Small Cap Value Report (Tue 3 Apr 2018) - AIR, RNWH, FLYB, HRN,

Tuesday, Apr 03 2018 by

Good morning, it's Paul here!

I'm back from a week's holiday on the west coast of America, which was interesting & enjoyable. If you think we've got a homelessness problem in the UK, then you should visit San Francisco - where the scale of the problem is unbelievably bad, and very sad to observe. All that wealth, yet thousands of people have just been abandoned, to live miserable & squalid lives on the streets.

Many thanks to Graham for doing a sterling job last week, which gave me a chance to have a rest from the markets.

It looks to be a quiet day today. So far I have the following on my list to review;

Air Partner (LON:AIR) - accounting issues
Renew Holdings (LON:RNWH) - trading update
Flybe (LON:FLYB) - trading update
Hornby (LON:HRN) - trading update

So I'll get cracking on those now.

IQE (LON:IQE) - I've just seen the tragic news that its Finance Director, Phillip Rasmussen, has died following a cycling accident abroad. He presented at a Mello evening a couple of years ago. His presentation was an absolute masterclass in how to explain complex subject matter with amazing clarity. Our condolences go to his family, friends & colleagues.

Air Partner (LON:AIR)

Share price: 113.25p (down 21.1% today, at 08:39)
No. shares: 52.2m
Market cap: £59.1m

Year end update (accounting problem)

A reader has asked me to try to explain today's announcement in plain English.

A problem has emerged during the audit of its figures for year ended 31 Jan 2018;

The Board of Air Partner has identified, during the course of its year-end review process, an issue predominantly relating to its accounting for receivables and deferred income.
Following preliminary investigations, the issue principally relates to the collection of receivables from customers and accounting for uncollected amounts since financial year 2010/11.

Certain uncollected receivables were inappropriately offset against deferred income rather than being expensed to the income statement in the appropriate financial year.

This is a non-cash item and has no bearing on the Company's cash balances.

This seems to be…

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Renew Holdings plc operates as a contractor in engineering services and specialist building. The Company's activities are carried out in the United Kingdom with some development activities in the United States. The Company's segments include Engineering Services, which comprises the engineering activities, which are characterized by the use of the Company's engineering workforce, supplemented by specialist subcontractors where appropriate, in a range of civil, mechanical and electrical engineering applications and; Specialist Building, which comprises the building activities, which are characterized by the use of a supply chain of subcontractors to carry out building works under the control of the Company as principal contractor, and Central activities, which include the sale of land for development, the leasing and sub-leasing of some United Kingdom properties and the provision of central services to the operating subsidiaries. more »

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Flybe Group PLC is a United Kingdom-based company. The Company is a shell company.

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Hornby Plc is a holding company. The Company is engaged in developing, designing, sourcing and distribution of hobby and interactive products. The Company distributes its products through a network of specialists through its online activities and various retailers throughout the United Kingdom and overseas. The Company has operations in the United Kingdom, the United States, Spain, Italy and the rest of Europe. The Company offers its products under various brands, such as Hornby, Scalextric, Airfix, Humbrol and Corgi. Its subsidiary, Hornby Hobbies Limited, offers products under various categories, which include Train Sets, Locomotives, Train Packs, Tracks and Extras, Wagons and Coaches, and Spares and Accessories. Its subsidiaries include Hornby Espana S.A., which is engaged in the development, design, sourcing and distribution of models, and Hornby America Inc., Hornby Italia s.r.l, Hornby France S.A.S and Hornby Deutschland GmbH, which are distributors of models. more »

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

34 Comments on this Article show/hide all

mrosbiston 3rd Apr '18 15 of 34

Flybe (LON:FLYB) my understanding is the bid was low balled at around 50p, just gossip so take it with a pinch of salt.

I know that Stobart are now restricted from making another bid for 6 months and cannot buy shares for 3 months in Flybe (LON:FLYB)

However, they did state that they reserve the right to set the restriction of rebidding aside in case of a 3rd party making an intention to bid. So could get hostile?

My sketchy number crunching has NAV at around 70p

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timarr 3rd Apr '18 16 of 34

The Air Partner (LON:AIR) announcement today suggested that the problems go back to 2011 and that a "significant proportion of this relates back to 2011". So I thought I'd have a look back to 2011. The interims back then contain the following:

Recent attention has focused on current liabilities, which contain an accrual for expenses of £3.1 million. These expenses are amounts that Air Partner has invoiced and accrued for, over a number of years, relating to charter contracts, in anticipation of receiving matching invoices from operators which have not in fact been received. A review of this balance indicates that it should no longer be retained. Contact has therefore been made with the relevant third parties and Air Partner is investigating, with those parties, the closing out of this accrual. The Board does not expect any material impact on profit although there will be an anticipated £3.1 million cash outflow in the second half of this financial year.

That happened in the first set of results after the appointment of a new CFO - the one before the current incumbent - and during a change of auditors from Mazars to Deloitte.  So one hypothesis is that something screwed up at this point, when presumably they were trying to kitchen sink past problems.

As it stands this doesn't look like a problem, but when the forensic accountants start trawling over the books there's always the chance something else might come out. I hold, but I'm not tempted to add. The Z score here is hovering on the edge of safety, so a degree of caution is indicated.


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jdnthomas 3rd Apr '18 17 of 34

For Air Partners (LON:£AIR) the original accounting entries would presumably have been:
Dr Accounts receivable £3m
Cr Deferred income £3m

This would have been in anticipation that when the cash was received the entries would be
Dr Cash £3m
Cr Accounts receivable £3m

and when the services were performed and thus the income earned the entries would be:
Dr Deferred Income £3m
Cr Revenue £3m

If as soon as they passed the initial entry 1) above they discovered the accounts were not to be collected then I would have thought it would be quite OK simply to reverse entry (1):

Dr Deferred income £3m
Cr Accounts receivable £3m

This is apparently what they did.

If there is a problem it is presumably that they either had already passed some of entry 3 above or that they continued to pass entry 3) (because the systems were set up to do so) after they has decided that the accounts would not be received and the revenue would never be earned. So deferred income would have been understated and revenue overstated. But that should have been picked up on analysing what was in the deferred income account on the balance sheet at the year end. Either it was, and so there should now be no further adjustments to make and everyone can relax, or it was not, which suggests the deferred income balance has never been proven for the last 7 years which would be appalling negligence by both the finance department and the auditors, and raise the possibility of the whole balance being overstated (or even understated) by much larger amounts. (everybody can make mistakes and it is only by analysing the balance between specific (live) contracts that such errors get picked up).

It does seem today’s announcement was rushed out before they really understood the nature of the problem and it may be that the benign scenario is the correct one. But the share price upside is surely limited in the short term - it’s not suddenly going to bounce back to the pre-announcement level. And the alternative is that deferred income could be a whole can of worms, and then the downside would be considerable.

If the share price had dropped 40% then a purchase now might be a reasonable gamble, but at the current price there seems to me to be more possibility of downside than upside in the short term.

But worth keeping an eye on in case it turns to be a storm in a teacup.

Incidentally I find the 2011 announcement (which may be related or may simply involve a coincidentally similar sum) totally incomprehensible.

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Ned Kelly 3rd Apr '18 18 of 34

Re Air Partner (LON:AIR) Thanks to Paul, Timarr and jdnthomas for your suggestions on what may have happened here. I did top up earlier at 112.4 giving the company "the benefit of the doubt" but wish I had seen more of the comments above beforehand. I do like the way the company is moving forward and hopefully this only relates to issues 5+years ago. Perhaps we will get a better answer on April 26th when results are due out.

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ridavies 3rd Apr '18 19 of 34

Re Flybe (LON:FLYB), the share price went up to around 50p and the market is rarely wrong....but on the other hand, Stobart pulled out after having had a good look at the figures. I do think that the company can do better than they have, and they are improving. Whilst I agree that the company cannot be blamed for the weather, if that starts to happen frequently, year by year, then it is a fact to be taken into account in how investors view the business model. Also, if things get a bit tighter for the European market, then the bigger boys - easyJet (LON:EZJ), Ryanair Holdings (LON:RYA) and Wizz Air Holdings (LON:WIZZ) can afford to take deeper cuts than Flybe (LON:FLYB) and we know what happened to other smaller airlines in the last 1-2 years. All IMHO of course and I would like to be argued out of my at best sit on the fence position.

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Paul Scott 4th Apr '18 20 of 34

In reply to post #348988

Hi apad,

In my opinion, Premier Technical Services (LON:PTSG) looks superficially attractive. However, I don't like the unexplained high debtors, nor do I like the Bob Morton connection. So not one that I plan on revisiting.

Regards, Paul.

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DJCP 4th Apr '18 21 of 34

Paul, Phoenix Asset Management have recently rescued Stanley Gibbons (LON:SGI) in a similar way as Hornby (LON:HRN).

Taken over £10m of debt from RBS, with interest accruing for next five years then becoming payable. They also took a 58% shareholding for £6m at 2.5p (current SP has recovered to 4.75p). Although not ideal for existing shareholders, the most likely alternative was liquidation.

Disc: Bought a few as a recovery punt a while back, but approx. 50% down at present. Would be pleased to get investment back, but could be a while !

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paul w Jenkins 4th Apr '18 22 of 34

In reply to post #348923

On air partners is it bound not to have a cash flow impact as deferred income by definition represents monies already received but where services are to be provided in the future. On the other hand debtors represent cash that is expected to be received in the future but which will not if the debt is bad.

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matylda 4th Apr '18 23 of 34

In reply to post #349383

Hi Paul,

Not a question I am qualified to answer and way above my simple standing (perhaps others more qualified can comment). The price action seems to be indicating an impact at present so I am happy being out for now.

Blog: Briefed Up
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paul w Jenkins 4th Apr '18 24 of 34

Hi Matylda

The RNS was confusing particularly re cash impact which reflects either their own confusion or a drip feeding of news. As I dislike confusion I am like you out for now and will just keep under review as and when clarification is forthcoming.

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nicobos 10th Apr '18 25 of 34

Wow, Air Partner (LON:AIR) just keeps on falling. Always worth reminding yourself about buying in too soon after profit warnings, which can be a temptation. Especially in small caps where it doesn't take much PI selling to move the price massively and not everyone sees the news on day one, which can lead to a continued drift lower.

Watching from the side-lines but wondering when it will be worth catching the falling knife !

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back2value 10th Apr '18 26 of 34

In reply to post #351743

I can't help but think this is a serious overreaction. Nothing new has come out since the update, but the price has been clobbered. Perhaps it's a worst case scenario and Air Partner is rotten to the core, but I doubt it.

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matylda 10th Apr '18 27 of 34

In reply to post #351748

Yes, glad I got out - I just wonder has it anything to do with Russia sanctions - Perhaps there will be a bit less spending from that area, on private jets. All I could think of.

Blog: Briefed Up
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CMWilliamson 10th Apr '18 28 of 34

In reply to post #351748

re Air Partner (LON:AIR) precipitous drop in SP. It's just as well that its aircraft don't fall out of the sky on a trajectory like this!

I too think that the drop is overdone, based on what was contained in the RNS. With some other holdings, I managed to sell at the bottom when the SP was dropping when the company was fundamentally sound; my opportunity cost of missing out on the subsequent recovery was huge. But the question remains: is the SP drop an overreaction, or is there something else going on in Air Partner (LON:AIR) that has not been released?

Note: I have been a holder since 2006, so this isn't the first period of low-flying I have experienced with Air Partner (LON:AIR) . I hope this patch of turbulence doesn't make me sick

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purpleski 10th Apr '18 29 of 34

In reply to post #351748

Air Partner (LON:AIR) Sell off.

Back2Value and Nicobus

I have held Air Partner (LON:AIR) since October 2012 (I have not sold any in the recent sell off; I thought the first day sell off was overdone, let alone what has happened since) and saw it as a sound well run company, which delivered steady growth and great divis (I have had £4,000 since 2012).

I am struggling to understand the scale of the sell off. I suppose one possibility is that the market is believes that this will cause Air Partner (LON:AIR) customers to lose trust in the company and not renew membership/charter them, or that this is the thin end of the wedge of accounting problems.

But assuming neither of these Stockopedia is showing £4.15m net profit for current year. If Air Partner (LON:AIR) has to restate previous years profits against this then profit for the year will be reduced to £850k. But this will not change the long term profitability to the company or cash flow/ability to pay dividends. (edit according to Torygraph article  the company gave guidance of £6.4m on Jan18th, which be an increase of 26.5% on last year

That said the lack of information from the company is frustrating and is not likely to engender shareholder loyalty.

So for now I am sitting tight but if the next news out of the company is not unequivocally positive I will sell out (if market conditions permit i.e. the shares aren't suspended).

Further edit the so called "scoop" by Shareprophets at does not really shed any more light on it.


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timarr 10th Apr '18 30 of 34

In reply to post #351843

Hi Michael

If that piece is true it would explain some of the sell-off - if their internal accounting controls were so weak that they couldn't spot this debt for 8 years then you have to wonder what else was missed. On the face of it this is far from a disaster - essentially they failed to invoice for £3.3 million they should have and presumably they overstated profits at some point. It shouldn't affect current business. If I was a customer I'd be quite happy that they weren't invoicing me ...

No cash has actually left the business - i.e. there's no direct fraud involved - so there isn't a black hole in the books. However, there'll likely be an official investigation and presumably fines levied for misreporting. I wouldn't want to be Deloittes here, this is exactly the thing that auditors are supposed to spot.

Bah, still holding. Still not tempted to top-up.


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Bonitabeach 10th Apr '18 31 of 34

In reply to post #351873


I held on at UTILITYWISE (LON:UTW) another company that didn't know its deferred income from its elbow. It proved expensive.

It has been a long silence from Air Partner which is not good news. Too many red flags here among the acquisitions.

At least Mr Briffa still looks cheerful - but then he has cause to be:
Thu, 19th October 2017
Mark Briffa, Chief Executive Officer, sold post-exercise 179,935 shares in the company on the 19th October 2017 at a price of 132.46p. The Director now holds 97,511 shares

No position & DYOR.



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timarr 10th Apr '18 32 of 34

In reply to post #351908

The problem that Utilitywise (LON:UTW) had with its deferred income was obvious to anyone who cared to look at the accounts. The problem with Air Partner (LON:AIR) isn't the business model, it's the financial management. I'm not saying that's less of an issue, but it's comparing apples with eggs, really.

Given the issues if there was a known serious hole in the accounts then the company would have announced and/or suspended. The failure to do either, or make any announcement at all, suggests that the analysis is ongoing but hasn't uncovered anything.

This, of course, may simply be the equivalent of the man falling past the 50th floor window shouting "OK so far" :)


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gus 1065 11th Apr '18 33 of 34

Update from Air Partner (LON:AIR) this morning on their accounts review.

PWC have been going through the books. Interim finding confirms the “hole” is not more than £4m and that prior to any related adjustments at the conclusion of the review the current trading period numbers are as previously indicated. At face value seems to have ring fenced the issue. Has the knife stopped falling? Remains to be seen if a nervous market gives them the benefit of the doubt.


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gus 1065 11th Apr '18 34 of 34

By 9.15 the Air Partner (LON:AIR) shares are up about 24% suggesting the market is giving them the benefit of the doubt for now.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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