Friday, September 7, 2012

Fri 7 Sep - 888, HOME, SCO, STAF

Good morning. A little bit later than usual again today - I've decided to take my time with these reports from now on & not rush to publish by 8am, since only a small proportion of the readership reads them immediately anyway. Therefore I can get more information into them & have a more relaxed morning too. Sounds like win win to me!

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I see that 888 Holdings (888) has put on a nice spurt this morning, up 6%. Not sure why, as there's no news, but I flagged the excellent recent results here the other day, and added a few to my portfolio, so pleased with that one.

Also, Home Retail Group (HOME), a big favourite of this Blog, is up again, now knocking on the door of 100p. A decent trading statement next week (due on 13 Sept) could catapault us well through that level in my view. As a broker noted yesterday, at the moment the market is valuing the operating businesses at nothing (which is what I've been saying here since June!), since the mkt cap = debtors + net cash. However, if Argos delivers even flat LFL sales again for Q2, then it will confirm that the previous sales decline has been cyclical, and not structural. Combined with the reality that Argos is winning the internet war (around 50% of sales in Q1 were multi-channel - i.e. internet, mobile & phone), this makes the valuation still look potentially far too low.

My macro view is that the economy will bounce back at some point, we just don't know when. Every time we've been in Recession before, it has felt like things would never improve, but eventually they do because of capitalism's naturally refreshing actions - inefficient companies going under, and reallocating cheaper resources & market share to stronger growth companies.

Also, even if we only get sluggish growth, the inevitable outcome of QE is inflation. So retailers are some of the best placed companies to benefit from inflation - dissipating debt, and lease liabilities into rising selling prices & gross profit. Hence I remain bullish on HOME, and eagerly await the Tr Stat next week. It is vital that they maintain a dividend at a reasonable level, as it signals mgt confidence in the outlook. To cancel the divi at this stage would be a terrible mistake, so I hope they recognise this.

Right, let's look at this morning's results. Oh! There aren't any really, that's unusual!

I see that Scotty Group (SCO) - no connection to me, I hasten to add - has put out a rather alarming RNS stating that they are in urgent need of E350k. Doesn't look good.

Finally, I was rather surprised to see a large Director sell at Staffline (STAF), announced today. However, on further enquiry it appears that the Director in question is retiring next year, so the sale was setting up his retirement fund, which is not unreasonable. As the shares have been placed with several institutions, this could also mean follow-on buying as more deep pocketed shareholders potentially buy for their other funds, etc. This morning's 3p rise is reassuring on that front.

Thursday, September 6, 2012

Thu 6 Sep - BVM, EMR, STAF

Good morning, a bit late this morning, my apologies. But I note from the page impressions that our readers are spread throughout the day, so it probably doesn't matter that much if it is a bit late. I was over-tired & just fancied a lie-in, tbh.

Another busy day for mostly interims. A micro cap called Belgravium Technologies (BVM) (£6.2m mkt cap at 6.2p/share) reports poor interims, with turnover down, and profits halved to £150k. The outlook sounds OK, an H2 weighted year, but with a word of caution that it may not match last year's H2. Bottom line for me, it's too small to be Listed, so I'm not interested. Met the management at one of David Stredder's excellent Mello Central evenings (hosted by FinnCap) earlier this year, and it sounded more-or-less like a one man band in terms of driving strategy & sales - so what happens if he falls under a bus? Shares down 16% as we speak.

In common with other small recruitment companies, Empresario (EMR) shares look cheap on a PER of about 4.5, at 25p, or £11m mkt cap. However, bear in mind they have relatively large net debt of £8.5m (almost as much again as the mkt cap, so adjust that out and the PER goes up to nearer 8).

Interim operating profit is up a whisker to £1.8m, and it looks like they have an H2-weighted year, as with other recruiters. Outlook is that they expect the full year to be slightly ahead of last year.

Staffline looks both better value, and with a stronger balance sheet, and better growth prospects, so confirms my view that I've picked the best one in the sector in STAF.

Sorry this is so short, couldn't find any other particularly interesting results, and I have to dash to get ready for a lunch appointment. I won't Tweet this, as it's a pale shadow of my usual market reports! Normal service resumes tomorrow. Hope you have a good day. 

Wednesday, September 5, 2012

Wed 5 Sept - AMS, PRZ, CNS, SMS, HOME, SPD

Good morning. Lots of results again today.

Advanced Medical Solutions (AMS) has cropped up on my radar many times over the years, and their results this morning certainly look impressive, although the growth has come from an acquisition of RESORBA (whatever that is). That has driven a doubling of adjusted interim profit to £5.4m. The outlook also sounds very good, with full year profit expectations confirmed, and a Board which is "very optimistic about our long term prospects". It has also reduced net debt to £10.6m, and pays a small dividend. Looks like the price is already up with events though, at 69p it has a pretty hefty £143m mkt cap.

Restaurant chain Prezzo (PRZ) has put out solid interims. Revenue up 14%, EBITDA up 11%, and adj profit up 4%, so looks like the depreciation charge must have gone up quite a bit due to new store openings. I did well on this share a few years ago, when it was languishing at a ridiculously low price of around 30p, but has since risen to 69p (£156m mkt cap), which looks a fair price.

Broker consensus is for 6.28p this year, which looks possible (as with many companies, H2 is the stronger half) that puts it on a PER of 10.8, although the yield is a miserly 0.5%.
However, I seem to recall that PRZ owns a lot of its own freeholds, so there is hidden value in the balance sheet too, might be worth checking out. That certainly increases the likelihood of a takeover bid (since it could be part-funded by a sale & leaseback of property). Management are smart here, and it's a nice business - a slightly more up-market version of Pizza Express. I would certainly be buying on any sharp pullback, but can't quite convince myself to buy now.

Interesting though how this is yet another example of how good companies manage just fine in economic downturns. Really sorts the wheat from the chaff.

I don't like the look of the interims from Corero Network Security (CNS). They report good turnover growth, but losses have got worse, so what's the point exactly?

Smart Metering Systems (SMS) looks an interesting growth company, results look in line with forecasts, but shares on a very high rating of 41 times this year's profits. Too warm for me.

Another broker upgrade has come through for Home Retail Group (HOME), one of my largest holdings, and main share reports here a couple of months ago. Readers who joined me at 70p are now sitting on a 40% gain, and in my view there's more to come. Still very cheap when you consider the business is in for free, since the mkt cap is equal to the average net cash balance + storecard debtor book. There's no corresponding debt at all. So I think a takeover bid is a strong possibility there, given the balance sheet strength. Trading statement is imminent, on Thu 13 Sept (next week).

Another very strong IMS from Sports Direct (SPD), and it doesn't look particularly expensive on a forecast PER of about 13. Wish I'd held on to my shares here, they've almost 10-bagged from the low point in 2008, and it looks like there's still some more fuel in the tank, but the bulk of the gain has now surely been made? SPD will benefit when JJB finally goes under (imminent), and could end up grabbing some of JJB's best stores from the administrator, who knows? Although by this point they must surely have competition regulator issues in doing so? So as there's probably only around another 20% upside in the shares, it's not for me.

OK that's it for this morning, have a good day!

Tuesday, September 4, 2012

Staffline Group (STAF) - Interim results meeting 3 Sep 2012

I attended the private client brokers lunch for Staffline Group (STAF), hosted on 3 Sept 2012 at Buchanan's offices in Cheapside (thank you to them for their hospitality). This report gives my thoughts on that meeting. There were 3 Directors present: Andy Hogarth (CEO), Tim Jackson (FD), and Diane Martyn (Non-Exec - with a lot of senior experience in the recruitment sector).

Disclaimer: I am a shareholder in STAF, and indeed bought a few more shares after the meeting, as I came away feeling positive about the company. In my opinion this share is very good value, but this report constitutes purely my opinions, and is not financial advice. So as always, please do your own research.

First off, the market cap? At 226p a share, it's £52m mkt cap (per DigitalLook).

A bit about the business. Staffline is a recruitment and outsourcing company, providing blue collar workers to primarily the UK food, manufacturing & distribution markets. So it's a low margin, competitive market, with many players - mgt told us there are about 17,000 employment agencies in the UK.

The best way to view STAF is as 2 complementary divisions - the main employment agency business, and the recently entered welfare to work (a key policy of the Coalition to get benefits claimants back into work).

Firstly their main business, which has a network of branches across the UK, some of which are in secondary  retail locations. However, interestingly 85% of their revenue is now from their "Onsite" model, where STAF situate one of their staff at the client's premises, and work for that client - hence no rent & rates, no need for multiple staff cover for H&S reasons, etc. Sounds a great idea, but it is being copied by competitors. This division is trading well, and the interims today indicated that profit rose 23% - but this seems to have been obscured by initial losses in the other division (of £400k, vs a one-off £400k profit last year (on the termination of the old Labour Govt work programme contract), so an £800k adverse swing for H1 results this year).

The relatively new welfare to work division (Eos) is potentially very interesting. This is where a lot of the growth could come from, and it seems to me that the Stock Market has not yet grasped how significant this part of the business could become over the next few years. Hence I believe there is an opportunity to buy these shares cheaply (on a PER of just 7) at the moment, before the profit growth (expected from 2013) from Eos kicks in.

At this stage, Eos is loss-making (£400k in H1), and consuming working capital, because fees are payable (by Govt) on a results basis - so the onus is on Eos to get people into work (proper, paid jobs, not work experience unpaid jobs) and crucially to keep them in work for 6 months, which then triggers a significant fee from the Govt.

We talked at length about this part of the business, and my distinct impression was that STAF approach this work positively, and do not seem a spivvy operator like some companies in this field which have attracted negative publicity.

They emphasised that they try to be "squeaky-clean about everything", in order to rise to the top in this sector. As with any investment, you're investing essentially in a management team. I was very impressed with STAF's Directors - all questions were answered immediately with a straight answer. Politicians could learn a thing or two from this approach - it instils confidence in their honesty & competence, unlike the evasive & spin-driven "answers" that you hear from politicians & their ilk.

So what you get here is a tell-it-like-it-is management team, a big box ticked there. They are also ambitious, part way through a rapid growth plan. They seem alive to opportunities too, such as the Eos deal, which could potentially look like a very smart move once the programme has really ramped up. It just has the feel of a group which is ahead of the curve.

There are significant barriers to entry with the welfare to work contracts, as they are awarded 5-yearly, and the nature of the cashflows is that costs are up-front, with payment by results later (typically 3-months to 6-months). So that limits how many companies are able to compete with Eos, and has frightened off many people in the sector.

There is a significant H2 bias to trading, so STAF are on track to make around £10m profit (before amortisation) this year, flat vs last year - that could be the reason that the shares dropped 5% on the results, perhaps investors were expecting another year of out-performance?

However, any such disappointment is misplaced in my view, since the growth lined up for 2013 is significant, at around 20%, so expect about £12m profit in 2013. There should then hopefully be continued growth from the welfare to work programme, and the core business. So quite why the market is pricing this as a value share on a PER of 7, is a mystery. It clearly has growth characteristics, and deserves a higher PER in my opinion. I'm valuing it on a PER of 12 times 2013 earnings, which implies a price nearer 450p (about double the current share price).

Moreover, it pays a sensible dividend, with a current year forecast yield around  3.1%, which isn't bad for a growth company. The CEO explained (rightly) that the cash is better used making bolt-on acquisitions at low cost, and of course it will be working capital hungry for the next few years due to the deferred payment nature of the welfare to work contract.

Another type of welfare to work contract via the EU has also been undertaken by STAF, but has not taken off, as Local Authorities are failing to refer people to the programme. Management are confident that can be restructured in due course, but it has been a drag on profits in 2012.

Net debt rose to £8.4m, but that's partly because last year's net cash of £2.4m was heavily flattered by short term cash balances of £8.2m at Eos (recent acquisition). The debt looks fine as it's under 1 year's profit, and mgt confirmed that there are no issues there. They also have a large, blue chip, ungeared debtor book. So if needed, they could move to invoice discounting, but don't need to. But it does mean there's potentially £30-40m in headroom on working capital if needed. They have a very strict 30-day payment terms requirement, and won't deal with bad payers - a good approach.

Mgt own 15%, which in my view is about right - not too much to be overly dominant, but enough skin in the game to make them highly motivated.
Their salaries also look about right, and not the excessive rewards you see all too often at Listed companies.

On the downside, STAF has always been cheap, slipping as low as a PER of 3 during the financial crisis. I'm not quite sure why this should be the case, although smaller recruitment companies generally are all cheap at the moment. Again, quite why that should be, when larger recruitment companies are typically on double the rating, is a mystery. In my view it's an opportunity, and STAF is certainly my favourite sector pick, as it offers good management, sound finances, good growth prospects, and a low PER, plus a reasonable divi in the meantime.

It also reminds me a bit of Judges Capital - i.e. that it's a consolidator in a very fragmented sector, and is able to buy small agencies at low prices, and fund those acquisitions largely through earn-outs. So a low-risk model for continued growth, although most acquisitions have been quite small.

I've no idea what the share price will do in the short term, however I believe that with a 12 month+ view, this share has excellent upside potential, mainly because of the growth anticipated from the welfare to work programme. That's not in the price, hence why I think it's good value.

Tue 4 Sep - STAF, SDM, ALU, QPP, JSG

Good morning! It seems like people are coming back from holidays, as the number of daily hits here is rising again from the August lows. I don't promote this Blog, so do feel free to flag it up to friends or colleagues, as the more readers, the merrier!

We've got readers from all over the world, and I'm amazed at how many readers we have across the pond in America, plus of course Britain & Ireland, and France. About to hit 50,000 page views imminently too, which I find rather exciting!

I'm just putting the finishing touches to my Staffline (STAF) report, after meeting management yesterday for their interim results presentation, so look out for that here later.

Busy morning for results, with 22 companies reporting. I'll pick a few that look interesting, so here goes.

Electronics company Stadium (SDM), £21m mkt cap at 70p a share, has had a poor H1, with profit before tax down two thirds to £500k. There's a pension deficit too. Although they are saying H2 should be similar to last year (and it looks to be an H2-weighted business) it looks vulnerable to further disappointment to me, with the valuation hanging on a decent H2, so I'll be taking this one off my watch list. They also announce an acquisition today.

Building & engineering products company Alumasc (ALU) issues annual results to 30 June, which look pretty poor, with underlying EPS down from 8.3p to 3.0p. That's in line with broker consensus, so looks like the poor performance has been well-flagged.

However they do flag a record order book, and say they expect a "much improved performance", so that should give some support to the shares. Broker consensus is a big bounce back to 11p EPS for y/e 30 Jun 2013, but I can't see the attraction in paying up-front for that with the shares at 80p, so will pass on this one.

Results from Quindell Portfolio (QPP) look pretty spectacular, due to the prior year comparatives not including big acquisitions. They seem to be calling themselves an IT and outsourcing company, but their activites seem to actually be heavily based on accident claims management, a very spivvy sector that I detest, having lost about £250k on my shares in Accident Exchange Group a few years ago. So I avoid like the Plague anything even remotely connected with accidents, compensation, etc these days.

I see that Quindell has got the extremely high Debtors which caused Accident Exchange (and Helphire) to unravel. In essence in both those cases the profits were an illusion, and were pretty much all subsequently written off as bad debts. Quindell looks too similar to me. Bargepole. Do let me know if I'm misjudging Quindell, as it's only based on a cursory glance.

Hydro International (HYD) has always intrigued me - they have innovative products for controlling waste water - but it somehow never seems to really get off the ground. Interims this morning reinforce that view, with disappointing underlying EPS more than halving to just 2p. They do have net cash of £3.6m, but the mkt cap of £19m looks hard to justify on these figures.

They emphasise that trading is expected to be heavily H2 weighted, but there's a lot of catching up to do, to meet 12.9p consensus FY EPS. Hence not for me at this stage.

I've never liked textiles hire & dry cleaning business, Johnson Service Group (JSG) because it carries a lot of debt, has a pension deficit, and seems to be permanently restructuring. Trouble is, the write-offs have been so large that it makes you wonder if any of the profit in the good years is real? I can't see anything exciting in their interims today, although the H2 outlook sounds reasonable.

Futures have improved nicely in the last hour, from flat, to a FTSE100 start up 17 points. My main stock picks, Trinity Mirror, Home Retail Group, and IndigoVision are all doing well, and I have high hopes for further gains from all 3.

Monday, September 3, 2012

Mon 3 Sep - STAF, KFX, CUP

Good morning. Today I shall be concentrating on Staffline (STAF), the recruitment & out-sourcing company which has issued interims today (please note I hold a small number of STAF shares). I shall be attending their private client broker lunch today, and will report back either tonight or tomorrow on how the meeting with management went.

Mkt cap is £54.3m at 237p a share.

The reason I hold shares in Staffline is simply because I think the shares are cheap! It looks a good company on a low valuation, which during a time of depressed economic activity means that it could look very cheap once the economy recovers, as it will at some point (we just don't know when).

Turnover has risen strongly, but the gross margin slipped from 11.8% to 9.3%, resulting in flat operating profit before amortisation of £3.8m. A couple of points to bear in mind - the fall in margin is due to known factors - start-up losses on new contracts, and investment in their welfare-to-work division, which is working for the Govt on a payment by results model (so initial losses are expected).

Most importantly, they reiterate expectations for the full year, and given that it's an H2 weighted business, this should mean profit of £10.3m for calendar 2012, EPS of 34p, so that puts the business on a rather cheap PER of 7 times, and a divi yield of 3.1% (with 7.4p expected for the full year).

Even though it's a group growing by acquisition, they only have net debt of £8.4m, which is less than 1 years profit, so doesn't concern me.

Most smaller recruitment companies are cheap, but at the moment Staffline is my favoured pick from the sector. To my mind the company warrants a valuation of a PER of about 12, hence that implies potentially 408p target share price, as opposed to 237p currently. Nice upside, and I don't see much risk here, other than the usual sector risk of clients going bust, legislative changes, etc. Although the wind is blowing in the right direction on that front, because it's precisely the never-ending waves of employment legislation from the EU which are driving businesses to instead use out-sourcing (thereby circumventing a lot of the problematic rules). As usual well-meaning Govt & EU  interference has the opposite effect to that intended (i.e. making jobs less secure, when trying to do the opposite). Will they ever learn?

There's an excellent, punchy, one-page broker note from Liberum Capital here on Staffline's website;
In my opinion that's exactly how it should be done - keep broker notes as short & sweet as possible, just giving the key opinion, and key numbers, all on one page. It would save so much time if more broker notes were done like this.

Software company Kofax (KFX) ended their year with a flourish, with decent Q4 figures announced this morning. Might be worth a look, as the valuation seems undemanding for a potentially exciting growth company (if that's what it is, I haven't looked in enough depth to find out, but the Q4 figures look good enough to make me take a look later).

Another company I've always liked the look of, but never got round to buying any, is online dating company Cupid (CUP).
It's a sector that is coming out of the shadows, with online dating now being so popular that it's no longer seen as disreputable. Plus of course people are prepared to pay, in order to find their soul mate.

On the downside, a bit like online gaming, there is a constant churn of customers, meaning that high marketing spend is needed to constantly replace customers who drop out of the system.

Strong top line growth is reported, and interestingly it's mainly organic, driven by "intelligent and targeted marketing spend".
However, at the EBITDA level it's only flat. Nice strong balance sheet with net cash.

They generate most of their profits in H2, and weight marketing spending into H1, hence results are lop-sided. They reiterate expectations for the full year, which are 15p EPS (double that of 2011!), so this puts the shares at 207p on a PER of 13.8 - looks cheap to me for a company growing organically at such a rapid rate.

Run out of time, that's it for the moment, have a good day!