Hits: 1

AFH Financial – Business Update

Share Price 276p

Mkt Cap £118m

Conflict Disclosure: No Holding

  • Update The company confirms current trading is strong with double digit gross inflows and 2% outflows. It re iterates its target of £10bn AUM, £140m revenue and 25% underlying EBITDA margin, which equates to £35m EBITDA. Perhaps the most significant part is the clear statement “ the Company does anticipate requiring any additional funding from the equity market in the foreseeable future”
  • Estimates To 31 October 2019 £17.7m PBT and £17.9m EBITDA is anticipated. 30.5p EPS
  • Valuation Adding the £15m convertible to the market cap we get EV/EBITDA of 7.4X.  If we take the medium term target of £35m EBITDA we get 3.8X. Current PER 9X, yield 3%
  • Conclusion Both Harwood and AFH have fallen as the market has fallen out of love with them.  On the current valuation I am hard pushed to see the downside. Particularly as the company has committed to print that no equity issuance is anticipated.

Christie Group – H1 Results

Share Price 103p

Mkt Cap £27m

Conflict Disclosure: No Holding

  • Results H1 Revenue flat at £38m, but and increased pipeline so the company expects a stronger second half (never a good look).  H1 profit £1.5m (2018 £2m). The outlook refers to a stronger H2 and some Brexit delays to transactions expected. The balance sheet has £5m net debt (2018 £3m) and a £12.6m pension deficit. Divisionally professional services made £2.3m (2018 £2.5m) while the inventory Services lost £0.6m (2018 £0.7m). Cash outflow from operations was £1.1m as working capital has grown. The company has a debtor book of c. 2.6 months.
  • Estimates There are no forecasts
  • Valuation PER 10X last year’s profits.  EV/EBIT 10.7 times including the pension deficit in the EV.
  • Conclusion  The costs look too high and with a sustainably loss making inventory services using up capital one would imagine a corporate solution may happen here. However the valuation looks too high given the pension deficit.  Looks far too high. Investors would do better in K3Capital for exposure to this space.

Begbies Traynor – Tip

Share Price 74p

Mkt Cap £93m

Conflict Disclosure: No holding

  • Tipped in the Midas column over the week end – based on last year’s 16k insolvencies growing towards the 26k achieved in the golden years of insolvency. They mention the target of £100m of revenues in 3 years.
  • Forecasts are for £66m this year rising to £70m revenue in 2022, so the targeted revenues aren’t in forecasts.  To bridge the gap may need acquisitions. The Exeter restructuring consultant was acquired in September at 2.7X revenue while in April a chartered surveyor business was acquired at c 1X revenue.  So to bridge the £30m gap it seems likely the company will need to pay £30m, which on a £92m mkt cap is significant, and could overhang the share price.
  • Acquisitions This is one of the rare companies that has shown it can acquire at a better ROE than reinvesting in its own business so the acquisition strategy would seem to be fully justified. Last year ROE increased from 3.9% to 5.5%. The shares trade at a 8% discount to NAV. To get above NAV the market needs to be anticipating a double digit return which is close to a doubling of profits from here.  And extra £30m revenue at 20% operating margin would achieve that. The last two acquisitions made 20% and 30% operating margins respectively.
  • Conclusion The acquisition strategy could turn this into a growth stock.  This is effectively a bet on the rate of acquisitions.  I think they may be able to deliver – and more.

Stanley Gibbons – Visit

Share Price 2.05p

Mkt Cap £9m

Conflict disclosure: No holding

  • Visit I visited the shop last week and Graham Shircore, the CEO, kindly spent some time with me. The company has hugely strong brands but as we have seen with other companies that may not stop them from disappearing. In this case the company needs to reach profitability before it is safe. With no forecasts available it is hard for investors to evaluate so let take a look at what is needed to reach break even.
  • Numbers Last year it achieved £11.8m revenue at a 51% gross margin, and £5.3m of admin costs combined with selling costs of £3.9m alongside a charge for the DB pensions scheme £400k and exceptional created a loss of £3.9m. The admin costs can perhaps be brought down to – lets guess- £7m from the historic £9m. If we use a 50% gross margin it would require perhaps £14m revenue to cover the fixed cost base which is 17% ahead of the current level. Given revenue fell 13% last year and the company is revamping website, shop etc. and bearing in mind the company achieved £15m revenue the year before this looks very achievable.
  • Downside If the company fails to achieve break even the 58% shareholder, Phoenix have a full debenture over their £11.5m debt so would simply take over the business wiping out the shareholders. The interest rate on their debt is a very generous 5% which is effectively subsidising the minority shareholders, so we don’t have any reason to suppose they will behave unreasonably.
  • Conclusion If the company traded profitably it could trade at 2-3X revenues. But with £11m debt and £5.5m of pension deficit the company is trading at an EV/Sales of 2.8X today. There is a lot of work yet to do to achieve profitability. With a refurbishment and a new website revenue could start to grow but I suspect this is one to revisit in 6 months’ time rather than being an opportunity today.  The inherent gearing of the share price makes this a warrant on profitability rather than an equity investment

jeremy@charltonillingworth.co.uk