Good morning, it's Paul & Jack here with you today. I'm (Paul) conscious that there's a big backlog from yesterday's results, so will try to make inroads into that. Today's report is now finished.
Agenda -
Paul's Section:
Science (LON:SAG) - impressed us last year, with a series of upgrades. It issues another positive update today, with H1 20% ahead of last year's impressive H1. Looks good value to me, although with so much macro uncertainty, nobody knows what might happen. Dollar strength is helping.
Redde Northgate (LON:REDD) - one of our favourite value shares, so I'll continue reporting on it, despite the growth in market cap. It's a very nice update today. There are some risks, but this share remains a SCVR favourite, with a low PER, robust outlook, divis over 5%, and strong net asset backing too.
N Brown (LON:BWNG) - I explain in the reader comments section why I've dropped coverage of BWNG. Basically because I'm worried about its large/complex legal action. But mainly due to the collapse of similar business model Studio Retail - selling stuff online, to generate business for a high risk/high cost consumer lending business. After a close shave with STU, I wouldn't go near any similar business ever again. That said, if you're prepared to accept the risks, then today's trading update does come across well. [No section below]
Polarean Imaging (LON:POLX) - a quick look at this blue sky medical company, to see if it has enough cash to reach regulatory approval? It seems funded into 2023, but risk:reward now looks a lot worse, given that if regulatory approval is denied for a second time, then another future fundraising could be very difficult.
Jack's section:
Keller (LON:KLR) - mixed results so far but management expects full year results to be in line with a customary H2 weighting. The group is low margin though, and it faces pressures in a number of markets, so I’m ruling myself out. But there’s a good dividend track record and the yield is nearly 5% (covered more than 2x), potentially something to consider for income investors.
Mello Chiswick update - it’s next week!
I know how hard David Stredder & the Mello team have been working behind the scenes, it’s been incredibly difficult for them to persuade companies and fund managers to come to a physical event, as they prefer online webinars now. I can understand that, but there’s no substitute for face-to-face interaction, and I’m really keen to see investors support these physical events, otherwise the danger is we’ll lose them forever. Obviously only if you feel comfortable attending a physical event, not everyone is, I understand that. David says the seating will be much more socially distanced than in the past.
Provisional schedules have now been published - do click on the links below, to see what's on, as they're very strong in my view -
Tues 24 May - day one schedule - focused on investment trusts & funds. This looks a really good opportunity to meet, and question many fund managers, in different sectors.
Weds 25 May - day two schedule - Andy Brough, Gervais Williams, and Lord Lee are the headline speakers, it should be fascinating to hear their perspectives on this horrible bear market. There are some excellent companies presenting too, that I’m looking forward to meeting in person, having written lots of stuff about them here! Will I need a bodyguard? Looking at the list, probably not, as I don’t recall being particularly rude about any of them!
Thu 26 May - day three schedule - highlights for me are my friend Leon Boros, who is always full of investing wisdom & insights, plus Ken Ford, Chairman of SDI (LON:SDI) which has a superb track record of acquisition-driven growth. If you’ve not heard Clarke Carlisle speak before, then his session is a must - I won’t spoil it for you, just hear him speak, a very moving, and inspirational man.
There are still available slots for companies that would like to get in front of & interact with hundreds of serious investors. Contact David here.
Discount code - get 50% off tickets, using: M2250
I’m looking forward to seeing Stockopedia subscribers there, to say hello, have a beer, and this will also give me an opportunity to apologise in person for Boohoo (LON:BOO) performing so badly, which I know has cost many of us an arm & a leg unfortunately.
Explanatory notes -
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Paul’s Section:
Science (LON:SAG)
380p (pre market open)
Market cap £173m
This share peaked at around 490p last autumn, and like almost all small caps, has slipped back (22% down from the peak) this year, largely irrespective of fundamental performance. I recall reporting on a series of positive updates from SAG last year, so it’s a company we like here at the SCVR - performing well, and now reasonably priced again.
What’s the latest?
Relating to FY 12/2022.
The person who wrote/approved the RNS seems to have forgotten to put in a description of the business. Here is the description which it did include in the last full results published on 16 March 2022. Management need to remember that investors have well over a thousand listed companies in the UK to look at, and some investors are new, so people won’t necessarily know what (particularly smaller companies) actually do! So a brief description should appear at the top of every trading update/results statement please.
Science Group is an international science, technology and consulting organisation. The Group comprises three divisions: R&D Consultancy; Regulatory & Compliance; and Frontier Smart Technologies ('Frontier'), together with significant freehold property assets and a strategic shareholding in TP Group plc.
This sounds positive to me -
The Group has had a good start to the year, with performance through April slightly ahead of the Board's expectations.
It is therefore anticipated that the Group will report adjusted operating profit ("AOP") for the first half of 2022 around 20% higher than in the same period of the prior year.
The Board is closely monitoring the impact of materials, energy and wage inflation but is benefitting from a broadly offsetting effect due to the strengthening of the US Dollar relative to Sterling.
That’s a really good point, which we haven’t mentioned yet here at the SCVR - that there’s been a significant strengthening of the US dollar recently, which makes inflation even worse in the UK of course. So if it sticks, then that adverse exchange rate move is more bad news for many UK companies. However, it’s good news for companies that generate sales in dollars, but report in sterling. So it’s worth having a think about which companies in our portfolios might benefit from, or be damaged by, this change in exchange rates. Or, we can just ride it out, if we’re longer term investors, as swings & roundabouts. That’s up to you, depending on your investing timescale with individual shares.
Looking back to last year’s interim results, they were very good - adj EPS up 51% to 13.3p in H1, then 15.2p in H2, giving 28.5p for FY 12/2022.
So being 20% ahead in H1 this year, looks impressive.
Outlook - nothing much is said about the outlook for the full year, which is a bit disappointing. I think in these unstable macro times, companies need to give clearer guidance, especially of the downside risks.
Liquidity - sounds fine -
Gross cash at 30 April 2022 was £38.4 million with net funds of £23.4 million. The Group's strong balance sheet, enhanced by the undrawn facility of £25 million arranged in December 2021, enables the Board to continue to evaluate corporate opportunities to increase the scale and/or development of the Group.
The balance sheet is pretty good, I’ve just checked the last one as at 31 Dec 2021. Although note 11 shows that trade creditors are high at £30.0m, including “contract liabilities” of £17.1m, which usually relates to situations where the customer has paid up-front (the double entry being DR cash, CR trade creditors), hence flattering the cash position.
Why does that matter? Because it could unwind possibly, reducing the cash pile if/when it does so. Hence best not to spend that cash, in case the favourable working capital position does unwind, or at least partially unwind. These things can also be set up so that they look good at year end, which is why I much prefer reporting average daily net cash, rather than a year end snapshot.
New Director - only a NED, Susan Clement Davies, but she has an impressive CV. I know some people roll their eyes at diversity, ESG, etc., but personally I think it’s great to have more diverse boards (providing people are suitably qualified for the roles). In my personal experience, the dynamic definitely changes when there are more women on a Board. Although there is a risk that the women change their behaviour, and try to out-macho the men, which is not good, which I have witnessed myself, thinking about one former colleague in particular!
My opinion - I don’t have an up-to-date note, but looking back to a Liberum note from March 2022, it was forecasting 2022 EBIT (i.e. operating profit) up only 2% on 2021. Hence the company telling us today that it’s now expecting H1 profit to be 20% up on 2021 looks like a considerable beat. Or at least, it seems to provide some leeway for H2 to be softer, and the group still achieves its full year forecasts.
It’s always better to be ahead of expectations, rather than scrambling to try to catch up.
The beneficial dollar effect is lucky! That could reverse of course, so caution is needed there.
Stockopedia is showing the forward PER as 13.9, which looks cheap for a group which has a strong track record.
There’s also the issue of its holding in TP (LON:TPG) where SAG’s shareholding has flopped in value, and its attempted takeover bid didn’t succeed. There could be an exceptional write-off there, perhaps? Or will SAG come back for another attempt at a bid, now the share price has crashed? The timing might be ideal for that now - shareholders would probably be more receptive to an exit at a decent % premium, now the share price is bombed out.
All in all, I do like SAG. As with everything though, we don’t know how current macro problems will play out, so there’s short term risk with practically all shares. Longer term though, equities (and property) are the best places to be when inflation is high. Whilst bonds & cash are the worst. So all those investors holding cash piles, you’re losing 10% p.a., so that cash needs to be put to work at some point!
I see SAG has opened up, so that's good news for holders.
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Also note that SAG owns 27% of listed TP (LON:TPG) (current market cap £18m) whose share price is not looking so robust, to put it mildly, hence a loss of value for SAG -
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Redde Northgate (LON:REDD)
379p (up 3% at 08:45)
Market cap £932m
Prompted by readers nagging me to look at REDD when it was dirt-cheap during the pandemic, we’ve done very well on this share. So it would seem a pity to drop it, just because the market cap has risen above our arbitrary £700m usual cut-off, hence I’m going to continue covering Redde.
Redde Northgate (LSE:REDD), the leading integrated mobility solutions platform providing services across the vehicle lifecycle, today announces its pre-close trading update for the year ended 30 April 2022, ahead of its results for the full year scheduled for Wednesday 6 July 2022.
My scorecard awards an “E” for the company’s own self-description above, which is meaningless.
Let me rectify that with my own description -
About half of REDD is a white van rental business in UK & Spain. The other half is credit hire & other legal services business - mainly providing courtesy cars for the not-at-fault party in car crashes, charging insurance companies the fees.
Isn't that better?!
Credit hire businesses in this sector tend to trade on very low PERs, because they’re often quite flaky business models - running up massive receivables, and sometimes going bust. I looked at something like this recently, but can’t remember the company name. I think it begins with A? It looked awful, with receivables well over 1 years' revenues! Big profits (and lots of tax to pay), but no cashflow. That looks an accident waiting to happen, Quindell v.2?! I've remembered, it's called Anexo (LON:ANX) - very much one to avoid I think, for the reasons given. If it starts to generate proper cashflows, then it might be worth a fresh look in future, but for now it's uninvestable for me.
REDD is better, because it moved to a collaborative model years ago now, whereby fees are pre-agreed with insurance company clients, and paid promptly. So it’s more of an outsourcer. Margins and cashflow are very good, and divis remain generous. Insurers probably don't care too much about REDD making nice margins, as it's all passed on to motorists through premiums. That's why false whiplash claims remain an obvious, and ongoing debacle - the cost is passed on to us.
REDD has also been lucky, in that the restricted supply of new vehicles means it’s been sitting on a goldmine, in terms of its large vehicle fleet appreciating in value. Although that may not persist, so let’s hope the company does move over to a leasing model, as planned, and they get the timing right to dispose of the owned vehicles whilst values are high. The clock is ticking on that, as in a recent webinar, the CEO of Vertu Motors (LON:VTU) (I hold) said residual values are now falling by c.2% per month, which is normal market conditions (although that’s from an inflated starting point).
PR heading -
Strong FY2022 performance across the Group
My summary of today’s update -
FY 4/2022 in line with expectations (raised in Mar 2022)
Underlying revenues up 24% on LY
Strong residual values for used vehicles due to restricted supply
New vehicle supply expected to remain constrained in FY 4/2023
Expecting “some moderation of used vehicle pricing”
Credit hire volumes at c.90% of pre-covid level
Longer credit hire lengths (good for REDD) due to parts supply constraints for damaged vehicles
Cost inflation - is being “carefully managed”, and margins in line with expectations - sounds encouraging
Cashflow - “underlying”, “remains strong”
Liquidity - “significant headroom” on bank facilities, renewed in Nov 2021.
Outlook - a bit vague, but sounds positive -
The ongoing macro challenges in the global automotive supply chains look set to continue in the short term, albeit expectations for a recovery next calendar year are growing. On this basis we expect to retain more of our van fleet this year and limit disposals in order to meet customer demand, and to grow our car fleet in line with our strategy.
With strong performance in all areas of the business and supplemented by previously announced new business wins, the Board expects to see another year of progress in FY2023.
Valuation- for value investors, how could you not like these numbers below - low fwd PER, great divi yield, and a price to tangible book value of only 1.38 - in other words, this share is also strongly asset backed, as well as being cheap on earnings & yield. Very attractively priced, for a fairly decent business I think -
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Downside risks might include -
- Regulatory/Govt action of some kind that could hurt the credit hire side of the business
- Loss of a major client on the credit hire side is something that previously triggered a nasty profit warning, a few years ago, from memory I think the share price roughly halved on that news - looking at the chart maybe it was 2015? Although note that the business is now more diversified, following the merger with Northgate’s van hire business more recently.
- For more risks, it’s always worth reading the risk disclosures that come with results statements, and are in Annual Reports. Many people ignore these notes, but they’re a mine of useful information.
- This sector tends to only attract modest PERs, and current profitability may not be fully sustainable, given the unusual shortage of supply.
My opinion - I used to hold REDD, but don’t currently. It’s tempting to buy back in, given the really attractive valuation, asset backing, and dividend yield. For existing holders, as always it's your decision. Although REDD looks well protected from current macro conditions, and you get lovely divis to offset some of the impact of higher inflation. After today's update, I can't imagine why anyone would be selling.
As you can see below, from the 3-year chart, it's proven resilient, and I cannot see any reason why that would change, given the strong fundamentals and low valuation -
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Polarean Imaging (LON:POLX)
50p (down 1% at 11:24)
Market cap £105m
Polarean Imaging plc (AIM: POLX), the medical‑imaging technology company with an investigational drug‑device combination product using hyperpolarised 129xenon gas to enhance magnetic resonance imaging (MRI) in pulmonary medicine announces its audited final results for the year ended 31 December 2021.
What a wonderful company description! At least it says what the company does, not that many investors will understand it!
We don’t normally cover blue sky companies, but some shrewd friends pointed me towards this one, so I did some work on it a while ago. To my untrained (in medical matters) eye, Polarean looks credible for a number of reasons, including having a heavyweight Italian medical company as a major shareholder.
It had a major setback recently, when regulatory approval was not granted, and POLX was sent away with a to do list, to reapply in due course. Many investors thought regulatory approval was a formality, which turned out to be wrong.
Hence the outcome here is binary - if approval is granted, then the share is likely to spike up instantly, and could go on to be successful if the product sells well.
The downside scenario is that it runs out of cash, and can’t get regulatory approval.
Polarean is largely pre-revenue (just a small $1.2m in revenues for FY 12/2021 for research purposes - but quite interesting that research customers obviously think the product has potential, or they wouldn't be buying pre-regulatory approval, one imagines).
Cash - is it going to run out of cash, is the main question with 2021 accounts? Probably not, I’d say, at least for now. There was a $28.9m cash pile at end 2021. However, costs doubled in 2021 vs 2020, resulting in a hefty $14.0m loss before tax. So if costs remain at that level, then the cash pile would last about 2 years, requiring another fundraise before it runs out, so in H2 2023 perhaps? This is confirmed by the company, which says -
The financing we completed in the first half of 2021 has put the Company in a solid financial position with the ability to fund the Company well into 2023.
The clock is ticking then.
How does that compare with the timescale for possible regulatory approval? This seems to suggest late 2022 -
We spent the first quarter of 2022 finalising our NDA resubmission focusing on execution of near-term objectives. We announced on 20 April 2022 that the FDA had accepted the resubmission of the NDA as a complete response and has established a user fee goal date of 30 September 2022.
My opinion - none, as it’s way outside my area of expertise, even to guess at! Readers who know more about POLX are welcome to add more detail in the comments section, as always with all companies. My stuff is just a quick overview, so we like it when readers add to it.
I just wanted to inspect and report on the cash position more than anything.
Good luck to holders, I know a lot of shrewd investors who hold POLX shares, hence why I’m keeping an eye on it.
Obviously the stock market is now in bear mode for speculative, blue sky shares like this, so market risk:reward has dramatically deteriorated compared with this time last year, for example, when we were at peak euphoria for speculative shares. Although as mentioned above, POLX strikes me as one of the few credible blue sky companies, out of the many junk shares that get listed on AIM to gullible punters.
So maybe investors need to ponder whether the upside now justifies the increased risk of something else going wrong - e.g. being unable to refinance in 2023, possibly? So this is very much a binary bet! Good luck to holders, I hope it pays off for you.
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Jack’s section
Keller (LON:KLR)
Share price: 785p (-1.38%)
Shares in issue: 72,770,781
Market cap: £571.3m
the world's largest geotechnical specialist contractor
A ‘mixed’ start to the year although expectations for the full year remain unchanged, despite a challenging environment, supported by a record order book of £1.4bn, and a foreign exchange tailwind.
Revenues are in line with expectations and Keller has passed on a ‘significant portion’ of cost increases in the form of higher prices, but performance has been affected by materials shortages and the residual effect of inflation.
We expect our full year performance to have the customary second half weighting, and to reflect our usual increase in trading momentum as the year progresses.
This H2 weighting does come across in previous interim results.
In North America, performance in the Foundations businesses has been hit by materials shortages, inflation, and ‘other operational challenges’ but all the other business units have performed well. A small bolt-on acquisition has been completed, GKM Consultants Inc, a geo-structural measurements and monitoring business based in Quebec, Canada. This goes into the Speciality Services business in the North America Division.
In Europe, the division is trading in line but there have been several deferred project starts, residual COVID-19 effects, supply shortages, and increased macroeconomic uncertainty. Keller has exited two peripheral geographies.
AMEA was the most impacted by COVID-19 in 2021 and has had a much stronger start to the current year, in line with expectations. Australia is recovering but the ASEAN business is still seeing lower market demand. The business environment in the Middle East and Africa remains challenging.
Diary date: interim results for the half year ending 26 June 2022 will be announced on 2 August 2022.
Conclusion
Keller may well compare favourably to its peers, but this is still a low margin, sprawling business, facing challenges in multiple markets.
It strikes me as well run and the valuation might be superficially attractive, but I’m also concerned about the group’s ability to handle the pressures it faces. The share price hasn’t done much over time and there’s not too much detail in this AGM statement, so not enough to convince me.
A good dividend track record though, with the forecast yield currently at just under 5%, so there’s something here for income seekers. Not to mention the strong StockRank of 95 of course.
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