Lots of full-year results again this week. Including Tandem, DigitalBox, Xaar and Personal Group. Plus, we finally get details of the Tekmar fundraise. Check out the SCL discord to join further discussions on Strix, James Latham, Quarto, Trackwise Designs and more.
Tandem (TND.L) - Final Results
You know a set of results is going to be poor when the lead with changes in net assets:
The net assets of the Group have increased by 18% from £22,739,000 at the year ended 31 December 2021, to £26,788,000 at the year ended 31 December 2022. As in the previous year, the increase in net assets was aided by a material improvement in the valuation of the defined benefit pension schemes by £2,026,000, due largely to an increase in the interest rate on UK Gilts. We were also very pleased with the revaluation of our warehouse properties in Castle Bromwich resulting in an uplift in value of £2,189,000.
And poor they are. Revenue was down 33% in H1 and was even worse in H2, down 36%. They also missed on EPS, coming in at 21.5p versus the 22.2p forecast from their house broker, Cenkos.
And this is despite them being slashed during the year:
The good news that they led with - the increase of net assets based on a property re-valuation looks a little shaky too. They have invested massively in new warehousing capacity that must surely have a very large over-capacity at the moment. Forecasts don’t appear to have that filled, even going out to 2024, assuming the 2021 revenue figures represent close to full capacity for the old set-up.
On the plus side, their pension scheme has done what you'd expect from a competently run one:
As in the previous year, the increase in net assets was aided by a material improvement in the valuation of the defined benefit pension schemes by £2,026,000, due largely to an increase in the interest rate on UK Gilts.
This is a reduced deficit that requires higher ongoing contributions, though:
This is due to a dividend share arrangement:
there is an agreed provision that in any calendar year should dividend payments exceed deficit contributions paid to the scheme, an additional contribution equal to the excess will be made. As a consequence of the total dividend in the year ended 31 December 2021, in 2022 the additional contribution made to the scheme was £193,000. For the year ended 31 December 2022 this will lead to an additional contribution of approximately £172,000 payable in 2023, subject to shareholder approval of the proposed final 2022 dividend.
There is a triennial valuation coming up where we can expect an improvement: in the funding position:
The Board remain mindful that the recovery plans set following the 2019 triennial valuations for the Tandem scheme exceeds the Pension Regulator's reported median length of 7 years.... The level of contributions and length of recovery plans for both schemes will be reconsidered following the outcome of the 2022 triennial valuations.
So based on the 2019 Triennial, they were making more than seven years of £500k plus dividend share contributions and still had a deficit. 2019 10yr gilts were around 1% vs 3% now, but it would seem optimistic to expect for all contributions to be removed. And they will make the current payments plus dividend share until the new Triennial is agreed upon. The central case has to be a contribution of £500k for, say, three years. The cash cost to the company is probably £2-3m over this and the next triennial cycle.
Adjusting for this means that the company is still only on a P/TBV of 0.8. However, a big chunk of this is warehousing that is partially unproductive and has recently been revalued upwards. Forecasts are for EPS to drop even further in 2023.
There is better news on the cash front as the company appears to have beaten on net debt forecasts, saying:
Net debt, comprising cash and cash equivalents less invoice financing liabilities and borrowings, was £1,551,000 at 31 December 2022, compared to net cash of £2,326,000 at the end of the previous year.
This doesn't match the net debt in the accounts, which must have lease liabilities in there. But there is no breakdown to check, which seems less than ideal. Worse still, the forecasts are now for another £1.8m increase in net debt this year.
Understandably, the market didn’t like these results and forecasts on Monday, and the shares sold off. Until…the company then appears to have been tipped by Simon Thompson at the Investors’ Chronicle, saying:
…with the shares trading on less than half book value, Tandem’s enterprise valuation equating to only nine times operating profit estimates, and a 4.4 per cent dividend yield on offer, too, the shares rate a recovery buy.
This seems a little strange. Value investors normally exclude intangibles, and to get to the ”half book value” you have to ignore the pension contributions, believe the revaluations in property, and include intangibles. The nine times multiple is EV/EBITDA, and 9x really isn’t cheap on that metric. And to receive the 4.4% dividend, shareholders would have had to buy at the low of the day after the shares were marked down on these poor results. Nor is there any recovery on the horizon.
So this reads a lot more like ego protection on a poor pick than any cogent argument for buying the shares.
DigitalBox (DBOX.L) - Final Results
With strong cash flow this year leading to an increase in net cash, this looks quite cheap on a cash flow basis:
The problem is that there are so many moving parts, such as intangible impairments, tax credits etc., that EPS isn’t particularly useful. And cash includes one-off working capital movements. Management suggests that investors use adjusted EBITDA as a preferred metric. Leaving aside Charlie Munger’s view of this metric, 5.8xEV/EBITDA doesn't look particularly cheap in these markets. They also adjust out share-based payments and acquisition costs when they are a serial acquirer. Which makes this even worse. Especially when compared to the valuation of other media companies.
National World has better quality digital assets and is on an EV/EBITDA of 3.1, for example. Reach doesn’t have the same quality of digital assets but is a much bigger company and is on an EV/EBITDA of 3.8 (after adjusting the EBITDA for pension contributions). To be fair, both these have legacy print businesses and probably play the same adjustment games. The bull case for DigitalBox is that they will keep buying small news websites, improving their ad offering and getting quick payback on their investment. But, of course, National World and reach could do exactly the same if they wanted. DigitalBox are only successful because they are so small they can buy the kind of sites the bigger companies don’t want. As such, we see little reason to prefer DigitalBox on twice the rating of National World.
Xaar (XAR.L) - Final Results
On the surface, the growth rates here look good:
However.... this was what they reported for H1:
So effectively, H2 was flat on H1. And this is after their spending on acquisitions. So like-for-like revenues, Gross Profit and adjusted PBT are all down half-on-half, perhaps significantly if you include the effect of inflation. So the growth here is really about how bad 21H2 was rather than how good 22H2 was.
Of course, the lack of growth wouldn't matter if they were cheap. However, with 78x historical P/E, they are anything but cheap. And the outlook is pretty vague:
With strong foundations in place as a result of the progress in our strategy over the last three years, the Board is optimistic about the opportunities that lie ahead for the Group and for all our stakeholders including employees, customers, and shareholders.
The EPS consensus of 3.02p does look achievable given the acquisitions, but this is a forward P/E of 60 and a PEG of over 2. This is still below 2021 EPS tho, so should this really be on a growth rating? Something like 10x forward earnings, or around 30p, would seem to be fair value here, given the very patchy track record.
Tekmar (TGP.L) - Strategic Investment and fundraise
We have been repeatedly warning here that investors were daft paying a mid-teens price for the shares when the company themselves were flagging that shareholders were about to be diluted at a much lower price. Even that was in doubt as the announcement took ages to arrive.
So the good news is that they finally managed it this week, and sufficient funding is now in place at the advertised price of 9p. Plus, shareholders will have some opportunity to reduce their dilution via an open offer if they choose to. The bad news is everything else.
Firstly the source of the finance. This is an oil services PE-structured conglomerate based in Texas. Although they have an office in Aberdeen, there is no evidence they have any experience with wind in Europe. Tekmar have still not admitted many of their contracts have gone wrong, let alone disclosed what went wrong, and we suspect SCF don't know either. This looks like dumb/speculative money and not a vote of confidence in Tekmar.
The Convertible Loan Note is intended to provide the Company with funding for the primary purpose of financing acquisition-led growth.
i.e. to double down on the failed strategy at IPO that led to the founder and original board losing their jobs.
The Convertible Loan Note Instrument is an effective mechanism of providing medium-term visibility of funding for the Company and creates a "war-chest" to be deployed as and when appropriate acquisition opportunities are identified.
But is it though? What about with the claim they can be deployed "as and when...opportunities are identified".
In accordance with the terms of the Subscription Agreement, SCF may also request that the Company issue to it Convertible Loan Notes such that it will be able to subscribe for: [£6m in each of the first three years]
What might motivate SCF to do that?
The Company will pay interest on the principal amount of any outstanding Convertible Loan Notes from the date of issue at a rate of 10 per cent. per annum
So won't SCF insist the loan notes are issued as soon as Tekmar's risk is lower than SCF's cost of capital? Basically, the moment Tekmar no longer need the money? And what about conversion?
The Convertible Loan Note Holders may, at any time when any principal of the Convertible Loan Notes is outstanding, convert such outstanding amount, together with any accrued but unpaid interest, into Ordinary Shares in the Company at the Conversion Price of 11.6 pence per Ordinary Share.
Loan notes have a term of 24 months.
So there's another motivation for SCF to insist loan notes are issued even if Tekmar don't need them. What about dilution and control?
If all of the New Ordinary Shares are issued for, they would represent an increase of approximately 139.30 per cent. of the existing issued share capital of the Company as at the date of this Announcement, and approximately 58.2 per cent. of the Enlarged Ordinary Share Capital.
That's a lot, but probably necessary to rebuild the balance sheet and allow them to execute contracts they have won and bid for new ones.
On Admission, the Concert Party (which comprises SCF Partners, SCF-IX L.P and Steve Lockard) will hold 47,505,458 Ordinary Shares, representing 32.6 per cent. of the voting rights of the Enlarged Ordinary Share Capital (assuming full take-up of the Retail Offer)
The takeover panel have agreed to a waiver to allow this to happen. And remember, this is the "best case" (lowest amount). The rules in the UK about consolidating control between 30% and 50% are strict because otherwise, it is quite easy for shareholders to find themselves in a disadvantageous minority position.
However, these rules are completely bypassed by the convertible loan agreement:
[SCF] could hold, following the Subscription and issuance and conversion of all of the Convertible Loan Notes ... a maximum of 233,712,355 Ordinary Shares, representing a maximum of 70.4 per cent. of the Further Enlarged Ordinary Share Capital.
So this is less about a 30% strategic fundraise and loan in the way this was originally billed, than a total change of control with the majority of any future upside going to SCF.
With the share price recently below the placing price, smaller shareholders are probably better off not taking up the Open Offer. Recent share price behaviour at Hummingbird Resources shows that the price can go quite some way below the placing price in these cases. Although, in that instance, it seemed illogical that it did.
Personal Group (PGH.L) - Preliminary Results
· Group revenue up 16% to £86.7m (2021: £74.5m)
· Adjusted EBITDA* of £6.0m, in line with market expectations, (2021: £6.1m), showing significant half on half EBITDA growth (H2 2022 adjusted EBITDA of approximately £4.5m, H1 2022: £1.5m)
· Adjusted profit before tax** of £3.8m (2021: £4.3m profit), with a statutory loss before tax of £6.8m as a result of £10.6m goodwill impairment of Let's Connect
· Adjusted Basic EPS** of 10.6p (2021: 11.5p), with a statutory Basic EPS of (23.1)p (2021: 11.5p)
· Strong balance sheet and liquidity, with cash and deposits at year end of £18.7m (2021: £22.9m) and no debt
· Final dividend for 2022 of 5.3p per share, making a full year dividend for 2022 of 10.6p (2021: 10.6p)
So the "approximately £85m" revenue guided in January has come out slightly ahead, and the EBITDA is in line. Less good is adjusted EPS, slightly behind Cenkos's recent forecast of 10.6p. But the investor focus is likely to be on the write-down of Let's Connect, despite this being wholly foreseeable.
The net cash situation isn't immediately clear - Cenkos say they have missed in their summary table, but we suspect this is IFRS 16 confusion, and 2023 forecasts have been significantly raised.
Outlook:
we have entered 2023 on the front foot, benefiting from the strong end to FY22. The growth in our insurance book, investments in our Hapi platform and expansion of our Pay and Reward offering all provide confidence in another successful year.
Cenkos have however trimmed EPS forecasts very slightly. More importantly, they have slashed FY 2023 dividend forecasts from 14.0p to 11.2p, presumably under guidance from the company, thus explaining the higher 2023 year-end cash.
Yield is, therefore 6.3% versus the 7.9% shown on Stockopedia - quite a difference. Much of this is already in the price, which had been weak of late. Hence the rebound on these results.