100. Eddie Stobart Logistics
Eddie Stobart Logistics (ESL) has been on quite the downward spiral – a more than 90 per cent decline in its share price from a year earlier speaks for itself. The trouble started last August when the group’s shares were suspended pending a review of its accounting practices. This entailed “a more prudent approach to revenue recognition, reassessing the recoverability of certain receivables, as well as considering the appropriateness of certain provisions”. The announcement was accompanied by the delay of its half-year results, a profit warning and the departure of chief executive Alex Laffey.
A further profit warning arrived in September on the back of a poor performance against an “ambitious budget”, delays in implementing operating efficiencies and provisions for problem contracts. The group also noted substantial working capital demands to set up operations for new business wins.
That same month sparked a flurry of takeover interest, first from private equity group DBAY Advisors, then TVFC, a company controlled by former Stobart (STOB) chief executive Andrew Tinkler. As if that weren’t enough, fellow logistics company Wincanton (WIN) decided to explore a potential merger. Ultimately it was DBAY’s offer that prevailed, with a £50m funding injection in exchange for a majority stake. It was backed by Eddie Stobart’s board, which warned of a potential liquidity crisis unless shareholders accepted the rescue package. The deal also secured an extension of the group’s existing banking facility and an additional revolving credit facility.
The shares were finally reinstated when Eddie Stobart unveiled its results for the six months to 31 May 2019 in February. The group recognised £169m of impairment charges, widening its statutory operating loss to £195m. Even on an underlying basis, it made an operating loss of £11.6m. At the time, it guided to a “small” underlying operating loss for the full year, with the caveat that auditor adjustments could make for a more unpleasant picture.
With regards to the Covid-19 pandemic, the group says it is seeing “exceptional volumes that we would typically see around Christmas”. But it does not yet have a sense of how this will impact earnings for the year ending 30 November 2020. In the meantime, unless it has made significant headway, Eddie Stobart has a big debt problem – with £215m of net debt at the end of last November, this is more than six times its current market capitalisation. We see little reason for investors to hang on. Sell. NK
99. Loungers
Loungers (LGRS) fattened its balance sheet towards the end of April, raising £8.3m via a share placing and securing a £15m revolving credit facility. The bar operator says it now has sufficient liquidity in case lower sales continue into 2021 and also to restart the launch of new sites when trading conditions improve. Loungers, which listed on Aim last year, typically aims to open 25 of its Lounge and Cosy Club sites a year.
There’s no way to know when Loungers will be able to reopen its doors, but the effect of coronavirus-led closures will extend into the medium term. It is negotiating with its landlords over waiving its March quarterly rent payments and has slashed its monthly costs from £9.8m to £2.1m. House broker Peel Hunt expects 11 weeks of closed sites will take £10.5m off Loungers’ 2021 cash profits (Ebitda), bringing the total down to £1.4m. This is versus its £16.3m forecast for the year ending 30 April 2020. We think this is one to avoid. Sell. AJ
98. Bushveld Minerals
Bushveld Minerals’ (BMN) annus mirabilis of 2018 is well behind it now. The vanadium miner and vanadium redox flow battery company has had to get used to a world where ferrovanadium is not over $60 per kilogram (kg), but under $30 per kg and is chipping away at a sustainable business model. This involves the Vanchem plant bought in 2019 and now in operation, which also allows it to get production going from the Mokopane mine (it now has a permit) far more cheaply than previously expected.
On top of vanadium production, the company has expanded its interests in batteries. While the majority of Bushveld’s vanadium goes to the steel industry, the various energy storage businesses hedge the company against vanadium price volatility. When prices are high its mining margins climb and when prices are low, the battery business wins out. We have recommended a speculative buy on Bushveld at 25p and higher, and enough promise remains to recommend the shares at 13p. AH
97. Premier Miton
Last month, Premier Miton (PMI) told the market that it had assets under management (AuM) of £9.1bn at the end of March, up from £6.8bn a year earlier. On the surface, that figure looks very impressive, especially if you factor in the rout in equities since the start of 2020.
In truth, the comparison is flawed, as Premier Miton was only properly formed in November via the tie-up of Premier Asset Management and Aim-traded peer Miton Group, in one of the latest examples of the sector’s continual consolidation. Reality is less flattering: the six months to March brought £4.7bn in new assets from Miton’s funds and investment trusts, consecutive quarters of client net outflows, and a £1.7bn negative movement in asset performance. Since the start of the year, AuM has dropped by a fifth.
However, it would be unfair to call this one step forward and two steps back. While 23 out of Premier’s 38 funds are first or second quartile performers in their peer groups, the money manager will never be entirely free from the swings of financial markets. Nonetheless, chief executive Mike O’Shea’s observation that the “current uncertainty will create attractive opportunities in the UK's long-term savings and investment market” puts the pressure back on his fund management teams to do their job and outperform.
If that proves a challenge – which it always will – the merger can at least help with margin preservation. Getting bigger (if not better) is one way to keep the passive investment wolf at bay, for now at least. So far, the integration of these two halves is “progressing in line with management expectations”. That means office space and duplicated staff roles have been trimmed, while efforts to harmonise the two companies’ operating models are set to complete by the end of 2020.
Juggling this process – and the one-off costs needed to smooth the merger – could still be complicated by the need to align overheads “with a changed and volatile revenue base”, as the group put it in a trading update last month. To facilitate this, the dividend policy will now focus on paying out 50 to 65 per cent of profit after tax, on a biannual (rather than quarterly) basis.
Against this, broker Numis forecasts a full-year dividend of 6p for the 12 months to September 2020, and a decline in earnings per share to 10.4p. To say those look achievable would be to call the direction of equity markets until then. Hold. AN
96. Alpha Financial Markets Consulting
One can make the case for or against Berenberg’s view that Alpha FMC (AFM) is a business “built to weather the storm”.
On the positive side, the asset management consultancy’s services are likely to remain in demand whatever the backdrop, as clients seek help in navigating the pressures of digitisation, automation and margin pressure. That, in turn, helps to explain the strong rise in client and consultant numbers in recent years. The project-based nature of its appointments might also explain why the company has seen no effect on trading as of 24 March, when the coronavirus had already deeply impacted financial markets and money managers.
But professional services companies’ business activity is never guaranteed. Alpha has already paused hiring, and accepts that its new business win rate is likely to slow over the coming year. Higher-fee integration work could also slow as the sector’s rampant consolidation takes a breather.
Despite this, the group remains well capitalised and offers value on less than eight times Panmure Gordon’s earnings forecast for the year to March 2021. Buy. AN
95. Atalaya Mining
Already weakened by poor industrial demand, copper has been further knocked by Covid-19. For Atalaya Mining (ATYM), the prospect of another year or more of weak prices – well below $3 per pound (lb), or $6,600 per tonne (t) – means it has had to think seriously about its balance sheet. In the March quarter, the average price was $2.54/lb, and the cash cost will be above the 2020 guidance maximum of $2.05/lb the company has said. Last year, at an average sales price of $2.73/lb and cash cost of $1.80/lb, Atalaya’s cash profit was €61m (£54m).
The positive for the company is that increased production from the upgraded 15m tonne-a-year plant will improve sales – in the first quarter of 2020, its output was up 30 per cent on a year ago, even with a maintenance outage and the week-long Covid-19 shutdown at the end of March. It has also added €33.7m (£29.3m) to its cash balance by drawing down from existing facilities. Hold. AH
94. Purplebricks
The government lockdown and tightening of mortgage criteria by lenders has dealt a hammer blow to the UK housing market. Even before advice that property moves be put on hold, estate agency Purplebricks (PURP) reported a decline in vendor and purchaser activity and anticipated a further reduction in instructions and completions.
Inevitably, management warned that revenue for the year to April would be below expectations – bad news for a group where rising marketing and other operating costs have consistently outpaced revenue growth. That means that even though it will no longer be ploughing cash into its US and Australian operations, which it decided to close last year, Purplebricks is unlikely to generate the cash profits that the market had been expecting. Given the group’s track record of cash burn, concerns remain that the outstanding £35m net cash balance is being depleted. Sell. EP
93. Telit Communications
Telit Communications (TCM) describes itself as an enabler of the ‘internet of things’ (IoT) , which it calls the “main driver of digital transformation for enterprises”. But it is perhaps best known for headlines last July, after the company agreed settlement terms with the London Stock Exchange for a (now fully waived) £0.35m fine and public censure. The events leading to the censure involved the actions of former chief executive Oozi Cats, who resigned in August 2017. Telit’s board has since been reconstituted.
Over the course of the last year the group has been refocusing its business towards industrial IoT products and solutions, which prompted the sale of its automotive business in February 2019. Indeed, management believed that this move would provide some shelter from the current market disruption. But the company said that it had seen some disruption in its supply chain in China, as well as signs of a slowdown in demand. We remain cautious. Hold. LA
92. Gateley
Legal and professional services group Gateley (GTLY) made a good start to the year, benefiting from increased business confidence and clarity following December’s election. But the ‘Boris bounce’ gave way to the ‘Corona crunch’ in March. Consequently, all guidance has been suspended and the 2.9p half-year dividend cancelled. Analysts at Panmure Gordon are pencilling in no final payout for the year ending 30 April, either.
The group has been chipping away at its debt pile. Excluding £25m in lease liabilities, net debt came in at £2.1m at the half-year stage, its lowest level since Gateley’s market debut in 2015. For as much as forecasts are worth these days, Panmure is projecting a net cash position at the year-end.
The legal sector will take a knock from the Covid-19 pandemic as corporate activity slows. But it enjoys defensive characteristics with counter-cyclical demand for litigation and corporate restructuring. The Vinden Partnership acquisition in March has bolstered Gateley’s offering of advisory and dispute resolution services for the construction and property markets. This keeps us sanguine on the shares. Buy. NK
91. The Pebble Group
The Pebble Group (PEBB), admitted to Aim last year, provides products, services and technology to the global promotional products industry. It operates through two differentiated businesses: Brand Addition and Facilisgroup, the latter of which provides subscription-based services.
Although public numbers only go back to 2018, maiden full-year results showed that adjusted operating profit grew by more than a half, although consideration payments for the acquisition of Facilisgroup and £3.9m of IPO costs meant the statutory bottom line was negative. As of March, the group was unable to estimate the full impact of the coronavirus, although Pebble’s corporate programmes, which account for 70 per cent of revenue in its Brand Addition business, are facing a major unquantified disruption. Hold. LA
In the links below you will find our round-up of the constituents of the Aim 100, as it was configured at the end of March. Our survey of the index’s 50 largest stocks will follow next week.
