Small Cap Value Report (Fri 23 Aug 2019) - GDWN, ESL, ETO, STL

Good morning, it’s Paul here.

I had a few technical problems getting yesterday’s article to update, so have decided to start with a new article today, with the backlog from yesterday.

Share price: 3480p (up 1.5% at close yesterday)
No. shares: 7.2m
Market cap: £250.6m

Final results

This is an engineering group. Several readers asked me to look at it yesterday. Unfortunately, the section I wrote yesterday disappeared when I updated the article, so am having to write it up again now.

Results for FY 04/2019 look solid:

• Revenue up 1.8% to £127m
• Pre-tax profit up 11% to £14.7m – note the decent profit margin of 11.6%
• Diluted EPS of 150p – giving a PER of 23.2 – that looks very pricey compared with Castings, which I looked at yesterday, on a PER of about half this level.

Outlook – this is the exciting bit. There’s been a huge increase in the order book, with more in the pipeline:

Furthermore, I am also delighted to confirm that we have seen a significant rise in the level of sales order input within our Mechanical Engineering Division. Whilst some individual elements would not be notifiable the aggregation is significant for the Group. With this exceptional input, I am able to confirm that, at the time of writing, the Group order input since the start of the new financial year stands at £93 million and the total forward order book stands at a record £165 million (July 2018: £85 million), a 94% increase from this time last year, with yet more large long-term contracts, that we have been targeting over the past few years, still to be placed.

That sounds tremendously positive. I wonder what’s driving it? At a guess, cheap sterling must be boosting things. Weak sterling is reported on the news as being something terrible, but of course it’s positive for UK producers amp; exporters, making them more competitive.

Here are my notes from reviewing the results today;

• Very positive commentary amp; outlook
• Capex heavy
• Capitalised development spend of £1.5m – not very much
• High inventories – but £5m due to unwind. Still high though
• Balance sheet OK, but weaker than Castings (CGS)
• Big fall in cash generation compared with last year
• Reduced reliance on petrochemical industry
• Some debt on balance sheet, but looks OK relative to profits/cashflow

My opinion – I can see why readers like this, and asked me to review it – because the outlook comments, and large increase in order book, suggest that profits could rise strongly in future.

Which is better, Castings, or Goodwin? On balance, I’m more drawn to Castings, as it’s much cheaper amp; has such a strong balance sheet. Although Goodwins seems to have much more exciting potential for growth – which is priced into the shares.

Weak sterling means that these UK businesses have quietly been getting a lot more competitive of late.

Share price: 71p at close yesterday – suspended from 07:30 today
No. shares: 379.3m
Market cap: £269.3m

Directorate change, company update amp; suspension

Eddie Stobart Logistics plc, a leading UK end-to-end supply chain, transport and logistics group…

EDIT: NB. please note that this announcement relates to ESL. There is another UK listed company called Stobart (STOB), which owns 11.78% of ESL, according to ESL’s website here. So it’s a bit confusing. 

Sounds like very bad news. To summarise:

• CEO standing down with immediate effect
• Replacement CEO being promoted internally
• Accounting problems have emerged;

As part of the Group’s review carried out in conjunction with the Group’s auditors in relation to the interim results, the Board is applying a more prudent approach to revenue recognition, re-assessing the recoverability of certain receivables, as well as considering the appropriateness of certain provisions.

While revenue expectations for the first half are broadly in line with previous guidance, the full impact of these items on Adjusted EBIT is unclear, but it is likely to be significantly lower than anticipated at the time of the Half Year Trading Update on 9 July 2019.

As a result, the Board also intends to review the Group’s current dividend policy.

Suspension – normally an announcement like this would probably hit the share price by perhaps 50-75%, in my experience. That’s not possible in this case, as the shares are being suspended, pending clarification of the financial impact.

Accounts delayed – but not by much. Interims (6m to 31 May 2019)  were due out on 29 Aug 2019. This will be delayed until “early September”.

Outlook – management say they are confident:

The Board has full confidence in the ability of Eddie Stobart’s management team to deliver an improved performance for the Group going forward, and remains confident in the strength of the underlying business.

My opinion – I’ve not looked at this share before. Looking back, its trading update on 9 July mentions accounting adjustments being required, but unrelated to what has been disclosed today.

I’ve had a quick look at the last reported accounts, and don’t like what I see. The balance sheet is weak, with £312m intangible assets. Eliminate those, and NAV of £236m becomes NTAV of minus £76m.

Net debt was last reported at £154m, at 31 May 2019.

We’ve seen before (e.g. Staffline), how companies with stretched balance sheets (i.e. too much debt, and negative NTAV), which uncover accounting problems, may not have any safety margin to ride out the problems. That might trigger the bank losing confidence, possible breach of covenants, and an emergency fundraising being required.

This looks pretty grim to me. I hope none of our subscribers here hold this share.

This is getting ridiculous! Yet another takeover bid.

US-listed Hasbro is buying ETO for £3.3bn, or 560p per share. That’s a 26% premium to last night’s close.

With so many bids occurring, for decent-sized companies, it’s difficult to avoid concluding that UK listed shares might be too cheap. Or at least some of them.

This is de-listing after many years on the UK stock market.

It’s absolutely tiny, both in terms of mkt cap (£1.65m), and revenues/profit. So a listing never made sense. It’s looking at doing a tender offer for some shares are 1p.

It mentions lack of liquidity in the shares, and costs of “at least” £120k p.a. Clearly that is money wasted.

I think this is a good opportunity to review any micro caps which we might have languishing in our portfolios. Does it make sense for them to remain listed? If not, then a de-listing announcement could clobber the share price.

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