Value now looks like its emerging after a small market temper.  These two companies have interesting valuations.

K3Capital – Private Equity Deals 

Share Price 141p

Mkt Cap £60m

Conflict Disclosure: No Holding

  • Report KPMG’s report yesterday that H1 PE deals were 35% below the prior year seems strangely encouraging to me. The volume of deals was 384, down from 594 while the value declined 40% to £28.5bn. The TMT sector accounted for 66% of the value of the deals. The slowdown was reported to be something to do with Europe. 2 Conclusions If PE funds are sitting on their hands until after October with value now beginning to emerge we could have a surprising number of deals at the back end of the year which would help markets.  But it is a concern for K3Capital. Specialising in deals at the smaller end where the slowdown is sharpest wont help them.
  • Estimates The 5 June trading update for the year to May said the company expected results to be at the upper end of forecasts which are for a 38% reduction in PBT to £4.5m. Results are due on 17 September. An increase to £7.5m PBT is expected in the year to May 2020.
  • Valuation The shares trade on 10X the forecast to May 2020 and yield above 10%.
  • Conclusion |This looks like a case of the KPMG report lagging the reality that was reflected in K3C forecasts a while ago and if we do get an uptick post that Europe thingy this could be a useful time to pick up these shares.

Non Standard Finance – H1 Results 

Share Price 33p

Mkt Cap £105m

Conflict Disclosure No Holding

  • Results Revenue up 12% to £88.3m and normalised PBT up 12% to £6.3m. Exceptional costs of £12.7m for the PFG bid and £12.5m goodwill impairment on Loans at Home. Loan book up 26% to £335.6m driven by 22% growth in Branch-based, 53% in Guaranto and a 6% reduction in Home Credit. Revenue yields declines modestly while impairments declined  modestly on H2 last year driven by an improvement in the Home Credit book. Cost income ratio also declined in all three businesses and now runs at 45.3% in Branch-based, 44.3% in Guarantor and 56.3% in Home Credit.  Outlook says trading is in line with expectations and the group is well placed.
  • Estimates The forecasts I can see look for £22.7m adjusted PBT for the year which assumes a large delta into H2 given £6.3m in H1. The company has hired 70 staff in everyday loans and opened 7 new branches which are anticipated to deliver an uptick in H2.
  • Valuation PER 5.8X and yield 9.2% is an appealing traditional valuation. ROE underlying this year is expected to be 14% while the NAV is 67p/share, twice the current share price although the tangible NAV is 18p/share. Of course writing down the goodwill will improve the ROE going forward
  • Conclusion These shares are now extremely cheap while the results are now improving. With the founder incentive plan maturing in March 2020 and the business improving the company would be vulnerable. There aren’t many acquirers given the regulated nature of the business but private equity may have a look.

jeremy@charltonillingworth.co.uk