Thursday, September 27, 2012

Thu 27 Sep (part 2) - NARS

Good morning again! Terrific reaction to IND's Special Dividend, and positive outlook, with the shares up 57p to 410p. That's still cheap in my view, since shareholders will get 75p in total divis in Nov 2012, meaning that the net cost of the shares (if bought today) would be 335p. With 7.5m in issue that's a mkt cap of £25m, which looks cheap to me for a business that has just spelt out a strong outlook, which could lead to profits doubling this year from £2.7m to potentially over £5m.

I still can't get over how confident IND's CEO must feel, that he's happy to hand out pretty much all the cash pile to shareholders - remember that the current CEO was the former FD who carefully built up that cash pile over several years. So to hand it out, tells you he's really confident about the company's prospects.
A very bullish signal in my opinion.

Have to dash for a train soon, so just a quick reaction to a few other results.
Nationwide Accident Repair Services (NARS) announces interims which are not too great. Revenue down 13% (but down 4.7% on a LFL basis), and underlying EPS down from 6.1p to 5.0p. Net cash of £8m.

However, the elephant in the room with this company is the pension deficit, of about £27m. They use a frankly disgraceful, and totally misleading accounting treatment for pension deficits, called the "coridoor approach". I would call it something a lot stronger, indeed it distorts the balance sheet to such an extent that the figures are materially false and misleading.

Shame on this company for using such a misleading accounting treatment (which disregards a £27m pension deficit, and instead shows a completely fictitious £11.7m pension fund asset on the balance sheet).
Shame also on the auditors for signing off such misleading accounts. It may be within accounting rules, but the figures are so misleading that the true & fair over-ride should have kicked in. This accounting treatment is being outlawed from 1 Jan 2013, so subsequent accounts will have to be restated to show the true position, which is negative net assets, not the £27.7m false net asset figure published in NARS accounts today.

Drat, lots more results to look at, but haven't got time. Most of them seem to be resource companies anyway, which of course I don't cover here. Have a good day everyone! Regards, Paul.

Thu 27 Sep (part 1) - IND results

Good morning. The focus today (for me) is on IndigoVision (IND) final results for y/e 31 July 2012. My journey with IND began in 2004, when the shares were a completely bombed-out wreck from the TMT boom & bust. I spotted the potential in the company, and the early stages of growth, and bought 8% of the company. It was a helluva risk at the time, as that was pretty much my entire portfolio in one share, but it paid off handsomely, with IND being my meal ticket for the following 5 years - the shares went from under 50p to peak at £10.

Of course, we all know what happened next, with the credit crunch - share prices were pole-axed, and despite putting in solid performances for several years, IND's share price collapsed from £10 to just £2. This absolutely crushed my portfolio, as even though I'd sold some on the way up, I made the terrible mistake of gearing up on the balance, which multiplied the downside, financially crippling me.

I don't mind being completely open about this, as I hope it stops other people making the same mistake - excessive gearing is a big mistake, and gearing combined with large positions in illiquid small caps is a highly toxic mixture that will, sooner or later, become a disaster. The worst thing was that the market dried up in 2008, so I couldn't sell even if I'd wanted to, so it was just a slow-motion train crash as my portfolio was slowly crushed.

Still, life goes on, and we never stop learning, so this has proved a valuable if painful lesson, learned the hard way, about not using gearing with illiquid shares.

However, I've always believed in IND's potential, although frustratingly they also scored some own goals with product quality issues arising from badly designed new products a couple of years ago, leading to an extended period of troublesome warranty claims & reputational damage.

Questions began to arise about the founding CEO, until in a bizarre Board Room coup, he was ousted after trying 3 times to buy the company on the cheap with a Venture Capitalist. It really was bizarre, given that he owns about 23% of the company, normally an unassailable position. The FD, Marcus Kneen was promoted to new CEO nearly a year ago, and has implemented a more rigorous management approach.

Note that at 352p/share, with 7.55m in issue, IND's mkt cap is £26.6m

So that's the background, what are the figures like this morning? Well, the figures were pre-announced in last month's trading statement, so there are no surprises there - turnover is up 5% to £30.3m, operating profit is up 123% to £2.7m (although that reflects more on H2 of the previous year being bad), and adj EPS tripled to 25p/share.

Pretty good so far. The final divi of 5p makes 10p for the year, up 33%.
The real surprise however is a fabulous Special Dividend of 70p/share! This is amazing since IND has carefully husbanded its cash pile, which has risen to £6m, or nearly a quarter of the mkt cap. The rest of the balance sheet is extremely strong too, with only £4.8m total creditors (both current and long-term). The special divi works out at £5.3m total cost, so amazingly IND are giving away pretty much their entire cash pile to shareholders.

This really is amazing, because mgt have traditionally been so cautious. Therefore they are sending a very clear signal that the business is doing well, it's difficult to imagine a more confident action.

This is backed up by the crucial narrative to the results. With this type of share, outlook is everything. Since they operate on 59% gross margins, it only needs a fairly small increase in sales to deliver a big increase in profits (which is what attracted me to the shares in the first place, together with world-leading video compression technology).

The outlook section sounds decidedly upbeat. Current year (7 weeks so far) has seen double digit sales growth, and this sentence intrigued me,

"Over the next 18 months, management is clearly focused on achieving growth rates at least equal to those of the markets in which IndigoVision operates. Whilst forward visibility of future sales remains relatively short, at this early stage there is every reason to believe that the current year will be a good one".

Combined with the special divi, that sounds great to me. They mention 20% p.a. market growth elsewhere in the report, so this is clearly signalling that we can hope to see 20%+ sales growth this year. That means potentially a £6m rise in turnover to £36m, and at 59% gross margin that equates to operating profit rising from £2.7m to £6.2m this year! Of course there would be some extra overheads too, so take off maybe £1m for that, and you still arrive at a doubling of profits this year from £2.7m to around £5.2m+.

The market would then put the shares on a growth PER (maybe 20-30?), in line with other growth companies), and that works out at almost 50p EPS even on a notionally fully taxed basis. So by my calcs that gives potential share price upside on this year's earnings to £10-15/share. Plus the market would then factor in some future year's growth too, and we could be heading towards my original long-term target of £25-30 a share (which is £187-225m mkt cap).

People have ridiculed me in the past for having such a racy share price target, but if you crunch the numbers, decent growth and a growth company PER could get us there in say 1-2 years. Indeed, the report today gives a tantalising glimpse of the upside case, when the Chairman opens the narrative with,
"These are excellent results from a business with the potential to be much larger. Extensive changes to the business, both completed and planned for the current year, are designed to position it for future growth".
So overall I'm expecting a decent share price recovery from IND in the coming weeks, as these results sink in. Certainly it warrants a 500p+ price before the Special Divi, which will be paid to shareholders on the register on 2 Nov 2012. After that, who knows? The upside case just became a lot more credible, and this could I think be a very exciting time for we IND shareholders.

OK, I'll publish this, then come back to look at some other company results. Have a good day everyone! As an aside, I got my first ever payment from Google for advertising revenues, for the first 2-3 months of this site running, a whopping £106! So thank you to everyone who has taken an occasional interest in my sponsors' messages! It's not the amount that matters, but more the fun of being paid something for doing what I enjoy & what other people seem to find useful. I shall put it towards a new laptop (going to try a Chromebook, as I'm moving rapidly over to the cloud & love all Google's services).

FTSE futures are looking a bit healthier, with a rebound overnight, IG are currently forecasting us to open up 17 points to 5791.

Best wishes, Paul.

Wednesday, September 26, 2012


Good morning. Another busy day for results, loads to cover.
Let's start with Snoozebox (ZZZ) love the ticker! This is one of my stocks, which I wrote about here on 14 July as a "speculative share idea".
They operate Patented mobile hotels, using converted standard size shipping containers. The concept appears to be taking off, so it's a roll-out story as an investment, with some future growth already priced-in. I hold a few shares in ZZZ. At 44p the mkt cap of ZZZ is £22.6m.

The interims to 30 June are not terribly informative, as they traded with 280 rooms from May 2012, whereas the full inventory of 520 rooms is available for the whole of H2. They raised £12m at an IPO in May 2012, and after a surge to 55p the shares are now back down to the IPO price of 45p.

The narrative really is an excellent read, with many events having successfully deployed a Snoozebox temporary hotel, and ALL recurring events attended in 2012 have re-booked for 2013. Examples include Silverstone Grand Prix, Isle of Man TT, plus one-off events like the Diamond Jubilee Pageant and the Olympics.

Less glamorous, but more important to earnings are corporate year-round deals, since occupancy (especially over the winter) is key to making the business model work.

The H1 loss of £1.7m should in my view be seen as start-up losses, and the outlook is that management are confident of meeting market expectations - which are for a £0.35m loss in 2012, and a £2m profit in 2013.
So overall that looks OK to me, providing they don't run out of cash. It's an exciting concept I think, so might buy some more, especially if the market reacts negatively to the H1 loss today.

I've always liked Andrews Sykes Group (ASY) - it's an aircon & pumps hire business. Bizarrely, they keep buying back their own shares, to the point where the free float is now tiny. At 178p the mkt cap is £75m, but 89% of the shares are owned by EOI Sykes Sarl and the Directors. Which perhaps explains why the shares always look cheap, and are currently on a PER of just 6, despite being net cash of £12.6m, and having delivered good solid results today. It's a terrific business though, churning out reliable cashflow every year, and occasionally they pay out a large special divi. The ownership structure will put off many investors, which is a pity as the company itself is surely worth around 300p a share (10 times earnings).

Under pressure from large shareholders, speciality foils business API Group (API) has put itself formally up for sale. Although it's been informally up for sale for most of 2012 already, so one cannot help thinking that anyone who wanted it might have made their move by now? That said, the shares look good value at 64p, which is only 7 times this year's forecast earnings, and less than 6 next year's. They have repaid most of their debt in recent years too. So might be worth a look?

Whenever you see a trading statement from Domino's Pizza (DOM), you just know it will be good. Today is no exception, with their Q3 IMS hitting the right buttons, with continued LFL sales growth, of 3.7% in the UK for Q3. Recession, what recession? They are confident of achieving full year profit, which is good since the share price of 563p puts them on a worryingly high PER of almost 27 times! Much too racy for me, although it is a fantastic business.

IT consultant Scisys (SSY) delivers reasonable interims, with adj operating profit up a smidge to £1.3m for H1. Net debt almost paid off, down to £0.8m. The outlook sounds solid, so at 57p I make that a current year PER of about 8. Reasonable, but not massively exciting in my view. Quite a low margin business. Divi yield unremarkable at 2.3%.

Topps Tiles (TPT) reports an improvement in sales trend for Q4 (ending 29 Sept), achieving +3.7% LFL sales - not bad going at all. That's a good improvement on full year LFL sales decline of 1%. Profits are expected to be "broadly in line with consensus", i.e. slightly below. Why can't they just be honest, and say slightly below? I hate this "broadly in line" BS that so many companies use. But I suppose it gives a bit of wiggle room in case of audit adjustments. Still, not a bad performance given economic conditions. PER is about 9, which given the very weak balance sheet, doesn't seem especially cheap to me.

£20m mkt cap jam tomorrow company, Oxford Advanced Surfaces (OXA) delivers lousy figures, with barely any turnover. It has £5m cash, but appears to be burning around £1.8m p.a.. Why people still pay premium prices for blue sky shares is beyond me, when practically all of them fail to deliver on the hype, or the timing. Having been burned many times before, I am now deeply sceptical about all blue sky investments. I'll stick to solid, cheap cashflows elsewhere thanks very much.

I was staggered to discover that Ken Brooks' 3DM with its "PIM" process (another blue sky company that serially disappoints) is still going! Under the name of Environmental Recycling Technologies plc (ENRT). It's still burning cash, and delivering no commercial results. But now is loaded up with debt from a funder called Oxford Capital, who are owed £5.5m. The mkt cap is £11m, so there are still some believers out there. I wonder how much longer it can carry on?

Very nice IMS from Porvair (PRV), saying that they "continue to trade well", and that the full year is expected to be ahead of market expectations. Can't argue with that!

Have a good day everyone. Regards, Paul.

Tuesday, September 25, 2012


Good morning. Surprised to see Becky Worthington has resigned from Quintain Estates (QED), to start her own business. Not quite sure what to read into that, although it did seem a bit crowded at the top at QED.

Am having my usual morning battle with a Dell laptop that likes mornings even less than its owner. Random crash no.1 of the day is now behind us. Moving on, I like the results from Regenersis (RGS), and so does Mr Market, with the shares up 5p to 96.5p. Given that they've just delivered adj EPS of 13.85p, only have £2.9m in net debt (vs £42m mkt cap), and have reinstated a divi, although only at 1.1p. On the back of these results & an upbeat outlook statement, it surely deserves a PER of say 10, which implies almost 40% upside on the current share price. Although I do note that, as was the case last year, most of the profit has been dissipated with a £5m exceptional restructuring charge. It's not really exceptional if it happens every year!

Shares in Hornby (HRN) have been pole-axed today, due to a pretty dreadful profits warning - poor sales, combined with supplier disruption mean they will now only make breakeven this year (and what's the betting that they put another profits warning out later on in the year?). Sorry to be harsh, but this just looks like poor management to me. I'd want heads to roll if I were a shareholder. The 5.5% forecast divi yield must be looking unsustainable too, another reason to avoid these shares.

Results from Hargreaves Services (HSP) look quite good to me - so am not quite sure why the share price has dropped sharply to 555p (down 139p on the day). I'm repelled by its activities though, namely coal production & distribution. They also have some kind of difficulties at their Maltby facility. Positive outlook statement and a PER of only 4.5 do look quite interesting though - might be worth a further look.

Private investor favourite, Judges Scientific (JDG), lead by the charismatic & astute David Cicurel (whom we had the pleasure of meeting at one of David Stredder's excellent "Mello Central" meetings earlier this year) has reported another excellent set of results. At around 805p the share price looks about right to me - 13 times forecast EPS for this year, although they look to be a bit ahead of that forecast. Growth will naturally slow, as it becomes harder to keep finding more bolt-on acquisitions capable of making as much impact on overall group results. But well done to everyone who saw the opportunity here, it's not one I'm going to chase up in price.

Good results also from Netcall (NET) who also presented at a Mello Central earlier this year. I recall the CEO had one of the strangest accents I've ever heard - half Scandinavian, and half Geordie.
Adjusted EPS for y/e 30 June 2012 rose by about a third to 2p. Share price now looks up with events at 29p, that's a PER of over 14, although they do have a strong net cash position of £8.4m (compared with £36m mkt cap). Outlook statement positive too.

The market has reacted negatively to a surprise profits warning & small Placing from KBC Advanced Tech (KBC), specialist consultants to the oil refining sector. This company has always seemed accident prone, I held shares in it about 10 or more years ago, and that impression is reinforced with today's wobbly interims, and cash crunch being fixed with a £1.35m Placing. Although their outlook statement does sound positive, so could be a buying opp?

HR software company, Bond International Software (BDI) has always looked a good company, but somehow never seems to deliver much on that potential. Interim results today look uninspiring, with interim operating profit down 40% to £1m. Don't be fooled by their penchant for capitalising internal development costs either, which is an accounting policy I deeply dislike. A balance sheet stuffed full of intangibles is no use to anyone. Mkt cap of £20m looks about right to me.

Have a good day everyone, and I'm delighted to see that our readership has grown usefully, to about 1,000 a day now, do spread the word, the more readers the better! So well worth me carrying on, since people seem to like these reports & I enjoy doing them. The intention is to broaden my knowledge of the market, as there are so many smaller companies out there off the radar, and every now & again we find a nugget of gold!

Best wishes, Paul.

Monday, September 24, 2012

Mon 24 Sept - JJB, STAF, MBH, FIF, TAST

Good morning. JJB has finally bowed to the inevitable, and gone bust, shares suspended as worthless. It's certainly been an extraordinary process, with the group clinging on for literally years, multiple fund-raising & 2 CVAs, all to no avail. Very traumatic for staff & suppliers, but surely nobody is surprised? A pre-pack Admin, with sale of the profitable shops & closure of the others, is now only days away.

My favourite recruitment company, Staffline (STAF) has announced another bolt-on acquisition today, of an agency focused on drivers. No financial details are given, so one assumes it must be small. This is a good business model - as such agencies are cheap to buy, and usually earnings enhancing. Moreover, much of the purchase price is paid from the acquiree's own profits, through earn-outs.

Results from Michelmersh Brick Holdings (MBH) are pretty underwheming, and they also warn on full year profit, indicating only breakeven. The shares are only down 5%, perhaps reflecting two things - firstly that MBH's Balance Sheet is underpinned by 15 acres of surplus freehold land pending disposal at above book value. Secondly, that management make an intriguing comment saying that they can survive the current downturn, but "will thrive when conditions improve". However in the meantime they have a helluva lot of debt on their books, so think I'll pass on this one.

Lighthouse Group (LGT) is below my £10m mkt cap cut-off point, at £7m mkt cap (5.38p/share) but interests me because of the battle by shareholders (led by ShareSoc) to fight off proposals from management to de-List. Shareholders won, and the Chairman resigned, as he should.

Interim results from LGT are a bit softer than last year, with EBITDA falling 23% to £740k, so roughly double that to £1.5m for the year - not bad for a £7m mkt cap. The balance sheet is apparently strong, with £10.6m in net cash. Although it should be noted that the cash is not really surplus as such, since current assets of £18.5m (including the cash, obviously) is only in balance with total liabilities of £18.1m, which includes £7.1m in provisions. Therefore the cash is essentially spoken-for, and this is reinforced by the fact that they have passed the interim dividend. So people running away with the idea that this is a cash-rich company need to look at the figures again more realistically. It's also a heavily regulated area, which puts me off - creates too much uncertainty, with a Govt that is thrashing around looking for direction - who knows what hare-brained ideas they (or the EU) will come up with next, adding more layers of cost & complexity?

Results from cake maker Finsbury Food Group (FIF) aren't bad, considering the weak economic situation & ever-present competitive pressures, combined with cut-throat tactics to screw their suppliers from the supermarkets. The mkt cap is only £18m (at 34p/share), and they managed adjusted diluted EPS of 7.8p, so a PER of only 4.4. But you know what's coming next, yes they have tons of debt, £33.9m actually, or 63p/share. I note that over a quarter of their profit is eaten up (!) by just the interest payments. That makes it too high risk for me, and not particularly cheap actually once you work out the EV is £52m.

Me-too pizza/pasta restaurants, "Wildwood" are owned & run by Tasty plc (TAST). It's one to keep an eye on, as although the mkt cap of £31m is a pretty rich valuation (putting them on 20 times this year's forecast profit, and 15 times next), retail roll-out shares always look expensive early on. However, the point is that once you have a format which is profitable (as indeed Tasty have), then it's a straightforward roll-out - i.e. you carry on opening more & more shops until you peak at something like 500 sites, which is about as many as the UK can comfortably carry.

My only reservation is, how many more pizza/pasta chains serving near-identical product, can the UK support? There's Pizza Express, Strada, Prezzo, Pizza Hut, and many more. Not to mention thousands of independents.

Also, I know from personal experience, that retail roll-outs are far from straightforward, and things go wrong at some point. It's relatively easy to run a chain of up to about 30 shops/restaurants with minimal Head Office staff, but once you get up to about 50, you need a significant infratructure of area managers, HR & training, accounts/admin, internal audit, etc. So Tasty still have a lot of work to do, and it will be quite a few years before they reach a significant size, but I shall watch with interest from the sidelines. 

However, I wouldn't be surprised to be kicking myself for not having bought these shares in a few years time, when they are a national chain.

OK, that's it for now. Have a good day!