Friday, 9 August 2013

Half year review - Part 3

LCG - London Capital Group

I did my main write up on LCG here. The two big bits of news since then for LCG have been the trading update and the change (again!) of the CEO, Mark Slade. With regards to the CEO, I'm sorry to see Mark go after such a short period but it does seem genuinely to be for non-business related reasons (and on the bright side, the overly generous options package granted to Mark will no longer dilute shareholders). The new CEO's background seems well suited to the role and he's already a shareholder so knows the business well.

The trading statement generated a bit of positive movement for the shares as it confirmed that the core business had grown from £12.8m to £13.2m (and this is based on the good H1 last year, not the bad H2) although the institutional FX and broking business declined from £4.8m to £3.1m. They claim an "adjusted" profit before tax of £3.1m compared to £2.7m in last year's H1. There's the expected IT platform cost (they are running two platforms concurrently whilst they perform a migration and should cease when completed) and some restructuring costs (which I think should be expected, given they are going through a much needed cost cutting process). Even being cynical with regards to how non-recurring these costs are, that's still an annual run-rate of £3m PBT (£6.2m if you think they are genuinely non-recurring) compared to a market cap of ~£23m (as I write, the shares are up today). They've disposed of two loss making divisions as well, which is good news. I still think there's plenty of upside left here.

PVCS - PV Crystalox Solar

All seems suspiciously quiet on the news front here from PVCS, as shareholders have been expecting a large return of capital (7.25p per share, compared to a market price of ~11.5p) for months now. Correspondence with the company has sadly only yielded a "wait and see" message, as they wait till the next trading update to announce what they'll do. The proposed tariff on Chinese imports on solar panels in to the market materialised, although they were somewhat less drastic than what was hoped for they still offer some degree of relief for the market. PVCS is still a net-net and all the reasons I have for holding still stand, although quite why the return of capital has taken so long is worrying.

TNI - Trinity Mirror

Trinity Mirror recently released their latest results and they were pretty impressive. Debt continues to be paid down from the huge cash flow generation and they even managed to grow operating profits despite the continued decline of newspapers. Many analysts still point to the huge pension deficit, which currently is larger than the market cap of the company. In many respects, owning the equity here is akin to a large bet on pension discount rates and their assumptions (although I still think the shares are cheap even if the liability is as stated). I made a comment on Stockopedia about my thoughts with regards to these assumptions and it's fair to say I want to bet on the overs when it comes to how realistic the current discount rates are (and hence I think the liability is considerably overstated). People also seem quick to forget the ~£300m of property assets they own as well as the fact cash flows are greater than profits due to depreciation being greater than capex.

The one thing I'm much less sure of, having given it some thought, is how well newspapers can handle the transition to online. Even with the huge growth figures being quoted for page views etc by TNI the actual revenue generated from their online operations is absolutely tiny - their tiny online recruitment businesses dominate their online news business. I did some research looking at DMGT (The Daily Mail group) and in their accounts I found that the group of businesses of which the Mail Online (the famously successful online tabloid and the world's most popular news site) is one contributed only £100m of revenues last year. Given that the wildly successful Zoopla group is one of those (who take up at least £30m of those revenues) that means the world's most successful news site does less than £70m in revenues a year. It certainly doesn't look like the monetisation of online news is anywhere near solved and, whilst I think there will always be a need for journalism, I'm not sure I know what its future looks like anymore. That said, some very bright people still think it's not all over yet...

TRCS - Tracsis

The only big news on the Tracsis front since my original post about them has been the trading update. To be honest I was surprised that profits were merely in-line, as the acquisition of Sky High should contribute significantly to profits in absence of any organic growth. Given so much of the profits come from the Condition Monitoring division, what do management have to say about it?
The Group is currently involved in negotiations with a major customer to continue the next phase of a significant Framework Agreement for its condition monitoring technology. The timing of the prospective contract extension indicates that potential major orders for the Group are expected in late 2013 or early 2014, assuming successful renewal. A further update will be provided in due course.
So it sounds like profits might be subdued somewhat until these orders arrive. I'm happy to hold here in the mean time, although I'll need to re-evaluate when the full results come in. I still think Tracsis has great long-term growth opportunities and the fact that they entered the rail freight market has gone largely unnoticed by the market. When I spoke to the CEO at an investor presentation he confirmed that they were pursuing the (much, much larger) American freight market and Tracsis still seem to be the only company dominating their market niche of crew scheduling software. I'll pay up for companies (within reason) where I can see a) very strong long term growth tailwinds in their market niches b) an excellent record of capital allocation and c) owner-operator management with an eye on the long term. Currently only JDG and TRCS fill this 'GARP' niche in my portfolio (although I'd argue ALLG should be considered a long-term GARP share, even if it's more deep value at the moment!) mainly because I find it hard to find many companies who tick all the boxes, especially box b).

Sharp eyes might have noticed I've missed off SPRP from this post. Given it's such a large proportion of my portfolio at the moment and I've not said a word about it I felt it deserved its own write up, so expect a full post on my first ISDX stock soon!


  1. Great write ups, i always take note of your posts.
    The recent half yr report for PVCS was underwhelming - i posted on the MF that i am not out due to disappointing EU tariffs. Cash has fallen too. Assets are still well above mkt cap but for me the whole outlook is negative.

    1. Shaun,

      I must admit I have quite a different perception here. The tariff outcome was indeed disappointing but that's not a necessity IMO to restore market prices (and don't forget, there's a quota well below existing Chinese import levels as well, for which the tariffs DO apply after). The cash dropping was expected - they removed significant liabilities by closing Bitterfeld and also they had a provision in their accounts before for the onerous contracts they are still under.

      The key thing is that overall asset backing hasn't fallen and they actually made a small profit - this implies to me that their provisioning is correct and fair and they are able to hold tight for a long period whilst waiting for a recovery. I wouldn't look at the cash in isolation - the other assets are perfectly valuable too (they have to be marked at the lower of cost of replacement value, so in fact the inventory actually has potential upside in the case of rising prices).

      Consider what this case looks like post 7.25p payout - the equity at the current market price would be 3.75p (11p - 7.25p) implying a market valuation of £15.6m. For that price, you get a business with £46m in NTAV (and a free factory, not included in the books anymore except at scrap value), of which a large proportion of the actual liabilities are provisions. This means you are buying at 0.34 of tangible book value with the comfort of knowing the future losses for the next few years are already accounted for in provisions - the margin of safety is huge and there's big optionality here.

      Should the pressure from market forces means the spot price recovers simply to the point of being break-even (why even be so optimistic as to consider market prices rising above production costs?) then those provisions aren't even needed anymore. If that happened immediately, that's an extra £42m of extra equity added to book value and your purchase is now trading at 0.18 of NTBV.

      To me, it's not necessarily about the outlook but rather the price I'm being offered relative to the range of outcomes. Buying at 0.34 of NTBV is a huge margin of safety and the accounting is very conservative.

      I still like PVCS

  2. Fair commentary although in honesty i still don't fully understand provisions.

    Directors are large share holders so i believe are motivated in shareholders best interests. I think key for me is i just don't see anything changing for the better any time soon.

    This statement in the latest report is important: LT they see +ve. Perhaps it will take years - i will take my chances elsewhere but monitor PVCS closely.

    "While the Group continues to believe in the positive long-term outlook for PV, it is mindful that the current market pricing is incompatible with a sustainable business. The Group has a healthy net cash balance and maintains significant manufacturing operating capacity. The Board will continue to monitor closely market trends and developments and to position the Group for the eventual return of a more rational business environment."

    All the best,

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