Friday, September 14, 2012

Fri 14 Sep - IMTK

We had a terrific evening at FinnCap last night, at my good friend David Stredder's quarterly investor evening, called Mello Central. It really is amazing all the functions that David organises for investors, all at no financial gain for himself, and at no cost to investors. We're very lucky to have him in our community.

Unfortunately people kept re-filling my glass, and I think it's terribly rude not to drink something once it's put in one's hand. Hence my market report being a tad late this morning, my apologies. Thank you also for all the terrific feedback last night, the funniest one was from "Fugwit" on advfn's bulletin board, who told me that this Blog enables him to stay in bed for an extra hour each morning, as I do the work for him & he gets up feeling like he's already done some work, once he's read this Blog on his iPad in bed! Made me chuckle!

Thankfully it's a very light day for results, just a couple for me to cover here.
Let's start with Imaginatik (IMTK) a £2.75m mkt cap tiddler which has put out a positive-sounding AGM statement. The only reason I mention such a tiny company is because we met the management at Mello Central last night, and to say we gave them a hard time is putting it mildly! It's a consulting & software company, based in America, which has spent the last 16 years burning cash & failing to demonstrate that it has a workable business model. So quite why investors keep putting money into it, is beyond me. However, the charismatic American CEO made a good case for businesses innovating, but didn't demonstrate that he has a viable business. So it's not one for me, although I was surprised afterwards at how many sensible investors were intrigued by the concept, and encouraged by recent contract wins. My view is that turnover is for vanity, and profits are for sanity, so given that there was no information on whether new contract wins are even being done on a positive gross margin, then it could be the case that more turnover just means greater losses? It looks a basket case to me, so I won't be investing. Although they have some smart people on their shareholder list, including Hargreave Hale, my old broker, who are very shrewd.

There are some other results this morning, but are all in sectors that I don't cover. To reiterate, here is an explanation of what is & is not covered here.

Let's look at the top rises & fallers of the day so far, of the sectors I follow.

Daily risers;

1. Corac Group (CRA) +22% - no explanation for the rise, no announcements.
2. Mobilityone (MBO) +22% - interim results well received.
3, 4 & 5 are resource stocks.

Daily fallers;

1. 2Ergo (RGO) -42% on a Placing announcement. I held these a while ago, when they were a lot higher, but it failed to deliver on what it promised, so I sold. Not going to revisit.
2. Mobilewave -25%
3. Pathfinder Minerals - 25%
4. Aerte Group -19% - looks a basket case.
5. SocialGo - 18% - also looks a basket case.

That's it for today, have a great weekend everyone & I'll see you again on Monday morning, unless I muster up the excitement to write about anything over the weekend.

Thursday, September 13, 2012

Thu 13 Sep - Part 2 - ECK, RGD, John Lewis, UNG, EKT, DNLM, CAU, NXT

Right, after all the excitement of HOME's positive Q2 trading statement is out of the way (bizarrely, the shares have gone down, so I've bought some more), we can carry on and have a look at some of the other results out today.

Eckoh (ECK) have once again put out a contract win statement with no financial details. This is poor stuff - it's PR froth, with no detail about the materiality of the contract (with Whitbread for Premier Inns). The danger with this type of announcement is that it builds investor expectations too high, which then leads to sell-offs when results come out.

Also logic would dictate that if you announce every significant contract win, then you should also RNS every time a significant customer declines to renew a contract. Have they ever done that? I'm not going to check back, but would be very surprised if they did (other than for a profits warning).

The RNS should only be for material trading items, not for spin. So Eckoh get another thumbs down for me on that front, for the second time in a few days.
Whoever does their PR needs to rein things in a bit, in my opinion. Sometimes, less is more. The RNS should be used for factual, material, information only. Expectations should not be artificially raised through repeated contract win announcements, unless they are materially improving the expected profits. Let the numbers do the talking every 6-months, not contract announcements in between, unless they are material to results (in which case that should be stated in the RNS, which it isn't here).

People who spotted Real Good Food (RGD) in early 2010 have done spectacularly well, with a 10-bagger on their hands. A lot of friends are in this stock, but it's never got me excited. I don't like the food production sector generally, as margins are too low & volatile. Also RGD has quite a bit of debt, hasn't paid a divi for years (according to Hemscott), and is now on a PER of 11. Can't get excited about that at all. Their AGM trading statement today sounds reasonable, with a strong Q1 and "a flatter second quarter", and expectations of an "exciting" Q3. On track to meet full year expectations.

I don't know why they announce results on the RNS, as they are not Listed, being a Partnership, possibly just to brag and say, this is how to do it! The John Lewis Partnership - the favourite shop of the middle class - reports sparkling interims to 28 July - revenue up 8.6% to £3.9bn, operating profit up 46.6% to £163.5m. Most of the profit comes from Waitrose.

This really IS how to do it - pay staff a decent wage, give them a profit share as owners of the business, results in motivated & long-serving staff, who want to give decent customer service as they feel involved & happy.
Whereas pretty much all other retailers are stuck on the treadmill of paying lousy wages to miserable staff, who then have to claim tax credits & housing benefit to survive, and the taxpayers expense!

We are long overdue a total re-think of the disastrous low-wage, state hand-out economic model here in the UK, designed to boost short term corporate profits, at everyone else's expense. You either close the borders, to prevent the large influx of cheap labour (simple supply & demand), and/or raise minimum wage to a level that people can actually live on. It will save money in the long run, as less support from the taxpayer will be needed for the low paid & more people will come off benefits.

The John Lewis model is perfect - I believe we need serious tax incentives for businesses which structure themselves either as partnerships, or hybrids where employees own say 50% of the business. I've always voted Tory, but find them now bereft of ideas. Belatedly the Labour Party are actually coming up with some sensible policies, even though they got us into this mess in the first place. You can't have open door immigration, and laissez-faire economics, or it just drives down wages & makes life miserable for millions of people. We need to protect & help the people at the bottom, by giving incentives & managing capitalism better so that wages are allowed to rise at the bottom.

£6m mkt cap tiddler, Universe Group (UNG) reports decent interims today - EBITDA up 31% to £950k. It's below my usual £10m minimum mkt cap, but it's mentioned because I'm meeting management tonight as one of the 4 companies presenting at Dave Stredder's "Mello Central" quarterly evening - see my Blog entry on Tuesday for details if you would like to attend - I think there are still a few places left. Shares in UNG are up 37% at 3.25p at the time of writing.

Interims to 31 July from Elektron (EKT) haven't gone down well, with shares down 17% to 16p at the time of writing, for a mkt cap of £19m.
Adjusted EPS seems to be running at about 1p per half year, so that puts them on a PER of 8. They have £4.6m of net debt. The outlook statement doesn't look great, and the interim divi has been passed, so nothing to inspire me here.

Yet another excellent set of figures from out-of-town homewares retailer, Dunelm (DNLM). LFL sales up 3.1% for the year ended 30 June 2012, and an impressive 20% rise in fully diluted EPS to 35.1p.
At 632p that puts the shares on a decidedly warm PER of 18. But they are increasing the divi, and paying a special divi of 32.5p a share.
Great company, but how much upside is there left in the shares? And what happens if something goes wrong? A high rating is always an accident waiting to happen in my view, which is why I tend to usually avoid them.

The market seems to like results for y/e 30 June 2012 from Centaur Media (CAU). Adjusted basic EPS is up 24% to 4.2p, but they do mention acquisitions, so not sure how much (if any) is organic growth. They moved from net cash to net debt of £7.2m in the year due to acquisitions. They also mention a significant acquisition after the year-end for £12m initial consideration, and further performance related consideration of up to £38m! Wow!! That looks a bit scary for a £58m mkt cap company, so think I might give this one a miss.

Retail stalwart Next (NXT) delivers a decent set of interims. Very reliable performer this one. Also bear in mind that their long-term strategy has been to pay divis and do large & continuous share buybacks, which constantly drives up EPS each year. A potentially risky strategy, but it works for them, and their shareholders, who've done very well out of it over the long-term.

Despite the good results, shares are down 6% at £33.51 each (time for a share split methinks!) due to stating that "August and early September sales have been disappointing during what has been an unusually quiet period".
This is probably causing read-across to other retailers today, e.g. HOME which is down a similar amount, despite reporting improving trends today.

Right that's all I can manage today, too many numbers spinning around my head! Hope to see some of you at Mello Central this evening, do come over and say hello if we haven't met before.

Thu 13 Sep - Part 1 - HOME

Good morning. Lots of results again today, so I'll only be able to cover some of them. The most important one (by far) for me is Home Retail Group (HOME). As regular readers will know, it's one of my main share picks, where I identified the deep value in the balance sheet as a catalyst for a re-rating once the trading position stabilised. HOME shares provided a tremendous, and illogically priced bargain at around a 70p double-bottom earlier this year.

They have since rallied to around the 100p level, and I suspect today's Q2 Trading Statement might well provide the catalyst to take the shares up to 120p+ in the coming weeks.

As I hoped, trading has indeed stabilised, in fact the key like-for-like ("LFL") sales measure - which strips out the impact of new store openings, closures, and refits/expansion of shops - has actually turned positive in Q2, by 1.4%. This comes on top of a broadly flat LFL sales performance in Q1 of -0.2%.

Gross margins were down slightly, by 75 basis points (e.g. that means a move from, say 40.5% to 39.75% - made up numbers, just to explain the basis points principle to anyone not sure of the terminology).

These are my back of the fag packet calculations, to examine what effect the change in LFL sales & gross margin has on LFL gross profit. Pleasingly, it shows that the Q2 overall position is improved from Q1 slightly.
I couldn't copy paste my spreadsheet here, so here is a link to the spreadsheet on GoogleDrive.

As one of the brokers covering HOME pointed out last week, if HOME can at least show a stabilisation in trading (which it has), then that should trigger a further re-rating of the shares. This is because, even after the strong recent rally, the market is still only valuing HOME at average net cash + debtors. Thus valuing the operating businesses at nothing! Given that we now know trading declines have been cyclical, and not structural, that is a nonsense, and the shares should be significantly higher.

Also note that Argos continues to win the internet war, with multi-channel sales now up to 52% (from 47% last year). So I remain of the view that HOME is the cheapest internet retailer out there, and remains a bargain in my view. Remember you heard it here first - I've been banging on about this since June, so nice to see the brokers catching up!

More later, gonna publish this just before mkt opens.

Wednesday, September 12, 2012

Wed 12 Sep - KGF, HOME, ALY, THT, AVG

Good morning, let's try a new font! (I'm bored with Verdana, so we'll have Helvetica today).
Another busy morning for interim results. Large cap (£6.5bn at 272p/share) retailer Kingfisher (KGF), owner of B&Q, reports a £68m (15%) fall in interim profits, due to adverse currency movement £25m, record wet weather in UK/N.Europe £30m, and £10m for the roll out of new products (that one's a bit lame!). Will be interesting to see what (if any) read across there will be for Homebase owner, Home Retail Group (HOME), which regulars will know has been a firm favourite of mine from the recent lows of 70p to its present 97p (trading statement tomorrow, 13 Sep from HOME).

KGF have followed the current trend for giving a programme of common sense profit improvement ideas a cheesy name - in this case they refer to it as "Creating the leader". They've even got a second cheesy name for their customer service ideas called, "Better Homes, Better Lives", so someone in Marketing at Head Office has obviously gone on some courses & drank too much coffee! I jest.

HOME reported in Q1 that sales at Argos were flat, and that profit for the group would be in line with market expectations. So if they even report continued flat sales in Q2, then that should trigger a re-rating. So fingers firmly crossed for tomorrow.

Laura Ashley Holdings (ALY) issues remarkably solid results - I thought this brand was a hangover from the 1980s, but apparently not. In the 26 weeks to 28 July they delivered impressive LFL UK sales up 3.9%, when most are struggling to get into positive figures at all that is impressive. They have net cash of £27.8m, and pay a maintained 1p interim divi. LFLs accelered in the current period so far (8 Sept). Over 40% of their product is manufactured in the UK, so a business worth supporting. Outlook is "confident". The shares look reasonably good value too, on a current year fc PER of about 11.

A third retailer reporting this morning is Thorntons (THT), the struggling chocolatier.
At 27p/share the mkt cap is £19m, but the results for 53 weeks ended 30 June 2012 don't look good. They scrape in just above breakeven at the pre-exceptional level, at £0.9m profit (prior year £4.3m), not good on £217m turnover. The bigger problem though is net debt, which has risen to £29.1m. How do you repay debt if you're not making any money? There is also a £29.1m pension fund deficit. There is no dividend. It is difficult to see any value at all in the equity, given the net debt & pension fund deficit, unless you believe a strong trading turnaround is in the pipeline. A glimmer of hope is that they have a strong order book for commercial customers.

£22m mkt cap component manufacturer, Avingtrans (AVG) has had a good year ended 31 May 2012, with turnover up 21% to £44m, and fully diluted, adjusted EPS up from 5.5p last year to 7.5p this year. At 85p the shares look reasonable, although bear in mind that net debt is up to £8.4m, so over a third of the mkt cap. Big rise in final divi from 0.4p to 1.0p, although that's still quite a low yield. Might be worth a further look?

Cracking results from housebuilder Barratt Developments for y/e 30 June. But given how ludicrously overpriced UK housing still is, propped up by a shortage of supply & record low interest rates, I can't bring myself to look at this sector. Far too high risk in my opinion.

Reckless punt of the day is Chariot Oil & Gas, which I have had a dabble on at 31p, following my friend Paul Curtis, who is a genius in this sector, who Tweeted to say he's bought in around that price.

Gotta dash, am on an IT course today to learn WordPress. Have a good day!

Tuesday, September 11, 2012

Tue - 11 Sep 2012 - HFG, BET, SGP, BRBY, ECK, Mello Central

Good morning. A moderate down day in the offing, with the FTSE 100 Futures off almost 30 points at 5765, on nervousness about (yawn) the Eurozone crisis yet again - in particular whether the German constitutional court will do something bad, concerning bail-outs one assumes.

Hilton Food Group (HFG) is capitalised at £211m at 298p a share. I rarely invest in food companies, because the power all lies with the supermarkets (which function as an oligopoly and squeeze out most of the profit in the supply chain). HFG shows volume & turnover up both up around 10%, but profits and EPS flat at 12.8p for the interim period, so full year looks to be around 25p. Shares on a PER of 12, looks about right to me. Forecast 4% divi yield looks OK. I note that net debt is falling quite rapidly, the progression being £24.8m, £18.7m, and £14.9m over the last 3 consecutive half years. Looks OK, but doesn't excite me on growth prospects or valuation.

Even though it's above my normal size, Betfair (BET) results are always interesting, as it's such an innovative & interesting company, with a brilliant betting platform. At 748p/share the mkt cap is £766m. As you would expect their Q1 (to 31 July) IMS is strong, given the summer of exceptional sporting activity. Sports betting is up 21%, and remember that as purely a middleman, BET are not dependent on luck - all bets are matched between 2 parties, so they make money regardless.

Mobile is absolutely key for growth in everything these days, and sure enough mobile revenue is up 98% in Q1. Any consumer-facing business that is not doing well in mobile is probably going downhill fast - absolutely vital area as people now use their smartphones as mobile computers.

Q2 so far (Aug-now) is actually down 2%, so the question is has the business gone ex-growth, or is that just an expected hangover after the Olympics? The fwd PER is 19.4, so that prices in some growth, although not stellar. Will be interesting to see how the market reacts, but it's difficult to see any justification for chasing the price any higher.

SuperGroup (SGP) is a share I've dabbled in, in the past, and usually made money buying as a short-term trade, after the big sell-offs, although I missed the last big bounce. Their IMS for Q1 (3m to 31 July) shows group sales up 10%, and retail LFLs up 1.7% in the UK - not bad as the weather was so poor, which is a major factor for clothing retailers in the summer particularly.

Wholesale is down 5.6%, but they cleverly refocus attention on the current order book, which is 7% up (nicely done, whoever wrote this RNS knows what they are doing!). Overall they reiterate they are on-course for the year so far. At 531p a share that makes them look good value to me, on a fwd PER of about 11.5, I would have thought the shares could carry a PER of 14 or 15 given the international growth potential?

Another fashion brand, this time Burberry (BRBY) puts out a mild profits warning, with Q2 LFL retail sales flat, and new space adding 6% to the total. They now expect profit for y/e 31 Mar 2013 to be "around the lower end of market expectations". That leaves a forecast PER of 19 looking decidedly warm. £6bn mkt cap too! Wow. Apparently the Chinese absolutely love Burberry, so a slowdown/crash in China is something to consider here too. Not one for me, unless the PER gets down to about 12.

Speech recognition company Eckoh (ECK) announces a contract win with Serco, for a public sector project, but doesn't give any indication of how material the contract is. That bugs me a little, because it comes across as using the RNS as a PR tool, rather than helping investors understand the actual performance of the company. A lot of companies do this though.

David Stredder's "Mello Central" quarterly investment evening (hosted by FinnCap) is happening this week, in London, at 5:00pm (for 5:30pm start) Thursday evening. Usually around 50-75 investors & city people go to these evenings, which are informative & enjoyable, with free drinks and buffet laid on afterwards.
I'll be there, so if you'd like to say hello, please do so!

To book yourself a place, please email your details to: (NB. you must put the word "meeting" in the subject line, in order to get through David's highly sophisticated spam filter!).

Once you are booked in, come along to FinnCap's offices at:
60 New Broad Street, London EC2M 1JJ . A short walk from Liverpool Street station/tube. 

There are 4 companies, each doing a 30 minute presentation this Thursday, as follows;

  • Universe Group
  • Trifast
  • Imaginatik
  • Avingtrans

I find it very useful meeting management, and understanding their businesses better, even if I rarely invest immediately, sometimes I do after subsequent results. Also, there is a Q&A session after each presentation, and you can of course chat to mgt & other investors over a glass or two of wine afterwards. It's all pretty friendly & relaxed.

Hope to see some of you there!

Let's have a quick look at some of the main movers this morning;

Top 5 risers;

1. Summit Group (SUMM) up 30% at 3.25p (£10m mkt cap) - very interesting-sounding license deal announced with Bristol-Myers Squibb.
2. Silence Ther. (SLN) up 12%
3. Reneuron (RENE) up 10% on a trading update.
4. ILX (ILX) up 8%
5. Havelock Europa (HVE) up 7.5% on its half-yearly report.

Top 5 fallers;

1. Aerte Grp (AER) micro-cap down 32% on dreadful-sounding trading update.
2. Burberry Group (BRBY) pretty savage reaction (down 17%) to mild profits warning.
3. Conti Coal (COOL) down 15%
4. Sefton Res. (SER) down 15%
5. Johnston Press (JPR) down 11% to 5p, which is 5p too much in my opinion since their debt is never likely to be repaid.

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

Monday, September 10, 2012


Good morning! Plastics Capital (PLA) has put out a trading statement today, confirming that they are trading "broadly in line with market expectations", which I always presume to actually mean slightly below! The rest of the RNS gives encouraging information about new contracts, but that this is essentially replacing lost or reduced business from existing clients. Therefore PLA appear to be holding their own in difficult markets, but no more than that.

In my opinion that's an OK situation - a business that can hold its own in difficult macro conditions should be able to do well once growth returns. Myself and David Stredder did our first "Mellocast" interview with the Executive Chairman of this company, who explained the company very thoroughly and eloquently I thought in our videos here.

The numbers for PLA look pretty good - it's on a current year PER of just 5.3, although bear in mind there's a fair bit of net debt - although that dropped significantly last year to around £10m, so could well come down to about £7m this year - manageable at around 2 times profits (roughly). I think the key outer to a higher share price here is probably growth resuming, and/or a bigger dividend (currently only 1.5% fc yield). But if you take a long-term view, then I could see PLA being a useful share to put in a SIPP, but as always DYOR!

Incidentally, David & I are hoping to do some more Mellocast videos in the coming months, when time permits, as the PLA one was so well received - a really good format for remotely meeting the management. Also the key differences with the Mellocast videos is that they are conducted by investors for investors - as opposed to some commercial presenter who hasn't got a clue about shares or investing just asking pre-prepared questions. Ours instead was a real meeting between investors and management, with no prior consultation on what questions we'd ask, and a lot of it was done on the fly in response to what the Chairman said. So a real meeting, as opposed to marketing fluff - totally unique, nobody else is doing this.

David & I are only interested in interviewing companies that we think offer excellent or very good value as investments for our own portfolios (although they are not recommendations to anyone else). So we're being highly selective in who we are prepared to interview! It's a don't call us, we'll call you approach!
I'd love to interview Staffline's CEO, and we're talking to them about that possibility later this week - that's my no.1 choice for the next Mellocast interview, so hopefully we can persuade them to say yes!

£14m mkt cap marketing company, SpaceandPeople (SAL) puts out interims to 30 June which are well ahead of last year in % terms, but so tiny it's probably best not to draw too many conclusions, with £437k operating profit on £5.1m turnover. However, they are an H2-biased business, but do give an in line outlook statement, which would put them on a PER of 8.9 and a divi yield of 4.2%, which looks reasonable. Although I tend to look for a PER of 6 or under when getting down to companies this small, as they are more accident-prone, often due to being reliant on a smaller number of customers than larger companies.

Small cap (£23m) recruitment company Hydrogen (HYDG) delivers interims that are a whisker ahead of the prior year H1, and an in line outlook statement. That  makes them look good value on a forecast PER of 7.4, with a useful 4.6% divi yield. The balance sheet looks pretty solid too, with a bit of debt, but well covered by debtors.

This is a competitive, low margin sector, but since the PER is low at this stage of the cycle (macro activity depressed), then it strikes me that there should be good upside in a recovering economy. Therefore I like cheap recruitment companies for their cheapness now, and upside in a cyclical recovery. Staffline remains my favourite in the sector, as it has better upside due to new Govt contracts, whilst being one of the cheapest on existing earnings PER basis.

Encouraging interims are announced by Christie Group (CTG) with a 67% increase in H1 operating profit to £1.0m, although it should be noted that on turnover of £30.2m (up 11%) that's a thin margin. Could be interesting if they also manage to deliver a good H2. Might be worth a closer look, as I note that they delivered much higher profit figures pre-credit crunch. So if a return to anything like those figures is on the cards, then the shares could look cheap. A small interim divi is restored.

Interesting announcement from DQ Entertainment (DQE) the Indian animation company, have done a deal with Burger King to use the Jungle Book characters in their marketing. I've always been a bit suspicious of DQE, and rejected it a while ago as a potential investment due to concerns over cashflow & credibility of the profits. Might revisit their figures, although usually I don't touch smaller foreign companies listed on AIM, as so many seem to fail, and after some bad experiences, once bitten & all that.

Impressive results for Murgitroyd (MUR), the European Patents company. Basic EPS up 19% to 36.4p for y/e 31 May 2012. Shares have bounced up 8% to 420p, but if that sort of growth can be maintained, then it could be interesting.