Less than a week to go to the Mello London investing conference. A lot of UK small cap investors, including many SCL contributors, will be attending. The big news, well in our world, is that Mark will be doing a talk after all, called “How to Stack the Investing Chips in Your Favour”. So do make sure you catch that when you join us for what is the UK’s best investing conference for individual investors. There is an even better discount code this week. Use code ML2350 to get 50% off as a last-minute deal.
AO World (AO.L) - Interim Results
The turn-around here continues as their focus shifts from revenue growth to actually making money:
However, it seems that there may still be fat in the business. Here is a picture of AO's London Creative Hub, where the analyst Q&A was held:
They also appear to have one in Manchester. This is exactly the sort of expenditure and level of fixed costs that make them uncompetitive. After a one-off adjustment in revenue to focus on profitable sales, they say:
Our medium-term ambitions remain unchanged:
· Annual revenue growth in a corridor of 10 -20%
· PBT margin 3 - 5%
· Profit converting to cash
The strategy shift appears to have worked for them, too:
Service revenue, which includes delivery and customer installation services, increased by 30.5% reflecting the annualisation of the introduction of delivery charges for all deliveries.
These are their two major external risks:
Commission revenue includes commissions generated by network connections in our Mobile business and from the promotion of AO Care warranties for Domestic and General.
The mobile commissions are supported by continuing to charge customers at a high rate after their handsets have been paid off, and the warranties seem a bad deal for consumers.
Commission revenue of £56.7m sounds like it is on a 100% gross margin, which overwhelms profitability metrics (there must be some associated incremental fixed costs). At 11.8% of revenue, it is also several times their targeted PBT margin, so it appears they have no ambitions ever to become profitable selling goods rather than less reputable products.
Anyway, in the short term, it seems we have an upgrade on profits and a downgrade on revenue, which is at least going in the right direction:
Our previous FY24 guidance in July was for PBT around £28m9. Whilst mindful of the ongoing cost of living crisis and geopolitical events that give rise to uncertainty and volatility, we continue to optimise for profit outturn and are increasing our profit before tax expectations to between £28m and £33m for the full year. We now expect FY24 revenue to be around -10% YOY. [previously -2%]
Surely this is a positive development for Mark’s Electrical, which is a much better company. It is just a shame that it remains materially overvalued.
Empresaria (EMR.L) - Trading Update
Another profits warning from this small cap recruiter:
As a result, full year adjusted profit before tax is expected to be in the range of £3.0 to £3.5m.
As previously communicated, we have taken significant action on costs during 2023. As a result, costs in the second half of the year are expected to be more than £3m lower than in the first half.
So basically, breakeven apart from the savings from all the people they've fired. The costs of the firing will presumably be adjusted out.
At the half-year, there was a slight increase in net debt. It didn’t look terminal but highlighted that there is none of the receivables backing of other smaller recruiters in the sector. We commented that:
As such, they look to be the worst place to invest in the sector at the moment (apart from Parity where the equity value appears to be zero).
Speaking of which:
Parity (PTY.L) - Proposed Disposal
Basically, they are giving up:
Parity Group plc (AIM: PTY), the data and technology-focussed recruitment and professional services company, announces the proposed disposal of 100% of Parity Professionals Limited ("PPL"), the Company's primary operating subsidiary, to Network Ventures Limited (the "Purchaser") for cash consideration of up to £3 million (the "Disposal").
This is their only operating subsidiary, but perhaps we were too pessimistic about the zero. But only slightly. They are only getting £2m upfront, and this seems ominous:
On completion, the proceeds of the Disposal will be utilised to remove the pension liability from the Company's balance sheet and in seeking to identify and execute a potential acquisition.
Looks like the buyer wasn't willing to take the pension liabilities. These are the details:
The Initial Consideration will be used to pay the settlement fee and agreed costs to the Pension Scheme totalling GBP639k, cover the costs associated with the Disposal, expected to total approximately GBP240k, and to provide the Company with working capital whilst it progresses with its strategy.
So, £879k goes out the door straight away.
Leaving £1.1m in cash. Looks like the £1m isn't deferred consideration but a working capital adjustment:
the balance of GBP1 million will be retained by the Purchaser to set off against the expected negative working capital position of PPL as at Completion and other minor adjustments. That working capital position will be determined from a set of completion accounts that will be agreed following Completion. To the extent that PPL's negative working capital position at Completion is less than GBP1 million, the difference will be paid by the Purchaser to PHL and to the extent that PPL's negative working capital position at Completion is greater than GBP1 million, the difference will be paid by PHL to the Purchaser.
So perhaps unlikely to get anything much. These sorts of cash shells typically trade at about a 50% discount because of the ongoing £100k pa listing costs and that directors like to keep paying themselves, which, even at a reduced rate, could be a few hundred £k per year. So fair value, about £600k currently? vs current market cap of £1.3m.
It is also the intention of the Directors to change the name of the Company to Partway Group plc
Partway to administration, presumably.
Macfarlane (MACF.L) - Trading Update
· The Board expects the Group's adjusted profit before tax* for 2023 to be ahead of last year and in line with its full year expectations.
· Revenue year to date is 2% below the same period last year, with weaker volumes and lower pricing impacting most sectors.
Revenue looks really weak here at 2% down, even after making acquisitions. However, this may just be lower commodity prices feeding through. PAT is ahead of last year and in line, though, which means that it is either the pass-through cost changes or cost-cutting in the rest of the business that is taking up the slack.
Of course, cost-cutting is clearly needed, but it is the least sustainable form of economic improvement. We really need them to give us packaging volumes, because they fell something like 20% last year. But if commodity inflation is now deflation, then they will have a FIFO accounting loss on inventory, so they are actually doing well to be up on last year.
So lots of moving parts, and without volume info, we don’t have enough to judge underlying business performance. Shore Capital calls this a “resilient update”, which it is, although the H2 performance to date looks like there risk of a miss at some point before now and the end of the year.
Paypoint (PAY.L) - Half-Year Results
The top line figures here look incredible at +68%, but they don't really try to hide the underlying performance, which is 4.7%, although perhaps it is confusing to call this the "PayPoint" segment when the vast majority of that business doesn't come from bill payments.
In fact, they declined to separate out what they call "Legacy energy sector" revenue within "Payments & Banking", but since energy payments fell 19.4%, but the overall segment fell 2.3%, we think we can assume it is small, likely sub-£10m of £80m overall including the Love2Shop acquisition. This is worth highlighting as many see the "Paypoint" name as synonymous with pre-pay meter top-ups. Nonetheless, some of the prepayment fall was done to lower bills rather than structural decline, which is at a slower rate.
PBT fell significantly, down 17%, even on lower exceptionals. It is surprising to see that Love2shop (Appreciate Group acquisition) made a loss even before the amortisation of acquired intangibles. However:
This is due to the seasonal nature of the business where profit is primarily generated in the second half of the financial year.
Still, losses at Love2shop / Appreciate losses increased from £1.2m last year to £1.8m this time.
Overall, LFL profit is flat. As is common for companies that report lacklustre results, they focus on strategic progress, but we believe this is genuine, especially in parcel collections. E-commerce grew 72%, with more to come from the recent news on Yodel/Vinted, and will soon become a significant driver for figures as a whole. Park Christmas Savings (part of Love2shop/Appreciate) is growing again.
Despite some recent recovery in the share price, this still looks good value, perhaps partly due to investors erroneously thinking most revenue still comes from bill payments.
Speedy Hire (SDY.L) - Half-Year Results
Due to the distortion from their fuel supply business, we suggest looking at gross profit, which is down 3.2% yoy, or about 10% in real terms. But according to them, their revenue would have been £6.9m higher but for the falls in fuel costs, which would have left them up 0.3% yoy in £ terms. So something else is happening here, and it turns out it is partly the thing they previously said was all over and done:
The gross margin decreased to 54.1% (H1 FY2023: 54.4%), with gross profit also reflecting higher depreciation charged against non-itemised equipment (£1.1m) and additional provisions recognised to cover asset write offs (£1.0m).
Clearly, that gross margin would have fallen further had it not been for the reduction in zero-margin pass-through revenues.
There's a lot about hydrogen in the report. At best, this is greenwashing as hydrogen has a far higher end-end carbon footprint than diesel, let alone HVO. This may change on a 10-15-year timescale, and maybe in 5-10 years, it is worth thinking about infrastructure to avoid a chicken-egg situation, but they're not even doing that with "bottled" hydrogen being used. Still, they have plenty of customers who also want to greenwash or haven’t done the maths, so it is not necessarily the wrong commercial decision.
The big problem is when they invest capital in it. We'd have a problem with a hire company vertically integrating to equipment manufacture of any kind and concerns about JVs of any kind, but a collaboration with a company such as AFC Energy just looks like money down the drain.
So, we need to adjust these figures for malinvestment of £2.5m for the AFC JV and £15m for the Green Power Hire acquisition. Further money drainage seems likely in future years and is probably baked in regarding the JV. But perhaps this doesn't matter as long as the shares are cheap enough and they keep paying the dividend?
The Board has declared an interim dividend of 0.80 pence per share (H1 FY2023 interim dividend: 0.80 pence per share)
Nothing about a progressive dividend policy, and you might have hoped for a small increase given the resilience in difficult conditions. Rather, it seems the dividend is set considering what cash they have left over following their various flights of fancy, rather than being the first call on capital.
Anyway, on to the outlook:
The Board remains confident of delivering results for the full year, albeit at the lower end of its expectations.
Broker Liberum say:
We cut our 2024E PBT estimate by 7% as management guides to the low end of forecasts, but note that half the move may be down to more cautious provisioning.
Half appears to be additional provisions, half is the ongoing effect of the non-itemised issue. The FY downgrade is also almost exactly the sum of the above two items. So surely there is another £1.1m for the higher depreciation in H2? This means the risk is ramping up here, with a dreaded H2-weighting:
As in prior years, the Group expects a strong second half weighting to its hire revenues and profits, as the winter programmes commence and new contracts extended and won fully mobilise in the period, including those communicated at year end.
That’s it for this week. Have a great weekend, and see you at Mello.