Let’s start this week with a small rant. Mark has noticed an increased use of the phrase "Teach-in" recently. For those not au fait with the term, it is a condescending expression usually used by poor-quality management teams in an attempt to pour derision onto mere mortals who couldn't possibly understand the business case for such a revolutionary company without hand-holding from them. Of course, this is a massive red flag for investors. One of the most prolific users of the “teach-in” was Quindell.
Along with the inappropriate use of the word “quantum” when meaning size, and the issue of SCRIP-only dividends (which are not dividends at all, but a small and completely pointless share-split), “teach-in” tends to indicate a company to avoid.
Small Caps
Alumasc (ALU.L) - Interim Results
The CEO seems pleased with these results:
This was a strong first half performance…
However, when we see the sales numbers, they are less than inflation:
Group revenues up by 5% to £45.0m (H1 FY22: £42.6m), with organic growth and pricing offsetting significant export orders in the first half of the prior year.
And the EPS is down slightly:
Underlying(1) earnings per share of 12.3p (H1 FY22: 14.1p).
· Dividend per share increased to 3.40p (H1 FY22: 3.35p) reflecting the Board's confidence in the future performance of the business.
Yes, these are difficult markets for a building supplies company, but we think we would be a bit more sanguine about such a performance. Still:
As a result, the Board remains confident in the Group achieving its full year expectations.
Which means they are pretty cheap on a P/E basis:
Although, there is a big pension deficit to consider, which sounds a lot like it had LDIs:
The Group's IAS19 pension deficit increased to £8.4m at December 2022 (June 2022: £2.1m, December 2021: £2.5m), as a result of market volatility reducing the value of the scheme's growth assets.
And they achieved these results by selling a subsidiary for a £1, despite it holding significant cash balances:
The disposal of Levolux, which completed on 26 August 2022, led to a £1.7m cash outflow in the period, which represented transaction costs together with cash held by Levolux on disposal.
And as a result, net debt increases:
The net cash outflow for the period was £2.1m (H1 FY22: £3.1m). Net bank debt at December 2022 was £6.8m (December 2021: £4.1m).
Adjusting for these factors gives a forward P/E of around 8.5 at a £1.61 share price. So still fairly cheap, but then so is the whole of the building products sector.
Hummingbird Resources (HUM.L) - Q4 2022 and 2023 Outlook
Hummingbird actually managed to deliver to target for a change:
Closing out the 2022 year with strong production of +28 koz, meeting revised full year guidance and on track at Kouroussa, Guinea for first gold pour at the end of Q2 2023. §All-in Sustaining Cost: Materially improved quarterly AISC of US $1,248 per oz for Q4 2022. o Full year 2022 AISC of US $1,782 per oz, meeting revised guidance.
This means that Q4 production almost doubled on Q3. We really didn’t think they were going to get close to this. Having a cash flow generative quarter at Yanfolila significantly de-risks the company, since they looked on very shaky ground if their producing mine was losing money while they developed Kouroussa:
§ Improved Group EBITDA of c.US$11 million for Q4 2022
In addition, Q1 is looking good too:
with a similar quarter-on quarter production profile expected for this quarter, Q1 2023
With higher average gold prices in Q1 so far, then EBITDA is likely to be significantly higher too. However, the share price reaction was muted for such a big shift in risk-reward. Perhaps because the finances still looked a little tight:
§ Net debt position c.US$114 million end of Q4 2022 (c.US$110 million including gold inventory value). As detailed in the Q3 2022 release, an additional c.US$35 million debt facility was agreed with Coris Bank International ("Coris Bank"), to secure funding requirements and ensure Kouroussa moves into production, with c.US$15 million of the US$35 million remaining available and expected to be drawn 1H 2023
§ Of the budgeted c.US$115 million capex for the construction of Kouroussa, c.US$65 million has been paid as at the end of Q4 2022, with the balance to be paid over the coming quarters from Yanfolila cash flows (which have improved) and existing debt facilities, including c.US$20 million contractor deferrals, retention incentives and working capital not expected to be paid until Kouroussa is into full production.
That’s $30m spend with $35m debt facilities - i.e. everything needs to go mostly to plan. Not something Hummingbird are known for!
So it should come as less of a surprise that they took this opportunity to raise money:
The Company is pleased to announce a strategic investment of US$15 million by CIG SA ("CIG")(1) into Hummingbird. CIG is a leading African investment company, with a ten-year track record and over US$100 million of active investments across a number of sectors including mining and construction.
$15m at 7.79p isn’t too bad, though, considering the current markets & importantly goes to a single investor, not flippers who will hit the price. CIG appears to be the equity investment arm of their main lender, Coris Bank, so could presumably name their price.
The dilution obviously takes some of the upside away, but the upside was never in doubt here - just look at the EV of other 200koz gold producers, they tend to be many times the current Hummingbird market cap. The doubt was whether the company would survive in its current form for equity investors to benefit. If the upside is 5-6x and this goes down to 4-5x in return for much greater certainty that it doesn’t go under, this is still a very positive move.
The market doesn’t seem to have taken it as such, and the price is around 10% below the placing price. Some holders seem to be selling in disgust, and many of their criticisms of management are fully justified. However, everything has its price.
Speedy Hire (SDY.L) - Financial and trading update
These are In line with expectations. The 4-month revenue is up 16%, which seems good considering the backdrop:
The Group continues to perform well in the second half, with its revenue (excluding disposals) for the four months to 31 January 2023 up c.16% against the corresponding period in the prior year and apart from any effects of the asset loss described above, the Board continues to be confident in delivering underlying profit* in line with its expectations for the full year.
BUT, £20m of equipment has gone missing.
The recently completed comprehensive count has covered both itemised and non-itemised assets. Whilst this count validated the previously disclosed net book value of itemised assets, it identified a deficiency in the value of non-itemised assets of c.£20.4m.
Which amounts to 41% of previously claimed equipment for hire in this class. Clearly, this would have materially distorted business decision-making on whether the hiring of scaffold towers etc. met their return on capital hurdles. It is unclear over what time period these items have gone missing, but if it is down to poor bookkeeping of inevitable losses rather than staff or customers actively exploiting control weaknesses, then profits have been overstated, potentially materially so.
Net assets excluding intangibles are approximately £200m and so £20m is material on an asset basis and may have distorted the decision to make share buybacks. The lenders will not be happy either. From H1:
An asset based finance facility of up to £175m, based on the Group's hire equipment and trade receivables balance. Cash and facility headroom as at 30 September 2022 was £91.7m (31 March 2022: £110.8m) based on the Group's eligible hire equipment and trade receivables.
Trades receivables plus hire equipment totalled £350m at the end of H1, so one possible deduction is that they can borrow 50% of the total, in which case the facility has just shrunk by £10m. However, that appears to leave ample headroom, and it may be the affected assets were not being lent against anyway.
Underlying operating profit runs at around £30m, so in the worst case, with these losses occurring over the last three years due to some permanent market change rather than fraud, profits have been overstated by more than 20%. A longer timescale or at least some element of fraud is far more likely.
Broker Liberum say:
10% NAV hit, no change to cash flows
The deficiency has no implications for past or future EBITDA
We are not sure how that can be true and certainly not asserted with confidence at this stage. The RNS talked about a "count", so this does not appear to be a matter of under-depreciation. Bits of fencing and the like going missing as part of a sale would go directly through the P&L
Liberum say:
Speedy’s accounting policies suggest that some access equipment was depreciated over 15 years, which means the difference between actual and expected values could go back some time. But, as we have observed for a while, the recurring but small profit on disposal of assets suggests to us that useful lives are on balance well estimated.
They explicitly say it doesn't affect the buyback because it does not affect cash. But surely the maximum price of a buyback is set by the discount to net assets / perceived fundamental value and the size by funding headroom? In February, they were buying back at 58p - does that really look like good value now?
Liberum addresses the funding situation as follows:
The Group has a £180m asset based finance facility.... Covenant tests only apply to this facility if headroom (the difference between eligible hire equipment, trade receivables and borrowings drawn) falls below £18m. We understand that headroom was around £75m before the write-off, which means the group has good headroom even after the £20m reduction in the carrying value of assets
So, they now have a cash and facility headroom of around £90m with a £37m asset headroom on top of that. If true, then there isn't a current or foreseeable problem. This week’s fall maintains the price to tangible book value at around 1x after the loss of assets. At the May 2021 peak, Price/TBV exceeded 2x. At a previous low point over the summer of 2016, it bottomed out at just under 1x. So purely on that basis, the shares look historically cheap if investors believe all the worms are now out of the woodwork.
Sanderson Design (SDG.L) - Full Year Trading Update
These look in line with previous trading updates:
Strong performances from the Morris & Co. brand, licensing and North America were offset by withdrawal from the Russian market, and a small decrease in manufacturing revenue against a strong comparator, to give Group sales for the year of approximately £112.0 million (2022: £112.2m).
Licensing is 100% GM so profits should be up, they say:
Underlying profits for the financial year ended 31 January 2023 are expected to be in line with Board expectations
However, licensing is recognised immediately but often paid over several years. Hence:
The Group's net cash position as at 31 January 2023, excluding leases, remained robust at approximately £15.2 million (31 July 2022: £15.0 million) after the strategic investment made earlier in the year in inventory to ensure availability of key lines of wallpaper and fabric.
Plus, the inventory has increased. We get no current-year outlook until the Final Results in April. It still looks good value but not the bargain it was due to recent rises.
The shares sold off slightly on the news, but this looks to be more like traders buying the rumour and selling the fact than anything fundamental in the trading statement.
Tandem (TND.L) - Directorate Change
…the Company's E-Commerce and Supply Chain Director, has left the Company and ceased to be a director of Tandem on 8 February 2023.
This seems a little sudden. Either a(nother) board falling out, or he’s going to a competitor. It looks like the company may still be having management challenges.
That’s it for this week, have a great weekend!