Tuesday 16 October 2012

CO-OP 5.5555 ... encouraging stuff


Yorkshire Building Society today announced a tender offer at 82% of par plus accrued interest for its 5.649 perpetual bonds, which could be called in March 2019. The 82p/shr offer compares to the mid-market price of 71p/shr prior to the announcement. This provides good evidence that some of the smaller, conservative borrowers are prepared to call or offer on perpetual bonds; in this case seven years in advance of the call date. I reckon it makes the discount to par on the CO-OP 5.5555 perpetual (link) appear even better value, especially when the potential return on equity through ETX Capital could be so high. 


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. 

Friday 12 October 2012

Avanti (AVN) ... still a space oddity

The loan by Avanti to its customer, Filiago, for what appears to have been £9.1m is interesting. As it is no longer a loan and has been exchanged principally for goodwill and intangibles, the cash has seemingly gone. The £9.3m loan cropped up some time in H1 2011 (calendar year), although at that time Filiago was not cited in name as the debtor; Avanti carried it on its balance sheet as a “financial asset to a strategic partner.” The loan was reported to accrue interest at 7%, and in the event that the asset was not fully recoverable over the term of the loan, then Avanti had “collateral over the balance which constitutes 75% of the equity interest in the borrower [Filiago] should there be a default.” I find this odd in itself as if a debtor defaults then I would assume the debtor to be insolvent and hence any equity to be near to worthless, particularly if there are hardly any tangible assets, which in this case there were.
 
When Avanti’s 2012 interims were released in February last, Avanti highlighted in its note 9. “Business Combinations/Intangible assets and goodwill” that it had “completed work which enhanced its security over the shares and the business ... The loan continues to carry the option to convert into a 75% equity interest.” To me this appears as though the debtor hadn’t paid any interest due (or was unlikely to) and so Avanti took control of the assets. At this point, Filiago was still not named as the debtor. Provisional values were attributed to the assets, liabilities and goodwill acquired as follows:

 
There are several things to note about the assets, liabilities and goodwill acquired:
  1. Trade and receivables appear to have been materially marked down from a book value of £606k to £229k.
  2. Where’s the cash? The debtor, Filiago, only had £2k in cash? Where did the other £9,133,000 of the loan go?
  3. 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.
Skipping forward to Avanti's prelims update to 30 June 2012, and Filiago is identified as the customer/debtor and some items of the assets, liabilities and goodwill have received fairly material changes to their provisional values:
 
  1. Trade and other payables are £629k greater than initially thought.
  2. 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.
  3. There is still only £2k of cash!
I sent an email to Avanti’s Investor Relations in early March 2012 asking for some clarity on this loan, specifically asking who it was to, and when it matured. I received no answer. So I asked its house broker, Cenkos. They weren’t much help either.
All this seems a far cry from how Avanti described Filiago at the time it won its £1.3m contract in December 2010. Then it described Filiago as “one of the largest satellite broadband subscriber bases in Europe.” Somehow, I can’t see that.
In summary. Avanti had a financial asset of £9.135m on its balance sheet as at June 2011 and now has what is principally £8.448m of goodwill and intangibles on its balance sheet as at June 2012. Where has all that cash gone?
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.

Speedy Hire (SDY) ... speedily higher?

I have bought a few shares in Speedy Hire, the UK tool hire business, at 29.5p/shr as I reckon it should be worth between 45-55p/shr. I like SDY for the following reasons: 
  1. 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.

  2. 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.

  3. 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.

  4. It generates cash. £75m in free cash flow since 2009, and better prospects going forward. That’s attractive to everyone, especially private equity.

  5. 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).

  6. 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.
The key risks are:
  1. Pricing pressure in the sector, which anecdotal evidence suggests has eased over recent months.

  2. Cyclical risks. However, having been in recession for three quarters, the UK economy may emerge at some point. Who knows?
If truth be told, I bought more than a few.
SDY share price
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 11 October 2012

Avanti (AVN) ... a space oddity

Yesterday I sold short in Avanti at 291p/shr and then again at 280p/shr this morning. Avanti appears to be one of those companies where a lot of hype over technology turns to disappointment. To highlight this I present the chart below. Since mid-2010, when its share price peaked at c. 740p/shr, consensus forecasts have fallen by 55-60% for sales in 2013-15. I suspect that when all the brokers get round to publishing new forecasts, that consensus will again be lower. 

Wednesday's 19% drop in its share price would suggest that the prelims statement was a disappointment. Two items in the statement struck me as particularly odd:

  1. 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.

  2. 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.

If anyone can provide clarity on the above then I would like to hear it.

Ps. I would ignore the token Director purchases that were announced yesterday. They really are small beer when compared to the whopping director sales of c. 858k shares in 2010 at prices of 475p, 700p, and 735p/shr. 

Pps. I would also ignore the broker forecasts. Cenkos is Avanti’s broker and they have previous with pie in the sky target prices. Most notably for Pursuit Dynamics (PDX) where they reckoned it to be worth 1100p/shr as compared to its current 5p/shr.

Avanti consensus sales forecasts
Avanti director share purchase and sales
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. 

Tuesday 9 October 2012

CO-OP 5.5555 ... it's not what you do, it's the way that you do it

The rationale for my purchase of some of the Co-op’s BB+ rated perpetual bonds was incomplete in so much as there were two attractions to the trade. The first appeal was the price and potential return on the bond, which I have detailed prior (and repeated below). The second appeal was the method through which I bought them, which was through my spreadbet provider, ETX Capital.

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
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.

Monday 8 October 2012

Capita (CPI) … adding to short

Capita announced last week that it had failed to renew the Criminal Records Bureau (CRB) contract it operated since 2002. This contract was widely reported to be worth £40m pa to Capita, or c. 1.1% next year’s sales. It’s not the end of the world but neither is it helpful and highlights the increasing competitiveness in the sector; a few years ago a renewal would likely have been a shoe-in for Capita. In the event, it appears that India’s Tata Consultancy Services is the winner.

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
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.

Wednesday 3 October 2012

BAE (BA/) ... merger gamble

Friday last I bought some Dec calls in BAE Systems (BA/, mkt cap £10.9bn). The strike is at 360p/shr and compares to today’s price at 334p/shr. BAE is in merger talks with EADS (EAD, mkt cap €21.2bn). I have no idea whether the merger will go through or on what terms. As the politicos are involved it is likely to be a tortuous process. However, there is a slim chance that Lockheed (LMT, mkt cap $30.2bn) or A N Other may pounce. In that event, BAE goes to 400p/shr in the blink of an eye. And the calls reap a 40p+ gain. Seeing as the price on the calls came to 3.8p, the risk seemed worth taking. I bought a few. They now trade at 5.3p and rising.

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.