Another challenging week for investors, but the show must go on:
Beeks Financial Cloud (BKS.L) - Final Results
This is another one where it gets worse as you go down the income statement. Revenue up, gross profit not as much, PBT even less, EPS down:
· Revenues increased 22% to £22.36m (2022: £18.29m)
· Gross profit up 15% to £9.12m (2022: £7.94m)
· Underlying profit before tax increased 13% to £2.33m (2022: £2.06m)
· Underlying diluted EPS4 3.96p (2022: 4.19p)
And, of course, significant cash outflow:
· Net cash as at 30 June 2023 of £4.41m (30 June 2022: £7.86m)
Also, on the plus side, they seem to have enough cash to still be paying suppliers on normal commercial terms again, which suggests they are not in financial distress anymore. And as we have said before, banks are willing lenders, since they are lending against computer kit that has real uses elsewhere if the company fails.
We think they are building some long-term value behind it all, but the more you think they have built, the more that just underlines how eye-wateringly expensive they were a couple of years ago. And they still look overvalued today on a forward P/E of 18, given how capital-intensive this business is, and their habit of regularly missing forecasts.
Character (CCT.L) - Trading Update
In line for this toy distributor:
…the Directors are pleased to report that, in line with the Board's predictions, the business has performed more strongly in the second half and the Group expects to report full year underlying profitability in line with current market expectations.
The problem is that these forecasts were slashed at the end of last year and put them on a forward P/E of 13.6. Which looks expensive in the current markets. There is net cash, but this rather vague statement suggests it may not be significant enough to change any valuation metrics:
The Group continues to have a strong balance sheet and a net cash position.
But they are not going bust, and they will probably recover somewhat in future years. Just that you’ll do a lot better buying something on a much lower rating that’s likely to recover more if taking the long-term view. And somewhere where management aren’t going to take the bulk of any upside from the return to positive trading.
DX Group (DX.L) - Final Results
These look excellent:
It is nice to see a set of results that look better as you go down the income statement, not worse. 4.1p adjusted EPS seems to be a decent beat on the last finnCap note of 3.8p, and a 20% beat on Liberum's 3.4p forecast. They have even beaten Liberum's forecast for next year.
The outlook, vague but positive:
The business has secured strong levels of new business in the first quarter of the current financial year and has a good pipeline of opportunities. It is also in a strong financial position, with healthy levels of net cash and good cash flows. While we are conscious of the current economic headwinds, the Board remains encouraged about growth prospects for the Group in the current financial year and beyond.
Meaning that they are probably on a cash-adjusted forward P/E of around 9 now. The reaction to a beat of this size looks muted, probably because of the bid premium. Although, we would now question if there is any premium in there. Say the bid falls through, and it falls to 35p. That would be a forward P/E of around 7. And given the tailwind of the Tuffnells failure, surely just too cheap. It seems that little is in these results from the business they will have gained from taking Tuffnell’s depots & clients. Management are guiding £32m of additional revenue from these new depots in the current year, plus hoping they can deliver a further £8m of new business through them.
So, one could argue that we now have very little downside in the medium term but a short-term 11% upside if the bid happens or a longer-term value higher if the bid fails. We are not naive enough to think the Share Price won't fall if the bid doesn't arrive, but it seems unlikely it would stay down for long, even in current markets.
Quartix (QTX.L) - Trading Update
Lots of waffle here before we get to the profits warning:
the Board does not now believe that the rate of growth has been sufficient to achieve current market expectations for revenue in 2023 or 2024, and it has now reduced its own expectations by approximately £0.9m and £2.6m, respectively.
The supplemental dividend cancelled is going forward. We need broker Cavendish to work out what this means for the bottom line:
So we have a negative/no growth company on a forward P/E of 24. Well. 18 after the 25% drop in share price in response to this profits warning. Companies with this EPS profile tend to trade on 5-8x P/E in the current markets. So this still looks significantly overvalued, by at least a factor of two.
Vertu Motors (VTU.L) - Interim Results
The Board anticipates that full year profits will be in line with current market expectations
The last month was strong:
Strong performance delivered in the plate change month of September despite economic headwinds
The three main legs of new, used and service are all strong:
· New vehicle supply continues to improve
· Used vehicle sales volume improving with prices reflecting more normalised depreciation patterns
· High margin aftersales demand remains robust and increased technician resource is being sourced to capture more aftersales revenues and profits
We believe the comment on used pricing above refers to traditional seasonal reasserting themselves rather than prices coming down per se: All indications are that used prices remain near records due to lower new supply 6-36 months ago. Here's the closest we'll get to bad news:
Number of quality bolt-on acquisition opportunities identified
Yes, there is a difference in valuations between individual and small groups of dealerships and large groups and a preference for OEMs to deal with larger groups, both of which they can take advantage of, but fundamentally, this is a time to be selling, not buying. At least the destination for cash of buying shares at a large discount to NAV is not currently available, albeit we do expect small buybacks to continue:
The Group currently has £4m of unutilised buyback authority, following an additional £3m authority.
Next bit of bad news:
The Board is closely monitoring the impact of the Agency model on Group performance
The implication is that there is some impact, whereas Robert Forrester previously claimed it would make little difference, not that anybody believed him. In any case, it is a reminder of something that is more of a threat than an opportunity.
Pension now seems stable, although interest rate volatility has since increased:
The accounting surplus on the scheme at 31 August 2023 was £3.1m (28 February 2023: £3.2m)
In the presentation, Robert says used BEV values have fallen by 40% over a year but now sees them as stable. The presentation also clarifies that he means a used car will now fall in value while being held in stock as was previously normal. That is consistent with LFL prices being stable.
Net tangible assets per share of 70.9p (28 February 2023: 65.3p)
Leo has verified this, although we prefer to exclude the pension "surplus", which leaves 70.2p. The previous figure was badly hit by the Helston acquisition, which involved significant purchases of intangibles, including indefinite life franchise assets whose existence is at the whim of OEMs and earlier mismanagement of the pension scheme. They still remain short of their claimed tangible asset per share from a year earlier of 71.2p.
Used car stocking loans had jumped in the 6m to 28/2/2024, probably related to the Helston acquisition, but by 31/8/2023, we can confidently infer had normalised. Interest-bearing new car stocking loans had been at low levels due to poor supply and perhaps excess cash but had increased by 28/2/2023. As they are hidden in the trade payables and excluded from net debt figures, we cannot infer them for 31/8/2023, but Vertu says:
Net finance charges rose by £6.8m to £9.9m reflecting higher new car stocking loans, the impact of higher interest rates and higher levels of debt year-on-year, reflecting the substantial purchase of the Helston Group.
We think lower net cash over 6m (£79m to £48m) has to be balanced against repayment of used car loans (£25m to £12m), but again, a full picture is difficult without knowing where the interest bearing new car loans ended. There's also £10m of one-off (ish) outflow from solar panels and buybacks. So that cash reduction on the balance sheet is not the concern it might immediately appear.
Zeus have increased EPS forecasts due to the share buybacks already undertaken with scope to increase further. Finance charges do increase despite the modest debt, concealing an upgrade to EBIT of 5%.
Forecasts also assume rate rises will have a greater impact on consumer demand in H2. Further out, it makes sense that integration benefits from Helston and network optimisation will support a further modest gain. The forward PE on Stockopedia of 6.8x is, therefore, broadly correct, and this would be cheap for most sectors. When considering the 100% tangible asset backing supported by recent disposals above book, it seems very cheap.
XP Power (XPP.L) - Trading Update
A bit of a car crash announcement from a former stock market darling. Trading below expectations, but most worryingly:
The Group continues to be in compliance with its banking covenants but is now expecting net debt / Adjusted EBITDA to be close to or above current covenant limits in the near-term.
So could be forced into a raise by their bankers. The shares have lost 75% of their value this week in response to this. Not only that, but later in the week, they cancelled their already declared dividend.
The question is, what does this mean:
…having taken account of the views expressed by the Company’s major shareholders
Normally, these sorts of announcements mention bankers or stakeholders, not shareholders. It could be:
a) they're not going to take part in a placing, and so this is the only way to scrape together some cash, or
b) a placing price has already been agreed, so the further loss of confidence doesn't matter, and of course, investors don't want to pay broker fees any more than necessary.
This may start to look cheap, given that normalised earnings over the long term have averaged around 130p/share. But we’d want to see the price of any placing and the level of dilution before being willing to take a punt on any recovery.
That’s it for this week. Have a great weekend!
BKS: On the cash - 2H cashflow positive. They also hold £2m in IT kit, bought ahead due to supply chain problems. Still developing and investing ahead of revenue recognition: growing rev c.25% CAGR so moving in the right direction. They have two new attractive propositions Proximity Cloud and Exchange Cloud yet to really kick-in. So definitely one to watch IMHO.