Small Cap Value Report - Tue 2 July 2019 - DIA, HAT, FCH, SOLI, IMO, MLVN | Paul Scott

3rd Jul '19 by Paul Scott

41 comments 10226 reads

Good morning, it's Paul here.

Graham has asked me to point out that he added a big section on Creightons (LON:CRL) to yesterday's report, later than usual. In case you missed it, here is the link to yesterday's completed SCVR.

Also, Graham is intending to write some sections for today's report too, on NAR and HAT, which i will incorporate into this report when he sends his work over to me.

So it should be a bumper report by the close of play!

Please see the header for which companies I'll be looking at today. I think this also incorporates all the reader requests in the comments section, at the time of writing.

Dialight (LON:DIA)

Share price: 346p (down c.30% today, at 10:42)
No. shares: 32.5m
Market cap: £112.5m

Trading update & Directorate changes

Dialight plc (LSE: DIA.L), the global leader in LED lighting for heavy industrial applications today publishes a trading update for the year ending 31 December 2019, ahead of its half year results to be published on 5 August 2019.

There's a nice clear summary of the key points, which saves me time in having to summarise a load of narrative!

The key question then, is how does the £10-13m range for profit guidance in 2019 compare with previous guidance & broker forecasts? Since the share price is down 30% (a standard profit warning price movement), then I'm guessing it must be well below previous forecasts.

Unfortunately, I cannot find any recent broker research, so am in the dark here. Stockopedia shows a 2019 forecast for net (i.e. after tax) profit of £10.8m, before today's profit warning, which seems fairly close to the revised guidance given today, if we were to take off say 20% for tax, then £10-13m range before tax, becomes £8-10.4m profit after tax revised guidance. Compared with the £10.8m previous post-tax forecast, it doesn't look to be too bad a profit warning (although I'm working on incomplete information).

Balance sheet - I always carefully check the balance sheet of any company which has warned on profits, to see if there might be any solvency issues. We've recently seen how problems at Staffline (LON:STAF)…

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BIACS

2nd Jul '19

Would be great if either Paul or (perhaps more likely given his interest in it) Graham could comment on the late announcement yesterday from H&T H & T (LON:HAT). The trading update part of the announcement is a solid 'in line', but the acquisition is the big news - it's quite a large one - 65 stores.

An acquisition of this number of additional stores is a big leap for them. Over-expansion in this industry in the past has led to competition between operators and a blood bath (remember Albemarle & Bond...?) so this initially made me nervous, but on looking at the sites, it appears there is little to no overlap between the Money Shop sites with H&T and Ramsdens which is nice to see. Also interesting that H&T are not buying all of the Money Shop stores and quite a number are to be closed down entirely - this is great news as essentially the customers from those stores are now up for grabs to potentially increase market size for H&T for its acquired stores.

H&T look like they've negotiated themselves a very good price too - paying less than £10m for trading stores creating annual PBT of £2.6m looks like a very astute piece of business buying from a distressed seller. On top of that they've also acquired pledge books of £1.6m growing their book nicely and opening up potential to cross sell other H&T services to those pledge book customers too.

My main reservation was the debt. They have (sensibly) opted to fund some of this from equity, but that still leaves an additional debt load to be added to the balance sheet of about £8.6m. Net Debt as at the last reckoning was just over £13m, so if cash accrual were neutral this year (this is v.conservative - last year they added nearly £3m in additional spare cash, but we don't know how much of this they've already allocated for this year to the new store costs in order to arrive at their required new equity of 6m figure, so let's look at worst case that all of that will be used up for the current year) - we'd then be looking at Net Debt of around £22m after the acquisition. Profits and revenue will also be up of course and it's a comfort that H&T say they expect fast integration and for the acquired sites to be earnings enhancing in the first year. If we say that the 2.6m profit from new stores were to be repeated this coming year (but, again conservatively, that there is no growth) then H&T's overall PBT figure jumps to £16.1m (simplifying it by ignoring part-year performance of course) giving us an after-tax figure of around 13m. Now, let's say they get the placing done at say 300p (a bit of a discount) raising 6m would add 2m shares giving a total of 39m shares in issue - that works out to be EPS of 33.3p - a very nice jump from last year. Assuming cash conversion is in line with the rest of H&T's operations, this ought to give them a good amount of extra firepower to reduce the debt load quite quickly in the next couple of years. We could easily see that net debt figure down to £14m or less in 2 years which then looks very comfortable. Indeed, I was very glad to see more that one reference in the announcement that H&T are aiming for "cash generation of the enlarged group deliver[ing] rapid deleveraging".

This makes me feel much better. I bought into this as a conservatively managed business with no grand plans and a 'steady as she goes' outlook. I would not want this to change substantially nor for risk and leverage to be cranked up too much in these uncertain times. It seems there is no danger of that - H&T say in the announcement that "H&T expects to integrate the Assets quickly into its business model to accelerate its growth trajectory. After which, H&T's conservative expansionary capex for estate growth and development is expected continue". So it looks as though this was an opportunistic acquisition of the 'unexpected, but too good to turn down' kind rather than a change in growth strategy.

Overall I am very happy with this and think it looks to be a clever piece of business, assuming they manage to get the placing away at a decent price. With H&T acting as a hedge in times of turmoil (it's business being largely unaffected (if not improved!) by problems in the wider economy, and its strong correlation to the gold price (which has been on a surge of late and should only add to their profitability) - they look to have timed this well too. I continue to be happy holder and look forward to years of steady returns ahead once the enlarged store portfolio is integrated and with the enhanced revenue and profit that this ought to bring.

There - I've stuck my neck out with my two pennies' worth. Let's see what the market makes of it today... (probably the opposite to me, as usual!). All depends if people decide to focus more on the share dilution from the placing (which is only about 5 or 6% if it goes for 300p) or the enhancements to be gained from the acquired assets. To me the earnings jump, additional customers, new (non-competing) territories, added pledge book and cross selling opportunities, combined with the very modest multiple paid for all this makes it a clear positive that I'd have been happy for them to have paid even a bit more for (but very glad they didn't have to).

post script: I just remembered - more than half of the acquired stores (34 to be exact) only have 18 months or less left on the lease - this generates a huge opportunity to increase profits still further by rent renegotiation given that commercial rents have been plummeting of late. More to smile about.

Small Cap Value Report - Tue 2 July 2019 - DIA, HAT, FCH, SOLI, IMO, MLVN

Dialight (LON:DIA)

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Paul Scott

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