Friday, August 24, 2012

Fri 24 Aug - SGO, AGA, AVCT

Good morning, glad it's Friday as these 7am starts really don't agree with me! Some good news though, I've got my proper laptop back, so can now use £ signs again before numbers, phew!

It's striking again this morning just how many resource sector RNSs there are. Of course I don't cover that sector on this Blog. But I do wonder, with the massive proliferation of resource stocks on the market, if it's a sign of a bubble? Certainly when the Chinese construction bubble bursts, then demand for resources is bound to contract sharply, so maybe that could be the trigger? That said, if you know what you're doing in that sector, it's very lucrative. Or has been so far anyway.

Although its market cap is only £3.2m, SocialGO (SGO) has come up with an innovative plan to avoid insolvency. They have done a marketing deal with a company the CEO also happens to own, which will now pay a fee of £50k per month to cover all SGO's overheads, whilst getting 60% of all turnover above £50k p.m. in return. Clever deal, which looks more of a face-saving exercise. However, it does mean SGO is now far less likely to go bust, although shareholders are having to give away 60% of the upside in order to secure the company's future. Interesting to see whether the market will react positively or negatively. I suspect it will be seen positively at this valuation.

I held some shares in AGA Rangemaster (AGA), the posh cookers company, a while back, until I did more research into the scale of their pension deficit - which is horrendous, so I sold. The results this morning on a trading level are a bit soft, but the outlook for the full year sounds positive, with growth expected.

However, this pales into insignificance when you look at the pension fund deficit, which in common with all final salary schemes, has seen liabilities rise sharply due to a fall in the discount rate (driven by corporate bond yields, which in turn have been forced down by QE).

This is not helped by the appalling mess that accounting for pension funds has become - so that a series of wildly different, and contradictory figures are published by most companies for their pension funds - the accounting deficit is completely different to the actuarial deficit, the numbers swing up & down unpredictably & subject to subjective decisions (like what discount & expected return rates to use), etc. It's a total mess.
NARS has even published misleading accounts which show a substantial pension surplus, even though there's a £26m deficit! (see my earlier article detailing that problem, which I forwarded to the FRC for investigation).
Some companies quote deficits before tax, others quote them after tax, there is no logic or consistency to pension fund disclosures as they stand.

The problem with AGA's pension fund is that it's vast (£760m assets, and a £6.8m surplus in 2011 turned into a £42m deficit in 2012). Moreover, the triennial deficit at 31 Dec 2011 is now expected to be higher than the previous £161m deficit in 2008! See what I mean about the figures being contradictory!

This is massively material, since the company is only likely to make a profit of £7m this year, and has a market cap of £46m, figures which are dwarfed by the pension scheme.

I tend to focus on the overpayments agreed with the pension trustees, to get an inkling of the real situation. In the case of AGA, the pension fund will have stripped out most of AGA's net cash, £16m this year alone, then there is a breathing space until 2015, when £4m is due. Overpayments then recommence at £10m p.a. from 2016-2021, and a lump sum of £30m in 2020.

These are pretty scary numbers, and in my opinion make AGA completely uninvestable. The whole business now exists purely to service the pension fund, and there is no prospect of a dividend for the foreseeable future (which in any case would need pension fund approval).

The only hope for shareholders is that the performance of the business recovers so well that it makes more than enough profit to service the pension deficit, and/or that interest rates rise sufficiently to eliminate the deficit through a higher discount rate. But do I want to bet on that happening? No! These shares should be much, much lower than the current price, and I think when people realise the extent of the pension deficit problems, AGA shares could go down significantly in price. I'd only be tempted to have a punt at about a quarter of the current price. So you have been warned!

Avacta Group (AVCT) puts out a positive-sounding trading update, with detail about how sales are up (although they are coming from a low base). The £23m market cap says that trading is in line with expectations, but since the consensus is for another loss this year, I can't get excited about this. It's the sort of share where you need to have done deep research on the products, markets, and management. If they are potential blockbusters, then great. If not, then why pay up-front for profits that haven't happened yet?

More problems with Morningstar (the service I use for my data), seriously thinking of not renewing my Premium subs - it's painfully slow to respond - 5-15 seconds, sometimes longer, every time you input a ticker. On a fast computer. Absolute crap. Hemscott was brilliant, and they ruined it when they acquired it & moved us over to this junk. Can anyone recommend a good alternative site with reliable data? (especially broker forecasts & 5 years+ historic data). My Morningstar subscription expires in 2 weeks, and there's no way I'm paying out £150 or whatever it is to renew, when the service is this poor.

OK that's it, markets opening in 2 mins, FTSE 100 expected to be down 15. Have a terrific day & weekend!

Thursday, August 23, 2012

Thu 23 Aug - pt. 2 - DLC, SMWH, ROL

Part 2 of this morning's report, as there are some more company results worth looking at.

Firstly, CAD software company Delcam (DLC), which is an old friend - I did quite well a few years ago on these shares, and know they have a good following on Motley Fool. The market seems to like their interims to 30 June, announced this morning, with the shares up 7% to 815p at the time of writing this, which is a mkt cap of about 65m.

Pre-tax profits rose a stonking 67% to 2.1m for the 6 months, and basic EPS up 77% to 26.2p. Very nice indeed. That is on turnover only up 15% to 22.9m, so it's a high margin business (gross margin is 67%), which is great when turnover is rising, but dangerous if sales prove sluggish. With software companies one also has to be very careful about one-off licence sales - how much of the revenue is recurring? The answer needs to be, "the vast majority" to interest me in the shares. From my cursory look, Delcam does seem to be heavily dependent on licence sales, which is a big risk factor. Someone who knows more about the company may be able to comment on this, and whether they are going down the more stable SaaS route, or not.

Strong cash balance of 12.6m, although as usual with software companies, some of that is up-front payments by customers (shown as a creditor called "deferred income"), therefore knock off that 6.4m to arrive at a true cash figure of 6.2m. There seems to be a pension deficit too, which is surprising for a tech company (as they are usually too young to have ever had defined benefit schemes) of 4.0m, so offsetting that against cash brings it close to net cash neutral, which is a more prudent way of viewing their balance sheet in my opinion.

They "remain optimistic for the full year", and according to Morningstar that means forecast 47.4p EPS for the year, so putting the shares on a fairly warm PER of 17.

However, what looks really interesting, is that they are spending a huge amount on R&D - which can often be a precursor to seriously good/better performance in the future, once it feeds through to actual sales.

If I'm reading this right, they say that they spent 5.6m on R&D in H1 (that's 2 & a half times their profit!), and it doesn't seem to have been capitalised. If that's correct, then the profit before R&D is enormously higher at 7.7m for the 6 months, which would make the shares look really great value.

The crux is whether that R&D really is R&D, which will reduce over time, thus boosting profits. Or, whether it's just a normal cost of running the business, which they happen to call R&D. I suspect it might be more the latter, as software companies have to run to stand still, constantly improving the products or they quickly fall behind, wither & die.

Also, if they were really expensing that much genuine R&D, then surely the tax figure should be negative (due to R&D tax credits)? Which it isn't. So at this stage, on first glance, I'm a bit sceptical about that R&D figure.

So overall, I'm intrigued. But on balance won't be buying any, as it wouldn't take much to trigger a nasty profits warning here - you know the type of thing, customers deferring buying decisions due to uncertain macro picture, which for a company heavily dependent on high margin licence sales, makes it quite high risk in the current wobbly macro situation.

Moving on, WH Smith (SMWH) has put out a surprisingly bullish trading statement. I just don't understand how it is that WH Smith are doing so well in a downturn - this should be the type of business that is moribund, selling declining things like books & newspapers, cards, etc. But it's doing remarkably well (they also have a big travel agents operation - but again, not exactly a booming sector).

It's got to be down to management & strategy, which against the odds are working well. Anyway, they expect results for y/e 31 Aug 2012 to be at the "top end of market expectations", so that's around 60p EPS, so even after gapping up 4% this morning, at around 600p they're on a PER of 10. Not bad for a business which is defying the gloom to out-perform. 4.5% divi yield not to be sniffed at either.

I've not looked at Rotala (ROL) before, but it's a small (16m mkt cap) regional bus operator on a PER of 8 and 3% divi yield. Profits are flat, but buses has to be a long-term growth area, and potential bid target. I see Nigel Wray holds 12% too, who is a very smart investor. Might be worth a look?

OK, that's it for this morning, mental capacity reached its short term limit!

Thu 23 Aug - pt. 1 - JD., STVG, HYNS

A fairly busy morning for announcements, let's start off with 2 shares in my portfolio. Firstly, JD Sports (JD.) announce a positive-sounding deal whereby they dispose of their "Canterbury" rugby brand for a payment of a useful 22.7m (sorry, using old laptop with no pound signs, so all figures are in pounds sterling unless stated otherwise). If I've read the RNS correctly, then the payment seems to be settling inter-company debt, with only one pound for the equity.

It's a related-party transaction, where JD. sells Canterbury to its own majority shareholder, Pentland Group (which owns 57% of JD.). Given that Canterbury only made 0.4m profit, and there are logical reasons for the disposal, on the face of it this looks like a sensible move that raises cash for JD.. There is also another smaller acquisition for 50k.

I like JD. and think the shares look very good value on a cashflow basis. They acquired Blacks Leisure when it went bust, so once that's sorted out JD. should see a nice boost to profits, in my opinion. I hold shares in JD..

Secondly, I also hold a small number of shares in Scottish TV company, STV Group (STVG). Their interims to 30 June are out today, and the headline numbers look OK - turnover flat, but EBITDA and operating profit both up around 16%. Adjusted EPS is up 7% to 16p, so assuming no seasonality that's 32p annualised - which looks exciting when you see that the shares are only about 90p, so a PER of just under 3!

Obviously, with that kind of PER, there is a fair bit of net debt, at 55.9m, but that doesn't look outrageous to me, given half year EBITDA of 9.3m. So it's about 3 times annualised EBITDA - high, but not in danger territory in my opinion.

There is also a pension deficit, but it's unchanged at 23m after tax (30m before). Given the long-term nature of pension deficits, this looks manageable to me, with an 18 year recovery plan in place. There is no dividend, but that remains under review.

The outlook statement is a bit vague, but points to reduced advertising revenues. That should change once the economy is recovering, so this is potentially a cyclical recovery story. I probably won't be rushing out to buy more shares at the moment, but on the back of these figures I'm happy to keep what I've got.

Gosh, running out of time already, this hour between 7-8am goes so quickly!
What's next? Haynes Publishing Group (HYNS) is a company I've always liked, as their products (detailed repair manuals for cars) are so good, that they have that market niche effectively to themselves. I also don't believe this area is likely to go online, as having used their products many years ago myself to service and repair my unreliable student cars, they get so covered in oil & dirt, that nobody in their right mind would use their tablet in such circumstances.

I'll never forget the flat inspection from our halls of residence warden in 1989, when her jaw dropped to the floor on finding a 2-litre car engine in my bedroom, propped up on two of the kitchen chairs! "Well that's something I've not come across before in the last 25 years here, she exclaimed!". I was expecting to receive a hefty fine for breaching my lease, but she chuckled, "well at least you put down newspaper underneath it!", and left it at that!

Sorry, I'm rambling. Getting back to Haynes, the figures today for y/e 31 May 2012 are not good. Revenue down 9%, and PBT down 35% to 4.7m. Ouch. Basic EPS is down to 20p, although the final divi of 9.5p is maintained, for 15.7p full year divi. Therefore this should be seen as a cash cow, but I think the market is also now likely to treat it as a declining business (which I don't think it necessarily is), hence I would expect to see the shares (currently 190p) pole-axed today, as the only broker forecast for 30p has been missed by a mile. Although the big divis might provide some support.

A word of warning on HYNS - I seem to recall that there are 2 classes of share, hence the mkt cap is understated on some data websites, so be sure to verify that.

OK, I'll publish this as part 1, then do a follow-up report in the next hour or so as part 2, as there are some more results I want to look at.

Also please note the box on the top left, which enables you to put in your email address - you will then be automatically emailed when new reports are published here. It's something automatic that Blogger do, so I don't get to see your email address or anything like that. Have a good day!

Wednesday, August 22, 2012

Wed 22 Aug - TTG, CKN, INL, VTC, SRT

Good morning! I've just been browsing through the interim results from TT Electronics (TTG). Looks OK, with PBT flat, and EPS up slightly to 6.0p for the 6 months. Although the outlook statement delivers a mild profits warning for H2.
They also refer to an additional "accordion facility" in their banking arrangements, first time I've heard that term, but expect we will hear it again, given how the financial sector loves trendy buzz-words (e.g. "no silver bullet", "add some colour to that", "risk on/risk off day", etc). Why not just call a spade a spade?

TTG did look reasonably-priced at 168p/share, with broker forecast at 16.9p for this year. However, that looks challenging now, as they only did 6p in H1, and I can't see any particular H2 bias in last year's results. So these shares likely to be under some pressure today.

I've always liked Clarkson (CKN) as a company - seems well managed, and has a lovely balance sheet stuffed with cash. Their interim results to 30 June are slightly up or slightly down, depending on which measure you look at. The PER still seems reasonable, at about 11, although they are another company mentioning "demanding conditions" in their markets. So the macro picture really isn't looking great at the moment generally - worth bearing in mind.

Housebuilder, Inland Homes (INL) announces receipt of planning permission on a site in Chelmsford with a gross value of 26.5m. Not bad for a 35m mkt cap company, if you think that residential property values are likely to hold up? I don't, and think that house prices in the UK remain grotesquely over-priced compared with household income, so am not interested in any housebuilder until house prices have adjusted to more sensible levels.

Vitec Group (VTC) results look good - adjusted EPS up 14% to 27p for H1 of 2012. But at 650p/share that looks to be in the price.

24m mkt cap Software Radio Technology (SRT) shareholders will be breathing a sigh of relief, as the rather accident-prone company announces that it has begun shipping the first batch of radio devices to a large customers. I would expect this to give the shares a nice boost today.

That's it for this morning, as my 8am deadline looms. FTSE 100 futures are pointing to an open down 44 points.

Tuesday, August 21, 2012

Tue 21 Aug - JPR, TNI, HAT, PTY, CPP

Good morning! Johnston Press (JPR) announces interims to 30 June 2012 which confirm my view that it is a zombie company, with such excessive levels of debt that the equity can only be considered worthless.

The contrast with Trinity Mirror (TNI) is stark. Whereas TNI is paying down its net debt so fast that it should become net cash positive in 2014, JPR is struggling to just service the debt, with very little reduction in the total.
In a declining sector, this must surely eventually be terminal for JPR? Therefore my bargepole is close to hand. I think shareholders here are deluding themselves that they own a viable business. Whereas the reality is that it suits the Banks to prop it up, since then they don't have to make a provision against the loans which cannot possibly be fully repaid from cashflow (in my opinion) which is likely to shrink over time. Net debt is about 360m, versus 30m interim cashflow, but most of the cashflow is swallowed up just paying interest. There's also a 100m pension deficit for good measure.

I'm having trouble with my data provider again this morning (Morningstar), and must say that I'm getting pretty sick of the poor service from them given the annual fee for premium services that I pay. It's very slow to load, sometimes won't load at all, and the data is poorly laid out. What a pity that Hemscott was taken over by Morningstar, it was so much better before that.

Pawnbrokers H&T (HAT) announce interims which don't look too great - operating profit has fallen from 10.9m to 8.1m on lower margins. But they do reiterate full year expectations to be in line. The balance sheet looks strong, and the shares look good value, however I'm just not comfortable trying to make money out of other peoples' misery, so won't be investing in a pawnbroker.

Parity (PTY) has issued interims which look pretty uninspiring to me, 43m turnover and breakeven underlying profitability, makes you wonder what the point is? Moving swfiftly on ...

CPP (CPP) interims show underlying operating profit down 23% to 19.2m. They look a rather spivvy business, insuring mobile phone handsets & the like (e.g. card protection policies). Also looks messy - with an FSA investigation, and a risk of not being able to renew its bank facilities. That said, if those factors are resolved then the shares look cheap, and I like the chart shape being formed.

OK that's it for this morning, although I missed yesterday's results, so will try to catch up later.