New Year Thoughts

  • Culture It can’t be a co-incidence that the companies with the most positive culture were among the best performers last year – personally. Dart Group and K3 Capital are among them. It is this culture that holds together a company in difficult times enabling them to emerge with a stronger business when luck returns. These are the long term compounders that we need to hold long term and so it is my intention to comment on culture more this year. I can feel a template change coming on…
  • China This is the decade that China’s GDP overtakes the US which the US is unlikely to take lying down. The trade war seems to be the US attempting to persuade China to buy more from American farmers while restricting China’s high-tech authoritarianism. Chinese tech firms rely on foreign suppliers for 55% of their high end inputs into robotics, 65% into cloud computing and 90% into semiconductors.  And China still trains its talent in the universities of the west. As the US/China trade war could escalate there is plenty of opportunity for others to provide the goods traditionally provided to China by the US such as tech kit and education.
  • This week is retail trading updates. I suspect Thursday’s papers will be full of pictures of the Greggs Vegan Steak Bake post their Wednesday trading update.  The Golden Globes have nothing on the launch of a Vegan Steak Bake launch in Newcastle.
  • Quilter The Mail reports that “significant” corporate activity is likely to occur in the very near future.
  • RBG announces this morning the settlement of case “blue sky” reporting a 317% IRR but notes it isn’t material to the group’s full year forecast.

Plus 500  – Trading Update

Share Price 853p

Mkt Cap £930m

Conflict Disclosure: No Holding

  • Update: Revenue for the year to 31 Dec expected to be $354m and EBITDA $190m. The group refers to continues optimisation of marketing spend and looking forward to 2020 is confident of the prospects.
  • Culture The company is efficient evidenced by the being the first out some 6 days post year end with a trading update together with the 54% EBITDA margin.  The fortuitous timing of management stock sales in the past has led investors to lose faith. However management bought stock in August since when the company has bought back in excess of 4% of the share capital.  This one to follow management’s share dealing.
  • Estimates This looks to be close to consensus EBITDA which is showing as $195.8m. Going forward 3% EBITDA growth is anticipated in 2020. Given H1 2019 was $ 66m EBITDA and H2 was $124m EBITDA we can expect the numbers to be upgraded on the Q1 trading statement in April.
  • Valuation PE 8.5X yield 3.4%.
  • Conclusion It’s not too late. The shares are up strongly from the £5 low last April but have traded at £20 in the past

Mattioli Woods – Trading Update

Share Price 815p

Mkt Cap £219m

Conflict Disclosure: No Holding

  • Update The H1 update to 30 November reports growth in revenue and EBITDA with improved margins following an operational restructure. £20m cash at period end and outlook in line with management expectations.
  • Culture: The company’s relentless and passionate focus on the client leads to a strategy of producing 20% operating margins through the vertically integrated model.
  • Estimates Last year revenues were flat but the EBITDA margin was 24.8%. This is anticipated to be 26% in the year to May 2020, which is 14% up.
  • Valuation PER 19.5X Yield 2.7%
  • Conclusion The high rating reflects the culture of the business.  With modest revenue growth and full margins the shares may be up with events in the short term having increased by 23% since October.

Knight Group – Acquisition

Share Price 339p

Mkt Cap £176m

Conflict Disclosure: No Holding

  • Acquisition A Birmingham based commercial litigation firm ERT with 24 fee earners is acquired for £1.8m, 50% in cash and 50% shares, subject to clawback for 2 years. That is a revenue multiple just under 1X and 6X PBT which is expected to fall to 5X post cost synergies.
  • Estimates In the context of £17.2m PBT for the year to April 2021 this adds c.2% but is not material at the EPS level. H1 results are expected on 15 January. 24% PBT growth is expected to April 2021. Net debt at April 2019 was £14.1m
  • Valuation The shares have performed strongly (up 88% over 12 months) and now trade at 20 times April 20 PER with a yield of 1%.
  • Conclusion Well run high quality but the high ROE is a function of acquiring regional firms on low multiples.  I don’t see this as a “forever” stock but it could continue to well for a year or two.

jeremy@charltonillingworth.co.uk