Friday, October 19, 2012

Fri 19 Oct - BEG, TNI, MAYG, XPS

Good morning! A very quiet day for results today, which will give me more time this afternoon to put the finishing touches to my new website. It's not finished yet, but by all means check it out to get a preview of what it will be like - at www.SmallCapValue.co.uk

This is a project that myself and a friend dreamed up & have been working on throughout 2012, which relies on a stock screening system called PAS (Performance Analysis Scores) which we've been given exclusive access to. The PAS system has been developed over 30 years by a UK Business School Professor, and the system has an enviable track record of long-term market out-performance. I'll be trying it out with smaller caps for the first time on my new website (which will be free [hopefully forever], if I can generate enough income from ads & sponsorship).

The frustrating thing (but a nice problem to have!) is that our main stock picks for the PAS system were going to be Trinity Mirror and IndigoVision, but of course they have both shot up in the meantime. Hence if only I'd launched the project a few months ago, we'd be looking like investing geniuses by now! The other reason I like PAS is because it has confirmed a lot of my own stock selection choices, as well as throwing up new ideas.

The unique thing with PAS is that it has been built by selecting 200 of the most successful Listed companies, and 200 of the least successful, then uses 120 algorithms which identified common patterns in the accounts of such companies over many years. These are things that are unique patterns, and not something which can be replicated using a conventional stock screen. The results are sometimes surprising, in that companies which I thought were safe are flagged as risky by PAS, and vice versa.

So my new site will be testing the system out in real time with a model portfolio, and who knows where that will take us in the future? But it will be an interesting project anyway.

We are hoping that using PAS as an initial market screen, and me then scrutinising and selecting the best stocks from within that group, should combine to produce significant market out-performance, at low risk, over time.

OK, looking at some announcements today, insolvency accountant, Begbies Traynor (BEG) - I hold shares in BEG - puts out an interesting "Red Flag Alert Report", commenting on the state of corporate UK. They note an increasing North/South divide, with London and the South East seeing growth, but other areas languishing.

That sounds sensible to me, as subjectively when I'm in Brighton or London, it doesn't seem like a Recession at all - bars, restaurants & shops are all busy, people are out spending money, and there's plenty of construction & refurbishment going on. If anything, things feel pretty buoyant right now. Whereas in the North, and elsewhere I hear that it's not buoyant at all.

BEG also comment on the continuing issue of zombie companies - which are essentially insolvent, but are being propped up by banks and other creditors (eg. HMRC) reluctant to foreclose. BEG say this is hampering an economic recovery, but they would say that, wouldn't they! (as they want more business).

There's no doubt that economic policy is wildly distorting lots of things right now - we should have seen a 30-50% correction in house prices, and much higher unemployment, but neither have happened due to artificially low interest rates. This may be a good thing in the short term, but how will the economy recover if it never goes through the necessary corrections fuelled by Recession?

Turning to my own stocks, Trinity Mirror (TNI) is still looking very resilient, hovering around the 70p level. There's an IMS due on 8 Nov, although we have already been told this week (RNS of 15 Oct) that trading is in line with expectations. So we will probably be told about further reduction in net debt, a possible fall in the pension deficit? (due to slight increase in bond yields recently).

I remain of the view that May Gurney (MAYG) seems good value, on a low PER and high divi yield, with a recent in line trading update, and good news on new contract wins. The previously reported problem areas are said to be ring-fenced, so I am hopeful for a gradual recovery in share price.

I've also opened a new position in IT etailer, EXpansys (XPS). The reason is a low fwd PER of 4-5, a solid balance sheet with net cash, good growth, 42% owned by Peter Jones from Dragon's Den, and a good chart. Also, I've noticed their ads all over the internet, and have just ordered a new laptop from them, as their prices look competitive.
On the downside, it's a low margin business, with potential product obsolescence risk. Just flagging it up for you to DYOR if you like the sound of it - do report back with any views, as two minds are usually better than one!

Thanks again for the kind & generous donations to my charity Half Marathon (see box on the right --->), it's greatly appreciated.

Have a good day & a smashing weekend!

Regards, Paul.

Thursday, October 18, 2012

Thu 18 Oct - MEC, XAR, LWB, MTC, HOME, 888

Good afternoon! Thank you so much for the generous donations to my Half Marathon charity thingy ----> we're already up to 15% of target! It's enormously appreciated. It's also motivating me to do more training, and will drag my carcass out for a jog along Hove seafront later today!

Another fairly quiet day for results. European publishing group Mecom (MEC) has issued an IMS. I flagged up this share at around 51p some time ago as a main write-up on this site, but sold them after a big rise & feeling that it was difficult to quantify the upside.

Today's IMS confirm previous guidance given on 6 June that full year EBITDA will be in the E85-95m range. It is very helpful indeed when companies spell out the actual guidance figures like this, rather than referring obliquely to management or market expectations (since we might not know what those are!).
A bit like TNI, Mecom are seeing declining turnover from their newspapers, but are compensating through cost cutting. Net debt has risen sharply, from E109.7m at 30 June to E150.8m at 30 Sept 2012, although they say that year-end net debt will be lower than market expectations.

Overall, I remain of the view that Mecom is tricky to value, hence am not planning on revisiting the shares at 84p today (up 5p on the day, so the market likes this IMS). In my opinion TNI is a safer, cheaper & easier to value bet in this market. Although Mecom is paying big divis, and is in play due to being forced by shareholders to break itself up. (I hold shares in TNI).

I've always liked print-head maker Xaar (XAR). Their Q3 trading statement today is reassuring, saying "the outlook for 2012 profitability continues to be in line with the Board's expectations".
Market consensus is for 15p EPS this year, and 19p EPS next year, so at 260p a share (£193m mkt cap) it's on PERs of 17.3 and 13.7, which is not exactly bargain basement territory, but not outrageous at all for a company with a great track record of strong EPS growth over the last few years.

They also have net cash of £18.8m, or 25p/share. So the Enterprise Value is 235p/share. I can see the attraction, but don't know enough about their market to determine whether or not the growth is likely to continue.

Low & Bonar (LWB) has put out a mild profits warning, due to problems at its yarns division. Shares are only down 4% to 55p, which is a very gentle reaction from the market. Even mild profits warnings usually seem to trigger an instant 20-30% mark-down, but not in this case.

The forecast PER seems to be about 9, and divi yield 4.2%, which looks like a fairly modest valuation, although I haven't looked at what their net debt position is.
(incidentally, whenever I refer to PER and divi yields, I'm always referring to the current year, forecast consensus, not the historic values).

The market has reacted very positively to the Mothercare (MTC) H1 trading statement today, with the shares up 16% to 269p. That looks a tad overdone to me, as their UK business is still a serious problem - they've only managed to stabilise LFL sales. Although their overseas business is doing well. On balance, I've missed the boat on this one, so won't be buying in after such a big rise.

But it does reinforce the view that the worst is probably now over for UK retailers. The ones that have survived, and are managing down their rental costs, should be OK from now on, perhaps. Share prices reflect that though, so it's not something I'm going to chase up. Indeed, I've sold my HOME shares recently, as they've had a great run (up 50% from recent lows), and I'd rather wait to see the Interim figures next week, and possibly buy back in, rather than risk holding them. Nobody ever went bust banking a profit, so there we go.

I see that 888 Holdings (888) have slipped back 6% to 102p today, after yesterday's positive trading statement. Might revisit this one, as I like the company, and the valuation seems reasonable.

OK, that's it for today, see you tomorrow! Am having an early night tonight, so hopefully will be publishing tomorrow's article a bit earlier.

Regards, Paul.

Wednesday, October 17, 2012

Wed 17 Oct - 888, SDY, TNO, BEG, VTU

Good afternoon! I'm thrilled with the increase in readership here. Yesterday was the best day ever, with almost 2,000 readers! Great stuff, the more the merrier, it certainly motivates me to keep going, knowing that people find my posts interesting.

Also a big thank you to those of you who have already donated to my chosen charities in advance of my Half Marathon in Feb 2013 (see box to the right --->). Your donations are hugely appreciated, thanks so much! Keep 'em coming, but we're already 5% of the way towards my target, not a bad start!

Comments are now open - at the request of a reader, I've removed the restrictions on posting comments after all posts here, so comment away if you have something useful to add!

uk-analyst.com - this is an excellent end-of-day round-up of stock market news service (free), and if you don't already subscribe to it, it comes highly recommended by me. You get the occasional ad/promotion emailed to you by them also, but that's a small price to pay for great quality free content.

I only recommend things that I use, and are genuinely good. They haven't paid me anything to say nice things about them, it's just an excellent service, so worthy of a mention.

OK, on to today's news.

Kicking myself for having sold 888 (888) in a margin-related incident a week or two ago, as I reported on it being a good company here not long ago (use search function on right hand side of this page to search for any old articles).
They've issued a positive Q3 trading statement, saying that "... we now expect EBITDA for the full year to be significantly ahead of current market forecasts".

I just cannot bring myself to buy back in 20% higher than I sold at recently, but the shares could well be worth another look even after today's 10% rise to 102p, as existing broker consensus is for 6.9 EPS this year, so significantly above that must be in the 8-10p range I would guess. So a PER probably not much above 10 looks pretty tempting.

I see that Speedy Hire (SDY) are following the latest fashion for giving a trading update a heading, which is supposed to tell you how to feel about it!
So they title their RNS, "Trading Update - Maintaining Momentum"!

The market has treated this PR spin with the contempt it deserves, and marked the shares down a penny to 30p. That's a mkt cap of £155m, up 50% in the last 12 months, not bad.

They do however say that they are "confident of meeting ... expectations for the financial year".
At broker consensus the shares are on a PER of about 13, with an unremarkable 1.8% yield. I can't see much value there, unless you factor in a cyclical recovery in earnings.

It amazes me how incompetent firms of accountants often are at managing their own affairs. RSM Tenon (TNO) is the latest in a series of such firms which expand too fast, over-gear, and then end up teetering on the brink of insolvency - not exactly a great advertisement for their accountancy & business advisory services! Mind you, having trained at a chartered accountancy firm myself (Price Waterhouse Coopers), I know that they tend to be full of bookworms, who've never actually run a real business in their lives. So quite why their advice is so highly valued, I have no idea.

Vantis of course went bust in 2010, and there have been others, but I cannot remember the names.

RSM Tenon state that the continued support of their bankers is "critical", hence to me that makes the shares uninvestable. Debt has increased further to £78m.

I remain a shareholder in Begbies Traynor (BEG), which is a specialist insolvency accountant, and is well run, also paying a generous dividend, and with debt under control. So I'll stick with that one.

My beief that the UK economy is coming out of Recession is reinforced by improved labour market figures today. Vertu Motors (VTU) interim results also reflect an improving car market, with an excellent 7.9% LFL new retail volume increase. Pretty impressive. They indicate that full year results will be ahead of expectations.

So I'm increasingly feeling that now is the time to be buying bombed out cyclical shares, which will benefit most from an improving economy.

Right, that's it for today. Apologies for lateness again (I seem to say that every day!).

Regards, Paul.

Tuesday, October 16, 2012

Tue 16 OCT - TNI, BWNG, CPR, ACM, DRV, NWS

Good afternoon! Happy days, as Trinity Mirror (TNI) continues its fantastic bull run. Every time my finger is drawn towards the sell button, I double-check the figures and see that it's still incredibly cheap (in my opinion. DYOR as usual!).

Broker consensus is 26p EPS forecast for this year and 25.5p next year, which might now be a little low, due to the latest cost cutting in the pipeline with the restructuring announced yesterday. So that puts the shares on a PER of below 3!

Also, by my calculations, TNI will have potentially repaid all its net debt at some point in mid 2014. The interims (announced on 2 Aug), which triggered this huge rally, showed that net debt fell by £40.3m to £180.9 in just 6 months to 1 July 2012, from normal cashflow! Hence with cashflow forecast to be stable at around the same level, that should mean TNI reduces its net debt by 4*£40.3m = £161.2m within 2 years, resulting in net debt of just £19.7m by 1 July 2014.

What excites me, is that means TNI will then have a massive ongoing cashflow from 2014 which will be available for expansion & development of their digital business, which has to be the way forward - especially if they hit onto some areas with major potential.

Hence in reality, TNI could be seen as a sort of venture capitalist, with say £40-80m p.a. cashflow to invest in new ventures from 2014 onwards. If they spend that money wisely, the results could be pretty spectacular.

Of course the newspapers will gradually decline, but in my opinion there is far more life left in newspapers than some people think.


For example, just look at this colossal pile of Evening Standards that had just been delivered to Green Park tube station when I was passing a week or so ago - 3 deep, 4 wide, and waist height, just for ONE tube station, on one side of the road (there's another entrance on opposite side of Piccadilly)! Sure the Standard is free, but some of TNI's regional papers are successfully using a free model in city centres (and charging in the suburbs).

What this picture tells me is that there's still huge demand for decent newspaper content (the Standard is going from strength to strength in terms of content, in my opinion), and advertisers will pay to access this. After looking at a screen all day, the last thing commuters want is to be peering at a tiny smartphone screen on the train home - a newspaper is a far more efficient, disposable way of absorbing a lot of content - providing that content is interesting. You don't have to charge it up, or worry about it being stolen either.

Also I note that the Standard have today announced a move back into profit, so their free model is working. In 20 years' time, who knows, maybe all newspapers will be free? But seeing as people pay £2 for a coffee without qualm, a few pence for a paper seems insignificant.

To my mind the figures are saying that it makes no sense at all on fundamentals to even consider selling my TNI shares below 100p (a PER of 4!), and even then it would only be to top-slice.

OK, turning to today's announcements, retailer N.Brown Group (BWNG) has released interims which the market seems to like, with the shares up 11% to 299p (mkt cap of £764m, so above my remit really as a mid cap).

Staying with retail, Carpetright (CPR) has issued an in line trading statement, with a reasonable performance in the UK, but awful sales decline of 12% in Europe. Broker consensus is for EPS of 10p this year, and 17p next year, so at 690p these shares are on a lunatic PER of 69 times this year's earnings, and over 40 times next year's earnings. WHY?! Nobody seems to be able to explain the reason why Carpetright shares are so ridiculously over-priced, and remain so, year after year.

CPR is one of the most heavily shorted shares in the market, with 9.5m shares out on loan, of a total issue of 67.6m, so that's a 14% short position. Yet despite this, the shares remain on an astronomical PER, and nobody seems to know why! Anyway, it's a bargepole stock for me at this valuation.

Software company Accumuli (ACM) has issued an in line trading statement for the 6m to 30 Sept 2012. Shares are unchanged at 11.1p (£16m mkt cap).
Broker consensus is for 1.3p EPS this year, so that's a PER of 8.5, probably about right for something this small.
Balance sheet is negative once you remove goodwill & intangibles too, so doesn't appeal to me.

Shares in Driver Group (DRV) rose 5p to 73p (£19.3m mkt cap) today on a strong trading update which says the company will exceed management expectations for y/e 30 Sep 2012. Broker consensus is 5.1p EPS for this year, so difficult to say whether shares are cheap or not, as we don't know by how much they are going to beat that figure. But certainly worth looking out for their results when they come out.

Smiths News (NWS) is the UK's largest distributor of newspapers & magazines, and other products, has put out decent results for y/e 31 Aug 2012.
Underlying EPS is up 28% to 19.9p, so with the shares at 141.5p I make that a PER of 7.1.
8.6p divis produces a very nice 6.1% divi yield.

Net debt is not insignificant, and due to acquisitions is up 59% to £100.5m (compared with a mkt cap of £260m).

The balance sheet looks pretty ropey, with net liabilities of £51.8m, and that includes significant goodwill. Strip out the intangibles and you get net tangible liabilities of £118.9m. Hmmm, not good.


Combined with the likelihood of print income reducing due to structural changes from digital, I don't think there's anything here to get excited about. Although it should be said they have a diversification strategy.

There seems to be a pension deficit too, as the cashflow statement shows £6.8m in pension funding, but I couldn't see that on the balance sheet. Having a quick look at the notes reveals the usual inpenetrable mess that is pensions accounting. They seem to be showing an unrecognised pension asset of £40.3m in one note, but then say there is a £50m deficit in another! Bottom line is they are having to make cash overpayments of £6.8m p.a., so there has to be a big deficit in real world tems that I would understand. Another reason why I'm beginning to reach for my bargepole with these shares.

A high divi is all very well, but if it's being paid on the back of a weak balance sheet, then it's high risk. If something goes wrong, the first thing to go will be the divi. Fairly high bank debt with little asset backing also worries me, so this one gets a thumbs down from me I'm afraid.

OK, that's it for today. Apologies for this being so late, will try harder tomorrow, just been so busy today that, well you know what it's like sometimes.

Regards, Paul.

Monday, October 15, 2012

Mon 15 Oct - SRT, TNI, YOU, SDL, NANO, CMH

Good morning! I was expecting a quiet day today, but actually there are quite a lot of trading statements issued. Very pleased to note that our readership here seems to have suddenly shot up (maybe we've been mentioned somewhere?), and is now around 1,200 per day, great stuff! Do spread the word, it all helps.

Incidentally, this site is also set up so that it works well in a condensed format on smartphones. Please also check out my Half Marathon fund-raising in the box on the right-hand side of this page. All donations to my chosen charities are very much appreciated, so if you like this Blog & have made any money from the ideas here, then why not make a donation to either MacMillan, or the Sussex Beacon, my chosen charities?

Software Radio Technology (SRT) is a popular share with private investors, they make some sort of positioning technology for boats. At 29.75p the mkt cap is £30m. That seems to be supported more from future expectations than the pretty dismal H1 figures of just £3.5m turnover, and £0.1m profit, although apparently even those tiny figures are ahead of internal budget expectations.

Looking at broker forecasts, they shoot up for y/e 31 Mar 2014, to £5m profit, and 3.6p EPS. So if you think they will achieve that, then the fwd PER is 8.3. Personally I don't like paying up-front for growth, so it's not for me.

Our favourite share here, newspaper group Trinity Mirror (TNI) has announced a management restructure - so looks like the new CEO, Simon Fox, has hit the ground running. As was reported in the press last week, TNI are merging their nationals & regionals divisions, which sounds sensible to me, and will create a "flatter, more efficient management structure".

They have also announced an intention to close Happli, the recently launched daily deals business. I'm a bit surprised at that, as Happli seemed a good idea to me, but was said to cost £5m p.a. at the time of launch, so now it's being closed profits should benefit by a similar amount, one assumes.
They say that it, "is unlikely to reach sufficient scale to become profitable in the near term". Fair enough, can't argue with that.

Most importantly, they confirm that "trading remains in line with the Board's expectations", so always reassuring to have an up-to-date trading statement under our belts. The shares remain amazingly cheap on a PER of only about 2.5 times this year's forecast earnings, notwithstanding the fact that the shares are up 160% since August. They were an absolute gift at 25p, when highlighted here earlier this year.

Also interesting to note that in his comments, Fox goes on to say that TNI has "significant unrealised potential". Sounds intriguing! I continue to hold these shares, and would not be surprised to see them continue rising to 100-150p (a PER of 4-6) in due course.

YouGov (YOU) shares have slipped slightly to 78p (mkt cap of £76m) today on the release of preliminary results for y/e 31 July 2012. Adj EPS is up 4% to 4.9p, so I make that a PER of 16, which looks fully priced or a tad expensive to me, given that there are lots of good small caps out there on a PER of 10 or less. Maiden divi of 0.5p looks pretty stingy too.

It does have net cash of about 10% of the mkt cap though, at £7.2m, and current trading is in line. Can't get excited about this one though, at that price.

Shares in SDL (SDL), a mid-cap (£438m mkt cap at 546p) software company, are down 15% to 546p on an IMS that says Q3 is broadly in line. I don't know this company, but cannot see anything in the IMS which justifies such a sharp markdown. Strange.

Prelims for y/e 31 July 2012 from Nanoco (NANO) look pretty awful - £3m turnover, and £4.3m loss before tax. They have £15.5m cash left to burn, so several years' worth. The mkt cap is a staggering £128m! Pretty steep for a jam tomorrow company. It still amazes me how many investors are prepared to pay such high prices for companies that have not yet reached commercial viability, purely on the back of future potential. Yet the reality is nearly always that products disappoint, most fail, and even the good ones have slip-ups on the way to success. It's like searching for a needle in a haystack, so why pay huge prices for things that are so risky? I don't touch jam tomorrow shares any more, too many painful losses in the past. Reality rarely matches the hype in my experience.

Engineering company Chamberlin (CMH) reports an in line trading update, shares are unchanged.

OK, that's it for today. See you tomorrow, hopefully a bit earlier, was up really late last night, hence the late start today.

Regards,
Paul.