Small Cap Value Report (Tue 7 August 2018) - PEB, HVN, PDG, CTO, DOM

Tuesday, Aug 07 2018 by

Good morning!

Things I've been looking at:

Pebble Beach Systems (LON:PEB)

  • Share price: 3.7p (-1%)
  • No. of shares: 125 million
  • Market cap: £5 million

Trading Update

We used to cover this when it was known as Vislink (VLK), so I'm curious to see how the story will end.

It now claims to be a world leader in broadcasting software.

I see that it issued final results for the year ending 31 December 2017 on 25 June this year - terrible.

H1 revenues this year are lower than last year (£3.9 million vs. £4.6 million). The backlog and pipeline will hopefully lead to an improved H2. There is no reference to performance versus expectations.

When I saw the wheels come off at Vislink, I assumed that it was going to go bust. Miraculously, it has avoided that outcome (through disposals) and even managed to avoid diluting shareholders. The share count has barely increased in recent years.

But that doesn't mean the existing equity is worth terribly much. Net debt of £10 million was recorded at December 2017 (twice the current market cap) .

I don't consider this investible at present but I'll keep an eye on it, to see if any signs of life will emerge now that it has been restructured.

Harvey Nash (LON:HVN)

  • Share price: 130.5p (+17%)
  • No. of shares: 73.5 million
  • Market cap: £96 million

Recommended Cash Offer

A takeover offer for this international recruiter from Dbay Advisors, its largest shareholder.

Note that Dbay appointed a Director to the board of Harvey Nash last year, so he is not independent when it comes to this proposal.

The offer is at 130p plus an interim dividend of 1.75p that would have been paid in November anyway.

To go ahead, the shares not already owned by Dbay will have to vote in favour of the deal, with a majority of at…

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All my own views. I am not regulated by the FSA. No advice.

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Pebble Beach Systems Group plc, formerly Vislink plc, is a software and technology company. The Company is engaged in the collection and delivery of video and data from scene to screen. The Company's Pebble Beach Systems division is a developer and supplier of automation, Channel-in-a-Box and content management software solutions for television broadcasters, cable and satellite operators. For the broadcast markets, the Company provides wireless communication solutions for the collection of live news, sport and entertainment. The Company's products include Marina, which is an enterprise level playout automation platform for multi-channel applications; Orca, which is an Internet Protocol (IP)-enabled cloud-based integrated channel delivery solution; Dolphin, which provides multi-format integrated channel delivery solutions based on information technology (IT) hardware, and Stingray, which is a self-contained Channel-in a-Box. more »

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Harvey Nash Group plc is a United Kingdom-based recruitment business company. The principal activity of the Company is the provision of professional recruitment and offshore solutions. The Company's segments include United Kingdom & Ireland, Mainland Europe and Rest of World. Services provided by each segment are permanent recruitment, contracting and outsourcing. The Company provides executive search, interim management and leadership consulting services. Its leadership services include board evaluations, management development, audits, assessments and strategic human resource (HR) consulting. Its professional recruitment services include technology recruitment business and recruitment solution business. Its offshore services include projects and software services, which provides application development, third party software maintenance and outsourced software services to clients across the world, and managed services/business process outsourcing. more »

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Pendragon PLC is an automotive online retailer. The Company's principal market activities are the retailing of used and new vehicles and the service and repair of vehicles (aftersales). Its segments are Stratstone, which consists of its vehicles, truck and commercial vans brand, including the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities; Evans Halshaw, which consists of its volume brand, including the sale of new and used motor vehicles and commercial vans; US Motor Group, which consists of its retail operations in California in the United States, including the sale of new and used motor cars; Pinewood, which consists of its activities as a dealer management systems provider; Leasing, which consists of its contract hire and leasing activities; Quickco, which consists of its wholesale parts distribution businesses, and Central, which represents its head office function and includes all central activities. more »

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

39 Comments on this Article show/hide all

john stone 7th Aug '18 20 of 39


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Graham Neary 7th Aug '18 21 of 39

In reply to post #388669

Hi Tristan.... yes, I'm also very interested in PDG after today's update. Software looks good, too. Just need the UK motors to stabilise. Cheers. G

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FREng 7th Aug '18 22 of 39

Marshall Motor Holdings (LON:MMH) (which I hold) has many of the characteristics that Graham highlights in his review of Pendragon (LON:PDG) so it will be interesting to see what Marshall Motor Holdings (LON:MMH) has to say in their half-year results next Tuesday.

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Graham Neary 7th Aug '18 23 of 39

In reply to post #388724

Hi letap, appreciate your message but I find that it's better if I don't try to make comments on things I know little about. The mining industry is one of those things, so I leave it to others to comment on Griffin Mining (LON:GFM). Cheers anyway.

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sharw 7th Aug '18 24 of 39

In reply to post #388829

Griffin Mining (LON:GFM)
Griffin Mining (LON:GFM)
I have been trying to reproduce your failed Griffin Mining (LON:GFM): thinking that it wouldn't work with a space or return after but I have failed so can't explain! However I hope the colon after without a space in this part shows one way of failing. No - not even that! I give up.

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langley59 7th Aug '18 25 of 39

Annoyed by the Harvey Nash (LON:HVN) offer, another of my good performing long term dividend rich holds being taken out of the market (after Waterman last year) leaving me with the problem of finding something else worthwhile to invest in with the cash.

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peterclothier 7th Aug '18 26 of 39

Hi Graham, Re: Domino's Pizza (LON:DOM), They recently lost their 3rd finance director in as many years, and have heard that the CEO isn't the easiest to work with. I think they are going to struggle personally, they have competition from Just Eat, Deliveroo etc. They seem to have had trouble with their European operations forever from memory. With a World Cup tailwind, despite the hot weather, is this as good as it gets for the UK side? I have been short since the FD left and covered today.

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samholloway 7th Aug '18 27 of 39

I've a moderate-sized long position in Harvey Nash (LON:HVN), I'll be voting no deal at 130p! It's not a terrible offer but given recent momentum and results, I feel there's another 20-30p needed on the offer price to tip it.

Also long-term T Clarke (LON:CTO) holder and pleased with today's news. The company works on good, respectable projects and doesn't need to be dealing with the lower-margin stuff. Quality not quantity seems like a sound strategy.

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cc2014 7th Aug '18 28 of 39

Just to note on CTO the pension deficit although still large has fallen by £4.5m since year end so the recovery payment plan is working. Yes it's a payment of £1.5m next year but it's £1.25m this year so apart from the extra £0.25m the costs are already in the exiting profit figures.

The interest rate rise last week should help bond yields and bring it down further by year end. The interest rate rise is post the end of June accounts.

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ridavies 7th Aug '18 29 of 39

In reply to post #388714

Re Proactis Holdings (LON:PHD), thanks for that. Useful comments.

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ridavies 7th Aug '18 30 of 39

In reply to post #388924

Re your comments on T Clarke (LON:CTO) and pension deficits, Paul Scott was always hot on picking shares with larger pension deficits but with good trading prospects, and highlighting them when there was the prospect of interest rate rises because higher rates tend to reduce deficits and vice versa (the problem for the last many years it seems!). Any thoughts anyone on which companies would be starting to look more attractive, especially if there is the prospect of another rate rise later this year?

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rmillaree 7th Aug '18 31 of 39

Is that Musk offering to take Tesla private via Twitter ? (is that allowed?) never a boring day with Musk/Tesla - he (and his dark forces) can have my shares for $410 never mind $420.

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Modform 7th Aug '18 32 of 39

Graham, if you are interested in DOM, you may wish to look into the USA version of it DPZ which has been growing steadily, the difference in the chart between DOM and DPZ is a clear indication of where the money is made.

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Edward John Canham 7th Aug '18 33 of 39

In reply to post #388944

Evidently serious (whichever way that could be taken) - Tesla shares suspended on NASDAQ according to the Beeb.

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RichardK 7th Aug '18 34 of 39

Thank you Graham and other writers on T Clarke (LON:CTO). I will continue to hold.

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Effortless Cool 8th Aug '18 35 of 39

In reply to post #388934

Perhaps take a look at Norcros (LON:NXR) and Macfarlane (LON:MACF).

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gus 1065 8th Aug '18 36 of 39

In reply to post #388934

Logistics provider Wincanton (LON:WIN) is another company with a large pension deficit relative to its market cap. Currently rated a Super Stock, it released an RNS this morning on arrangements with its pension trustees for plans to manage ongoing contributions. Gives a good overview of the size and complexity of this issue for them.

Depending on the valuation methodology used, the deficit is in the range of £79 to £221m in the context of a £338m market cap.


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hawkipa 8th Aug '18 37 of 39

Some thoughts on Pendragon (LON:PDG)

The strategy change is clearly reactive to a changing UK motor retailing landscape and management are clearly thoughtful of the future. However, the change in strategy presents many risks ie can growth in the software business & leasing really replace the clearly declining UK motor division. Further, if they double used revenues by 2021 are they effectively just aiming to replace a lower margin division with the more challenged New car sales division? Could this prove to be a mis-step in time if in fact new car sales do recover in a post Brexit world and battery powered cars are sold through existing dealer networks?
Net debt to EBITDA at 0.8x is good but what is the plan for the £174m coming into the business? There is no real detail on plans for it. Why not at least increase the buyback by £10m to £30m. Or return cash to shareholders a special dividend of £10m looks to be about 0.7p a share? Given that the share price is -15% YTD that would provide a useful boost. Perhaps the Full year will detail this.
With regards to the Software business, I also have concerns as it is essentially a dealer management system. If this business model is challenged as many believe then the possibilities for growth must be limited? That is without even considering the clear and present danger of an Amazon or other well financed internet company who could upend this business overnight should they wish.
Leasing seems a good business, but there is little competitive advantage here, so it can clearly grow but I suspect it’s a commodity business. The only competitive advantage I see is links to manufacturers and the fact that they have a ready supply of used vehicles. I would suspect others have similar relationships though.
On specific financials the rapidly reducing dividend cover and Free cash flow are serious concerns. ROCE is reducing but the stated ROE at half year of 13% seems acceptable. Whilst on a PER of c6.6x & EV to EBITDA of 3.5x it remains cheap but it can get cheaper and with an operating margin of 1.51%, it doesn't have the smell of a good business going forwards despite the efforts to transform it. The property assets have a value but in some ways the intangibles of £362.5m more than outweigh the £236.1m of land and property. The reduction in the pension liabilty to £41.9m is welcome and I suspect will continue to move in the right direction as rates rise. I will be watching it closely in the coming months as I have relied on it being cheap on a PER for far too long, which has cost me along with presuming that car sales would recover.
Best regards

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ISAallowance 8th Aug '18 38 of 39

In reply to post #388934

Another reasonably attractive company with a largish pension deficit is Avon Rubber (LON:AVON)

I'm not really convinced by the rising rates is good for companies with pension deficits argument though. In the short term, sure, the acturial deficit may come down. But in the slightly longer term, if (or when!) rising interest rates set off a recession / market crash then these companies will be exposed to both a cyclical downturn in earnings at the same time as a crash in the asset values of their pension schemes, which could get very ugly in some cases.

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Effortless Cool 20th Aug '18 39 of 39

Hard to see anything other than a beat coming in H2 for T Clarke (LON:CTO).

H1 revenue was £153.5m, consensus is £300.9m, implying £147.4m for H2. However, historically, H2 revenues have generally been higher than H1. If the average relationship since 2012 is applied, that gives H2 revenue of £172.9m and full year revenue of £326.4m.

You might note that the order book at the start of 2018 H2 is lower than one year previously: £370m versus £392m. However, £370m is the second highest level the order book has ever been at - it was only £337m at the end of 2017.

I am forecasting 2018 revenue of £325.7m and normalised EPS of 13.6p, versus consensus of 13.2p.

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

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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