Small Cap Value Report (Wed 5 Apr 2017) - STY, HSS, LTG
Good morning, it's Paul here!
I wrote about loads more companies last night. So in case you haven't seen it, yesterday's full report is here, and includes sections on the following companies;
Fulham Shore (LON:FUL)- in line trading update
Keywords Studios (LON:KWS) - good results, but pricey
Utilitywise (LON:UTW) - all sorts of problems, looks messy, I don't like this one at all
Next Fifteen Communications (LON:NFC) - good results, but relies on large adjustments. Weak balance sheet
Koovs (LON:KOOV) - a trading statement that tells us nothing about profitability, or financial position
Adept Telecom (LON:ADT) - good trading update
Universe (LON:UNG) - OK results for 2016
Flowtech Fluidpower (LON:FLO) - results & trading update sound pretty good
Topps Tiles (LON:TPT) - negative LFL sales, but profit still within range of market expectations
Nanoco (LON:NANO) - cash running out fast, and orders have (so far) failed to materialise
Thankfully it's a bit quieter today, and I have to be quick, as am off to an investor lunch at the RAC Club.
So today I intend writing about;
Styles and Wood (LON:STY) trading update
HSS Hire (LON:HSS) final results
Learning Technologies (LON:LTG) 2016 results
Here goes.
Styles and Wood (LON:STY)
Share price: 429p (down 8.3% today, at 10:10)
No. shares: 8.7m
Market cap: £37.3m
Trading update - this company describes itself as an;
"integrated property services and project delivery expert"
Profitability in 2016 seems to have been in line with expectations;
...anticipates delivering strong underlying profit and margin performance in 2016 with adjusted profit before tax in line with Board expectations.
As usual, we have to assume that the Board's, and the market's expectations are the same.
That sounds alright to me, so why is the share price down 8.3%? It seems to be due to these additional comments from the company today;
Following a review of full year performance ahead of the Group's 2016 results, the Board expects Group reported revenues to be approximately 9% below that for FY 2015.
This arises due to the accounting treatment for the recognition of revenue related to frameworks and projects awarded to the Group in the second half of 2016 with carry through workload for 2017.
Whilst pre-commencement activities began during the period, significant proportions of the associated work streams were carried over into 2017 resulting in a corresponding impact on the revenue recognised in 2016.
Given that the company has achieved its overall profit objective for 2016, then I'm not sure why the market has reacted negatively to some revenues being deferred into 2017? Perhaps people were expecting out-performance on profit in 2016? Anyway, revenues being nudged from 2016 into 2017 should benefit performance in 2017.
My opinion - I've tightened up my stock selection criteria, and I no longer take any interest in low margin contracting, or consultancy type businesses. So this one's not of any interest to me.
It had balance sheet issues in the past, which have improved, but there's still no dividend currently. The forward PER for 2017 is just under 9, which might look cheap, but companies in this sector really don't justify a rating any higher. Low margins, and big (often complex) contracts, means that there's an ever-present risk of something going wrong. With no divis either, at the moment, I can't see much attraction.
The shares have had a great run, almost 10-bagging, but that's because at the starting point it was financially distressed. It isn't any more, after a successful restructuring.
Note that the Stockopedia computers do like it a lot - a StockRank of 98. So maybe it might be worth a closer look?
HSS Hire (LON:HSS)
Share price: 63.4p (down 5.8% today)
No. shares: 170.2m
Market cap: £107.9m
Final results - for the year ended 31 Dec 2016.
These figures don't look much good to me. A few key numbers;
- Revenues up 9.6% to £342.m
- Adjusted profit before tax flat vs 2015, at only £5.8m
- Adj EPS fell from 3.2p in 2015, to 2.94p in 2016 - so a PER of 21.6 - why so high, for a heavily indebted equipment hire business? The market must be anticipating strong growth in future earnings.
- No final dividend - this looks a sensible decision, given how awful the debt position is.
- Statutory profit is a heavy loss, of -£17.4m, so a big difference between statutory and adjusted figures.
- Restructuring ongoing.
- Profit growth in 2017 expected to be H2 weighted - usually seen as a negative by the market.
Cashflow - on a more positive note, both capex & finance costs reduced considerably, thus making the cashflow position improved vs 2015.
Balance sheet - just looks ridiculous. I have no idea how they managed to float this company with such a terrible balance sheet.
NTAV is actually negative - at -£25.4m. What does this mean in practice? Well, with no equity at all, basically the entire hire fleet is funded by bank debt, plus there's a deficit on working capital. It's extremely precarious in my view, and makes the equity very high risk.
My opinion - this company is ideally positioned to go bust in the next recession. It's not making much money in the good times, and has a mountain of debt that could easily pull it under when business dries up in the next recession.
Therefore my only interest in this share would be to short it.
Learning Technologies (LON:LTG) - this is a stock we discussed last weekend at the UK Investor Show, as Nigel Wray has a big position in it.
The share price is up 4.8% today, to 46.1p, on positive-sounding 2016 results.
The figures are difficult to analyse, because the company is expanding, and making acquisitions. So I think the best thing would be to get hold of the latest broker research, and sense-check their forecasts.
A big recent acquisition of NetDimensions should considerably boost the 2017 (and beyond) figures.
It's not cheap - the share seems to be rated on about 30 times 2017 forecasts. However, there is work in the pipeline (for the Civil Service) which sounds like it could be lucrative.
At a very first, quick glance, this share looks potentially interesting. I'll try to spend more time researching it, maybe at the weekend, or whenever time permits.
Note that it's not capitalising a lot in development spend, so the EBITDA looks pretty genuine.
Sorry, that's all I have time for today. Graham might possibly add some more comments, below, if he spots anything interesting.
Regards, Paul.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
13 comments
There are some other threads on here about Learning Technologies (LON:LTG) which are worth reading including this one http://www.stockopedia.com/content/learning-technologies-someone-talk-me-out-of-it-142085/ .
I'm long and bullish on Learning Technologies (LON:LTG) and have been for some time having first bought in Jan 2015.
I don't like the fact that they can't seem to put a figure on just how transformational the Civil Service work is - they should know by now how much they are going to make from the deal and when the money comes through. They are cagey about it which worries me. They could be stating the expected increase in revenue and profits but they aren't.
On the plus side with the Rustici acquisition they have effectively bought the company that defined the standard for e-learning packages. In theory the blend of companies that they now own should be able to provide killer e-learning software and deliver the software and training content results right across the globe. Very little large organised competition in this field.
The potential is huge but they do talk themselves and the SP up a bit early in my mind.
Would be interested to hear peoples thoughts on sirius minerals (LON:SXX) . Plenty of opinions on other boards (and plenty of ramping), but interested to know what you guys thought and if it really is too long away to be considered anything but a punt. Not sure if its small cap but noticed it had a similar market cap to purplebricks. Cheers
My simple rule on blue sky stuff like this, is not with the pole of the barge!
Normally if you want to invest in this kind of stuff, you have to be happy to throw twenties into the ground and hope fifties come up. Most of the time that doesn't happen.
Maybe on the third capital raise, we've had the first one back at the end of Nov, £330m.
Just my experience of 33 years of investing and making expensive mistakes.
Best of luck either way.
Chris
Sirius Minerals (LON:SXX) may get a bit of a lift from transferring from AIM to the main market. But as an investment it would require a fair amount of patience and fortune, and after the last fund raising I fear shareholders are in the queue behind Gina Rhinehart when it does start to produce income.
Re. £SKIN Just a heads up for IPO fans. First dealing date for a company called Integumen with a fantastic epic code SKIN. Apparently it sells products mainly for skincare.
I suspect it will be a few days before you see it listed on stocko..
I gave the admin doc a once over and found too many negatives for me. Market cap only £8m. ; loss making ; tiny revenues of £153K in last FY. I won't bother but please DYOR
Regards, Ram
ps. just checked sp and it is below the placing price of 5p. Not surprised.
Well, this is like London red buses time. Yesterday there was another first dealing date IPO also in the business of skincare, called SkinBiotherapeutics (ticker SBTX) .
It is a demerger from Optibiotix which will retain approx 42% of the equity.
Placing price 9p, sp at close yesterday 13.5p
Check out ShareProphets site for more details.
The company will keep £4m out of the placing to fund development to commercialisation stages.
A huge warning : this is blue sky territory, more of a punt than an investment.
James - yes you are of course correct and I forgot to clarify that key point although Styles and Wood (LON:STY) do offer a number of consulting services rather than being a pure contractor. Point noted, however!
As usual Paul some excellent commentary and analysis. With respect to Styles and Wood (LON:STY) I have to beg to differ re: the potential valuation and attraction of consulting type business in this space as clearly demonstrated this week by the proposed acquisition of WS Atkins (LON:ATK) by SNC Lavelin at a multiple of around 1 x sales and a hefty double digit forward earnings multiple.
Numerous other consulting firms in this sector have been the subject of M&A activity over recent years, typically being acquired for 0.75 x sales. I dont hold Styles and Wood (LON:STY) but see value in this space and can foresee further M&A which could include the likes of Waterman (LON:WTM), Driver (LON:DRV), Aukett Swanke (LON:AUK), RPS (LON:RPS) and WYG (LON:WYG) amongst others.
I am a holder in Styles and Wood (LON:STY) so do believe they are undervalued but its worth noting that they are a contractor and not a consultancy like the others you've listed.
Hi,Paul.Any chance of a look at old favourite Dart DTG - even though it has grown a bit ?
LTG were at the UK Investor show. Have to say I really like them but not bought shares in them because I feel they are a bit expensive. That said the CEO has a bucket load which is a good sign, as Nigel Wray keeps pointing out. But this may explain why the dividend is important to the company.
A couple of things struck me while looking through the results for Learning Technologies (LON:LTG).
Firstly there are a couple of prior year restatements following a review carried out by the Financial Reporting Council's Conduct Committee. Maybe this is all above board but I'm not sure I like the idea of a regulator's conduct committee sniffing around a company.
Secondly, the retained earnings balance turned negative this year but they are still paying dividends, which I thought was illegal. I suppose it's possible the parent company has sufficient retained earnings while the group's retained earnings are negative in aggregate due to consolidation effects, but it looks odd and I would have expected some sort of narrative explanation.
No half decent auditor would let something like that slip through if something was really amiss, so I assume it's OK but maybe I am being naive with that assumption...
"This company is ideally positioned to go bust in the next recession." Superb.