Friday, November 23, 2012

Fri 23 Nov - FUTR, CSG, EPO, IND

First off, a company I've never looked at before, a magazine publisher called Future (FUTR). As with other media companies, they're trying to reinvent themselves for the digital age. Judging from their results for y/e 30 Sep 2012, issued this morning, they're not doing too badly.

As ever, I don't have time to go into any real depth in this morning skim of results, but just looking at the headline figures, turnover is down from £121.9m to £117.7m (that's the normalised figure, as it looks like they have disposed of something as total turnover fell by a larger percentage).

However, EBITDAE (the last E is "exceptionals") is up from £7.8m to £9.4m. They also talk about possibly resuming divis in 2013.
On the downside, I note that the vast bulk of their business is still print media (magazines), so the digital talk looks a bit of a smokescreen to me.

Readers here are familiar with the publishing sector, as we made a very nice profit on Trinity Mirror (TNI) shares this year, and are hence well aware of the declining nature of sales. Although I think magazines have a much longer lifespan than newspapers, as they are special interest, niche products.

With 1.1p adjusted EPS, and a share price of 17p, I really cannot see any value in Future, so will pass on this one.

Had a very quick look at interim results from Sweett Group (CSG), which is a £11m mkt cap international construction/property consultancy. The headline figures look quite good, returning to profit. But I don't like the balance sheet - too risky, with too much net debt, and debtors are too large (perhaps not surprising, as they operate partly in China, where paying debtors seems to be optional & when you feel like it).

Results from Earthport (EPO) are always good for a laugh, and today's announcement of prelims to 30 Jun 2012 are no exception. As usual, it starts off with lots of positive talk about new customer implementations, growth potential, etc. And in fairness, they have managed to increase turnover by 21% to £3m. Gross margin 78%, lots of bullish narrative, they even managed to get yet another fund-raising of £10.3m this time away successfully.

So all looking interesting, until you get to the P&L. Operating loss of £8.5m for the year. Staggering! With £5.8m cash left, they're burning through the latest fund-raising at a helluva rate. How many more years will this continue before investors will finally realise that EPO is a crock! There's nothing there, just a lot of bank accounts for moving client money around. If you need to operate overseas, then just open a bank account overseas, there is no need for Earthport to exist at all.

The mkt cap is £44m, so it seems that a new set of mugs appears every few years to refinance it. The total tally of losses to date, over 15 years, is a breath-taking £112m!

I see that IndigoVision (IND) my largest holding for many years, got a very bullish write-up in Shares magazines yesterday, and I'm hoping to have a meeting with management later today. Not sure whether I'll be able to report back though, as they have gone very prickly over some critical AGM comments on Motley Fool bulletin board. Trouble is, that's the deal when you become a stock market listed company - shareholders will discuss the company on bulletin boards. No way round that. Better to engage & manage the flow of information, than retreat into a shell, surely?

I firmly believe that Listed companies need a good mix of private investors (who create liquidity, narrow the spread, and set the share price), and Institutions (who provide long-term finance, and quick access to additional funds through Placings). Both are equally important, and need managing.

All too often Listed companies just manage their Institutional holders, and largely ignore their private investors. What they should do is engage with private investors, arrange meet the management sessions (e.g. through Dave Stredder & his excellent investor evenings at Finn Cap once a quarter), get some sponsored research notes out to private investors (as all too often we can't get access to conventional broker notes), do some investor videos, that kind of stuff.

Research clearly shows that an active private shareholder base means a much healthier share price, a much tighter bid/offer spread, which creates a proper market for everyone - as you need the liquidity to enable shareholders to move in & out. Far too many small caps have dormant share prices with ridiculously wide bid/offer spreads, because not enough effort is made to market the shares to investors. As long as that is done honestly & sensibly, then it's a win-win for everyone.

OK that's it for today, not much else in the way of small cap results, hence me wandering off at a tangent in today's report.

Good weekend all,

Thursday, November 22, 2012

Thu 22 Nov - DTG, CUP, SEPU, DGB, IGP, PYM,

Yes I'm back, sorry for going AWOL for a few days, have been having problems with insomnia lately. Here goes with some results from this morning.

I've always quite liked Dart Group (DTG), which is a budget airline (, travel operator, and a haulage business called Fowler Welch. The shares always look very cheap (on a PER of 5 or 6 usually), and have had a good run up to 100p recently (for a mkt cap of £142m).

Interims today from Dart look pretty good, with group profit before tax up 37% to £57m, which looks amazing until they say that the business has become more seasonal, so a larger loss is expected in H2.

It has considerably more than its own mkt cap in cash, at £206m, but bear in mind that £98m of that is advance payments by customers.
Still looks like an awful lot of business for the mkt cap. In the key Outlook section they state that H2 losses will be larger, but they should exceed full year market expectations for y/e 31 Mar 2013. I would imagine these shares are likely to have a decent further increase on these good results, and that the fwd PER is now probably only around 5. I'm not keen on airlines, as the margins as thin, and risk high, given that they are so dependent on the oil price & other factors (e.g. the Icelandic dust cloud).

Very small dividend, which seems odd. Surely they could pay out a more sensible amount?

Dating websites group, Cupid (CUP) has put out a positive-sounding trading statement. Strange to see that the shares have fallen back recently from over 200p to 175p. It looks surprisingly good value (based on fwd PER) for a company that is growing earnings so strongly. Could be worth a look?

I made a bit of money on specialist radio maker Sepura (SEPU) some time ago, but decided the shares were fully priced so sold out. Their interims today certainly look good, with adjusted EPS of E2.8c (important to note that their accounts are stated in Euros, so adjust for that when working out price, which is in pence). The outlook for the full year sounds confident too, but that seems to put them on a current year forecast PER of 15.5, which is hardly cheap. Good company though.

I've not looked at Digital Barriers (DGB) before, it seems to have consolidated some security surveillance companies, including Coe Group (which rings a bell from a few years ago).

Their interim results today look diabolical, with £8m turnover, and a £7m loss! So the £61m mkt cap (at 143p a share) seems to be supported entirely by expectations of future growth. Not my cup of tea, I'd rather have cheap cashflows now, rather than paying up-front for future growth which may or may not happen.

Security software company Intercede (IGP) issues lousy-looking interims, with turnover flat at £3.5m, and a fall into losses of £185k. I'm struggling to come close to justifying the mkt cap of £34m, although it does have £7.2m in cash.

Drug developer Phytopharm (PYM) seems to have been promising jam tomorrow for many years. Results today say that they've got enough cash to last until Q1 of 2014, so test results due in Feb 2013 look pretty crucial. Too high risk for me.

OK that's it for today. Normal service has resumed, so see you tomorrow morning.

Regards, Paul.

Sunday, November 18, 2012

Inland Homes (INL) - Part 2

The AGM for Inland Homes (INL) is fast approaching, on 27 November, so given my outspoken comments on excessive Director remuneration at this company previously on my Blog, I thought it would be useful to take a dispassionate look at the detailed facts.

Insomnia has its uses, as I was able to put my time to good use overnight going through the AIM Admission document for INL from Spring 2007, and every Annual Report from 2007 to 2012.

I have tabulated the key figures on a spreadsheet which is available to view by clicking on the link below;

Click here to view spreadsheet

Note there are 4 tabs, the main one which summarises key data (focused on Directors remuneration) and another tab which shows key points from the AIM Admission Document. The last 2 tabs are charts. Switch from one tab to another using the buttons at the very bottom of the page.

Key Findings

Inland was Listed in April 2007, after a Placing of 100m shares at 50p, raising £47.5m cash, after expenses. Yet here we are, 5 and a half years later, and the share price is languishing at 18.5p, or 63% down on the Listing price. By any standards that's a lamentable performance.

It's worse because there has been nothing paid in dividends, apart from the derisory 0.067p per share (yes, you read that right!) in 2012. That's a 0.36% dividend yield. The total cost of the maiden dividend was £122,610, yet it came at the same time that the Directors awarded themselves discretionary bonuses totaling £246,000, on top of generous basic salaries. What does that say about their priorities?

Therefore it's no wonder that shareholders are angry, because what we have is a well-paid Board drawing hefty salaries, whilst having presided over a considerable destruction of shareholder value.

We keep being told how astute these guys are, but are they really? They raised money & invested it at the top of the market, almost went bust shortly afterwards, and even now have failed to recoup even half of the fall in NAV between 2007-2009.

Shareholders have lost 63% of their money (50p Placing price to 18.5p share price now), whilst the Directors & employees have drawn over £8m in remuneration since Listing. It's very clear for whose benefit this company is run, and it's not shareholders! So I feel that Directors should ponder these facts, and how it feels from a shareholder perspective, before they jump on their high horse about their remuneration being challenged.

Also, check out the poor profit performance, and the corresponding level of total pay for Directors & employees (the bulk of which is for Directors);

Enormous losses, which wiped out a third of NAV seem to have only caused a temporary moderation in remuneration, until resuming its upward trajectory in 2011 and particularly 2012, with the large, undeserved bonuses paid, with no explanation that I can see in the Annual Report.

It's a public company, and shareholders have every right to challenge excessive remuneration, and rewards for failure.
Indeed, as they stated in their Admission document from 2007;

"The Company values the views of Shareholders and recognises their interest in the Company's strategy and performance and accordingly the Board positively encourages their attendance at general meetings."

So I am looking foward to a warm welcome from the Directors, and a constructive dialogue at the forthcoming AGM. Hopefully these issues can be resolved.

AIM Admission document (spring 2007)

Inland Listed in April 2007, and the Admission document contains lots of useful information, including about Director remuneration under service agreements dated 8 Mar 2007.

The key points are that Wicks & Malde each have £225k p.a. salaries, plus a further 20% for pensions, fully expensed company cars up to £20k p.a. cost (!), annual discretionary bonuses of up to 100% of salary (!!!), private healthcare, 25 days paid holiday, and the obligatory 12-month notice period.

So pretty generous service agreements, but nobody is denying that these 2 Directors have specialised knowledge & experience. But there again, so does every company Director, in whatever field they operate.

The service agreements were put in place towards the tail end of a long property boom, when these levels of remuneration would not have raised an eyebrow, given the proven track record of the Directors concerned.

However, those times are over, and anyone can make money in a boom. The truth is that Inland's Directors have proven far from successful in more difficult market conditions, especially considering they operate in the South East of England, where market conditions have actually remained fairly buoyant.

Proposal for revised Director service agreements

Therefore my assertion is that the service agreements should be revised, and remuneration reduced to more realistic levels for the current economic climate. My proposal would be these;

1. Revert to the original £225k basic salaries for the top 2 Directors, or rebalance the salaries to reduce the FD to a more realistic level.
2. No bonuses at all - all incentives should be via a new share option scheme, with a strike price of 50p a share, the original Placing price.
3. Freeze the company car allowance for 5 years.
4. Rolling 3-month notice period, there is no justification for 12-month notice periods.
5. Unjustified bonuses paid in 2012 to be returned to the company by Directors.

Remuneration committee

Inland has 2 Non-Execs, who have been in place since Listing in 2007.

My view is that they are not likely to be independent, and made a serious error of judgment in authorising £246k bonuses in 2012. Therefore they should be replaced as soon as possible with genuinely independent candidates who will safeguard shareholder interests.

The existing situation, where the Non-Execs authorise Executives pay, and vice versa, is ludicrous. It should be noted that Non-Exec fees were frozen at a grand total of £55k for 4 years, but then increased by 24% to £68k in 2012.

I would not want to see any further increases in Non-Exec fees for several years, they are quite high enough for a small AIM company.

Individual Director remuneration

Looking at my spreadsheet, I don't actually have any problem with the CEO's salary. It has tracked around £300k, which is perhaps warm for the mkt cap of just £33m, but it's not outrageous.

It should also be noted that the presentation of Director remuneration has changed, such that in 2011 and 2012 the totals included Employers NIC, whereas before they didn't. This skews the numbers somewhat.

I also note that the CEO has not taken the 20% pension contribution that he's entitled to, so credit where credit is due.

The figure that does jump out as too high, is the FD's package. A total cost of £506k for 2012 is absolutely ludicrous for an FD, in what cannot possibly be a full-time role. That is multiples of what a sensible salary would be, of perhaps £150k.

Therefore I propose that the FD's salary be substantially reduced by around half, and no more bonuses be paid.

I've heard that the FD is more than an FD. Well in that case, he should be given a different job title, perhaps "Deputy CEO & FD"? But the onus is very much on the company to justify such a huge salary for an FD.


It's time for a wake-up call at Inland.

The Directors have been paying themselves handsomely for 6 years, whilst delivering only a substantial destruction in shareholder value.

This calls into question the viability of the company as things stand. Maybe it would be better simply to complete the current projects, then wind it up & distribute the cash back to shareholders?

Or if the Directors have a better idea, then let's hear it, but certainly the current strategy of Directors being essentially the only beneficiaries of the company's existence, and shareholders providing the capital for no reward whatsoever, cannot continue.

I look forward to a constructive dialogue with Directors at the AGM, and will be sending this information to the Directors before the meeting, so they can consider their response.

I have absolutely no issue with Directors being well rewarded when they deliver shareholder value, which is why the best form of remuneration is relatively low basic salaries, and incentives linked to the share price in the form of share options. So perhaps we should suggest that Directors propose a new Share Option scheme, together with reduced salaries, in order to properly align shareholder and Director interests for the first time.

If I get time, I'll benchmark Inland's Director salaries against other small Listed housebuilders. Or actually, if anyone else has some spare time, maybe you could do this? I would be happy to publish here (with accreditation) any such work providing it's accurate.