Small Cap Value Report (Wed 14 Nov 2018) - FLYB, ABDP, MMH, RNO

14th Nov '18 by Paul Scott

38 comments 13021 reads

Good morning! It's Paul here.

To get you started today, I added 3 more sections to yesterday's report in the evening, being updates from;

Ideagen (LON:IDEA)
N Brown (LON:BWNG) and
Carclo (LON:CAR)

Here is the link to yesterday's completed report.

Flybe (LON:FLYB)

Share price: 12.1p (up 3% today, at 10:48 - volatile)
No. shares: 216.7m
Market cap: £26.2m

Formal sale process - this regional airline has put itself up for sale. This is part of a strategic review with several options (i.e. Plan B, if nobody wants to buy it);

These options include further capacity and cost saving measures, initiatives to strengthen the balance sheet and preserve cash resources, as well as a potential sale of the Company through the commencement of a "formal sale process"

Discussions are already underway;

The Company confirms that, at the time of this announcement, it is in discussions with a number of strategic operators about a potential sale of the Company.

The question is whether any other airlines will see value in Flybe. The stock market certainly doesn't with the share price down to only 12p. There was a short-lived bounce this morning, that was snuffed out by sellers. Who knows what happens next.

On the one hand, I can see that buying Flybe for peanuts might be attractive, if another airline were able to strip out a lot of duplicated costs, and make Flybe profitable. On the other hand, maybe its legacy issues, such as onerous leases on uneconomic planes, might put off potential buyers?

The fundamental problem with Flybe seems to be simply that not enough people use its flights. Therefore, flying with too many empty seats just doesn't consistently make any money.

Let's have a look at its latest results, announced today.

Interim results - for the 6 months to 30 Sept 2018.

Usually when a company puts itself up for sale, after its share price collapsing, then you expect to see dire results. However, these interim figures actually look quite good - adjusted profit before tax is up from £9.4m last time, to £14.0m this time. That's a profit, not a loss.

The CEO's summary mentions…

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matylda

14th Nov '18

Great stuff Paul - Thanks.

Re: New factory, I recall but I may be wrong that IQE did something similar recently - Still a valid point of course but one which may not be as clear cut, assuming my memory on IQE is not way off.

Effortless Cool

Ab Dynamics (LON:ABDP) is currently building another new factory (it's in planning) about the same size as, and just over the road from, the one just completed (3000m squared) and has also leased 950m squared in Germany that it is currently optimising.

Thus, when Paul says "Ab Dynamics (LON:ABDP) said some time ago that it was facing demand that it could not fulfil, due to capacity constraints. It's built a new factory, and now sales & profits are soaring. We must remember to buy any shares in future when a similar situation arises", it is worth noting that Ab Dynamics (LON:ABDP) itself is, in fact, in just that similar situation once again.

daveinthelakes

Just sent this tweet out re Flybe (LON:FLYB) if £50M that's a doubling of sp

Bought #FLYB as #STOB would have had to pay £125-150M in Feb but maybe £50M now? Stobart operate Southend Airport, franchise routes for Flybe/Aer Lingus, aircraft leasing op and ground handling bus inc Easyjet at Stanstead. Synergies obvious. Also hold #STOB up tdy on expectation
3:55 PM - 14 Nov 2018

bobo

Flybe continue to fly to and from places where customers 1 do not want to fly and at 2 prices that customers do not want to pay. They have an option to go low cost, but, because of 1 they cannot.

I link to Loganair's comments in March 2018 when Flybe stepped away from competing with them https://www.loganair.co.uk/loganair-responds-termination-flybes-competition-across-network/
says it all

Still my Dad always liked the champagne

sheeza

Many thanks, Banzii

Lord Gnome

Flybe do fly where we want to go and from where we want to go. The Norwich to Exeter route is a winner for us. Far quicker, far easier and far cheaper than road or rail alternatives. Suits a Turbo Prop aircraft. Niche or what?

browndogwork

Ditto Lord Gnome - us Channel Islanders, especially Jersey, would be stuffed for tourists in the summer without Flybe. It is highly unlikely Easyjet would be able to run any of their summer routes out of Jersey with an Airbus. As for Guernsey, the runway isn't long enough for anything but the aircraft used by Flybe. It's these sort of communities that Flybe is best serving, where their presence is essential. Fingers crossed they are still here next year; aside from being a shareholder, I need them to get off our rock!

Gromley

Indeed when I read Paul's paragraph on Capex, I mentally added the footnote "unless they happen to be a supplier to Apple!"

More seriously of course that situation is far from played out and whilst I wouldn't be optimistic about the share price in the short term, the medium term potential there remains strong imho.

Just the recap on that this time last year IQE (LON:IQE) raised £95m with a placing at 140p in order to buy a new reactors to meet the growing demand - with the share price now at less than half that level it hasn't been a successful investment so far In truth though that is a multi year investment to meet demand over a longer period.

Zotefoams (LON:ZTF) recently discussed here is another example where they have been investing heavily in capacity to meet growing market demand I am expecting continuing progress over the coming years.

More generically I seem to recall reading something from one of the (other) gurus that looking out for step change increases in capex leads to out performance. I have in mind that it may have been Peter Lynch, but I cannot seem to track down the piece nor much research on the subject.

Is anyone aware of this or any studies on the subject?

peterg

Agreed. I fly Flybe quite a bit (but then I do live near Exeter). But it does have coverage of large parts of the country that are not otherwise served. It's certainly niche, and that's clearly part of the problem - the volumes are not massive, but it would leave a big hole if it disappeared, which makes me think something is likely to survive.

MiserableJacktPotato

Sorry about the thumbs down, was on train and a jolt caused me to miss the thumbs up.

Great work and interesting reading as usual.

ACounsell

Have to agree with Paul on his analysis re Ab Dynamics (LON:ABDP) and stop losses. I held the stock at the beginning of the year and had an automatic stop loss in place and was caught out by the volatility in January (evident on Paul's chart). I was still in profit to the tune of c. 100% but am now very frustrated to miss out on another C. £5.00 increase in the share price having not been able to get back in at a decent price! This along with a similar but less damaging stop loss on Computacenter (LON:CCC) prompted me to ditch automatic stop losses altogether replacing it with stock alerts (using Stockopedia) and taking a manual decision as to whether to sell. Downside of that is rapid falls due to profit warnings (Royal Mail (LON:RMG), Keller (LON:KLR), Numis (LON:NUM) to name but 3!) and the current volatility in a downward direction of many apparently solid companies means that a lot of the portfolio is sitting at a significant discount to cost. Stockopedia's 'Profit Warning Guide' advises selling on a profit warning is the best course of action. Unfortunately loss aversion and the hope that thing will improve if you wait long enough is a strong behavioural bias to overcome!

Boon

With rising interest rates and also longevity rates stalling (and reversing) might we see the pension deficit drastically reduce in the near future with Renold (LON:RNO) ?

Fangorn

Easier surely to contact the broker and pay what you owe if stamp duty is due on any of the purchases they've not been levied on?

ie Being honest!!

smatthews1

15th Nov '18

I would argue thre turbo props are in high demand, for anyone who follows Avation (LON:AVAP) would remember they were being offered an attractive 'above value book offer' for half their fleet of turbo props, at some point last year. Which Avation (LON:AVAP) Declined. Also they seem to have a constant orders placed with ATR to keep up with demand for regional airlines in Asia.

So I would imagine these would be snapped up quite well.

Snoo

Yeah, good point. With Asia expanding rapidly there must be quite a few airports which suit type of aircraft quite well. Not sure how much can be realised though - a new Q400 has a list price of $32.2m, and the fleet is on average 10 years old. The NBV covers 85 aircraft, which is not much per piece. That said, it would be a significant amount relative to company valuation.

I can see this being a case of all or nothing. Rumours of IAG or Easyjet taking over seem a bit far out of the mark.
Easyjet have already purchased the Gatwick slots. IAG already divested itself a long time ago of its 'BA Connect' type operations.

The thing is no doubt they are very convenient for some people. But that doesn't translate into profitability. If they disappeared overnight, nobody would seek to re-invent them. The marginal routes would simply not run any more, the good routes would be jumped on by others. Airports like Norwich, Exeter, Southampton can accommodate the A319.

It might be better for Easyjet to wait rather than takeover for pittance, and then have the public outcry as they cull a load of jobs.

I agree with Paul though, it might be fun for a punt. The debt position is secured by aircraft values, and somewhere in there there is the core of good routes - I would guess that average load factors are being dragged down by the poor ones.

Michael Tee

Does anyone have the address and times for the Learning Technology event today. It is frustrating that it is not shown on their website. I have emailed and called them but am still none the wiser.
Would have really liked to post this on today's placeholder but it has not appeared.

Reacher

Further development at Patisserie Holdings (LON:CAKE) with the resignation of Paul May CEO and appointment of new CEO. Very little details about Paul May's resignation.

https://www.investegate.co.uk/patisserie-hldgs-plc--cake-/rns/resignation-and-appointment-of-ceo/201811151255045097H/

Laughton

Reacher - thanks for highlighting that re Patisserie Holdings (LON:CAKE).

Lots of emphasis on new CEO being a turnaround specialist so looks (to me) as though the company has NOT been making profits for some time. That would mean the missing funds are a result of largely overstated profits rather than the CFO salting away money for his own benefit.

But how is it possible that more of the board couldn't have been aware of what was going on.

ridavies

Flybe (LON:FLYB) ditto re Isle of Man. 4 x pd to Manchester. Same to Liverpool. Less so to Belfast. Very important to us. Just restarted a base here so the first flights out in the morning are from here, not return flights from somewhere else.
Also remember that the turbopros were supposedly very fuel efficient, getting to cruising heights and speeds quicker than jets .....or so the company claimed, especially significant on shorter regional journeys in UK where a few minutes here or there are less important.

iwright7

17th Nov '18

Effortless - Yes Ab Dynamics (LON:ABDP) are clearly on a roll and are in the right place at the right time. Their latest results indicate a widening moat and the Mr Market is responding accordingly. I note this morning that the Stocko algorithms have produced a significant Quality score upgrade of +25 to 92 too. What a great business and I continue to hold. Ian

Small Cap Value Report (Wed 14 Nov 2018) - FLYB, ABDP, MMH, RNO

Flybe (LON:FLYB)

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Paul Scott

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