Here are some of the things we discussed this week:
Creighton’s (CRL.L) - Board Changes
Many of us rate Pippa Clark in her previous role as Marketing Director, so following the unceremonious exit of previous, long-standing Group Managing Director Bernard Johnson, then her promotion to Group MD seems a positive move. On top of this, we get the Executive Chair and CEO, William McIlroy, moving to a Non-executive role. Given that we had never heard from him, and his main qualification for this role appeared to be that he was a founder and still a 23.7% equity holder, then this also seems good news. Another major shareholder also joins as a non-exec.
However, this is still a little bit confusing. Why wasn’t Pippa given the CEO role? Do they intend to bring in an external hire for this position? A Group MD role would usually have a strong operations focus, and as far as we know, Pippa has no experience in this. A CEO should mainly focus on capital allocation, strategy, and communication. It is these tasks that Pippa seems the logical choice for.
Again, they could have re-assured on trading, and chose not to. Given that it will take time for the impact of management changes to be reflected in financial results, this may be ominous for short-term performance.
HSS Hire (HSS.L) - Sale of Power Generator Business
Selling Power for £23.5m. Derisks balance sheet further, but:
Power represented £34 million of Group revenues and £6 million of Group operating profit for the year ended 31 December 2022.
So, they've only got 4x Operating Profit for the business. Applying the same metric to the business as a whole would give an EV of £97.6m and a market cap of £60.6m, pretty much where they are today. So, this seems to be in line with the rest of the business, and they don't seem to have got a particularly good deal, especially as it seems to be one of the highest margin parts of the business. The benefit of the transaction is that we have a company with lower leverage on the same valuation, but that is largely cancelled out by the lower quality of the remaining business.
There is a commercial agreement for some continuing revenue:
Around £20 million of this revenue was through the Group's marketplace business which will continue to be provided under the commercial agreement.
But presumably the vast majority of the profits will be going to the new owners from this revenue. The main winners appear to be the market makers, as the news prompted a few trades, and they are quoting a 15% spread, although they probably aren't out celebrating their profits on the £10-20k typical daily volume.
Kinovo (KINO.L) - Update on DCB
We knew bad news was on its way, as in the last trading update, they said:
As a result of these delays, the total net costs incurred have increased to £7.1 million as at 31 December 2023 including additional procurement, warranty and remedial costs. Kinovo are seeking to recover some of the additional costs incurred through claims and recoveries, but the total pre-tax net cost to complete is therefore expected to be a material increase from the previous estimate of £5.72 million.
This week, things get even worse:
the Board has assessed that the pre-tax net cost to complete all the DCB projects has now risen by a total of £2.9 million from the £5.72 million highlighted at the Interim Results issued 28 November 2023.
This is the gift that keeps on taking. Net cost now stands at £8.62m. At this point, RX3 must be sighing in relief that shareholders rejected their offer. It seems there was a reason management wasn’t willing to open themselves up to sufficient due diligence around these contracts for RX3 to make an offer.
These unexpected costs have increased by 10% of the market cap since the interim results and 5% since the last trading update, so it is no surprise that the share price is weak in response to this.
However, the 16% fall looks like an overreaction if you believe they have finally started to hone in on the real cost of DCB and that they can survive the cash impact. Apparently, the broker's cash forecast was previously £-4m debt, i.e. £4m cash. So, despite worsening figures, the current overdraft is probably sufficient to see them through this.
Robert Walters (RWA.L) - FY23 Results
Fair play to them for not playing games with adjusted figures, but these look to be a big miss:
We can't always trust Stockopedia's data provider on this, but 20.1p vs 26.6p consensus, here:
With a big miss for FY23 and the following outlook, then 2024 looks set up for an even bigger miss now:
During the first few weeks of 2024, trading conditions across the Group's markets have, consistent with the end of 2023, remained muted - albeit with some isolated pockets of growth.
A P/E of 20 looks daft, of course, but the market is looking through the cycle and hoping they will be highly profitable again in the future. The share price keeps recovering on no news before being repeatedly dashed on the rocks of reality. Because of that, the 5% fall in response to these results doesn't seem to reflect the size of the miss here and the increasing time value of money until the eventual but much-delayed recovery.
Having about £80m net cash and maintaining the dividend, although uncovered, for a 6% yield is presumably providing some downside protection. However, that sort of uncovered yield doesn’t stand out in the current market.
Somero (SOM.L) - FY Results
No real surprises here. All metrics are down vs the strong previous couple of years:
Although these figures represent a small beat on profits and cash balance vs brokers’ forecasts, which is nice. The momentum was strong at the end of the year, following new product launches and this has continued into the new financial year. Broker Cavendish keep the same forecasts but flag potential upside from this momentum. The price reacted negatively to these results, perhaps reflecting the ope of some for a broker upgrade. This seems a bit harsh, given that they beat expectations.
In other news, they say their first electric screed will launch in 2024. They say it is ahead of the demand curve, but this must surely reflect their US focus. European customers have been wanting electric propulsion for a while now if the trade shows are anything to go by.
Cavendish say:
Our target price of 585p remains, based on a target P/E of 17.1x (on what should be cyclical trough earnings)
The risk is that they aren’t really in a cyclical trough. A US economy where there is a shortage of drivers to move concrete is not in a trough. Rather, demand was brought forward in 2021 and 2022 for warehouses, and now activity is being propped up by the Inflation Act. If this is the recessionary trough then it is one of the mildest ever.
However, the rating is still undemanding for such a cash-generative business with high Returns on Capital. As usual, the argument comes down to whether you believe their innovations will start to gain traction while maintaining their market-leading margins. Or you think they are ripe for competitors to erode their moat over time. We can see both possibilities.
Vertu Motors (VTU.L) - Trading Update
The highlights sound pretty positive:
· In line with expectations, UK used vehicle values have stabilised in recent weeks following post-October wholesale pricing correction.
· Group successfully increased used vehicle stock-turn and significantly reduced inventory levels to adjust to the changing market dynamics.
· Group delivered substantial £5.2m growth (28%) in core gross profits from fleet and commercial vehicle sales.
· New vehicle UK retail market is down year on year; Manufacturers discounting and enhancing offers to stimulate demand.
· Operating expenses fell as a % of revenue to 9.8% (FY23: 9.9%).
However, ultimately, this is a slight profits warning:
Full year FY24 adjusted1 profit before tax expected to be broadly in-line with current consensus.
This follows from the previous profits warning. Given the whoops through the rest of the update, it's not immediately obvious what has caused this, but we suspect it’s that increased stock turn. Despite the spin, this has to come at a cost, and apparently a higher one than first envisaged. Higher stock turn is usually achieved at lower margins, and there has recently been a scrabble in the trade to restock.
Group aftersales operations delivered a robust performance with higher technician numbers, despite some parts supply challenges, with revenue and gross profit growth achieved.
The parts supply challenges almost certainly refers to JLR screwing up their own logistics, not the wider problems that also affected new car supplies coming out of covid. However, their logistics issues were well known at the point of the last profits warning and have now eased.
We find it difficult to believe that the last two months of trading would be hard enough to cause the miss. This was the quietest time of year, and they still had order backlogs. It seems that the main reason for the miss is a lack of conservatism in Vertu's forecasts. There is a risk that the recent broker change was because the company didn't agree with the outgoing broker’s outlook and target price.
The share price rose, presumably on this:
Year-end net debt2 expected to be reduced ahead of market expectations to between £60m-£65m, reflecting strong working capital management and robust free cash flow generation.
Year end forecast was previously £87.2m. Yet, it is likley that this is simply because they have dumped too many used cars at low margins, leaving themselves short of stock. In the video accompanying this trading statement, they say they have reduced stock by £40m, so really, this is behind market expectations. Some of this will be due to larger than usual trading losses over Dec/Jan/Feb.
So in summary, we have:
A second profits warning (albeit of unknown size)
Adjusted cash miss
Likely short of used car stock in a rising market (but at least it is rising)
Risk of industry oversupply in aftersales
Adverse mix in new car sales
No active takeover discussions (since otherwise directors would be able to exercise options and sell in the market.)
Leaving us unimpressed with this former favourite of ours.
That’s it for this week. Have a great weekend!