|Avanti Communications revenue, receivables and payables, June yr end|
Source: Avanti Communications annual reports
Friday 23 November 2012
Tuesday 20 November 2012
|"Note 2. Revenue" from Avanti Communications Annual Report and Accounts for the year ended 30 June 2012|
|Latest broker revenue forecasts compared to those from July 2012|
|Latest broker EBITDA forecasts compared to those from July 2012|
|Latest broker net debt forecasts compared to those from July 2012|
Friday 16 November 2012
|The limited forward visibility of sales is demonstrated by the sudden drop in 2009|
|In the context of the weak macro backdrop, consensus sales forecasts seem complacent|
|RSW valuation - forward P/E rating and EV/EBITDA multiple|
|Volex (VLX) earnings momentum - what others in the electric component space are saying is hard to ignore|
|RSW and VLX share prices - the disconnect is also difficult to ignore|
|RSW and PFL share prices - another disconnect in the electric component space|
Thursday 8 November 2012
- Operating cash flow in H1 2013 was $433m, marginally down from $439m in H1 2012 (Mar yr-end). The group highlights that cash flow is seasonally weaker in the first half, but still this doesn’t fully explain why it should be lower than the prior year period. This is highlighted by the cash flow conversion being 73% in H1 2013, compared to 79% in H1 2012.
- The group is laying out its stall for $110m of “one-off restructuring costs.” Further, the majority of this is suggested to be in cash. $9m of this impacted the H1 cash flow statement, so it would seem the remaining $101m will impact in H2.
- Net capex and spend on intangibles (software, databases etc) continues to climb higher. Expenditure on these items rose to $218m in H1 2013, compared to $198m in H1 2012. This equated to 9.5% of sales, while it equated to 9.2% of sales in H1 2012, and 7.2% of sales in H1 2011.
- Despite “benchmark” profit again rising, when stripping out goodwill and intangible items, the group’s balance sheet continues to weaken. Net tangible LIABILITIES totalled $2,463bn in H1 2011, $2,645bn in H1 2012, $2,814bn for FY 2012 (Mar yr-end), and rose to $3,187bn in H1 2013. In the light of the loss of shareholder value attributable to PriceGrabber and LowerMyBills, I would be cautious as to the carried value attached to the goodwill and intangibles the group reports arriving at its total net asset figure.The shares are currently flat on the day. For the above reasons and my prior observations (EXPN - a lot of acquisitions, capex and director selling) I remain short.
|EXPN share price|
|EXPN current P/E and EV/EBITDA|
|EXPN consensus 2013 earnings momentum and share price|
Tuesday 16 October 2012
Friday 12 October 2012
- Trade and receivables appear to have been materially marked down from a book value of £606k to £229k.
- Where’s the cash? The debtor, Filiago, only had £2k in cash? Where did the other £9,133,000 of the loan go?
- A business that has net liabilities of £134k, contributes £330k in revenue, a loss of £81.5k, and seemingly cannot honour its interest payments has goodwill and intangibles (I expect the intangibles are possibly values attached to customer lists) valued at £9,478,000.
- Trade and other payables are £629k greater than initially thought.
- The value of the intangibles (which could be customer lists or software or other) is worth £2,419,000 less than originally determined six months prior. Fortunately the bulk of the difference has been bumped onto goodwill, which is £2,152,000 higher.
- There is still only £2k of cash!
- In 2009 it was saddled with debt. Net debt stood at c. £250m. Three years on and the net debt position has been brought down to £76m and I reckon this will have fallen further when it next reports. EBITDA has risen from £34.4m in 2009, to £60.3m in 2012 (Mar year-end), and is forecast (Bloomberg) to rise to £68m this year. Debt is much less of a concern.
- While the outlook is now much more encouraging than in 2009, bizarrely, Speedy Hire is actually cheaper than it was in the trough of 2009. Yes, its market cap is £64m higher than it was in 2009. However, since then, it has raised £100m via equity and generated £75m of free cash flow. That would suggest c. £111m of cash has not been reflected in its valuation, which equates to 70% of its current market cap.
- It has a net asset value of 45p/shr. This compares to its current price of 30p/shr. Even if one were to strip out intangibles (always wise), then its net tangible asset value is c. 35p/shr. In event of the company being sold or liquidated, I actually reckon there to be far higher upside than this. But either way, there is good support there on a tangible basis.
- It generates cash. £75m in free cash flow since 2009, and better prospects going forward. That’s attractive to everyone, especially private equity.
- Private equity has a record of strong interest within this space. Archie Norman’s Aurigo investment vehicle together with the US hedge fund Och-Ziff, bought HSS hire in 2007 for £310m. Last year, Ashtead (AHT, mkt cap £1.7bn) together with Belgium’s TVH Services were reported to be interested in bidding for Lavendon (LVD, mkt cap £244m).
- It’s cheap to peers. Speedy Hire trades on (Bloomberg consensus) an EV/EBITDA multiple of 3.1x forward year EBITDA. This compares to Ashtead on 5.3x, Lavendon on 4.2x and VP (VP, mkt cap £130m) on 4.2x. Even if Speedy were not to re-rate higher, as the debt is paid down the value of this should migrate over to the value of the equity.
- Pricing pressure in the sector, which anecdotal evidence suggests has eased over recent months.
- Cyclical risks. However, having been in recession for three quarters, the UK economy may emerge at some point. Who knows?
|SDY share price|
Thursday 11 October 2012
- The group suggests that in the light of the company's ambition to move to the Full List "the Board has adopted an increasingly conservative accounting treatment for certain FY12 transactions, particularly relating to deferral of income over the lifetime of contracts, regardless of upfront cash flows." I reckon this is an odd statement. In adopting an
“increasingly conservative accounting treatment” I then wonder what “accounting
treatment” Avanti is leaving behind.
- My second observation concerns its penultimate note to the prelims, note 7. “Business combinations/intangible assets and goodwill.”Avanti states that on 1 November 2011 it took effective control of Filiago (careful how you say that) GmbH “by enhancing the security over its loans with Filiago.” This again seems odd. Filiago was announced as a customer of Avanti in December 2010 (see link), when it reported a five year contract with Filiago. At that time, this contract was initially valued at £1.3m. Filiago is a broadband reseller. If it is as it appears, then I am unsure why Avanti had provided loans to Filiago. Was the loan for the purchase of its services? If it is the case that this happened, then there is a phrase for that kind of activity. Further, if this did occur then I would be interested to learn if there are other customers to which Avanti has also provided loans; particularly in southern Europe.
|Avanti consensus sales forecasts|
|Avanti director share purchase and sales|
Tuesday 9 October 2012
While it is widely known that indices and equities can be traded with margin and tax efficiently through a spreadbet, surprisingly few investors are aware that it is also possible to trade bonds (sovereign and corporate) the same way. In the case of bonds, this has the great advantage of mitigating the tax liability on any income streams from the coupons, i.e. the coupon is received in its entirety, gross, rather than receiving net of tax. Further, ceteris paribas, the income returns can be enhanced through purchasing the bond on margin.
The above is probably easiest made clear through a description of my purchase of the Co-op perpetual. The bonds were/are priced at 77p/shr and pay a coupon of 5.5555p/shr (7.2% yield) until December 2015. So I bought 100,000 of them through ETX Capital at a cost of £77,000. Therefore, I expect to receive £5,555.50p per annum through to December 2015. However, ETX Capital offer 25% margin on this line of stock, so the capital which I had to provide totalled 25% x £77,000 = £19,250. I still receive the £5,555.50p pa, so my return on equity (ROE) = £5,555.50 / £19,250 = 28.9% pa.
In December 2015, the Co-op can decide whether it wishes to call them at par (100p/shr) or not. If the Co-op calls the bonds then I’ll get 23p/shr (100p less purchase price of 77p), or a capital gain of £23,000 and will have accumulated three lots of 5.5555p/shr in between, an income stream totalling £16,666.50p. That comes to 39.7p/shr, or a £39,666.50p gain, or a 51.5% (gross) return over three years. But, because I have bought through ETX Capital, the tax free return on equity is actually £39,666.50p / £19,250 = 206% (gross) over three years.
Of course the Co-op may decide not to call in 2015 and in that event the coupon drops from 5.5555p/shr to 3-month LIBOR +205bp. Not calling is generally discouraged, but it would mean a post 2015 coupon of c. 2.69p/shr (at current LIBOR). If the bonds aren’t called and the coupon drops to 2.69p/shr, then I reckon the price of the bond drops to c. 68p. This price would equate to capital loss of £9,000, but having still received the 5.5555p coupon each year, the total gain would equate to £16,666.50p - £9,000 = £7,666.50p over three years. Again, because I have bought through ETX Capital, this is tax free and the return on equity = £7,666.50p / £19,250 = 39.8% (gross) over three years.
So I reckon that having bought through ETX Capital, the ROE over three years will be somewhere between 39.8% to 206% . That appears pretty attractive to me, and I expect the Co-op will call the bonds, which is why I bought and did so through ETX Capital.
|Co-op 5.5555 08/29/49 perpetual bond|
Monday 8 October 2012
As this had cropped back up on the radar and looking back as to why I began shorting (Capita ... it's very bouncy), I decided to short some more at 764p. The key reason to short remains that I reckon Capita will continue to face headwinds on cash flow. Capita had made a fairly large cash call at the start of the year, both through debt and equity. This was suggested to be used to make acquisitions. The size of the raise (c. £562m total; a £285m 2 year loan in February 2012 and c. £277m in equity in April 2012) pointed towards some urgency on the acquisition front. However, on inspection, spending appears to have been fairly pedestrian. The group appears to have spent £150-165m on acquisitions year to date, which is pretty similar to prior years and considerably less than the cash call.
|Capita share price|
Wednesday 3 October 2012
Wednesday 26 September 2012
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.
Thursday 20 September 2012
Of course the Co-op may decide not to call in 2015 and in that event the coupon drops from 5.5555p/shr to 3-month LIBOR +205bp. Not calling is generally discouraged, but it would mean a post 2015 coupon of c. 2.69p/shr (at current LIBOR). If the bonds aren’t called and the coupon drops to 2.69p/shr, then I reckon the price of the bond drops to c. 68p; this price would equate to a 3.9% yield. In that event the return over three years is 3x5.5555p/shr + 68p/shr – 76.5p/shr = 8.2p/shr, or a 10.7% (gross) return over three years.
All in all, to me this looks like 52.5% upside return to 10.7% upside return over three years. I expect the Co-op will call the bonds, which is why I bought.
|CO-OP Bank COOPWH 08/49, price|
Wednesday 19 September 2012
Monday 17 September 2012
|RIO share price and prior QE|
|RIO share price vs. FTSE. A gap|
Tuesday 4 September 2012
|United Rentals share price compared to Ashtead, USD adjusted|
Friday 31 August 2012
|Randstad share price|
|Randstad valuation, 2013E P/E and EV/EBITDA|
|Randstad consensus 2013E earnings momentum|
Tuesday 28 August 2012
- April’s cash call came shortly after it arranged a new £285m 2 year loan in February 2012. On my maths, that tallies up to a raise of c. £562m from its banks and shareholders during H1.
- Prior to its equity raise, Capita had suggested that it would likely reduce its acquisition spend during 2012, relative to previous years. Indeed it acknowledged this in the accompanying statement to its equity raise. It subsequently concluded that the “current acquisition environment continues to offer a rare opportunity to broaden its business”. That seems to me to be a bit of a “flip-flop” approach.
- In its equity raise statement, Capita also suggested that “its clients value Capita partly because of its financial strength.” This would be reflected through keeping its net debt to EBITDA level within its targeted range of 2-2.5x (2011: 2.5x). However, in the light of the company spending £1.3bn on acquisitions since 2005, and £733m since Jan 2010, a more welcome outturn would be to see these acquisitions begin to provide a greater input into the reduction of net debt, as opposed to a cash call. I note that my estimate of its free cash flow shows it has not risen since 2009 (in fact it seemed to have halved in 2011 – see below), while the net debt to EBITDA ratio has risen. To me it appears as though prior acquisitions have not helped with the group’s financial strength. So I don’t see why further acquisitions should do either.
- Total annual spend on acquisitions has been increasing while the valuations attached to those acquisitions appear to have remained high and the margins bought appear to be getting lower. On my estimates, acquisition spend has been c. £175m, £181m, £311m, £341m in the years 2008-11, while (again on my estimates) the average EBITA margins of the acquired businesses has fallen from low double digits in 2008, to single digits in 2011. Further, despite lower margins associated with acquisitions and the difficult trading backdrop across the market, valuations paid appear to have remained relatively sticky at c. 9x EBITA.
- Its net debt has risen from £258m in 2005, to £1.33bn in 2011. This declined to £1,201m in June 2012; however, excluding April’s cash call, net debt would have risen to £1,477m. Meanwhile, on my estimates, CPI’s free cash flow more or less stalled in 2008-10, at £209m, £239m, £240m, and then halved to £121m in 2011.
- The Deferred Annual Bonus Plan criteria appear to have been steadily falling. In 2009 the criteria for 33% to 100% vesting was for the company’s EPS growth to fall in the range of RPI + 6% pa up to RPI +16% pa. In 2010, this was brought down to a range of RPI + 4% pa to RPI + 14% pa. In 2011, this was again brought down to a range of RPI + 4% pa to RPI + 12% pa. Over the past two years the upper boundary for vesting has fallen from RPI + 16% to RPI + 12%. That is against the grain of management’s rhetoric on record pipelines.
- Operating lease commitments rose significantly in 2011. Future minimum rentals payable under non-cancellable operating leases rose from £265m in 2010 to £379m in 2011; by 43%.
|Capita share price|
Wednesday 22 August 2012
|Hays vs Michael Page|
|Hays share price|
|Michael Page share price|
- Despite having spent $4.5bn on acquisitions since 2006, I reckon its organic and acquisitive revenue growth for the past six years appears somewhat lacklustre.
- Margins have improved dramatically, but the group’s capex as a percentage of sales has also risen sharply and has significantly diverged from the rate of its competitor, Equifax.
- Experian has spent a considerable amount on acquisitions since 2006. As far as I can infer, they have been very expensive.
- I consider its balance sheet to be weak. Ex-goodwill and intangibles the business has net liabilities of $2.8bn.
- The shares appear expensive and consensus has significantly downgraded its future EPS estimate over recent months.
- Management have bought £200k of stock during the past two years as compared to £42m of sales.
What does Experian do?
Revenue and margins
In 2007, Experian sued a US based company called Mighty Net for trademark infringement. At the time, The President of Experian's Consumer Direct segment, Ty Taylor, was reported to have said "We believe it is important to not only protect our intellectual property, but also to protect consumers against such companies [Mighty Net]." My emphasis added.
Lots of selling
|Experian 2013 consensus valuation|
|Experian 2013 consensus earnings momentum|