Updates - Avanti, Avesco and ISG

It's been a busy week for news flow from some of the companies that I own shares in or have written about in the past.

Firstly, starting with Avanti Communications. This is one of my more speculative investments, and I have mentioned it several times on my blog. The shares nosedived following their most recent trading statement, but after publication of their prelims this week, the shares have bounced back by over 30%. You need a strong stomach to invest in these type of stocks since at the early stages in their development, the share price movements can be volatile and highly unpredictable. I try generally to think long term, and I'm talking several years not months.. I try to buy when the risk/reward ratio looks favourable and just hold on unless I feel the story has changed so much that I have lost all faith in the company.

In Avanti's case, I have held on and now believe it could be a multi-bagger from these levels. The key to my cautious optimism is that they have recently turned cash-flow positive, they are picking up blue-chip customers and from the finals:-

"with £39 million of cash on the balance sheet at year end and operating cashflow positive reached in June, we have the comfort of sufficient cash to cover debt repayments for two years.  We plan to meet those obligations from cash generated from operations and with Backlog in FYE 2014 of £42 million, we expect to generate strong positive cash flow from operations this year."

Directors picked up around a quarter of a million pounds worth of shares between them following the results, and have been consistent buyers over many months. This further adds to my renewed confidence.

Next up, Avesco. This has been an outstanding investment for me, not least with a bit of good fortune from the Disney pay-out which they intend to distribute to shareholders in December. Whilst their third quarter trading update wasn't great, the balance sheet more than makes up for it.

I still believe that Avesco is significantly undervalued with the shares standing at £2.13 and  NAV of £3.09 made up of quality assets. This is a cash generative company that is yet to benefit from improving conditions in the world economy. If you couple that with the even year effect then shareholders might reasonably anticipate (as indicated) a progressive dividend policy. Strip out the £1.10 cashback to shareholders in December, and I expect this year's dividend to be around the 5% mark and rising in future years. I still believe that you are pretty much getting one of the market leaders in it's sector for nothing, and merely paying for it's assets. Many sector peers are priced at a premium to NAV, Avesco at a significant discount. I also wouldn't discount Private Equity interest in Avesco at some point in the not too distant future.

It's worth noting that trading profit for the 9 month period was £3.8m compared to £4.1m in 2012 (Olympic year). The shortfall in operating profit against last year is due to a one off cost of just over £3m from payments to LTIP holders and bonuses in connection with the Disney settlement.

Finally, 2014 is an even year which should boost profits substantially. Quite frankly in more than ten years of investing on the stock market I can't remember a situation where a profitable, cash generative and growing company(long term) with a NAV of £80m (mostly quality tangible assets) and £48m of cash on the balance sheet is valued at just £55m.

Finally, just a brief mention about Interior Services Group which I reported on last year:-

http://michae1mouse.blogspot.co.uk/2012/10/interior-services-group_4968.html

They also released their finals this week with improved underlying profits, net cash and order book.

The outlook is encouraging. From the CEO :-

"ISG has delivered an improved performance and growing order book.

 

In the UK, we have seen signs of improvement in the London office fit out market and have maintained our market leading positions in the office fit out and retail sectors.  We have had considerable success in the data center sector.  Our UK Construction business has increased its level of repeat work through its focus on key customers and frameworks.  

 

Overseas, our businesses are performing well and we are entering new markets and strengthening our existing presence through selective acquisitions.

 

We are looking forward to the future with growing confidence."

 

The dividend is 9p for the full year. I mentioned the shares at around £1.35 and they currently stand at £2.29 (up 70%). 

 

Right, I'm off to watch Dragon's Den.

 

As ever, no advice intended or given.

 

Avation - a trading buy? and Belgravium Technologies

I might be missing something but Avation (AVAP) looks overlooked and extremely undervalued?

The company, which is essentially an aircraft procurement and leasing company, released their results at the end of August where they significantly beat market expectations with earnings of $23.25 per share or around 15p. This means that the shares are currently trading on a p/e ratio of around 6. The outlook for 2014 is very positive, and the company have just introduced their first dividend alongside plans for a progressive dividend policy. Directors have been helping themselves to the shares in the open market and the company appears to be highly cash generative.

The company boasts a NAV above the current market cap of around £40m, and whilst there is significant debt on the balance sheet given that it’s a capital intensive company, I do like everything else about them and have bought the shares.

Unusually for me I felt that this was a trading buy and believe the shares have possibly 50% or more upside in the short term.  This is based on a very reasonable 8/9 times this year’s 15p earnings.

As I said there may be something I have seriously overlooked, but the Director’s confidence suggests otherwise.

Belgravium Technologies also released their interim results on Wednesday, and I am encouraged by the narrative which hints at an improved performance for the full year, and cautious optimism for the future. The EPS figure for 2012 was 0.33p which puts the shares on a p/e ratio of 10.6. This looks cheap given any growth this year and in future years.  The company also pays a dividend around 3%. They have stated in the interims that a dividend is highly likely to be paid again this year given that cash generation is good, and despite having used funds for a recent acquisition. This is a long term hold for me and I have previously commented on BVM below:-

http://michae1mouse.blogspot.co.uk/2013/08/13-rise-for-belgravium-technologies.html

Needless to say, no advice is intended or given and please do your own research.

Sexy is as sexy does!!

Who on earth would be interested in buying shares in a boring old shipping services company when there are so many other sexy options to choose from?

Well in 2002 that's exactly what I did, purchasing shares in Clarkson for around £2 a piece.

It was really my first serious foray into the stock market. I had dabbled between 1999 and 2002, but not seriously and with little background reading to guide me. In retrospect this was an invaluable lesson since the subsequent unwinding of the dotcom bubble and general market collapse made me realise that some serious research was necessary before gambling hard earned cash on the markets. Thank goodness I did some research and started to learn about p/e ratios, dividend yields, balance sheets, net asset values etc. Most of all thank goodness for Ben Graham and his principles of value investing.

Whilst I can't claim to have strictly adhered to Graham's principles over the last decade or more, I do try to look for at least some margin of safety.

In 2002, feeling pretty confident about Graham's ideas, I decided that one company that appeared to generally fit his value based criteria was a company called Clarkson. Whilst the markets were still somewhat volatile I decided to take the plunge and buy shares for about £2 a piece. The p/e ratio was low single digits, the dividend yield just over 7% and the company had no debt. What could possibly go wrong?

You can only imagine my dismay and despondency when the share price subsequently fell further to around £1.50.

I tried not to panic and held on, consoling myself with the fact that at least I would get some money back through dividend payments, but I did question myself, wondering if I had totally misunderstood the principles of value investing and margin of safety.

Luckily as markets began to pick up so did Clarkson's share price, and initially just getting back to break even  was a huge relief, but I continued to hold. I received my 7.2% dividend and eventually sold my holding for a profit of 67%. What a result I thought at the time, and let's face it where else are you going to invest and get that sort of return in the space of a year or so? Other successes followed, notably Ashtead and Hunting, both bought for 15p and 114p respectively and sold for double digit percentage profits after a relatively modest holding period (I know, I know.......but nothing teaches like experience) and from that point on I was totally hooked on stock market investment and still am.

But who really wants to hold on to these boring companies, particularly when you've made a great profit in no time at all? I mean what's happened to Clarkson for instance since 2002?

Well firstly the share price is now £19.75. It's nearly ten-bagged in 11 years. That's a compounded rate of 23% per annum just in capital appreciation. £100,000 invested would now be worth £987,500.
Pretty impressive, but let's now consider the dividends paid out during that period.

Firstly, Clarkson have clearly operated a progressive dividend policy. When I bought the shares the dividend was 15p per share, but the dividend has increased year-on-year and currently it stands at 51p. Sticking with the assumed £100,000 invested, dividend payments amount to nearly £200,000 (£199,250), twice the original investment.

Whilst I wouldn't be tempted to buy shares in Clarkson now (it looks expensive on first glance to me), it does illustrate three things. Firstly, value investing can be extremely rewarding, secondly, with prudent stock selection, buy and hold can work very well and thirdly boring companies can be very sexy indeed!!