Small Cap Value Report (Wed 20 Dec 2017) - LWB, AVAP

19th Dec '17 by Paul Scott

43 comments 15648 reads

Good morning, it's Paul here.

It's very quiet for news today, so I'm going to run some errands now, then come back later to report on what looks like a profit warning from Low & Bonar (LON:LWB) and an update from Avation (LON:AVAP) . IQE (LON:IQE) looks interesting too, although it's probably too large for me to be covering it here (although have done in the past). I think expectations for IQE were already baked in for out-performance against existing forecasts, hence the muted response to a good update today.

Quiet days are handy, as it gives me a good chance to catch up with some reading of broker notes, etc. Plus of course battling the ongoing daily burden of vast quantities of incoming & backlogged emails!

Low & Bonar (LON:LWB)

Share price: 54.0p (down 20.3% today)
No. shares: 329.7m
Market cap: £178.0m

Directorate change (and a profit warning) - this is really out of order, to bury a profit warning in an announcement about a Directorate change. There clearly should have been 2 separate RNSs, one to inform that the CEO has resigned, and another RNS to give a trading update. This is a "performance materials" group.

The CEO has stepped down from the Board immediately, so clearly something must have gone wrong. However, as the CEO is remaining with the company as an employee until 30 Apr 2018, that suggests there's nothing scandalous (e.g. gross misconduct) about his departure.

A NED called Trudy Schoolenberg is taking over as interim CEO.

Trading update - I like that specific figures are given;

Whilst market conditions for the Group as a whole have remained stable since the trading update on 16 October 2017, full year outturn will reflect a weaker than expected final quarter in the Coated Technical Textile business unit as a result of an adverse product mix and sales timing.

As a result, the Board expects to report full year adjusted profit before tax (before amortisation and non-recurring items) for the year ended 30 November 2017 of between 30m and 31m and net debt, as at 30 November 2017, of approximately 138m.

Low & Bonar…

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FREng

20th Dec '17

Paul,

I notice that you bought 4m Mobile Streams (LON:MOS) this morning for BMUS at 2.75p and they have now risen 40%! What's your secret?

sharw

Yes - I did a dummy buy to get the price of Bonmarche Holdings (LON:BON) a few times over the last week and often got 'negotiated trade only'. This was after reading Roland Head's article last Wedenesday - I didn't know he had such influence on the market!

https://www.stockopedia.com/content/sif-portfolio-bonmarcheacute-holdings-could-be-a-good-look-for-2018-252983/

slopsjon

It seems that Brett Simpson ex CEO of Low & Bonar (LON:LWB) is to be CEO of Fenner (LON:FENR)

Mr Simpson will join the Company on 1 May 2018 and will take over from Mark Abrahams as Chief Executive Officer from that date. Mr Abrahams, who temporarily resumed the role of Chief Executive Officer at short notice in January 2016, will retire from his executive position and the Board upon the appointment of Mr Simpson; he will be retained on a consultancy basis for a period of time to enable an orderly handover.

Gromley

IQE (LON:IQE)

Re. IQE, there seems to be a lot of emphasis in the update on revenue growth in assorted areas, without any mention of actual profit growth. It is fairly obvious the pre-tax profit is going to be dented quite a bit by the tax irregularity, a change in currency rates, etc

Certainly the tax issue will create an exceptional, but that was already known about.

In terms of currency rates :

A forex tailwind of approximately 5% against the prior year turned into an approximate 5% headwind in the second half. However, this is largely presentational as the majority of the groups costs are also in foreign currency.

IE the revenues are "reduced" as a result of forex in H2 (one reason perhaps that the revenue number seems to have disappointed some people) , but the margins won't be dented.

And as for general comments on profit :

profit before tax for the Group is expected to be ahead of current market expectations.

Other than indicating by how much, I don't think they could be much clearer on that point.

Additionally they expect to benefit from the US tax changes that have recently been passed (although in the short term this will incurr an exceptional write down of the US deferred tax asset.)

(I don't know if these are just "loose words" but I note that the above quote does not refer to "adjusted" PBT , so might imply that even net of one-offs for previous tax and defered tax write downs, profit it is ahead).

More interesting for me however is the outlook - more on that later but sadly Christmas shopping beckons!

vik2001

Genius or pure luck.

fwyburd

To be accurate, the indicative opening price was 2.25 and Paul bought at 2.75 so he has not benefited as much as you say. The price is now 3.14 so his gain is 14%. Still, not bad!

judywil

Great article Paul, thanks for the great analysis, as you say - very misleading RNS. Look forward to the update.

muckshifter

Paul,
I think you started off comparing apples to oranges with Low & Bonar. The Net after tax profit forecast will have made some allowance for amortisation / depreciation, which was £4m last year, and perhaps some "non recurring items" which were £9m in 2015 & £2m in 2016.
Regards.

newstart

Paul, what are you thoughts on BOTB announcement last week as I know you are holder

RichardK

Paul, re` LWB, I did a slightly different sum to you.

I took the mid-point (£30.5mn) of the forecast profit before amortisation, extraordinary items and tax, looked up the amortisation and extraordinary items fro 2016 which totaled £7.2 mn, increased it to £7.5 mn and subtracted it from £30.5 mn to get pre-tax of £23 mn, or after tax of £18.4mn, compared to brokers' estimates on Stockopedia of £22.4 mn. This is a 20% shortfall, similar to today's fall in SP.

Not a disaster, but may not be the last profit warning!

Richard

Gert1e2sh0es

It was recommended in a national newspaper the other day so maybe this has dredged up a bit of enthusiasm.

Ramridge

Anybody in Fusion Antibodies (LON:FAB) ?
It IPO'ed on the AIM market couple of days ago, opening sp 85p . Current sp is 167p a rise of over 90% in 2 days.
Not done an analysis yet, but it looks like a company in the same market as Bioventix (LON:BVXP) , or similar.

I tend to stay away from pharma companies so maybe I should think again.

No position.

So the IQE (LON:IQE) share price finished down 8.4% on the day and some 20+% below its recent peak.

That was one heck of a “disappointing” announcement then.

Well, whether anyone genuinely has a case to be disappointed or not is open to opinion, but it does seem to me that IQE has a body of unusually twitchy investors. Perhaps this is only to be expected after the mercurial rise in the share price this year. It seems to me that there is a lot of fear, greed and herd mentality going on, together with a strong desire to blame manipulation by those evil shorters for the volatility (when in fact it is much more likely to be flighty shareholders causing the fluctuations).

Expectations of this TU were high, perhaps overly so, but were those expectations disappointed?

Having gone through the numbers I don’t think mine were.

True the revenue “beat” is relatively modest (about 2 or 3%) but given that with less than two months of the year to go they were only prepared to commit to being in-line that doesn’t strike me as too bad.

H2 revenues were 14% up vs H1 (no reason to believe there would be any natural seasonality to the numbers), but in fact when you consider they had a 5% forex “tailwind” in H1 and a similar headwind in H2 that looks to me to be about 27% on a “constant currency” basis.

The commentary on margins is pretty positive too (more on that below).

There is a very useful amount on information provided as to performance in the segments in which IQE operates :

Wireless

With all the current excitement being around the photonics segment it is easy to forget that up till now around two thirds of the revenues have come from wireless.

Revenues here are broadly flat across the year with customers reducing their inventories. I think I infer from the statement that IQE actually drove this inventory reduction in order to switch capacity to Photonics. Certainly they expect inventories to “normalise” in 2018 as the up production again. I read this as being that they have voluntarily deferred wireless business in 2018. Given that wireless is significantly lower margin, this seems pretty smart and it is good that they have customer relationships that allowed them to do this.

Photonics

Revenues up about 83% (H2 vs H1) , (>100% on a constant currency basis and c. 100% Full Year vs Full year. That is seriously impressive growth and whilst one can argue that this may be the peak period for Iphone X demand, the likelihood is that Apple will move on to deploy VCSELs in its other devices together with other customers and applications coming forwards.
On the basis of the guidance given Photonics will have been over 1/3rd of the revenues in H2 and given that this has been the highest margin segment, that is all to the good.

Infrared

This is a relatively small segment currently. Revenues for the full year will be up c. 10%. Allowing for the currency effects this is probably a small acceleration in H2.

What is interesting here though is the comment that :

"This business has historically focussed on advanced "see in the dark" technologies in the defence sector, but it is now engaged with major OEM and device companies in product development programmes targeting mass market consumer applications."

So a previously niche market is developing the potential for mass market consumer apps (I have no idea what these will be). That looks set up nicely to provide, in a couple of years , the next post VCSEL wave.

CMOS

This is a tiny area of the business (loss making so far) o mention in the statement today. As I understand it though there are bigger potential opportunities some years down the line in more efficient power conversion.

Overall then the Segmental view looks something like this :

You’ll notice here that I haven’t attempted to project the H2 margins. The commentary on margin is all pretty confident : “expansion of wafer margins” “is after upfront investment in overheads to establish the new foundry that will begin operations in 2018.”
On this basis it might seem reasonable to at least carry forward the H1 margins into H2, but when I modelled that, it would suggest profits significantly in advance of expectations and I am mindful of the fact that the company have not claimed that.
So I will keep my powder dry on profit expectations and stick with the fact that the company calls out “profit before tax for the Group is expected to be ahead of current market expectations”.

As for the outlook, the company promises more on that along with the final results on 20th March. In the meantime though, just looking at H2,the fact that growth has “continued to accelerate sharply” and the new capacity coming online next year it is hard not to see significant upgrades to the current consensus forecasts.

So that ladies and gentlemen was the bad news ; it’s high time they had something cheery to tell us don’t you think?

runthejoules

Gromley thanks very much for that IQE (LON:IQE) analysis which has put my mind at ease somewhat! With the resident expert on the ADVFN board away it may be a good idea to share your analysis up there, if I haven't missed it already (for selfish reasons, I hold!)

ive had enough with IQE (LON:IQE) as a share, people are using it more of a trading stock to go in and out, and its very unpredictable. today was a fine example of that.

Thanks joules - I see you've name checked it over on ADVFN - they can come here and read it then. Perhaps Ed will pay me commission ;-)

Ajay_Gajree

21st Dec '17

Thanks for your IQE views Gromley, have to say I don't really understand why Paul hasn't reviewed it given he's said he probably would in his opening paragraph, seems an odd statement to say it's too large to cover when it was the largest holding in BMUS probably ever? Poor effort I feel to be honest given the amount of interest in the stock.

-8

shanklin100

22nd Dec '17

Paul

Please would you add IQE to the header of this e-mail, so that if one clicks on the "Discuss" tab of the IQE stockreport, this report comes up and we can access Gromley's post 36.

As it is, with the fairly limited search function, this post is otherwise virtually impossible to find.

Many thanks, hopefully, Martin :-)

Edward John Canham

27th Dec '17

Hi Gromley

I disagree with your figures for adjusted operating profit for H1 2017.

I draw your attention to page 11 of their interim statement - their figure for adjusted operating profit is £10.6M - the difference between your figure and theirs is the £4.5M of "Central corporate costs" which they used to allocate to the segments but now just disclose as a separate figure (see also page 11 of their interim statement from the previous year).

The impact is the operating profit percentage is 15% for H1 2017 not 21% and therefore this metric and the absolute level of adjusted operating profits is falling/static not rising.

Whilst I agree their prospects in H2 are good and they will be for 2018 IMO this does not justify their current very high rating. They appear risen too fast too soon.

Phil

IGotPoesJacket

I'm no expert but the "infra red" growth at IQE could be due to advanced facial recognition - a lot of devices now have an infrared as well as normal visible light camera so when you scan your face it photos the heat sources as well as what you look like to improve security, i.e. to stop you being able to hold up a picture to unlock a device.

Small Cap Value Report (Wed 20 Dec 2017) - LWB, AVAP

Low & Bonar (LON:LWB)

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Paul Scott

43 comments

Wireless

Photonics

Infrared

CMOS

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