Friday, July 27, 2012

Fri 27th July 2012 - Morning Report

Good morning! I've selected 5 companies to report on here, so can hopefully manage that before 8am.

Remember also, that here I focus mainly on small caps, and I exclude the resources sector, financials, insurance companies, foreign companies with a UK secondary listing, and anything else I don't like the look of. This is proving to be a really useful exercise, as I'm finding all sorts of companies that I've never heard of before, some quite good & building up a pretty good database of info, which I might make publicly accessible at some point.

There's a really handy "Search" function on the top RHS of the page here, which if you type in a company name, then wait briefly, it will list all the instances of it having been mentioned here. So do make use of that, if you wish.

Should be a good open, with US markets very strong overnight, and hence a FTSE 100 open up 33 points is on the cards. Apparently Draghi said something positive about the Euro, which is nice. But I'd rather hear something positive from the Germans, who are paying the bill. It's very simple Germany - you need to either fold, or go all-in. This middle ground is killing all of us.

Let's start with brownfield housebuilder Inland Homes plc (INL). A lot of my mates are in this one, and I've met the management twice, who seem very switched-on, if somewhat overpaid- big salaries for a £31m mkt cap tiddler (e.g. £326k for an FD is pretty bonkers!!).

Inland's trading statement (ahead of prelims to 30 June 2012) is mixed - they have achieved a resolution to grant planning consent on what seem to be improved terms on both 127 plots in Essex, and 276 plots in Farnborough.

On the downside, there has been a delay to the sale of land that was expected to contribute £2m profit to the results for y/e 30 June 2012, but expect to conclude this sale "in the near future". Common sense says that shareholders should not panic at a sale simply being delayed, so I doubt this news will do the share price much harm over a timing difference. Management confirm that net asset value "remains robust".

My feeling is that residential property is so wildly over-priced relative to incomes in the UK, especially in the South, that I'm not touching anything in the sector, even apparent bargains.

Another share that many of us either own or follow is £17m mkt cap cruise ship operator All Leisure Group plc (ALLG), which seems to have been plagued with problems in recent years, but has always looked cheap if you look beyond the short term issues, if that's what they are?

Interims to 30 April 2012 cover the quiet half of the year, but even so look really grim - turnover has dropped 29%, and last year's interim loss of £4.3m has ballooned to £11.2m loss. The interim divi has been cancelled, along with all dividends "for the foreseeable future". That's bad. Although they have previously indicated that this period would be weak, as they only operated one ship during the period.

Mgt say that improved trading relies on adverse economic, fuel, and exchange rate environment abating. The balance sheet looks stretched, relying on trade creditors to finance the business. I don't like the look of this overall, and it seems a full year loss is now inevitable, so I will be taking this one off my watch list.

Nationwide Accident Repair Services plc (NARS) issues a positive trading statement for the 6 months to 30 June 2012. Trading is in-line, and cash position remains strong. These shares look cheap, on a current year PER of 6, and with a whopping 9% dividend yield forecast. It's a mature business that fairly consistently chucks out roughly £6m p.a. in profit and 5p a year in divis. 

(EDIT: See the comments section below, Mark B has kindly pointed out to me that NARS has a £26m pension deficit, which bizarrely is not shown on the Balance Sheet - which I had checked, but seen an £11.4m pension asset - therefore thought there was no problem. Having dug further, they are making £2.6m p.a. overpayments into the pension fund, so this is clearly a material concern, and I think it's appalling that the accounts do not properly disclose such a large pension deficit on the Balance Sheet. I shall be contacting the company to clarify what on earth is going on - and why do the auditors allow such a misleading accounting treatment? But in the meantime, this certainly puts a much worse perspective on things, hence despite the big dividend yield, I don't see this as a bargain after all, given that a significant chunk of future earnings will be needed to prop up the pension fund).

Soft drinks maker AG Barr (BAG) reports a rather lacklustre trading statement. Understandably, the poor weather has had an impact, but despite this they achieved +4.5% sales revenue. However, costs rose such that interim profits are expected to be slightly below prior year. Margins will improve in H2, but not enough to recoup shortfall in H1. One assumes they will also be seeing improved sales now the weather is hot. The shares do not look cheap on a fwd PER that must now be nudging 20.

I can however confirm that their IRN-BRU drink is amazing at curing hangovers, which is probably why it's so popular in Scotland.

Another small cap favourite is toy maker Character Group (CCT). Their trading update this morning seems to use every excuse possible (Jubilee, Euro 2012, abnormal weather, Eurozone crisis, the Olympics, increase in clearance sales, reduced margins, retailers delaying stock intake, blah blah blah!).

But the bottom line is they've underperformed, and now expect to miss their full year forecasts, but they don't say by how much - a glaring omission, so now the market will probably fear the worst and mark down the shares a fair bit. Having said that the fwd PER was only just over 5, so looks like the share price is already factoring in some disappointment. They do also say that they expect a good start to the new financial year from 1 Sep 2012. Might be worth bottom-fishing this one today if they fall by more than 20%? It just depends whether this is a mild profits warning, or whether it's the usual start of a series of problems.

(I do NOT hold shares in any of the companies mentioned, and emphasise that this free Blog is purely for general interest, and does not constitute financial advice. Please DYOR as always).


  1. This comment has been removed by the author.

  2. Hi Paul,

    Thanks for the report

    Had a look at NARS, as a stable looking high yielder. Unfortunately discovered that it has a £26m unfunded pension deficit, not shown on the balance sheet. Gross liability £83.3m - massive cf market cap. See note 15 to the accounts. That makes it a no-no for me.


    Mark B

  3. Hi Mark,

    Bloody hell, that's a bit scary. I had a quick look at their balance sheet, and they show a £11.4m pension ASSET! But then in the notes to the accounts, as you say, they disclose a £26m deficit in the notes to the accounts.

    Looking at note 5 to their last prelims announced on 2 April, the reconciling item seems to be £37.5m of "Unrecognised actuarial losses" which translates the £26m deficit into the £11.4m surplus which is reported on the Balance Sheet! But how can actuarial losses IMPROVE the situation, turning a deficit into a surplus? Totally bizarre, I don't understand this at all.

    They seem to be paying £2.6m p.a. overpayments into the pension fund, but despite this they still have enough cashflow to pay big divis.

    But I find the accounts totally misleading! The fact that a £26m deficit is not shown on the balance sheet, but actually presented as a surplus is outrageous!

    Thank you very much for pointing this out, and I will update my original post to reflect this, mentioning you).

    Best wishes, Paul.