Good morning, it's Paul here with the SCVR for Tuesday.
The news coming out of Oxford University sounds very encouraging, with talk of a possible covid vaccine by the end of this year, if further trials are successful. Wouldn't it be wonderful if a vaccine is successful, and is given to the world by British scientists? Let's keep everything crossed to hope it works. I suppose we mustn't jump the gun, but this surely increases the probability that we should be thinking in terms of a bullish outlook for sectors that have been smashed up so badly, such as hospitality, travel, etc.. Providing companies have the balance sheet strength to survive into 2021, then some of these shares could be very lucrative from this point onwards. Hence I've closed my shorts, and am now thinking in terms of economic recovery, and maybe things even returning to normal next year? If a viable vaccine is imminent, then investors are likely to look through poor 2020 results. This is a big opportunity I think, to snap up some bargains.
Please see the header for the company announcements I'll be looking at today.
Estimated timings - we'll see how I get on.
Optibiotix Health (LON:OPTI)
The CEO reached out to me, with a slightly ill-tempered reply to my negative article about his company yesterday. Bizarrely, he accused me of lying, and having an agenda against Tom Winnifrith! (who I've had no contact with for several years). Complete nonsense of course, but there we go. Whereas if he were a regular reader here, he'd know that I just give my opinions on shares, warts and all. I'll have a look at that later, and formulate a response.
It's absolutely fine for companies to have a right of reply, especially if I've been critical of the company & its track record, as in this case. So once today's news is out of the way, I'll take a look at what he says & publish something about it. Or it may be tomorrow, depending on timings.
Six years after listing, and having generated little meaningful revenues (let alone profits), it's no wonder the heat is on, and he wants to shoot the messenger.
Gattaca (LON:GATC)
I've had another snotty email, from the PR to this staffing company, demanding a correction re its net debt. Again, I'm happy to follow up on that when time permits, and give their side of the story. She makes an interesting point about non-recourse invoice discounting being excluded from net debt under IFRS, so I'll look into that. I think the point is that investors don't have to slavishly follow IFRS. We can adjust the accounts any way we like, to suit out personal view of things - e.g. I always write off intangible assets, and add back capitalised development spend. Also I ignore lease-related debt. It boils down to personal preference. As far as I'm concerned, non-recourse invoice discounting is a debt facility, which would cause problems were it to be withdrawn. Therefore, in my eyes, regardless of what accounting standards say, it's debt.
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Judges Scientific (LON:JDG)
Share price: 4850p (down 7%)
No. shares: 6.27m
Market cap: £304.1m
The Directors of Judges Scientific (AIM: JDG), the group focused on acquiring and developing companies in the scientific instrument sector, provide the following update regarding the Group's trading performance for the six-month period ended 30 June 2020.
This group previously issued a cleverly worded profit warning, which I reported here on 20 May 2020. The house broker lowered forecast EPS by 30%, but nobody seemed to notice. That's encouraging I think, in that it seems to demonstrate that JDG has committed, long-term shareholders, who are not easily spooked.
Order intake - today it says this (which looks very similar to what was said on 20 May) -
The main adverse impact of COVID-19 has been, and continues to be, on order intake. Across the Group, Organic order intake for the 6 months to 30 June was down 17.3% compared to the same period in 2019, caused by the closure of universities, the cancellation of scientific conferences and our inability to travel....
In May, Organic order intake recovered, to an extent, from the trough of April and then progressed slowly in June.
The way I read that, conditions are not improving much.
It says the order book overall is satisfactory, at 10.8 weeks of budgeted revenue.
H1 sales - down 12%, which strikes me as a reasonable performance in a very turbulent environment.
The Group has operated profitably in each of the first six months of this year and generated positive operating cash-flow for the period. As a result, the Group has maintained a robust balance sheet with solid liquidity.
Again, that's similar to what it said in May.
Outlook - uncertain.
Valuation - it's looking expensive, as I noted last time. Forecast EPS is 151p this year, so the PER is 32 times. This seems to be pricing in a strong recovery in earnings next year. Forecast is 186p, dropping the 2021 PER to a still punchy 26 times.
My opinion - it's up to you to decide whether the premium valuation is worth it. I can see why this share justifies a toppy rating, because it has an excellent track record. Personally, it doesn't appeal to me, on valuation terms. I can remember buying this on a PER of 13 a few years ago. It's remarkable how PEs have expanded in the last couple of years. The big question is whether high PERs are the new normal, with interest rates seemingly permanently near-zero. Or whether we'll eventually get some reversion to the mean. Answers on a postcard please!
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Ted Baker (LON:TED)
Share price: 77p (up 9%)
No. shares: 184.5m
Market cap: £142.1m
For the 11 week period from 3 May 2020 to 18 July 2020 ("the period")
This is a fashion brand, selling online, through stores, and wholesale.
If you recall, it was really struggling, even before covid closed its shops. It refinanced by selling off its London office freehold, and doing a deeply discounted placing. This has eliminated debt, and left it in a healthy net cash position;
Net cash as of July 11 was £56.7m, ahead of management expectations due to strong cash management.
It's vital to remember that Govt tax deferral schemes are artificially boosting many companies' cash positions. I think all companies should disclose how much they have deferred in taxes, otherwise it's highly misleading. Remember these back taxes have to be paid in early 2021, so if we're not told the amount, then we don't know what the real cash position actually is.
It says that trading is resilient, but that's not what these figures are saying to me;
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I can understand the stores being well down on last year, because they've only recently re-opened. But is the +35% e-commerce sales growth a cause for celebration? I'm not particularly impressed, and have seen much higher growth from some other brands over this lockdown period.
Trading overall sounds as if it's better than expected;
Overall trading has been ahead of the base case scenario provided alongside the Preliminary Results announcement on 1 June 2020. The base case scenario was one of two ranges set at the time of the equity raise, along with the reasonable worst case scenario which was used for funding requirements.
I can't find any numbers forecasting profitability, so am in the dark somewhat. Ah, I've just found an update note on Research Tree, here we go;
Forecast EPS loss of (37.1p) this year FY 01/2021, a horrific loss before tax of £(66.5m)
Then a bounce back into profit of 6.1p EPS FY 01/2022, and 12.2p EPS FY 01/2023.
Current trading - from stores looks bad, and no doubt stores will be heavily loss-making at such greatly reduced revenues;
As at 18 July 2020, 95% of the store estate was open globally, and 75% of stores have been operational for the last four weeks. Like-for-like store sales were down 50% versus last year for the last four weeks of the trading period.
Wholesale and licensing are doing even worse;
Wholesale and licence revenue decreased 70% compared to 60% decline in the base case revenue scenario. The weaker performance reflects cautious ordering from store-based trustees since the early phase of the pandemic.
Guidance - I'm getting really sick of this. Companies should not be withholding guidance. This is wrong. They should be giving whatever information they have to investors, i.e. a range of possi ble outcomes - base case, upside, and downside cases.
In common with many other public companies, the Board will continue to withhold guidance for the current financial year ended 30 January 2021 given the unprecedented uncertainty around the severity and duration of the impact of Covid-19.
The rest of the announcement today sets out strategy and aspirations.
My opinion - the company has fixed its balance sheet in the short term. However, it's trading at a massive loss, which is likely to deplete that cash pile as this year progresses. Then there will be all those stretched creditors (e.g. VAT & payroll taxes) to catch up on in early 2021. It does have bank facilities available, but banks hate funding losses, so I wouldn't rely on those being available longer term, since there might be covenant breaches.
Retail turnarounds hardly ever work these days. It's all about being able to get out of the property leases, since rents are generally far too high to make stores viable these days. Therefore, I would only be interested in this share, if the company did a pre-pack administration to ditch all its lease liabilities. Another issue is what bad debts might occur in the wholesale receivables book?
On the upside, TED benefits from having Toscafund, and activist investor, holding just over 25% of the company. They might even bid for the whole company, which is what they did a few years ago to apparently remove a mistake from public view.
Is Ted Baker still a relevant brand? I don't know. When I was in Selfridges last year, looking for a leather bag, the Ted Baker offerings looked quite nice, but expensive. It's 50% off menswear is still about 3-4 times the price that I would be prepared to pay! But I'm probably not the target customer, judging by how thin the models are.
I categorise TED and SDRY in the same boat - rather tired brands that were seriously struggling (breakeven or loss-making) before covid struck. Therefore now heavily loss-making. Will they survive as standalone companies, or are these brands eventually destined to join BooHoo's (I'm long) growing stable of brands bought from an administrator?
Overall, I can't see any appeal to this share.
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Sdi (LON:SDI)
Share price: 59p (up 8%)
No. shares: 97.5m
Market cap: £57.5m
Investor presentation - this Friday, 24 July, at 4pm. Sign up link is here.
SDI Group plc, the AIM quoted Group focused on the design and manufacture of scientific and technology products for use in digital imaging and sensing and control applications, is pleased to announce its final audited results for the year ended 30 April 2020.
Revenues up 41% to £24.5m, but nearly all the growth is from 4 acquisitions. 4% organic revenues growth.
Adj diluted EPS up 23% to 3.43p - a PER of 17.2 - anything under 20 seems a bargain these days, comparatively. Bear in mind that covid would have only impacted about the last 6 weeks of FY 04/2020
Net debt seems fine, at £4.0m (ignores lease liabilities, which is fine by me). Note that gross bank debt is £9.4m, with £5.3m in offsetting cash. Note that most companies have a push to collect in cash for the year end date ("window-dressing") which is fine, it's not breaking any rules, but it's always worth bearing in mind that the balance sheet date might not be a typical position. I would much prefer if accounting standards required companies to publish the average daily net debt/cash, and a graph showing how this fluctuates throughout the year. That would give a much more meaningful view of reality. That is more a general point, than specific to SDI.
Outlook comments look mixed, but at last here's a company that gives investors some profit guidance;
SDI Group has started the new financial year in a strong financial position and a number of our companies have seen increased demand for medical products which are being used to address the COVID-19 challenges. Other companies within the Group face some uncertainty and a downturn in orders although all our manufacturing facilities remain in operation.
There are early signs of a return to normality in trading and overall SDI remains profitable and cash generative.
For the financial year ending 30 April 2021 the Group expects to report year on year revenue growth and profits at least in line with FY20.
That last bit is the most important. If we can anchor on profits being at least in line with FY 04/2020, then the valuation looks reasonable to me.
Acquisitions strategy sounds interesting. This reminds me a bit of Judges Scientific (LON:JDG) actually, with a similar strategy - acquiring niche companies and using new shares and the cashflows from them to repay debt fairly quickly. Note that SDI has increased its share count about 4 times in the last 6 years, which does somewhat cap the share price upside, if it keeps diluting shareholders to buy more companies. Over the same period, the share count at JDG has hardly changed, so actually they're not similar at all in that regard.
Balance sheet - not the best I've seen, so it gets an adequate rating from me. NAV is £20.1m, less intangibles of £21.65m, gives NTAV (the more conservative way of viewing a balance sheet) slightly negative, at £(1.55m). I wouldn't want to see the company raising more debt for acquisitions, personally. As the covid crisis has vividly demonstrated, nobody knows what the future holds, so having a buffer on the balance sheet (cash, and freehold property) is very valuable in times of crisis. Look at how many companies, large and small, overstretched their balance sheets on cheap debt, and then ended up being forced to raise equity at the worst time & price. Overly generous dividends are another policy that plenty of companies must now be regretting too.
Cashflow statement - very much as I was expecting. It's genuinely cash generative, and then spends that money, topped up with bank debt, on acquisitions.
Dividends - it's not paying any at the moment, which is fine for a company focused on growth.
My opinion - I've not ploughed through all the narrative, but it's there in the RNS for anyone interested.
My quick financial review has left me comfortable that this looks a decent investment proposition. Going forwards, it all depends on the quality of the acquisitions. With any acquisitive group, the danger is always that they buy something duff, and gear up too much. Providing those pitfalls can be avoided, then this share could do well. I'd like to see it get to a point where it can safely make acquisitions without issuing lots more equity - that's a key difference between SDI and JDG - where JDG has pulled off the remarkable feat of funding its acquisitions without dilution or excessive debt.
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Bidstack (LON:BIDS)
Share price: 4.33p (up 1%)
No. shares: 387.4m
Market cap: £16.8m
Bidstack Group Plc (AIM: BIDS.L), the native in-game advertising group, is pleased to provide a trading update for the six months ended 30 June 2020.
I keep a vague eye on this speculative little share, because I like the concept - selling advertising space within computer games.
The good news - revenue in H1 2020 has gone up 10-fold!
The bad news - it was £27k last time, and is £270k this time. As the saying goes, 10 times f-all is still f-all!
Companies built on future expectations have to regularly stoke the fire with exciting narrative, and we get a decent helping of that today.
Cash looks fine for now, given the recent fundraising. Although the cash burn rates looks high, so this is probably only enough to last about a year or so;
The Company's significantly oversubscribed placing, the results of which were announced on 5 June 2020, raised gross proceeds of £5.7m for the Company leaving Bidstack in a healthy cash position to continue to pursue its business plans.
Outlook - I should hope so, that H2 revenues improve on the poor H1 revenues;
As announced on 28 May 2020, the Board continues to expect revenues for 2020 to be very significantly second half weighted and in line with market expectations for the year ending 31 December 2020.
My opinion - looks potentially interesting, if the company can increase sales further by a factor of about 100!
I'll watch from the sidelines for now. Very few speculative AIM shares actually deliver on their promoted potential. The usual route is a 45 degree downwards chart, with repeatedly lower fundraising prices, and massive dilution. Before eventually giving up, and turning the company into a shell to do something else similar, in order to utilise the tax losses.
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Ao World (LON:AO.)
I despise value creation plans. To my mind they're cynical ways in which management want to be paid twice, or three times if you include existing share options and salary.
So I was ready to launch into a tirade against this, but actually it sounds quite good - focused on rewarding all employees, not just Directors (which are capped at a modest £20m!). The founder pledges his payout to a youth charity, a nice touch. His trademark gushing, slightly unhinged, style of expression comes through in this RNS, in particular this made me chuckle;
AO Founder and Chief Executive, John Roberts, said: "This is the AO Way of doing a Value Creation Plan. The decision to create an opportunity for every AO employee to receive a meaningful reward for the value they create is one that I'm proud to tell my mum about.
Good for him (and his Mum!) - I like a bit of quirkiness, not everyone has to be a boring grey suit!
The hurdle looks very high at 523p per share. Above that, 10% of the sustained share price gain is given to employees. I think shareholders would probably be very happy for the share price to get anywhere near that, since it looks too high currently at 164p, for a low margin box-shifting business.
... to realise the full benefit of the scheme, we would need to achieve a share price of at least £9.41 (equivalent to £4.5bn market cap) and that value must be maintained for at least two further years (March 2025 - March 2027).
My opinion - it's a nice idea actually, and I hope more companies come up with schemes to reward & lock in staff, as opposed to just Directors. In this case the hurdle looks unrealistically high to me. It then runs the risk of the scheme being ignored by staff, if they think it's unattainable. Then the hurdle would have to be lowered, leading potentially to reward for failure. Still, it's a nice idea for a business focused on customer service. Certainly that's needed, as in my sample size of 1, the delivery driver from AO who visited me, was a right grumpy git!
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Bloomsbury Publishing (LON:BMY)
Share price: 224p (up 12%)
No. shares: 79.1m
Market cap: £177.2m
The market seems to like this, with the share up 12% today, so let's take a look. This company is a book publisher.
Bloomsbury announces its trading update for the four months ended 30 June 2020, ahead of the Company's Annual General Meeting ("AGM") at 12.00pm today.
Note the unusual 28/9 February financial year end.
This sounds good;
Bloomsbury experienced strong trading for the first four months of its financial year, ahead of the Board's expectations, with year-on-year sales growth of 18% during a period of unprecedented disruption caused by the coronavirus pandemic.
Our revenue and earnings are weighted towards the second-half, with sales of trade titles rising for Christmas and sales of academic titles being strongest at the beginning of the academic year in the Autumn.
More detail is given, with the stand-out items being 28% growth in consumer titles (helped by lockdown I imagine), and digital revenues up a vry impressive 63% (but unfortunately no absolute figures provided, so I I don't know how significant diigital is overall).
Liquidity - sounds fine;
At 30 June 2020, Bloomsbury held net cash of £35.5 million and in addition has an unsecured revolving facility with Lloyds Bank Plc of £8 million in the first half and an additional £4 million in the second half, totalling £12 million, to match Bloomsbury's cashflow cycle. With our strengthened liquidity, the Board believes that we have sufficient liquidity to weather the impact of the coronavirus pandemic and avoid damaging our business in the long-term.
Unsecured lending is great, as it demonstrates the bank is supremely relaxed, and sees no risk requiring security.
Outlook - there's more detail given, but the key part says;
Our good May and June performance in particular were unexpected, and historically demand for books has been resilient in times of economic downturns. However, our customers are unclear about what is to follow. Our outlook in the next eight months therefore remains uncertain as the pandemic continues.
Bloomsbury has a successful track record of acquisitions and we are considering opportunities in Academic publishing.
It did a fundraising in April, as by the sounds of it, the company was expecting conditions to be a lot worse that they have turned out.
My opinion - this looks an encouraging update. Hopefully divis should resume in future. This looks a nice steady company and it could put the cash pile to good use, if financially distressed acquisitions appear. So it gets a thumbs up from me. I've always liked the strong balance sheet here too.
(by the way, I'm writing this outside in strong sunlight on my laptop, so apologies for any typos, I'll edit it later)
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Tclarke (LON:CTO)
93p (down 4%) - mkt cap £40m
TClarke plc ("the Group" or "TClarke"), the Building Services Group, announces its half year results for the six months ended 30th June 2020.
This company mainly does complicated electrical/computer fitting out for large buildings like office blocks, so the obvious worry is that work might partially dry up due to the work from home trend. On the other hand, public sector work may increase due to the Govt priority to increase infrastructure spending?
The order book looks healthy being up
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