Friday, July 6, 2012

Begbies Traynor results audiocast link

The presentation slides which were discussed at the Begbies Traynor analysts meeting yesterday are now also available online in an audiocast with the Chairman & FD. Well worth a look if you're interested in this company. Here is the link;

Fri 6 July 2012 - morning report

Good morning. Very little news this morning. Please see my report on Begbies Traynor analyst meeting from yesterday - a good company, now focussed on core activities. Looks cheap to me, on a PER of 5, and various reasons to expect a re-rating. In the meantime a 7.3% dividend yield keeps one more than amused.

Aga Rangemaster (AGA), the maker of expensive cookers, and operator of Fired Earth shops, reports a bit of a mixed bag in advance of its interim results for y/e 30 June 2012, due to be issued on 24 Aug 2012. Sales & profits are expected to be slightly down, but they confirm the outlook for the year as a whole (due to cost cutting & new products).

At first glance AGA looks like a great cyclical recovery share - hence looking forward to economic recovery could see the shares go substantially higher. However, the elephant in the room is their pension deficit, which looks to me to be sucking up pretty much all the profit & cashflow the company is likely to make in the next few years.

This big issue is rather glossed over in today's statement, which says that the pension fund was fully funded on an accounting basis as at 31 Dec 2011. However that is misleading, since there was a yawning gap on an actuarial basis requiring very large overpayments. I do wish accounting standards would be changed for pension funds, as there currently seem to be 2 completely different methods of calculating deficits, leading to widespread confusion.

All in all, my view on AGA is that it's potentially interesting, but the pension issue is so large relative to profits, that it makes the shares uninvestable in the short term.

A very unusual set of results from PSG Solutions (PGS) announced this morning. Profits at their specialist electronics division have shot up from £1.5m last year to £11.6m! However this seems to be on the back of one-off MoD contracts. Nevertheless, with net cash of £17.3m (despite tender offers for share buybacks), against a mkt cap of £27.8m, this one looks potentially interesting. Worth a look, but not easy to analyse, given the one-off nature of their MoD contracts. They also have some smaller operations in property services, and packaging. The former has moved from losses to profits.

I started to look at results from Coms plc (COMS), but gave up when I saw how tiny the numbers were, plus it's loss-making and seems to have almost run out of cash. It really is daft having such tiny, early stage companies Listed on, and clogging up any Stock Market. The rules need tightening up in terms of requiring more trading history before being eligible to List.

That's about it for this morning, a very slow day for announcements. By the way, I don't cover the resource sector here, as it's not a sector I understand, hence avoid. And plenty of other people cover that sector elsewhere.

Thursday, July 5, 2012

Begbies Traynor (BEG) results (5 July 2012)

Voluntary disclosure: my family hold a small amount of shares in this company.

I went along to the analysts meeting this morning for Begbies Traynor (BEG), the only Listed pure play insolvency practitioners. This is a specialist & highly regulated area of accountancy, with high barriers to entry (the qualification is very difficult indeed to obtain). Today's meeting gave me the opportunity to meet the Executive Chairman (and 29.7% shareholder, Ric Traynor), and the FD Nick Taylor - both of whom impressed me as being down to earth and focussed on delivering shareholder value.

I know a bit about this sector, as when I did my chartered accountancy training with Price Waterhouse in the recession of the early 90's, they transferred me from audit into insolvency, and I helped in the Receivership of a Rolls-Royce dealership, a hotel, and a leisure group. It's difficult & delicate work (I still remember an angry ex-employee bursting into the premises & threatening me, and another time when all the locals came into the hotel bar to take the mickey out of me doing a stock-count, suggesting I needed to count all the matches in the matchboxes, to general hilarity).

Also I've been on the other side, buying a business from the Administrators about 10 years ago, who happened to be Begbies Traynor!
They are well known, and the market leader of small to medium insolvency jobs. Their main competitors are the big 4 accountancy firms.

I would describe the results as reasonably resilient, with turnover slightly down at £57.7m, and adjusted profit before tax of £7.4m (prior year £8.1m). That translates to adjusted EPS of 6.0p (prior year 6.4p).

At 30p the shares are therefore on an adjusted PER of just 5.
The market cap is £27m (with 90m shares in issue).

The dividend has been maintained at 2.2p for the year, although the phasing has been changed to reflect the seasonality of the business. This gives a very attractive dividend yield of 7.3%.

So why are these shares on such a low PER of just 5? Several reasons perhaps, as follows.

Firstly, the business has had several problem divisions (such as its tax practice, its loss-making Red Flag business, and some small but problematic overseas operations). Therefore the valuation probably reflects some discount for what the Chairman referred to as the "sins of the past". But the point is that these problems have now been solved, with disposals. So it's now a nice clean focussed business.

Secondly, the market perhaps aligns Begbies with problem firms of accountants like the bust Vantis, and the almost bust RSM Tenon. Both took on far too much debt, and got into problems (amazingly, as surely accountants are supposed to be experts in finance?!).

Begbies does have significant debt, but I will explain why it's not a problem. Net debt fell to £20.1m, down from £22.5m a year ago, and well down from £27.3m 6 months ago, helped by profits and a sale & leaseback of 160 company cars.
This is well within banking facilities.

So why am I relaxed about debt? It's because of the nature of the business. Insolvency practitioners always require bank financing to run the Administrations, and they are then eventually paid from asset disposals once the fees are approved at a creditor meeting (usually led by the bank).

Hence they run a large, long debtor book (8.5 months long in Begbies case, at £43.8m), which is part-funded by £20.1m in net bank debt. The two items need to be seen together, and the normal course of business.

I asked about the banking relationships, and management confirmed they are  very solid. The facilities are provided jointly by HSBC and Yorkshire Bank, and are unsecured - very important in showing how comfortable the banks are.
We were told there is no pressure to reduce the borrowings, and there is plenty of headroom.

So once you understand that the debt is simply a revolving facility to finance the long debtor book, which is normal for insolvency practitioners, then it suddenly ceases to be a problem. This message has not got across to the investment community - yet. This in my view is one factor which could trigger a re-rating, once the market learns to become more comfortable with the nature of this debt.

Thirdly, the dividend yield is now looking comfortably sustainable, hence there is scope in my view for the dividend yield to come down from 7.3% to perhaps 4-5%, which implies the shares could be around 50% higher in time. And until then, it's rather pleasant to keep receiving the dividends!

The other significant factor which could trigger a re-rating of these shares is the nature of the insolvency market. We were shown an interesting slide which charted the number of insolvencies over the last 40 years. As you would expect, this showed a spike in insolvencies both during Recessions, but also a further significant increase after Recessions (as creditors - mainly banks - push for asset disposals in a recovering economy).

But this time around things have been different. Unprecedentedly low interest rates, and political pressure, mean that insolvencies have been artificially low in this cycle. HMRC have been exceptionally lenient in allowing more time for financially distressed companies to pay, and hence this has kept alive many "zombie" companies which are essentially bust, but still operating on life support.

Clearly this will not last forever. At some point the Recession will either get worse, in which case insolvencies will rise, or the economy will begin improving and zombie companies put out of their misery by Banks cleaning up their balance sheets. But at the moment Banks don't want to make any provisions that they don't have to.

So the interesting thing is that either way Begbies should benefit. So not only are the shares cheap (in my opinion) based on current trading, but there are good reasons to expect better trading in the future whatever path the economy takes.

Begbies have nothing exciting planned - probably more small, bolt-on acquisitions (which are now reasonably priced), which is all I want them to do. It's now a focussed specialist, sticking to its knitting - ideal from an investor point of view.

There are no regulatory or legal issues on the horizon which worry management. Govt is not going to change the law on pre-packs, which was one recent issue.

So as a boring, sound business, paying a smashing dividend yield of 7.3%, with good upside for a re-rating at some point, I like these shares, like the management, and consider this a long-term hold for me.

As usual please do your own research, this is personal opinion only, and nothing here should be misconstrued as being advice, which it is not.

Thu 5 July morning report

Good morning! Here's my quick, pithy review of this morning's RNSs which interest me.

As usual, a retailer first. Absolutely stonking Q4 trading statement from discount sheds operator Dunelm (DNLM) - LFL sales up an astonishing +10.4% in Q4, and +5.2% in the second half, and +3.1% for the year. So that's an accelerating trend throughout the year.

Interestingly, they say that the inclement weather boosted sales, and just goes to show that the only weather that matters is whether you have the right stock in the right place at the right time!

They raise profit expectations to £96m for the year ended 30 June 2012, although that's possibly priced in to a £1,035m mkt cap at 512p. Trading from 115 superstores, another 10 are planned for this year. A really very impressive business, so I must visit one to see what they're doing which is working so well! The PER seems to be about 14, based on the revised profit figure, so there could be some scope for the shares to rise on this excellent performance, but not a huge amount.
Net funds have risen to £60m.

Next, insolvency accountants Begbies Traynor (BEG) - note the appropriateness of the ticker for the sector!
Adjusted EPS fell slightly from 6.4p to 6.0p, but bear in mind the shares are only 30p, so the PER looks cheap at 5.

(I should declare an interest here, as my family hold a few shares in BEG).

Noteworthy is the 1.6p final divi, giving 2.2p total for the year, a very attractive yield of around 7%.

Net debt has fallen by just over £2m to £20.1m.
Worth noting that their bank debt is unsecured, very unusual, which gives me confidence that the Bank have confidence in them.

I once worked on insolvency jobs, 20 years ago, and the nature of the work is that large debtors build up, a backlog of fees, which are then paid in a lump when the creditors meetings are held. Hence a long-dated debtor book, financed by bank borrowings, is completely normal.

I don't think the stock market has ever quite grasped that, and has instead lumped in Begbies with problem over-geared accountants like Vantis & RSM Tenon - isn't it shocking & surprising that groups of accountants are so frequently incompetent in managing their own businesses!

But all looks fine at Begbies, and on the back of these figures I'm happy to continue holding. Might see if I can attend the analyst meeting this morning at 9:30 as I happen to be in London.

They have disposed of problem divisions, and now seem focused on the core insolvency business. A nice counter-cyclical share to hold.

Cinema operator, Cineworld (CINE) announces an in-line trading statement. These shares look priced about right to me, on a PER of 11.

Stadium (SDM) announces broadly in-line (i.e. slightly below!) trading.

Progressive Digital Media Group (PRO) also announces in line trading.

I am left again thinking, recession? What recession?!

Rather odd announcement from Media Corp (MDC) about re-acquiring some websites previously disposed of. Adds to my gut feeling that this company has a slight whiff of something not quite right about it. But can't put my finger on it.

Have a good day, looks like a modestly up start, with the FTSE 100 futures up about 10.

Wednesday, July 4, 2012

Home Retail AGM - 4 July 2012

I published a detailed report about Home Retail Group (HOME) here shortly after their latest IMS, which indicated that sales at Argos have now bottomed out, and that management are comfortable with market consensus forecasts for the year. Previous HOME report.

The shares shot up about 25% on the day of the IMS, peaking around 97p, but subsequently slipped back to 80p. I should add at this point that I've put money where my mouth is, and hold a long position in these shares.

Interestingly, HOME is one of the most heavily shorted UK shares, and I reckon the shorts have got it wrong, so at some point they will become forced buyers (perhaps explaining the 25% move up as shorts ran for cover on the date of the IMS). Their pain is our gain, so bring it on!

My view, and please remember this is only my opinion, is that Argos and Homebase are both fundamentally good businesses, but the decline in sales and profits of recent years has been largely due to consumers tightening their belts with reduced spending on what are essentially discretionary items.

However, the squeeze on household incomes is now coming to an end, with inflation easing and real incomes now likely to begin modest growth after several years contraction. HOME is therefore an operationally geared play on a consumer recovery. Recent trading statements from a number of retailers have been positive (e.g,. Debenhams, Topps Tiles).

Above all, as I highlighted in my previous report, HOME has an absolutely bulletproof balance sheet, so is not only a low-risk investment in my view, but also offers deep value - which could well be outed from a takeover bid.

Consider these figures - at 86p/share the mkt cap is now about £700m, yet the business had an average net cash balance throughout 2011/12 of £320m (page 25 of the latest Annual Report), and astonishingly also owned outright its own store card operation with net debtor book of £461m! There is no corresponding debt, so the business is essentially thrown in for free! That is the type of deep value that makes me salivate, as well as sleeping well every night.

That's the background, so let's turn to today's AGM. It was held in the Jurys Inn Hotel in Milton Keynes, so I travelled up from Brighton this morning by train. The meeting was reasonably well attended, with perhaps 50 people, being mainly assorted suits (although some were Argos & Homebase senior management, on hand to meet investors), and the usual smattering of AGM pensioners!

The outgoing Chairman, Oliver Stocken chaired the meeting, and began by introducing the Board - the CEO Terry Duddy and FD Richard Ashton being the Execs, the others Non-Execs, including the incoming Chairman, John Combe, who said a few words at the end.

The CEO then gave a short speech recaping on 2011/12, making these points;
  • Difficult & challenging market conditions
  • Homebase has gained market share
  • Argos lost (slightly) market share, mainly as a result of a decline in video games consoles sales
  • Costs were flat, with savings offsetting increases
  • EPS fell 59% to 8.7p
  • No final dividend (making the 4.7p interim divi the total for the year)
  • Even more focused on costs & cash preservation
  • Argos has made solid start to Q1 of new year
  • Homebase impacted by poor weather, but held market share
  • Prioritising multi-channel (i.e. internet, mobile, and telephone)
  • Capex reducing this year to £100m
  • Argos - the last 2 quarters have seen multi-channel over 50% of sales!
  • Check & Reserve has been a success
  • Refurbing another 100 stores
  • New CEO of Argos (formerly of Best Buy) has made rapid impact already
Next came the official AGM votes, with the advance proxy votes being the only ones that mattered - and made all resolutions a fait accompli. We were all given a sheet detailing the proxy votes.

There was a 6.5% no vote against the remuneration report, so pretty muted there despite the questionable bonuses in such a bad year for profits & divis.
There was also a 20% vote against authorising Directors to allot new shares - although they stressed (as usual) that this was precautionary & there was no plan to issue new shares.

Next the Chairman invited questions, or cue eccentric/cantankerous pensioners!
The first eccentric pensioner was given a radio microphone, and pulled out a 2-page typed script, which he began to read. It rambled on pointlessly about minor operational issues concerning the pricing of a Panasonic TV at the Chichester store, you get the drift. He was humoured by the CEO & Chairman for a few minutes, then the mic was passed to me for my questions.

I flagged up the excess capital held by the business, referred to above - the excess cash and debtor book being more than the mkt cap. So I asked what plans the Directors had to unlock this excess capital - e.g. securitising the debtor book, returning cash to shareholders, etc.

The Chariman confirmed that my analysis was correct, in that the Balance Sheet is indeed very conservatively financed. They had looked at options, but felt that securitising the debtor book was not advantageous at this time. he bottom line is that they are cautious, and like having an ungeared balance sheet, and are not minded to change that any time soon.

They did point out that accounting standards might well mean that lease liabilities have to be brought onto the Balance Sheet at some point, which would increase liabilities by about £2.5bn (see below for more discussion of this point). So they want to keep things strong in that event.

I then asked a follow on question about the position with leases, in that 30% of their shops were coming up for renewal or break clause in the next 5 years, and asked whether they were able to push through rent decreases.

The FD answered this, saying that yes rents were being reduced on renewal, and that of the 30 leases renewed in 2011/12, the average decrease in rent was 16%. That's a very significant point in my view, and confirms my view that, over time profits should hold up as the rent roll reduces through renewals. The average lease term is 7 years at Argos, and 10 years at Homebase.

They negotiate with each landlord at lease renewal time as you would expect - by looking at the store's profits (or losses), and negotiating a revised rent which ensures the shop is profitable. Otherwise they hand the shop back to the landlord.

Next it was time for a cantankerous pensioner to moan about, amongst other things, the lack of a Trading Statement with the AGM. The Chairman politely pointed out that they have never issued a Trad Stat with the AGM, but regularly updated the market with IMSs. This pensioner also moaned about the cut in dividend, saying that he had been assured last year that it would not be cut.

The Chairman indicated they will consider an interim dividend in Oct 2012.

In response to another comment, it was pointed out by the Chairman that the business has changed enormously, and as the UK's 2nd largest internet retailer, many shops had become effectively customer pick-up points (plus of course getting passing trade too).

We were assured that HOME is a good business, and that it was unfortunate the share price has not performed.

Overall, my impression was of a management team who know what they're doing, and have lots of ideas for taking the business forward. They have successfully tackled the challenge of the internet, grabbing a big market share, and offering something unique with same day collection from Argos - particularly useful at peak trading periods, and for hot products.

There were no other questions (as no Trad Stat, didn't seem to be any City analysts at the meeting). We went outside into the lobby for a modest selection of sandwiches, teas/coffees, etc. I avoided the pensioners table, and instead hovered hoping to catch one of the Directors, who I was told by a pleasant lady shareholder usually mingle. She thanked me for pointing out the huge debtor book asset, which she had been unaware of.

I was delighted when the FD, Richard Ashton spoke to me (I had mentioned in one of my questions that I am a former ladieswear FD), and it turned out that we both trained as chartered accountants at the same firm, Price Waterhouse.

We had an interesting chat, and he struck me as both having an approachable manner, and clearly on top of his game.
He pointed out that their Balance Sheet strength had enabled them to pick up some good assets at reasonable prices - e.g. the Schreiber & Hygena brands from MFI, stores from Focus DIY, Habitat, etc. So they are not sitting on their hands, but are driving the business with new product initiatives, e.g.. mezzanine floors at Homebase with furniture, etc.

I did say that we hadn't really touched on what they are doing to turn the business around after a very poor 2011/12. He pointed me in the direction of a detailed presentation on their website which gives some excellent background, which can be found here (then click on June 2012 investor report).

I made the point that putting leasehold liabilities on the balance sheet is a nonsense, since that ignores the trading income from those shops! A lease is only a liability if the shop is trading at a loss. The FD agreed with me on that point.

The FD emphasised that the economic situation is unpredictable, and HOME is focused on weathering the storm & gaining market share, at the expense of weaker competitors. He gave the example of Woolworths, which used to be no.1 in toys, whereas now Argos is.

He also agreed with my analysis that many households have cut back on discretionary spending, as their incomes are squeezed and go mainly on food & energy, etc. But at some point the economy will recover, then of course HOME will see an operationally geared impact on its results.

With the share price now valuing the company at nothing (since it's cheaper than the excess cash + debtors), but still chucking out £200m+ cashflow, and trading having now stabilised, then I reckon this share represents a very good risk/reward play right now at 86p. That is my personal opinion, and absolutely not any kind of recommendation! I do not give any financial advice remember, this is a personal interest blog site only. So please always do your own research.

I shall post a link to this article on Motley Fool, and invite discussion of this share at Paulypilot's Pub on Motley Fool, here.

Weds 4 July morning report

Good morning! This has to be quick, as I have to dash for the train to Milton Keynes shortly, for the Home Retail Group (HOME) AGM.

Further evidence that retailing is bottoming out/improving has been supplied today with a decent trading statement from Topps Tiles (TPT). They report positive LFL sales, and confirm market expectations for the year.

Debt has been a problem for TPT - they geared the business up at the wrong point in the cycle, and have been struggling ever since. It doesn't look cheap to me, once you factor in the debt.

Silverdell (SID) seems to be on a roll, with some decent-sized contract wins announced today for its recently acquired EDS subsidiary. I don't hold, but like the management, whom we've met twice at Dave Stredder's "Mello Central" investor evenings hosted by FinnCap. Seems to be an ambitious company that is going places.

Taylor Wimpey (TW.) report a stable property market, and in line trading.

Strong trading update from Netplay (NPT) but it only talks about sales and says nothing about profit! Given the company's tendency to disappoint in the past, I'm sceptical given its £28m mkt cap.

Right, gotta dash for this train. I'll report back on the HOME AGM here either later today, or tomorrow.

Tuesday, July 3, 2012

Tuesday Morning Review

Good morning! No report yesterday, as there were no results which interested me, and I picked up a mild cold over the weekend so was resting.

Just a handful of results today, as usual I'll start with retail, N Brown Group (BWNG) put out a trading statement ahead of its AGM later today. Whilst womenswear has been hit by poor weather, other categories have performed better, such that overall LFL sales were up 1.9% for the 17 weeks to 30 June 2012. More evidence that retail is bottoming out, hence bombed out shares in the sector are worth a look - my favourite on a value basis being HOME (since its balance sheet contains net cash + storecard debtor book which are greater than the entire mkt cap, so the business itself is effectively in for free!).

N Brown looks reasonably priced, on 8.8 times forecast earnings, and a very good yield of 5.6%. There is some debt though, so that needs checking. The rating looks about the same as Debenhams. Since N Brown does just over half of its sales over the internet, it's certainly wrong to think of it as old economy.

Housebuilder Persimmon (PSN) reports positively on current trading. Legal completions in H1 are up 6% against prior year, turnover up 13%. Average selling price is up 7%, and operating margin has risen from 9% to over 11.5%. Pretty impressive stuff, but it all relies on an artificially expensive housing market which is supported by ultra-low interest rates, and where affordability has gone out of the window for many people. Hence owner-occupation has sadly become a luxury available only to older people, a small number of high earners, and people whose parents are rich enough to give them a substantial deposit. How long before prices eventually correct back to affordable multiples of salary? I don't know, but it makes me want to steer well clear of the entire housebuilding sector - much too high risk.

What did catch my eye in Persimmon's statement this morning is that they plan on returning £1.9bn of capital to shareholders over the next 9 years, starting in June 2013. That is equal to their entire mkt cap!

Real Good Food Company (RGD) - a favourite amongst PIs, has released its RGD results. A big increase in diluted adjusted EPS from 2.6p to 6.5p, so that puts it on a PER of about 8. However note that net debt has risen to £25.9m, so in the context of a £34m mkt cap that makes it look rather pricey in my opinion. Wafer thin profit margins on large turnover don't appeal to me either - increases the risk of something going wrong.

The outlook statement makes a bold statement that they are "embarking on an exciting period designed to transform the scale of the Group over the next 3 years". I can't get excited about this one I'm afraid.

£10m mkt cap minnow AdEPT Telecom (ADT) announces solid results. Looks good value on an EBITDA basis (3 times) and maiden divi. Worth a look perhaps.

That's it for now, have a good day!

P.S. Quite a busy week, as I'm off to Milton Keynes tomorrow for the Home Retail Group (HOME) AGM. So once I've collected my thoughts, and got an internet connection, will post a report about it here - so do check back regularly for new stuff! I'm planning on gradually building up the amount of stuff I post here, but have been busy on a couple of other interesting projects, details to follow!