Friday, October 26, 2012

Fri 26 Oct - ZTF, TRT, TNI, ASC, DEB, BMY, DTG

Good morning. Zotefoams (ZTF) issues a positive trading statement, indicating a "satisfactory outcome for the year". Shares look fully priced on a forecast PER of 18.6.

Transense Technologies (TRT) issue a positive sounding AGM statement, with sales up almost 4 times vs last year's comparable period from July-October. Sounds great until you note that sales last year were only £1m for the entire year! And the mkt cap is £17m. This company has been promising jam tomorrow for as long as I can remember.

For the avoidance of doubt, I'm now out of Trinity Mirror (TNI), because of the step change in seriousness of the hacking allegations. So am happy to sit on the sidelines until it becomes clear what the potential liabilites amount to. I remain of the view that the underlying business is extremely cheap, but with a potentially large & unquantifiable set of liabilities out there, it's almost impossible to value right now.

Disappointing that this issue had to blow up now, as on fundamentals the shares looked ready to push up to 100p+. I can't see that happening now, due to the latest hacking stuff, so risk/reward has (at least in the short term) worsened. I shall continue to monitor with interest, and once we have some clarity, might well buy back in.

Very few results this morning, so that's about it. So as I missed a report yesterday, will give a quick run down of anything of interest from yesterday, as follows.

Results from online clothing retailer ASOS (ASC) were good, but the valuation really is terrifically stretched. 39.6p EPS, and the shares (even after recent sharp falls) at 2198p are still on a PER of 55 - that's way too high in my opinion. But this business has always looked expensive, even when I sold my 0.5m shares in it at (drum roll!) 9p (argghhhh!!!), because they looked fully priced. That was a long time ago admittedly, but demonstrates the point that when you find a really exceptional growth company, the valuation is largely irrelevant in the early stages.

Solid results from Debenhams (DEB), with EPS up 14% to 9.8p. At 118p that puts their shares on a PER of 12. Sounds reasonable, although bear in mind there is also about 29p/share in net debt too. So that increases the cash-neutral PER to about 15 (I know it's simplistic to calculate it that way, as you should really strip out interest cost from earnings, but as a quick rule of thumb I find it helpful).

I see that DEB are copying Next's trick of constantly buying back their own shares, in order to drive up EPS. It's worked very well for Next over many years, so not something to be sniffed at.
As with many retail shares, I feel that DEB shares have had a good run & are now up with events.

Interims from Bloomsbury Publishing (BMY) looked unexciting, with basic EPS down from 3.3p to 2.2p. It's an H2 weighted business, and it strikes me that the outlook statement lacked conviction, so think this could be vulnerable to more disappointments, hence am avoiding it.

I also missed a positive trading update from Dart Group (DTG) the low cost airline and haulage business. They indicated on 24 Oct that they would exceed market expecations. The shares do seem cheap, on a PER of around 5. Be careful with their balance sheet though - the cash pile is actually prepayments by airline customers, so it's not Dart's money!

Thursday, October 25, 2012

Thu 25 Oct - HOME

Good morning. I have been quietly digesting the Home Retail Group (HOME) analyst presentation, and have come to the obvious conclusion that this group needs a massive shake-up. Check it out for yourself.

In particular, the group structure is irrational, and needs to be broken up. From what I have seen, The Argos MD has a brilliant turnaround plan, which may or may not work, but seems to me bang on the money. 4% LFL sales growth seems ambitious though, coming on the back of 4 years decline, and this year just stabilising sales. So I doubt that turnaround will happen quite as quickly as they plan.

The Group FD is sound, but there is no reason at all to have a Group in the first place. Argos has no synergies with Homebase. The weakest link is obviously the Group CEO, who has presided over many years' decline & should be ditched as soon as possible in my opinion. Harsh, but true.

Observing the analyst meeting yesterday, the Group CEO came across to me as the weak link in the chain - full of his own self-importance, but failing to demonstrate what he was actually there for? Apart from awarding himself big bonuses for poor performance - usual corporate arrogance & greed that is not acceptable any more (not that it ever was).

A couple of times in today's meeting, he snapped at other people - talking right across his very capable FD, who was mid-sentence - dismissive & rude. Then again, snapping at an analyst who dared to say something he disliked. Simple message - get rid of this idiot (Terry Duddy). He's been in situ too long, and has failed. Simple as that. Time to go.

I see this CEO is also a Non-Exec at Hammerson. Err, why? If he's only working part-time at HOME, then he should be paid a part-time salary. A bit like all the minimum wage slaves on the shop floor. Not having his snout in the trough with other Directorships, when he is already paid a king's ransom to run HOME full-time. What a disgrace.

The American guy (John Walden) has a terrific turnaround plan for Argos, but the group needs to be broken in two - Homebase, and Argos, and ditch the entire pointless group structure. It just creates unnecessary cost, and inflated egos.

Homebase has a credible plan, as does Argos. What is now needed is a takeover knight to get rid of all the dross at the centre, and let the 2 businesses become lean & productive. Just in my opinion.

There is also a ton of surplus capital sitting on the balance sheet here, roughly equal to the entire mkt cap - namely net cash of £350m average daily balance (far more meaningful than the year-end snapshot), and about £450m in net debtor book (store card) with no corresponding creditors.

I sold my shares at 105p, as a 50% gain is more than acceptable, but there is still value here if someone grabs HOME by the balls and shakes it up a bit.

This may be hard-hitting, but it's true.

Wednesday, October 24, 2012

Wed 24 Oct - HOME, SPD, SNX, IND, TNI

Good morning! This is turning into a busy & interesting week. HOME results today, so I'll move onto those in a moment. Firstly though, I just wanted to update you on my charity fund-raising, which is going really well (see box on far right of this page --->). Lots of donations have been made, thank you all so much. Also, Ian Reid has made an extremely generous pledge offline, to donate via his charity CAF account in Feb 2013, when I have completed the Half Marathon. Thanks Ian, you're a star! Anyone else is welcome to also pledge in this way, if you would prefer, or just use the JustGiving website. I'm trying to get as many donations as possible in the bag before people start blowing all their money on Xmas shopping & parties!

Secondly, I'm delighted to announce that I have secured an advertising or sponsorship deal with WH Ireland. So I've written a bit of blurb on the Sponsors Page which details an excellent product they are offering which I think will be of specific interest to some readers here, hence why I agreed to promote it.

They combine a proper telephone broker service with a white label spread betting service. What's so good about that? Well, it means that you can trade small caps through a proper broker, and secure dramatic price improvements (often getting well inside the spread), plus combining that with the tax free status of a spread bet.

Spread betting is inherently risky if you use the gearing available, but there is no necessity to use gearing at all. You can just deposit say £20k and open £20k in underlying positions if you want. Or deposit £5k, and keep the other £15k in a secure bank account, available for margin calls should it be required.

I'm planning on writing a more detailed article about my successes and failures with spread betting, and what I've learned from that. I do emphasise that it's a potentially risky product which should only be used by sophisticated investors in my opinion. However, this WH Ireland combination of telephone broker service, big price improvements on small caps, within a tax-free wrapper is in my opinion a winner. I have also traded with Rich & Sam (the London-based brokers with WH Ireland) for years, and found them excellent people to have on your side.

I should also emphasise that I have a deal with WH Ireland whereby new accounts referred through me trigger commission payments to me, so this is a great way of supporting this Blog (as I need to earn a bit of an income from it, to reflect the amount of work involved in publishing it). Rest assured however that I will only ever promote things that are genuinely good & helpful, in my view.

The Google ads on this site are served by Google, so that's a separate thing, and gives me a little income of about £90 a month. So I won't be retiring soon, but every little helps, as they say!

OK, on to Home Retail Group (HOME) interim results. I sold my shares at around 105p in advance of the interims, as decided that a 50% gain was too good to ignore, and I'd rather see the results before deciding whether to buy back in.

The results are pretty much as expected, with benchmark operating profit down 29% to £19m. Given that turnover was £2,531m in the 6 months, we're really talking about more or less breakeven. But at least they didn't tip over into a loss, which in encouraging.

Sensibly, they have maintained an interim dividend, although greatly reduced to 1p, but that's fine and was expected to be cut or passed altogether. Paying something signals some confidence, as was the right decision.

Cash generation is particularly good, at £122m in 6 months, with closing net cash of £316m, so that bullet-proof balance sheet remains intact. They also continue to have a huge store card debtor book of £437m sitting there, with no corresponding creditors at all required to finance this.

At £893m mkt cap (at 110p a share) the shares are still therefore arguably cheap on a balance sheet basis. Although they don't look at all cheap on an earnings basis, with consensus estimate of 6p EPS that puts the PER in the high teens. It's also high risk, given that the operating profit margin is now wafer thin - i.e. it wouldn't take much to tip HOME into losses.

On balance I feel the shares are probably priced about right at 110p in the circumstances, and am happy with my decision to bank a cracking 50% profit on these shares from the recent lows.

I watched the online analyst meeting, which actually was a lot easier than dragging myself up to London to be there, so they did me a favour by not allowing me to have a place at the meeting. Stupid decision by HOME though, since my analysis here is read by almost 2,000 investors per day. So categorising me as a private investor instead of an analyst has not exactly endeared me to them. But there again, they allowed the 6th largest short position in the market to build up here, which suggests that communicating their strengths to the investor community is not exactly this group's strong point!

On the other hand, as I predicted, the closure of the short positions is providing a lot of the upward impetus for the shares. The short position has shrunk, but is still enormous at about 120m shares out on loan.
So the short squeeze could well continue, which would be good for the share price.

In my opinion the analyst meeting was pretty impressive - they have an excellent, coherent plan to transform Argos, presented by their new, American MD of Argos. It's all about modernising it, and making Argos a digitally-focused business. As 50% of its sales are already multi-channel, they're not doing too badly already, but lots of sensible ideas on what can be improved through investment.

So on balance I'm optimistic about HOME's future, but for now the shares look to be priced about right at 110p, until the turnaround bears more fruit. Therefore I'm happy to watch from the sidelines, and would become interested again if they slip back to say the 80p level.

Another good trading statement from Sports Direct (SPD), but the share price looks up with events at 401p.

Synectics (SNX) used to be called Quadnetics, and is a CCTV surveillance company, so I always look at their trading to see what the industry trends are for read-across to my largest holding, in IndigoVision (IND).

Therefore it is good to see SNX shares up 5% today on a positive trading statement. Also interesting to note that the founder, and deposed CEO of IndigoVision has sold his shares - amazingly, dumping them at 400p (over 20% discount to the market price yesterday) which seems a bizarre move, given that there are 75p divis due shortly. Although maybe some deal was done with the divis between the seller & buyers?

Anyway, it's good to have him out of the way, and it looks like the shares have been Placed with Institutions, as already an RNS has popped up saying Liontrust have taken 7% of the company. More RNSs will no doubt follow. The shares were pre-emptively marked down this morning to deter any flippers trying to bank an instant 20% gain, but quickly recovered, so they seem to have been Placed with sensible buyers. Could lead to follow-on buying from these new shareholders, if the next trading statement is as positive as I suspect it might be.

Finally, I must admit to starting to get cold feet on the Trinity Mirror hacking publicity. It's not news at all, as information that TNI were probably involved in phone hacking has been in the public domain for many years now. However, 4 actual legal cases have now emerged, and that worries me. If it's the thin end of the wedge, then things could get messy. If not, then I'm sure there will be an opportunity to buy back later.

So having slept on it, I've sold some TNI shares today, as it now looks higher risk to me now that specific evidence appears to be emerging, and nobody ever went bust by banking a profit.

Tuesday, October 23, 2012

Tue 23 Oct (part 2) - MUL, ARM, SND, TNI (again!)

Hello again! After all the excitement of the TNI hacking allegations (see my earlier comments here in previous post), let's have a look at today's other company results.

Posh handbags maker, Mulberry (MUL) is down a thumping 25% this morning to  998p, following a disappointing trading update, containing a profit warning. The ridiculously high rating for this share meant that it was always an accident waiting to happen.

EPS was 44p last year, and they say today that this year will see lower profits than last year (but not quantified). So if the drop is only small to say 40p EPS, then that means the shares are still very highly rated on a PER of 25, even after today's falls. Any more bad news, and it would be easy to see these shares fall much lower again. Not for me, I'd rather buy bombed out things where the bad news is already in the price, not premium-priced shares which are a hostage to fortune - especially in these times of macroeconomic uncertainty.

Another share on a premium rating is chip designer ARM Holdings (ARM). At £8.1bn, it's market cap is in the stratosphere, but I mention it merely to point out the rating. Q3 EPS came in at 3.7p, so annualise that (ignoring any seasonality) and you get 14.8p EPS. So at 627p the shares are on a staggering PER of 42. Turnover & profit growth are both only around 20% year on year, so this looks a really toppy valuation.

Software group, Sanderson (SND) has fallen for the latest fashion of heading up a trading update with a tag line which is supposed to tell the reader how to interpret it, which in this case is, "Strong trading momentum maintained".

I detest these tag lines, because it is our job as investors to interpret the trading update. Just give us the facts & figures, and no spin thank you!
Pleasingly, the shares have fallen on this announcement, by 3% to 46p (£21m mkt cap).

The statement itself isn't bad though, with the key line being that "trading results for y/e 30 Sept 2012 are slightly ahead of market forecasts, and the Group's cash balance as at 30 Sept 2012 has further improved to £4m".

The shares look priced about right, on 13 times this year's forecast earnings.

I see that TNI have just put out a response to the phone hacking allegations, which is short & sweet, saying;

Response to Reported Allegations
 We note the allegations made against us by Mark Lewis in today's papers.
 We have not yet received any claims nor have we been provided with any substantiation for those claims.
 As we have previously stated, all our journalists work within the criminal law and the Press Complaints Commission Code of Conduct. 

The share price is recovering from recent lows, confirming my view that these phone hacking allegations are nothing new, and that it's already in the price.
Regards, Paul.

Tue - 23 Oct - TNI - Mirror phone hacking allegations

Good morning! No report yesterday, as there wasn't anything of interest to me on the RNS.

Today we have a sharp markdown (13% to 62p a the time of writing) on Trinity Mirror (TNI) over revelations overnight that it is alleged to have been involved in phone hacking. Well, Queen Anne's dead! Of course it was, they all were - this is an industry-wide problem, and once one journalist cottoned on to the fact that it's a doddle to access anyone's mobile phone & listen to their messages, this trick would have spread like wildfire.

Indeed, Piers Morgan even explained the technique in his memoirs, published in 2005, a copy of which I have here. He of course dressed it up in faux innocence, saying something like, apparently there is this technique that ...., etc.

It's going to mean some costs, and potentially some compensation, but this long after the event it will be difficult to prove in Court, and newspapers are sued all the time, it's par for the course. Do the public actually care that some celebs got caught with their trousers down, using this method? Not in the slightest, in my experience.

The supposed scandal was used as a stick to beat Murdoch, but I don't see that same level of outrage (which was largely manufactured by Guardianistas) being directed at the Mirror's advertisers in the same way. Why would Lefties want to stir up hatred against the only Leftie tabloid? Answer, they won't.
As long as TNI distance themselves from Piers Morgan, then they should be fine.

In any case Murdoch used the NotW scandal (which concentrated on the genuine public outrage over the Milly Dowler case) as an opportunity to strip out duplicated costs by closing NotW and moving the Sun over to 7 day operations. It's difficult to see any read across to the Mirror. They will just deny it, and throw Piers Morgan to the wolves, which most people will view very positively! His evidence to the Leveson enquiry was painful to watch too - he may think he's an accomplished liar, but my reading of his body language made it very clear to me that Morgan was lying through his teeth! Of course he knew about phone hacking, as admitted in his memoirs.

Now it's out in the open, I would say a 5% markdown in price is probably enough to cover the total costs. Hence this morning's 13% reaction seems overdone, and it's on fairly small volume (about 1m shares at time of writing), so not something that concerns me longer term. But obviously make up your own mind, these are just my personal opinions.

I'll report on other company RNSs shortly, just wanted to get this comment out first.

Regards, Paul.