Shedding light on the debt crisis

Despite being married for nearly 20 years, I still have a nasty habit of trying to answer my wife’s questions knowledgably even when I haven’t got a clue what I’m talking about. I think it started in our early courting days when sub-consciously I might I have made the decision that to utter the words, “I don’t really know”, might have been seen as a sign of weakness.

Anyway, on Friday I briefly caught a news item which suggested that the speed of light might not be the universal speed limit that Einstein thought it was.

I made the mistake of mentioning this discovery to my wife. Quite reasonably she asked me what exactly had travelled quicker than the speed of light. Now at this point I hadn’t got a clue, but not wishing to show my ignorance I started to mutter something about protons, neutrons, and electrons that I vaguely recalled from ‘A’ level Physics. My wife looked suitably unimpressed, could clearly sense my discomfort, and in a slightly mocking way asked me if I was sure that it wasn’t perhaps some piece of fruit that they had managed to catapult at an extraordinary speed. 

In a mild panic I considered a stab at Higgs Boson, but fortunately stopped short when a better idea came to mind.  “I remember”, I said, and knowing that my wife has a total disinterest in athletics added, “They’re not entirely sure, but they’ve called it the Usain Bolt”. Unbelievably this seemed to do the trick, and fortunately the conversation moved on.

I have since discovered that the “thing” that appears to have travelled faster than the speed of light is a subatomic particle called a neutrino. To be honest, I think I’ll stick with the “Usain Bolt”, since I’m sure I took a couple of neutrinos recently to cure a nasty headache.

Now you might be wondering what I’m going to say to my wife when Usain Bolt is all over the news in 2012.  Simples.  “Look darling, there’s a bloke running the 100m who’s changed his name to that “thing” which travels faster than the speed of light”. 

You may also be wondering why I’m relating this particular story at all.

Well it strikes me that there’s an awful lot of blaggin’ (http://onlineslangdictionary.com/meaning-of/blag) going on at the moment about the global debt/financial/economic problems that appear to be pushing the world towards another “great depression”.

I have a theory that nobody really fully understands what’s going on, and most worryingly that includes the politicians and financial experts that are supposedly attempting to come up with the solutions.

You see here’s what I don’t get. Since most countries appear to have huge debts, not least the US and ourselves, just who the bl**dy hell does everybody owe money to? Is it the banks and other institutions?

For arguments sake, let’s say it’s largely the banks, and assume that our government has borrowed money from say, Lloyd’s bank. Hang on, didn’t we bail out some of our banks including Lloyd’s. Does that mean we’ve borrowed money from ourselves?

Of course it doesn’t end there, because haven’t we lent Greece a sizeable amount of money that we clearly haven’t got?

Effectively, we might have borrowed money from ourselves to lend to someone else who can’t pay us back. Surely that can’t be right? Confused? Me too.

Anyway, all is not lost. Tim Geithner’s got a plan, although correct me if I’m wrong, doesn’t he represent the US which has just had to raise its debt ceiling for the first time in its history?

Never mind, perhaps Dave and George can sort it out in true Bruce Willis fashion; why do I get the impression that they’ve both been watching too many action movies? Dave believes “…we’re staring down the barrel….”, and George is issuing ultimatums to Eurozone leaders. Don’t be such a pair of drama queens!! Pssst…, I hate to remind you boys, but there are a few issues to sort out back home first of all.

“The blind leading the blind?”

Mind you, it’s either them or Mr Bean. By the way, would anybody care to ask Labour whatever happened to the “Goldilocks economy”? Not too hot, and not too cold.

Oh yes that’s right it didn’t actually exist, in fact the pot was bl**dy boiling over, it’s just that nobody even noticed.

I’d bet that if you took anybody and gave them a good grilling about what exactly is going on, they wouldn’t be able to tell you, so here’s my final theory. Everybody owes money to an internet based debt collection agency called “payusbackorwe’llbreakyoureffinglegs.com”. Hence the global panic.

If the world economy does manage to steer itself away from another great disaster then I’d guess it will be more by luck than judgement.

Anyway, whatever happens, “Bu da geçer”, and whılst world financial and economic systems are constantly changing, we’ve always got the certainty of E=MC².

Changing the subject totally, a month has passed since I started the FTSE-250 vs. “they can’t really be that bad surely” portfolio.

I have taken the mid-prices from Friday’s close, and here are the results so far:-

Firstly, the FTSE-250 stood at 9815.50, a drop of 2%.

Individually the porfolio shares have performed as follows:-

Cable and Wireless Comm.         39.54p   (+23%)

Man Group                                   231.4p   (+12%)

ITV                                                57.75p  (+3.4%)

Vodafone                                      161.6p   (-1%)

Game Group                                  21.75p  (-5.5%)

Aviva                                             277.3p   (-13%)

Cable and WW                               29.75p  (-14%)

Thomas Cook                                 36.09p  (-17%)

I’m not aware of any individual company news that may have caused the share price of Cable and Wireless Communications to increase by 23%, or indeed Thomas Cook’s share price to decline by a futher 17%. I have noted that one or two Directors at Aviva have been purchasing stock. If AV. hold the dividend then they’re offering a hugely attractive payout.

Assuming an equal amount was originally invested in each of these companies, the portfolio is showing a loss of 1.5%.

In other words it’s neck and neck at the moment, although it’s very early days.

I’ll try and update you on the relative performance of the porfolio on a monthly basis.

Great balance sheet, but little else to shout about.

Indigovision released their full year results today which show maintained revenues for the full year, but significantly lower profits. Given the earlier trading update in August, the results didn’t come as any surprise.

After the first profit warning, as previously mentioned, I sold the remainder of my holding in Indigovision to crystallize a 750% profit overall.

I commented at the time, both here and on the ADVFN bulletin board that I could see the SP falling below £2 in the short term, and that is exactly what has happened.

Whilst investors shouldn’t be surprised by the final figures, the outlook statement doesn’t instill any confidence in near term trading.

Whilst sales in the first seven weeks of their new financial year are comparable with last year, the order book is lower and concerns are expressed about economic conditions.

The shares took another hit today and dropped a further 14% to end at 182.5p by the close, putting them on a P/E ratio of 22.

On a P/E basis the shares look expensive, however Indigovision boasts a strong balance sheet, a 4% dividend yield, the company is cashflow positive, and has no debt.

On balance, I’m not tempted back in just yet though. Although I wouldn’t be entirely surprised by an opportunistic bid, the short term outlook isn’t encouraging, and with falling sales, higher overheads and continued margin pressure, it appears possible that they will record a loss in the first six months, and I can’t justify buying the shares purely on the possibility of a bid approach.

With a long term horizon, Indigovision may prove to be a bargain at below £2 and I will certainly keep monitoring the situation, but as I mentioned in a previous blog, it appears that Indigovision need to peddle faster just to keep still, and unfortunately this is proving difficult.

Surgical Innovations

Those of you who take a peek at my blog on a regular basis will be aware that until relatively recently I was a shareholder in a company called Surgical Innovations. I bought shares in SUN for just below 2p and sold them for over 10p, crystallizing a fivefold profit in just over a year.

Whilst I could and can see a very bright future for this company, I was more than happy with my gains, and stated at the time that whilst I could see potential upside in the SP over the medium to long term, I felt it unlikely that the SP would multi-bag again in such a short time period.

Surgical Innovations released their interim results today, and there is nothing in the report that would lead me to change my mind.

The shares took a hit today and are now trading below my sell price. On the face of it, the results are disappointing with both revenues and operating profits falling against the comparable period last year. However, a one-off industrial contract did flatter last year’s figures, and there has been a temporary reduction in OEM orders due to the phasing of larger orders. This largely masks an excellent 29% revenue increase in SI branded products, and an impressive 7% improvement in margins. Basic earnings per share at the interim stage are 0.12p.

The company is confident that growth prospects will be achieved in 2012 and 2013, and current trading is encouraging with strong customer demand.

Previous broker forecasts for 2011 are for an EPS of 0.6p. Given the improvement in margins, and the expected progress in the second half, this doesn’t look too outlandish. This gives a forward P/E ratio of 17.5 (SP 10.5p at time of writing). The market capitalization is about £40m with a NAV of approximately £11m. Revenues at the interims came in at £3.2m with a profit before tax of £474,000.

Great little company, great prospects for growth going forward, but at this stage in its development it looks fairly priced to me.

As I mentioned in a previous blog, Surgical Innovations will remain on my monitor, and I may reconsider buying again on any significant SP weakness.

Third quarter results for Avesco and other updates

Avesco released their third quarter results today, and they certainly didn’t disappoint. The underlying growth story remains firmly intact, and in my opinion this is still a hidden gem.

Whilst the final results will give a clearer and fairer picture of progress, the nine month comparatives point towards a company that is steadily growing organically and has a very bright future.

Trading profit for the nine month period virtually doubled from £1.7m in 2010 to £3.2m this year, whilst the operating profit of £2.8m has increased more than four-fold. Diluted EPS comes in at 6.1p with an adjusted figure of 7.9p.

The nine month figures also appear to indicate another slight improvement in margins to around 34% (about 33% last year).

Clearly, the company has achieved significant growth this year which is even more impressive given that last year they benefitted from the Shanghai Expo, the Football World Cup and the Winter Olympics.

If you dig a bit deeper into the report, you will see that all three divisions (Creative Technology, Full Service and Broadcast services) were profitable. CT and FS are the most indicative of the underlying progress since they are less dependant on the major events; both produced a significant uplift in profitability, with CT producing a 21% increase in revenues and a 120% increase in operating profits. Broadcast services benefits the most from the even year effect, and will almost certainly show a huge uplift in revenues and profitability next year.

Ian Martin the Chief Executive commented:-

 “The Avesco Group enjoyed another period of strong growth during the nine months ended 30^th June 2011, with further progression in revenue growth and profitability.

Looking towards 2012, we expect to benefit significantly from the “even year effect”, notably with the inclusion of business generated from the European Football Championships and the London Olympics. In addition, we have a full 12 months’ contribution from a number of multi-year projects that we have begun during 2011”

I have highlighted the last sentence since this appears to be something I wasn’t personally aware of, but which looks significant.

It is amazing to think that Avesco is still valued at a 24% discount to its tangible net asset value which currently stands at £1.50 per share. The possible payout from Disney is approximately £1.40 per share.

Essentially this profitable and growing business with revenues well in excess of £100m is being accredited with having no value (apart from its assets). It must still be one of the most undervalued companies on the market.

In other updates, Zetar’s Finance Director has bagged himself £20,000 worth of shares in the company at prices around the £2.50 mark.

DCD Media appear to have secured their short term future, with the help of one of their major shareholders, through the issue of convertible loan notes and Subscription Shares. Existing shareholders will see their holdings significantly diluted. Taya Investments, another major shareholder, are noticeable by their silence. Taya were once rumoured to be a possible bidder for DCD Media. They don’t strike me as a company that would be happy to see their 20% stake significantly diluted by this funding proposal. This story may yet have further to run?

Your m8 , my m8, TRAKM8

In one of my previous blogs, I wrote an article about the significance of Director buying entitled “Put your money where your mouth is”.

I do like Directors to own a fair chunk of their own businesses, and I’m always interested when they buy or sell.

This month I noticed that the Directors of a company called Trakm8 had bought 400,000 shares between them, which collectively takes their holding in the company to around 46%. Notably, the two Directors that purchased the lion’s share were the Finance Director and the Sales Director.

After some research, I decided to join them.

From their website, “Trakm8 designs, develops, manufactures, supplies and supports vehicle tracking, fleet tracking and GPRS/GPS tracking products and services. The company provides both hardware and software telematics solutions.”

I think that the market may be missing the underlying growth story here, and may have been mislead by what appears to be a drop in EPS from 3.1p (March 2010) to 1.1p (March 2011).

This is one of those instances where the EPS is not the most reliable indicator of the progress a company has made.

The difference in the EPS figures is accounted for by a substantial tax credit in 2010, as opposed to a tax charge in 2011. This masks the excellent underlying growth.

Revenues grew by 22% to £4,186,000 and operating profit 19% to £329,000. Profit before tax increased 23%.

What is also impressive is that they increased cash balances from £427,000 to £1,119,000, gross margins were 66.6% and the NAV increased to £2,236,000 (includes £1.2m of intangibles). The market capitalization, when I last looked, was around £2.7m. This certainly doesn’t look expensive given the growth prospects and balance sheet.

Further attractions include contracts secured with Jewson and the AA (over the past year or so), a significant jump in monthly recurring revenues from 49.9% to 61.7%, and relatively low borrowings at £184, 491 (reduced from £223,265 the previous year).

The Chairman’s outlook states that “The board is confident that the revenues and profitability growth of the group can be continued over the next 12 months”.

The current p/e ratio is about 13, and my conservative forecast puts the company on a forward p/e of around 10. This seems mean given the growth prospects.

A couple of bear points might include

1)       The Company not paying a dividend. They prefer to reinvest their growing cash resources into the business and look for suitable acquisition targets.

2)       The illiquidity of buying their shares.

Overall, it looks an interesting story, and if growth continues over the next two to three years then the share price has substantial upside potential.

As ever, time will tell.