Friday, January 18, 2013


Back to normal, apologies for yesterday's failure to produce a report, just ran out of time in the end.

I did however attend an excellent investor evening, arranged by Equity Development, which followed the tried & tested format used by David Stredder's excellent "Mello" investors evenings.

Three companies presented last night, being Regenersis (RGS), VP Group (VP.), and Tracsis, then we had excellent canapes, drinks, and networking courtesy of the hosts, legal firm Fasken Martineau in Hanover Square, London.

I was very impressed with all 3 company presentations. It's so useful to meet management, and get a feel for the people who actually run companies that we can invest in.
If anyone does a write-up of the presentations onto a bulletin board (I don't have time, on top of the time it takes me to write these reports), then please let me know, and I will happily provide a link from here.

But very quickly my impressions were these;

Regenersis (RGS) - sensible strategy to target high margin growth from emerging markets. Shares have performed very well recently, and in my opinion are probably getting close to being up with events. I could see upside to 200p, but at 169p that doesn't give me enough % upside to jump in now, so regrettably it's one where I've missed the boat. Which is a pity, as I actually flagged it here on 25 Sep 2012 as being good value when the shares were 96p! A bit annoying that I didn't follow up my own analysis with a purchase, but never mind.

VP (VP.) - Another company that I was already aware of & liked, they are a niche equipment hire business. The CEO really impressed me with his strategy (proven to be very effective, in how they have coped well with a major Recession), and a keen focus on shareholder value. They have never cut their dividend in over 30 years! It would make a terrific share to just tuck away & forget in a long-term portfolio, being reasonably priced on a PER of about 10, and with a 4% dividend that's likely to just steadily grow each year. so much better than a Bond, as you have in-built inflation protection, which is why I think equities generally are under-priced compared with Govt Bonds.

It was also interesting to note that VP said the Banks are lending, but by implication only to businesses that are low risk. Which is surely what Banks should be doing?!

Tracsis (TRCS) - This share is intriguing. They have had a very good year or two, and the share price rise has been underpinned by repeated above expectations trading statements, and excellent results. I have a nagging doubt as to whether those results are sustainable though, as a lot of the out-performance was from hardware sales rather than recurring revenue, if my memory serves me correctly.

The valuation looks a lot more interesting when you consider that about a quarter of the mkt cap is net cash. Also it has very high margins, so the price of 4x sales is not particularly relevant. Pricing power means they have something special, and have hoovered up pretty much all the main train operators in the UK as clients, so the product is clearly dominating its niche - a very nice strategy. They are acquiring other companies very cheaply. It all sounds intriguing. It's high on my watch list, but again don't think I can buy after such a big run up in the share price.

As someone quipped afterwards, what a pity we hadn't had this meeting & met these companies a year ago! But thanks again to ED for organising this, immensely useful, and let's hope there will be more such investor evenings with high quality companies presenting in future.

OK, turning to this morning's RNSs next.

Games Workshop (GAW) have issued a solid set of interims to 2 Dec 2012. Selling action figures to nerds is clearly a Recession-proof activity!
There is a striking jump in operating profit pre-royalties received, from £6.5m to £10.6m. Although their royalties received has plunged from £2.6m to £0.4m, so that needs looking into.

The interesting thing here is that GAW pays out the bulk of its earnings in dividends, so you get a whopping 6.7% divi yield. Although personally I like to see divis better covered than this. It also has a very solid balance sheet, with net cash. But the PER of around 13 means it's priced about right, so not of interest to me.

Shares in K3 Business Technology (KBT) have plunged 17% to 110p today, on the back of a profits warning. Can't say I'm surprised, as I've previously commented here before (on 18 Sep and 5 Dec) of the potential for a profits warning with this company. So I hope everyone steered clear, as I did.

There is far too much debt on its balance sheet, and now with a profits warning on top, it's not something I will revisit. Why take the risk when you don't have to? I'm convinced that long-term investing out-performance is best achieved by avoiding highly geared companies. After all, a company with cash in the bank that under-performs (like French Connection) has time to sort things out, and break-up value. A company stuffed full of debt which under-performs is at the mercy of the Bank manager, who can pull the plug any time they like, rendering the equity worthless.

Another strong housebuilder statement, from Bovis (BVS), gives me increasing confidence that my shares in Inland (INL) are overdue a re-rating, although they have been quietly ticking up in the last week or two, at long last!

Finally, I see that Home Retail (HOME), an old favourite of mine here, which I was very bullish about at 70-90p last year, put out a positive trading statement yesterday, although I feel the price is now well up with events at 140p.

The interesting thing here is that the short position has actually been rebuilt (led by aggressive hedge funds apparently), who must be smarting at their losses, as they've got it fundamentally wrong - Argos & Homebase are good businesses, with a bullet-proof balance sheet, which will not only survive the downturn, but will gain market share from rivals that go bust. The new head of Argos is brilliant, and has an excellent turnaround plan for Argos, which is working.

Of course, I sold too early (always do with my best ideas), at 105p.

Although I am intrigued at how all these shorts are going to square their positions when they eventually give up? According to Markit, there is a short position of 180m shares in HOME, which is a staggering 22% of the total shares in issue! There could well be an almighty short squeeze, which conceivably could take HOME up to 200p or more, in my opinion. I can't be the only person who gets a warm glow at the prospect of hedge funds making huge losses?!

Finally, can I just say thanks to the many people who have emailed me in response to my request for help & ideas last weekend. I have a big backlog of emails to reply to, which I'll plough through this weekend, and it's great to get so much positive feedback from many people who tell me they find this Blog useful. It's good to be appreciated!

Best wishes, Paul.

Of the shares mentioned today, Paul holds shares in Inland only.

Wednesday, January 16, 2013


French Connection (FCCN) has issued its sesasonal trading statement, although around 2 weeks earlier than last year, so it's taken me by surprise.
Broker consensus for this year (ending 31 Jan 2013) is for a loss of £4.8m.
Today's statement indicates a loss of £7.5- 8.0m for the year is likely, so that's worse than expected, but not catastrophic. Although on c.£200m turnover, it's not a massive variation.

The key point with FCCN is that they have time to turn it around, because the balance sheet is immensely strong - not only are they net cash throughout the whole year, and have today reported £25m net cash at this time of year, a seasonal high. But also they have the further advantage of a substantial debtor book from their wholesale business, which has no associated debt. If necessary this could be invoice discounted, raising more cash.

There is considerable value in the brand, which has a very high profile amongst affluent female shoppers. Investors tend to be male, hence think only in terms of the old hat "FCUK" slogan T-shirts from the 1990s. But actually French Connection is more about very stylish womens dresses, and gets a lot of coverage in the press, especially from celebrity endorsements like Pippa Middleton & Carol Vauderman, being a couple that I've noticed in 2012.

The litmus test is that their brand licensing division is highly profitable, which is basically free money for other people stamping the French Connection name on products such as glasses, perfume, etc. That indicates the brand, whilst somewhat diminished, still has considerable clout.

The upside potential of course is that FCCN once again becomes a really hot fashion brand, then the upside is shown by British fashion brands such as Burberry or Mulberry. Maybe they should change their name to French Connectioberry?!

This latest mild disappointment might knock a few pence off the share price in the short term, but with the mkt cap only £28m at 29.5p, the share price is only a whisker above net cash, and already factors in continued disappointment. They have time to turn it around, so everything still to play for.

Also worth noting that FCCN had a terrible H1 last year, so they are now up against very soft comparative numbers, which could mean that the next trading statement may surprise on the upside possibly?

I'm happy to continue holding, as this is an each way bet - either they turn it around, or there will be a trade sale, and I think the brand alone is worth multiples of the current share price. However, today is likely to be a down day for these shares- as indeed it is, with them having opened down 16% at 25p, so it's now trading a whisker below its own net cash! I'll be buying more if it goes any lower. (note: FCCN has since bounced a bit to 10% down at 26.88p mid-price at 08:51)

Housebuilder Barratt Developments (BDEV) issues a strong trading update, and appears in rude health - operating profit up 31% vs last year's interim period (6m to 31 Dec), PBT more than doubled to c.£45m.
Net debt has fallen from £542m to £332m, and operating margin has increased from 6.4% to 8.4%.
This surely augurs well for the economy overall in 2013, if housebuilders are seeing strong profit growth & increasingly sound balance sheets? That is bound to increase new building activity.

I've never heard of Ebiquity (EBQ) before. It seems to be some sort of consultancy to the advertising & PR sector. It's previous name was Thomson Intermedia (prior to 2008), but I've never heard of that either!

Whilst their trading seems good, the balance sheet is stuffed with Goodwill, and has too much debt, so that rules it out for me.

Forbidden Technologies (FBT) has put out a positive-sounding trading update, which has put a rocket under the shares, up 25% to 25p, which takes the mkt cap up to a staggering £21.6m.
I say staggering, because this company has delivered de minimis turnover, and has never made a profit. Why people are prepared to pay such a large up-front premium for growth which may or may not happen, is beyond me. Particularly when technology changes so rapidly, this kit might be obsolete before they've even managed to deliver any sensible turnover?

Toumaz (TMZ) was the only blue-sky thing in my portfolio, and whilst their trading statement today has some positive noises in it, the figures and timescales are not attractive enough for me to continue holding, so I've sold out this morning. The mkt cap here of £63m is entirely based on future hopes for its products, and that's just too high a valuation in my opinion.

N Brown (BWNG) reports a superb performance for the 19 weeks ended 12 Jan 2013, with LFL sales up 7.9%! That's really something, given the economic climate. Online sales are an astonishing 54% of total revenue.

They have re-invested profits in measures to drive growth (such as giving discounts to new customers), hence profits are expected to be in line (whereas one would have expected them to be above). The forecast PER of 13 looks about right to me, as growth potential must be fairly limited now one would imagine.

It looks like a good long-term investment to me, the sort of thing to tuck away & forget for 5-10 years, which will churn out gradually rising divis. The divi yield is about 3.7%, so a lot better than a deposit account!

Thorntons (THT) has always seemed to me like another relic from the past, destined to go the way of Comet, Jessops, and HMV. However, their trading statement today gives some hope. Their multi-channel approach, especially targeting commercial sales, seems to be paying off.

Thorntons say that, "We enter the second half of our financial year with profits in line with our expectations and ahead of last year...", pretty reassuring.

They are expected to make a £3.1m profit for this year.

The elephant in the room is their debt, roughly the same as the £30m mkt cap. That makes it far too high risk for me to even consider buying the shares. A significant increase in profits is needed to make that level of debt sustainable.

Marketing materials printer, Communisis (CMS) shares had a good year in 2012, and they confirm that results for 2012 are in line with expectations. Net debt has fallen to £21m, just under a third of the £67m mkt cap, so still a material amount.

The PER is about 9, so given the debt too, I think that seems about fair value. The shares are up almost 50% in the last month, which makes it look fully priced to me, for the time being. It's low margin work, and in a mature/declining sector, so I can't get excited about this one.

Bloomsbury Publishing (BMY) issues an IMS today, which gives lots of detail, but not a terribly clear overview. However, they do say that;
"In the four months ended 31 December 2012, Group operating profits from title sales were up year on year because of lower relative costs of production in the new digital environment and a lower returns rate as the proportion of online sales increased, in spite of a 2% decrease in title sales".
So that sounds reasonably positive.

I'm quite tempted to have a nibble here, as the fwd PER is only 8.9, the divi yield almost 5%, and it has net cash of £7.7m at 31 Dec 2012. So good value characteristics there.

It's very clear that companies which are succeeding at the moment are those which have embraced the internet age, and have an effective multi-channel strategy. Bloomsbury seems to tick that box, so it looks interesting at the current price of 116p.

I've read the Braemar Shipping (BMS)  IMS, but since it doesn't give an overall trading comment (just division by division), I can't draw anything meaningful from it as to the company's overall performance.

So a big thumbs down there for a worse than useless trading statement, which has just created uncertainty. The whole point of an IMS is that it should give investors a clearer picture of a company's overall trading performance. This one from BMS today just muddies the water. So not surprising to see the shares have dropped 5%, as investors will usually read ambiguity as negative.

OK, that was a lot of information to plough through today!

Just a quick heads up, I'm considering an offer of payment to publish my morning reports on another website. They will still be free to view, and the content will be exactly the same, with me having full control over the content & free to write what I like, but they might appear on a different website.

I might trial this idea, and if so, there will be an introductory paragraph here, together with a link to the day's article. So just one extra click for readers, but it should generate a bit of income for me, which would be helpful as writing these reports is quite a big chunk of my time & energy each day, so it would be nice to earn a bit of income from doing it.

It might not happen, as we're still discussing terms, but just wanted to flag it up to you. Of course if any other website or publishers would like to talk to me about my morning reports being published exclusively by you on your website, paper, or magazine, and if the price is right, then get in touch sooner rather than later!

Regards, Paul.

Tuesday, January 15, 2013


A little late today, as I had a late night at one of Dave Stredder's monthly "Mello" investment evenings in Beckenham (there is also a quarterly "Mello Central" in London). Of course I remained completely sober all evening for my DryAthlon, and many thanks to the kind gentleman who handed me an £80 CAF cheque for Cancer Research last night, it made my day!

We were given a results presentation from software company Sanderson (SND). I liked the straight-talking management, and the company seems to me a nice steadily profitable, if unexciting company. Some growth prospects, but nothing much to get excited about. The price looks about right on a PER of 11.

Also, I would say that you have to be careful about cash balances with software companies - as in this case, and many others, the cash is actually up-front payments by customers for services that have not yet been provided. The clue is to look for "deferred income" in the creditors section of the balance sheet, then deduct that off the cash balance to strip out the cash effect of such up-front customer payments. Sanderson is about cash neutral when you do this. Important to remember this, as otherwise you end up over-valuing companies when you work out Enterprise Value if this adjustment is not made.

However, Sanderson seems a fundamentally sound company, which has repaired its balance sheet, and makes good margins, with a quality customer base. So it's good to have met management, and park it in the section of my investing memory which says: decent company, buy if/when the shares get cheaper, e.g. on a profits warning.

Quite a lot of larger cap trading statements today, so I'll have a quick skim of the retailers, since that's my background (I was the FD of a ladies wear chain for 8 years in the 1990s), and I maintain an interest in the sector.

Ocado (OCDO) is a stock I am very bearish on, since their business model is fundamentally flawed - they deliver Waitrose goods, but do not have exclusivity. Plus it's a low margin, competitive area. They require huge capex, and have never made a profit! Yet it's valued at £470m. Absolutely crazy, and an accident waiting to happen, in valuation terms, in my opinion.

Their top line figures, reported today, look good with gross sales up 14.2% in the 6 weeks to 6 Jan 2013. Sales of Ocado own label products (surely the only area that might take them into profit?) are up 70%, but it doesn't quantify the total, so that might be 70% on top of a tiny number, which is still a tiny number. Or it might not be, the statement just doesn't give enough information. There's nothing on profitability (or lack of) either - funny that.

Market consensus is for further losses in 2013 and 2014, so what's the point in this company existing? You could argue that it makes a positive EBITDA, but that argument falls apart when you consider that it actually needs heavy capex to exist and expand. Is that a good use of capital, ploughing it into a business that generates no return? I would argue not.

Another stock I'm bearish on is Quindell Portfolio (QPP). They've put out a positive-sounding trading statement, but I will reserve judgment until their next balance sheet is issued. The key line to look at will be Debtors, which I suspect will be roaring up inexorably higher as all those "profits" are booked. The same thing happened with Helphire & Accident Exchange, and it didn't end well.

I may be wrong, but one thing I have learned over the last few years, is that if there's a nagging doubt in your mind about a company, deploy your bargepole. Plenty more fish in the investing sea.

It's sad to see HMV finally lose its heroic struggle for survival, but the pincer attack of technological progress (internet & downloads), unaffordably high rent & rates, and high levels of bank debt from foolish acquisitions, just squeezed them out. That said, I'm sure a phoenix company will emerge from Administration with the profitable shops only, last another 3 or 4 years, and then go bust again. The bottom line is, if we want a High Street CD/DVD retailer, we have to use it. When it's so much easier & quicker to shop at Amazon, why bother?

I'm surprised Halfords (HFD) have managed the last 5 year downturn as well as they have, but for whatever reasons the internet doesn't seem to have harmed them much at all.

They had a solid Xmas, with LFL* sales up 1%. It is worth noting that retail achieved +0.4%, but the Autocentres (car repair shops) achieved a very creditable +5.6% LFL sales growth. So clearly the expansion into car repair shops is working.

The most noteworthy thing about Halfords shares is the stonking dividend yield. They have paid 22p in each of the last 2 years, so that's a yield of 6.6% with the shares at 334p. If you think that can be maintained, then the shares look attractive. The forecast PER is about 11.6, so the divi is not well covered - hence I'd be nervous about buying just for the divi, since the risk of it being rebased to a lower figure looks quite high. So would be worth scrutinising their last couple of Annual Reports to see how committed management sound to maintaining the divi (although it's often best to ignore such assurances, as they mean nothing).

Hydro International (HYD) is a specialist waste water management company. Their trading update today indicates that whilst 2012 will be in line with expectations, prospects for 2013 and beyond are not looking good, due to 3 major contracts with Thames Water coming to an end. This has knocked 16% off the share price, which is down to 104p at the moment.

I've always liked this company, so it might be a buying opportunity, and they do have a strong balance sheet. Might do some more digging on this one. Although lumpy orders to major customers does increase the risk of mishaps a lot, as today's RNS demonstrates. Often a big risk with smaller caps, who can be over-reliant on one or two big customers.

Alliance Pharma (APH) is a stock I've looked at closely before, but never taken the plunge. Its trading statement today looks good - due to stronger gross margins, profits are expected to be slightly ahead of current market expectations.

Taking into account their debt, the shares look priced about right to me, hence are of no interest - I'm looking for bargains, not fairly valued companies!

Mears (MER) has issued an in line with expectations trading update for 2012. Shares here also look priced about right, although I note EPS has been rising quite strongly recently.

OK, that's it for today, sorry it's a bit late. Normal time tomorrow hopefully!

Regards, Paul.

(of the shares mentioned today, Paul owns none of them)

* LFL = Like-For-Like, i.e. stripping out the distorting effect of newly opened or closed stores, and comparing only the aggregate trading performance of shops that were open in both the current and prior year comparative periods. Thus LFL gives the truest reflection of underlying sales performance.

Monday, January 14, 2013


Here we go again, Monday morning, and another busy week in the offing, with many 31 Dec trading statements likely. I'm pleased to say my DryAthlon is going well, haven't touched a drop of booze since 29 Dec. Better still, the donations for Cancer Research (almost all from readers here!) have already hit 155% of target - awesome! Thank you to everyone who has donated, it's much appreciated.

Sarantel Group (LON:SLG) has finally run out of investor appetite for repeated fund-raisings, and has put itself up for sale, having just reported on another year (ended 30 Sep 2012) where it burned around £2m in cash losses.

Pity, as I always thought their product (high performance, small antennae for high end mobile devices) has great promise, but as is often the case with new technology it takes longer & costs far more to commercialise things than originally planned.

From today's RNS it looks like a sale process is well advanced, and is likely to pay out roughly the current mkt cap - so if it succeeds, then it will be a lucky escape for shareholders I think. If I held the shares (which I don't), I'd head for the exit now, as there seems little if any upside, and considerable downside risk.

A very interesting trading update has been issued by Porta Communications (PTCM), with trading "ahead of management expectations", with, "an exceptional end to the year". It seems to be a small advertising & PR group, which invests in start-ups, rather than buying existing businesses. Interesting strategy, and probably sensible given that it's a sector which is all about people & contacts.

Whilst they say that annualised revenues are now running at £16m, and all companies in the group expected to be profitable in 2013, the level of profit is not quantified, either in this trading statement, or in broker notes (since there don't seem to be any broker notes).

I can't just make a leap in the dark with no forecasts, so unless & until they commission some research and issue it to the market, then the shares can't possibly go into my portfolio. Pity, as I like the look of it.

Bioquell (BQE) is one that got away - it came up on a stock screen I did with PAS (Performance Analysis Scores), the stock screening tool that I now use on my other website, in Jan 2012 at around 110p, but I didn't follow it up. The shares are now 160p.

Their trading statement today details some issues around the year-end, with orders delayed due to various factors. Also their military division has had a poor year, with inherently "lumpy" orders. However, their core business seems to be doing well & has good prospects. It does look like a veiled profits warning for 2012, so with a PER of about 20, the share price looks vulnerable to me, so I won't be buying any.

I see that Vianet (VNET) is on the move upwards again. Apparently it was tipped in a highly-regarded tipsheet (SCSW) over the weekend, which reinforces my confidence in the shares as an excellent value and growth situation. Always good to have another set of eyes & slide rules run over a share in my portfolio, which is one of the reasons I like throwing my portfolio ideas over to public scrutiny - several minds are always better than one, and any pitfalls are more likely to be spotted.

Accounts from housebuilders are always worth a look, as a general pointer to the economy as a whole. Taylor Wimpey (TW.) report a calendar 2012 that has gone very well, with profits up over 40%, at the upper end of expectations.

It certainly looks as if all the measures taken by Govt to artificially prop up house prices that are historically still way too high in relation to incomes, has worked for the time being. So perhaps there is hope that housebuilding might increase in 2013, that we might begin to actually build anywhere near the number of houses we need given our hugely increased population since the doors were thrown wide open in 1997, without even the vaguest thought given to where all these new people were actually going to live! Common sense departed Westminster a long time ago I'm afraid & shows no sign of ever returning!

Recruiter, Hydrogen (HYDG) announces a positive end to 2012, bouncing back from their soft Q3. Could be a buying opportunity, now that trading is back on track, but the share price still well below where it was 3 months ago.

By my calcs the PER is 9.8 times market consensus for 2012 EPS, which they have confirmed today will be achieved. That drops to 7.9 times 2013 forecast EPS. A very nice divi too, yielding 5.2%. Looks tempting.

Menswear retailer & hirer, Moss Bros (MOSB) says that they had a good Xmas, and expects to exceed market expectations for 2012/13. The shares have looked pretty pricey for a while now, so this perhaps explains why. It has a strong balance sheet too.

Another recruiter reports today in line trading, Networkers International (NWKI). They look potentially interesting, with possible upside from 4G roll-out on their telecoms recruitment division.

Pure Wafer (PUR) has never looked viable, with (admittedly reducing) losses in all the last 5 years. They seem to be around breakeven now, which doesn't excite me.

OK that's it for today, same time tomorrow!

Regards, Paul.