Lots of movers and shakers to cover today, which includes (another profit warning) Interserve, (a minor profit warning) IWG PLC, (the asset disposal firm) Stobart Group, (the volatile earnings) Braveheart Investment Group and (contamination prevention) Tristel.
UK retail sales are down 0.8% in September.
Spain is to suspend Catalan autonomy, raising the probability of Independence.
OPEC chief says oil demand will rise to 100m barrels daily from 97m barrels. This rise of 3% over three years looks like slowing oil demand.
Finally, China’s economy grew 6.8% in GDP. I wonder if the MSM pay more attention to debt growth.
SHARE PRICE: £2.20 (down 30%)
It says trading is weaker than expected in the third quarter with sales down 1.9%, but revenue growth from open centres division is up 4.4%.
The next part explains why the shares took a tumble.
IWG admits to increasing capex, due to winning many contracts. It also commits to investing in their development capabilities to establish a strong pipeline of growth for the future.
But in the short-term, this leads to increasing overheads.
To top it off, the group operating profit is to be in the range of £160m-£170m and below market expectation.
Trading Update Conclusion
First, IWG told investors of weaker than expected performance. Then, it will increase capex leading to HIGHER operating expenses. Finally, operating profit is below market forecast.
The tumble in the share price got little to do with lower than expected operating profit. But, there is uncertainty surround IWG FUTURE operating profits because of lower margins for next year.
What does IWG PLC do?
A global leader in the fast-growing Workspace-as-a-Service (WaaS) sector. It gives businesses the flexibility to lease premises for shorter periods and when it most requires.
It is the owner and operator of internationally renowned brands like Regus, Spaces, Signature, Open Office, Kora and MOS.
Looking back at historical performance:
The growth of this company is remarkable with sales doubling to £2.2bn from 2011. Profit has been rising steadily since 2009 and has surpassed their peak set in 2008. Although net profit margin is underperforming by 60%.
The company used a lot of capital to grow its businesses.
Think about it:
In 2007, it requires £92m in capex and acquisition to grow net profit to £103m. The level of capital employed is £429m and depreciation and amortisation annualised at £45m.
Now, nine years later, the level of capex and acquisition grew to £330m helping to push capital employed to £1.5bn. Net profit was slightly better at £138m and D&A expense rose to £195m.
Homebuilders were blamed for having too much debt during the financial crisis. Now, after raising share capital and massively reduced their borrowings. It resulted in them being cash-rich and (almost) debt-free businesses.
IWG, on the other hand, was cash-rich (2008: Net cash of £211m). Now, it has net borrowing of £162m.
When you see housebuilders with 10-times PER and growing profits, then IWG shouldn’t be valued at 20 times PER when profits are lower. Albeit why the market has marked IWG share price down to 30%.
Some investors are going to get tempted into this company by trading it.
But when the dust settles, investors should realise the high level of capital expenditure needed to grow profits makes it riskier as an investment.
This means more borrowings. For now, the shares are fair valued at best and I won’t be surprised if the company’s share price fall further.
Share price: 16.5p (down 11%)
This fund management group and strategic investor group has reported lower revenue than their previous six months to £397k from £562k.
Meanwhile, profit fell to £191k from £475k.
It runs a fund under management of £71m. The Group provides equity, loan and mezzanine funding to Small and Medium-sized Enterprises (SMEs).
This is a small fish in the financial industry, where profits can easily turn to losses from one year to the next. The level of revenue reported depends on fees paid by clients, which also varies from year to year.
The same appears on their balance sheet.
At £5m, the market capitalisation, this company is fairly valued. But it is not an investment for me.
Share price: £2.70 (down 1.4%)
Apart from revenue more than doubling, their operational performance is lop-sided.
The company is in a transition period after disposing of 70% of Eddie Stobart.
Asset disposal and Sales and leaseback
We know that net disposal of their Eddie Stobart investment raised £111m, but it still holds 12.5%. The remaining stake is worth £71.5m.
It has also made sale and leaseback of eight ATR aircraft helping to generate £115m. That was used to pay £26m in dividends and repay £109m in borrowings.
Stobart Aviation ambition
The Stobart Group wants to make some great stride in developing their aviation division (which saw revenue increased from £12m to £97.5m). Most of this is down to acquiring Everdeal Holdings Limited, which owns their regional airline Stobart Air. And they bought Propius Holdings shares from Aer Lingus for $14.7mln (£11m) in cash. Propius Holdings reports profit before tax of $2.8m (£2.3m) in 2016 and had gross assets at that date of $153.3m (£119m).
It looks like a great acquisition which causes underlying EBITDA to rise to £6.2m from £1m. But underlying means before depreciation and other expenses.
Their future plans are to increase the run rate of 5 million per year by the calendar year 2022.
For me, the underlying concern would be maintaining a high load factor. Their current load factor of 78% is too low compared with Ryanair and EasyJet of over 90%. Based on their passenger numbers of 610,000, it looks capital expenditure is needed.
Stobart Group shareholders saw this stock rose 100% in over one year, due to disposals, reduction in borrowings and returning proceeds to shareholders.
My concern is the sales and leaseback process will create short-term gains for shareholders and then it will revert back to raising financing to expand their business.
If you take out the proceeds from assets, the underlying business records £27m in profit. But includes impairment charges it turns into a net loss of £9m, also their net cash flow is showing £10.4m in losses.
For me, Stobart is fully-valued and is in a transitional period.
Share price: £2.87 (down 2.5%)
A company that handles containment of contamination in the healthcare sector, pet care and hazardous conditions has reported a jumped in revenue to £20.3m.
It also announces dividend per share of 4.03 pence, an increase of 21%, a yield of 1.7%.
The share price did breach £3 at one point, but since the EPA delay, the approval of DUO, a form-based chlorine dioxide, the shares took a tumble.
This company is growing nicely. Profits are increasing, along with their cash balance and dividend payout.
Their biggest division is Human Healthcare, which contributes 80%.
Valuation ahead of expectations for now
Normalised EPS of 8p was ahead of expectation. But, the expectation of profits arising from £3.4m to £4m-£4.5m in 2018 gives it a forward-PE of 30 times.
The EPS growth of today makes this a great investment opportunity. But forecast EPS growth of 6% and 10% in 2018 and 2019 dampened this opportunity. For now, the shares are too high for my liking.
This stock is interesting I want to do further research before committing to an investment.
Share price: £0.60 (down 33%)
It seems the problems are worsening in their construction and support services divisions. But they made some great stride in their equipment service and international division.
Giving Interserve a Dr Jekyll and Mr Hyde persona.
The company states overall group operating profit to half, this leads to second half-profit of circa. £25m, giving full-year adjusted profits of £60m.
However, it reveals additional costs of £35m on their waste contracts.
Investors are definitely freaking out what the financial institutions would do next since they broke their net debt to EBITDA covenant. Interserve is negotiating on their £600m+ borrowings.
LAST CHANCE SALOON:
Management has now commerce a review of their construction services and support services. That is likely to mean disposals. Their equipment services would fetch around £500m, based on my analysis. But it won’t be enough to cover current level of borrowings and additional costs.
With the share price 92% below 2014’s peak, I feel that Interserve will need to raise funds from selling their assets by doing a placing.
Anywhere between £120m-£170m would provide relief until management is able to sort out disposing of large parts of their business.
However, unlike Carillion, Interserve has a much lower pension deficit of £50m vs. Carillion’s £700m+.
The share price is too exposed in the open. No one knows which way they will go. Therefore, the advice is to wait for further actions from management on their review and likely share placing to save the business.
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The above analysis is my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.