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Daily Grime - HAT/KW

By Jeremy GrimeStock MarketsOct 01, 2019 09:00
Daily Grime - HAT/KW
By Jeremy Grime   |  Oct 01, 2019 09:00
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  • IntegraFin (LON:IHPI) founder sells 6m shares yesterday at 370p, a 6% discount to the 396p price
  • Manolete (LON:MANO) CFO steps down now the IPO heavy lifting is done. Replacement comes from RSM.
  • Augmentum (LON:AUGM) announces EUR6m into a German Renter of electronic equipment.
  • H&T Group (LON:HTGR) – Acquisition & Update

    Share Price 380pMkt Cap £151mConflict Disclosure: No Holding
    • Acquisition & Update Yesterday at 4.43pm H&T acquired 113 pledge books from Albemarle & Bond which has recently closed all its branches causing much upset to customers unable to redeem their property. Consideration is £8m and no branches are being transferred. The size of the pledge book is not disclosed. Given the distressed state of the closed business I imagine this would have been a value purchase. The trading update is ahead of expectations with recent acquisitions trading well alongside the strong gold price helping.
    • Estimates Forecasts are for 23% PBT increase in the year to Dec 19 to £16.6m followed by 15% growth £19.1m. EPS grows by 18% in the current year to 34.5p and 15% to 39.1p in 2020. This looks like the forecasts may be 10% too low.
    • Valuation ROE is expected to increase to 11.8% this year pre yesterday’s acquisition, while the shares trade at a 35% price/book. PER 11X and yield 3%
    • Conclusion Like buses everything comes at once. The gold price is helping, competitors are failing presenting opportunities while there is a stressed consumer requiring the services of a friendly pawnbroker. While it looks set fair the shares have now trebled from their lows in 2013. The valuation improvement has come through and there is probably another two years of upgrades to come. Its important to remember to sell this one when the market mistakes it for a growth stock.

    Kingswood Holdings (LON:KWG) – H1 Results

    Share Price 11.25p

    Mkt Cap £25m

    Conflict Disclosure: No Holding

  • Results Kingswood announced H1 results showing revenues of £4.2m to June and a small core loss off the back of £1.9bn AUM. This morning it announces the completion of the Sheffield IFA acquisition. Recently the company announced an issue of £80m irredeemable convertible preference shares to Pollen Street. All we need to do is read clause 4.6 of this agreement. Copied here “in the event that, having completed the sale of all of its Ordinary Shares arising on Conversion, Pollen Street has not realised (pre-tax) sale proceeds equivalent to at least twice the amount it has subscribed for the Convertible Preference Shares (any such shortfall, the “Realisation Shortfall” and the amount so subscribed, the “Aggregate Subscription Amount”), then the Company will pay to Pollen Street an amount equal to the Realisation Shortfall,”
  • Estimates Revenue is expected to be £11.8m in 2019, £13.4m in 2020 and £15.1m in 2021.
  • Valuation The company trades at 2X revenue. But with an £80m acquisition facility I imagine that the shape of the business will be very different to forecasts.
  • Conclusion I haven’t come across shareholders underwriting convertible holders for a doubling of the share price by 2023 before. Unusual.
  • Begbies Traynor (LON:BEG) – Tip

    Share Price 74pMkt Cap £93mConflict Disclosure: No holding
    • Tipped in the Midas column over the week end - based on last year’s 16k insolvencies growing towards the 26k achieved in the golden years of insolvency. They mention the target of £100m of revenues in 3 years.
    • Forecasts are for £66m this year rising to £70m revenue in 2022, so the targeted revenues aren’t in forecasts. To bridge the gap may need acquisitions. The Exeter restructuring consultant was acquired in September at 2.7X revenue while in April a chartered surveyor business was acquired at c 1X revenue. So to bridge the £30m gap it seems likely the company will need to pay £30m, which on a £92m mkt cap is significant, and could overhang the share price.
    • Acquisitions This is one of the rare companies that has shown it can acquire at a better ROE than reinvesting in its own business so the acquisition strategy would seem to be fully justified. Last year ROE increased from 3.9% to 5.5%. The shares trade at a 8% discount to NAV. To get above NAV the market needs to be anticipating a double digit return which is close to a doubling of profits from here. And extra £30m revenue at 20% operating margin would achieve that. The last two acquisitions made 20% and 30% operating margins respectively.
    • Conclusion The acquisition strategy could turn this into a growth stock. This is effectively a bet on the rate of acquisitions. I think they may be able to deliver - and more.

    Stanley Gibbons (LON:SGI) – Visit

    Share Price 2.05p

    Mkt Cap £9m

    Conflict disclosure: No holding

  • Visit I visited the shop last week and Graham Shircore, the CEO, kindly spent some time with me. The company has hugely strong brands but as we have seen with other companies that may not stop them from disappearing. In this case the company needs to reach profitability before it is safe. With no forecasts available it is hard for investors to evaluate so let take a look at what is needed to reach break even.
  • Numbers Last year it achieved £11.8m revenue at a 51% gross margin, and £5.3m of admin costs combined with selling costs of £3.9m alongside a charge for the DB pensions scheme £400k and exceptional created a loss of £3.9m. The admin costs can perhaps be brought down to – lets guess- £7m from the historic £9m. If we use a 50% gross margin it would require perhaps £14m revenue to cover the fixed cost base which is 17% ahead of the current level. Given revenue fell 13% last year and the company is revamping website, shop etc. and bearing in mind the company achieved £15m revenue the year before this looks very achievable.
  • Downside If the company fails to achieve break even the 58% shareholder, Phoenix have a full debenture over their £11.5m debt so would simply take over the business wiping out the shareholders. The interest rate on their debt is a very generous 5% which is effectively subsidising the minority shareholders, so we don’t have any reason to suppose they will behave unreasonably.
  • Conclusion If the company traded profitably it could trade at 2-3X revenues. But with £11m debt and £5.5m of pension deficit the company is trading at an EV/Sales of 2.8X today. There is a lot of work yet to do to achieve profitability. With a refurbishment and a new website revenue could start to grow but I suspect this is one to revisit in 6 months’ time rather than being an opportunity today. The inherent gearing of the share price makes this a warrant on profitability rather than an equity investment

    Daily Grime - HAT/KW

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    Daily Grime - HAT/KW

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