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

19th Dec '17 by Paul Scott

43 comments 16604 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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vik2001

20th Dec '17

IQE (LON:IQE) - has dropped down a few % this morning, currently at 150p. could provide a excellent entry point back in. this happened last time only for the share price to shoot later back up in the day. I suspect its because people put in sell orders last night not expecting a good update.

fwyburd

Possibly. But shorters again increased two days ago and their positions total now stand at 8.05% of declarable positions, so may be even higher than that....

Francis

Ramridge

Re. IQE (LON:IQE) IMO the RNS news was already priced in. I suspect the drop in sp is due to profit takers and some misguided people who were expecting a lot more.
Anyway, I am back in @ 148.5. Looking ahead I suspect it will be a rollercoaster ride in 2018.

somebody bought 1.5million pounds worth of shares this morning at 8.50, was that you :)

I wish :)

RichardK

Low and Bonar tucked away a profit warning at the end of an RNS entitled Directorate Change. The latter announcement was that the Group Chief Executive, Brett Simpson, is leaving to join Fenner. L&B down 21%, Fenner down 4.7%.

I hold both. Aaaarrrgh! But maybe not for long.

Richard

Paul Scott

Hi ratioinvestor,

Yes I saw the article in the Times about Sosandar (LON:SOS) - my broker emailed it to me.

I'm amazed at what the ladies at Sosandar have achieved in their first year of operations from startup in autumn 2016. I think this company has great potential, and is well-funded since the IPO. However, it's currently very speculative - it needs to achieve stellar growth to get anywhere near breakeven, let alone profitability. So I'm comfortable with the valuation being where it is, and will wait to see how the company performs over the next year or two.

Online fashion is a risky area, but highly rewarding when you get it right and pick a winner. It's also usually fairly obvious from the figures which companies are winners, and which are losers - e.g. Koovs (LON:KOOV) was a basket case from day one, which was glaringly obvious from the numbers.

Also, whilst it's imprecise, I like the fact that you can monitor web traffic via Alexa for online businesses. Sosandar is rising impressively up the rankings, which combined with its recent positive update (general, no specifics) gives me comfort.

It's all about management. Everything I read about them, and indeed when I had a conference call with the Directors of SOS pre-IPO, makes me feel that there's a good chance they could succeed - they're very experienced fashion industry people, and it's really all about product, and marketing, which is what they're good at. Everything else (e.g. logistics & IT) can jut be outsourced these days. Highly speculative at this stage though, so extra big risk warnings apply!

Regards, Paul.

Re: My Market Sentiment Report:

An eagle eyed reader (laurie) has spotted a error in my calculations about investor sentiment. It turns out they are marginally bearish (not marginally bullish as I reported). I got the mean wrong - duh!.

I have now corrected the report here

many apologies

Francis

FREng

The ECJ has just ruled that Uber is a transport company. That might affect a lot of the digital disruptors.

bsharman

Thanks for flagging this up Paul - I'll take a look at the Times article - interesting how they have a joint CEO. Sosandar (LON:SOS)

Andrew L

Paul, Thanks for that. Out of interest do you mind if I ask who your broker is? Pretty impressive that they send you newspaper articles on stocks you cover. I never really looked closely at Koovs and I think the main pitch is that someone behind ASOS was somehow involved in it. Lord Alli I think. But cracking India with an AIM listed company in the UK is a tough call.

Sosander - I like the logic of the market niche they are going after. I.e. women graduating from ASOS and Boohoo as they move up the age scale and want smarter stuff. The two CEOs also look credible and should be able to get the marketing side right. The trouble is as you say it is hard to make these things profitable given delivery costs and returns. Revenue is likely to be tiny at this stage. I would say it is a credible speculation but I am guessing they will need more money at some stage. What is interesting is that marketing is key to this kind of business and the two CEO's should have the backdrop to get that right.

monzo

Re: IQE (LON:IQE) It's worth noting that they are one of the more heavily shorted shares on the market with just over 8% borrowed short

Carcosa

Since Paul indicated he would mention Avation (LON:AVAP) today i thought I would wade in with my views...

I follow Avation (LON:AVAP) quite closely. This month there has been a pivotel change in their aircraft line up with the recently delivered new B777-300ER and the soon to be delivered used A330-300. Whilst 'list-price' of these aircraft are astronomical the real discounted prices are, in my estimate aggregate to $253m, Compared to a single ATR72 worth about $19m. In other words a step change in fleet asset value will have occurred by year's end. Similarly the lease revenue from the wide-bodied aircraft will be around $26m/annum.

These aircraft will deliver around 30% growth from the FY 2017 total assets. Although I do note that in todays announcement there was a glaring omission of the A330 and also a suggestion that the H1 revenue numbers will be below comparatives. I had it slightly ahead so I hope the A330 aircraft is not delayed extensively or cancelled.

However these two aircraft are contributing practically nothing for year ending Dec 31/17, assuming the A330 gets delivered as previously advised. With the sale of the 6 ATR's earlier in the year H1 revenue was, in my estimation, going to marginally higher but todays update suggests it will be marginally below the comparative period. Full year 2018 numbers are going to be significantly ahead at around $118m or 26% YoY as a consequence of the two new wide-bodied aircraft and 5 more ATR's (which in themselves will not contribute much due to deliveries being near the end of the financial year).

So, without Avation gaining any additional orders FY 2017/18/19 revenue numbers will increase anyway; simply because of aircraft delivery timing issues.

Avation remains a very very small niche player in the leasing market and they do have limited economies of scale and high aircraft concentration when compared to larger lessors. Exposure to certain lower credit quality lessees and elevated balance sheet leverage. It is essential Avation grow their fleet and customer base. I hope additional jet powered narrow/wide bodied aircraft will be added to the fleet and older aircraft are sold on next year. A rule of thumb is that wide-bodied aircraft attract a better credit rating airline. Scale and diversification are the primary drivers of credit ratings which drive Avation’s cost of debt. As ratings are improved a lower comparative cost of debt will mean that Avation is able to compete for a larger proportion of the new/secondary aircraft acquisitions on an annual basis allowing high growth to be maintained.

Unsecured debt is probably going to increase from 18.2% of total debt to almost double that. Leverage will likely increase in excess of x4 which for a lessor is as high as you want to go. It therefore leaves Avation on a relatively low share price rating. Nonetheless with a share price of around 224p and a NAV of around 330p at Dec 31/17 and 350p at the end of the financial year results, it is a compelling buy for LTBH investors. Avation is not going to set the world alight with its share price action but steadily appreciates over the longer term (I have been a shareholder since 2013).

Brookeda

Thanks for your extensive notes. Aviation is my 2nd largest stock today and I've held stock with them for a few years now. As you say it's not going to set the world alight but it's a good growth stock and longer term will continue to grow or be bought by one of the bigger fish at some point so I'm happy with it's performance and continued trajectory. The management team in Aviation have a lot of experience and know the market very well, that gives me faith this company will continue to deliver in the long term.

andrea34

Francis,

Please can you advise what site(s) one would use to find out the amount of shorting on a stock?

Andrea

https://shorttracker.co.uk/

you can also go into IG and look at market data to see if people are long / short.

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

JohnEustace

If you type "short interest iqe" into Google this comes top:
https://shorttracker.co.uk/company/GB0009619924/

This is the source data:

https://www.fca.org.uk/markets...

Thanks very much 'vik' :-) Interestingly I was looking at the price graph of Debenhams (LON:DEB) this morning wondering about the significant recent fall, and see they are being heavily shorted!

Anyone noticed the big rise in Bonmarche Holdings (LON:BON) on no news?

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

Low & Bonar (LON:LWB)

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Paul Scott

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