Stockopedia StockSlam - February 2019

A few weeks ago I enjoyed myself at the first Stockopedia StockSlam of the year. Once again we managed to deliver an excellent line-up of presenters all happy to stand-up in front of a packed out audience. It's always a surprise, to me, finding out which companies are going to be presented but it's usually a happy surprise. Generally there's a good mix of names that I'm familiar with along with some that I've never heard about before but may end up becoming of interest. It's a lot like running a screen on Stockopedia but with an added human touch!

Stop press: I'm pleased to say that the next StockSlam will take place next week! If you'd like to present, which I thoroughly recommend, please follow the instructions here:

Cake Box (CBOX)
  • Recent listing floated in June last year at 108p - hit current share price within two weeks and has stayed roughly at this level ever since

  • A specialist retailer who does fresh cream cakes but not just any old cakes - they are egg free

  • Company started in 2008 and has grown up to 91 franchise stores

  • Aim is to go from 91 stores to 250 - opening roughly two a month they’ve got a fairly long runway ahead of them

  • At half year results they did 4.35p EPS while current forecast for the year is 8.1p so perhaps that is something of an underestimate?

  • They’ve opened 12-15 stores in the first half and they’re due a similar number in the second half. If you've got 100 stores, and you are opening something like 20 a year, that’s a pretty material increase in stores and should generate a lot more in sales

  • Online sales are up 86% in the first half and they are opening a new warehouse facility in the north, so that will obviously give them better coverage in the rest of the country

  • Online customer reviews are very mixed. You either have people saying 5 stars, fantastic cakes, not had better or essentially one star, it was stale, it was like a brick, it was inedible

  • Employee reviews are also mixed and some say that it isn’t a great place to work. They seem to be minimum wage people, or even the people being brought in on unpaid internships, and they are being made to decorate cakes 14 hours a day and they don’t really like it that much

  • They only have one facility for baking cakes, based in Enfield, and obviously if a disaster happens then that is pretty much the end of the business

Q: One of the metrics that I look at is price to tangible book and at 12.4 it suggests it’s quite highly overvalued?

A: This is a very asset light business, run as a franchise. So, they don’t own any shops. If you look at it at book value then yes it’s overpriced but that doesn't mean much here.

Q: It’s a franchise business; what proportion of their revenues come in from an annual franchise fee and what proportion comes from royalties? Which leads on to the next question; the actual franchisees themselves, what’s the health of the underlying business?

A: They have an unusual franchise model because they don’t charge a royalty and they don’t charge annual fees either. Where they make the most money is in supplying the ingredients and sponges to the stores. Probably 70% of their money is made just on ingredients and they also take a cut of online sales along with some fees for starting a franchise.

Evraz (EVR)
  • 7 billion market cap miner - quoted in FTSE100 and last year one of the best performers

  • A high yield, cyclical up-trend stock hedged against the pound and certainly a hedge against the UK in general

  • Evraz is Russia’s biggest steel maker. Big in infrastructure steel - beams, pipes, rails etc

  • Also makes steel in other places, notably the United States, and also mines coal so it's a proper multinational company

  • Evraz was a mess between 2012-2016 as earnings went negative, the dividend was cancelled and leverage became very high

  • In 2017, like a lot of mining companies, it came good because it cut a lot of costs and the price of steel went up

  • Among other things the debt fell and it paid out 1.1 billion dollars in dividends giving a yield of around 13%

  • The forecasts are that this company will make 2 billion in profits in 2018

  • Since Evraz reports in dollars and pays dividends in dollars it potentially offers some protection and some diversification

  • What we have seen from Evraz during the past couple of years is that when the market gets rattled the stock tends to go up

  • At the current price its yield is around 12% and it’s as cheap as chips with a PE of 5.5

  • So it's high quality, throwing off cash with super margins and with a really solid balance sheet

  • Also it's the highest-ranking stock in Stockopedia over the past year

  • But it’s clearly exposed to certain factors - steel demand, US steel tariffs, strengthening Rouble against the Dollar

  • Also company free float is 35% since the biggest shareholder is Roman Abramovich with 30% interest

  • In addition his two friends, the CEO and the Chairman, own another 30% interest, so it’s liquid but there's a lot of connected parties

  • Upside to this company is that it pays out dividends when the sun shines and pays them out handsomely

Frenkel Topping (FEN)
  • Frenkel Topping is a company on the edge of medical, legal and fund management

  • If people have a medical negligence claim, or a personal injury claim, these are the experts that provide the witnesses

  • They have one business, that is assisting lawyers, and then they have another business which is looking after the money

  • Some smart people got into this company back in 2015 when I bought at 40 pence with a PE of 18 and a ROCE of 30%

  • I saw that they got into the business, when they bought 30% of the company - it immediately went to 60 pence and I thought I was in the money

  • In 2016 they said they were going to move a certain amount of the money into their own fund management business which would increase earnings

  • Then at the beginning of 2017 they said they couldn’t do that and they weren’t moving money at speed

  • All because there were people from London telling them how to run the company in Manchester and the advisers to the people with medical claims rebelled

  • In fact they were all walking out the door and taking clients with them

  • Now they have changed the management completely and the old guys who used to run the company are running it again

  • They have put in place a training academy which will train new advisers to replace the ones that they lost

  • They put out a trading update in November saying they were on target to achieve forecast numbers and I think it is a fairly positive story now

  • The price of the shares is 30 pence and I am buying at a discount to where I was previously

Q. Their revenues are more consistent than their profits - is there any reason for that?

A: I suspect that they are having to put money into unproductive people. They have started this training academy, they are taking graduates over a two-year period. They basically had to renew the staff in the company, HR and everything else because of the ruination of the company.

Marston's (MARS)
  • This is a pub operator and brewer based in the West Midlands

  • It’s been trading since 1861 and in its current form it has 3 divisions

  • A destination premium, which is the source of most of its profits, where it manages all of the pubs

  • It has got taverns which are more independent pubs

  • It has got a brewing business with various beer brands which it exports and sells in supermarkets

  • In terms of valuation it has got a StockRank of 89. It has a forecast PE ratio of just 6.5. It’s got a dividend yield of 8%. It’s got net tangible assets of £1.50 per share and its share price is just 95 pence

  • Why is it trading on this discount? It’s basically because of sentiment towards the market and attitudes around its debt pile

  • If we look at its capital structure we see that Marston's has assets of 2.2 billion pounds, 93% of which is freehold. It’s got 1.4 billion pounds of debt and around 600 million pounds of equity

  • Actually over the last 10 years it has paid out more than half of its current market cap in dividends

  • It has got all this freehold so that means its debt is asset backed and it’s long term in nature which means it has less onerous covenants on the debt

  • The net debt to EBITDA ratio, it’s come down from 4.8 to 4.6 times and this should continue to fall

  • In terms of fixed interest coverage charge ratio, that’s 2.5 times which means it’s got plenty of breathing room for operations

  • In terms of trading, you would think it is distressed but it is actually doing quite well.

  • It’s had 5 years of like for like sales growth with an operating margin of about 11% and an underlying PBT margin of about 9%

  • EPS was down last year but that was due to a paper loss and revaluation of its estate

  • The underlying EPS was around 13-14p, so I think it is all fine there

  • In terms of what it has been up to over the last 10 years, it has built about 200 new pubs, bars and lodges, it has a solid pipeline for new future growth

  • It has acquired some local breweries and some other pubs and moving forward it is targeting profitable growth, improving return on capital and decreasing leverage

  • It's valued as if it’s in trouble but it is not. The business has been around for a millennia (breweries and taverns) and Marston's is one of the best

  • The concerns in the market are overstated. This is a long-term stable investment and you get rewarded with an 8% yield whilst the shares are re-rated

Q: So, do you know what proportion of the earning are from wet led pubs and food led pubs?

A: They don’t so much split is as food led and wet led, they split it as destination and premium which is more food led and taverns which are more wet led. Most of the profit is from destination and premium, which does include premium bars.

Q: You said the debt to EBITDA is 4.6 times, does that not give you slight concerns? That they could come to a sticky end should anything go wrong in the economy?

A: That is why I included the fixed interest coverage of 2.5 times and that the debt is asset backed and securitised. So they have a bit more of a say at the table in negotiations.

Sylvania Platinum (SLP)
  • I'm looking for 5 things in an investment: possibility of growing 20% in one year, maybe 50% over two or three years, limited downside, simple story and confirmed by the chart

  • This is one of my top 5 holdings

  • It has forecast P/E of four times, EV of 3 times, yield of just under 5%, and if we adjust that for net cash those figures would all be lower

  • Net asset value is about 40p with 5p a share cash and 15p for exploration rights

  • However it’s a small cap, it’s tightly held, it trades in South Africa, it’s listed under Mining and it’s dealing in platinum which we all know has a commodity price that has fallen off a cliff over the last couple of years

  • What about the stock ranks? Quality 71, value of 83, and momentum 98 with the overall being 98. Stockopedia says a Super Stock

  • Looking at the graphs these show growth whilst production has doubled in the last 5 years

  • Looking at broker consensus forecasts they have risen 20% over the last 12 months

  • Looking at the stock screens it qualifies for five of them

  • On the discussion board there is some very good analysis which is detailed and positive

  • On the chart it’s at a seven year high above a rising trend which is supported by good volume

  • What do I like? It has doubled production whilst increasing margins, debt has turned into cash, it has started paying dividends and it has bought back its shares

  • Simon Thompson has recently been writing in the Investment Chronicle with a price target of 30p

  • What they do is they re-treat tailings from mines and extract platinum and other products; My argument is it’s not a miner, its actually an engineering company

  • While platinum has collapsed palladium, which is 40% of its business, has surged 80% over the last year while rhodium (20% of the business) is also up 40-50%

  • Independent analysis has confirmed them as the second lowest cost producer of platinum in the world

  • It’s a simple story and the downside protection is the fact that they are second lowest cost producer in the world backed by net assets of 25p with 15p of exploration assets

  • Upside is growing profits, cash and dividends while low rating offers potential to rebase at least 50% over the next few years

Q: Stockopedia says that the shares are distressed?

A: On Stockopedia there’s an error in the data. Their exploration rights are an asset but Stockopedia shows it as a negative liability.

City of London Investment Group (CLIG)
  • It’s a specialist fund manager mainly working for US institutional investors - making it a people business which is capital and asset light

  • Very high quality with a quality rank of 98, return on capital nearly 60% and return on equity of 50%

  • Rock-solid balance sheet with net cash - just declared a special dividend as they've got more cash than they actually need

  • Being a people business, culture is absolutely vital. This is supportive and collaborative, which is shown to investors when senior managers present and not just the CEO

  • Particularly important as the CEO is retiring this year, stepping down at the end of this month and departing from the board at the end of the year

  • Reinforced by staff bonus policy which is weighted more towards corporate profitability rather than individual performance

  • Up to 30% of pre-tax profit is allocated to an employee bonus scheme which means that base salary cost is relatively low which makes it resilient when revenues go down

  • There is also a share plan where employees can swap some of their bonus for shares

  • Revenue is essentially proportional to funds under management which are about 5 billion dollars currently

  • They also publish their estimates of profits historically and what they turned out to be for dividend cover

  • Departing CEO owns two million shares and has declared that he intends to sell three lots of 500k shares at share prices of 450, 475 and 500

Q: Is there a reason for the drop in the estimate of earnings?

A: Yes it’s because their funds are mainly emerging market funds and these dipped quite strongly at the end of last year which put a bit of a dip in the revenues. They publish the funds on a monthly basis so you can see exactly what it is going on.

Q: Is it worth investing in fund management companies right now given the markets?

A: Well the stock was quite a bit cheaper late last year. The dividend has become pretty big so effectively you are buying at 390 now after today's rise. I think it’s a good price for it.

Expeditor (XPD)
  • Expeditor is a British based logistics business with a 30% revenue in the UK and 70% in Central and Eastern Europe

  • B2B business that ships containers by road and sea for 14,000 customers but with no one customer accounting for more than 2% of its revenue

  • It has niche services such as a pallet franchise and highly profitable fuel card franchise in Romania

  • Listed on AIM in August 2017 at 24p, it’s currently 64p, that’s up 92% in 18 months

  • Reached a high of 86.5p in July 2018 and has fallen on light selling - only partially recovering from a low of 33p in December

  • PEG ratio is 0.8 times

  • Business is growing strongly. It’s has good organic growth and has made 4 value adding acquisitions since IPO helping it to grow its revenues 54% last year

  • Earnings have grown from 3.3p in 2017 to 4.5p for 2018 which will be up 38% and 5.1p expected in 2019, that’s up 10.5% before any further acquisitions

  • The current PE is only 9 times

  • On acquisitions it pays 5 times EBIT and shares in the benefit of buying power and commercial synergies

  • End of last December, no debt.

  • There’s a beefed up management team, a new CFO, a new head of M&A and integration, new CIO and new NED’s

  • Founding managers own 46% of the shares and did not sell one share on flotation, a good sign of your interests being aligned with theirs

  • CEO founder is an entrepreneur and an accountant who founded the group 30 years ago

  • I can see the business nearer 300 million revenues by the end of 2019 than the 218 being expected

  • There are likely to be further acquisitions and further organic growth such as e-commerce

  • Profit margins are creeping upwards they were 3.7% in ’17, 4.3% in ’18, expected 4.5% in ’19

  • This is a capital light business model with most warehouses rented

  • Return on capital employed is increasing 15% to 22% expected for ’18 and 27.5% expected in ’19

  • Aim is to build a 500-million-pound group and be a top 25 global player in the medium term, currently at 60 million

  • Logistic businesses in Europe with a strong network tend to be snapped up by the global players once they reach 200-300 million revenues, so they don’t become a threat to them

  • Sector is trading on circa 12 times, we’re on 9 times, so there’s rating upside potential

  • Cantor Fitzgerald name Expeditor as one of their top tips for 2019 with a target price of 90p - that is 100% up from where we are now

  • Results are due in April and positive news-flow should underpin interest here in 2019

Q: I have a question on return on acquisitions. What do you think of the return on that?

A: They only pay 5 times EBIT. So that’s 7 times after tax and they are trading on 9 times. They have been trading up to 18 times. So, they can issue shares and when they buy someone these businesses are valued more. Then they have synergies on buying power, over their cost reductions, for every business they buy. It’s an acquisitions story. So, I think you are benefiting both ways.

Q: Their operating margins show as about 3%. Does that worry you?

A: No, not at all. Look at the return on capital. It’s a high-volume business and it’s because they have got 12,000 customers it’s pretty stable. It’s growing because they are buying high margin businesses as they go along.

Alpha FX (AFX)
  • Foreign exchange broker that provides consultancy services and solutions to small to medium sized businesses

  • Foreign exchange markets are fairly volatile with currencies fluctuating 10% to 20% in value

  • If you're buying and selling products outside the UK then you have a foreign exchange requirement

  • This means having a hedging solution which is fine if you're a big player but small companies don't have the resources to do this themselves

  • That is where Alpha FX comes in where they work with clients and provide strategies

  • The consultancy work is for free because once they get a client they charge some commission on transactions

  • Alpha FX’s market share is less than 1%, so they need to grow, and one key factor is having a very good sales force

  • The second one is that once you have a client you need to keep them in order to keep making money on their business

  • In summary it is a decent working business, growing rapidly, although I don't have an opinion on their valuation

Q: Price is important and it is trading on 29 times earnings. Do you not think that is rather high?

A: No, the way I would look at this kind of business is based on the quality of the management and how they are executing their plan. They have less than 1% market share and are opening up the execution side of the business so there is growth ahead of them.

Q: I’m just curious about the operating cash flow that has been positive for a few years, but what happened in 2017 when they were suddenly negative 15 pence per share in cash flow?

A: If you look at their business they have to put in collateral hedges for any of the hedging services provided to the client. So it could be because of that.

Pelatro (PTRO)
  • A high growth stock which, in my opinion, is seriously mispriced by the market.

  • It has an 86% gross margin and a 58% operating margin

  • It addresses a global marketplace and is quite early stage which means that it has the ability to strike transformative deals that could lead to a re-rating of the business

  • The company provides marketing software tools to telecoms companies both fixed line and mobile

  • The business started in 2013

  • It’s a repeat management team who grew their last business to a 200-million-dollar market cap business and they sold out

  • Marketing software essentially adds revenue per subscriber and decreased churn. The telco market has gone ex-growth so if you can add revenue, add customers and decrease churn that’s a really good thing for clients

  • It is very strong in emerging markets; Singapore, Bangladesh, Kazakhstan and places like that

  • It’s working its way up the smaller telecom companies globally generating reference revenue, reference sites and it’s working its way up to larger telcos.

  • It made an acquisition in 2018 which added it to Telenor’s global framework - that’s the Norwegian operator

  • They have a global framework agreement that gives it access to 29 telcos, some of which are tier 2 and tier 1, which is executing on strategy

  • Since that acquisition it has added loyalty and campaign management software so it is adding and building to its product set

  • In terms of valuation, you can see here the Stockopedia rankings and there’s lots of green

  • It’s got a PEG ratio of 0.18 and forecast EPS growth of 66% this year

  • It's asset light as a software company with a good operating margin and return on equity

  • Why is it so cheap? Well it IPO'd in December 2017 at 62.5p but its revenues were only a million and EBITDA was only 300,000. So, it came to the market at 17 times sales and 39 times EBITDA

  • It’s now on a forward EBITDA basis of 4.5 times and the PEG is 0.18. So basically, it came to the market at a very high price.

  • It’s beginning to accelerate the deals that it is bringing to market and I think that this could really double over the next 12 months.

  • It has got a price target from Finncap of 120 and it’s got a very strong pipeline of business so it is doing everything that it set out to do when floating

Q: How did you get comfortable with debtor day’s?

A: They are bringing in the debtor days. The CEO had said we’re a small company so we need to extend debtor days in order to win the business and then we collect all these debts. His only problem is that national telco’s are all good risks but it just takes a while to get them to pay.

Q: What do you think of the managements prior business? In presentations they indicate they’d achieved very impressive revenue growth. I have viewed their annual reports and they hit problems with acquisitions and the shares are back to 1% of their peak. So, I wondered if you have a view, if it was really a success or not?

A: Organically I think it was a great success. They made an acquisition, for about 180-million-dollar value, and I think they just got that wrong. That was 2012. I think it had taken them about 10 years to build that business. The management team then immediately left and started this business. I think once bitten, twice shy.

Law Debenture (LWDB)
  • It’s quite interesting as a slow growth, steady stock because it is made up of two separate businesses under one umbrella

  • The investment trust part is a very ordinary trust that invests in mostly FTSE350 stocks with the fund managers looking for domestic revenue type businesses

  • The other part is a law services business that provides a lot of corporate legal services such as pension trusts, corporate trusts and whistle blowing

  • It's a fast growing business that's got a bit stale over the last few years but they have recently brought in a new CEO who’s re-energised it

  • This business pays a regular dividend back into the trust which supercharges the trust return, making it much more interesting and ensuring that the business is always growing slightly

Q: It’s two businesses really. On the one hand it's an investment trust fund and a law services business. To separate it out in our minds, what would the investment trust be? It would be an investment trust business trading on a discount? What would be the other business be? It would be on an EBITDA of X?

A: They quote the NAV as a fair value of the trust plus an estimate of what the law services business is worth. Currently that’s all trading at a discount, down to about 12.5%.

Disclaimer: All of the information presented here is purely for educational and entertainment purposes and is not a recommendation of any of the shares mentioned

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