We are well into results season, and together with ongoing market volatility, it felt hard to stay on top of all the news this week. The discord bot is now well and truly running, posting key news items into discussion threads as they arrive. So if you think we’ve missed some important events, jump onto the discord server and kick off some discussions.
Mpac (MPAC.L) - FY Results & CEO Succession
The first thing to notice is that the reported revenue at £97.7m is above Equity Development’s guidance of £95.8m. Despite this, these results look very poor:
Underlying profit before tax is on target at £3.5m versus £8.6m the previous year, translating into an unadjusted EPS of -2.2p versus 38p the previous year. An axe was taken to these targets in the middle of last year, though:
Cash is apparently ahead of guidance at -£4.7m versus -£5.3 forecast and £13.6m the year before. We doubt shareholders will be celebrating that massive cash burn, however. Some companies make a point of disclosing current cash figures, some make a point of not doing so, and there isn't much correlation between whether do and whether they should do. MPAC have not, which misses an opportunity to assuage concerns.
One of the other concerns here has been the Pension deficit that has required ongoing recovery payments and admin costs even if the company would rather shareholders ignore these and focus on “adjusted” numbers. To try to escape this hole, the company appears to have purchased LDIs and then bought a lot of equities, where the assumed higher return profile allows them to report a scheme surplus, even if they still had to make the same cash recovery payments. This has not been a good strategy as the following move in scheme assets shows:
The value of the scheme's assets at 31 December 2022 was £311.2m (2021: £453.1m)
If you thought your small cap returns left something to be desired in 2022, at least you weren’t the Mpac scheme managers who managed to lose over 30% on the year. Rising interest rates rising has benefitted them in the past, so this must be forced selling and/or a highly-geared equity portfolio. Despite this, the company appears to be in denial about LDI:
Despite the unprecedented volatility in financial markets around the world in 2022, the scheme's protection strategies, notably its use of Liability Driven Investments, ensured that the surplus was protected.
Note how the US scheme was not affected beyond underlying asset price movements:
Total assets of £8.1m (2021: £9.9m)
We also get news on the triennial valuation:
The UK scheme's triennial valuation as at 30 June 2021 was completed in the year, with the reported deficit reducing to £28.4m (30 June 2018: £35.2m). The contributions remained at the same level, but the recovery period reduced to four years and six months (30 June 2018: 6 years 1 month).
They make it should like this was announced before. These contributions don’t appear to be ending anytime soon, and with the equity losses (partially offset by the LDI interest rate hedges.) And the Triennial will always make more conservative return assumptions, hence the big gap between what they report on the balance sheet versus the recovery payments they need to make.
The pension isn’t the only bad news, there is also a large working capital outflow. Half-yearly inventories £5.5m (31/12/2021) to £6.3m (30/6/2022) to £9.6m (31/12/2022). That's more in inventories than Leo was anticipating. Trade and other receivables also soared £34.5m -> £33.8m -> £47.3m, but these were more in line with what he expected.
We won't know the precise breakdown into work in progress / finished goods, contract assets / liabilities until the Annual Report, maybe in 10 days, but there is some info in the cash flow statement.
This leads Leo to this estimate:
You can see the main problem is uncompleted, un-invoiced goods, not those delivered just before the period end and unpaid. However, getting everything as ready to ship as possible as early as possible at great cash expense may be the best strategy to keep customers happy. The question is, who is on the hook if deliveries get delayed further?
The company remains positive and is “excited”, but this appears to now be delusional:
Our search for further complementary acquisition targets continues.
They appear to be only one further mistake away from an emergency fundraise. This statement implies working capital build has not materially unwound yet.
The increase in working capital is expected to unwind as the backlog of projects are largely cleared in H1 2023.
In light of this, this looks like the wrong goal:
Our goal remains to grow Group revenue at a double-digit rate year on year.
The goal now should be to consolidate and recover their balance sheet. Forecasts are unchanged and make them look very cheap given the opportunities, ignoring the debt and the pension commitments. However, it would appear to be foolhardy to simply brush these away.
In addition to these poor results, Tony Steels retires. Firstly it is very sad that he is leaving under these circumstances after so much success in transforming the company a few years ago. Either he's been sacked or, worse, he is giving up as he doesn't see things getting any better in the short term. The other suspicion must be that institutional shareholders have applied pressure, perhaps after having been sounded out over a fundraise. At 56, he seems far too young to be retiring entirely. And the choice of the COO to replace him also looks worrying. Surely he also bears some responsibility for the current issues?
Bigblu Broadband (BBB.L)- Annual Financial Report
The opening paragraph gives a good idea of what they are about:
During the Period, BBB delivered positive progress with strong revenue and profit growth in the Australasian region. The trading performance of the Norwegian business was impacted in the year by a cyber-attack to its satellite provider and by delays in the 5G product launch. Quickline, which the Group still has a retained interest of 4.0% in, has undergone significant scaling since BBB sold its majority shareholding in this company in June 21 with the support of its new owner Northleaf Capital Partners, including £70m of additional capital, and can now address around 300,000 premises with its hybrid Fixed Wireless and Full Fibre infrastructure.
There's no proper segmental reporting section, but there is this under an Note 7 (adjustments):
So they have zero UK exposure. Having a UK-listed company operating in Australia and Norway is a red flag. We wouldn't say the ASX is a perfect stock exchange, but it certainly is big enough for them to list on and probably attracts higher valuations. Most UK investors will have no idea of about the competitive landscape in Australia and Norway and could easily be missing something that a local would consider makes them uninvestable. Alternatively, we could be missing something positive, and on average, I would expect overseas companies on AIM to trade at a discount, potentially providing opportunities. So it is interesting they say:
we remain focused on creating and realising shareholder value for BBB Shareholders and in this regards we are exploring all options for the Australasian business including a potential ASX listing.
Any suggestion that the ASX are reticent about having them would be the biggest red flag imaginable! Anyway, the thing Australia and Norway have in common is low and uneven population density. And the thing that makes them completely different is how flat they are. While microwave might be the best option in Australia, the only thing that would work well in both countries is satellite. This puts them head-to-head with a megalomaniacal wanna-be cult leader. As well as Musk's StarLink, there is Bill Gate's Kymeta, HughesNet, Viasat and OneWeb.
Our Australian business SkyMesh, is the leading Australian satellite broadband service provider having been named Best Satellite NBN Provider for the fourth year in succession (2019-2022). SkyMesh has continued to be the market leader in the satellite broadband market with a total market share post the recent Uniti transaction of c.40% (FY21: c.36%).
Presumably it is called SkyMesh on the basis both SkyNet and StarLink were already taken. From the SkyMesh website:
2020: SkyMesh becomes largest Sky Muster Provider
More Australians eligible for Sky Muster and Sky Muster Plus service have chosen and continue to chose SkyMesh than any other satellite provider.
So it looks like they are just a reseller. And today we have:
In our Australian business underlying churn was 30.3% (FY21: 28.6%) due to the removal of COVID Support packages and continued technical challenges on the Skymuster plus product, which will be updated in FY23 to an improved product which would be more attractive in terms of speed and data packages, which should reduce churn. Competitors, such as Starlink, have also contributed to the churn with aggressive marketing, and we continue to work with NBNCo to counter this.
The operator of the satellites is NBNCo. Wikipedia:
NBN Co Limited, known as simply nbn, is a publicly owned corporation of the Australian Government, tasked to design, build and operate Australia's National Broadband Network as the nation's wholesale broadband provider.
So a bit like OpenReach except state-owned rather than just state-controlled. If the market follows the UK model then presumably SkyMesh / BBB make most of their money scamming grannies with high per-minute telephone call rates, charging twice the going rate for those that don't phone up ever year to renegotiate and acting as part of the conduit of money from sports fans to drug cartels. However, a quick look at the website suggests while rates for a fake landline are high, they don't offer their own bundled TV service.
(Prices in addition to internet service). This is quite literally a dying market. The other thing noticeable is how many times "nbn" comes up in their advertising material. It is far more clear that they are using the same networks as many competitors as it is with, say, OpenReach. So their competitive positioning appears to be:
Almost completely dependent on the state-owned nbn service where they are the biggest but only one of many operators all offering the same nbn-branded plans.
Strong competition from Musk's Starlink, which may be technically superior, more agile, have better scale, but in any case, have no particular remit to make a profit.
Dying high-margin market
No integrated mobile phone service
No integrated TV service
Accordingly, we don't expect a high rating here.
The forward PE is around 11. In boom times, that might be a low rating, but not today. From finnCap, FY 2024 forecasts are now for EPS of 5.9p with a positive cash flow of £2.5m. Revenue is barely growing ahead of UK inflation, with past growth aided by acquisition. So it looks overvalued based on how the business stands today.
Luceco (LUCE.L) - Final Results
Adjusted EPS of 11.1p looks a decent 12% beat on consensus:
But unadjusted is just 7p, so you’ve gotta believe the adjustments here to celebrate.
We have identified £2.0m of such items within our reported operating profit for 2022. They consist of:
· Amortisation of acquired intangibles: £1.8m
· Acquisition-related costs of £1.2m
· Restructuring provision release of £1.0m
At first glance, Mark thought those didn’t add up, but the restructuring provision release will be an exceptional gain. Amortisation of acquired intangibles is standard these days, but removing acquisition-related costs for a serial acquirer looks a little cheeky, although not out of line with other companies.
The outlook is the key:
· 2023 trading in line with expectations
· Seeing expected tailwinds from improving trends in:
o customer destocking
o gross margin
o input costs
· Slower Residential RMI market, as expected
· Comparatives get easier as the year progresses
· Well positioned to progress as market conditions improve
Ultimately the in-line statement for 2023 doesn’t make them look particularly cheap. And this is perhaps why the shares have sold off this week (plus previous tip buyers with stops in place taking their usual beating.)
Cost inflation is looking much better:
Although the tailwinds sound like they will beat this and deliver a slightly improved performance on 2022, which would be a big beat. They also report the de-stocking headwind is almost over. Macro risks remain, though.
4.6p FY dividend is also a small beat vs consensus, but down quite a lot in 2021. The free cash flow in H2 has been very impressive, led by working capital management:
This means the net debt is much reduced at £29.4m, which is 0.8x EBITDA. Their target is 1-2x, and this gives them significant firepower to make further acquisitions. They say they prefer macro to be a little stronger, but if a bargain was available, they would buy. They are going to run an exercise on diversifying their manufacturing base this year, which could see an acquisition end of this year or into next.
Even without any acquisitive growth, they don’t see why they won’t return to 15% operating margins in more medium-term benign end markets. This would give them about 15p EPS, putting them on a P/E of around 7. Although, they are unlikely to deliver at this level given the 2023 macro backdrop. Still seems too cheap for a Buffett-style great business.
finnCap (FCAP.L) & Cenkos (CNKS.L) - All-share merger
Mark thought there would be M&A in the sector, but thought it was more likely finnCap & Peel Hunt. Instead, we get this combination of equals. The merger of finnCap & Cenkos makes sense from a scale point of view, but we are not sure the culture is a great fit. finnCap worked hard to build a reputation for doing the right thing. Cenkos still has a bit of a whiff about it from the historical Woodford link. Although the board disagree saying:
The finnCap Board and the Cenkos Board believe there is a strong cultural alignment
They would say that, though. With hindsight, finnCap shareholders would have been better off taking the mooted 20.3p in cash from Panmure Gordon. Although, clearly, when the boom times are back, the combined equity of finnCap & Cenkos should be much higher.
This reads more like a joint venture consisting of each company's entire operations than a merger:
The Combined Group will be led by the existing CEOs of Cenkos and finnCap as co-CEOs. Lisa Gordon will become Chair of the Combined Group Board which will comprise equal numbers of finnCap and Cenkos Directors.
Co-CEOs are often a recipe for disaster, but perhaps John Faruggia will step back to head up the M&A part given his background, in a suitable face-saving time.
Under the terms of the Merger, Cenkos Shareholders and finnCap Shareholders will each hold approximately 50% of the entire issued ordinary share capital of finnCap.
Although Cenkos shareholders get a dividend.
Each Cenkos Shareholder will be entitled to receive and retain the 0.5 pence cash dividend for each Cenkos Share held on the 2022 Dividend Record Date (the "2022 Dividend") which was announced on 10 March 2023
The Cenkos Board intends in due course to declare an interim dividend of 3 pence per Cenkos Share, which is intended to be formally declared after 30 June 2023 and paid before the Effective Date
Overall, the merger makes sense but is hard to get excited about.
Portmeirion (PMP.L) - Preliminary Results
Record Group revenue of £110.8 million in the year to 31 December 2022, an increase of 5% over the prior year
So a significant real and likely currency-adjusted fall in revenue. However, this is essentially a home products company that might have benefitted from covid, so this is relevant:
19% over pre Covid-19 level
That's probably a whisker ahead of inflation.
Headline operating margin1 increased from 7.2% to 7.8% and we reiterate our long-term ambition to improve the operating margin to 12.5%.
Restating the operating margin "ambition" is probably positive, but this feels more like a target used to apply pressure on themselves rather than anything anybody reasonable would ever expect them to reach. And inexplicably, this has been reduced from the 13% they repeatedly quoted in the past, most recently in the January trading statement.
Sales from online platforms continue to grow despite physical retail stores reopening, and now represent 51% of total sales in our core UK and US markets in the year to 31 December 2022 (2021: 50%
So flat to marginal real-terms absolute online sales. But again, this is actually impressive versus many who saw large post-covid falls in online sales. Pre-covid, it was only 30%.
On profitability, margins are up, but cashflow lurched into negative territory:
Unfortunately, the increase in pre-tax profits could be explained by higher inflation of just 2% on closing inventory. Surely it has been more than that, and the normalised margin is actually down? Despite the summary headline of "inventory levels remain elevated at year end to avoid supply chain disruption", they later come clean that the inventory increase of 40% is mostly inflationary:
We had a net working capital outflow of £10.3 million driven by increased inventory over the prior year. About two thirds of this increase was caused by foreign currency retranslation and supply chain cost increases, mainly container freight rates and material increases.
The remainder was early purchasing for additional stock depth of key lines, which meant we exited the year with a higher stock balance.
On to current trading:
Trading in the first few months of 2023 is in line with our expectations and our forward order books remain healthy.
They don't say anything meaningful or useful about their outlook. Singer have slightly raised revenue forecasts, we suspect due to higher inflation, but the increase is by the EPS line. They have also engaged Shore to write research, so presumably, they feel their shares to be undervalued. The forward dividend yield of 5%, with hopes of strong future growth, is a point in the company's favour from an investment perspective. But how realistic is this, given recent cash outflows?
They have moved from net cash to net debt due to working capital movements which will not immediately reverse unless the recent increases in input costs do. However, the current ratio remains strong, and they are trading at around tangible book value.
The wildcard is what happens to energy prices when their forward energy contracts (which they continue to describe as "long-term energy price hedges") expire in around 12 months. Clearly, the situation has improved dramatically, and their heavy reliance on gas is in tune with the current government's anti-electrification policies. But brokers are conspicuously silent about what energy price assumptions they are using for 2024 and 2025 forecasts.
The main adjusting item is "restructuring costs" of £958k. Last year's annual report says:
Restructuring costs relate to a redundancy exercise undertaken within the Group
They appear to be recurring enough and not lead to an overall reduction in staff numbers, to be treated with caution. As is:
We continue to make contributions to our closed defined benefit pension scheme and paid £0.9 million during the year.
The pension scheme is consolidated, as is usual, and so this doesn't affect profits, but it does hit cash. At least they don't adjust out pension running costs. It would be prudent to assume £1.0m pa payments will be required indefinitely.
Even adjusting for that and the entirely unexceptional restructuring costs, the PE is well under 10, and hence it still looks like good value if forecasts are correct.
NAHL (NAH.L) - Final Results
EPS of 0.8p here looks like a small miss on consensus. Making them on a historical P/E of 45, without even adjusting for having pretty much their market cap in there again as net debt.
Forward forecasts in Stocopedia are for little improvement in the near term. However, the house broker appears to forecast 2023 EPS of 3.9p, rising to 6.9p and then 11.9p. So shareholders presumably have some (misplaced?) faith in this. Otherwise, we don't see the attraction of an ambulance chaser on a debt-adjusted P/E of over 70.
We thought popular small cap commentator Paul Scott was being witty when, in his Stockopedia review of the company, he said: "Strange, the accounts have a gap where the balance sheet should be" But there's quite literally a gap where the balance sheet should be! This is a pity as this is the first thing investors must check for a company like NAHL.
Staffline (STAF.L) - Final Results
The company retains Alan Partridge as headline writer:
- Strong performance across FY 2022 with underlying operating profit ahead of expectations
- Strong balance sheet, with net cash of £5.0m
Lest to the untrained eye, this could look like it's rubbish, and they haven't bounced back. Without the hyperbole, this looks like a small revenue miss but a bigger EBITDA beat. From the trading statement in January:
This week:
The company has large pass-through type revenues, but this is a reminder that audited results can vary meaningfully from what is given in a post-period trading statement. In retrospect, perhaps giving four significant figures in January was excessive!
On the outlook, they say:
The Group expects to grow market share across the temporary recruitment market, but anticipates short term market challenges within the retail and consumer sectors subduing growth in permanent recruitment with low unemployment trends expected to further constrain volumes within PeoplePlus' Skills and Restart businesses
However, they claim forecasts are already conservative. Covid was a net plus for the company, with government assistance allowing them to run high levels of debt at low rates while the cash flowed and until equity markets became optimistic enough for a relatively well-priced placing. However, they still retain significant debt, which is not ideal going into a banking crisis. A check of the cashflow statement is therefore wise.
They continued to repay "borrowings" from customers and suppliers over the period:
Accordingly, the underlying cash flow is better than it looks.
On the balance sheet, cash more than covers borrowings, but this is needed due to the considerable weekly/monthly swings resulting from the high level of passthrough revenue. And they have off-balance sheet customer financing, which, although at low margins due to the quality of the customers, will be getting more expensive as interest rates rise. The on-balance-sheet debt is also receivables, which is why it shows as current, despite being agreed until at least the end of 2025. Here's a note on that off-balance sheet stuff:
The value of invoices funded under the Customer Financing arrangements was £51.7m at 31 December 2022 (2021: £42.3m). Costs incurred in relation to these arrangements are charged to profit and loss as finance charges when incurred.
So a bit of a concern this is rising as well as the on-balance-sheet receivables. There were also some prior year adjustments:
During the year it was determined that PeoplePlus had overstated revenues totalling £2.6m in relation to the period prior to 31 December 2021, as PeoplePlus had not met some of its revenue related performance obligations.
The suspicion must be this also happened versus the original revenue expectations for FY 2022. Fortunately, they'd never been paid for this work-not-done, and so there was no cash effect. Indeed there is a tax benefit. So be cautious of extrapolating out the EPS beat. However, overall, the recovery continues.
That’s it for this week. Have a great weekend!