Small Cap Value Report (Wed 28 Feb 2018) - AVG, SFE, SAG, FOXT, CSSG

In reply to post #331308

Hi Clementwether,

Science Group Science (LON:SAG) Solid company, good balance sheet, decent results, slow and steady with surplus cash used for the occasional bolt-on acquisition.

Thanks, sounds interesting, I'll take a look at Science (LON:SAG) .

It's very helpful when people put in a request like yours - i.e. giving me some key bullet points that motivate me to look at the stock! If people just say, "please look at xyz", with nothing else, it's a bit lazy & less likely to persuade me to look at it.

Regards, Paul.

Hi,

I'm running a bit late today, so this report will take shape during the afternoon & early evening.

Looking through the reader requests, the main one is Avingtrans (LON:AVG) so I'll look at that first. After that, I'll review Safestyle UK (LON:SFE) , Science (LON:SAG) , Foxtons (LON:FOXT) , and if there's any time left, Croma Security Solutions (LON:CSSG) .

That's probably enough for today, so preferably no more requests from now. Thanks!

As mentioned in a post above, I much prefer it when people add some key points into requests. So rather than just asking me to look at XYZ, please try to add some colour. Tell me why it's interesting, with some key bullet points. I'm not a machine, I have to motivate myself to spend time looking at companies, so input from you is very helpful. It's a team sport after all, so the more you can add, the better!

Thanks, Paul.

In reply to post #331468

Thanks both runthejoules and ridavies for the furher thoughts on Safestyle UK (LON:SFE) and their new competitor Safeglaze.

I'm not an expert on this industry so please don't put any special weight on my thoughts.

As far as I can see Safeglaze are not a 'disruptor' as such insofar as I believe they operate essentially the same business model as Safestyle UK (LON:SFE) , Everest and many more besides.

So whilst it's certainly true that additional competition will always drive down margins, I'm not sure that this is a fundamental change in the longer term. They are referred to as an aggressive new competitor which I took to infer that they are thought to be "loss-leading". That being the case then clearly it is a drag in the near term, however I'm not convinced that it is a structural change in the market. In fact given the strength of Safestyle UK (LON:SFE) you might fancy them to come out on top if it comes down to a dog eat dog fight to the finish.

More reason, I agree, to want to sit on the sidelines for now, it may not be so significant in the longer term imho.

In reply to post #331428

Hi

Croma Security Solutions (LON:CSSG)

Debtors are more or less in-line with the increase in turnover and at about 2 months seem reasonable (may in fact be less than this if you assume accelerating month by month income, which doesn't seem imprudent).

I also note that the company is due to buy-back another million shares (6%) in May 18 at 40p under an arrangement with a previous director! (RNS 3/11/17)

Interesting company.

Phil

In reply to post #331428

Like you I had not looked at Croma Security Solutions (LON:CSSG) until this morning. I can find no forecasts including https://www.reuters.com/finance/stocks/analyst/CSSG.L which normally coincides with the StockReport figure.

The company gets low marks for its investor website which shows Mark Whettingsteel as a director and shows his shareholding. He left last August and did a deal for the company to buy back his 2m shares in two tranches. The second was done today at 40p.

The problem for me is that the company says"During the period under review, the division won six new contracts from both public and private organisations of which two were one off projects which boosted the financial performance....". There is no indication as to whether the one off contracts were wholly within H1 which could mean lower H2 figures that would worry investors. Equally there is no indication as to the extent that the four other contracts will boost H2. If they discuss that with WH Ireland and the latter then produce a forecast we may have something to go on.

They seem to have some potential gems including FastVein:

https://www.youtube.com/watch?v=3DEBAZ42OH0

In reply to post #331503

Ref Safestyle

"They are referred to as an aggressive new competitor which I took to infer that they are thought to be "loss-leading". That being the case then clearly it is a drag in the near term, however I'm not convinced that it is a structural change in the market. In fact given the strength of Safestyle UK (LON:SFE) you might fancy them to come out on top if it comes down to a dog eat dog fight to the finish."

Well if the Bod in charge is getting paid a £4 million + annual salary + options- it wont really take any loss leading for a competitor to beat them on price. Relative of a bod at work got front and back door done by them in London and they cancelled appointments 3 times at short notice and it took 3 visits to get the doors fitted correctly when they could be bothered to turn up- inefficiency like that (if it is repeated) and they may be taken to the cleaners by Pat's lot or any other lot for that matter:).

In reply to post #331498

Fair points about the inputs. The new point in the mix for me with Safestyle UK (LON:SFE) which I once owned, thought I had sold too early and now am happily out at around 220p, is 'the new competitor' and the fact that they have 'let go' a significant number of staff over the Dec/Jan period - grist to the mill for a hungry and recruiting competitor. Safestyle UK (LON:SFE) have invested heavily in new manufacturing facilities so are state of the art (in their market) now and manufacturing costs per item at a low now. Im not sure I understand what they expect to gain from the 'investment in IT'. Not exactly an IT company is it?
Anyway as always grateful for your thoughts, though I guess they will be even more thorough and penetrating at the prelims 22nd March, especially since we will hope to learn much more then about the Outlook for 2018.
PS I thought your piece on Johnson Service (LON:JSG) yesterday was a master class on business analysis. I learned so much from it.

Re Science (LON:SAG) - here are my comments. I hold.

This is a Martyn Ratcliffe (ex-RM (LON:RM.) and ex-£MCGN) turnaround of a previously loss-making consultancy. The numbers are relatively clean with adjustments for amortisation of £1.4m (£0.4m less than the prior year) and £0.8m for integration costs (against a previous forecast of sub-£1.0m).

The balance sheet is supported by (regularly-valued) property of £21.9m (against which there is bank debt of £13.9m with interest fixed at 3.5%). The company claims to have a cash balance of £19.9m at the year-end but this doesn't square with finance income of just £3k. The balance sheet has net tangible assets of £16.7m.

Adjusted diluted EPS from continuing operations is 12.8p, slightly ahead of consensus forecasts of 12p. This gives a historic P/E of 16.4 at today's mid-price of 210p. In September 2017 they acquired Technology Services Group, a US-focused business, for £13.2m. They had previously announced investment in headcount in the US In January so this was a continuation of that strategy. The acquisition wasn't cheap - around 16.5 times pre-tax earnings of £0.8m - but then nothing is in the States these days. It is also designed to increase their presence in Europe.

44% of the turnover in 2017 came from their US operations and 36% came from Europe. This will increase with a full-year effect from the acquisition. In 2017 foreign exchange benefitted revenue by £0.7m This will reverse to some extent in 2018 as the pound has strengthened.

The dividend is small 4.4p giving a yield of around 2%. And the growth rate is pedestrian - CAGR revenue of 9.4%.

I think Ratcliffe is a class operator and has a large amount of skin in the game (34.1%). This is a solidly managed and financially stable business. The question is where is the growth going to come from? If by acquisition it will run the risk of destabilising the balance sheet and organic growth is sluggish. Given that Ratcliffe returned capital rather than paid over the odds for businesses at Microgen (LON:MCGN), I can;t see him putting the balance sheet at risk to grow.

This is also a consulting business and so any sp increase is unlikely to come from multiple expansion as the market puts a low price on highly mobuile human assets.

The shares are thinly traded and it has the feel of a bit of a lifestyle business for Mr Ratcliffe who can't need the money. However, at some point he will want to exit so I am looking to the longer-term as I suspect he will get a good price for it. A similar situation to £AVS?

My concern about Science (LON:SAG) is that it may turn into one of these companies run for the employees and executives rather than the shareholders. Today's narrative seems to suggest a lot of any upside may be needed to attract and retain staff.

In reply to post #331508

Yes Croma Security Solutions (LON:CSSG) does look interesting but i’m Put off by the low operating margin, 2% in 2017 results, which could explain the rather up and down profits over the years.

I wonder whether final results refers to year end results and preliminary results refers to pre-audited results. Hence in the case of Foxtons (LON:FOXT) it means they are for year end but have yet to be audited.

Preliminary results are the first communication to the market of the annual results post sign off by the board. I believe they are preliminary to the publication of the full report and accounts. Clearly the printing and dissemination of the full report and accounts can take some weeks, therefore companies publish prelims which are much more than a snapshot, but not the full works. Thus prelims/interims are the same as full year/half year. Readers may be surprised that the torrents of stuff now produced was once not the norm-some companies in the 1980s would publish half a page or a page for their prelims (these were the exception). Obviously the published full year accounts had to cover the statutory requirements plus whatever the board wanted eg photos of themselves!

In reply to post #331668

That's my understanding of "preliminary" too. I think "Final" refers to Year End? So Preliminary AND Final results not necessarily a contradiction? BUT I'm not an Investor Relations / PR guy, so not 100% confident.... could just be a typo?

Paul,

Just one additional clarification on Safestyle UK (LON:SFE) re your comment :

Competitors eating their lunch is usually the real reason that most profit warnings occur, yet it's rarely disclosed as the reason. We normally hear waffle about lengthening sales cycles, consumer confidence, Brexit, you name it.

Clearly as you observe this latest downgrade does cite the new competitor as part of the cause, but we should not lose cite of the fact that the series of previous downgrades have come despite increasing market share (as per the independent FENSA stats), so unfortunately for a lovely soundbite, the waffle about consumer confidence etc. has some truth also. Important in the sense that Safestyle UK (LON:SFE) has two major headwinds to counter not just one.

In reply to post #331643

Hi Herbie

Croma Security Solutions (LON:CSSG)

I also don't like investing in companies with low operating margins - but the margin here is increasing which makes it worthy of consideration.

The gross margin is static at 18%+ on vastly increased sales, but admin costs seem to have a high level of fixed cost - H2 2017 £2M and H1 2018 £2.2M. This leverages the operating margin up to 5.9% in H1 2018 which makes me interested. Also if you believe sales will continue to increase then so will the operating margin.

Phil

In reply to post #331458

Directors of newco NIAMAC DEVELOPMENTS LTD t/as Safeglaze listed as former Safestyle Ops Director, Philip O'Malley and founding family member, Aarti Misra.

So is everyone convinced that SafeGaze is the SFE competitor mentioned in their release?

Is there any published information on SafeGlaze's financials? If they are selling at or below cost to gain market share, how deep is their balance sheet to sustain losses?

How long has SafeGlaze been around? Are they copying the SFE direct-to-customer sales and production model?

If this is a well-financed competitor who is using the same direct-to-customer model , and if they are willing to run losses or zero profits for years, SFE's stock will end up trading based on a worst-case revision to ROE down to some very marginal level, around 5%. The shares could easily end up trading at or below book value, which implies the share lose more than 60% of their value from the already-collapsed price.

In reply to post #331863

 So is everyone convinced that SafeGaze is the SFE competitor mentioned in their release?

Good question pone, I haven't personally validated it, but there was a poster on ADVFN who called out the issue before Safestyle UK (LON:SFE) did, so I'd be happy enough with that for now (especially as I'm not investing here at the moment).

I'd got the impression that they were newly set up by the ex-SFE staff, but in fact they have been around since 2014  https://beta.companieshouse.go... so perhaps the ex staff moved into a previously pedestrian business to take on SFE.

If I have found the right company in the above link, then it looks as though the company was dormant up to Mar-17 : 1 staff, zero turnover and £61k of assets - so perhaps this was a plan long in the making.

I don't use trustpilot much so I don't know if this is unusual, but there have been  a large amount of recent (mostly positive) reviews for Safeglaze in the last few days.

 https://uk.trustpilot.com/revi...

It looks like SPAM to me, but others with more experience of trustpilot may be able to comment.

The Big Risk for estate agents who have effectively all become letting agents due to the attractiveness of recurring revenues, is very strong moves towards banning letting agent fees as has occurred in Scotland. Trying to get money out of landlords is a completely different kettle of fish than being able to bully tenants. The experience in Scotland is that the total fees charged has significantly reduced, as the true buyers of the services (landlords) shop around and that any attempt to recover those fees through higher rents is thwarted by market affordability reality.

Quick footnote for the record following up on Paul’s excellent write up on Science (LON:SAG). They’ve recently (end March 2018) completed an open market valuation of their two large freehold properties. Full report is in the company RNS notes posted on March 26th. Summary from report below:-

“Summary

The Board holds the freehold properties on the balance sheet on a historical cost basis and depreciated to a residual value. At 31 December 2017, the assets were held on the balance sheet at a value of £21.7 million.

The independent valuation indicates an aggregate Vacant Possession value of around £22.6 million and, based on current market rents and property yields, an aggregate Sale & Leaseback value of around £33.9 million.”

Seems to be a pretty solid anchor for that part of the valuation. Also found a useful recent commentary from Richard Beddard on the company. He quite likes it - link here.

http://www.iii.co.uk/articles/494231/understanding-science-worth-effort

No position yet but thinking of it at around 200p entry level.

Gus.