Good morning from Paul & Graham!
Today's report is now finished. Lots more to cover, but I've run out of time & energy!
Explanatory notes -
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Agenda
Absolutely loads of updates today, plus some backlog items. So we'll focus mainly on short sections, covering as many companies as we can.
Paul's Section:
Cambridge Cognition Holdings (LON:COG) [quick comment] (I hold) - in line with market expectations trading update. Interesting acquisition of Winterlight Labs for £7m (£3m cash, £4m shares with 6m lock-in, c.10% dilution). Acquisition seems to be loss-making, but with exciting-sounding potential - it talks of “major growth”from specialism in speech-based digital biomarkers. Strong order book. Cross-selling opportunities. Sounds interesting, but does this mean the enlarged group will become loss-making again? Does that matter? Will be interesting to see how a market that’s turning more bullish sees this. It could add some spice to the way COG is perceived, if bullish conditions develop further maybe?
Warpaint London (LON:W7L) - another positive trading update, ahead of expectations, from this makeup company that has been on a roll for some time. I work out the valuation (in the absence of broker notes) and think it looks bang in the middle of what seems reasonable. Update - a note from Shore Capital has just come through! Therefore despite a strong run up in share price recently, I think the fundamentals justify & back up this price rise. More detail below. Thumbs up from me!
Reach (LON:RCH) 80p (down 27%) mkt cap £253m. [quick comment] - a disappointing Q4 and FY 12/2022 update has clobbered the share price by 27%. Main problem is worsening trend in advertising revenues - down 20% in Q4, down 16% YTD - due to macro & consumer uncertainty, advertisers are spending less, as I would expect. Circulation revenues up slightly in Q4 (due to cover price rises), YTD only down 1.7%. More cost-cutting of c.£30m planned. “Challenging market” to continue in 2023.
Profit warning - operating profit for FY 12/2022 below expectations by c.5% (previously £112.8m, now c.£107m). Is the 27% share price drop an over-reaction? Maybe not, as 2023 forecast (Singers) EPS comes down 16% to 22.7p. But the PER is only 3.5! Divis look well-covered, so should be a hefty yield too. Pension scheme uncertainty - still swallowing a lot of cash. My opinion - worth investigating further at this lowly valuation. Ad revenues could recover once recession over (in 2023 or 2024?). Seems strange that forecasts didn't already factor in a worsening ads revenue trend, given the macro picture. Why is the market surprised that it's slowing, isn't that obvious?
Surface Transforms (LON:SCE) (down 3% to 37p - mkt cap £88m) [quick comment] - shares have been drifting down recently, in a market where lots of small caps have been bouncing strongly. SCE is a specialist maker of high end brake discs. Today it says production problems in Nov & Dec have resulted in 2022 revenues of £5.1m falling short of forecast (shown on the StockReport as £6.4m). Although this is still well over double 2021 revenues.
Outlook for 2023 - says unchanged guidance, and expects a maiden profit.
My opinion - I’ve not researched SCE in great detail, but my general view is that the shares are almost impossible to value at this stage. It has exciting orders & big demand, but today’s update is a reminder that massively scaling up production of innovative, highly technical products, is not easy, and there will be problems along the way. The drop of only 3% in share price today suggests that SCE shareholders are already fully aware of this!
I’m happy to say this share does look one of the most credible jam tomorrow growth companies on the UK market, with real products and big orders. How to value it? You have to just make assumptions about future results, build in a margin of safety, and then hope that management are able to deliver, and that no competitors develop anything better & cheaper.
Very quick comments on some larger caps (possible read-across for small caps?) -
J Sainsbury (LON:SBRY) - reports a strong Christmas, and indicates profits towards top end of £630-690m range. Argos did well, benefiting from its own distribution network during postal strikes. Big pay rise (10%) for staff recently announced (putting pressure on other sectors for scarce staff). My view - surprised! The media have previously reported that Aldi/Lidl were winning market share, as people traded down. So SBRY also doing well is interesting. It does beg the question over whether the consumer downturn is actually as bad as we fear? Or have people had a Christmas splurge, before hunkering down in 2023?
JD Sports Fashion (LON:JD.) - shares up 7% today on a positive trading update. Revenue growth accelerated, and reached over+20% in December. Profits toward the top end of broker forecast range £933-985m. Outlook - guidance for FY 1/2024 is "just over £1 billion" profit. This share looks cheap to me, considering the phenomenal long-term performance of the business, and continued expansion internationally.
Boohoo (LON:BOO) - press reports that it's cutting 100 jobs in its London HQ. Doesn't suggest that things are going well. So I'm worried about the next update here, particularly as the evidence so far (e.g. from Next (LON:NXT) ) is that shoppers are returning to physical stores. Has fashion online peaked, or even in decline now? We'll find out when they next report.
Frasers (LON:FRAS) - is relaunching Missguided brand acquired (a boohoo competitor than failed) as concessions in its stores. There's been stunning EPS growth at FRAS in the last couple of years. The manic pace of brand acquisitions does worry me though, and I'd lean more toward JD Sports as a safer bet than this.
Direct Line Insurance (LON:DLG) - shares have crashed 27% today on a profit warning, and cancellation of the divis - a key consideration, as the forecast yield was almost 10%. It blames bad weather, causing more car accidents (and higher repair costs), underwriting losses on home policies for burst pipes, etc. Also notes drop in value of its commercial property investments. Has the value of the business really fallen 27% just because of one bad patch? Seems extreme. Looks as if there's sector read-across, with Admiral (LON:ADM) down 9% today. I'm wondering if this might affect Saga (LON:SAGA) too? So have decided to close my (small) position there, just to be on the safe side, and it has roughly doubled from the recent low. I'll watch from the sidelines, and decide whether or not to buy back when it reports shortly. Let's hope Sod's Law doesn't intervene with a takeover bid in the meantime, which is always a risk when you sit on the sidelines.
Lookers (LON:LOOK) - see section below, where I look through today's positive trading update, ahead of expectations for 2022, with profit guidance raised almost 10%. This results in a super-low PER, with a nice divi yield, buybacks, and strong asset backing also thrown in. We know that bumper profits are likely to ease back in future, but the 2023 forecasts are already set very conservatively, and it's still cheap on a low multiple of a soft target. Lots to like here, so I award it a thumbs up. (more detail below)
Graham's Section:
Nichols (LON:NICL) (£401m pre-market) - we covered the most recent interim results for Nichols in some detail here. Today we get a full-year trading update from this soft drinks group. Adjusted PBT for 2022 is anticipated to be in line with expectations, despite the “ongoing inflationary pressures” that have been repeatedly highlighted by management here. The key Vimto brand has performed well both at home and internationally, and it appears that the logistics issues that plagued the company have been resolved as Vimto’s H2 international revenues increased 48% year-on-year.
Furthermore, Nichols has continued to benefit from the post-Covid normalisation of trading as “Out of Home” revenues have bounced 43% year-on-year. Nichols is now finishing a Strategic Review with the goal of improving margins from this route to market. Given the inflationary pressures and the expected weakness in consumer demand in 2023, the company is not expecting adjusted PBT to increase this year, but it’s more optimistic for 2024 when it expects that inflation might cool and its strategic actions to improve margins will have taken effect.
I continue to view this as a company of the highest quality, even if it is currently “ex-growth”. Profits have stalled over the past 5 to 6 years, and so has the share price, even though the company’s revenues have grown considerably. I think the shares could be interesting here, if we take the view that margins can normalise and profits will finally start to grow again.
Hostelworld (LON:HSW) (£137m pre-market) - this online travel agent confirms that trading has been in line with guidance through December and the beginning of 2023. For the full-year 2022, it generated net bookings of 4.8 million, far higher than the Covid-stricken performance in 2021 which saw only 1.5 million bookings. Along with the revenue growth, the company is also improving its profitability with marketing (as a percentage of revenue) reducing from 70% in H1 to 52% in H2. The company has hit its target of positive adjusted EBITDA for the year of €1m (as I mentioned last time, doing this would require a €10m positive swing in performance from H1 to H2 - a fine achievement!).
The company is pitching itself as a social network for travellers and while I think scepticism around that claim is easy to justify, it’s harder to argue against the strong improvement in trading that the company has achieved. The strongest bear argument, in my opinion, relates to the balance sheet and the high-cost €30m debt (charging 9% + Euribor) which I fear is going to eat up a significant portion of the company’s operating profits in the near-term. For this reason, I’m neutral on the stock.
Ab Dynamics (LON:ABDP) (£370m) (-0.5%) [no section below] - this provider of vehicle testing services and products has issued an AGM statement for today’s meeting. Thankfully, performance has been in line with expectations during the first four months of FY August 2023. The order book is “solid”, with “good visibility” into H2, and the integration of its recent acquisition is proceeding as planned. Net cash remains positive at £17.6m despite the cost of the acquisition, and expectations for FY 2023 are unchanged.
This statement contains very little new information and so I have to keep my stance on this stock unchanged: I continue to believe in the quality of this business, and in its post-Covid recovery, and I have no reason to distrust management’s M&A strategy. My difficulty is that I can’t fathom how it can be worth nearly £400m, especially in a bombed-out UK small-cap market. With so many cheap investing opportunities in this market, I fail to understand why ABDP is rated as if it were a US tech stock.
Ten Entertainment (LON:TEG) (£196m) (-2%) [no section below] - this bowling hall operator gives us a full-year update with some positive headlines. 2022 produced the company’s strongest ever trading performance: like-for-like revenues are up 5.5% against 2021, and up 39.8% against 2019 (the last pre-Covid year). Like-for-like revenues measure the same sites over the same time period. As discussed by Paul in September, it appears as though the company has reached a new baseline of higher visitor numbers and revenues at its sites. Adjusted PBT for 2022 is now set to come in at the “upper end of market expectations” (£25 - 26.1m).
Eleven centres were refurbished or upgraded during the year, i.e. almost a quarter of the entire portfolio, and the company reassures us that it is up to date with its capex spending. A handful of new centres are opening in 2023, too. Additionally, the company has finished the year with £10m of net cash and has helped its lowest paid staff members with pay rises brought forward six months.
In my view, there’s nothing to dislike in this announcement. While it may seem odd that the shares haven’t risen today, they are actually up 15% compared to a week ago, i.e. the market had already priced in this excellent trading update. Some may worry that the novelty of bowling might wear off as we move further into a post-Covid, “normal” trading environment. Personally, I like what I see here but as it’s a capital-intensive sector, I do think investors need to be careful not to overpay for shares such as this one. Therefore, it looks priced about right to me at a PER in the region 10x.
Paul’s Section:
Warpaint London (LON:W7L)
190p (pre market)
Market cap £146m
Warpaint London plc (AIM: W7L), the specialist supplier of colour cosmetics and owner of the W7 and Technic brands is pleased to announce a trading update for the year ended 31 December 2022.
This looks good - ahead of expectations -
“Particularly strong” trading in Q4
FY 12/2022 revenues guidance raised from previous £61m, to £64m
Adj PBT guidance of £10.0m - up from previous guidance of at least £9.0m.
Margins improved vs LY
Strong balance sheet (I confirm this is true!) with £5.8m cash and no debt.
FY 12/2022 results will be published in April 2023.
Outlook -
We enjoyed a strong trading performance in Q4 2022 across the Group, with sales growth in the US and online being particular highlights.
"We expect to see a continuing strong performance in 2023 and I look forward to updating further at the time of the release of the Group's results in April."
Broker updates - Shore Capital has put an update note on Research Tree, many thanks. It has raised 2022 to 10.5p, but leaves 2023 at 9.9p, which looks too pessimistic. Hence ahead of expectations TUs are likely in future, and upgrades. I like it this way, as modest forecasts should mean there's low risk of a profit warning.
Stockopedia broker consensus data is just from 1 broker, but shows a nice progression, and we’re now about 10% ahead of these numbers. So I would value the share on a multiple of maybe 10-12p EPS. What multiple? Maybe 15-20, since the company is growing nicely and keeps putting out positive updates.
That results in my valuation range between 150-240p. The actual share price is currently 190p, right in the middle of my range, suggesting that this share is fairly priced right now.
This is impressive given macro conditions. Bear in mind also this is as of yesterday. So there will be a further increase of about 10% in these lines after today's update -
My opinion - this is one of my favourite value/GARP shares, and we’ve been reporting positively on it for a while. The shares have had a nice run recently (as have many things), but the strong fundamentals and positive trading updates justify the price rise at W7L, whereas with some other companies I think rises have maybe been somewhat spurious/speculative, so could reverse.
Since the strong fundamentals support the current valuation, W7L looks good to me, so it receives a thumbs up.
Lookers (LON:LOOK)
81.3p (up 4% at 11:33)
Market cap £313m
Lookers, one of the leading UK integrated automotive retail and service groups, today provides an update on the business, including trading for the three months ended 31 December 2022 ("Q4" or the "Period") and the full year.
Strong finish to 2022 - further increase in full year expectations
It's now expecting to make at least £80m underlying adj PBT for FY 12/2022.
2023 Outlook -
The Board is encouraged by the strength of trading in Q4 and the magnitude of our new car retail and fleet order banks entering into 2023. However, we are also conscious of the potential impact on consumer spending by external factors such as high inflation and interest rates. We begin the new financial year with confidence in the resilience of our business model and 'omni-channel' customer offering, and as such the Board's expectations for 2023 remain unchanged.
Liquidity - has net cash of c.£70m (up from just £3m a year earlier). Working capital is huge though, so there could be large movements of this number on a daily basis. I’d like to know what the average daily cash/debt figure is (for all companies), as that’s far more meaningful than a one-day snapshot (which can easily be manipulated to give a flattering picture).
Balance sheet - LOOK reminds us today that it owns freeholds in the books at £297m. It says that property & cash totals 95p per share, but this is misleading as it ignores liabilities. The actual NTAV per share, which includes everything apart from intangibles, is 58p per share - that’s the figure that matters, and it’s below the 83p share price. Overall though, this share is nicely asset backed, so everything’s fine.
Diary date - 5 April 2023, for FY 12/2022 results.
New brands - has signed up as a franchise partner for ORA, a Chinese electric vehicle maker entering the UK market. I suspect we’ll see more of these Chinese brands coming here. ORA’s website shows that you can buy through a retailer (Lookers is listed), or buy online (direct presumably?). AutoExpress review the ORA Funky Cat here, giving it ⅘. Personally I think it’s ugly, and for similar money, I’d go for a Mini Electric. It might take the UK public some time to embrace unknown Chinese brands instead of well-known European ones.
Also a Lotus showroom is opening shortly in Belfast.
Broker forecasts - thanks to Zeus for an update. It raises FY 12/2022 PBT by 9.1% to £82.5m. This equates to 17.0 EPS. The PER is now only 4.8!
Obviously the market thinks earnings are not sustainable at this level, but that’s what everyone said this time last year, and 2022 actual out-turn was only a little below 2021’s bumper earnings.
Eventually vehicle supply will get back to normal, and margins probably normalise at a lower level, but who know when? Meanwhile the car dealers are coining it in still.
Zeus has a big drop to 11.4p pencilled in for FY 12/2023, which is going all the way back down to 2016 & 2017 profits, which seems very conservative to me. Hence I’m comfortable that even if market conditions worsen a lot, LOOK should be able to still say it’s trading in line, or even above, the current very soft forecasts for 2023. That’s a nice setup, and should mean profit warnings are unlikely even in a down market.
People tend to lease new cars now, so they’re not really particularly big ticket items any more - e.g. I got a new Audi A4 recently on a personal lease, and it’s only £275 per month. Insurance is dirt cheap, and repairs won’t cost anything, so it makes a lot more sense than buying a car outright, or buying secondhand, in my view. But there’s a wait on new cars, as production problems are still limiting supply.
Bottom line, is that even on soft 2023 forecast of 11.4p, the PER is still only 7.1 - which I think is very cheap.
My opinion - I remain a fan of the car dealers, because they’re classic value shares - substantially asset backed (freeholds), combined with low PERs and quite good yields (plus buybacks in LOOK’s case).
We know they’re enjoying a boom at the moment, due to restricted supply (hence high margins), but a full return to normal is already priced-into the shares.
Sector consolidation is a big theme, so bids could come in at any time. Plus we might see the demise of the numerous online-only startups, as they run out of VC/PE cash piles, which should benefit the traditional dealers as there's less competition for stock and customers.
There’s lots to like with this sector generally, and LOOK seems one of the best. A thumbs up from me.
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