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

28th Feb '17 by Graham Neary

12 comments 15071 reads

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)
Redde (LON:REDD)
Avanti Communications (LON:AVN)
Swallowfield (LON:SWL)

Cheers

Graham

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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AlanJenkins2

28th Feb '17

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

FREng

Graham

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

Rusty2

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.

andrea34

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

Ramridge

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

Graham Neary

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.

You're welcome Herbie

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

Many thanks, Graham.

1st Mar '17

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.

gus 1065

9th May '17

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.

http://www.investegate.co.uk/cti-engineering-co-/rns/recommended-offer-for-waterman-group-plc/201705090700085331E/

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.

Gus.

tiswas

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:)

Regards
Tis, a very surprised and happy holder!

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

Waterman (LON:WTM)

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Graham Neary

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