Happy New Year Everyone!
Hope you all enjoyed your festive breaks. As expected, there was very little news last week. However, it did mean we had time to do a live event discussing the events of 2021 and looking forward to 2022. We recorded the audio and hope to have an edited version available next week.
Leo also kicked off his 2021 review series on his blog here. His 40%+ return for 2021 was excellent. Mark had a good year (although sadly not as good as Leo) but doesn’t do an annual review since he intentionally tries to avoid any form of explicit commitment bias. (The more astute amongst you can probably work it out from public comments where he stands on most things, though.)
What is amazing to Mark is that even after a good 2021, his portfolio starts the year incredibly cheap on a number of metrics. Many commentators predict 2022 to be a tougher year for markets due to inflation concerns and the potential for higher rates. And while that may be true for the wider market, at the portfolio level, the forward P/E for Mark’s portfolio is around 6 (cash & debt-adjusted). The year after this falls to around 4.5 following a weighted average forecast EPS growth of around 35%. A lot can happen between forecast and reality, but the potential for strong growth from holdings on very low multiples means he starts the year with very positive expectations.
While on the subject of portfolio reviews, here are some of the ones we have been tracking, together with a quick summary of their style and 2021 returns:
Ed Page Croft’s NAPS on Stockopedia 28.3% (subscriber-only)
Paul Scott - A volatile year driven by (excess?) gearing 13% (video)
Rhomboid1 - LTBH 8.9%
Maynard Paton - UK Quality Shares 24.5%
Rob Mahan - Deep Value Investments 20.5%
MG - Investor - Mainly Growth/Healthcare 37%
Vivek S - Defensive Growth 6.5%
John Kingham - UK Dividend Stocks 17.6%
Roland Head - Stock In Focus 29.3% (subscriber-only)
Investor John UK - Mostly Growth/Quality 27.8%
Invested Geordie - Value/Growth 16.2%
Bruce Packard - Value/Quality 22%
Shares
Creightons (CRL.L) - H1 Results
Here are the two obvious takeaways from today's results:
Nothing has gone wrong to explain the results delay; it was probably just about Creightons being Creightons
Revenue and profits have fallen YoY due to the lack of hand sanitiser sales.
Number two should have been expected, but you never know with a stock popular with PIs and no broker coverage. Number one was always the most likely option. But looking behind the numbers, there are a few interesting things. Firstly there is a disturbing trend on inventory and receivables.
(All those lines are a percentage of revenue, except for the current ratio.)
So inventory isn't actually a trend; it is an anomaly. Inventory is a concern because (in other companies) it has a habit of being written down, especially if, say, there was a sudden demand for hand sanitiser that then disappeared. However, the notes of the accounts show that the Emma Hardie acquisition brought with it a significant amount of inventory and but only two months worth of revenue.
It may be that a bigger, vertically integrated group will be able to reduce inventory at Emma Hardie in future, or that it is an unavoidable part of their business model, or that some of it needs to be written down/off. But even taking out Emma Hardie entirely, inventory levels have still shot up relative to revenue. Likewise, so have receivables. Here there is the commentary on the matter:
Also, we have increased our investment in working capital in the period with increase in inventories of 43.7% and trade debtors of 19.3% including the working capital from acquisitions.
Supply chain issues may mean that an increase in inventories is prudent. They don't directly make this point, but do say:
we have experienced global supply chain pressures throughout the period which have manifested in the form of delayed deliveries from suppliers, higher input and overhead costs.
On the trade debtors, they continue by saying:
Trade debtors have increased due to the profile of revenue throughout the period.
This may be code for "sales accelerated strongly towards the end of the period", which has to be good news. They continue:
The second half of the year will see these levels fall as the cash is received.
This, unfortunately, means that these last-minute sales were probably a one-off. With other companies, you might question if these sales were brought forward (e.g. by offering discounts) to flatter or smooth the results after the loss of hand sanitiser sales. Fortunately, as per the above graph, payables have also risen as a percentage of revenue, limiting the impact on cash. When adjusting for Emma Hardie, quite possibly they have grown in proportion to receivables.
The other thing to note from the above graph is that the current ratio has fallen back dramatically, and that is before making any adjustments, e.g. for inventories. However, even if you wrote inventories back to levels two years prior (unfair since the business was smaller), it stays above 1. Realistically it would require problems with both inventories and receivables for it to dip under 1. And in the last annual report they say:
All customers’ debtor limits, apart from the Department of Health and Social Care, are within insured credit limits or they pay on a pro-forma basis.
And the structure of the debt seems conservative:
£2.6m of their debt is from a mortgage which is on a fixed rate for another 8 years.
They have £5m headroom on their invoice financing facility. There are some amber flags here, but, in summary, they don’t appear to have any problem with their debt position or current ratio.
Of course, the reason why they have this debt is down to two recent acquisitions:
Brodie & Stone was completed just a week before the period end, so not much can be gleaned from the £20k turnover reported there.
But Emma Hardie had a couple of months trading and did £770m. That's a run rate of £2.3m in 6 months versus £2.5m for the whole year to December 2020, the last figures available prior to acquisition. And, I imagine that August and September are hardly peak months for Emma Hardie, with Christmas likely to be their key period.
There's no clear pattern of seasonality with Creightons in the past, which seems strange given the type of product. However, in the past, they did a lot of low-value contract manufacturing and retailer private label, with their own brands being mid-low market. In contrast, it is likely to be the more expensive brands that will do well at Christmas. They now say:
Branded sales (excluding hygiene and acquisitions) increased by 47.0% from £5.47m to £8.04m with a strong performance from Feather & Down and Balance Active brands.
Their contract manufacturing leg has also proven extremely useful - they were able to cut this right back in H1 2020 to create capacity for high margin hand sanitiser contracts. Their retailer private label business is also both successful and useful in terms of market insight and access.
Private label sales have increased from £10.76m to £13.09m and have returned to pre-Covid levels with the re-opening of the High street and the addition of a large contract with a key grocer.
The move to more branded sales is seen in the gross margins, which are up to 42.7% in these latest results, which is a record at least for the last several years. Unfortunately, there is also a long trend of increasing distribution costs.
Overall these are another solid set of results. And Leo was surprised to see the reaction to these results as rather muted. Especially given that the price had been weak in the run-up to these.
However, Mark struggles to get excited about Creightons anywhere near the current price. Fully Diluted EPS for the full year is likely to be around 5.5p. This puts them on a forward earnings yield somewhere around 5%, which seems expensive for a stock facing some mean reversion that has always traded much more cheaply than this.
However, Leo is looking through the current year to their 2024 “aspirations”. He gets 9p fully diluted EPS on their £100m turnover / 10% PBT margin 2024 "aspiration", taking into account likely share issuance. That would be a 2-year annualised growth rate of 30% and a 4-year CAGR of 20%, which must surely be worth a PE of 15x, implying a share price of 135p or higher.
Where Leo & Mark differ, it seems, is in their confidence that Creightons can hit their management aspirations, and how much of that potential should be priced in today.
Capital Ltd (CAPD.L) - Share Buyback
the Company entered into a buyback agreement with Stifel Nicolaus Europe Limited ("Stifel") on 31 December 2021, instructing Stifel to repurchase Capital's ordinary shares of $0.0001 each ("Ordinary Shares"). The Programme will not exceed 2,000,000 Ordinary Shares, and the maximum pecuniary amount allocated to it is $2,500,000 (the "Programme").
This is a relatively small amount, and the company still highlights that its current focus remains as a rapid growth company. Still, it’s a good sign. Hopefully, this buyback will be like Vertu’s and renewed when the modest limit is reached.
At Q3 end, we got an update RNSed about the latest equity portfolio valuation. At Q4 end, we didn’t get a similar update, so their brokers must not think the c.$10m rise in equity stake valuation is material enough to be RNSed. On the other hand, the Q3 rise of $23m was greater than 10%, so perhaps that is the materiality threshold they are using. We’d expect them to comment on it in the Q4 update in a week or so, instead.
Some people may question the buyback at 85p, given that the company raised significant equity at 58p at the end of 2020. However, trading has materially improved since then (although the more astute investors perhaps could have predicted this). Perhaps more importantly, they have generated much higher returns than their equity portfolio in the same period.
At the time of the raise, Mark thought they over-raised at 58p and would have preferred more debt or equity share sales to the dilution. But it appears he was wrong about the equity share sales given the subsequent performance. Perhaps he was wrong about the debt side too, and it would have limited the deals they could do for drilling contracts. Given the management's decade+ history of excellent capital allocation, maybe he should have just trusted them a bit more to know how to run the business optimally!
SDI (SDI.L) - Acquisition of SVS and Atik Order
When we looked at SDI following their interim results, we doubted that the share price represented good value given the mean reversion in earnings forecast and the very high rating. In light of this, today’s acquisition is good news:
SDI Group plc, the AIM quoted Group focused on the design and manufacture of scientific and technology products for use in digital imaging and sensing control applications, is pleased to announce the acquisition on 05 January 2022 of Scientific Vacuum Systems Ltd ("SVS"), a UK manufacturer of physical vapour deposition equipment (the "Acquisition"). Total consideration, including earnout, is forecast to be approximately £4.9 million, net of cash acquired…
• Revenues for the year to September 2021 were approximately £2.5m and EBIT of £0.7 million
• Acquisition expected to be immediately earnings enhancing
They are paying 7xEBIT, which seems reasonable value. Although it always seems a little bit like alchemy that SDI buy at 7xEBIT and the market immediately values those earnings at many multiples higher simply because ownership has changed.
Given that they are paying cash and interest rates are so low, being earnings enhancing is very much to be expected.
The other good news is that the drop off in covid-related work for Atik Cameras has been postponed:
The Company also announces that its Atik Cameras division has received a further firm order for cameras to be used in PCR machines, for delivery in the year ending 30 April 2023, extending the series of orders related to the COVID-19 pandemic.
For details of how this affects the numbers, we turn to house broker finnCap:
Forecast changes reflect both the acquisition of SVS and additional sales and profits from the extended OEM contract for Atik cameras. We forecast SVS to contribute £0.6m and £0.15m to FY 2022 revenue and adjusted EBIT, respectively, rising to £4.0m and £1.1m in FY 2023. We expect SVS to be 2% accretive to adjusted fully diluted EPS in the current year and 15% in FY 2023. We increase FY 2022 adjusted pre-tax profit and EPS by 4% to £9.6m (+29% yoy) and 6.9p (+15%) and FY 2023 adjusted PBT and EPS by 22% to £8.7m (-9%) and 6.4p (-7%), respectively.
That is a decent 15% upgrade to 2023 estimates. However, it still leaves 2023 estimated to be lower than 2022:
The current 208p share price leaves them on a 32.5x forward P/E with a small amount of net debt. Holders at that rating have to be betting on substantial upgrades to 2023 figures still to come. While further bolt-on acquisitions can’t be ruled out, it will take a lot to move those figures to the kind of growth rates that can justify such a lofty valuation.
That’s it from a short couple of weeks. We are expecting more substantive news to report on in the next couple of weeks. Enjoy your weekend!