Small Cap Value Report (Tue 13 April 2021) - DLAR, TLY, RBG, SOS, QUIZ, BILN, HRN

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Timing - update at 14:01 - I've still got a couple more sections to write, so estimated finish time today is 16:00. Update at 16:00 - today's report is now finished.

Agenda -

Paul -

De La Rue (LON:DLAR) - A reassuring trading update for FY 03/2021. At top end of (tight) range of £36-37m adj operating profit, so in line with expectations really. Don't forget the £15m p.a. pension recovery cash outflows, which are material to the valuation.

Boohoo (LON:BOO) (I hold) - a separate post here - I comment on the announcement of acquisition for £73m of a Soho office block, plus the recent 1.2m sq.ft. (leasehold) warehouse in Daventry. The group is gearing up for major expansion, with new brands acquired recently, such as Debenhams, Dorothy Perkins, Wallis & Burton. NB. Separate, new thread - here. Please do not comment on BOO here! We're now using separate threads, to avoid clutter here with what is now a mid-large cap.

Totally (LON:TLY) - a positive trading update. Looks an interesting company, that is growing on me, the more I research it.

Revolution Bars (LON:RBG) (I hold) - H1 results to 31 Dec 2020, largely academic due to lockdowns. More importantly comments & numbers on liquidity look encouraging. Trading after restrictions end in May-June 2021 is all-important now. Management talk about "huge pent-up demand" in today's update, soundning more bullish than in previous updates.

Sosandar (LON:SOS) (I hold) - starting to look interesting again. Strong trading in Jan-Mar 2021. Still loss-making (60% reduced). Change of broker - prelude to a placing maybe? Overall, quite an encouraging update I think.

Quiz (LON:QUIZ) (I hold) - another special situation. It's still solvent, and with shops re-opening, and special occasions resuming soon hopefully, this gives QUIZ a fighting chance.

Jack -

Billington Holdings (LON:BILN) - improving outlook but cost and competitive pressures from this micro cap steelworks company

Hornby (LON:HRN) - positive reaction to today's 'ahead of budget' update but a degree of recovery already priced in

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Paul’s Section

De La Rue (LON:DLAR)

187p (pre market open) - mkt cap £364m

Trading Statement

De La Rue plc (LSE: DLAR) ("De La Rue" or the "Company") today announces a trading update for financial year 2020/21, which ended 27 March 2021.

This sounds encouraging -

As a result of continued positive trading, the Board expects Adjusted Operating Profit for the financial year 2020/21 to be around the top end of the £36 million to £37 million range previously indicated in the Company's trading update of 28 January 2021.

Here are my previous notes relating to the 28 Jan 2021 trading update. It was an ahead of expectations update, with guidance raised from £34m adj op profit to £36-37m.

Today we’re told it’s at the top end of that range, but given £36-37m is quite a tight range, then today’s update is only really in line with expectations, and I wouldn’t expect them to miss guidance that has only recently been increased, and being near the end of the financial year. So it's mildly positive, but not a big deal.

Net debt - this sounds positive, but due to deferrals of capex, so only a timing difference -

End of year Net Debt was approximately £53 million, which is lower than market expectations(1) by approximately £21 million. This is mainly due to lower capital expenditure during the year, consistent with adjustments made to the timing of capital spend as the Turnaround Plan has evolved. Total aggregate 3-year cash investment for the Turnaround Plan remains unchanged.

Furlough - DLAR has joined the increasing list of companies that have repaid taxpayer support through the furlough scheme, in this case a relatively trifling £0.4m. If companies are now performing well, it’s only fair & decent for them to repay the furlough support monies, and any other grants they received which were surplus to requirements.

As an investor, it does give me a warm glow that a company has repaid furlough money. It suggests to me that management behave ethically, which is important, as it probably means they’re less likely to be fiddling the books, or their expenses!

Asset impairment charge of £13m (classed as exceptional) will be booked in H2. Doesn’t really matter, as it’s non-cash. This relates to the closure of a plant in Gateshead.

Diary date - 26 May 2021 for publication of FY 03/2021 results - as previously announced.

My opinion - slightly positive, but shouldn’t really make much difference to the share price, which like everything else, has been doing well lately.

The key issue on valuation here is the large cash outflows of £15m p.a. into the pension scheme. That consumes about 40% of operating profit, so it’s a very material cash outflow.

Remember that pension recovery payments are not reflected in the PER, so on a PER basis DLAR looks cheaper than it actually is. Hence why I’m flagging this point, because it’s very significant to how we value DLAR shares.

Overall though, the trading turnaround at DLAR so far has been very convincing, hence I rate this company highly.

Stockopedia gives it a high StockRank (see green line below, under the share price line).

Share count almost doubled with the emergency refinancing last year, there are now 195m shares in issue, versus 114m prior to covid. Therefore don’t expect the share price to regain previous highs any time soon (if at all), because that would be a very much higher market cap than before.

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Totally (LON:TLY)

34.5p (up 11%, at 10:50) - mkt cap £62m

Trading update

The Board of Totally plc (AIM: TLY), a leading provider of a range of healthcare services across the UK, today announces an update on trading for the 12-month period ended 31 March 2021.

Excellent trading performance

(we’ll be the judge of that, let's see the numbers!)

This sounds good -

Based on draft unaudited numbers, the Group anticipates reporting EBITDA* for the year ended 31 March 2021 substantially ahead of both management expectations and the historic underlying EBITDA of £4.0 million reported by the Group in the financial year ended 31 March 2020.

What has driven this strong trading? -

… due to multiple factors but primarily as a result of the Company being able to respond proactively and quickly to the numerous demands for its healthcare services during the global COVID-19 pandemic...

That does raise the question of whether the improved performance is temporary or might be sustainable? We’ve seen in other areas, how the authorities threw money at pandemic-related problems, with little cost control. So I’m just flagging that as a question to ask here.

Liquidity - sounds good -

As at 31 March 2021 the Company was in a healthy financial position with £14.8 million of net cash (31 March 2020: £8.9 million). The Company has no debt financing ** and all deferred HMRC payments have been paid in full.

Although, as with all companies, a snapshot cash position on a single day can be quite meaningless, as it’s easy to window dress, and may not reflect intra-month, or broader seasonal gyrations.

I would much prefer companies to report average daily net cash/debt, in addition to year end snapshots.

Contract renewals - sounds good, but remember that TLY is a low margin business -

Over the course of the 12-month period the Group announced numerous contract renewals and new business models being delivered, many targeted to manage demand during the pandemic, which amounted to an aggregate contract value of c. £92.5m….

The Directors also note that waiting lists across the UK have all increased during the last year as a result of elective care being paused during the COVID-19 period. The Group's insourcing division continues to be appointed by numerous hospitals across the UK and Ireland to provide services to help reduce these waiting lists.
The Directors therefore anticipate significant growth for the insourcing division of the Group in the short term.

Forward guidance & diary date -

The Directors expect the Company to release its audited final results for the 12-month period ended 31 March 2021 in July 2021.
The Directors expect to re-introduce market guidance at the time of the final results.

My opinion - I looked at this company properly for the first time in a few years, when it last issued interim results. Checking back through my notes from the webinar, I liked management (who came across as intelligent, thoughtful, articulate, according to my notes!), but I decided not to invest due to the low EBITDA margin, and that EBITDA turned into no actual profits, due to a large amortisation charge.

Also the balance sheet is weak, with negative NTAV. The cash pile comes from a favourable working capital position (i.e. creditors much larger than receivables). If you were to equalise the two, then the cash pile would evaporate. Hence it’s one of those business models where they have to keep the plates spinning, in terms of keeping creditors above receivables. In the last webinar, they did say that the NHS are “good payers”, and contracts are sticky, so the favourable working capital position may be sustainable.

Looking through the last cashflow statement, Totally doesn’t seem to be routinely capitalising costs into intangible assets, so maybe it’s OK to ignore the amortisation charge? In which case, the underlying level of profitability might be closer to EBITDA than I previously imagined? (a good thing).

Overall, I’m warming to this share. It’s not really a sector that appeals to me personally (low margin outsourced contracts from the NHS), but I can see why people might latch onto this share, given that the newsflow is good, and management seem to know what they’re doing. Today’s update is strong, and I look forward to reviewing the figures when they come out in July.

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The share price chart is the same as everything else - up 50%+ in the last 6 months! In this case it seems justified, by a strong trading update today.

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Note that Totally qualifies for the “Tiny Titans” stock screen, as shown on its StockReport. I’ve had some good stock ideas from the Tiny Titans screen in years gone by, I can’t vouch for the stocks it currently selects, but it could be worth a look. The picture below is a clickable link.

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Revolution Bars (LON:RBG)

(I hold)

31.25p (up 3% at 12:16) - mkt cap £39m

Interim Results

Revolution Bars Group plc ("the Group"), a leading UK operator of 66* premium bars, trading under the Revolution and Revolución de Cuba brands, today announces its unaudited interim results for the 26 weeks ended 26 December 2020.
*67 Bars as at 26 December 2020.

This is clearly a special situation, because the bars were either closed, or subject to heavy restrictions (e.g. a 10pm curfew roughly halved sales). Therefore the P&L isn’t of any interest to me. All that matters is what damage has been done to the balance sheet, and if it needs to repair that with another fundraise.

For the record though -

H1 revenues down 73% to £21.6m

Adjusted loss before tax of £(11.5)m in H1 - horrible obviously, as the peak Xmas/NYE period didn’t happen due to lockdowns

Balance sheet is actually better than I was expecting. Here it is (with my comments below it)

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Superficially, things look awful with NAV negative at £(36.5)m.

However, this weakness is caused by the IFRS16 entries, namely a £66.3m notional asset, less £(103.2)m long-term, and £(5.6)m short term lease liabilities. Add them up, and it’s a £(42.5)m net lease liability. Strip this out, and adjusted NAV (pre-IFRS 16) would be £6.0m positive - this is a more realistic view of things, in my opinion.

Given that RBG did a CVA, and jettisoned all its loss-making sites, then logically there should not be a deficit on lease liabilities (in excess of the right of use asset) at all. I queried this with the company, who said that the way IFRS 16 has interacted with covid lockdowns, is that a very gloomy view is taken of site profitability, reflecting circumstances of the time. Hence the low "right of use" asset.

Once sites are operating again, and should all be profitable again, then the next set of accounts (as at June 2021) should show a dramatically improved balance sheet - because the right of use asset should then shoot up to reflect that all sites should be profitable again.

If that’s how things pan out, then we should see today’s balance sheet as an aberration, reflecting covid circumstances, that should right itself next time accounts are prepared.

The reason that total lease liabilities haven’t reduced much, despite the CVA, is that a lot of sites were “re-geared” on a consensual basis with landlords - i.e. RBG agreed to surrender the existing lease, and sign a new, longer lease, in return for getting a significant rent reduction that would make the site profitable again, hence worth keeping.

In the clumsy way IFRS 16 calculates things, liabilities may not have changed, but the commercial reality is that problem leases (on loss-making sites) are no longer a problem, because those sites should be profitable based on the new, lower rents agreed.

This situation highlights what a useless accounting standard IFRS 16 really is. The total lease liabilities are irrelevant. What matters is whether a company is trading profitably from each site. If a site is profitable, then the length of the lease doesn’t matter at all - in fact, the longer the lease, the better, because you want to hang on to your profitable sites!

Therefore, the way I look at things, this balance sheet is actually fine, or will be once the IFRS 16 entries sort themselves out in future, when trading has returned to normal (hopefully).

Bank debt - this looks OK to me, at £25.6m, less £4.6m cash = net debt of £21.0m at 26 Dec 2020. That will be worse once sites can fully re-open in May 2021, but it’s not ruinously high at all, given that trading normally, this business should be generating (by my estimates) c. £15m p.a. EBITDA. There’s no tax to pay for a while too, so I reckon debt could be paid down quicker than people think, especially if we get the expected pent-up demand bonanza.

The latest net debt position has obviously deteriorated further, due to lockdown in 2021. There's still enough headroom though, given that we're only about 5 weeks away from re-opening (cash burn is c£0.4m per week) -

As at 13 April 2021 net bank debt was £30.8 million, and total agreed facilities were £40.3 million.

The main risk is if covid starts killing lots of people again post re-opening, forcing another lockdown. In that scenario, I think RBG would definitely need another equity raise, so this share is not without risk - same as practically all hospitality/travel/leisure shares.

Going concern - the above is reflected in a “material uncertainty” going concern note, as previously indicated in last year’s FY 06/2020 annual report. It’s important not to gloss over this - we have to think about the downside risks, as well as the upside imminent from re-opening. As with all investments, it’s all about weighing up risk:reward.

... the existence of a material uncertainty which may cast significant doubt over the ability of the Group and Company to continue as a going concern.

This uncertainty is somewhat reduced following the Prime Minister's roadmap and the Chancellor's Budget announcement but continues to exist until a firm reopening date is delivered. The unpredictability of the nature, extent and duration of COVID, the vaccination programme, and the imposed operating restrictions seen to date means that the uncertainty still exists, and how this will impact the Group's operational performance and in particular the level of sales and EBITDA generated that will in turn determine the Group's covenant compliance.

I’m encouraged by the commentary today, stating that in its “severe but plausible” scenario planning, the group would remain within its bank facilities, and covenants.

So for the time being, and subject to re-opening work out well, then I don’t have any concerns about solvency here. If circumstances change, then obviously I’ll reconsider that in the light of any developments.

Outlook - as the bars have been shut, then Q3 (Jan-Mar 2021) has been poor. No surprises there. We’re reminded that FY 06/2021 will “incur a substantial loss”, again no surprise, that’s stating the obvious.

Due to vaccinations, unrestricted (no social distancing) trading is expected from 21 June 2021. Are people going to respect social distancing once trading starts properly in May 2021? Judging from the pictures of Soho in today’s papers, I very much doubt it. Once people have a couple of pornstar martinis in them, restraint goes out of the window - that's the whole point of drinking them!

RBG’s commentary today seems much more upbeat about re-opening than in the past, saying -

- our target customers, due to our focus on young adult age groups, are at lower risk from COVID health issues;

- there is likely to be huge pent up demand given that normal operations will have been suspended for over twelve months; and

- our marketplace may be less competitive as some capacity has come out of the market.

My opinion - RBG has done well to survive through the pandemic, thanks to shareholders providing more capital, and support from the bank.

I’m expecting to see an absolute boom-time for the company from May 2021 onwards, as young people have had a year of their lives ruined, which is a big deal when you’re in your late teens or twenties - it’s a large section of their adult lives to date. Data from Saga (I hold) shows that the over-50s have generally taken things more in their stride. Hence I think the next trading update from RBG could be very good, and I definitely want to still be holding this share when that time comes.

If we do see a boom in trading, that in turn should see RBG able to reduce debt quite quickly. Plus it needs to resume the refurbs of tired sites, which was delivering good results & high ROI (return on investment) pre-lockdown.

If the share price recovers to say 50-60p, then I think the company should do a placing, to provide funds for refurbs, maybe some acquisitions, and debt reduction. Personally I’d be happy to exit at around that level, this is not a share I want to hold forever. I bought heavily very near the lows, so my heavy losses previously could end up being largely recouped, which would be a more than satisfactory outcome, given everything that's happened.

Dilution - it’s important to remember that the share count has risen from 50m shares pre-covid, to 125m now, for that reason we can’t expect the share price to return to previous highs. It’s vital to check that for every share at the moment, and it’s a good reason not to draw slanting lines on charts, and imagine that predicts the future. It won’t necessarily work, if the share count has risen very considerably, as it has here, because you’re not comparing like with like any more.

The quickest way to check this, is to look at the current number of shares in issue, at the bottom of the StockReport:

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Then compare that number I’ve highlighted (current no. of shares in issue for Revolution Bars (LON:RBG) ) with the historic share count, shown further up the StockReport -

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I always check this highlighted information anyway, because it gives a nice idea for what propensity any company had to issuing new shares in the past. Ideally I want to see little to no new share issuance. Issuing new shares for acquisitions is OK, if the acquisition is stunning value, but not if it's expensive.

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Sosandar (LON:SOS)

(I hold)

19.5p (roughly flat today, at 14:19) - mkt cap £37m

Trading Update

Sosandar, the online women's fashion brand, is pleased to provide the following trading update for its financial year ended 31 March 2021.

A year of strong revenue growth accelerating in Q4 with substantial EBITDA improvement year on year

Hmmm, it’s not really a year marked out particularly by strong revenue growth, as the out-turn is way below what was originally planned for revenue growth!

I’d say it’s more a year marked by deep cost-cutting (something that online retailers have a great advantage in, having flexible costs), and cash conservation, which has been very effective. Reasonable revenue growth has been delivered despite the cost-cutting, which is actually quite impressive.

A lot of investors thought Sosandar was a lost cause, burning cash like confetti, and doing repeated fundraisings. That’s changed for the better in the last year, with a much leaner costs operating model these days, which I prefer.

Q4 (Jan-Mar 2021) - revenues of £3.94m (up 64% on LY Q4) - that’s really good actually, because this is the seasonally quiet quarter. That said, renewed lockdown meant that physical stores were closed, helping online-only businesses like Sosandar.

We should be able to at least quadruple Q4 sales to annualise it, hence it looks to me as if the run rate for revenues in FY 03/2022 could be maybe £16-20m p.a.. That’s getting to the level where the business is nearing profitability, and further growth would mean a self-funding virtuous circle of growth. This is starting to look interesting again.

Gross margin - this is very good for a small fashion retailer, online or not -

Gross margin has also shown continual improvement throughout the fourth quarter with March at 54.0%.

This is an improved gross margin from the 52.3% reported in H1 (and 48.5% last year FY 03/2020). Bear in mind Asos (LON:ASC) (I hold) only achieved 45.0% gross margin in its recent interims. For tiny Sosandar to be achieving a usefully higher gross margin than Asos, is really quite remarkable.

Revenue - for FY 03/2021 is £12.2m, up 35% on LY. Not bad, considering costs (esp. marketing) were slashed, to conserve cash.

EBITDA loss reduced by over 60%, but no figure given, which annoyingly means I have to work out the figure myself. Why not just tell us instead of trying to hide the number?

Last year’s accounts show an EBITDA loss of £(7.66)m, so that means FY 03/2021 must be an EBITDA loss of c.£(3.0)m - better, but still not great.

This implies that revenues would have to grow about 50%, to c.£18m, to reach breakeven. That might be do-able in the current year, so this is looking potentially interesting.

Net cash - still looking quite healthy. Although I’d say another fundraise is probably on the cards at some stage. Maybe 10-20% dilution possible? So nothing ruinous.

John Lewis & Next - sales have been “very successful”, but no figures given. Maybe it’s too commercially sensitive to publicise? Just launched with Marks & Spencer - “incredibly successful”, with many styles selling out in the first week. That augurs well I think.

Outlook - it’s all just waffle, but the tone sounds upbeat!

Change of NOMAD & Broker -

A separate RNS, saying N+1 Singer has been appointed (to replace Shore Capital) with immediate effect. This is really good news, because Shore weren’t interested in engaging with private investors, and withheld their research from the people who needed it, us lot! We are the market in small caps, we set the prices and create the liquidity.

On cue, the new broker has published a note on SOS this morning, with new forecasts, which is available on Research Tree! Bravo to N+1, and to Sosandar for appointing them.

A change of NOMAD/broker can often be an indication that a placing is on the way. I’m fine with that. Current trading is good, and a bit more dilution, to secure the finances, is something I can live with (as an existing shareholder). Taking the story to a new pool of investors makes sense, rather than keeping the same broker, trying to tap the same investors for more money.

My opinion - I am full of admiration for the ladies who created Sosandar. Attempting to start a completely new fashion brand, sell online, taking on so many large and established competition, is very brave. Many have tried, few have been successful. They’ve done everything well, all aspects of the business.

Sure, the original plan was too optimistic, under-estimating costs, but show me a start-up plan that doesn’t.

I’m amazed that SOS has got through the covid period without needing to raise more cash. The business has been more resilient than I imagined.

If you look at the valuation of (non-competing) online fashion business In Style (LON:ITS) and the high valuation it floated at, basically after just 1 decent year, then SOS looks cheap in comparison.

After a bit of a fallow period last year, I think SOS shares are starting to look quite attractive again.

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Quiz (LON:QUIZ)

(I hold)

12.5p (unchanged, at 15:32) - mkt cap £15m

This is another special situation, where it’s all about re-opening. Especially as QUIZ is a retailer (stores, and online) which focuses on special occasionwear - which obviously has been the worst area impacted by covid/lockdown.

The main thing, is the company has survived, has dumped all its loss-making shops through a pre-pack administration in mid-2020, halved the rents on the shops it decided to keep (on turnover rents now), and still even has a small amount of net cash remaining.

Therefore, with re-opening starting yesterday, and hopefully pent-up demand for special occasionwear, I am hoping that this bombed out share, could be a nice recovery situation.

It’s not something I want to hold forever, by the way, but I’ve pencilled in a target price of about 40-50p per share, if things go well. My average buy price is 7.5p, so at 12.5p it’s already done quite well, but this share is fiendishly difficult to trade, because it’s tightly held (the founders still own c.50%).

Trading Update -

QUIZ, the omni-channel fashion brand, provides a trading update covering the financial year ended 31 March 2021 ("FY 2021") as well as recent trading.

The figure are obviously going to be awful, because the shops were shut for much of the time, the main concession hosts have gone bust (Debenhams) and there haven’t been any special occasions, so nobody needs to buy special occasionwear. You couldn't have planned a worse situation if you tried!

In a way, it’s almost a miracle that the business still exists.

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I had hoped that online sales might perform a bit better.

Net cash - amazingly, it still has a little net cash, of £1.5m at 31 March 2021 (cash of £4.2m, offset by £2.7m in drawn down bank borrowings). There’s headroom of £0.8m in additional undrawn bank facilities.

With shops opening around now, then I hope the cash position could start to improve, as inventories start turning into cash again.

Debenhams closure - this issue has been known about for a long time of course. QUIZ says today that it doesn’t really matter -

Given the previous decline in revenues, the Group does not anticipate that the termination of sales through Debenhams will materially impact upon its profitability or cash flows.

That would leave only 15 concession sites remaining. Hardly worth bothering with. Maybe QUIZ needs to ditch the omni-channel policy, and instead focus on online, and cheap rented stores only?

Outlook -

The Group looks forward to the further reopening of stores and concessions and the continued relaxation of restrictions on social activities, which the Board believes will result in increased demand QUIZ's ranges which have traditionally provided popular options for social events and celebrations…

we remain confident that there is robust underlying demand from our customers for the QUIZ brand and our trademark dressy and occasionwear. We are looking forward to being able to serve customers again through our store estate and to the gradual opening up of the retail and leisure economies over the coming months, which we believe we are well placed to benefit from."

My opinion - the company has done well to survive. It now has a much leaner cost base, and most importantly, has got rid of all the loss-making shops, and reset rents to a much lower level, and based on lower risk turnover rents, which flex in line with trading. That’s ideal, as it should provide a springboard for a return to profitable trading post-lockdown.

The way I look at things, if the company performs half decently, then it should move back into profit. Management are very experienced, although doing a pre-pack administration every time there’s a recession, is not exactly confidence inspiring.

If they focus online only, and don’t sign any more conventional leases for shops, then hopefully another future insolvency can be avoided. It’s the leases that kill retailers, every time.

Now the shops can trade again, and social occasions are resuming, then I think QUIZ looks in better shape now than at any time prior to covid. Let’s see what happens.

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Jack’s section

Billington (LON:BILN)

Share price: 342p (pre-open)

Shares in issue: 12,934,327

Market cap: £44.2m

Billington Holdings (LON:BILN) is a well-run steelworks and construction safety operator. It tends to have quite a low operating margin but it also likes to operate with a prudent net cash position, which makes it able to navigate trickier periods like the past twelve months. It's a small company, and the shares can be illiquid, but it is one of the better run micro caps out there in my view.

It also now owns a selection of other businesses that somewhat diversify its operations and have been slowly increasing those low margins (the past year or two notwithstanding).

Those businesses are:

• Billington Structures - nationally recognised and award winning steelwork contractor,
• Easi-Edge - safety barriers and measures for construction sites,
• Marshall Steel Stairs - engaged in the design, fabrication and installation of highly engineered steelwork, staircases and balustrade systems,
• Tubecon - structural steel fabricators specialising in Architecturally Exposed Structural Steelwork (AESS) and other complex structures work for the UK Construction and Rail,
• Hoard-It - re-usable and eco-friendly site hoarding solutions (a part of Easi Edge), and
• Shafton Steel Services - a large independent steel services and processing centre based in Barnsley, South Yorkshire.

As noted though, it’s been a disrupted year for many construction operators and Billington’s share price has come down after hitting multi-year highs in FY19 into FY20.

UK gross domestic product fell by 9.9% in 2020, remember - the biggest fall in annual GDP since 1709 - and the current estimate is that the UK structural steelwork market declined by 20% in 2020.

But with the economy unlocking, is the outlook improving quickly?

Final results

Highlights:

• Revenue -37.1% to £66m,
• EBITDA -53.8% to £3.6m,
• Profit before tax -71.2% to £1.7m,
• Cash and equivalents -15.6% to £15.1m,
• Earnings per share -71.6% to 11.3p.

There’s an operational gearing effect here, with smaller changes in revenue translating into bigger impacts on profits. Unfortunately this time it is going the wrong way. The group’s cash position looks robust though, particularly given it is only a £44m market cap company.

So if conditions improve that gearing effect can quickly start contributing positively once again.

These results are affected not just by Covid, but the fact that 2019 was a bumper year for the group, with a number of large projects completed that year.

And though the year-on-year figures look bad, the company is not distressed. Billington remained profitable, it’s got a strong cash balance, and the group is resuming dividend payments (of 4.25p covered 2.66 times by earnings).

Covid disrupted the first half of 2020 but the impact subsided in the summer months and the group ‘enjoyed a return to more normal trading conditions in the later part of the year, which has continued into 2021.’

The order book for the remainder of 2021 is strong and Billington’s facilities are operating at full utilisation. The group notes a ‘75% improvement in the order book for structural steel activities at the year end relative to 31 December 2019… with a good pipeline of future opportunities.’

It does, however, caution that the outlook ‘remains competitive’. Continued price escalation and the availability of some raw materials remains a concern and, while Billington can partially mitigate these headwinds, it could take a while for margins to recover.

So on balance the outlook is improving and positive, but with definite notes of caution around margins and price & competitive pressures.

Conclusion

Billington has prudently managed its way through Covid, and it’s perhaps unfortunate that a bumper 2019 comps make the Covid-disrupted 2020 decline look particularly bad.

I would back the company to bounce back but of further concern is comments regarding the competitive environment and market pricing pressures. Perhaps this is management prudently acknowledging risks but it is also a reminder that Billington operates in a tough industry.

In addition to the demand issues caused by the pandemic, the Group has faced a significant increase in structural steel costs during the year. During the period the price of iron ore and scrap steel nearly doubled leading to major increases in the price of steel products, ‘a trend that is expected to continue.’

But Billington does differentiate itself well, with a gaggle of well regarded businesses and a cash-backed balance sheet. And the outlook is improving, which is what I’m looking out for:

During the year our structural steel businesses, Billington Structures and Peter Marshall Steel Stairs continued to see market pricing pressures, due to the impact of Covid-19, and suffered a number of project delays… By the year end we had seen a return to more normal levels of activity and I am pleased that the businesses have been successful in securing a significant amount of new business for 2021, in a variety of sectors.

As with all the Group's businesses, the easi-edge perimeter edge protection and fall prevention business experienced a material drop in activity in the first half due to the Covid-19 lockdown, although as projects restarted a recovery was seen in the second half. The business entered 2021 with a good degree of forward visibility and we anticipate the improving trends experienced in the later part of 2020 to continue, although there remains uncertainty as to when certain project deferments will restart.

hoard-it was impacted, particularly in the first half, as the pandemic led to a pause in new site commencements. However, on-site activities built back up to historic levels in the fourth quarter and hoard-it entered 2021 with a promising pipeline of new business.

Current forecasts for the UK structural steelwork industry are for the market to return to growth with an increase of 16.2% in 2021 and a further 7.4% in 2022 following the fall in 2020. These forecasts will be subject to revision of course, particularly given the unprecedented conditions.

The pension scheme remains in surplus, liquidity is strong, dividend payments are resuming, and the company expects improved results for FY21, so I’m cautiously optimistic here. At the end of the day though, this is a volatile micro cap stock, so that must also be taken into account.

Hornby (LON:HRN)

Share price: 57p (+15%)

Shares in issue: 166,927,838

Market cap: £95.1m

A very brief update from this intriguing turnaround backed by Phoenix Asset Managers. Hornby (LON:HRN) owns several known and nostalgia-inducing toy model brands including Airfix, Arnold, Bassett Lowke, and Hornby model railways.

The group has recently moved back into profitability despite the obvious pandemic headwinds but, again, liquidity is an issue here with a 606bps spread.

Hornby has a market cap of more than £90m on revenue of £43m. In the past ten years, the most net income it has generated in any one year has been £3.16m.

Meanwhile, shareholders have been considerably diluted, so I’m cautious as to the potential upside here.

Although there is no denying that the group’s products are interesting. As we’ve seen with Games Workshop, strong brands with loyal fanbases in this area can translate into a surprising amount of ongoing value.

Trading update for the 4th quarter ending 31 March 2021

Group sales for the 4th quarter were ‘very encouraging and ahead of budget’, with cumulative sales for the financial year ended 31 March 2021 also ahead of budget and 28% up year-on-year.

So that suggests FY revenue of £48.4m. The fact that management accomplished this feat during the Covid period is certainly encouraging.

Net cash as at 31 March 2021 was £4.7m compared to net cash of £5.4m at the end of March 2020.

We can expect more detail in June.

Conclusion

Shares are up 15% on this brief update.

Let’s say we want the share price to double over two years to 110p on 10% profit margins and a 15x PE multiple. That requires 7.33p of earnings per share across 167m shares in issue, meaning a net profit figure of £12.24m.

Using that hypothetical 10% profit figure means we would need £122.4m of revenue compared to this year’s c£50m. The group has not been close to that level of revenue at any point in the past decade.

There’s a lot of guesswork in these numbers and it’s a very speculative exercise, particularly with regard to potential margins, but it still suggests to me a good degree of recovery is priced in.

It’s possible that Hornby is a special company with unique and valuable IP but I have no experience with its products and so I find the upside hard to judge here.

It’s an interesting case and the market clearly likes what’s happening but, on balance, I would want a cheaper share price before considering it as an investment.