Straight in this week:
Calnex (CLX.L) - Trading Update
An intraday trading statement is rarely good news, and indeed, it isn’t in this case:
The cautiously improving outlook for the sector identified earlier this year has not developed momentum and the Company is aware that certain customers have elected to delay projects and associated orders in response to continuing wider economic uncertainty. These factors have led the Board to conclude that H2 FY24 will be slower than anticipated.
…the Board now anticipates that...revenues for FY24 will be in the region of 20-30 per cent below current market expectations
There's also what looks like bad news on cash:
cash at the end of September 2023 of £13.5 million, following investment in inventory.
But they insist this is all about timing:
certain customers have elected to delay projects and associated orders in response to continuing wider economic uncertainty.
...No customer orders have been cancelled and all are expected to be fulfilled once the delays to customer project spending are relaxed.
While it is good news that customers are not going to competitors, what usually happens with situations like this is that, to any extent that these orders appear in their FY2025, other orders will slip into FY2026 and so on.
Yet another reminder to discount any forecast that builds in an "improving outlook", "optimism", "improvement" (Calnex's AGM statement), or "pipeline conversion" (Beeks, Speedy Hire), or anything else similar.
They've guided their house broker Cavendish that a 20-30% drop in revenue means 29%, and operating profit is essentially wiped out. As suspected, the worst impact is to cash, which was previously forecast to be up YoY from £19.1m to £20.3m but is now expected to end at £13.9m.
Unsurprisingly, the market didn’t miss the intra-day warning and the price kept falling by over 50% over a few days. This is on top of falling last week on the read-through from Spirent warning on 5G rollout. The problem is that, despite a 70% fall this year, this looks far from cheap.
Eneraqua Technologies (ETP.L) - Interim Results
The outlook here seems to have worsened further. To summarise briefly:
We have seen a marked change in some customer behaviours post-period end as Local Authorities and social housing landlords have experienced further pressure on their capital budgets...approximately half of all social landlords intend to re-phase projects.
As a result:
we expect our revenues and profit for FY24 to be substantially below market expectations.
Re-phasing means deferrals into 2025, which will now be ahead though, right? Wrong:
…the knock-on impact means it is prudent to expect lower revenues and profits in FY25 than currently forecast.
This is a common theme seen in a number of companies recently: Delays to contracts are not giving an advantage in the following year.
Broker Liberum say:
We reduce our FY 24 net cash estimate from £4.2m to £1.4m.
Ouch! However, this is still a big turnaround from an FY 1/2023 net debt of £3.0m, and they still forecast a net cash flow of £1.4m a year from then on. So perhaps that gives some downside protection on the £13m market cap after this week’s 60% fall. In addition to that cash flow, there are forecasts of a progressive dividend, 1.4p this year, 1.6p next, etc.
It also appears to be trading below tangible book value. However, this needs to be treated with some caution. Receivables have increased recently, and of course, this is where any bodies of poor revenue recognition would be buried:
We don't like mixing prepayments up with accrued income, but it is common. Given the nature of the business, if they were having to make significant pre-payments to secure parts, this would be worse than it being accrued income. We think it is fair to assume this is almost all accrued income for unbilled work. But here there is some good news:
As at 30 September, over 83% of the accrued income had been collected as cash with the remaining balance due in the coming weeks.
That doesn't mean that there isn't new accrued income to replace it. However, that 83% of accrued income has been invoiced and collected within two months of the Balance Sheet date gives a lot of confidence that these will be paid, and we are less concerned that they have been replaced by further unbilled accruals given the record of being paid. There is no explanation as to why contract assets have increased significantly, though.
This doesn’t appear to be a particularly high-quality business. The company was founded in August 2012 by current management, and the original focus appears to have been to play the system of subsidies and borrowing limitations at housing associations and councils to provide "financial structuring consultancy" for district and communal heating systems. In 2017 they augmented this with technical design and physical delivery using subcontractors and added the water efficiency side.
Their main IP is the HL2024 patent and the associated family of products, which wasn't acquired until 2021, although they had an exclusive relationship and joint IP rights with them since 2017. Around the same time (2021), they vertically integrated further by buying a borehole drilling company for ground-source heat pump installations. However:
The Group currently outsources the majority of its operations, including manufacturing and installation work. The Group relies on a number of third parties for the supply, delivery of equipment and installation.
So, it is unclear if this IP gives them any real competitive advantage. However, it is certainly cheap now if brokers’ forecasts are to be believed, but it may take some time for trust to be rebuilt.
Mind Gym (MIND.L) - HY Trading Update
Fair play to the company for opening with the profits warning rather than hiding it after pages of waffle:
Trading in the first half of FY24 has been below our expectations
The impact for the full year is given as:
As a result, the Group expects to report H1 FY24 revenues of c. £21m, (H1 FY23: £26.8m) and a loss at EBITDA level. The Group now expects FY24 revenues and profits to be significantly lower than current market expectations
These are the prior expectations:
We see little H2-weighting apart from normal growth, so this looks to be a huge miss. With them now reporting LBITDA combined with:
Cash at bank at 30 September 2023 was £2.1m which, combined with immediate access to £2m of its undrawn £10m debt facility, provides the Group with adequate liquidity.
This looks ominous. Perhaps they can now access only a part of their facility, given that if they have EBITDA covenants, they are missing the E part completely.
We would have preferred a different word to “adequate” in there, too. This is another share like XP Power that bounced in July/August for no reason and is now setting new lows on a trading update. Given the severity of the miss and lack of TBV backstop, the 35% fall looks too light, if anything.
Mark’s Electrical (MRK.L) - Trading Update
This summarises things well:
We've built on the good momentum delivered at the start FY24, with revenue growth of 24.8% against a Major Domestic Appliances & Consumer Electronics market that is broadly flat in the first half of our financial year.
Some of this growth has come from installation and connection services rather than market share gains, but a quick calculation suggests the contribution from these remains modest for the moment. However, they did add to fixed costs:
Strategic decision to introduce our own installation service, combined with inflationary pressures in distribution costs impacted H1 margins, but expect this pressure to ease over H2 as we benefit from improved operating leverage during the peak trading period
Some growth has also come from expanding further outside their MDA (major domestic appliances) niche:
particularly high growth in televisions (+71%)
Despite earlier investments in their distribution centre and vehicle fleet apparently ahead of demand, more investment has been required:
Invested £1.2m in our vehicle fleet and distribution centre, improving our capacity...
But they are also investing being able to further invest in their people:
...and training facilities, including the development of the Marks Electrical Academy
This investment and higher fixed costs, however, hit cash generation - in H1 2022, they generated net cash of £3.8m, but this time around, it was only £0.9m. Accepting that, in principle, year-on-year comparisons are better for seasonal businesses, they are a bit coy about this:
Retained our robust net cash balance sheet, carefully managing inventory levels, investing in selected capex opportunities and closing the period with a further improved net cash position of £10.9m (HY23 £7.7m)
So, our suspicion is they might be trading behind full-year cash and profitability expectations. Equity Development perhaps agree:
Due to first half sales growth strength, we have revised upwards our sales forecast for FY2024 from £114.5m to £116.0m. However, we reduce our EBITDA forecast from £8.9m to £8.0m as well as making downward adjustments to FY2025.
We will never tire of repeating that EBITDA is not a profit measure, but there should be no surprise that EPS follows it down. Comparing with their previous note:
FY2024: 5.37p => 4.48p
FY2025: 7.30p => 5.94p
We have previously mentioned that they have a bit of a track record on earnings downgrades, but we believe this is an example of them investing for the longer term at the expense of short-term profits. They do need to watch those fixed costs, however. That's what made AO uncompetitive. Also, the shares appear materially overvalued in today's market at a forward P/E of 24.
Reach (RCH.L) - Trading Update
The bull case here continues to be declining print revenue being offset by growing digital revenue. Or maybe some weakness on the online advertising side, but of course nowhere near as bad as print advertising and made up by online subscription revenue. So, how are they getting on with that?
Badly it seems. But, of course, this company is a pension scheme with a small operating business attached. The good news on this front is that they now only have one triennial review on the go:
We are pleased to report that we have now concluded the 2019 triennial valuation for the MGN scheme
Our guess of the situation has always been that the company wanted to pay lower deficit recovery payments, whereas the trustee wanted them to be the same higher. The dispute went on for so long that the pension regulator had to get involved. So what is the outcome:
This deficit is expected to be removed via a schedule of contributions that includes annual payments of £46.0m pa from January 2023 until January 2028. The previous schedule of contributions for the MGN scheme included payments of £40.9m pa from 2023 to 2027
Like interest rates, higher for longer, is the mantra. This is not good news as it is around half of adjusted operating profits:
Market expectations compiled by the Company are an average of analyst published forecasts - consensus adjusted operating profit for FY23 £95.0m.
And these have always been heavily adjusted.
Their other liability was for accessing celebrities' voicemails that were left publicly accessible by the mobile phone companies:
We expect a High Court judgement on time limitation relating to historical legal issues in the next few months.
Who knows which way that could go?
Robert Walters (RWA.L) - RESILIENT PERFORMANCE
This company goes full Partridge with their all-caps headline. It turns out that this announcement is actually a trading update for Q3. So, have they bounced back?
No.
Profitability isn’t given, as these are quarterly figures, but:
§ Headcount down 2% quarter-on-quarter to 4,200 (30 June 2023: 4,280) as the Group continued to closely manage its cost base in line with market conditions.
So, with inflation, costs are likely to be up, severely reducing profits. In light of this, the following statement seems carefully worded and perhaps doesn't mean in line with market expectations, or at least gives them some wriggle room:
The Group is well positioned to swiftly capture opportunities when there is an upturn in market confidence and our expectations for the full year remain unchanged.
The benefit of this sort of business is that it throws off cash in the downturn as working capital unwinds:
§ Strong balance sheet with net cash of £65.0m as at 30 September 2023 (30 June 2023: £69.9m).
Which they have been using to buy back shares. However, with the shares now at around £3.65 they appear to have shot their bolt on that one:
§ During the quarter, the Group purchased and cancelled a further 1.7m shares at an average price of £3.87 for £6.5m. The programme is now complete, and the total capital returned to shareholders was £10m for the year.
Sanderson Design (SDG.L) - Interim Results
Weak end markets, but they are saved by high-margin licensing deals, but we already knew that. All eyes are on the outlook:
We are focused on growth opportunities in the US, where we are currently under indexed, on driving licensing income internationally and on mitigating the softness in the UK market through cost saving measures. Our licensing activities had an outstanding first half and continue to drive the Group's profit growth in the current year. At the start of this month, the second year of our Morris & Co. womenswear licensing renewal with NEXT was confirmed, attracting accelerated income of £0.3 million.
As we enter the key autumn selling period, we are encouraged by the high level of sampling from recent product launches, by our pipeline of licensing opportunities and by the strength of our balance sheet. Therefore, the Board's expectations for the full year remain unchanged.
This seems marginally more positive and specific than their trading statement in August.
Inventory is down due to SKU rationalisation, with a bit more to come in H2 as manufacturing raw material stock gets worked through. In the results call, they stated that they see a net inventory reduction of £1m in H2, at least half from raw materials. We think it could be argued that the guaranteed licensing should be treated like cash, although not something they could access on their time frame. Which puts them in a very comfortable financial position.
They also see some brightness in the strength of sampling requests. On the call, they added some detail: on Disney, this was their largest sampling rate in the first 6-8 weeks. They expected high demand, but this exceeded it. Sophie Robinson for Harlequin was 5x higher than expected. Although these don’t automatically translate into higher orders, this gives them confidence in hitting their FY numbers. As such, they continue to look too cheap.
That’s it for this week. Have a great weekend!