There was further disappointment in the autumn when the company’s shares lost 15 per cent of their value after the board reduced earnings guidance by 5 per cent (‘Communisis slammed for earnings miss’, 16 Nov 2016). I felt that it was an overreaction at the time given that analyst Guy Hewitt at brokerage finnCap still expected 2015 full-year EPS to rise by around 15 per cent to 5.3p, which meant that the shares, at 45p, were being priced on 8.5 times likely earnings. The historic dividend yield was 4.5 per cent and analysts expected the payout to be hiked by 10 per cent to 2.2p, so the prospective dividend yield was almost 5 per cent. In the event, the company declared a 12 per cent rise in EPS to 5.2p, and declared the anticipated 2.2p a share payout. But the shares refuse to re-rate even though free cash flow doubled to £12m, and the board highlighted decent growth prospects.
One reason for the muted investor reaction can be attributed to the slower than expected contribution from the company's shopper marketing agency, acquired in January last year, reflecting some reduction or deferral in spending by existing clients and the phasing of certain new business opportunities. When the business was acquired for an initial consideration of £14m, guidance pointed to it delivering cash profit of £1.4m in 2015, up from £1m in 2014. Communisis issued the vendors with a two-year, bank guaranteed promissory note of £9.3m, £700,000 in cash and almost 8m new ordinary shares.
There is also an earn-out agreement. At the time of the acquisition additional consideration of up to £9.3m was payable on the basis of the acquired businesses' future performance including its average adjusted cash profit for the two financial years ending 31 December 2015 and 2016. This deferred consideration has now been renegotiated and substantially reduced and is reflected in a £6.7m exceptional credit in last year’s accounts. The need to do this raises uncertainty as to the quality of the business acquired in my mind. Communisis also booked £2m of restructuring costs and wrote-off £500,000 from “certain customer relationships acquired over the past two years”. In other words, given that last January’s acquisition still has to prove itself, and exceptional charges are still being booked, then it’s going to take some time yet to restore investors’ confidence.
Also, the 10 per cent rise in net debt to £39.4m, albeit this was better than finnCap’s £40.4m forecast, makes investors cautious too. True, finnCap expect net borrowings to fall by a quarter to £30.3m at the end of this year based on predictions that Communisis will grow revenues by 3 per cent to £370m to deliver a £2m increase in adjusted pre-tax profits of £16.4m, EPS of 5.8p and a dividend of 2.4p a share. The board under the leadership of chief executive Andy Blundell may indeed deliver, but I just can’t see a catalyst to get the share price moving near-term and feel that the shares could easily trade sideways for another six to eight months before there is firm evidence that the company is delivering.
So, having reinitiated coverage when the price at 69p ('Making the right communications', 3 Feb 2015), I am calling time on the holding and crystallising the loss. Sell.
Please note that I have written five columns today, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on more than 90 companies this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew Holdings: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)
■ GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)
■ Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)
■ Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)
■ Cambria Automobiles: Buy at 83p, target 95p; Vertu Motors: Buy at 71.75p, target 85p to 90p ('Lowly rated car dealers motoring back', 7 March 2016)
■ Sanderson: Buy at 80p, target 90p ('Tapping into cloud based profits', 8 March 2016)
■ H&T: Buy at 195p ('A golden opportunity', 8 March 2016)
■ Software Radio Technology: Buy at 25p, target 40p ('Software Radio surges on huge contract win', 9 March 2016)
■ STM: Buy at 55p, target 80p ('Lowly rated, cash rich pensions play', 10 March 2016)
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p (‘A solid buy’, 15 March 2016)
■ 32Red: Run profits at 150p (‘32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p (‘Patience running short at Communisis’, 15 March 2016)
■ Global Energy Development: Sell at 27p (‘Global Energy plays waiting game’, 15 March 2016)
■ Raven Russia: Sell at 30p (‘Raven Russia battens down the hatches’, 15 March 2016)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking
