write.
This is one falling knife I will not be tempted by. I was never convinced by their business model and their competitors in UK and especially US are not lying down and rolling over.

Gary Leach

Morning Graham. Any chance you could cast your eye over the Innovaderma Interims this morning?
As an illiquid stock it's had a volatile journey since listing in 2016 and sits around lows today. However they seem to have overcome a recent DTC hiccup with their flagship product Skinny Tan as demonstrated by a strong recovery so far in H2 and are about to launch in Boots for peak season which should provide a further major boost. They have it all to do in H2, including making better progress on the other major brand Roots but there seems to be a lot of potential for a £13m market cap. You were once warm towards it but later cooled so would be interested in your current thoughts. Thanks

Nick Ray

Re Purplebricks (LON:PURP), and to paraphrase Oscar Wilde, "To lose one CEO may be regarded as a misfortune; to lose both looks like carelessness."

andrea34

I also hold Morgan Sindall (LON:MGNS), Vitec (LON:VTC), and Macfarlane (LON:MACF) although I'd challenge whether Morgan Sindall (LON:MGNS) are a small cap. Personally I'm happy with the results of Morgan Sindall (LON:MGNS) and Vitec (LON:VTC) but I feel Macfarlane (LON:MACF) are no more than fair valued with a bit of a lacklustre tone.

Graham, please can you cover these stocks?

Hi andrea34l.

Fair comment on Macfarlane (LON:MACF) results - packaging sector generally is in the doldrums at the moment so I think they’re holding up pretty well. My small cap threshold is “up to about £500m” so Morgan Sindall (LON:MGNS) and Vitec (LON:VTC) are both at or slightly above the upper end of this - even more so with this morning’s tick up in share price.

Gus.

The Phoenix

Macfarlane (LON:MACF) another vote for this small cap Graham seems a steady performer and there is some consolidation going on in this sector.

Thanks

Ned Kelly

Thanks Carcosa. As a long term holder of Avation (LON:AVAP) I really appreciate your reviews and expansion of the news flow

Aislabie

I am also a long term holder of Avation (LON:AVAP) and much appreciate your regular and comprehensive updates.
With more aircraft having fully paid off or with lower debt as the company deploys its cash flow, there seems a good prospect of even firmer cash flows in future.
A small point is that the Vietjet sale (and the upcoming purchases) are for the A321. Although generically part of the A320, family this larger capacity version seems to be very much in the hot spot right now.

davidjhill

Innovaderma (LON:IDP) is looking pretty interesting

Half year results as expected following teething troubles but what's much more interesting is the 2nd half prospects.

The first 6 weeks of 2nd half : revenue is up 34% at group level. Implies £5.4min if you extrapolate out from H1 based on current DTC channels and existing stores. However, they move from Skinnytan being in 700 stores to 2000 stores next month in time for peak tanning sales. Even if the new stores only sell an average of £1000 p/store (50 odd bottles or 12 p/m, which feels very light to me) that would add £1.3m in 2nd half. Thus with minimal headwinds you could see H2 being around £7m revenue at gross margins of 58% = £4m gross profit.

Factor in £2.2-2.4m of marketing/admin/salary costs and full year EPS would come out circa 7 or 8p. More importantly for me though is an implied 1Y fwd EPS of 12-13p assuming no growth, but I think there is a reasonable chance of that proving conservative.

If my numbers are correct I feel it should be trading around the 120-150p mark so I quite like the risk/reward here personally.

Small Cap Value Report (Thur 21 Feb 2019) - PURP, PTSG, MCB, MACF, IDP, KWS, AVAP

Purplebricks (LON:PURP)

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Graham Neary

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