Lots of trading updates to look at this week:
Argentex (AGFX.L) - Trading Update & CFO Appointment
Given the turmoil here, a further profits warning here didn’t come as a surprise to SCLers. They have gone from expecting flat operating profits in their November trading update to:
The Board now confirms that it expects revenues for the twelve months to 31 December 2023 of approximately £49.8m, compared to £50.4m for the twelve months to 31 December 2022*, and operating profit of not less than £8.0m, compared with £11.3m for the same period in 2022.
Quite the downgrade. Adjusted operating profit was £5.4m at the Half Year, so H2 is c.£2.6m. Finance costs were just £0.4m in H2, so they remain profitable. So this is 1.46p adjusted EPS for H2, vs 3.1p for H1.
This does seem to have come as a surprise to many, though, with the share price inexplicably rising 50% since the November warning:
Only to give it all back this week. It isn’t helped by the brokers removing forecasts from the market but the data providers keeping the old forecasts in, which may have fooled some. The moral is always to check the forecasts directly or do your own model if you can’t access them.
This adds further to the woes of Rockwood Strategic, who had this as one of their “Springboard” investments. Here is a live shot of that springboard in action:
After other poor updates from Trifast and Titon last week and a mixed one from Flowtech Fluidpower this week, they are starting to look more like Downing Strategic by the day. Full of great ideas to turn around failing businesses, but the turnaround takes far longer and costs far more in capital than they ever expected.
In the same announcement, we find out that Arengtex manages to find a new CFO, but only an interim one, to add to their Interim CEO:
He was also the deputy CFO of Camelot from 2017 to 2022 and later interim Director of Group Finance at Rank Group plc.
Given the state the company finds itself in, his gambling experience may come in useful.
Comptoir Group (COM.L) - Trading Update
…trading for the 52-week period ending 31 December 2023 was in line with management expectations and, subject to audit, the Company expects to report a revenue performance of approximately £31.5m (2022: £31.0m).
Given inflation and store changes, the revenue figure doesn’t really give enough information to judge business performance. They made a loss at the Half-Year, and things have only got worse for casual dining in both demand and costs.
The cash figure looks strong compared to an £8.6m market cap:
…the Company retains a strong balance sheet, with net cash at 31 December 2023 of £5.4m (H2 2022: £5.7m)
But this is at a single reporting date, and no average cash balance is given. The fact that at the half-year, they had £1.9m of debt and negative £3.9m working capital suggests that this is not at all representative of the average figure. So basically, we have no idea if this business is worth investing in or not. Our gut says no at the current economic state & valuation. Particularly given the risks of a large founder controlling stake and management merry-go-round.
Dillistone Group (DSG.L) - Trading Update
Many would say expectations were optimistic here, and so this looks like a win:
The Board is pleased to report that it expects its 2023 results to show continuing progress in its turnaround, with profit measures in line with expectations. This is expected to result in a first adjusted operating profit since 2018 and a significant improvement in EBITDA.
However, an EPS of just 0.3p was forecast, and even if that doubles in FY 2024, we don't see how that supports the current 11p share price.
Fintel (FNTL.L) - Trading Update & Acquisition
Unlike recent acquisitions, they are willing to give us some figures on this one:
Completed in late January 2024, the transaction was funded entirely from cash reserves with a net upfront cash consideration of £0.7m representing an EBITDA multiple of 3.8 times. In addition, up to £1.6m contingent earnout is based on certain trading criteria being delivered in the first three years of ownership
The quoted 3.8x EBITDA rises to 6.1x with earnouts, though, so isn't amazing value. Although it compares favourably to the rating Fintel trade on.
And we are starting to be able to squeeze that bus between adjusted and statutory numbers. Here is what they had in H1:
Operating costs of an exceptional nature of £1.5m (HY22: Nil) comprised the following:
· Transformation costs of £0.8m - includes implementation costs to enhance Fintel's customer relationship management platform ("CRM") and a new enterprise resource planning system ("ERP"),
· M&A pipeline costs £0.4m (HY22: Nil) - including costs relating to the recent acquisition of Plannr Technologies Limited
· Restructuring related costs £0.3m (HY22: Nil)
Given that they completed six acquisitions during the past twelve months, these look like core business functions, so when they say:
Adjusted EBITDA1 growth of c.6% to £20.5m (FY22: £19.4m), in a period of continued investment in our core products and services
The "real" EBITDA has to be somewhere around £18m, perhaps £16m if you include share options impact. This gives a 17x EV/EBITDA multiple. Revenue is flat, and adjusted EBITDA grows 6%, both of which are down for the FY vs H1 numbers, suggesting H2 has decelerated. This isn't a bad business, but 17x EBITDA for zero growth, even after acquisitions, is far too rich a rating.
Luceco (LUCE.L) - Trading Update
Revenue is slightly ahead, with profits & cash flow ahead of expectations:
2023 Full Year Results
· The Group expects to report full year 2023 revenue of c.£209m and Adjusted Operating Profit in the region of £23.5m - £24m, ahead of expectations and shows good progress over 2022 despite the challenging economic conditions.
· Our balance sheet remains strong, with our Covenant Net Debt ratio expected to be less than 0.6x - well below our target range of 1.0 - 2.0x EBITDA.
· Cash generation was better than expected driven by higher operating profit and improving working capital efficiency, leaving the Group's net debt at circa £23m at 31 December 2023.
A very credible performance given the economic backdrop. Still not obviously a bargain at P/E of 12. However, the company highlights that results will look a lot stronger when RMI markets recover:
Whilst the RMI market has been challenging, we continue to achieve growth and once the macroeconomic conditions ease, Luceco is well positioned to benefit from operational leverage given its integrated model.
Not expensive either, though, given the quality of the business, high returns on capital and the ability for organic and inorganic growth. It seems a bit strange for the shares to sell off on an ahead statement that, as far as we can tell, wasn’t expected by many:
However, this is probably just the impact of short-term traders and could provide an opportunity for those with longer-term investment horizons.
Speedy Hire (SDY.L) - Trading Update
Having tracked this company for a while, we were in little doubt that all the pre-amble was leading to a profits warning, as the forecast didn’t look credible following the H1 update. This is confirmed in the final sentence of today’s update:
…with weakness in some of our end markets and seasonal product lines, and some delays in mobilisation of significant contract wins, the Board expects the full year profits to be below its previous expectations.
Broker Liberum say:
We reduce our FY 24 FD EPS estimates by 34% and 17%.
That's a rather confusing way of saying FY 2024 cut by 34%, FY 2025 by 17%, and FY 2026 by 16%. Dividends are cut similarly.
As we have previously reported, there is a problem with shareholder communications here, which is how we get a 34% EPS forecast cut in one go despite the obligation to notify the market as soon as a 10% miss is identified. Note that forecasts had already been cut at H1, so they’re down 40% at least this year. Again, this is another company where it was bonkers that the market bid it up after falling on weak H1 results:
It is very difficult to understand how their return on capital (tangible assets) can be so much lower than competitors. In light of this, and the recent non-itemised shortfall it would seem unwise to rely on claimed tangible assets as downside protection.
The company claims that the shortfall in trading is due to delays in mobilising large contract wins:
At the same time, we continue to see revenue growth from opportunities with both new and existing National customers and, in the third quarter, we secured over £40m of annualised revenue from new multi-year contracts. These contracts represent attractive growth opportunities but have taken longer to mobilise, due to contract specific delays. Therefore, new contract revenues will have only marginal benefit in FY24 with the full effect coming in FY25.
However, their broker Liberum appears to immediately quash this idea by cutting FY25 & FY26 by 17/16%. At this stage, we have little faith in the company or these forecasts.
Somero (SOM.L) - Trading Update
Trading is confirmed as in line with forecasts:
The Board is pleased to report that with good trading and excellent operational performance in fulfilling customer orders globally during H2 2023, it expects the Company to report 2023 revenue of US$ 120.7m, in line with previous guidance and market expectations.
This is potentially a relief to many who expected a further downgrade here. They say the key was:
…good trading and excellent operational performance in fulfilling customer orders ... US$ 120.7m, in line
So it seems they had to run fast to meet previous guidance. Sounds like there wasn't a lot of slack there and it was a race to recognise revenue in time:
A strong finish to the year was achieved despite ongoing headwinds in the US from concrete supply chain shortages, elevated interest rates and tightened bank lending, as noted in the Company's 20 June 2023 trading update.
However, there’s no sign of a “race to the line” in the working capital so this was likely just a strong final quarter:
The year end cash position is expected to be $33.0m, slightly better than anticipated reflecting lower net working capital.
We also finally get some guidance for the current year:
…the Board expects 2024 will be another highly profitable year with healthy cash generation, revenues that are comparable to 2023, and EBITDA that reflects modest incremental investment ... within our traditionally targeted US$ 2.0m.
So flat, which is perhaps a little disappointing. We had expected some of the headwinds to relent during FY 2024. Somero can be conservative at times and not build such hopes into forecasts, but presumably, there are no signs of "concrete easing" yet, or they'd have said so.
Facilitated by the Company's increased strategic focus on and resource allocation to Europe and Australia, full year trading in both territories continued to improve year-over-year, driven by sales to new customers and underpinned by healthy non-residential construction market conditions.
Australia did indeed grow well, but surely volumes went backwards in Europe given inflationary price rises:
Sales in Europe grew to a lesser extent to US$ 15.1m compared to US$ 14.9m in 2022
So, this remains highly reliant on US non-residential construction. A P/E of 10 remains very undemanding for such a cash-generative market leader. However, it perhaps isn’t as cheap as in the recent past.
Supreme (SUP.L) - Market & Trading Update
Having doubled down on disposable vaping distribution, this week’s announcement of a ban on them is undoubtedly bad news for Supreme. However, balancing this is the trading update the company brought out in response:
Supreme has delivered an excellent trading performance across the Group during our historically busiest quarter. It is now expected that FY 2024 will significantly outperform market expectations1, with revenue projected to be at least £225 million and Adjusted EBITDA2 anticipated to reach at least £38 million - a doubling from FY 2023's Adjusted EBITDA
Much of the beat is down to the distribution of ElfBar:
ElfBar distribution opportunity is now expected to significantly exceed previously issued guidance3 in FY 2024.
Unsurprisingly, they are doubling down on vaping:
Supreme has an established suite of fully compliant rechargeable pod systems
The Company expects that more than half of disposable vape activity will permanently transition to alternative forms of vaping such as Pods and 10mls, and Supreme will work closely with its retail partners to manage this seamlessly.
On the positive side:
already implemented a number of proactive measures, including narrowing and re-naming of flavours and tailoring packaging
Previous names included Violet Pearls, Lemon Sherbet, Rainbow Burst and Watermelon Strawberry Gum. Here is what is changing:
Violet Pearls: Still sold, but the picture of sweets is removed from the label
Lemon Sherbet: No material change
Rainbow Burst: In the process of being renamed to Fruit Mix
Watermelon Strawberry Gum: Unchanged
So, although this ban is unlikely to have any impact in the short term, it will surely reduce sales in the long term. It could certainly be argued that a P/E of 6 already prices this in, though. And it could be cheap for those willing to consider this sector (not us.)
Tandem (TND.L) - Trading Update
The good news that trading didn't worsen in the last two weeks of 2023:
The Directors expect the loss before tax for FY23, subject to audit, to be in line with guidance provided by the Company on 13 December 2023.
eMobility is the only bright spot here. Although, we note some double counting in their top-level segment presentation with Golf only down 8%, Bicycles up 17% and eMobility up 44%, but both Golf and Bicycles are actually down severely if you exclude the parts of them also counted in eMobility.
This is perhaps the most important information:
We are actively engaged in discussions to maximise the short-term utilisation of our newly constructed warehouse, including considering potential acquisition opportunities that would have the potential to create synergies.
This appears to be tacit admission that they have over invested in the warehouse following the post-COVID boom, and stand no change of filling in the medium term from current business segments. This is despite trends way from FOB business where presumably stock goes straight into customer warehousing.
The big question is how will they fund any acquisition to try to get better warehouse utilisation?
We are pleased to announce that the Group continues to enjoy the support of our banking partners, HSBC. Further to the update provided in the Company's interim results published on 20 September 2023, the Group has now entered into a new five year bank facility with HSBC, which will refinance and replace all existing loans with HSBC on drawdown, ensuring stability for our future plans and growth.
The fact they have to say that their bankers are supportive is not a good sign. Until this moment we hadn’t thought that they might not be! Although HSBC appear to have used the opportunity to extract some extra fees from the company via a refinancing which will help assuage their concerns. Realistically, extra bank debt of the scale required is unlikly to be an option.
There must be no shortage of struggling wholesalers so perhaps they can pick one up, and utilising the warehouse space makes sense. We are just not sure shareholders will be particularly keen on the (probably discounted) placing that will be needed to fund any acquistion. Perhaps the better option is to sell themselves to someone who needs the warehouse space. A deal at a modest disount to TBV would give a small premium to shareholders, and would cover the acquirer for the future losses from the Tandem business. The pension deficit has always been a blocker to a deal for this sort of company in the past. However, in a higher rate environment these have been less of an issue lately.
That’s all for this week. Have a great weekend!