Tuesday, September 18, 2012

Tue 18 Sep (Part 1) - TNI, DEB, JD., KBT, VLX

Good morning. Apologies for no report yesterday - I had a look through the morning's RNSs and just couldn't find anything of interest to me - all just boring stuff & lots of micro caps below my £10m threshold.

Then of course Trinity Mirror (TNI) began another big rise (up about 11% yesterday), and I got rather over-excited about that for the rest of the day. Amazingly, despite only having been going for 3 months, this Blog has already delivered its first 100% gain, following my TNI article 22 June 2012, when the shares were just 25p (they closed at 52p yesterday).

I should of course stress that this is NOT a share tipping site, but just somewhere I share my research ideas & opinions. Readers are always urged to do your own research & take the necessary professional advice for your circumstances. Sometimes I'll be right, and sometimes wrong, but in the case of TNI it appears to be a winner, and remarkably despite doubling in price, TNI shares are still only on a current year, and 2013 year forward PER of just 2! Yes, TWO!

Masses of debt? No, actually. In fact it's being paid down at the rate of £40m per 6 months, and is not much over 1 times EBITDA, which is generally seen as pretty modest gearing. I calculate that TNI will move into net cash at some point in 2014.

Pension deficit? Yes, but it's roughly equal to TNI's own freehold property, so what's the problem? Also, overpayments of £10m p.a. until 2014 are only about a month's cashflow.

I cannot see myself selling any TNI below 100p, which even then would only be a PER of 4. In my view newspapers, if well managed, have decades life left in them, and should be seen more as lifestyle magazines, or time fillers, rather than the main source of news. And of course, as TNI has shown, they are still highly profitable - I don't ever recall seeing another dying industry operating at a profit margin of 15-20%, which is where TNI is at.

Turning to today's RNSs. Debenhams (DEB) has issued a positive trading update covering various periods in its year ending 1 Sept 2012. The upshot is that they've delivered positive LFL sales throughout the year, averaging +2.6%, and with trend accelerating to 4.4% in the last 10 weeks. That's really impressive. Gross margins a whisker down, and full year profit expectations confirmed.

It's a quality business, and the shares have done very well this year, rising steadily from 60p to 99p. However, at that level, they're priced about right in my view (PER of about 11). Given that the balance sheet is still weak, stuffed full of intangibles & debt - the long-lasting & near-disastrous legacy of private equity involvement a few years ago - I wouldn't want to chase the shares any higher.

A better value retailer in my view is JD Sports Fashion (JD.). Their interims to 28 July 2012 look poor at first glance, but remember this is expected because JD acquired the best Blacks Leisure shops from the Administrator. Hence has incurred some initial trading losses as they rebuilt the stock & sales of those shops.

The underlying business looks good to me though, with LFL sales of +1.1% (anything above zero is good in the current economic situation). It's heavily reliant on Xmas and January sale trade, and has confirmed full year expectations, so that puts the shares on a current year PER of 7.7, falling to 6.8 next year. I think that looks good value.

Although on the downside, JD is 57% owned by Pentland, and the shares are not as liquid as you would think for a £355m mkt cap company. Often a very wide spread. A quality company though, and the only real competitor to Sports Direct, now that JJB Sports is on its way out.

K3 Business Technology Group (KBT) looks interesting, as its results for the year to 30 June 2012 are issued, and deliver adj EPS of 30.2p, putting them on a PER of just 5.9 at 177p/share. There is net debt of about 55p/share on top of that to take into account though.

The shares have opened down 15% at 150p because a separate announcement says that offer talks have ended. Might be worth a further look?
Talk in their outlook statement of this year being one of investment, sounds like a veiled profits warning too, so I might wait for the dust to settle here before diving in.

Electrical flex maker, Volex (VLX) has put out a profits warning. Savage reaction from the market, with the price marked down 35%. This seems harsh, given that they indicate profits will only be flat against last year. But there again, looking at the figures, they did 18p EPS last year, and consensus was for 28p this year, so on that basis a big sell-off is probably warranted. Puts them on a PER of about 10, probably about right (they look around net cash/debt neutral).

There are lots more results to look through, so I'll publish this & hopefully come back with part 2 after a cup of tea & some porridge!

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