Small Cap Value Report (Tue 21 May 2019) - NEXS, ACSO, SHOE, MYSL, BMY, TCG

Good morning, it’s Paul here.

7-8am comments Nexus Infrastructure (LON:NEXS)

Interim results – I’ll have a proper look at these later, below.

The group warned on profits on 29 Apr 2019, which I didn’t get round to looking at. So it’s been on my list of things to catch up on, hence interim figures today being of interest.

Operating profit of £2.9m is down 17% on last year – hardly a disaster. There has been a 40% drop in share price since the Apr 2019 profit warning, so weaker performance looks baked in already.

Strong order book. Balance sheet looks OK, with some net cash.

Stockopedia shows forward PER at 8.7 – which looks about right to me, for a cyclical contracting business.

Outlook comments today sound positive, and interim divi is being maintained.

More detail on the numbers later today.

Trading statement (AGM) – this share is on my watchlist, because it hasn’t bounced after the indiscriminate sell-off in growth shares last year. My feeling is that’s either a buying opportunity, or not.

Today’s update reads positively, but there aren’t any figures.

Historically it’s been a highly seasonal, H2-weighted business.

While the majority of the trading year still remains ahead of us, the Board is encouraged by the trading seen at this stage of the year and remains confident in the Group’s outlook, maintaining Board expectations for the year ahead.“

My view – I understand the bull case;

• Commanding presence in a niche with little competition, globally
• Tech companies are not valued on profits (look at Uber for a large example)
• Once development spend is completed, then profits could flow
• Potential bid target for private equity?

The drawbacks for me are;

• Enormous capitalisation of development spending onto balance sheet
• Weak balance sheet
• It doesn’t really make any money – I’m not happy with the adjusted numbers
• Huge Director selling in recent years – if the future is so bright, why would they sell?

It’s possible that today’s update might reassure, and trigger some buying, maybe? Personally I can’t see anything much to get excited about in this update. This one remains in my “too difficult” tray, but I am tempted to buy – because the market got wildly excited about this stock in the past, and once it starts rising again, there could be a nice trade there, who knows?

Interim results – flat against last year. Nearly all the profit is made in H2, so there’s little point in analysing the H1 figures. 

• Divi maintained.
• Mgt speak amp; outlook sound confident
• Outlook says full year should be in line with expectations 
• Strong balance sheet, although note pension deficit
• Very short leases amp; flexibility – key competitive advantage
• Very good gross margins
• Rents falling – down 18.5% on renewal – helpful

My view – an unlikely hero in an embattled sector. Valuation at current share price of 227p looks about right to me – fwd PER of 12.9, and divi yield of 5.1% looks the correct price in my view.

I think the above summary captures the main points, so no need to expand on it any further in today’s report.

Sports Direct announced yesterday that it has sold out of this struggling (failing?) Aus/NZ eCommerce fashion business. The other big shareholder (apart from mgt) is Philip Green, and he’s got his hands full at the moment, trying to turn around his own collapsing empire.

The only hope for MYSL shareholders looks to be if the founders buy it back. They banked a lot of cash at the IPO. Why would they be  generous to outside shareholders though?

My view – the bears got this one right, but not for the right reason – nobody foresaw the VAT rule changes in Australia, which clobbered its margins. 

I feel that last year’s positive trading updates were highly misleading, and hence for me this one is uninvestable.

Share price: 235p (up lt;1% today, at 12:40)
No. shares: 75.3m
Market cap: £177.0m

Audited preliminary results

Bloomsbury, the leading independent publisher, today announces audited results for the year ended 28 February 2019, ahead of expectations.

I wonder why the share price is almost unchanged, if results are ahead of expectations?

I’ve highlighted below the financial highlights that particularly catch my eye;

PER – based on the 14.97p adjusted EPS figure above, that’s a (historic) PER of 15.7

 Stockopedia shows broker consensus for FY 02/2019 of 14.3p, so it looks an earnings beat of nearly 5% – good stuff.

Forward PER is 14.3 (based on an uplift in EPS to 16.3p forecast for FY 02/2020.

Although I’m struggling to see why a book publisher would be on a rating any higher than that.

Highlighted items – note 3 shows what adjustments BMY makes to its profit numbers. Are these reasonable? I think so, yes. Of the £2.3m adjustments, £1.7m is amortisation of acquired intangibles. That must be related to acquisitions, which is fine to adjust out of earnings, in my (and almost everyone else’s) opinion.

Outlook – the narrative has an upbeat tone. I like that the group is not sitting on its laurels, but seems to be driving growth through new initiatives amp; acquisitions. Digital amp; academic/professional divisions seem to be doing well. It has cash for further acquisitions.

This sounds OK. Slight typo (for a book publisher, oops!) but I know what the meant;

Excluding the impact of IFRS 16, performance is line with management expectations for 2019/20.

Harry Potter – most of the group’s profit (£9.8m of £14.4m) comes from the childrens’ books division. It is not clear how much of that is from Harry Potter, but it must be a high proportion. Do any readers know if BMY has ever indicated what proportion of its profits comes from Harry Potter?

Before buying this share, I’d want to know what the terms of the Harry Potter contract are – how long, can it be cancelled (thus risking a good slug of BMY’s profits), etc. Plus crucially, how much does it contribute to BMY’s profit? This seems the major potential risk facing BMY.

Harry Potter seems more a timeless classic, than a fad, so I don’t think consumer demand for that product is likely to be a problem. I’m no expert on this sector, so this is just my initial thoughts when pondering the business model of this company. It says today that sales of Potter were down 15% on last year, the 20th anniversary.

Balance sheet – is very strong.

The one figure that jumps out at me, as looking too high, is receivables of £81.9m. That’s almost half the year’s revenues! Although remember that trade receivables are inc VAT, and revenues are Exc VAT. Even so, it’s much too high.

Note 8 explains why – receivables includes £22.7m in royalty advances. Trade receivables is a more palatable £50.0m. That looks a little, but not alarmingly high, so I’m OK with that.

Cashflow statement – looks good – this is clearly a genuinely cash generative business, which is using that cashflow to pay divis and make small acquisitions. I don’t see anything untoward.

My opinion – in his morning tweet, MrContrarian pointed out that BMY is still (probably) heavily reliant on Harry Potter. As mentioned above, that’s the key risk that I can see.

I’ve noticed recently how several branches of Waterstones have been quite busy. There is clearly still demand for physical books, as well as Kindle.

I like this company, but personally am looking for shares with greater growth potential. So it’s not for me.

Stockopedia likes it a lot – “Super Stock”, and a high StockRank;

Stockopedia