Small Cap Value Report (Tue 28 Feb 2017 - Part 2) - WTM, REDD, AVN, SWL

Tuesday, Feb 28 2017 by

Good morning!

Many of you have probably already seen Paul's Part 1 report, which is at this link and covers Revolution Bars (LON:RBG) and Boohoo.Com (LON:BOO).

In this report, I'm planning to cover at least these four:



Waterman (LON:WTM)

Share price: 78p (-5%)
No. shares: 30.8m
Market cap: £24m

Interim Results

I think shareholders are right to be a little bit disappointed with these results.

I've covered this share a couple of times recently, including the end-January trading update which announced that there had been a "positive interim trading period" and "revenue, profit and operating margin percentage generally in line with the prior year comparable period."

Strictly speaking, this is true: revenue is +1% against the comparative period, while PBT and the operating margin are unchanged (£1.8 million and 4.1%, respectively).

The problem is that (adjusted) operating profits in the UK fell by 37% (from £1.9 million to £1.2 million), being offset by growth in corresponding measurements for the overseas operations of Australia and Ireland (up to £0.9 million from £0.5 million).

But the profitable operation in Melbourne is only 51% owned by Waterman plc and so after you deduct minority interest, the EPS for Waterman shareholders ends up falling by 10%.

That's not a disaster but the UK is still 87% of revenue and being 100% owned by the plc it is the driver of EPS. So it's a worry to see it struggling a bit.

Dividend: the interim divi is increased by 33%, which is still well covered by earnings (note that Waterman pays equal-weighted interim and final dividends).

Outlook: "Measured optimism" beyond 2017, which is set to be a period of "consolidation":

The Board anticipates that the Group will continue to experience a stable trading outlook overall with revenue, profit and operating margin generally in line with the prior year.
Whilst trading conditions in the UK are expected to remain challenging, it is encouraging that Waterman continues to win exciting and varied projects across many sectors.

My opinion

I won't change my view on…

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Waterman Group plc (Waterman) is a United Kingdom-based holding company that offers a range of engineering and environmental services. The Company, through its subsidiaries, is engaged in the provision of design services and advice in the fields of civil, structural, mechanical and electrical engineering together with environmental, and health and safety consultancy. Its segments include Property, and Infrastructure & Environment. The Property segment consists of the United Kingdom structures and building services consulting businesses, which are involved in development projects both in public and private sectors. In addition, this segment includes its overseas business in Australia, Ireland and Poland. The Infrastructure & Environment segment comprises Waterman's civil, transportation and environmental consulting business, which trades as infrastructure and environment consulting and Waterman's highways and transportation outsourcing business, which trades as Waterman Aspen. more »

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Redde plc is a holding company. The Company is engaged in providing non-fault accident management assistance and related services, fleet management and legal services. The Company offers a range of motor claims accident management services, including vehicle replacement and repair management together with full claims-handling assistance, as well as legal and other personalized services. The Company manages its own fleet of approximately 7,000 vehicles and has access to over 50,000 vehicles through selected rental partnerships. It also provides specialized large fleet accident and incident management services through the FMG group of companies with over 300,000 fleet vehicles under management. It provides accident management services from operational call center sites in Peterlee, County Durham, Huddersfield and Croydon, as well as solicitors' services through Principia Law Limited from Northwich and NewLaw Legal Limited from Bristol, Cardiff and an associated office in Glasgow. more »

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Avanti Communications Group plc is engaged in the provision of communication services. The Company is engaged in commercial exploitation of its space and network assets, which include its spectrum rights, satellites, intellectual property and ground station assets. The Company's products include SELECT, CUSTOM, PURE and ApTec. The Company's satellite network interface gives service providers the control across the fleet and ground infrastructure. The Company's shared bandwidth product is an end-to-end solution that provides terminal equipment and a contended access path from an end-users property to the Internet. Its service levels range from 512/128 kilobits per second (kbps) to 30/2 megabits per second (Mbps). PURE is suitable for established satellite service providers and supports any satellite based data communications application on any vendor's Ka-band hub. ApTec is a specialist systems integration and solutions sales group, which helps Government to achieve outcomes to policy. more »

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  Is LON:WTM fundamentally strong or weak? Find out More »

12 Comments on this Article show/hide all

AlanJenkins2 28th Feb '17 1 of 12

Looking forward to your coverage of Avanti,Graham,as you've been nicknamed baby bear :-].

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FREng 28th Feb '17 2 of 12


Any chance you could look at yesterday's finals from WH Ireland (LON:WHI) ?

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herbie47 28th Feb '17 3 of 12

Graham, thanks for the Waterman (LON:WTM) review. I agree as a shareholder I'm a bit disappointed after the previous update, I now see these shares as a value trap and I will be looking to sell soon. I think the UK market will be getting more challenging in the next year or so.

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andrea34l 28th Feb '17 4 of 12

RCDO interim results out today are also pretty dull IMHO... just mentioning as they've come up before here; have sold

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Ramridge 28th Feb '17 5 of 12

Hi Graham -
Re. Redde (LON:REDD) I had a cursory look at the report this morning and was puzzled to see a revenues rise of 37.5% but a diluted & adjusted eps rise of (5.15 / 4.7 % = ) 9.5% only.
Which suggests that a lot of the value from the acquisition is not flowing through to the bottom line ? Or could there be other higher order reasons?
Regards, Ram

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Graham Neary 28th Feb '17 6 of 12

In reply to post #173441

Hi ram, FMG is a lower-margin business and the main Redde business also achieved lower gross margins in the period than it did before, so the gross margin fell by 300 basis points for Redde as a whole. Expenses also went up by £9 million - a couple of factors could be blamed for that but I'd just see it as the business not having a lot of operational leverage.

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Graham Neary 28th Feb '17 7 of 12

In reply to post #173408

You're welcome Herbie

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Graham Neary 28th Feb '17 8 of 12

In reply to post #173387

Hi FREng, I'm afraid I'm out of time to do that. Apologies!

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Ramridge 28th Feb '17 9 of 12

In reply to post #173459

Many thanks, Graham.

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herbie47 1st Mar '17 10 of 12

Re Swallowfield (LON:SWL), I have read that the share price fall is due to rising material and packaging costs due to £s fall and global inflation. The wide spread of around 5% does put me off.

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gus 1065 9th May '17 11 of 12

All cash recommended bid announced this morning for Waterman (LON:WTM) at 140p per share representing more than an 80% premium to yesterday's closing share price.

Looks pretty well tied up. Good outcome for shareholders IMO.

A possible further example of post Brexit £ weakness making UK acquisitions even more attractive to overseas (in this case Japanese) investors with cash to spend.


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tiswas 9th May '17 12 of 12

Waterman (LON:WTM)

Graham N on 28/2/17 said.

I wouldn't have the confidence to bet on that segment but I can see that the shares are priced for a really good shareholder outcome should that segment pull through over the next couple of years.

Come on Graham, surely you meant the next couple of months not years! 8:)

Tis, a very surprised and happy holder!

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 Are LON:WTM's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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