Friday, August 31, 2012

Fri 31 Aug - RDW, IFP, CTR, TNI, TRK, RTN, DSN

Good morning. Got computer problems again, so am having to use my backup laptop, the one which doesn't have any pound sign key, and a sticky "c" key, and which is as good at getting going in the morning as me (i.e. not very). All figures are therefore in GBP unless otherwise stated. Soldiering on ...

Interesting to see a couple of RNSs re a possible cash bid for Redrow (RDW) at 152p. Strangely though, that's effectively a nil premium to yesterday's closing price of 151p. Either a lot of insider dealing has been going on, or the bidder has been hoovering up stock in the market before bidding (is that legal? Not sure. Perhaps anyone who knows for certain could comment at end of this piece).

Interestingly, 2 of the 3 potential bidders (Bridgmere & Tosca) own together 54% of Redrow already, so this just goes to show that investing in any company with a large, dominant shareholder, is very risky - there's always the risk that they will try to push through a takeover on adverse terms, or otherwise line their own pockets at the expense of other shareholders.

I rarely invest in companies where any shareholder or management own more than about 25%, as it then becomes too high risk for this reason. Certainly where one shareholder has over 50%, you're just a sitting duck as a minority shareholder, totally reliant on their goodwill.

With UK house prices so precariously high, I'm surprised at the strength in the sector. But there was a commentator on CNBC yesterday who was saying that with more reasonably-priced land now filtering through to completions, margins in the sector are improving.

My view is that the Coalition have really missed a trick with house-building. Due to uncontrolled mass immigration under NuLab we now have a chronic surplus of people (which has caused a shortage of housing), and the price to buy or rent is now out of reach for most ordinary people in the South of England. Therefore more are renting at exorbitant rates (funded by Housing Benefit) for often unsuitably cramped housing. Just look at how private landlords are subdividing already small properties into even smaller "open plan" [i.e. shove the kitchen in the lounge, and hope the tenant won't care] or "studio" flats - i.e. a cubby hole with a loo.

It's a terrible situation which combined with ever lower real wages (due again to uncontrolled immigration from Eastern Europe eradicating upward pressure on wages for entry level jobs), and a generation of English kids who would rather be at Uni studying media studies, or on Benefits, now means the next generation are seeing living standards below those of the previous generation, and little hope. They are infantalised as adults, being forced to live at home with parents sometimes into their 30s, and needing the Bank of Mum & Dad to provide the large deposit now necessary to buy property. Plus the final salary pension scheme is a luxury their parents receive, but they won't. It's all wrong! So as long as this continues, expect more riots, and an increasingly divided & unhappy society. I'm no socialist (far from it), but even I can see things are going badly wrong, with society completely polarising into the haves & the have nots. That never ends well. We should be giving the next generation a viable future, with hope & aspirations. Instead we're doing the opposite.

What we clearly need is a massive programme of new Council House building, to give young people affordable accommodation and an incentive to work. Leaving the EU, closing the borders, and assimilating the people we've got (instead of encouraging them to form totally separate communities) would also be a good idea. While the Govt is borrowing at less than 2%, surely this is a golden opportunity to borrow cheaply to finance a long-term infrastructure boom, rather than borrowing to finance the day-to-day overspending of a  bloated & inefficient public sector.

Why do we elect these intellectual pygmies into office (or power as they now call it). What happened to public service? David Cameron & Nick Clegg wouldn't even make the shortlist for a CEO position at a mid cap, due to lack of experience and wisdom. Yet they are allowed to run the country, purely because they present well in front of a camera. Pathetic! You get the Govt you deserve I'm afraid. So it's difficult to see things getting better any time soon with these clowns in power. And the alternative is possibly even worse - Miliband & the bunch of fools who got us into this mess in the first place.

If we'd had people with vision in office, then by now we would have a construction boom going on, with 2m new affordable Council Houses & Flats being built to house our over-sized population, which would have pulled GDP growth up to 2-3% by now. Sure it might take the top off house prices, but seeing as Council Housing is for rent, not for sale, I don't think that would be a major negative. We got through negative equity in the early 90s alright, and it flushed out the system very well in the long run. Trouble is today, nobody wants to take any pain, so policy is all about smoothing over the necessary adjustments, which just extends the pain over a longer period.

IFG Group (IFP) looks potentially interesting. The 148m mkt cap is now sitting on 50m net cash, of which 30m is to be used for share buybacks. The continuing business (which runs SIPPs) must surely be under pressure from low cost providers like Hargreave Lansdown?

Charles Taylor (CTR) interims are flat on an adjusted basis with EPS of 9.6p and interim divi of 3.25p. Assuming no seasonality, then that puts them on a PER of about 10. Although net debt is quite high, at about half the mkt cap, so it doesn't look cheap when you adjust for that.

Blast, am running out of time, market about to open flat. If I hadn't done that rant about Council Houses & my laptop was working better, there would be more time to look at some other results. Think I'll carry on & publish a bit later today, as there's nothing time sensitive here.

I see that Trinity Mirror (TNI) announced that Simon Fox (CEO of HMV) is joining as their new CEO. On the plus side, he certainly has plenty of experience in dealing with a declining sector at HMV. In my opinion he very skilfully steered HMV through a pretty disastrous situation, in particular keeping banks & suppliers onside (with a very clever deal to involve suppliers in the equity of HMV through granting them Warrants in return for improved terms & continuing credit).

On the negative side, he didn't really come up with anything much on the digital side at HMV (although whether there was any possibility of doing anything there is a key question - the answer is probably not).
The worry must also be that he'll blow the cashflow at TNI on poor acquisitions. What we need instead is some really inspired initiatives within TNI to drive up sales & margins by combining digital & print.

If he gets some excitement going about the future potential of TNI, then that could trigger a massive re-rating. Remember that the shares are on a current year PER of only 1.5! And the pension fund deficit is roughly equal to freehold property, so is effectively covered. Meanwhile, net debt is being repaid so fast that it will be cleared completely by 2014! Yet still every article published about TNI refers to it being deeply in debt, in trouble, etc. It's utterly bizarre the way the more that untruths are repeated, the more they become the accepted norm, with only me & one or two other private commentators actually screaming, "you're wrong!", and demonstrating why with the figures.

Anyway, we'll clean up on TNI shares in my view, if the new CEO comes up with a strategy that is credible & excites the market. We're already up over 50% from the recent low, so bring it on!

Torotrak (TRK) has been promising jam tomorrow for almost 15 years now, despite which the optimists are still in control, valuing it at £59m despite tiny turnover & perpetual losses. The long-standing CEO has resigned to pursue some Govt initiative. Of course there's the usual flannel about how he's leaving Torotrak at such an exciting time, etc etc. I suppose it becomes second nature to come out with stuff like that after you've spent so much of your career doing it, but in my view actions speak louder than words.

I'm impressed by strong interims from £650m mkt cap The Restaurant Group (RTN). Despite a difficult economy, they're reporting positive LFL sales growth, strong margins 10.8% operating margin (over 10% operating margin is the litmus test, in my view for a retailer or food/drink), and a positive-sounding outlook (although they don't comment on market expectations).

It reinforces my long-held view that good businesses do well, even in economic downturns, by giving customers what they want at a reasonable price, and by gaining market share from weaker competitors. RTN seems just such a company. It looks to have manageable net debt, although I do notice that their trade creditors figure looks rather stretched. So I suspect they are partly financing the business by paying suppliers on extended terms, or it would appear so anyway from the large deficit on net current assets. Given the profitability, it's not a problem, but the underlying net debt position looks to me somewhat artificially suppressed in this way.

On a current year forecast PER of 12.4 and with a 3.9% forecast divi yield, I think this looks like a quality growth company at a reasonable price, which in my opinion would be ideal for a long-term portfolio like a SIPP.

Densitron (DSN) is below my usual £10m mkt cap cut-off point, but it's one that I vaguely recall owning shares in years ago, and have a feeling I might have met management at some point? Hence why I glanced at their results this morning.

The £6m mkt cap (at 9p/share) makes information display systems. Their results this morning are disappointing, with costs of opening an Indian office taking them down to about breakeven. However, interesting to note that the outlook is positive, saying they "remain hopeful of achieving the market expectation for 2012", due to strong orders.

If so, that would put it on a PER of about 5, and with a divi yield of about 8%. Not bad. Also they mention a 1.25 acre strip of land at Blackheath, which they are seeking planning permission for. That must be worth a material amount for a £6m mkt cap company. So could be an interesting special situation, for someone prepared to do the detailed research?

OK that's it for now. Have a lovely weekend all!

Thursday, August 30, 2012


Good morning. Another busy day for results, far too many for me to cover, but as usual I'll pick out the 3 or 4 that look most interesting to me.

I am pleased to see that the inept Chairman of Lighthouse (LGT), David Hickey has today resigned (before he is pushed). This is the Chairman who tried to de-list Lighthouse against the wishes of its shareholders - a pretty stupid course of action. Let's hope the Directors of other small caps learn the lessons from this case that de-listing;

1) Destroys shareholder value (typically a share price will halve, or more, when it is announced that they are to seek a de-listing,
2) Is only ever justified in the most extreme cases where the mkt cap is tiny, the company is loss-making, and strapped for cash,
3) Where all other options have been exhausted, and
4) Where shareholders have been consulted and agree with the course of action.

In my opinion when a company lists on the Stock Market, then that is permanent, other than in the circumstances noted above. Therefore it is good to see a Director who failed to look after shareholder interests get pushed out.

It has been obvious for a long time that JJB Sports (JJB) is moribund (as I've been saying for a long time, including Tweeting about it yesterday - see the panel on the right to follow me on Twitter, @paulypilot). It has had an extraordinary series of refinancings, and 2 CVAs to ditch many loss-making shops, but to no avail.

Their RNS this morning more-or-less throws in the towel, saying that a formal sale processs is now underway through KPMG. Nobody in their right mind is likely to take it on as it is, therefore I believe the inevitable outcome now is that the profitable stores will be sold to the highest bidder for not very much, and that the amount raised is highly unlikely to be enough to cover the creditors. Therefore these shares are worth nothing (as has in reality been the case for a long time). Sad, but that's life. JJB has been crushed by the competition, Sports Direct, JD Sports, discount general retailers, and the internet.

Shaft Sinkers (SHFT) whose name always sounds like it should be a DJ or dance act, announce disappointing interim results. Revenue (which is mainly underground construction in South Africa) fell 10.6% to £100m for the 6 months, but a sharply lower gross margin added to their problems, and profit before tax has collapsed from £6.2m to £1.1m. Ouch.

However, the outlook sounds OK, and they are paying a 2.4p interim dividend, saying they are confident. Might be worth a look once the dust has settled, but likely to sell off on the back of these poor figures I would imagine. The Lonmin situation is presumably a significant risk too, given that SHFT mainly operates in South Africa?

Interims from Churchill China (CHH) look OK - turnover flat, EPS up 25%, although the profit growth is not terribly meaningful, being based on a very small figure (bugger-all plus 25% is still bugger-all!). It's an H2 weighted business.

However, they have maintained the interim divi at 4.8p, so the yield looks fairly attractive at around 4-5%, although the PER looks a bit toppy to me around 14-15.

Interims from £17m mkt cap Pilat Media (PGB) don't look very good, with turnover down a bit, and underlying operating profit almost halving to £0.6m.

Interims from CAPE (CIU) look pretty grim - adj EPS is down 67% to 7p. However, they reiterate full year guidance (which seems to be around 32p according to Digital Look), and have maintained the interim divi at 4.5p. So if those figures are right, then it looks potentially interesting on a fwd PER of around 6, and divi yield of around 7%. There's a fair bit of debt though. I might put this on my watch list, but no more than that at this stage.

Macfarlane (MACF) results look reasonably good, but the size of the debt + pension deficit put me off. Interesting to note though that they've managed to continue paying divis despite this.

Looks like a soft start - FTSE100 futures are currently down 20.

Wednesday, August 29, 2012

Wed 29 Aug - BQE, CRG, 888

Good morning. As usual, here are my remarks on RNS results which interest me this morning (See the "What Sectors?" tab above to see which parts of the market I tend to focus on).

Bioquell (BQE) issues interims to 30 June today. I like this company, and have come close to buying shares in it, but never quite pushed the button. At 131p (£54m mkt cap) these shares have been steadily rising this year. They have 2 divisions, bio-decontamination products, and specialist testing. They are based in Andover.

Interims are a tad disappointing, with turnover down a little (caused by lumpy defence orders drying up), but EBITDA has held up reasonably well at £3.7m for the 6m (£0.2m down on equivalent period last year). Basic EPS fell from 3.5p to 2.7p. There was an H2 bias last year, so broker consensus of 8p for the full year still looks possible.

So that gives a PER of 16, which isn't cheap. However, the interesting thing is new product launches lined up for H2, which sound exciting - "more than doubling of the Group's manufacturing facilities in preparation for roll-out of new products ... with attractive recurring revenue profiles to be launched in 2012 ... transformational range of new products ..."

I shan't be rushing out to buy the shares, but it remains high on my watch lists, and I suspect these shares might well end up a good bit higher in a couple of years' time, it just looks to me like an ambitious & well-run company.

Another small cap that I like, but didn't quite get as far as buying, is maker of artificial hips, Corin Group (CRG). Mkt cap is £26m at 60p/share.

Their interims show group sales up 15% to £25m, and operating profit of £1m, so not particularly exciting margins there, but usefully up on last year.
The main risk here is litigation, as a number of claims have arisen against Corin because of issues with Metal-on-Metal products (potentially causing small fragments of metal getting into the blood, or something like that). Although Corin do state that they have commercial insurance which covers this, and £0.1m costs in H1 are hardly irksome.

The outlook statement is unexciting, with H2 sales predicted to be down, due to a stocking-up effect by a customer in the prior period. So overall nothing here makes me want to rush out and buy the shares. A bit like Bioquell, these shares are really a bet on their new products doing well in the future.

FirstGroup (FGP) issue an interesting RNS rebutting Virgin Rail's claims about the disputed inter-city west coast rail route. I can see the reasons for privatisation in some areas, but rail has always struck me as being one of the less obvious ones. Surely it would be better to have an integrated network, run by competent people, in public ownership? Other countries seem to manage that.

A cracking set of interims are announced by 888 Holdings (888), showing revenue up 21%, and EBITDA up a whopping 81% to US$36m for the 6 months. They say the increase in profit is due to their improved product, which looks pretty exciting, if true. Interim divi is being reinstated 2.5c per share.

So whilst I can only give a very quick review to anything in these morning reports, due to lack of time, this one certainly looks worthy of further investigation, based on these excellent results, and mkt cap being £288m at 82p/share. Looks like their results seem to be well ahead of broker estimates, so I suspect this share could rise from here. But as usual, please do your own research!

They do however caution that H2 margins will be impacted by higher marketing costs to drive growth in Spain & Italy.

There are a few more results I might look at, so possibly another supplementary report a bit later, depending on how things go. Have a good day! FTSE looks set to open roughly flat in a few minutes.

Tuesday, August 28, 2012

Tue 28 Aug - YULC, LAM, BPI

Good morning! I trust you enjoyed the long weekend, as did I. Lots of announcements this morning, but very few that interest me.

I've glanced at results from mid-cap Yule Catto (YULC) at 142p, for a £481m mkt cap. They seem quite good value - with interim operating profit up 5%, and underlying EPS up 30% to 12.3p. Good increase in interim dividend to 2.2p as well.

Net debt has reduced sharply to £174m. They reiterate guidance from June saying that the full year should see underlying profit ahead of last year's £96m. Seems quite good value to me, although I do note there is a pension deficit of £116m shown on the balance sheet. Might be worth a further look.

Oil rig maker, Lamprell (LAM) has been very accident prone of late, and its interims to 30 June are poor, as they had previously warned. The £233m mkt cap (at 90p a share) has swung into H1 losses of $33.8m at the operating level (note accounts in US dollars). The interim divi is cancelled.

Net debt has come down sharply to $35.7m, but there is an emphasis of matter section from the auditors, saying that there is a question mark over Going Concern, due to breach of banking covenants. That's not something you see often, and it's a major red flag.

The debt position doesn't look too bad, but the management here just seem incompetent, based on the group lurching from profits warning to profits warning, hence I'm steering clear of these shares from now on. A large contract business which does not seem to be under control, is a dangerous beast. Although they do seem to have a sensible pipeline of new contract wins, so customers must still have faith in Lamprell.

British Polythene Industries (BPI) delivers flat interim results, with operating profit at £15m for the 6 months to 30 June. Net debt nicely down from £38.5m a year ago to £23.3m. Although the pension deficit has more than doubled to £70m before tax, similar to big increases in most pension deficits at the moment, due to low bond yields increasing the present value of future liabilities (due to them being discounted at a lower rate).

The forecast PER of 7 looks about right, when you allow for the fact that net debt + pension deficit is about equal to the mkt cap, so the adjusted PER is really about 14. Divi yield is reasonable at forecast 3.7%.

That's it! Market just opened down about 5 points.