MS international and Hydro International

Two further companies from the value portfolio.

Firstly, MS international which is already up by 12% since I included it in my January 5th blog.

On first glance this is a company that appears to have been hit by difficult trading conditions in the Defence sector, and a move from the main market to AIM which can cause institutional investors to become forced sellers of the stock.

After a cursory look, the financials do look attractive, and this could prove to be a good recovery stock. At the current share price of 195p, the company is backed by 143p of tangible assets and pays a dividend yield of 4.1%. The current p/e ratio is around 8, and since 1998 they have clearly implemented a progressive dividend policy.

Whilst earnings for the current year will be below expectations, encouragingly they have maintained the interim dividend and the longer term prospects appear quite positive:-

"the structure of the 'Defence' division's order book provides a solid base load of business stretching out to the end of the decade. This means that, despite any current market slackness, the division not only has contracts to be completed within the current year, but also has the positive benefit of a continuous stream of business, scheduled by customers for delivery in each successive year through to 2020."

A recent purchase of the shares by the Finance Director (around £20,000) may give rise to further confidence.

Hydro International (AIM: HYD) describes itself as a leading provider of environmentally sustainable and innovative products for the control and treatment of water.

Dealing with the financials first; it has a market cap. of £16m, a yield of 3.2% and a historic p/e ratio (based on last year's figures) of 9. The net tangible asset value is 50p. Again the dividend policy has been progressive.

Although the interim results were slightly ahead of last years with revenues up 6%, the company states :- "Our view remains, therefore, that both revenue and profitability in 2013 will be materially lower than 2012 levels, and that results for the year will again be weighted significantly to the second half-year." Hence the currently low p/e. As far as I can see there is no indication of their intention on the dividend policy this year.

In November the new Chief Executive announced a Global Leadership Team to drive forward growth. The shares have remained fairly static since earlier in the month.

As ever, no advice intended or given

Market correction and updates

Market's are currently looking a little jittery. There has been plenty of talk in recent months about share prices getting ahead of themselves, and that a Market correction was looking a distinct possibility. Whilst ratings on certain stocks may be a little toppy and suffer a setback, my personal view is that in the long term this Bull market still has considerable legs. Having said that, it does largely depend on the portfolio of stocks that you currently hold. Economic recovery is happening, but it's still in it's early stages (hence the low interest rates), and when it really does build momentum then I expect earnings reporting from many companies to surprise to the upside. Ultimately it's earnings that dictate the share price direction. So far my portfolio has managed to shrug off the current nervousness in markets, and most have issued robust trading statements. If any prices suffer because of general market sentiment then I will see that as an excellent opportunity to increase my holdings.

On this subject, at last week's Avesco GM the share-buy-back, and B/C Share scheme was approved by shareholders, and £1.10 will be returned at the end of this month. The share price dipped on Friday to reflect the return of cash as the shares went ex-dividend. Avesco's shares now trade at £1.25. With a declared dividend of 5p this year, the yield is a generous 4% with a progressive dividend policy in place. To see why I believe that the 2014 dividend could be considerably more generous read below:-

http://michae1mouse.blogspot.co.uk/2013/12/proposed-share-buy-back-and.html

The shares of course trade at a considerable discount to NTAV, and needless to say, I consider the shares to be undervalued.

In other news, another of my holdings Trakm8 released a RNS detailing their biggest ever contract win with  a UK insurance group. Whilst the £1.2m hardware order is significant, the bit I like best is this:- "This hardware order is expected to be followed by a service support contract providing additional and long-term recurring revenues for the Group."

http://uk.advfn.com/news/UKREG/2014/article/60634813

The group boasts a significant percentage of revenues as recurring, and coupled with high margins and good cash generation, Trakm8 remains a very promising long term hold for me. For further details:-

http://michae1mouse.blogspot.co.uk/2013/12/trakm8-interims-and-brief-updates.html

Finally, a mention of my speculative holding in Angle. It's becoming increasingly difficult not to get excited about this company and it's Parsortix product following a string of positive news flow. Following on from the news last year of CE mark approval, they have recently announced the appointment of an eminent Scientific Adviser, Dr Harold Swerdlow and an agreement with the Medical Research Council's Cancer Unit at the University of Cambridge to investigate "several exciting research avenues to test different applications of the Parsortix system in the diagnosis and personalised treatment of cancer."

Angle will release their interim results on Thursday this week (30th January). I don't expect to see much evidence of revenues from sales yet, but I am looking forward to reading about any further progress.

As ever, no advice intended or given.

Fairpoint and H&T Group

Continuing with my very brief analysis of the value portfolio, I shall take a look at Fairpoint and H&T. Please note that this is not intended to be in-depth research, merely a snapshot based on the current financials of each company.

Starting with Fairpoint. The company describes itself as :- "The leading provider of advice and solutions to financially stressed consumers".

An initial glance at the figures reveals that the company is currently trading on a P/E ratio of less than 7, and yields a 4.3 % dividend which is covered more than three times by earnings. The company appears to be highly cash generative. Net cash at the June interims was £2.8m vs. net debt of £2m at the same period in the previous year. The current market cap. is around £54m. They operate a progressive dividend policy, and increased the dividend by 10% at the interim stage to 2.15p (2012: 1.95p).  Basic EPS was also up at the interim stage by 21%. Their outlook statement indicated solid progress.

Based on the financials and outlook it certainly appears to be an attractive investment, and probably undervalued? We shall see.

H&T Group has had a decent week, and the shares are up around 5%. They released a trading statement on 7th January confirming that full year profit will be in line with management expectations. The trading statement also mentioned that they had reduced net debt by around £7m to around £20.8m, although they mention that market conditions are challenging.

H&T are a pawnbrokers, and based on last year's earnings the historic p/e ratio is less than 5 and the dividend around 7.7% covered more than three times by earnings. It should be noted however that at the interim stage the dividend pay out was reduced from 3.8p to 2.1p in light of the challenging trading environment. EPS (interim) had fallen from 14.5p to 9p. If you strip out goodwill and intangibles from the balance sheet then tangible NAV is around £68m against a market cap of £56.5m.

This is one of those stocks where most of the bad news could already be priced in? Again only time will tell.

It's probably not too surprising that both of these companies have appeared on the value list given the nature of their businesses. Certainly, investors would perceive (possibly) that their prospects are inversely proportional to the health of the economy, and all indications point to a growing recovery.

21st Century Technology Plc

21st Century Technology (C21) is the second of the value plays on my list, and it is a company that I'm reasonably familiar with. It has been on and off my monitor a number of times. My impression to date is that it has been somewhat of a serial disappointer. Just when you think it's turned a corner a profit warning suddenly emerges out of the blue. In fact I wrote a few lines about C21 in my August blog with particular reference to Jan Holstrom, the outgoing Non-Executive Chairman:-

http://michae1mouse.blogspot.co.uk/2013/08/updates-ubc-media-densitron-ddd-group.html

However, it's a company that's always looked like it had promise, and with the recent Directorate changes, it is a company that is firmly back on my monitor.

C21 describes itself as "a leading supplier of public transport CCTV and other monitoring systems, including their award winning EcoManager".  Looking at the figures from last year's results the company looks very much like a value share with (in theory) potential for significant growth. Buying growth companies when temporary circumstances render them attractive as a value play can turn out to be very rewarding for medium to long term investors. What investors will need to weigh up here though is whether C21 is a genuine bargain or simply a value trap.

Based on last year's earnings, the historic p/e ratio is less than 6, the dividend yield is around 9% covered twice by earnings and the market cap. is £7m. The tangible asset value is around 4p or 8.5p including intangibles.

However, I mentioned that this could turn out to be a value trap because at the half year, Jan Holstrom had this to say about trading in the second half:-

".... We are now experiencing a significantly lower than expected order pipeline for H2 2013. We have received indications that revenue receivable from one of our largest customers is likely to be 70% lower in H2 2013 than H1 and below our previous expectations, whilst a four-year contract with the GoAhead Group is due to expire very shortly.
"In view of the above, the Board has sought to reassess the Group's order book and pipeline opportunities and anticipate that its financial performance for the year ending 31 December 2013 is likely to be significantly below its previous expectations and of the previous financial year, should the pipeline remain at its current levels."

So I suppose the question is can the new faces that have joined the Board put C21 back on track and re-establish a growth trajectory, and if they can, just how long will it take?

In October of this year, Russ Singleton, the Chief Executive Officer and Glenn Robinson the Group Finance Director, purchased over £160,000 worth of shares between them at 6.5p, and so it would appear that they are confident of steering C21 back in the right direction.

Only time will tell of course, and as ever please DYOR, and no advice is intended or given.

The low p/e, small cap, high yielders vs. FTSE all-share

For my next study, I have decided to compare the performance of the following companies against the FTSE all-share index over a period of around 3 years. The companies in question are:-

Bischi Mining (BISI) -110p
21st Cent. Tech (C21) - 7.5p
Fairpoint (FRP) - 130p
H&T Group (HAT) - 145p
Hydro Intl. (HYD) - 113.5p
MS Intl. (MSI) - 174p
Quarto Group (QRT) - 163.5p
Tandem Group (TND) - 75p
Walker Crips (WCW) - 44.75p

Again I don't hold any of these shares in my personal portfolio, and I haven't conducted any research on the individual companies. However, the selection is not a totally random one. Each of the companies listed has a current market cap. less than £100m and pays (or has paid) a dividend of over 3% (relative to it's current share price) covered more than twice by earnings. Their current p/e ratios are all less than 10 (based on last year's earnings). I have listed each company's current mid-price alongside it's ticker. The FTSE all-share currently stands at 3605.

Value investors will understand why I have chosen the nine companies above, and I intend to research each in turn and post my thoughts on this blog.

I'll start with Bischi Mining which already looks interesting to me. Bischi describes itself as a UK mining company with direct coal mining operations in South Africa. The current share price weakness appears to be related to "a short term impact on production following an incident at one of Black Wattle's main production pits, where we have mined into old underground workings which were never recorded on any historical mine plan". This will impact earnings for 2013, but they don't expect production or profitability to be impacted in 2014.

Looking at the financials, the historical p/e is below 9, the dividend yield is above 3.5% and the shares are trading at a significant discount to TNAV (169p). It also appears that they have a UK property portfolio linked to the retail sector which is performing well. Cash on the balance sheet looks healthy, and they don't appear to be heavily indebted. In fact what's not to like about this company with a medium to long term view?

Generally, I don't invest in mining companies but I am going to research this one further, and it will definitely go onto my monitor.

As ever, no advice intended or given.

More share tips for 2014

Investors Chronicle have published their share tips for 2014 this week, and if you wish to read their rationale then you're going to have to purchase the magazine or become a member I'm afraid:-

http://www.investorschronicle.co.uk/2014/01/03/shares/news-and-analysis/tips-of-the-year-6VAcXZE4OAY1MiLBMoWm5L/article.html

Nevertheless, here are the names of the companies they are tipping with their bull and bear points (IC opinion). I might add my own views at a later date, if time permits.

For reference their 2013 tips made an average gain of 31.4% (FTSE all-share 13.3%). Their top performer being Vodafone with a 53% gain, followed by Henry Boot 51.1% and Invensys 50.4%. The IC also includes a brief report on each of these companies.

Anyway here are their 2014 tips:-

Growth tip of the year - Utilitywise (UTW)

Bull points:-
Beneficiary of rising energy prices
Scaling up rapidly
Secured contracts give good visibility
Strong balance sheet with net cash
Bear points:-
Will need to successfully manage rapid expansion
Limited track record as listed company

Value tip of the year - Wincanton

Bull points:-
Highly geared to economic recovery
Restructuring programme ongoing
Low rating on several metrics
Chairman buying the shares

Bear points:-
No improvement in core business yet
Still lots of debt

Income tip of the year - HSBC

Bull points:-
Impressive dividend prospects (forecast 5.6%)
Improving credit quality
Emerging markets exposure
Partial UK arm float could release value

Bear points:-
Business misconduct issues have hit sentiment
Ongoing margin erosion

Old reliable tip of the year - Chesnara

Bull points:-
Large dividend (forecast 5.7%)
Strong balance sheet
Swedish operation now profitable
Trading below embedded value

Bear points:-
Vunerable to market volatility
Policy attrition still prevalent in Sweden

Overseas tip of the year - Novo Nordisk AS

Bull points:-
Dominant insulin market share
Productive pipeline
Favourable demographic trends
Cheap by historic standards

Bear points:-
Plenty of emerging competition
Tresiba set back

Recovery tip of the year - Hays

Bull points:-
Sizeable potential for UK profits to recover
Recruitment markets improving in many regions
Two consecutive quarters of better than expected net fee growth
Valuation discount versus other large recruiters

Bear points:-
Australian business hit by resource market weakness
Highly geared to economic recovery

Take over tip of the year - Anglo American

Bull points:-
Improved prospects at Minas Rio
Rationalisation benefits
Glencore listing facilities potential bid
Margins recovering

Bear points:-
Labour problems in South Africa
Existing capital commitments

Contrarian tip of the year - Zambeef

Bull points:-
Vertically integrated business model
Share price far below net asset value
Decent macroeconomic outlook for Zambia
Deal with Rainbow Chickens

Bear points:-
Damage to reputation may linger
Currency risk for UK investors

Whilst I would never recommend buying shares from tips in newspapers or magazines or anywhere else for that matter, sometimes they can provide a useful starting point for your own research or indeed to confirm or question your decision to hold, buy or sell if you're already an investor.

As ever, no advice is intended or given.

Corero Network Security

Now here's a interesting company that some investor's might like to research further - Corero Network Security Plc.

Firstly here's a brief description of what the company do from their half-yearly report:-

"Corero Network Security is an international network security company and the leading provider of Distributed Denial of Service (DDoS) and cyber-attack defence solutions. As the First Line of Defense, Corero's products and services stop DDoS attacks, protect IT infrastructure and eliminate downtime. Customers include enterprises, service providers and government organizations worldwide. Corero's appliance-based solutions are dynamic and automatically respond to evolving cyber attacks, known and unknown, allowing existing IT infrastructure -- such as firewalls -- to perform their intended purposes. Corero's products are transparent, highly scalable and feature the lowest latency and highest reliability in the industry."

At first glance it doesn't look particularly appealing since it's loss making, and revenues were down slightly at the half year stage compared with last year, whilst losses had risen. Cash on the balance sheet was $5.3m, but it is burning cash. Earlier in the year they also had to issue additional equity to raise cash for organic growth. Needless to say it's never paid a dividend, and whilst it's net asset value was recorded as around 33p (current share price 18p) it's tangible value is in negative territory. Added to this it's a US company listed on Aim. Whilst I'm a fan of finding hidden gems listed on Aim, I'm only ever interested in British companies. Before you conclude that I'm some sort of xenophobe, I can assure you that I'm certainly not and I'll leave readers to conduct their own research on some of the horror stories that have emanated from overseas companies listed on Aim. My particular lucky escape was RCG Holdings. Truly a case where fact was much stranger than fiction:-

http://michae1mouse.blogspot.co.uk/2011/02/rcg-holdings-brief-encounter.html

So why on earth am I writing about this company given what I've just written above? Well, the half-year results are for 30 June 2013. On the 1 August they completed the sale of Corero Business Systems Limited for a net consideration to the Company of $16.5 million with a profit on sale of approximately $15.0 million. Gross cash on a pro-forma basis at 30 June 2013 is $21.2 million and net cash $15.2 million (approx. £9.2m). This is highly significant since this is not far short of the whole market cap. (£10.5m - figure not checked) of the remaining company. The sale of the CBS business has resulted in the Company becoming exclusively focused in the network security market and has provided the Company with the cash resources to fund the organic development of the network security business. I further notice that they have since used some of this cash to pay off all of their loan notes which held a punitive 8% coupon.

Clearly the group will report a large profit at the end of the financial year from the sale, and will benefit from the cash injection going forward. The outlook statement is encouraging:-

"The Board believes that the network security market remains highly attractive. Specifically, the DDoS prevention market is forecast by Infonetics to grow by over 25% CAGR in the period 2012 to 2017 and IDC forecast the market will be worth $870 million in 2017.

For the year ending 31 December 2013 the CNS division expects to report revenue similar to that for the year ended 31 December 2012.

The Board remains confident in the Group's prospects."

It may be a company worth sticking on the monitor?

As ever, no advice intended or given.

Hopeless cases portfolio vs. FTSE-250 - Year end review 2013

Started back in August 2011:-

http://michae1mouse.blogspot.co.uk/2011/08/very-little-research-but-are-these.html

In my update back in late September, the hopeless cases portfolio had just taken the lead despite one total write off. What's the current picture just 3 months later though?

Whilst the FTSE-250 has moved from a percentage gain of 48.9% to 59%, despite a total loss on Game Group and a 59% depreciation on Man. Group., the hopeless cases portfolio has increased it's lead. From a 51.6% gain in September it has now gained 73% in just under two and a half years. In other words, the hopeless cases portfolio leads by 14% points.

By far the best performers remain TCG and ITV up by 283% and 247% respectively. Following on behind is CWC with a current gain of 75%, Vodafone 46% and two purchases of Aviva (reasons explained in previous posts) with gains of 41% and 38% respectively.

I'm not sure what this proves, if anything, but I have found it interesting. Certainly it goes to show that out of favour or distressed stocks can eventually turn out to be the multi-baggers of the future (TCG and ITV), and even the biggest of companies that are watched by a multitude of financial experts can bring handsome rewards. Certainly if you can buy them when they appear to be unpopular e.g. Vodafone. Also bear in mind that VOD has paid excellent dividends over this period with a special dividend to come from it's sale of Verizon Wireless (I'm assuming it hasn't already been distributed?).

I probably won't pursue the comparison any further, but might instead choose a different 'hopeless cases portfolio' in the future to conduct a similar comparative study.

Incidentally, from April 2011:-

http://michae1mouse.blogspot.co.uk/2011/04/watch-out-for-competition.html

"This brings me on to Vodafone. Whilst I don’t invest in large cap. companies, I read in one of today’s newspapers that over the past 10 years Vodafone shares are down more than 17% whilst the FTSE 100 is up nearly 7%.  This is quite an underperformance. Cursory research shows that Vodafone pay a near 5% dividend, it has a modest p/e ratio (from ADVFN data) and a Chief Executive who appears to have a sensible approach to creating shareholder value.

It will be interesting to see if Vodafone moves from being the under-performer to the out-performer over the next few years."

 

Barratt Developments, RSA Group and Firstgroup

For completion, I shall take a brief look at the final three companies on the Sunday Telegraph's share tips list for 2014. They are Barratt Developments, RSA Group and Firstgroup. Please note that my thoughts are based on a fairly cursory glance at the figures, and I'm not saying the Telegraph is right or wrong to tip these companies. As mentioned before, it is rare that tipsters make any reference to the fundamentals of the companies they recommend, and I'm simply adding a few figures. As always stock pickers should carry out their own informed research.

Before I assess Barratt Developments, I should mention that I never buy housebuilders. Rightly or wrongly I class them as a trader's share as opposed to a long term buy and hold. It's a very cyclical industry, and I'd find timing when to buy and sell very difficult.

The chart shows that Barratt is in a clear uptrend, and although the share price has risen substantially from its lows, it is nowhere near it's 2007 high of over £12. The shares are trading above Net Tangible Asset Value (£2.21) which I don't find particularly attractive, and they currently sit on an historic p/e of 45 with last reported EPS of 7.7p. They haven't paid dividends since 2008 (interim of 12.23p). However, prior to that it appears that they had a progressive dividend policy, and in 2007 they paid a whopping dividend of 35.68p which would be a 10.2% dividend compared to the current share price. Maybe they will be able to re-instate the progressive dividend policy in future years. On the face of it, it doesn't look attractive to me, but as I said I'm not a fan of housebuilders and they are subject to the vagaries of both the British economy and the government.

RSA Insurance looks potentially interesting. Clearly the recent profit warnings have taken a toll on the share price which is now at 12 month lows and appears to be falling towards a possible 10 year low (we shall see)? I find it difficult to value insurers, but for income investors the larger cap. insurers usually pay handsome dividends. According to ADVFN's figures, the p/e ratio is currently below 10 and the yield is around 8%, although I suspect this will fall substantially this year given the interim payment and subsequent profit warnings. This is the sort of company I would put on my monitor as having recovery potential, I might wait to see if it falls further before serious consideration though. Aviva is a good example of how these insurance company recovery plays with a record of generous dividend payments can be good investments.

Finally,  Firstgroup also looks like a very interesting recovery play. The share price sits at a 10 year low. It's an easy business to understand, and until recently it boasted a record of being able to increase dividends each year. Following a discounted rights issue it is unlikely to go bust in the foreseeable future. Has it already hit it's share price nadir? Always difficult to know, but I'd bet it's somewhere near, and if it's not going bust then the share price has only one way to go in the longer term. I'd classify this company in the same bracket as RSA, in other words, potentially very rewarding if management can get their act together. If not, then shareholders may benefit from a activist Hedge Fund shareholder (Sandell) pushing for asset sales.

As ever, no advice intended or given. It will be very interesting to re-visit the Telegraph's tips at the end of the year.