Large Caps Live Monday 28th June
I will be the first to say I am wearing humble pie and that several times I have thought the market is overheated and will turn down and I have been wrong. So we are up about 40% from the bottom in the UK but not yet reached where we were before the crash.
So I thought I would look at the world again from scratch today and think about where we are and how we can profit. I think what really matters is the last 17 months or so have shown that:
The world is connected by people – something happens in one place and it spreads fast
That many people can work from home – whether they want to is a different issue
That the vaccine rollout is going to take time --- BUT that the US, UK and Europe will probably be more or less complete by the year-end. We can argue whether that means today for the UK or next month but actually, that is almost irrelevant. What matters is that it will be done
So for us as investors, I think the key question is how do we profit. Frankly, the only trade you really needed to do in the last year and a bit was buy all of the tech giants – all of them or one of them – it did not matter. In fact, I will go further and say that all the nonsense about macro did not matter in the last year. All you needed to know was that there was a Covid crisis. I would argue that Leo has covered Covid better than many economists / strategists etc.
And all we needed to do was think what our fellow citizens would do:
Work from home. So more kit (ie phones / computers / chips). Also, software to enable remote working ie Microsoft Office, Zoom (though actually many corporates have access to Teams / Skype but do not realise it). (I know that there are fans of Google Docs around but really?)
Spend more time on the internet
Buy more stuff online
Stay away from others, ie autos, & bigger houses in the suburbs.
And we can think through what many corporates would do:
Retail:
If you are in any way involved with the consumer you tried to switch from physical retail to online
Either via a platform like Amazon, Ebay or via a storefront like Shopify
Then you realise that you cannot just expect ‘footfall’ so you have to advertise the heck out of your site
Review and source product – initially many cut down on production (eg automakers) and cancelled orders but now finding that they are having to ‘catchup’. (Actually, I bet the economists in big automakers have cost them a fortune right now).
Commercial/business to business:
Communicate with your customers via video ie Zoom etc
In response to your customers you probably initially cut production and now finding you are in shortages
Realised that you can strip a heck of a lot out of your business by WFH – save on office costs but – perhaps not yet realised – also perhaps on layers of management. (I was talking to someone the other day who said that in his organisation there are managers who have only a single report – so he wonders what they do all day).
If you look at the big tech names (FANG BATMAN – Facebook, Amazon, Netflix, Google, Baidu, Alibaba, Tencent, Microsoft, Apple, nVidia) I would argue that they have all benefitted from the above.
And we had to have a stab at what the authorities would do:
Monetary authorities ie the Fed / BoE / ECB / BoJ etc: a. Print more money ie QE – ie buy govt bonds b. Print more money ie buy corporate bonds c. Lower rates – at the front end d. If that does not work try to lower back end rates
Fiscal authorities: a. Spend on PPE and healthcare b. Support the workers via furlough or equivalent c. Support corporates via payments/tax deferral etc
I reckon if we had all sat around virtually in March 2020 over some beers we could have got that list of items I have listed into 2 pages and it would have delivered tangible trades
So where to now? I frankly think a thought experiment is needed to set the path for the next few years.
As we open I think that there will be some move back to the office. But that it will not be back to what we used to have.
A side effect of this is that WFH might mean work from the UK but it could also mean work from Marbella or Thailand or frankly anywhere. The biggest issue will be timezones but not all jobs have that issue (eg if you spend a lot of time programming then you might have very few meetings).
As we open up I think people realise that WFH = Mobile lifestyle (ML). I think that this is a massive event. Combine a laptop with ubiquitous wifi or a 4G /5G hotspot and the world changes for many people. For most, I think it means working at Costa Coffee rather than Costa del Sol, Starbucks rather than Butlins, Café Nero rather than Kalo Nero etc.
I think that this also means that during the working day local high streets will be busier. Even if I am not working from Thailand but rather from the UK, I would look to maybe work for an hour from a coffee shop to get a change. (Frankly, if INTU was not bust I think it would be really interesting now).
Increased utilisation during the day of suburban coffee shops etc. (If Whitbread still owned Costa Coffee that would have been a buy).
I think that regional hotels will benefit (eg Premier Inn).
I also think that the increased cash in consumer wallets means that many people will go up a star in their hotel selection or will have more frequent breaks. The interesting thing is that a couple of decades ago the UK had Forte Group, and controlled Hilton International etc. Now all we’ve got left is IHG which sounds like its name was invented by a management consultant on weed.
The big swish hotels do rely on large events ie business conferences, weddings etc. I think that wedding will have a big bounce back. I also actually think that if people are WFH there will be a lot more business ‘get togethers’.
Having been couped up at home, and indeed WFH going forward I think people will be more active during weekends which will mean that more eg going out for leisure ie out of town malls.
I think that the total occupancy costs at malls etc will face downward pressure. But interestingly I also think that there may start to be a bit of a move away from online as people will opportunistically buy.
Stocks like Tui travel are priced as if it will take 3 years for recovery: I am not sure that that is right. I think the assumption is that it will take that long for the world to open up and behaviours to return to ‘normal’. Given it is a September year-end company I agree that 2021 is a washout but 2022? I am beginning to think, that by 2022 all the Brexit issues for holidaymakers will be sorted (is that too optimistic), competitors will have fallen away, and prices will rise and margins will recover faster. And the company will offer more holidays to Covid safe locations.
I do think that there is more short term downside first but on a ‘bad day’ I think it is worth looking at. The other reason for my caution is the balance sheet. But the following is interesting:
Clearly, the delay in the UK must have affected TUI. And it is hard to predict where Germany is. Though I would say that I think people in the UK do not realise how fast parts of Europe are running their vaccination programmes.
Small Caps Live Wednesday 30th June
Autins (AUTG.L) - Interim Results
Autins reported Interim results today to 31st March. This is a supplier of noise-absorbing foam. If you are ever amazed about how quiet your car is compared to the one your parents drove, this sort of thing is the reason why. Manufacturers are increasing focused on NVH - Noise, Vibration & Harshness - and a variety of solutions get implemented each year, from statistical tolerance stacking to sticking bits of tape over all contact points. Although not exclusively an automotive supplier, the vast majority of their revenue is ultimately tied to this sector.
These are this week’s headline numbers:
- Revenue increased by 3.7% to £13.71m (H1 20: £13.22m)
- Gross profit increased by 1.8% to £3.91m (H1 20: £3.84m)…
- Adjusted EBITDA of £0.66m (H1 20: EBITDA of £0.27m)
This led to an increase in operating cash flow, and a reduction in net debt. So a very credible performance given that Autins mainly supplies the automotive industry and this has had significant disruption. Profit After Tax was just £10k, so the cash flow was driven by D&A being above capex and this is clearly unsustainable in the long term.
It doesn't really bear working out a P/E when the numbers are this small. However, at 21p this trades at just 1.1xTBV which may well represent good value if they can make those assets productive and return to profitability in the medium term. Unfortunately, the outlook for the automotive industry seems weak:
Whilst we expect revenue for H2 21 to be less than H1, the Board remains positive regarding the prospects for the Group in our next financial year, although the scale of any improvement will be dependent on the timing and strength of the recovery of the UK automotive market from the current specific semiconductor supply issues.
So, it’s those dastardly semiconductors again. And I can’t help thinking more businesses are going to be affected by these sorts of supply chain disruptions.
The Q3 outlook means that Autins has had to seek covenant waivers for 21H2:
The subsequent shortage of semi-conductor chips into the automotive supply chain has caused a second wave of disruption for our key customers and consequently automotive sales reduction within the Group. This had a partial impact in Q2 21 but has become particularly acute in Q3 21. As a result, the modelled H2 21 forecast shows downside risks that would cause September 2021 period end EBITDA covenants in the UK to be breached. Regular review discussions take place with the primary lenders and the Group has proactively engaged with them. Both lenders have adopted a supportive position after reviewing forecasts and actual financial performance data, and the Company has now received advance covenant waivers for the September 2021 testing date.
The long-term outlook may not be great either since electric motors and battery packs generate a lot less noise to dampen. In light of this, I am not sure the outlook is sufficiently predictable, or the price sufficiently cheap to consider investing at this time. However, this remains on my watchlist since very few businesses trade at a similar P/TBV and in most cases, recovery has been already priced in. The risk is that those assets may never be particularly productive.
Carclo (CAR.L) – Preliminary Results
Carclo used to be in the automotive space producing low volume specialist lighting services. They then got themselves in serious trouble trying to move into mass-market vehicles which they couldn’t deliver profitable high-volume manufacturing. They sold off the lighting business leaving a Technical Plastics division which is the bulk of the business and an Aerospace division.
The remaining businesses have been touted by many commentators as a strong recovery play, so what do today’s results for the year to 31st March show?
So, no sign of significant recovery yet. Although, both divisions being profitable before central costs is a credible performance given the backdrop. In terms of outlook, they are positive, at least in Technical Plastics:
These strategies are focused on delivering profitable organic growth and operational improvement, supported by targeted investment. CTP is already starting to make solid progress against these objectives having secured a number of new contracts in the medical sector, while our focus on cash generation along with working capital improvement are starting to deliver results and facilitate growth. Recovery in the Aerospace business will take longer as we expect activity levels in this sector will remain below 2019 levels for the next three to four years. However, the overall impact on the Group business is low due to the much smaller scale of the Aerospace division.
So what about valuation? They delivered £10.8m in underlying EBITDA for FY21. With headwinds continuing in Aerospace, I can see them delivering maybe £12m in EBITDA for FY22. TP may continue to grow but it is hard to see this generating significant EBITDA growth given that, like foam manufacturing, plastics are not exactly rocket science anymore.
Technical Plastics is a fairly capital-intensive business so perhaps 7x forward EBITDA is a maximum valuation that could be considered reasonable. Which would be an Enterprise Value of £84m. However, they have £20.5m net debt excl. lease liabilities & a £37.3m Pension Deficit. So maximum valuation of the equity should be around £26m. At 53p today, the market cap is £39m which appears to make the equity significantly overvalued.
At this point, investors will likely say that the deficit isn’t real, and will disappear when interest rates normalise. But if that is your bull case, then you should be investing in interest futures, not companies with large deficits.
The company don’t appear to be making recovery payments at the moment, but that is presumably because they would have bankrupted the company if they had been forced to make them. The actuarial deficit is even worse:
The last triennial actuarial valuation of the Group pension scheme was carried out as at 31 March 2018, reporting an actuarial technical provisions deficit of £90.4 million. The next triennial actuarial valuation results as at 31 March 2021 are not expected to be finalised until June 2022, but the actuary's update of the 2018 triennial valuation to 31 March 2021, based on the 2018 actuarial assumptions adjusted for changes in market conditions, reported a deficit of £89.9 million, indicating the scheme to be 65% funded on a continuing basis. By way of comparison, the statutory accounting method of valuing the Group pension scheme deficit under IAS19 resulted also in a small improvement in the net liability of £37.3 million (2020: £37.6 million).
It was a much bigger company in the past. Effectively they sold off the lighting division since they could afford the capex to turn it around but had to retain the pension liabilities. They did manage to book some exceptional gains this year by allowing members to take some flexible benefits that reduced the deficit, but at 65% funded this isn't going to eliminate the deficit.
If the company have now returned to sustainable positive cashflows then I expect the vast majority of those to be claimed by the pension trustee. I struggle to see a case where Carclo pays a dividend in the next decade.
Wynnstay (WYN.L) – Interim Results
Today’s H1 results were a pleasant surprise. In many industries, there are one or more trade magazines and these can be very valuable to provide an understanding of both long term trends and short term trading. In Wynnstay’s case, that publication is Farmers Weekly. So I was already aware that, from the farmer’s perspective, arable was strong but livestock was very mixed, and that from Wynnstay’s perspective feed prices would be the big story, although Wynnstay have previously suggested they make a fixed £ margin here. Industry contacts told me that farmers were pretty bullish but still avoiding investment in large farm machinery due to ongoing uncertainty about the new UK subsidy scheme, but fortunately, Wynnstay does not sell farm machinery.
This is what they have to say:
Record underlying and reported pre-tax profit* results as sector confidence returns, helped by:
stronger farmgate prices, greater clarity with the completion of EU settlement and enactment of UK Agriculture Bill
balanced business model supplying products to both livestock and arable farmers
Basic earnings per share, including non-recurring items up 24% to 21.62p (2020: 17.50p)
Net cash at 30 April 2021 increased to £4.01m on a pre-IFRS 16 basis (excl. leases) (30 April 2020: £1.28m) even after commodity inflation and period of peak working capital utilisation
Here’s the divisional detail:
Agriculture Division - revenue of £180.72m (2020: £166.41m), operating profit before non-recurring items up 21% to £2.20m (2020: £1.81m)
feed activity performed very well - manufactured volumes recovered strongly, buoyed by more normal winter weather pattern and improved farmgate prices
weaker performance from arable operations, as expected - with last year's exceptionally poor planting season and poor harvest, impacting grain trading and seed sales in line with national trend
Glasson activity performed well
Specialist Agricultural Merchanting Division - revenue of £68.88m (2020: £62.83m), operating profit before non-recurring items up 13% to £3.40m (2020: £3.02m)
strong demand for bagged feed
recovery in hardware sales as farmers returned to investing in their businesses
So, feed is indeed the big story, and inevitably it seems that either their pricing model does give them a way to increase £ margins after all, or that it has allowed them to increase volumes. Gross margins and other variable costs suggest it is mostly the latter, with the increase in profits being due to admin costs staying steady (adjusting for acquisitions) as turnover has risen. Acquisitions also made an initial contribution.
The outlook is also strong, in particular, the normalisation of seed sales seems likely - poor autumn planting conditions in 2019 led to farmers holding spare seed this year and higher wheat prices are likely to encourage increased planting. Additionally, although acquisitions are inherently a one-off gain, it one-off was for only two of the six months in the period, boding well for H2 and giving some growth support to FY 2022.
Forecasting is difficult as revenue is H1 weighted, but joint ventures are only reported in the full year and then only as a share of profits. There’s reason to believe the same gearing effect will apply to these as Wynnstay’s other profits, but there is no guidance. Taking into account acquisitions my conservative forecast for FY 2021 is adjusted EPS of 40p and I see Shore have upgraded theirs to 39.2p. Increased amortisation of acquired intangibles will however means statutory EPS will be reduced by more than in the previous years that didn’t incur exceptional costs.
Shore forecast steady continued organic growth in FY 2022 and equally importantly increasing cash, suggesting shareholder returns may be improved by special dividends, buybacks or, most likely, further earnings enhancing bolt-on acquisitions.
Clearly, it is not as cheap as it was a year ago, but it does seem to be structurally undervalued on a risk-adjusted basis. Furthermore, it suffers from price swings, which I suspect is a hangover from holders since demutualisation selling down. So there are short and long term opportunities. In recent months when many things have been looking pricey I've found it a useful place to put money. Some earlier figures have been distorted by their "Just for Pets" business which turned out not to be a good fit and they disposed of. Though in retrospect they probably should have hung on a few more years.
Hunting (HTG.L) – Trading Update
Hunting issued a scheduled trading update yesterday. This wasn’t particularly well received with the share price weak during the day, before recovering somewhat and then falling again today.
They said:
In the period, the Group has moved from a negative EBITDA result in Q1 2021 to a positive EBITDA result in Q2 2021, driven by an improving market in the US onshore
But this leads to a loss overall:
Group EBITDA in H1 2021 is likely to report a modest loss given the market conditions noted above and the additional production disruption in Texas in February 2021 due to the severe weather which occurred. The majority of this trading result was generated in quarter one, followed by a small positive result being recorded in Q2 2021 as trading conditions within the US onshore improved.
And the outlook for FY21 isn’t as strong as expected:
Overall, Hunting Titan and the Group's onshore businesses have traded ahead of expectations in the period, however, this has been more than offset by a lower performance from Hunting's offshore and international businesses. We expect to see an improvement in trading in H2 2021, but we now anticipate that the Group's projected 2021 EBITDA result will be below previous expectations, but ahead of the 2020 full year result of $26.1m, with this EBITDA shortfall moving into 2022.
Perhaps importantly, they flag that this is a delay rather than missed demand. With oil above $70/bbl onshore will surely pick up, although a lot of US shale producers were hit by the last oil collapse and appear to be cautious to ramp up capex. Similar dynamics are seen in EMEA & AP:
The EMEA operating segment has reported a subdued trading environment throughout H1 2021, as activity remains slow in the North Sea. However, the segment has received its first, sizeable, order for the Organic Oil Recovery technology from a client in the Middle East, which will include a 30 well treatment programme.
The Asia Pacific operating segment has seen challenging trading conditions in the period, as the ongoing impact of COVID-19 has slowed the pace of anticipated recovery across the region. However, in the period the segment has received its first order for its micro hydro generators, underpinning the segment's efforts to diversify its revenue streams. During H1 2021, the Group has also incorporated an entity in India to build its presence in the OCTG supply chain, along with its strategic partner Jindal SAW.
But again, I can’t see how $70+ oil doesn’t drive recovery here in time too.
The argument for investing in Hunting at the current prices has mainly been about not just a recovery in the oil price but that it trades at a big discount to tangible assets, most of which are liquid such as cash and inventories. They took an inventory write-down last year, and have made further progress turning inventories into cash:
Hunting retains a strong balance sheet with net assets of c.$950m and total cash and bank in excess of c.$100m.
Inventory levels have also continued to reduce since the start of the year, with the balance at the end of May 2021 being $269.7m compared to $288.4m as at 31 December 2020.
Koyfin shows brokers lower estimates across the years, which again probably also explains the share price weakness:
However, this doesn't line up with what the company are saying about this being delays not missed demand. Given the liquid asset backing, this could provide a good opportunity, if/when the forecasts start to move in the other direction.
Hurricane Energy (HUR.L) – Resignation of Non-execs
Hurricane announces that all their non-execs have resigned. Before they were presumably going to be kicked out anyway by an EGM, which is now cancelled. With Crystal Amber providing their own narrative on this.
Crystal Amber still seem to be not accepting they have called this wrong though:
Crystal Amber regards Lancaster as one of the most prolific production wells in the North Sea. Crystal Amber would refer market participants to Hurricane's Restructuring Business Plan Presentation dated 24 May 2021, which is available on the company's website. The presentation sets out Hurricane's long range forecast of production from its existing P6 Well. By February 2024, this is estimated to deliver 8.4 million barrels of oil. Based on the forward curve for oil prices, this would generate approximately $600 million of revenue. Based on historic margins, this would deliver operating cash flows of in excess of $250 million.
This ‘prolific well’ has the water cut is increasing each month, they have had to get OGA permission to produce below the bubble point, and the well pump has been on the blink. Maximising value from the Hurricane assets requires some quite significant capex requirements which the bondholders have a veto over.
Crystal Amber claim they can raise money to make up any shortfall in the bond payments. However, one of the reasons that Hurricane ended up in this mess is because Crystal Amber appear to have refused to engage with the board when they approached them about raising fresh equity last year.
The other major shareholder Kerogan we believe may also hold the bonds and therefore be a more significant stakeholder overall. Adding into the mix Sabia capital who appears to have gone above 25% in CRS and are looking to wind them down. Could they also be bondholders in Hurricane who are looking to play hardball with Crystal Amber?
Crystal Amber appear to have been trying to maximise the option value by running the company undercapitalised and hoping something will start going well. If I were a bondholder, though, I would call their bluff and issue default proceedings next. I wouldn't want to be taking all the risk and letting equity get all the upside from bondholders providing the risk capital.
Immotion (IMMO.L) – Trading Update
These guys do VR moving modules that are installed in theme parks etc. And when I say "do", I mean they provide the hardware and software in return for a fee per ride. In order words, a recurring revenue model that completely ceased to recur during covid.
Following continued strong growth in revenues, the Group achieved a small EBITDA profit in May 2021 followed by a substantial EBITDA profit in June 2021. This has been driven by further significant growth in the revenue of our Location Based Entertainment (LBE) sites.
But could this be the turning point?
Each of the last three months have seen record revenue in our LBE business: £402k in April, £457k in May, and June is expected to be in excess of £600k.
Total Group revenue for June (including Home Based Entertainment (HBE) and Uvisan) is expected to be over £700k and this should result in underlying EBITDA of circa £100k.
So that's an EBITDA run rate of £1.2m pa. That compares with a market cap of £25m.
With the busy summer months ahead of us, and further installs in the pipeline, we expect Q3 to be a period of very strong trading.
So maybe the terminal run rate will be better still?
Almost all of our LBE sites are now back in operation.
But not by that much. Looks like June is as good as it will get with the current estate. So, 20x EBITDA. Pretty rich. And, of course, EBITDA is only a suitable measure if there's no capital investment and depreciation required. From the last annual report:
So that £1.2m EBITDA doesn't remotely correspond to either profits or positive cash flow (except in extremis). Agreements vary, but effectively it is based on the value-added per ride. In some cases, there are add on tickets and they get a proportion of that. So, clearly, they need to grow, but on the other hand that is going to be difficult due to capital intensity. On the first point:
We are pleased to report that, following the very successful launch of our 22-seat installation at Clearwater Marine Aquarium, Florida, USA, we have a number of discussions ongoing regarding larger LBE formats and we hope to announce a number of new installations in the coming weeks. This larger format with mini theatre and pre-show will be our main area of focus as we move forward and we believe both Clearwater and Mandalay Bay demonstrate that this offering can provide a new core attraction for partner sites, as well as delivering significant revenues for both parties.
On the second:
Following discussions with a small number of significant shareholders, the Company has decided to withdraw Resolution 5 from today's AGM. Resolution 5 was a special resolution which, if passed, would have given the directors of the Company the authority to dis-apply pre-emption rights when allotting shares in certain circumstances.
So what they really need is some kind of high margin, low capital intense revenue stream that can use existing content...
Revenue in our HBE division (Let's Explore) is in in line with our expectations, with the main focus being on preparation for the busy Q4 period. The consumer "intent" in the Q4 period is dramatically increased as we saw in 2020, when we sold circa 11,000 units. We therefore believe that Q4 which includes Black Friday, Thanksgiving and Christmas, should support significant sales volumes.
With trading now established on Amazon in the UK, the USA and Canada, this division should be well set to capitalise on this busy period. As previously announced, we have forward purchased 34,000 units of stock with substantial deposits already paid, ensuring significantly reduced product cost and the ability to plan ahead.
Here's the outlook:
The strong recovery of our LBE business underpins our confidence in our core business model. Demand from aquariums remains strong, and the move to larger immersive theatre style installations and entry into the zoo market should provide ample growth opportunities for the foreseeable future.
Our cash position remains satisfactory and with considerable investment already made in motion platforms and Let's Explore Oceans stock, along with the move to profitability, we feel we are well placed to take advantage of the opportunities that lie ahead of us.
We anticipate a strong and profitable summer season in our LBE business. As we move into Q4 we should benefit from a larger LBE estate and HBE's peak season, as well as continued progress from Uvisan. Accordingly, we are looking forward to a strong second half.
With plentiful growth opportunities available, we now look forward to H2 and beyond with renewed confidence.
So, in summary, it looks very expensive and appears to need yet more cash to grow. Oh, and the shareholders might be getting jumpy about stumping up more capital. But the strategy makes sense for where they are.
Small Caps Live Friday 2nd July
finnCap (FCAP.L) – Final Results
The most notable news for me yesterday was finnCap results for the year ended 31st March. We knew they were good as the last trading statement had already revealed that their revenue was up 83% and had been upgraded twice during the year.
Therefore, all eyes were on the EPS & Cash Balance:
· Adjusted EPS:(1) 4.80p (FY20: 0.80p); Basic EPS: 4.41p (FY20: 0.49p)
· Total dividends 1.5p per share (FY20: 0.80p)
· Cash of £20.4m (31 Mar 2020: £4.7m)
The only research available is from Progressive and these figures handily beat their estimates of 4.4p EPS. 1.0p dividends and £15.9m cash. Normally you’d expect this sort of beat to add 10% or so to the share price, however, the share price was off 6% yesterday.
Perhaps it was due to investors buying the rumour and selling the fact, a behaviour we often see in financial markets. After all the share price had shown some strength in the last few weeks. However, I’m not sure it is due to this. The share price started rising recently due to some large deals being announced in 22Q1, so this appeared to be a response to forward-looking numbers. And it is here that the market may be becoming cautious.
The narrative from the company is still strong:
Our stronger results allowed us to accelerate our strategy of expanding our product suite for growth companies in the second half making key sector and origination hires, increasing our capability in our core ECM business and establishing access for clients to new pools of capital.
FY22 has started well and our pipeline of deals expected to complete in H1 is strong.
But the actual guidance some may consider subdued:
Although it is still early in the year, our pipeline of business is good, including several potential IPOs and M&A deals. Our results will be influenced by the market's continuing receptiveness to new equity issuance and IPOs, however, we currently look set to have another strong performance in FY22 and expect revenue for FY22 to be in the £40-£50m range.
That has been interpreted by Progressive into the following figures:
So, it may be the forecast drop in EPS that is causing some investors to sell. After all, this has been an exceptional year on so many levels.
However, this caution seemed at odds with what we are tracking for deal flow in Q1, what the company said about their pipeline, and what they are saying on the company presentation yesterday which included:
- Cavendish expect to do more than £12m this year.
- 5 debt advisory arrangements in Q1
- PLC strategic advisory only second to Rothschild in the UK
I asked them about this at the investor meet company presentation. And they said that delivering at the top end of the revenue range was dependent on larger deals completing and there was always an element of timing, and the equity markets need to remain strong for this to happen. In general, I got the feeling that they like to under-promise and over-deliver which is why Progressive have been consistently behind the curve in the last year. Judge for yourself here though.
The most interesting part of the presentation was about future strategy – they are targeting £100m revenue in 5 years of which about £20m will likely come from acquisitions. They very much see themselves as a business advisory company with a core broking arm rather than just a broker. And they expect to move more into this space rather than trying to diversify with wealth management like some other competitors.
If you take a business advisory company such as K3 Capital, you see this trades on a 30x EBITDA multiple or 5x forward sales, rather than the c.4 & 1.5 that finnCap does. With those metrics, this could be a £500m market cap company in 5 years’ time.
I asked specifically about whether they would be a consolidator in the broking space, but they said they thought that was unlikely. They value their culture & reputation and felt that broking acquisitions often dilute that. So they would take teams, people & clients but not whole companies.
One of their focuses is to be ESG advisory - and while I'm sceptical of tick box mentalities here, or companies that focus on the E by ignoring the S & G, this is an area that more institutional investors are focusing on.
They also would like to keep a minimum of £10m cash in the bank, not just for reg cap but to provide stability for the business So expect lots of bolt-ons not one-off big bangs.
That puts pay to my idea of getting them to buy Arden partners who I think are still subscale as a listed business.
Arden Partners (ARDN.L) - Interim Results
Speaking of Arden, we got their results yesterday too. Again, these beat my expectations:
· Revenue: increased by 118% to £5.0m (2020: £2.3m) with growth in all areas of the business
· Profit before tax: £0.9m (H1 2020: Loss before tax of £1.5m)
· Basic earnings per share: 3.5p (H1 2020: Loss per share of 5.7p)
And perhaps beat other people’s too, with the price up around 20% yesterday.
Technically, this is no longer a value trap, as the net assets are no longer falling!
The Group's net assets at the period-end were £5.5 million (31 October 2020: £4.6 million). The capital adequacy ratio as at 30 April 2021 was 221% (31 October 2020: 249%).
Again, the outlook is strong:
Following on from the strong performance in the period under review, trading in the second half of this financial year has continued to be very encouraging. We have completed one IPO and three secondary equity fundraisings (raising a cumulative £35 million) and have a good pipeline of transactions in the pipeline, including some sizeable equity fundraisings and a number of M&A transactions. Market sentiment remains positive and the trading environment remains favourable.
Although you have to question this statement since how bad would H2 have to be for them to book a loss here?
We remain confident of delivering a profitable result for the year as a whole, the scale of which will be determined by the delivery of these pipeline deals.
Q1 deals have been reasonable so I reckon that 5p+ EPS for FY21 is probably in the bag given the transactions already known. The problem is that this is much more likely to be unsustainable than finnCap. If markets do take a downturn in sentiment, then this is much more likely to be cash-flow negative again, as it has been in recent years. And their diversification into wealth management is cyclically aligned to the rest of the business.
Arden management must feel there is an aspect of unsustainability in there too, since they are not paying a dividend. Whereas with finnCap you have long term growth overlaid on top of some phenomenal short-term results.
That said, Arden still trades at a discount to Tangible Book Value, where the vast majority of that is liquid assets. Its research is considered one of the better ones in the small-cap space which is generally a sign of quality in other areas. That combined with the (at least short-term) positive outlook means I am in no rush to take profits here.
That’s it for this week, enjoy your weekends!