Wednesday, December 12, 2012

Wed 12 Dec - Begbies Traynor interims

Begbies Traynor (BEG) is a favourite value share of mine, and I reported on it originally here in early July. At the outset, in the interests of full disclosure, I hold shares in this company.

Today I went along for their interim results presentation, given by the CEO and 29.5% shareholder, Ric Traynor, and FD Nick Taylor. Begbies website is here.
They are the market leader insolvency practitioners for small to medium corporate insolvencies, and have 7% of the overall insolvency market. They are the only pure play insolvency practitioners Listed in the UK, most competitors are partnerships, operating much like firms of lawyers, with the international Big 4 dominating the larger corporate insolvency market (Price Waterhouse Coopers (the firm I trained with), KPMG, Deloittes, and Ernst & Young).

You might expect the insolvency market to be buoyant, but it isn't - because Banks and HMRC are under political pressure to keep unemployment down, hence with low interest rates, many "zombie" companies are continuing to trade, whereas in previous Recessions they would have been put into Administration.

So the point is that, at some point, Begbies are likely to see a long-term surge in business once the zombie companies are eventually broken up. The trade body called R3, estimates that there are 160,000 UK zombie companies, so this is a big issue.

Interims today were pretty soft - turnover down just over 10% to £26.1m for the 6 months, but continued staff reductions mean that adjusted profit before tax was £3.2m (cf. £4.1m last year H1). H2 is the seasonally stronger period, so it looks to me as if full year EPS is likely to come in around 5-6p.

Bear in mind that the shares are only 32p, and you can see that they look cheap, on a current year PER in the 5-6 range.

Dividends are a key attraction here - the interim divi is maintained at 0.6p, and when I asked them about sustainability of divis, mgt were emphatic that it is their intention to maintain the current progressive dividend policy, so that should mean about 2.2p for the full year, giving a cracking yield around 7%!

Debt is not a problem, as it's unsecured, and is expected to be renewed in 2014. Note that net debt has reduced substantially from £27.3m this time last year, to £18.3m this year. Bear in mind that with the very long debtor book inherent with this type of insolvency work, the debt is required to support the >£40m debtor book of unpaid work in progress. So it's revolving debtor financing, not structural debt used for acquisitions. Key difference.

Whilst the insolvency market remains tough, and competitive, there are 2 interesting reasons to be cheerful.
Firstly, management are back on the acquisition trail. They say price expectations have moderated to a PER of 5-6, and that less is expected up-front, so earn-outs for more than half the price are now possible. So expect growth through small, reasonably priced acquisitions from 2013 onwards.

Secondly, Begbies believe that the market is now so competitive that the Big 4 are not making their required returns from small to medium insolvency work, and dislike the reputational impact which is inevitable with this work (there is always someone aggrieved). So long-term, it is possible that the Big 4 may even withdraw from the smaller end of the market, leaving the field to Begbies.

So overall my view is pretty sanguine about Begbies. Yes their market is tough at the moment, but there are reasons to expect a stronger outlook long term. Given that they are only on a PER of 5-6 in tough times, then the shares could end up looking amazingly cheap in a few years' time with some growth under their belts. Meanwhile we are paid 7% p.a. in divis to be patient.

I asked about the Caledonian overhang. Mgt said it will take time to clear, but they are not sellers at any price. Of course today's overhang is tomorrow's surge. And it allows people who want cheap stock to buy in size without chasing the price up, much like Vianet. Hence for patient investors like me, it's an opportunity not a problem, indeed I bought some more BEG this morning.

Their outlook statement says the full year (to 30 April 2013) should be broadly in line with last year, and the impression given is that no further significant softening of the market is likely, but also no big upside in the short term either.

A lot more detail was covered in the meeting, but these are the salient points as I see them. To me, this seems a well-managed business, making decent margins in a tough market, with the upside in for free, and a great, sustainable divi whilst we wait.

As usual, this is NOT any kind of recommendation, but is merely my personal opinion for general interest. As always, please do your own research, take professional advice, etc.

Tue 12 Dec - BEG, SRG, STAF

A shorter report today, as I have to dash to the Begbies Traynor (BEG) results presentation at the offices of MHP Communications, just behind Oxford Circus, so am bracing myself for the rush hour tube journey.

Begbies interim results are fairly subdued, as I was expecting given the very low PER. Turnover is down about 10% to £26.1m, and adj profit is down from £4.1m to £3.2m for the 6 months. However, the outlook statement is OK, saying,
"We anticipate an improvement in activity in the second half of the financial year during the traditionally busier winter months. Given this, we currently anticipate that the group's performance for the year as a whole will be broadly in line with last year."

So we're probably looking at expections being trimmed from about 6p to about 5.5p for the full year, which means the shares remain good value in my opinion at 32p, off a penny so far today. PER is about 6, and the divi has been maintained at 0.6p, so no reason to expect any change in the full year divi of 2.2p, giving a very pleasing yield of almost 7%.

Net debt has fallen a bit to £18.3m, which sounds a lot, but it's fine. The nature of insolvency practitioners is that they run a very long debtor book, since fees are accumulated until authorised by the creditors meeting after asset disposals have been made. So they are paid in one lump, often a long time after the work was started. BEG has a £44m debtor book, so more than double its net debt, which I'm relaxed about. So are the banks, as the bank debt is unsecured, a very unusual situation. Remember that insolvency practitioners effectively work for the banks, so debt here is not an issue. I hold shares in BEG.

As planned, Security Research (SRG) announces a 1 in 5 Tender offer at 225p, a big premium to the current price which was 125p last night, and is 10%  this morning to 136p. I hold.

Another share in my portfolio, which has been doing well of late, is Staffline (STAF). They announce another bolt-on acquisition this morning, financed from existing facilities.

Right, gotta dash. I shall report back on Begbies this afternoon hopefully.

Regards, Paul.

Tuesday, December 11, 2012

11 Dec 2012 - Interesting growth company - Zytronic (ZYT)

Zytronic (ZYT)

318p (at CoB 11 Dec 2012) * 14.9m shares in issue = £47.4m Mkt Cap

Invitations to meet company management often hit my inbox these days, as more brokers and PR companies recognise the useful role I can play as a conduit between the City and private investors, a role I'm very happy to play for quality companies only!

I've held shares in Zytronic before (but not currently), so was pleased to meet their CEO and FD today at Buchanan's offices, for a results presentation and lunch. Many thanks to Buchanan for their excellent hospitality!

As an aside I must also mention my astonishment when at the end of the meeting, whilst I was chatting to Zytronic's FD, another attendee at the meeting  chucked two ten pound notes across the table at me, and just said, "for your running fund!", smiled and disappeared. I was so taken aback, I didn't properly thank him! So if you're reading this, thank you so much for your generosity, and I have paid it across to the charity on your behalf through JustGiving.

What do Zytronic do? They are a specialist manufacturer of rugged, larger, touch screens, typically for ATMs, vending machines, betting terminals at casinos, etc. About two thirds of their touch screens are 15-20" (across the diagonal), with the trend being towards larger sizes still. They are based in the North East of England, and manufacture everything themselves in clean rooms in 3 factories.

Their results issued today for y/e 30 Sep 2012 can be found here.

I'm very pleased to see that the results presentation given at the meeting today is also on their website here. That's very shareholder-friendly, hence gets a big thumbs up from me.

Looking briefly at their results, turnover was flat at £20.4m, but operating profit rose a respectable amount from £3.7m to £4.3m, due to high achieved gross margins. Margins are expected to continue rising, and the company is targeting an increase from mid-30%'s to low-40%'s. You can do the maths, but that makes it look to me as if it probably won't be long before profits pass the £5m p.a. level.

EPS moved up a useful 21% to 22.2p. So at the current share price of 318p that works out at a PER of 14.3 - which in my opinion looks about right for a solid growth company in a nicely profitable niche.

So it all boils down to the outlook. The reason the shares dropped sharply this morning, and then partially recovered intra-day, is because the results said, "current trading is behind the equivalent period last year ...".

As I pointed out to the CEO, the mistake was not quantifying this. So the market will take a knee-jerk reaction, assuming the worst. Whereas it would have been better to say that sales are down x%, and whether that trend is likely to improve & if so how much. It's all about managing expectations. Uncertainty breeds fear!

Face to face, management were explicit in saying that the outlook is "very positive", with new projects in the pipeline. Their sales tend to be project-based, but once a component has started to be supplied to a customer (say, a new ATM machine screen), then that contract will tend to run for several years, giving good visibility to sales.

The latest house broker is forecasting 23.5p EPS this year, but my instincts tell me that management are looking to out-perform that figure, so perhaps 25-26p EPS might be more realistic for the current year, if new projects happen as planned. They talked about growth coming in waves, with a wave of new products on the way now, but timing always uncertain as out of their hands.

Turning to dividends, there has been another useful rise to 8.5p total divis for y/e 30 Sep 2012. So that is a yield of about 2.7%, and the divis have risen very nicely from 3p in 2007. Similarly, EPS has a great track record of rising a decent % each year from 2007. So if you look at ZYT as a long-term investment, it makes a lot of sense, assuming that growth continues. Given that such growth has been achieved against the background of the worst financial crisis in living memory, then it is actually pretty impressive. Imagine what additional growth they could achieve once Western economies are recovering?

Worth noting that the tax charge should gradually reduce as a percentage in coming years, due to enhanced R&D allowances, and the "Patent Box" scheme recently set up by the Govt, which sounds very interesting & allows companies to pay just 10% tax on profits from specific UK Patents.

There are also more efficiencies to be had, in particular they noted that their current manufacturing facilities could handle 3-times the current volume output if needed, so continued growth will mean higher margins as they become more efficient utilising surplus capacity.

Net cash has risen to £2.3m, and the company is very comfortable about its financing generally - as I discussed with their FD, they are able to take long-term decisions in the best interests of the business, without having to worry about cashflow issues.

Conclusion? Really nice growth company. I like the management, who seem serious & focussed. It has a strong  track record of steady growth with no mishaps. Rising dividends. Niche products with 20% operating profit margin (indicating pricing power). It's the sort of long-term growth stock that I would be happy to put into a SIPP or other long-term portfolio, with the intention of holding for 5 years or more. Being an AIM stock it also has IHT exemption as well - useful for wealthy elderly investors.

I don't see any immediate big upside on the share price, so won't be buying any just yet, but it's certainly a stock that will be high on my watch list, and if I could get in around 200-250p then I'd load up with them. The time to buy might well be when the next set of interims come out, as they will be up against a strong H1 last year, which might trigger a short-term fall in price perhaps?

So, a quality company, price is probably about right at the moment at 318p, but I'll be looking to buy on any big dips!

P.S. Out of interest, I've had a quick look at the 2011 Annual Report for Zytronic, to see what level of Director remuneration they pay, as that is a big issue to me & many other investors.
What a refreshing change to see Directors that pay themselves sensible, reasonable, real-world salaries. The CEO is paid a basic of £108k, and his total including bonuses & BIK is £144k. The FD's total is £123k.
Remember this is for performing well - with a growth company, that is creating shareholder value, paying divis, and has a rising share price.

Compare Zytronic with the delusional, arrogant Directors of Inland (INL), who pay themselves multiples of these amounts, despite presiding over 5 years of share price weakness (still 60% down on their IPO), and only one derisory dividend!

I am really warming to the idea of investing in companies in the North East. As with Vianet, Zytronic seems a sound growth company, run by people who respect shareholders, and only ask a reasonable return for their work. This is a serious point actually, as they also have much lower overheads (rent, rates, and staff all a lot cheaper than in the South East), and the culture genuinely seems different - people who are prepared to work hard, and only ask for a fair salary. As opposed to the rampant greed we so often see from South East/London companies.

Tue 11 Dec - ZYT, CPR, ASC, IGR, BEG

Prelims from Zytronic (ZYT) are released today. They are a maker of touch sensors, with a mkt cap of £51m at 347p/share. Their results look pretty good, with PBT up 17% from £3.6m to £4.2m, and EPS up 21% to 22.2p.
That puts the shares on a fairly warm PER of 15.6, although they do have net cash of £2.3m, and the divis are up 10% to 8.5p (a yield of 2.4%).

The short term outlook looks a bit wobbly - with current trading below the equivalent buoyant period last year, as expected they say. The interesting bit is that there are some "very interesting & substantial projects for major customers under development".

I've been invited to meet management later today, so am looking forward to hearing more about the company's growth plans.
Their 20% operating profit margin indicates that they have pricing power, something that appeals to me. If decent growth is in the pipeline too, then could be interesting.

I see that ZYT shares have sold off 11% in early trading, so the results must have disappointed some holders.

Carpetright (CPR) shares have maintained an impressive feat of levitation for many years now, nobody seems to have any idea why the company has such a stratospheric valuation. Shorters have attacked it again & again, and every time it rebounds.

At 666p (a sign? lol!) it's valued at £470m. Their H1 performance in the UK was improved a bit, from breakeven last year's H1, to a £5.2m operating profit this year. Europe (a much smaller part of the group) went the other way, with operating profit falling from £2.9m to breakeven. There is no dividend.

It does own a property portfolio worth £82.6m. The average net debt in H1 was £27m, down from £79.6m in the previous H1), a large reduction, driven by the sale & leaseback of freehold shops.

The valuation remains completely unfathomable, one assumes because investors are looking back to 2006-7 when it made £40m+ profit p.a.. Someone ought to point out to them that those figures were on the back of an unsustainable consumer credit boom that is not going to be repeated.
At some point the bubble here will burst, and the shares will come down to fair value, which I reckon is probably 200-300p/share, if that.

ASOS (ASC) really is a remarkable business, and for me very much "the one that got away" - I sold my half million shares in it for the princely price of 9p each, pleased at having more than doubled my money quite a few years ago. They are now 2446p per share. Hmmmmm.

Their Q1 trading statement today shows sales up 30% overall, with the UK still strong at 24%, but International now 63% of total retail sales, and up 34%. So they seem to be doing what so many UK retailers fail at - namely expansion abroad. The valuation still looks absurdly high at £2bn, but it is a very special business. I cannot help think though, at some point, there will be a sharp correction.

Had a quick look at results for International Greetings (IGR), but the extremely high level of debt puts me off, even allowing for the fact that it's a seasonal peak (stocking up for Xmas).

Tomorrow I am up in London again to see the Directors of Begbies Traynor (BEG), presenting their interims to 31 Oct. This is one of my favourite value shares, with a low PER and high divi yield. Business is likely to remain somewhat depressed, due to the lenience of Banks & HMRC, under political pressure not to push zombie companies into insolvency. But that is a temporary factor, which will unwind once the economy begins improving. So that could bring a multi-year boom in business for BEG. Given that the shares are cheap in a quiet period, then they might look ultra-cheap once business is improving.

I don't normally like ambulance-chasing businesses, but insolvency practitioners are a necessary part of the process for orderly and legal resolution of insolvent companies, however harrowing the process might be for the people involved.

That's it for today. Tomorrow's report might be in the afternoon, as I have to get across London to the Begbies meeting for 10am.

Regards, Paul.

Monday, December 10, 2012

Mon 10 Dec - AMO, INL, AND, HDD, AN., TET

A fairly light morning for news so far. The only share in my portfolio putting out an RNS today is more good news from Amino Technologies (AMO). They've won a contract with a European telecoms company for their innovative set-top boxes which stream TV to devices around the house. It's put a couple of percent on the share price. This is on top of last week's in line trading statement, and news of a progressive dividend policy that sees the yield over 5%, and rising 15% p.a. for 2 years. So a good incentive for me to sit tight/buy more on any dips.

I note that Inland (INL), the brownfield regeneration minnow, is starting to move up this morning, a delayed reaction to the granting of planning permission on it's site in Poole. Their mishandling of Directors remuneration has certainly put a dampener on things, together with the bizarre reaction of the CEO at widespread criticism from shareholders at their AGM. But let's hope this year will finally show the company actually generate some shareholder value? Although the shares are still 60% down on the IPO price. There is "hidden" NAV though, so the true underlying NAV is probably now around 32-35p, hence why despite my reservations about management, I bought a few more after their AGM.

Results from specialist camera maker, Andor Technology (AND) look reasonably good, with adj profit before tax edging up from £9.7m to £10.0m. Adj EPS comes in at 27.5p, so the shares aren't exactly cheap on a PER of 14.4. However, when you consider they have £17.1m in net cash (compared with a mkt cap of £114m at 395p/share) and are still managing to grow in a lousy economy, then it might be an interesting company.

Their inaugural dividend of just 2p seems unnecessarily cautious given the strength of both profits and the balance sheet, they could have paid much more, 5-10p would have made a bolder statement, and would be easily affordable.

Results for y/e 30 Sep 2012 from minnow metal hardening engineer, Hardide (HDD) look encouraging. It has swung from losses into a £378k profit on turnover up 49% to £2.9m (still tiny, but a good profit margin which indicates lean overheads & pricing power).

The £8.4m mkt cap (at 1.1p/share) doesn't exactly make it look cheap on those figures, but if this becomes an exponential growth story, then it could be a tremendous bargain. Might be worth doing some digging to find out what the growth potential is?

Telecoms company, Alternative Networks (AN.) results look pretty good, although as always in these reports I only ever have a quick glance, so it's essential to DYOR.

Adj EPS is up 10% to 25.3p, although it looks like there are quite a lot of share options in existence, as the diluted adj EPS figure is a fair bit lower, at 22.4p.
Using the latter figure, that puts the PER at 11.6 (at 259p/share). Given that it also has net cash, a positive outlook statement, a strong balance sheet, and a decent dividend of 11.5p (for a 4.4% yield), and stated intention to raise divis by 10% p.a. over the next 2 years, this looks like an interesting situation.

The 2 things to watch out for with this type of company, are that they're not inflating profits by capitalising costs into intangibles. There are £26.3m of intangibles on AN.'s balance sheet, so that needs a further look.

Secondly, the risk is that net cash can be up-front payments by customers, hence always worth checking what the deferred income creditor is, and deducting that from net cash to arrive at a true net cash owned by the company itself.

But at first glance, I like the look of Alternative Networks.

Have had a quick glance at results from Treatt (TET) the supplier of organic & fair trade ingredients for food & cosmetics - likely to be a good growth sector one would imagine.

Looks like they've been under margin pressure, with profit before tax down 20% to £5.1m, on turnover flat at £74m.
Dividends are healthy, at 15.5p for the year, a yield of 4.2%.
Debt is a little higher than I would like, although the Balance Sheet overall looks OK - the debt seems to be mainly supporting fairly high stock levels, and low trade creditors.

I can't invest in the face of falling earnings though, unless the PER was much lower. Another fly in the ointment is the absurdly generous 2-year notice period in the former CEO's contract, resulting in a £0.6m pay-off. This is yet another area where shareholders need to put their foot down & demand improvements in conduct - yet another area where Directors "take the proverbial".

Why on earth should anyone have a 12-month notice period in their contract? (let alone 24?!). 6-months is plenty, and 3-months would be adequate for most Directors. They rarely actually work out their notice periods anyway. Nobody is indispensable, and in truth long notice periods for Directors are just yet another example of a managerial class finding ways to dip their hands into the till at every opportunity, even when they're leaving. So people who under-perform & leave, are given a 12-month pay-off, it's ridiculous! They should leave with 30-days pay at best, if they under-perform. Or nothing.

So this situation at Treatt where the outgoing CEO got a 2-year pay-off needs to be investigated, and if I were a shareholder then I would be asking the head of the Remuneration Committee why this has happened, and to make sure that in future Directors are only given 6-month notice periods at the maximum. Anything more is pure greed. It's difficult to think of any examples of Directors who have given their notice, and then continued working for more than 6 months. Usually they leave within about 3-months, by mutual agreement, as they are anxious to take on their new position. But they are always paid 12-months. This has got to stop. Time for a new shareholder spring in 2013 I think, to challenge & reduce excessive rewards for failure, including long notice periods.

You can't beat a good rant to get the blood pumping! It's a glorious day here in Hove, so I'm going for a jog along the seafront now, as only 2 months away from my Half Marathon - thank you so much to everyone who has already sponsored my 2 charities, and if you're feeling generous then please feel free to contribute here at JustGiving. We're already up to 47% of my target, but it would be great to get over 50% before Xmas!

Regards, Paul.