Apologies for the late summary email, with family stuff taking priority during the day today.
Driver Group (DRV.L) - Preliminary Results
We knew these results would be bad, and they are:
Financial Summary
· Revenue decreased by 4% to £46.9m (2021: £48.8m)
· Underlying* loss before tax of £1.0m (2021: profit £2.0m)
· Net cash of £4.9m (2021: £6.5m)
· Utilisation* of 67.5% (2021: 72.4%)
Big problems in APAC and ME are the reason. The CFO fell on his sword for these failings. On top of this, we are always a little worried when a company takes more time than usual to release results, and then only preliminary ones arrive. However, our worries appear to have been unfounded, as the Annual Report appeared later in the day, and the audit looks completely clean.
The real unknown in these results was the outlook:
Q1 revenue increased by 5% to £11.8m
Operating profit of £0.25m
Interim Dividend approved
The Board expects to return to profitability for FY23
So pretty good, although maintaining the dividend and being profitable is really the minimum acceptable level we would want for this turnaround. Their investor presentation gives a little more details, with them claiming that Q1 is ahead of their expectations:
Momentum does seem to be with them, though, and with further cost savings to come, profitability could be quite good. And statements like this are positive:
we are confident that as a result of this reorganisation our presence in the UAE, KSA, Qatar and Oman will now deliver more consistent profitability within the region.
The executive management here are usually cautious by nature, perhaps too cautious sometimes. However, one of the most consistent reasons that investors gave for passing on Driver as an investment is the presence of Steven Norris as Chairman, until now:
On a personal note, having served as your Chairman for over eight years, I will be handing the stewardship of the Group to Shaun Smith who will join the Board and become the Group's new Non-Executive Chair following my retirement at the conclusion of the forthcoming AGM on 23rd March 2023.
So this is fantastic news! The background is that while he juggled his many other board positions elsewhere, at Driver, he oversaw several CEO changes with very high payoffs (some of which are still being paid as options several years later) and then recruited their replacements. In contrast, the appointment of Shaun Smith as the new Chair seems to be well-received. We hear that those who’ve worked with him at previous businesses speak highly of him.
Just to tie up a couple of loose ends from things we’ve mentioned before:
The ERP system has gone live. Whether it was a little late or not, this is an achievement. In the ED presentation, they talked about its importance in real-time reporting and driving higher utilisation. Getting to their target utilisation of over 80% is one of the keys to much higher profitability.
The new CFO resigned the two of her other positions and so is clearly treating this as a full-time role.
Equity Development still aren’t willing to put their head above the parapet with forecasts yet:
the lack of forward visibility results in a continued suspension of estimates. That said, we expect FY23 to prove to be a turning point in the Group’s fortunes as utilisation levels improve now that projects are serviced globally.
But stick with their 49p fair value estimate. Of course, we have to be wary of these. Here is their rationale:
Comparing DRV to a wider consultancy peer group that trades on an average historic P/B ratio of 4.7x, suggests that DRV (on 1x NAV) remains significantly undervalued. We retain our fair value/share of 49p.
P/B isn’t a great measure, but thankfully, ED are using their tried and tested method of simply picking a price target out of thin air rather than taking 4.7x the current price and running with it.
Although the maintained dividend is welcome, we are disappointed not to see a new share buyback given the cash balance. But the new CFO will no doubt want to see cash-generative growth first. Of course, the share price may be much higher at this point. Again, perhaps too cautious.
Leo thinks the valuation doesn't really stand out for a people business, although it currently has good momentum. Mark thinks that a recovery in APAC and ME, plus cost savings and higher utilisation, could make it look very cheap again. For a long time, he’s been expecting some kind of takeover, as has happened to every other UK-listed construction consultancy, with large holder AB Traction doing their usual king-making. However, this has never come, with Driver perhaps being too niche and too small.
The share price reacted slightly positively to these results, but then it had been rising into them, so some of this news was already in the price.
Angling Direct PLC - Full-Year Trading Update
Since the Company's last update on 12 October 2022, trading has been in line with the Board's expectations and has delivered a 2.2% increase in revenue for FY23 to £74.1 m. The total number of stores increased from 42 to 45 in the year, with new openings in Washington, Coventry and Stockton-on-Tees.
Revenue is very slightly ahead of expectations, and EBITDA is in line. They have £14.1m net cash, despite investing in three new stores in the period (with associated fit-out and inventory costs). Setting up the EU hub to be able to trade effectively in Europe has had significant start-up costs but is paying off:
sales in the key European territories of Germany, France and the Netherlands increasing by 32.3%.
Outlook generally positive but non-specific:
Ahead of the start of the 2023 fishing season, the Board re-affirms its view that the Company is well-placed to capitalise on the opportunities ahead and gain market share both within the UK and Europe whilst remaining vigilant as to continuing challenges for consumers in the macro-environment.
Five years ago many believed companies like this, and other specialist retailers would have been felled by the unstoppable Amazon onslaught. How things change! Who would have predicted Amazon would have neglected their retail offering to the extent that nobody believes this any more. It is still possible Amazon could come back from the morass of inaccurate listings, fake reviews and dangerous electrical goods, but it is looking increasingly unlikely by the day.
After rising 5% on the day of this trading statement, the share price has now dropped back. With an EV of just £8m and trading at just 0.68 TBV, it wouldn’t take much of a trading recovery to see this bounce strongly.
Hummingbird (HUM.L) - Strategic Investment & Placement Update
· CIG Investment, as previously announced, of US$15 million, made up of two investment tranches, the first of which has completed, with the second tranche of US$11.2 million being subject to shareholder approval. CIG currently holds 8.6% of the Company's issued share capital, and assuming the full take up under the Open Offer and completion of the Fundraise will hold 25.6% of the Company's enlarged share capital.
· A Subscription with certain larger existing institutional shareholders for an additional c.US$1.4 million (c.£1.2 million), also subject to shareholder approval. The Subscribers have undertaken not to participate in the Open Offer.
· An Open Offer to qualifying shareholders to raise up to an additional c.US$2.4 million (£2 million), also subject to shareholder approval.
· All new ordinary shares issued in connection with the Placement shares will be issued at a price of 7.79 pence per new Ordinary Share, which represents a c.2% premium to the 30-day VWAP ending on 5 February 2023, being the last practicable date prior to announcement of the CIG Investment.
So sounds like some of the institutional holders were not happy about being diluted and have demanded to be able to participate on the same terms as Coris Bank (CIG). The open offer seems pointless, but I guess it gives the same opportunity to other larger holders if they wish. And on the management presentation, they suggested they wanted to be fair to all holders:
Of course, smaller shareholders would be daft to take up the open offer as it is at a premium to the current market price. It also seems daft that the share price is down on this news this week because a) it further strengthens the balance sheet, b) shows certain institutional holders are happy to pay a premium to the current market price, c) doesn't really dilute smaller holders since they can buy in the market today at a cheaper price.
Sanderson Design (SDG.L) - Major Licensing Agreement with NEXT
It is always good when a company can name the client:
The agreement includes a five year licence period from product launch in spring/summer 2024 following a year of product development by NEXT. The Clarke & Clarke licensed products will be available in NEXT stores and online at next.co.uk, and will also be wholesaled to third parties.
It must help that Sanderson’s chair (Dame Dianne Thompson) has been on Next’s board since 2015. In addition, it seems previous brands have been well received/sold well. The Scion baby clothes are some of Mark’s favourites as they look good but are well-designed so easy to get on a wriggling baby! Pleasingly they also provide some figures for this new licensing deal:
Acclerated licensing income of £2.6 million will be recognised by the Group in the current financial year in connection with the agreement, which covers the UK and Eire.
This should be at a 100% margin, less tax, and is very material compared to pre-tax profits of around £10m. However, these profits will not recur every year since recognition is accelerated, and so it is perhaps better compared to the market cap of £85m preannouncement. Additionally, they don't say when the cash will be received.
On the other hand, "accelerated" implies that some, but not all, of the expected revenue is being recognised. And nor would you expect NEXT to take the unnecessary product risk by paying licencing fees for products that might not sell well or even get made. So perhaps the minimum and therefore recognised licence fee is between a quarter to a half of what they "hope" for?
Plus they say:
The new agreement marks the latest in a series of licensing agreements between NEXT and the Group's brands.
Which implies there could be more agreements with NEXT. And:
The new agreement is the first major licensing agreement for the Clarke & Clarke brand [but not the first overall]
This implies there could be more agreements with other customers. In both cases, this agreement must increase the probability of more. So it seems reasonable to ascribe a 4x multiple to the £2.6m, i.e. £c10m, so we're looking at a greater than 10% jump in the value today. The price rose about 15% on the day but has softened a bit since.
Singer start off by being less optimistic:
The accelerated income in Jan’24 (non-cash) underpins forecasts this year.
We would have expected an upgrade, at least for the current year, not underpinning, which suggests the licencing agreement was already priced in!
The agreement will then be EPS/cashflow accretive from Jan’25 onwards.
From the rest of the report, it looks like they mean "Accounting year ending Jan 25", i.e. substantially calendar year 2023 here.
Given the timing lag, the incremental value for equity holders is tricky to estimate. Our DCF analysis suggests it could be worth 11-20p depending on the duration and scale.
Brokers always use crazy low discount rates, but that takes us back to the change in valuation we estimated. So, much confusion. They also say:
We expect to introduce Jan’25 forecasts in April (prelims) and, by way of illustration, would anticipate the agreement being c3-5% EPS accretive.
Which is just background noise. As the revenue, EPS, and cash guidance don't seem to add up, we are really quite confused and none the wiser after reading the Singer report. The share price rise merely takes it back to the levels immediately before the (apparently in line) trading update a couple of weeks ago, so remains good value even after this rise.
Sylvania Platinum (SLP.L) - Half-year Report
The results here aren't really surprising given they have excellent quarterly reporting that includes almost all these figures. The only new news is the level of depreciation, which is fairly immaterial to the investment case.
Group EBITDA of $45.6 million (HY1 FY2022: $36.2 million);
Net profit of $32.6 million (HY1 FY2022: $24.4 million);
$45.6m EBITDA for H1 is pretty good vs a $363m market cap and $239m Enterprise Value. The problem is that based on the upper end of production targets and the current PGM pricing, H2 EBITDA is likely to be more like $27m. So the forward EV/EBITDA is around 3.3. Not expensive but not that cheap for a SA PGM miner.
In addition, since Mark has a fairly detailed model of the company’s financials, we can say that if they are to hit these Net profit broker consensus:
They are going to have to either beat the upper end of their production forecasts or hope that PGM pricing recovers. Mark asked the management exactly this on their Investor Meet Company Presentation:
Q. If the company produces 72koz for the year, current spot PGM prices mean that net profit for the year is likely to be around $50m vs market consensus of $60m - should the company update the market on this?
The answer didn’t really get to the nub of the question, but the CEO was right when he talked about there being a lot of sensitivity. They said they intend to further update the market with their Q3 results. Our feeling is that they are being fairly cautious on production guidance and will probably get close to the $60m PAT by beating production, at least within the 10% that would require a warning. However, the risk remains that they deliver a Full Year miss. That the share price rose 6% in response to these results perhaps reflects that they continue to pay decent dividends, plus that very few investors do their own modelling work, and instead rely on brokers’ estimates that are often out of date.
Q3 trading update: https://www.investegate.co.uk/system1-group-plc--sys1-/rns/trading-update/202302230700037679Q/
System1 (SYS1.L) - Q3 Trading Update
This company has a habit of bigging up its potential and then massively missing forecasts. Since they are marketers at heart, their comments require interpretation.
Data revenue grew 18% on the comparable period to £3.4m, a quarterly record, (Q3 2022: £2.8m) representing 55% of Q3 revenue. Year-to-date Data revenue increased by 31% on the comparable period to £9.6m.
= the growth in our data business is rapidly decelerating
As expected, the reduction in consultancy revenue narrowed from 46% in H1 to 21% in Q3 on the comparable period.
= our core business is still declining
Q3 period-end cash, net of borrowings, was £5.1m, compared with £6.6m at 30 September 2022, due partly to high quarter-end working capital following a strong December.
= The last balance sheet net cash was overly optimistic due to window dressing. We intend to window dress to the max in the future.
Still, Q3 revenue at £6.2m is finally growing again after 3 flat quarters: (£5.3m, £5.2m, £5.3m). So the share price went up simply because the market was expecting much worse. They say:
Gross profit margin improved in Q3 compared with the first half-year, lifting the year-to-date margin to 82.7% (H1 2023:81.5%)
So, that’s a gross profit run-at-rate of £20.5m vs an annualised admin cost base of around £18m, maybe more like £19m if we assume they are giving employees a 5% pay rise. So assuming Q3 isn’t a one-off, then they appear to be profitable again. But they are not cheap. They are probably on a Q3 run-rate P/E of 20 so a lot to prove, and they are a risky stock given the large spread and illiquidity.
That’s it for this week, have a great weekend!