SYSTEM1: Positive H1 2024 Reveals Platform Revenue Up 44% And Leads To Encouraging Dividend Reappearance While £17.5m Illustrative CMD Ebitda Projection Supports Possible £15 Share Price And Reinforces Bid-Target Speculation

23 June 2024
By Maynard Paton

H1 2024 results and Capital Markets Day (CMD) summary for System1 (SYS1):

  • A positive H1, with platform revenue up 44%, greater workforce productivity and improved cash generation leading to better-than-expected Q3/Q4 statements and the upcoming reappearance of the dividend.
  • H1 progress was not perfect, and drawbacks included questionable adjustments, revenue per client seemingly stagnating and services beyond ad-testing — which offer much larger addressable markets — still losing sales and still requiring product revamps.
  • Despite the higher H1 revenue, direct costs declined a remarkable 17% to deliver a record 88% gross margin. But significant bonuses limited the Ebitda margin to 13% — somewhat below the “at scale” target of 30%.
  • The subsequent CMD disclosed founder/executive John Kearon is now evaluating “long-term strategic opportunities“, which raises questions about his “relentless execution” of his own platform plan.
  • The CMD also provided a £17.5m illustrative Ebitda projection, which supports a possible £15 share price and reinforces my speculation that SYS1 could/should become a bid target.

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[SharePad] Small-Cap Spotlight Report: COLEFAX

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13 June 2024
By Maynard Paton

The email I received was intriguing:

“The numbers speak for themselves. The company has repurchased more than 75% of shares outstanding since 1999, has a decent return on equity (last financial year approximately 18%), and is trading at an EV/EBITDA of 3-4 due to £20m net cash on the balance sheet.

The market has either overlooked the stock entirely or is pricing in profits falling off a cliff, which I don’t see happening given the maximum decline of 40% after the GFC. I’d love to know what you think.”

The company in question is Colefax (CFX), a small-cap so obscure that even I — a keen investor for 30 years — had previously never heard of.

But any business that has bought back more than 75% of its shares must be worthy of further investigation. Sure enough, Colefax’s share count has reduced from a peak of 28.5 million during 1999 to 6.2 million today:

(Source: SharePad)

What is going on? Let’s take a closer look.

Read my full COLEFAX article for SharePad >>

Maynard Paton

[SharePad] Small-Cap Spotlight Report: VICTORIA

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17 May 2024
By Maynard Paton

Oh dear. Today I am writing about Victoria, a £228 million carpet manufacturer that last year attracted attention following an adverse audit:

(Source: SharePad)

When I last looked at an adverse audit for SharePad, a commotion erupted that debated whether I was simply reporting “transcription errors” or spotlighting something more sinister.

So to be clear:

  • What follows is just my interpretation from reading Victoria’s 2023 annual report and other company statements;
  • I have not inspected every part of Victoria’s accounts nor considered every aspect of the wider investment case, and;
  • Please do your own research and form your own conclusion.

And with that, let’s take a closer look.

Read my full VICTORIA article for SharePad >>

Maynard Paton

MOUNTVIEW ESTATES: Reassuring 59% Gross Margin And Hefty £29m Property Acquisitions Support Satisfactory H1 2024 Although £100 Shares Still Trade At NAV Despite Possible £189 Value

17 May 2024
By Maynard Paton

H1 2024 results summary for Mountview Estates (MTVW):

  • A satisfactory H1 performance, showing revenue up 5% and profit up 16% buoyed by the gross margin on property sales rebounding to a reassuring 59%.
  • Despite a hefty £29m spent acquiring new properties, greater debt, higher interest costs, extra tax and the chunky dividend kept net asset value (NAV) at approximately £101 per share. 
  • Properties purchased after a 2014 valuation and then sold look to have realised limited gains, and could explain why NAV growth has slowed and the share price has stagnated during recent years.
  • The protracted search for a replacement non-exec could spark further tensions between the board and unhappy shareholders, with the chief executive still entrenched through family support albeit with no obvious successor.
  • The £100 shares currently offer a 5% income, the highest for decades aside from the banking crash, and could be worth £189 if all the group’s properties were sold today at their vacant possession value. I continue to hold.

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ANDREWS SYKES: Preparing For A Bidder? Bumper £25m Special Dividend, ‘De-Risked’ Pension Scheme And Intriguing Executive Appointment Prompt My Speculation After Eclipsing Record H1 

26 April 2024
By Maynard Paton

H1 2023 results summary for Andrews Sykes (ASY):

  • A bumper £25m special dividend was the clear highlight of this record H1, which reported net cash reaching £39m after revenue increased 2% and profit gained 14%.
  • Progress was underpinned mostly by ASY’s European depots, where revenue climbed 17% and earlier restructuring led to “significantly reduced” losses in France. 
  • The “de-risking” of the pension scheme was a welcome surprise and, alongside a very intriguing executive appointment, could be interpreted as preparing the company for a potential bidder.
  • The accounts remain very respectable, with the H1 margin at a super 25%, cash generation helped by tight stock management and bank debt kept at zero.
  • A possible 13-14x P/E does not appear outrageously expensive, although the limited free float, weather-sensitive operations and mixed H2 outlook might restrict any re-rating. I continue to hold.

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ANDREWS SYKES: Water Pumps Rather Than Heatwave Scramble For Air Conditioners Drive Record FY 2022, Lift Net Cash To £37m And Support 20%-Or-More Margin For 20th Consecutive Year

19 April 2024
By Maynard Paton

FY 2022 results summary for Andrews Sykes (ASY):

  • A record FY performance, with revenue up 10% and profit up 8% buoyed mainly by greater demand for water pumps rather than the scramble for air conditioners during the 40-degree summer.
  • Bolstered by strong Italian, Dutch and Belgian progress and defying problems in France, European revenue climbed 24% and represented a record 31% of the group’s top line during H2.
  • A £2m write-down of unpaid customer invoices appeared to draw a line under the group’s problematic Middle Eastern division.
  • Revenue per employee reached a new £151k high although hire revenue at 1.07x the cost of hire equipment indicated no real improvement to fleet productivity.
  • The accounts remain very favourable, showcasing net cash of £37m, a 26% return on equity and a 20%-or-more operating margin for 20 consecutive years. I continue to hold.

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[SharePad] Screening For My Next Long-Term Winner: YÜ GROUP

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13 April 2024
By Maynard Paton

Everybody loves shares that keep on rising.

SharePad lists 37 names that have consistently delivered 15% or more annualised returns during the last one, three and five years:

(Source: SharePad)

The shares of independent energy supplier Yü Group have certainly kept on rising; they have more than tripled since April 2023 and have 20-bagged since early 2019.

Factors involved in this superb investment include:

  • A ‘market-pariah’ valuation caused by an adverse accounting review;
  • An astounding recovery buoyed by elevated energy prices;
  • A ‘scalable’ business that generates extra revenue without a commensurate increase to the workforce, and;
  • The entrepreneurialism and commitment of founder Bobby Kalar.

Let’s take a closer look.

Read my full YÜ GROUP article for SharePad >>

Maynard Paton

Q1 2024: My Portfolio’s Best And Worst Corporate Cash Managers

03 April 2024
By Maynard Paton

Happy Wednesday! I trust your shares have enjoyed a positive start to 2024. 

A summary of my portfolio’s first quarter:

  • Q1 return: +8.2%* (FTSE 100: +4.0%**).
  • Q1 trades: None.
  • Q1 winners/losers: 4 winners vs 6 losers.

(*Performance calculated using quoted bid prices and includes all dealing costs, withholding taxes, account fees, paid dividends and cash interest **Total return)

The year has started with my best Q1 since I commenced this blog at the beginning of 2015.

As I predicted within my 2023 review, System1 has dictated proceedings and an upbeat statement from the advert-testing specialist has caused its large weighting to become even larger. My portfolio now requires only a further 5% advance to match its all-time high of December 2021. 

Other RNSs from my portfolio were somewhat mixed. Bioventix and Tristel both issued record H1 figures and provided useful increases to their dividends. But S & U warned of lower collections and cut its interim payout, which feels unnerving. I can’t recall the last time a holding of mine reduced its dividend for non-pandemic reasons.  

The rest of my shares seem to be marooned, with the stock market generally circumspect about their prospects given their flat-at-best earnings. Small market caps and limited liquidity due to significant director (and ex-director) holdings have not helped matters.

But I remain convinced the owner-orientated managers — backed by respectable competitive positions and asset-rich balance sheets — will eventually reward shareholders for their patience.

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M WINKWORTH: ‘New Blood’ Sought To 3-4x Revenue At Certain London Branches After ‘Challenging’ Market Reduces H1 2023 Profit By 26% And Leaves ‘Progressive’ Dividend Yielding 6.9%

31 March 2024
By Maynard Paton

H1 2023 results summary for M Winkworth (WINK):

  • Only the dividend advanced higher (+7%) after a “more challenging” property market alongside greater costs caused franchisee network income to decline 5%, revenue to remain flat and profit to drop 26%. 
  • WINK’s franchisees continue to report greater SSTCs and exchanges versus other agents, with sales commissions improving to an estimated £5.4k per transaction and “new blood” being sought to 3-4x franchise revenue at certain London branches. 
  • A third company-owned office seems on the horizon, although the departure of WINK’s successful Tooting manager plus unclear financial progress at Crystal Palace do raise questions about the in-house approach.  
  • A lower margin and adverse cash generation reflected this H1’s reduced sales activity, but a post-H1 update indicated a stronger H2 2023 that ought to include greater returns from franchisee loans. 
  • Projected earnings of c12p per share may limit increases to the 11.7p per share dividend, although net cash of £4m alongside owner-directors committed to a “progressive” payout should sustain the 6.9% yield. I continue to hold.

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[SharePad] Small-Cap Spotlight Report: ROCKWOOD STRATEGIC

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24 March 2024
By Maynard Paton

Rockwood Strategic could be the ideal choice for anyone wishing to capitalise on the sorry state of UK small-caps.

A check of your own portfolio may support Rockwood’s belief that numerous UK small-caps are ready to be revitalised by fresh management and then be sold to the highest bidder.

You may not be able to appoint new board executives and argue for takeovers, but this £60 million ‘activist’ investment trust can do so on your behalf and has a 125% return to prove it:

(Source: SharePad)

Let’s take a closer look.

Read my full ROCKWOOD STRATEGIC article for SharePad >>

Maynard Paton

S & U: Record H1 2024 Overshadowed By Subsequent 8% Dividend Cut As Economic ‘Headwinds’, Greater Regulation And Higher Debt Costs Leave £18 Shares Valued Below 1x NAV

24 March 2024
By Maynard Paton

H1 2024 results summary for S & U (SUS):

  • A record H1, during which larger loan sizes and lower-than-normal bad debts offset higher interest costs and pushed net asset value (NAV) to a fresh £18.86 per share high.
  • This H1 was then overshadowed by February’s trading update, which revealed H2 motor-loan collections alarmingly reduced from 94% to 90%, extra Q4 write-offs of approximately £5m and the second-interim dividend cut by 8%.
  • Greater FCA regulation, including the new Consumer Duty regime, is prompting SUS to revise its motor-finance lending and seems likely to lead to inherently lower margins, reduced transactions and higher regulatory-admin expenses.
  • Net finance costs absorbed a significant 12% of H1 revenue, with post-H1 debt increasing to £224m — equivalent possibly to 100% gearing — and borrowing rates perhaps now at 8%.
  • Tighter regulation, greater debt expense plus various economic “headwinds” leave the £18 shares at 2014 levels and below 1x NAV, a valuation that has occurred only occasionally during the last 30 years. I continue to hold.

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[SharePad] Screening For My Next Long-Term Winner: PROPERTY FRANCHISE

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29 February 2024
By Maynard Paton

Today I am studying Property Franchise, an estate-agency franchising business that appeared on my radar after I reviewed fellow estate-agency franchisor Belvoir last year.

To recap, I finished my Belvoir write-up by suggesting Property Franchise might have been the better sector opportunity:

“The outperformance of Property Franchise following Belvoir’s [unsuccessful bid] approach could in fact mean Property Franchise is the better business of the two. Just like Belvoir, Property Franchise claims to be the country’s largest property franchisor and, funnily enough, was also among the 21 matches from this SharePad screen…

I feel a review of Property Franchise is required to give greater shareholder perspective and to perhaps highlight a more attractive sector opportunity.“

Determining whether Property Franchise or Belvoir is the better sector opportunity has now become academic because the two companies recently agreed to merge.

According to my SharePad filtering, the Property Franchise/Belvoir combination should be an attractive operator. Both Property Franchise and Belvoir continue to appear on my SharePad screen that seeks companies exhibiting:

  • An operating margin (latest and 10-year average) of 20% or more, and;
  • A return on equity (latest and 10-year average) of 20% or more.
(Source: SharePad)

Businesses blessed with a consistent margin and return on equity of at least 20% are probably quite special.

Let’s take a closer look at Property Franchise and the Belvoir merger.

Read my full PROPERTY FRANCHISE article for SharePad >>

Maynard Paton

BIOVENTIX: End Of 7-Year Special-Dividend Run After Record FY 2023 Spotlights Encouraging Alzheimer’s P-tau217 R&D And Leaves £50 Shares Trading At 31x P/E

27 February 2024
By Maynard Paton

FY 2023 results summary for Bioventix (BVXP):

  • A record FY, with revenue up 9% and profit up 8% albeit split between a post-pandemic H1 rebound followed by a standstill H2.
  • Sales efforts were supported by best-seller vitamin D (+7%) and second-best-seller troponin (+30%), although the latter may not be too far away from reaching ‘peak’ revenue. 
  • Significant long-term progress continues to rest upon R&D success with the University of Gothenburg, which has published encouraging lab results using BVXP’s antibodies to identify early-stage Alzheimer’s through p-tau217.
  • While revenue per employee at a super £801k and minuscule £11k capex continue to underpin amazing cash generation, the total dividend was unchanged at 152p per share, dividend cover has reduced to almost 1x and the seven-year run of special payouts has now ended.
  • The £50 shares trade at a premium 31x P/E and reflect understandable Alzheimer’s optimism alongside the general revenue longevity and terrific economics of successful antibodies. I continue to hold.

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FW THORPE: Record FY 2023 Delivers 21st Consecutive Annual Dividend Increase, Suggests SchahlLED Acquired At 5x Ebitda And Justifies £35m Cash Reserve To ‘Some Shareholders’

11 February 2024
By Maynard Paton

FY 2023 results summary for FW Thorpe (TFW):

  • A record FY performance bolstered by acquisitions that showed total revenue up 23%, adjusted profit up 16% and the ordinary dividend lifted for the 21st consecutive year.
  • Largest division Thorlux continued to fare well, expanding by almost 30% helped by SchahlLED acquired at a possible 5x Ebitda.  
  • Mixed progress was experienced elsewhere, with Dutch profit down 8%, Zemper yet to show its full potential and the EV-charging joint venture going from profit to loss.
  • Despite acquisition payments of £19m, very respectable cash conversion left cash only £6m lower at a very useful £35m — a figure that required justification to ‘some shareholders’. 
  • A possible 20x P/E seemingly reflects TFW’s distinguished operating history and the persistent demand for energy-saving lighting rather than doubts about the significant acquisition expense and near-term prospect of subdued trading. I continue to hold.

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MINCON: Prospect Of H2 Profit Dropping 45% Overshadows Underwhelming H1 2023 And Heightens Concerns About Debt Covenants, Dividend Payments And Boardroom Strategy

01 February 2024
By Maynard Paton

H1 2023 results summary for Mincon (MCON):

  • An underwhelming H1 performance caused by reduced mining-customer activity, with revenue down 5%, profit down 12% and an unchanged dividend paid more than two months later than normal.
  • This H1 was overshadowed by October’s Q3 update, which warned of weaker sales, lower margins, exceptional costs and H2 Ebitda dropping 45%.
  • The Q3 update — and possibility of a difficult FY 2024 — heightened concerns about the group’s debt covenants, capital-intensive growth strategy, dividend payments and boardroom personnel.
  • Hopes of improved financials seem to rest upon a mining-customer revival, further geothermal installations plus R&D projects such as Greenhammer and subsea micropiling becoming commercial successes.
  • The shares currently trade below their 2013 flotation price and leave minority investors trusting the 56% family owners take the necessary action to safeguard the business. I continue to hold.

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