LON:WTM | Waterman - What Is A Fair Price Post Brexit

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6th Jul '16 by jonno

18 comments 11719 reads

Like many UK centric construction related stocks Waterman's share price has been battered falling from100p to just over 60p at the time of writing. Clearly some reduction in the price is warranted given the current uncertainty, but is the risk to the downside now reflected in the shares or is there more to come? The honest answer is I suppose that no knows, but nonetheless all views welcome.

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Jonno

Premium Member

18 comments

Trigger14

6th Jul '16

Yes you're right that it is really difficult to say at this point. Given it's strength of balance sheet I'd say it probably looks fair value right now though I think it is high likely to become much better value over the course of the rest of this year (and maybe beyond). So whether to hold or not might depend on your timescale and investing/trading system etc.

I sold out of WTM as soon as I could post Brexit which looks like it was a good call now. I had held not because I thought it was a quality business for the long term but that because it looked stonkingly cheap in the short term. Post-Brexit this no longer seemed to be the case so it was an easy decision...

biloseli

6th Jul '16

I'm still holding at the moment, but I must admit I wish I'd sold WTM as I cleared out lower conviction stocks post-Brexit.

The market seems extremely bearish on anything property-related. It seems out of proportion to the magnitude of the inherent risks at the moment. It's possible events will conspire to trigger a recession, but I think if it happens it will be a "normal" recession. I can't see anything that will create another financial crisis-style meltdown. I wonder if too many people have anchored to what happened back then?

jonno

6th Jul '16

Thank you for your views Trigger and biolseli; both have merit. Trigger the sale was a good move immediately post Brexit and in retrospect I should have done the same, but like biloseli I still hold and any decision to sell is currently a little more difficult. It is reasonable to expect a downward adjustment in revenue and eps going forward but as to how much and whether this is captured in the price is a finger in the wind assessment. I also continue hold one of two property related companies such Conygar, that trade at a very substantial discount to NAV. At some point the tide will change but as to when? In the meantime I might see if I can speak with Nick Taylor, CEO at Waterman. He may be prepared to give a view on how he sees the near term in the aftermath of Brexit.

mpat89

6th Jul '16

I sold out today for a dismal price of 58.38p with a 31% loss. I had to sell in accordance with my strategy (kill losing trades)

I found it hard to justify buying more instead of killing the holding as:
- depressed property related valuations likely to stick around for a while so long as there is brexit uncertainty
- the business just has such a low margin it could easily slip into a loss

So for now I am out but lets see how the share price progresses. If this volatility continues we could easily have the opportunity to buy sub 50p

rhomboid1

6th Jul '16

Waterman (LON:WTM) rely on project sanction, we are in a brief, imho , hiatus , this piece sums it up really well;

http://funds.wiseinvestment.co.uk/news/property-panic-tony-yarrow

I'm holding as this looks like a classic black swan event that creates a hugely oversold position in quoted Property related businesses,.

mpat89

6th Jul '16

I fear that oversold is actually a longer term downtrend. FTSE 250 is in the process of establishing a downtrend.

smatthews1

6th Jul '16

rhomboid1, This is an excellent article, I am currently sitting on the fence with this one. Its latest reported news was about 2 new contacts which is obviously positive, however this was most properly well into the pipeline before the Referendum.

However there hasn't been any new news recently, so fundamentally everything remains strong. I cant help but think that cheaper finance from the low interest rates (soon to get lower) can only do wonders for any new and upcoming constructions projects, so I would be very surprised if demand here would tail off for Waterman.

I can understand to some extend why house builders are affected as their average house selling price is a main concern, but I really dont know why this would get dragged along with it?

mpat89 also makes a very valid point about their low margin, which they would properly struggle to stay profitable if there really is an underlying problem in demand. So this conerns me more than anything.

I will wait this one out until there is some news or comment from Waterman, seems to hasty to sell straight after the vote.

Sean.

jonno

7th Jul '16

Hi rhomboid, to reiterate smatthews1, the article by Tony Yarrow is indeed excellent in providing a dispassionate assessment of the current situation with regard to commercial property and too a lesser extent house builders.

Wisely or naively I also bought Bellway last, time will tell which.

Thank you for the research.

jonno

thirty fifty twenty

13th Jul '16

I am very positive on WTM.
post Brexit there will be a downturn in demand - we don't know how much.
However all WTM needs to do is match the level of consultants it employs to that new level of market activity.
So yes it will have to make some redundancies, and yes the P&L will reduce as it realigns....
but it will find that balance and return to being a profitable company.. maybe not at the £3m level but very probably at the £2m level.
We know that WTM generates BIG CASH flows.... in 2010 debt was £10m,
today after growth, taxes and dividends the CASH balance is £7m.
This CASH Flow is a nature of its simple business and will not change in the future.
In my calculations I have allowed £2m for redundancies - that's 40k payment each for 30% for staff and a further £1m for exceptionals etc..... So in an immediate sense I see a business making £2m profit (EPS of 6p) and with CASH of £5m (16p) - that business is probably worth c.70p....
However I also think that the real situation is better than that....
(1) WTM has several future visible contracts for the next year or two so profitability (and CASH FLOW) will be maintained for a short time - this will increase the CASH balance
(2) this visibility gives them some time to re-align their business, and also there will be some element of natural wastage of their consultants which reduces the upheaval cost from my assumptions
(3) in time there will be rumours of a take-over / merger (with Mouchel out of Kier??) - not this is not imaginable today but give it 6 to 12 mths and the possibility will surface. Take-over premiums are maybe 30%+ but I think as a strong candidate to be taken over the price will command a 10% premium.
So for me - I calculate an extra £2m CASH flow in the next 2 years and a 10% premium to give a decent 12 months price value of c.85p. in the meantime there is a near 4% yield.

naturally I am a holder.

I can see why investors spooked the price down to sub 60p - I think they are wrong because they have extrapolated the current situation and not allowed for action that mgt can take. In addition I think people have made a comparison with 2008/9. the key difference then being that going in WTM was highly geared so when worked dried up it meant that the banks could effectively call the shouts..... with £7m CASH in the bank there is no chance of that happening however pessimistic one is of the economic outlook. All WTM need to do is align the number of consultants to the on-going level of work.

of course my assumptions may be inaccurate but I am happy that they are not ridiculous and the resultant value I calculate gives a purchase today a big margin for error (as well as the divi) ,
I am also aware there is a scenario of increased Gvt intervention to stimulate the economy with infrastructure growth which might turn out to be a good news for WTM!

B of L all

back2value

13th Jul '16

I thought the shares were good value at 90p and as there is no prospect of WTM's business falling off a cliff in the short term, at 69p they are even better value now. This is a conservatively financed and scalable business which won't grow counter-cyclically but which should keep winning business through thick and thin, in my opinion.

Arguably the prospect of a bid from others is probably lower now than before the referendum, but I wouldn't have ever justified a purchase for that reason alone. That said, WTM still has the feel of a potentially great bolt-on to a bigger group in the long run.

B2V

WarrantStar

22nd Jul '16

I am a holder and have put it through my "holdings review" process, which gave the following summary:
BEST REASONS TO KEEP HOLDING
THE SHARE PRICE IMPLIES EPS CAGR WILL BE ZERO. VALUE RANK 96. DIRECTOR BUYING. VERY STRONG TRADING UPDATE. SCVR BEFORE BREXIT WAS TO BUY. SHARES MAG REC BUY BEFORE BREXIT. INTERNATIONAL EXPOSURE. THE COMPANY IS SOUND.

BEST REASONS TO SELL
BREXIT WORRIES. RECESSION WORRIES. HIGHLY CYCLICAL & CURRENTLY UNPREDICTABLE. NEGATIVE PMI INDEX FIGURES JUST RELEASED FOR JULY. NEGATIVE SHARE PRICE MOMENTUM.

So it's a very difficult decision. But I will hold.

FREng

1st Aug '16

The SP is recovering so it seems the sharp fall was a buying opportunity.

One thing I don't understand. The Altman Z-score for Waterman (LON:WTM) includes this as a risk:

Testing: Market Value of Equity/Book Value of Total Liabilities > 1.439
Waterman Details: Market Value of Equity/Book Value of Total Liabilities = 0.77

The explanation is this: Market Value of Equity / Book Value of Total Liabilities. This offers a quick test of how far the company's assets can decline before the firm becomes technically insolvent (i.e. its liabilities exceed its assets).

I don't understand how a change in share price is a measure of a change in the company's assets and solvency, and I can't see how to calculate total liabilities from the Stockopedia figures.

PJ0077

1st Aug '16

FREng

The total liabilities in the Accounts section are revealed as 30.1m.

Hence Market cap/total liabilities = 23.1/30/1 = 0.77.

As you say, a change in the share price has no immediate impact on the Balance Sheet. However Altman used this ratio as an indication of the market’s confidence in a company’s financial position. Generally speaking, the higher the market capitalization of a company (relative to total liabilities), the higher the likelihood that the firm can survive going forward.

FREng

1st Aug '16

PJ

Thanks for the reply. Where did you find the £30.1m? The WTM Accounts/Balance Sheet tab gives 30.3m.

I can see that the share price is an indication of market confidence but it seems a much weaker indicator of financial strength than (for example) free cash flow per share.

PJ0077

1st Aug '16

My mistake.. £30.3m is indeed last year's total liability.

No idea why Altman included this ratio, other than due to back-testing.

I guess it's a "what if" ratio i.e. if Waterman needs to issue Equity to eliminate it's liabilities, potentially how dilutive to shareholders will this potentially be?

schober

6th Aug '16

Why not switch into ATK?

1) The historical record of eps and divi is much better (divi increased every year since 1997 (2003 an exception))
2) ATK is a less volatile stock
3) ATk has a much wider geographical base
4) ATK has US exposure; after the elections it is likely there will be a major fiscal expansion resulting in more infrastructure projects
5) ATk has exposure to the middle east and should benefit when teh oil cycle turns

Chart.aspx?Provider=History&Code=WTM&Siz

dfs12

3rd Oct '16

Interesting development announced last week (RNS 22nd Sept 2016)... "Waterman are assisting Canary Wharf Group with their plans for a further phase of the overall Canary Wharf development which is likely to involve over 200,000 square metres (2,100,000 square feet) of mixed use buildings."
The news is very positive but the lack of detail regarding the likely effect on the profit and loss has largely left the share price unchanged. In order to quantify I thought 'd compare the size of this development to the size of other recent developments in London. It turns out that 200,000 square metres is the equivalent of 5 London Gherkins. So pretty significant.
It's also significant for the post-brexit financial district. This scale of development demonstrates that there is little concern that all the current financial institutions in Canary Wharf are going to close offices and move to Frankfurt/Paris/Dublin leaving a surplus of office space. Far from it - this shouts that the developers expect demand to increase!

rhomboid1

3rd Oct '16

On Twitter I did a similar calculation and concluded that WTM fees would be 1% or more of project cost so this contract is in the £10m plus range so v.material designingbuildings.co.uk/wiki/Building_…

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Waterman - what is a fair price post Brexit

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Jonno

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