As expected WYG said their interim was very disappointing. The company took a net loss of £2.8m blaming provisions. Even their adjusted Profit before tax fell to £1m from £2.8m.
Having studied the company’s financial statements at length, I see a lot of problems in their past, present and future. Below I will be presenting 11 observations that any investors should be making and how it affects the company’s share price.
Brief Business Background
So, WYG has three streams of business: –
Advisory; – a management consultancy that helps to I.D. opportunities for clients and support decision-making process.
Consulting; – gives technical expertise and insight to deliver projects. Also, it has the expertise to support the project at each stage of their lifecycle.
International Development; – helps to optimise donor-funded projects. It aims to improve infrastructure and unlock the potential for sustainable development.
Overall, WYG employs over 1,600 people and operating from more than 50 locations across the UK, Europe, Africa, Asia and the Middle East.
Observation 1: Risk of contract delays
Despite touting contract wins and growth, management has warned about programme deferrals on existing contracts and delays as an ongoing risk to WYG’s performance.
That has contributed to WYG seeing their share price falling from £1.20 to 40 pence. However, today’s revenue has increased by £2m to £75m, compared to the same period of last year.
Shouldn’t delays in contracts or deferrals see lower revenue?
If you are wondering receivables growth, it actually declined.
So, management should have said that the delay in contracts is adding to costs of turning over a profit.
Observation 2: The unconventional use of “Adjusted Operating Profits”
Last year, WYG reported adjusted operating profit up by 22% to £8.8m but reported operating profit came in at £2.15m. A difference of over £6m.
The practice of adding back costs is seen as boosting profits.
Surprisingly since 2012, the company adjusted operating profit was ONLY £4m higher than operating profit. That’s because in 2012 saw adjusted operating loss of £5.8m vs. operating profit of £11m, due to debt rearrangement (debt to equity swap of £50, see below for details).
Since then, the company adjusted profits have been higher than reported profits AND the difference is £22m.
Observation 3: Staff Costs
One of their major cost is staff as this accounts for 35% since 2012.
Observation 4: Other external and operating charges
Another major cost is their obscured Other external and operating charges. Although little is known, this cost represents over 50% of revenue.
Observation 5: The power of adjusted profit and unadjusted profit vs. Valuation.
If you compare market capitalisation to adjusted operating profit and unadjusted operating profit, then the result is an illusion.
Shareholders thought they were investing for a reasonable valuation, instead, they ended up paying 40 times’ earnings.
At £28.4m mkt. cap. and management of adjusted profit of £3.5m, this value the business at 8 times. But reported profit is likely to fall into a net loss.
Observation 6: Keep your eye on changes to provisions in their balance sheet
One thing that caught my eye is the trend in WYG provisions reporting. Here is an illustration below:
In 2012, provisions reported in their balance sheet amounts to £26m and this has been steadily falling. Their last annual report saw provision fell to £3m.
Accounting for provision is simple:
If provisions decline from the previous year, the difference gets added as income in the profit and loss account.
If provisions rise, then it is an exceptional item and the difference is treated as an expense.
I can’t help but wonder that the decrease in provisions has increased WYG to report a profit. And it is no coincidence that when provisions have risen by £2m management are placing this blame on provisions.
With provisions near record lows, there are fears this will begin to rise. If so, it will play havoc with the company’s share price.
Observation 7: The company is super volatile, in terms of market valuation and Turnover
Investors want stable and steady growth.
They don’t want to own stocks where in a matter of one day see it collapse by 30%-40%. WYG is a volatile business and in the past year, shareholders have lost a lot of money.
Below is a chart showing turnover and market capitalisation:
You get my point!
Observation 8: Raised £30m by issuing 64m new shares for 50 pence each
It helped to turn net debt from £29.2m into net funds of £24.2m. Now, seven years later, the company is forecasting net debt of £6m to £7m. So, how is this possible?
Didn’t the company make “adjusted profit” totalling £22m since 2012? So, why is net debt rising?
Observation 9: Capex and dividend
To answer the (above) question, it must be that WYG is paying out a hefty sum on dividends and net capital expenditure.
Surprisingly, net capital spending totals £24.4m and dividend paid was a measly £1.5m. This shouldn’t change WYG’s net funds of £24.2m too adversely.
The problem with adjusted profit is it adds back too many costs that are part of annual expenses and costs of doing business.
Observation 10: WYG went on a spending spree
Between the period 1997-2007, the company acquired 38 companies leaving it with a hefty debt burden. With high levels of borrowing, it did a debt for equity swap by converting £50m of debt into new shares.
Observation 11: Slater Investments is the biggest investor of WYG PLC
Mark Slater is a famous investor and runs the Slater investment funds. The fund owns 9.54m shares or 13%, as of 15th May 2017, either this will give investors some glimmer of hope we won’t know.
But, we do know this that everyone is fallible for a loss on investment. Just ask another great investor Warren Buffett.
Thoughts on WYG PLC
First, I want to list the most important factors which will affect WYG as an investment.
1). Provisions; – rising.
2). The use of adjusted profits; – misleading.
3). Weak business sector; – known for delays.
4). Thin margins; – nature of the business.
5). Rising net debt; – a concern, but shows the business lacks free cash flow generation features.
However, the 70% fall in share price makes it cheap, and would greatly stabilise the price for now. But, my concerns are the prospects of recovery and future share price appreciation. On that basis, I can’t see the shares rising meaning the probability of further falls is more likely than a rise.