Before we dive into the company analysis, a quick word about the Fund Your Retirement podcasts that Mark appears on. These podcasts involve a fair amount of time and effort, particularly on the editing and production side. Many podcasts cover these costs via advertising and sponsors. However, adverts are rarely popular, and sponsorship for a financial podcast often comes with strings attached. Instead of these, in order to make the podcast sustainable, a decision has been made to split the content into free and paid podcasts. The interviews with great investors such as Chris Boxhall and many others on the Fund Your Retirement channel will be free. But, from 1st August this year, there will be a monthly charge of £12.50 to listen to the Investor's Roundtable podcast, the Value Trapped podcast and the Private Investor's podcast. As an introductory offer, those who subscribe before 1st August pay £10 a month.
The premium podcasts will still be available on all major platforms, such as Apple, Google and Spotify, and connecting to the subscriber-only feed can be done at the click of a button. Just visit www.pipod.co.uk.
Arcontech (ARC.L) - Trading Update
A strong update from this microcap software company:
adjusted EBITDA and adjusted profit before tax is expected to be ahead of market expectations by approx. 31% and 49%
This is a big beat, but it appears to be a one-off due to lower bonuses and delays in hiring staff. This shows how tight this company is on operating costs. A hire here or there has a material impact. So forecasts for the current year are unchanged. Apart from the cash balance. No figures are given by the company, but finnCap say they are upgrading net cash forecasts to £6.4m for FY23 and £6.6m for FY24.
The company looks incredibly cheap, but only if they use or return this big cash pile to shareholders. The initial reaction looked a little underwhelming, given that the share price had been weak into this beat, perhaps reflecting a share overhang. However, a tip by Simon Thompson in the Investors Chronicle seemed to move the price later in the week, so perhaps the overhang is now cleared?
City of London Investment Group (CLIG.L) - Pre-Close Trading Update
Many fund managers are suffering outflows right now, and City of London Investment Group are no exception, suffering 5% outflows in their main fund in a single quarter. In normal times reduced performance sees inflows as institutional investors re-balance into their emerging market exposure. However, recently they have had a double-whammy of outflows and reduced performance.
Their core strategy relies on the volatility in the discount to NAV in closed-ended emerging market funds, but they suffer when they widen as they have recently. Historically they have always come back. As they have previously stated, this strategy is at capacity. Perhaps there is a risk of a self-reinforcing downward spiral where investors remove money from their open-ended funds, forcing sales of their closed-ended holdings, widening the discounts further and worsening performance compared to other strategies. Ultimately, high discounts cause close-ended funds to liquidate, reducing the investable universe and the manageable assets for the company.
Their revenue margin of 71bp has been slowly reducing as newer mandates tend to attract lower admin fees while operating costs march ever higher. Their own figures demonstrate that the dividend is currently on the very edge of sustainability:
The shares have historically been a good buy when investors have inappropriately extrapolated short-term events. In practice, revenues are sticky in the short term, and things tend to normalise in the medium term. However, it seems unlikely that deterioration in relations with and, therefore, valuations or investability of Emerging Market countries like Russia and China will improve any time soon, and as a group, they have plenty of scope to worsen. Nor is it clear that interest rates will ever revert to previous levels.
Empresaria (EMR.L) - Trading Update
NFI is down 9%, and net debt is up. But worst of all:
Anticipated improvements to trading conditions have not been seen and we now do not expect these to significantly change in the second half of 2023.
Leading to:
Full year adjusted profit before tax is expected to be materially lower than market expectations
So big profits warning here. It wasn't particularly expensive on forecasts with a P/E of 8, but with a big miss, it looks expensive now.
We have never liked the balance sheet here. The current ratio is only 1.0, and they don't have the loads of net cash that other small recruiters have to mitigate their big working capital flows. This means if a real downturn happens, they would be in big trouble. This profits warning doesn't look terminal yet, but ramps up the risk as well as making them look expensive compared to other recruiters.
Norcross (NXR.L) - AGM Trading Update
Just as well they led with:
The Group's overall trading performance for the first quarter was resilient, with the Board's expectations for the full year remaining unchanged.
...because the rest of the update sounds terrible, with the UK down 4.2% (in the face of 7-8 % inflation, remember) and South Africa down 10.9%!
They must be channelling their inner Partridge:
Alan: To the untrained eye, this could look like it's rubbish and that I haven't bounced back.
Lynn: But you have!
Alan: I know!
Paypoint (PAY.L) - Final Results & Q1 Trading Update
According to the trading update, they appear to be firing on all cylinders, but parcels (e-commerce) is where the real growth is, particularly on the outward side. We both know people who are very regular users of their services for buying and selling on Vinted. Offering a low-value parcels service is clearly a win-win for corner shops who get paid and get footfall likely to lead to sales.
However, given the fall in domestic energy costs and the move away from cash, this is inevitable:
Cash payments net revenue decreased by 13.2% to £7.3 million (Q1 FY23: £8.4 million) and transactions decreasing by 17.1% to 35.8 million (Q1 FY23: 43.2 million), with growth seen in housing and a stable performance in mobile top ups, but offset by a reduction in energy transactions
But this has been an ever-reducing proportion of revenues, now down to 20% in Q1. It also has the major advantage for new shareholders of holding down the valuation as many assume that this is a majority of their business. Surely it is just a matter of time before PayPoint plc changes its name? They say:
This has been another positive quarter for the PayPoint Group where we have delivered further net revenue growth across the Group and continued the strong performance seen in FY23.
So further revenue growth this quarter, but in line with expectations overall for FY24. Broker Liberum have underlying FD EPS of 52.8p for FY2022, 60.3p for FY 2023 (actual), then 66.4p, 72.7p, 78.4p.
And the results were apparently a beat on cash. where Liberum say:
Given the better cash generation in FY 23, we reduce our FY 24 Net Debt from £84m to £70m.
+10% on EPS isn't great, given that they have recently acquired Appreciate. However, part of this will be a higher tax charge, part higher debt after the acquisition, and part higher interest rates (probably). Liberum’s PBT growth is forecast at 20% after adjusting for higher average shares in issue, some of which relate to Appreciate.
They have the cash resources to make further acquisitions or share buybacks, either of which would boost future EPS growth further. In the meantime, the increased dividend means that the yield remains well over 8%.
Reach (RCH.L) - Half-Year Results
This is up 18% on these results, but they look pretty bad to us:
Plus, it puts them back into net debt:
The statutory results are barely break even. Unfortunately, none of these exceptionals that they implore investors to ignore are exceptional for Reach:
Included in adjusted items in 2023 are restructuring charges of £10.2m, principally severance costs that relate to cost management actions taken in the period. Other adjusted items comprise the Group's legal fees in respect of historical legal issues (£4.6m), adviser costs in relation to the triennial funding valuations (£1.2m), internal pension administration expenses (£0.3m) and corporate simplification costs (£0.2m), less a reduction in National Insurance costs relating to share awards (£0.4m) and the profit on sale of impaired assets (£0.3m).
Their business model is to keep taking costs out by making journalists redundant. They will almost always have legal fees, and the pension is not going away. The triennial advisor costs are potentially exceptional or at least shouldn't occur each year. Although it does take them more than three years to agree to a triennial valuation - hopefully, they are not paying double fees now there have two on the go simultaneously.
So it seems inexplicable that the share price rose on these results. The only bright point we could see was stronger print circulation than expected and newsprint prices declining. But this is meant to be a story of digitisation, not simply hiking prices on the physical print titles. However, these factors should at least be a positive read across to National World, which remains on a forward P/E of 4 (cash-adjusted) vs over 10 for Reach (debt & pension deficit-adjusted).
Safestyle (SFE.L)- HY Trading Update
Safestyle appears to have outperformed the market:
The Group expects to report H1 revenue of £74.0m, a decline of 5.4% on H1 2022, which is in line with our forecasts and reflects the challenging trading conditions of the first half of the year.
Sadly, their market is doing terribly:
H1 industry data from Fensa shows that the market for installations is c.8% lower year on year, with Q2 representing a declining trend at c.12% lower. Alongside the reduction in installations in the market, the average number of frames per installation has also declined.
And the order book is down a massive 22%:
H1 order intake (value) was 6.4% lower than the prior year and our H1 order book closed 22% lower than an unusually strong H1 22 comparator.
The decline in housing looks far from over.
The challenging market conditions have worsened over the last 5 weeks into July and have adversely impacted order intake volumes which the Board forecasts will be an ongoing trend to the extent the Group's full year performance is now expected to be materially below current market expectations. The Board continues to forecast an underlying profit before taxation for H2, now expected to be c.£0.5m. This performance level represents ongoing delivery of monthly profitability established at the end of H1 into H2. The Board also remains confident that the Group will continue to deliver market share growth for the remainder of the year.
Another materially below statement, but, usefully, this one is quantified. Adjusted PBT of £0.5m is surely a statutory loss. Which is combined with the poor H1 gives a big loss for the year:
In line with our forecasts, the Group expects to report an underlying loss before taxation for H1 2023 of c.£(6.0)m.
Given the lack of TBV support, it is not surprising that the shares fell 45% on the day. The positive is they expect to have net cash again by year-end, and they look able to survive this downturn.
However, the real news here is about the poor trading of the last five weeks. This surely has a read across elsewhere. But strangely, Eurocell had an inline update this week, and Tyman were at the upper end of the forecast range. We can only imagine these other companies have been quicker to take costs out in this market. (Redundancy costs are easy to move into exceptionals, in the hope that shareholders ignore them.)
In their trading update, Eurocell said:
The latest Construction Product Association (CPA) forecasts published earlier this week predict greater declines for 2023 in the RMI market of 11% and new build market of 19% (previously 9% and 17% respectively), before both markets begin to recover in 2024.
Given these predicted declines, this feels very much feels like the calm before the storm for any company with newbuild housing exposure, directly or indirectly.
Somero (SOM.L) - Trading Update
Not scheduled, but a July trading update is certainly customary. The price had been strong into this update, so perhaps the hard figures leaked:
trading for H1 2023 ended at the high end of the guidance range set forth in the 20 June 2023 trading update.
It is debatable whether they will ever regain the 2021/2022 peak, but a reminder they are certainly off it for now:
As expected, trading in North America was the driver for the overall decline compared to H1 2022
We know that as late as H1 2022, they were prioritising supply to the US over that to Europe (and presumably Australia), so this is not a surprise:
H1 2023 trading in Europe and Australia reflected the positive momentum carried forward from H2 2022 with both regions reporting improvement over the comparable H1 2022 result.
They claim it is fundamental market activity, but with the UK looking wobbly and Germany in recession, we are sceptical. Most importantly, given the H2 weighting, they confirm they will anticipate a recovery in the US and are on track for the full year:
As such, the Board remains confident that 2023 results will fall in line with market expectations with revenues of approximately US$ 120m, EBITDA of approximately US$ 36m, and year-end cash of approximately US$ 32m.
A 3rd profits warning is avoided, but with a lack of share price reaction, it seems that, for whatever reason, this update was already in the price.
Van Elle (VANL.L) - Final Results
Good results here, with PBT up over 40%:
Although EPS of 4.1p looks in line with Stockopedia consensus here. So it is the outlook really matters. Stockopedia has EPS falling to 3.5p next year for a forward P/E of 12. Not cheap, so they really need to be on to beat this. So it looks good when they say:
Strong trading momentum from FY2023 has continued into FY2024 with all divisions operating at high activity levels.
But then these levels are actually slightly down on last year:
activity levels in the first quarter of FY2024 have sustained and are broadly consistent with trading volumes throughout FY2023.
But then the rest of the year looks to be even lower:
Strong activity levels in the Housing sector during Q1 FY2024 but a decrease in demand is anticipated from Q2 F2024. Delays to Highways schemes and the Smart Motorway Programme Alliance experienced in FY2023 are also expected to ease by FY2025.
There’s lots of talk of a good long-term pipeline, but with the short-term looking increasingly uncertain and not obviously cheap on earnings, this will only appeal to the very long-term holder. NTAV is up by about £3.5m in the year and now stands at £46.3m around the current market cap. So if they can hit their targets, which are:
The Board remains confident of achieving its medium-term financial targets of 5-10% annual revenue growth, 6-7% operating profit margin and 15-20% ROCE.
Then they will be cheap, but it looks like that this year they will be going backwards on these targets. The market liked these results, but we are puzzled as to why - that outlook is definitely much weaker than we'd like to see for a business on a forward P/E of 12.
WH Ireland (WHI.L) - Placing
WH Ireland struggled to make profits even in the good times, which is why we don't talk about them much here. This week we get the following update:
In recent weeks, on the basis of the adverse current and forecast trading and resultant losses, the Company has been in discussion with the FCA (including in respect of the Group's relevant net asset and regulatory capital positions) in order to ensure that, in the absence of the injection of further capital pursuant to the Placing, the Company could deliver a solvent wind down for the Group, if required, in line with the Company's solvent wind down plan ("SWDP").
However, we didn't realise things were this bad.
The current regulatory capital position of the Group (as at 30 June 2023) is a c.£1.9m shortfall below the current FCA regulatory capital requirement. On the basis of the adverse current and forecast trading and resultant losses, without further funding pursuant to the Placing, the SWDP would be required to be implemented on 31 July 2023.
So this is as an emergency as fundraisings get.
The Placing Shares, assuming full take-up and completion of the Placing, will represent approximately 70.63 per cent. of the Enlarged Share Capital, including the issue of Fee Shares (as defined below).
The Placing Price represents a discount of approximately 86.67 per cent. to the Closing Price of 22.5 pence per Ordinary Share on 27 July 2023
There is also emergency cost-cutting:
In order to reduce costs, the Company will commence a collective consultation regarding headcount reduction. In addition, it is proposed that certain senior management team members would sacrifice a proportion of their salary in consideration of being awarded with options to subscribe, at nil cost, for such number of New Ordinary Shares at the Placing Price, as is equal to the amount of salary sacrificed.
Although nil-cost options save cash at the expense of further dilution.
With the shares still trading at double the 3p placing price, it looks like even more pain to come for larger shareholders that are unable to sell. The nimble will already be out the door.
That’s it for another week. Have a great weekend!