Good morning, it's Paul here with the SCVR for Weds.
Estimated timings - I'm a bit more with it today, so should be able to meet the 1pm official finish time. Today's report is now finished. My apologies for the unreliable timings this week.
Looks like we're in for another rocky day, with futures down heavily overnight. My view (subject to change on a daily basis) remains that I'm sceptical about the strong recent rally. As company updates are making clear on a daily basis, many (most?) shares are currently impossible to value, because we don't have any earnings visibility. For that reason I cannot see any reason to buy the market generally at the moment. Individual shares can make more sense, if companies have recurring revenues & strong balance sheets. But in other cases, why take the risk?
Norcros (LON:NXR)
Share price: 125p (pre-market open)
No. shares: 80.6m
Market cap: £100.8m
In light of the rapidly changing developments regarding COVID-19 (Coronavirus) since our last announcement on 20 February 2020, Norcros, a market leading supplier of high quality and innovative bathroom and kitchen products is today providing a further update on the potential impact on its performance for the year to 31 March 20201 and the measures it is taking to manage the associated risks.
Trading has slowed down in March 2020, meaning that it will now miss the full year numbers.
China supply chain now operating at "close to normal" levels.
Demand shortfall is now the bigger issue.
South Africa - trading has ceased due to Govt edict. 26 March to 16 April.
UK - customer closures mean trading is "now minimal". Norcros has therefore suspended its main UK assembly & manufacturing operations.
Guidance for FY 03/2020 is reduced, but bear in mind coronavirus only impacted the last few weeks of this period, so it's not terribly relevant;
We now expect our underlying operating profit2 for the year to 31 March 20201 to be approximately £31m compared to the previous consensus forecast of £35m. All of this reduction is attributable to the COVID-19 situation, is considered both temporary and exceptional, and follows a period of robust trading including market share gains.
This is probably the most important part of the announcement, saying that (relying on bank facilities) it can withstand an extended shutdown;
The Group has access to a £120million committed RCF financing facility, plus a £30million accordion facility, which mature in November 2022 and has drawn down £84m on the RCF facility to ensure that it has sufficient short-term liquidity.
We have modelled a number of different potential scenarios of different durations and severity including periods of nil revenues followed by periods of reduced revenues and assessed the impact on both profitability and cash flow over the next 12 months. We are confident that with the actions being taken to preserve cash and the financial resources available to it, mean that the Group is well placed to withstand an extended period of reduced trading.
Dividends - under review. I think it's safest to assume that there won't be any divis for the time being. It will need to reduce debt as the main priority once trading recovers.
My opinion - frustratingly, I haven't got enough information to make an assessment here. Nobody has got any idea how trading might pan out in the new financial year that starts on 6 April 2020 (note that it's a 53 week period to 5 April 2020).
It sounds as if liquidity, and therefore survival, is dependent on drawing deeply on the bank facilities. That is dependent on the bank playing ball, and of course that the company doesn't breach its Net Debt: EBITDA covenant during the year. We really need to know how that will be tested - e.g. is it quarterly, on a rolling 12 month basis? Zero revenues over an extended period could quickly turn that test ugly.
I also don't know the split of fixed, and variable costs. That's absolutely vital information in the current scenario.
On the existing broker forecasts, the PER is only 3.7 - but of course that is only of passing interest, as to what level of earnings the company might be able to return to, once the economy has fully recovered. But when is that going to be (if at all?).
Until we have more forward visibility, then unfortunately this share remains impossible to value.
Brokers seem very reluctant to publish sensible new forecasts. Therefore broker research is currently of little to no value.
Is it a bargain yet? Nobody knows.
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Air Partner (LON:AIR)
Share price: 53.5p (up 16% today, at 08:16)
No. shares: 53.5m
Market cap: £15.3m
Air Partner, the global aviation services group, is providing an update on initial trading in the financial year beginning 1 February 2020. This is the second update to be given during the COVID-19 pandemic and will be followed by shareholder updates approximately every four to six weeks during the crisis.
That's a really sensible touch - giving us an idea when to expect further updates. I like that a lot. All companies should publish a similar schedule, and update shareholders regularly. After all, this is an intensely stressful time for shareholders, so long gaps in reporting by management are thoughtless at best.
The share price for AIR has been all over the place of late;
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This sounds really good;
The Group has had a strong start to the financial year. The unaudited management accounts for February and the flash report for March show that each month generated profits well ahead of both budget and the prior year. The current indication is that the Group has delivered around £2.4m of underlying profit before tax in the first two months of the year, as new business wins from the crisis, such as repatriation contracts, have outweighed a decline in Safety & Security and European private jet charter during the pandemic.
Outlook for April is "encouraging"
Cash & debt facilities sound fine
Private jet usage is down
Freight & charter both doing well from the crisis
This is impressive, especially the 20% Director pay cuts - we need to see more of that, Directors should lead from the front in times of crisis;
Cost management and cash conservation
The Board reminds shareholders that the Group owns no aircraft and does not operate as an airline. We continue to tightly manage costs to preserve cash and maintain our working capital. While we have enjoyed a strong start to the financial year, our expectation is that business will now slow as the pandemic continues to restrict aviation activity globally. Accordingly, we have implemented a series of temporary cost management initiatives and made use of the available government grants and benefits to significantly reduce our cost base for the coming months. These include every director taking a voluntary 20% pay reduction for at least the next two months.
The combination of a strong start to the financial year, the swift action on costs and our positive cash balance give the Board confidence that Air Partner is effectively positioned to cope with the challenges and uncertainty posed by the ongoing COVID-19 pandemic.
My opinion - this is an impressive update, but it sounds like some of the benefit from this crisis has only been temporary.
Overall though, it sounds like the company is nimble, and is taking advantage of commercial opportunities thrown up by the crisis.
It's got a decent long-term track record of being profitable.
It looks a rare bright spot in the aviation sector. Not sure I'd particularly want to get involved, given the small size, and lack of liquidity. The recent rebound looks justified, but is it worth chasing the price up any further? Maybe not, I don't know.
Castings (LON:CGS)
Share price: 296p
No. shares: 43.6m
Market cap: £129.1m
Castings PLC announces a trading update in respect of the year ended 31 March 2020.
This came out yesterday. Castings makes automotive parts, such as turbocharger housings for trucks. It has a long history of decent profitability, and a strong balance sheet.
We reported in November 2019 that the commercial vehicle sector was witnessing a decline in order intake in Europe. Therefore, as expected, we experienced lower output levels at the end of Q3 and into Q4 from this element of our customer base, which represents 70% of group revenue.
Meanwhile, more recently things sound like they've got a lot worse;
There were indications that demand was increasing slightly towards the end of Q4. However, the consequence of the COVID-19 outbreak is affecting the truck sector significantly. Many of the OEMs have recently reported factory closures as a result of labour shortages and supply chain disruption.
Whilst we have not completely closed either the foundry or machining operations, we have reduced production levels to reflect the significantly lower levels of demand. Given the uncertainty of the situation, it is not currently possible to predict the impact on the business heading into 2020/21.
Oh dear, well that effectively renders the shares impossible to value. We've had a discussion in the comments section, with one reader saying we can just value shares on previous average earnings, but I don't see things like that. There's a risk that approach could lead to us over-paying for businesses that might even collapse under ruinous losses over the next, say, year. Operational gearing in reverse, with revenues falling in some cases to zero, could destroy even a good business frighteningly quickly.
Pensions - sounds like a deal has been struck to buy insurance to cover pension liabilities, and it might even leave a surplus. Sounds good.
My opinion - neutral. I don't have enough information about the outlook, nor the potential extent of short term losses.
That said, Castings has a fantastic balance sheet, so even if it incurs heavy losses in 2020, there should not be any concern over solvency. For that reason, I'd be more inclined to have a punt here, than with other, indebted companies.
Renew Holdings (LON:RNWH)
Share price: 353p (down 6% today, at 13:02)
No. shares: 78.6m
Market cap: £277.5m
Renew (AIM: RNWH), the Engineering Services Group supporting UK infrastructure, announces an update on trading in advance of the interim results for the half year ended 31 March 2020.
H1 trading in line with market expectations
Acquisition of Carnell in Jan 2020 is going well
Covid-19 causing disruption in some areas, outlook is unclear
80% of activities are deemed "critical", hence protected from shutdown
Cash generation strong, net debt £15-17m which doesn't look a problem. Plenty of headroom in bank facilities
Sensible cash preservation measures taken, and I applaud the 20% pay cut for Directors - this is very important, and I'd like to see all companies do this, to demonstrate Directors are prepared to share the pain;
Since the escalation of the Covid-19 pandemic, the Board has been focussed on taking actions to preserve cash and protect liquidity in a way that does not compromise the long-term prospects of the business. These include deferral of all non-essential capital expenditure, a hiring freeze, cost reductions, deferral of VAT payments (£2.6m deferred in March), utilisation of the Government's Job Retention Scheme and a temporary 20% reduction in the salaries of the Board and senior management from 1 April 2020. In addition, the Board has decided to suspend payment of the interim dividend which would ordinarily have been paid to shareholders in July. We understand the importance of the dividend to our shareholders and will keep our dividend policy under review in the coming months.
That all sounds fine to me. Dividend cancellation or deferral are becoming the norm, for many companies.
No forward guidance, so shareholders will have to do you own spreadsheets of various scenarios.
My opinion - I think I'm right in saying that the operational gearing here is fairly low - i.e. the group makes a smallish profit margin on big contracts. It sounds as if most of Renew's contracts are ongoing, being essential maintenance services for infrastructure.
As you can see from the chart below, the share price has only corrected back down to where it was before a rather euphoric rally in autumn 2019. I wouldn't say it looks a particular bargain on valuation metrics, given that we're likely to see at least some hit to forecast earnings in 2020.
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Sorry for the unreliable timings this week.
Regards, Paul.
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