TT Electronics Share Blog – Interim Results Year Ending 2019

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TT Electronics have now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year due to a £22.3M growth in Global Manufacturing revenue, a £20M increase in power and connectivity revenue and a £1.7M growth in sensors and specialist component revenue.  Cost of sales also increased to give a gross profit £9.4M higher.  Distribution costs were £1.9M higher, restructuring costs increased by £6M, there was no property sale, which brought in £3.6M last year and underlying admin expenses increased by £3.7M, although acquisition costs fell by £4.5M and other operating income was up £800K to give an operating profit down by £800K.  Finance costs increased by £1.3M which meant that the profit for the period was £5.3M, a decline of £1.8M year on year.

When compared to the end point of last year, total assets increased by £41.9M, driven by a £14.6M increase in right of use assets, an £11.1M increase in cash, a £10M growth in receivables and a £3.8M growth in inventories.  Total liabilities also increased during the period as a £4.1M fall in pension liabilities was more than offset by a £32.1M increase in long term borrowings and a £19.7M increase in lease liabilities.  The end result was a net tangible asset level of £82.2M, a decline of £4.4M over the past six months.

Before movements in working capital, cash profits increased by £7.3M to £29.8M.  There was a cash outflow from working capital, special payments to the pension fund increased by £3.5M and interest payments were up £1.3M, although tax payments fell by £2M and acquisition and restructuring costs were down £1.5M to give a net cash from operations of just £2.1M, a decline of £8.6M year on year.  The group spent £7.1M on fixed assets, £1.9M on development expenditure and £2.1M on acquisitions which meant that there was a cash outflow of £9.3M before financing.  The group spent £7.4M on dividends, £2.2M on finance leases and £2.1M on “other items” so took out £31.9M of new borrowings to give a cash flow of £11.1M and a cash level of £51.7M at the period-end.

Overall the 27% increase in operation profit was largely driven by operational leverage and better efficiency.  There was a £1.6M contribution from acquisitions. 

The operating profit in the Sensors and Specialist Components business was £7.5M, a decline of £1.1M year on year.  Following a strong performance over the last two years with component shortages contributing to strong growth, softer market conditions and inventory de-stocking in the first half has impacted demand.    They have accelerated actions to improve the efficiency of their cost base including optimising their footprint and fixed labour costs and as a result are in the process of closing two facilities and consolidating production.  The total cost of this programme is around £2M with a payback in a year.  Initial benefits are expected in the second half of the year.

They launched new products in including a new sensing and power management product released in the period for use on hybrid electric vehicle battery management and energy metering.  During the period they have won positions with new and existing customers, including a contract with a US defence prime from cross-selling opportunities following the acquisition of Precision.  They are providing a custom sensor used in power management for a precision guidance mechanism.  They have seen growth in the period with global industrial customer for their sensors which provide solutions for accurate information sensing for cash and card transactions.  They are also winding down a tail of lower margin products to improve the quality of revenues in the division. 

The operating profit in the Power and Connectivity business was £7.2M, a growth of £3.4M when compared to the first half of last year with £1.7M of that coming from acquisitions.  There was a 4% organic growth in revenues, driven by an increase in aerospace and defence, and a 240 basis point improvement in margin reflecting efficiency improvements from last year’s investments. 

They continue to benefit from the electrification of aircraft.  They increased sales to key aerospace and defence customers and saw strong growth related to volume ramp up on defence and civil programmes for power products as well as satellite and space projects.  They won a contract with a new space customer for satellite navigation solutions and saw good growth with power products for Honeywell.  They continue to make progress with their new connectivity platform products, including with a European rail customer to provide preventative maintenance solutions and with a healthcare provider for medical wearable devices.

The operating profit in the Global Manufacturing Solutions business was £8M, an increase of £2.1M when compared to the first half of 2018 with revenue growth driven by new and existing customers across all regions.  They have transformed the business from one with a manufacturing focus on printed circuit board assemblies to increasingly providing value-added services to their customers.  They have invested in engineering teams to enable the manufacture of complex box build assemblies and provide more sophisticated testing and engineering services. 

During the period they won four new customers, three of which were in aerospace, defence and medical markets.  In the aerospace and defence market they won a new contract for more complex engineering and manufacturing services in the UK, expanding on the PCBA services previously provided.  They won a five year contract with an existing medical customer.  Medical projects won include a handheld surgical device used by doctors to seal blood vessels, cut tissue and stop bleeding and a bioanalytical measurement device used to analyse protein and cell biology for advancements in life sciences. 

Growth in the period came from a Chinese rail infrastructure customer benefiting from increased government spending on the high speed rail network.  They have also secured positions on major commercial aerospace platforms and the F35 and engaged in a new business alliance with L3, a US-based aerospace and defence company.  They were awarded their first contract with L3 to support a substantial electronics manufacturing programme for a key military program. 

In March the group acquired Power Partners Inc for an initial £1.2M and up to an additional £1M.  The fair value of net assets were £1.4M, generating goodwill of £800K.  During the period the business generated an operating profit of £200K.

As usual there were a number of one-off costs during the period.  Restructuring costs relate to costs arising on restructuring the Sensors and Specialist Components division (£5.3M), costs incurred restructuring the site footprint acquired with the Stadium Group (£1.1M) and other restructuring (£1.4M).  A past service charge of £400K has been recognised as a result of the pensions equalisation.  Acquisition costs include amortisation of acquired intangibles (£2.6M) and other costs of £1.5M largely relating to the integration of Stadium and Precision and the acquisition of Power Partners.

The pension seems to be fairly onerous at the moment.  Under the existing recovery plan for the scheme, contributions of £5.1M are to be paid in 2019 with £2.5M already paid in the first half and £3.9M to be paid in 2020.  The outstanding deficit contribution payments due under the Stadium scheme’s recovery plan were accelerated and £3.4M was paid immediately prior to the merger.  In addition, the group has set aside £2.5M to be used for reducing the long term liabilities of the scheme.  The total payments made in the period was £6M and the triennial actuarial valuation of the TT scheme is currently in progress.

Going forward, despite the current macroeconomic environment, the first half performance and order momentum positions the group well to make further progress in 2019.

At the current share price the shares are trading on a PE ratio of 29.8 which falls to 13.2 on the full year consensus forecast.  After an 8% increase in the interim dividend the shares are yielding 2.8% which increases to 2.9% on the full year forecast.  At the period-end the group had a net debt position of £82.4M compared to £41.7M at the same point of last year. 

Overall then the picture here seems a bit mixed.  Profits declined due to increased restructuring costs, net assets fell and the operating cash flow reduced due to an increase in receivables, with no free cash flow being generated.  The Sensors division saw performance suffer due to a reduction in demand but the power division saw an improvement due to efficiency improvements and Global Manufacturing Solutions did well with growth across all regions.  The forward PE of 13.2 and yield of 2.9% isn’t all that cheap and there is some considerable debt here but performance seems to be steady and I hold for now.

On the 19th November the group released a trading update to the end of October.  They have delivered organic growth with revenue 12% up and 5% up on an organic basis.  This growth is driven by Power and Connectivity and GMF with revenue in Sensors and Specialist components continuing the weaker trend experienced in Q2 which is now expected to continue into 2020.

The order book is ahead of last year with significant customer wins for recurring revenues, primarily in aerospace and defence and medical markets.  GMF has continued to deliver growth with their large global medical customers and are booking orders ahead of revenue.  They continue to prepare for further revenue ramp-up in 2020 from their customer wins this year.  In Power and Connectivity they continue to deliver good growth and margin progression with strong demand for their power solutions with aerospace and defence customers.  They have extended actions to optimise the cost base and restructuring costs will increase by £2M.

They have agreed to acquire the aerospace and defence power supply business of Excelitas Technology based in California, for a total consideration of $17.7M.  This will enhance their presence in the US aerospace and defence market and extend their power electronics capabilities to include power converters, moving them up the value chain.  This will also provide access to new defence programmes and new customer relationships with US defence primes.

Adjusted EBITDA for the business was $1.7M last year and the board expect to meet their 12% pre-tax return on invested capital hurdle in the third year of ownership.

Games Workshop Share Blog – Final Results Year Ended 2019

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Games Workshop has now released their final results for the year ended 2019.

Revenues increased when compared to last year due to a £27.1M growth in trade revenue, a £5.8M increase in retail revenue and a £2.4M growth in online revenue.  Amortisation was up £1.2M, cost of inventories increased by £10.8M and other cost of sales were up £7.2M to give a gross profit £16.2M higher.  Operating lease payments were up £910K, there was a £696K increase in redundancy costs and other operating expenses grew by £8.3M, although a £1.7M increase in royalty income meant that the operating profit was £6.9M higher.  Interest payments reduced somewhat but tax charges were up £660K which meant that the profit for the year was £65.8M, a growth of £6.4M year on year.

When compared to the end point of last year, total assets increased by £19.4M driven by a £4M growth in inventories, a £2.8M increase in deferred tax assets, a £2.6M growth in other receivables relating to royalty income following a change in accounting practices, and a £2.3M increase in plant, equipment and vehicles.  Total liabilities also increased as a £2M decline in trade payables was offset in other areas.  The end result was a net tangible asset level of £89M, a growth of £16.5M year on year.

Before movements in working capital, cash profits increased by £11.5M to £98.3M.  There was a cash outflow from working capital and tax payments increased by £4.1M to give a net cash from operations of £72.5M, a growth of £2.5M year on year.  The group spent £13.7M on fixed assets, £7M on product development and £1.9M on software to give a free cash flow of £50.1M.  Of this, £50M was spent on dividends which meant there was a cash flow of £540K and a cash level of £29.4M at the year-end.

The operating profit in the Trade business was £43.7M, a growth of £10.8M year on year.  Sales increased by 28% with growth in every major country.  Sales to trade accounts which sell primarily online continue to perform well. 

The operating profit in the Retail business was £10.4M, an increase of £3.2M when compared to last year.  The group opened 40 new stores which generated £3M of profitable sales, 19 of which have been in North America and 8 in Asia.  The main focus for store openings in the year ahead will be North America and Germany.  The group opened their first store in the south of China, a multi-man store in Shenzhen which adds to the five stores based in Shanghai. Sales in Japan grew by 22% where they now have eight retail stores and doubled the amount of independent stores. 

The operating profit in the Online business was £29.3M, an increase of £1.4M when compared to 2018.  Sales grew by 5% and this is a key area of focus for the year ahead.  The operating profit in the product and supply business was £18.5M, a decline of £5.4M year on year.

Royalty income was £10.6M, a growth of £1.7M when compared to last year.  This was due to the strong performances of Total War: Warhammer 2 and Warhammer: Vermintide 2.  87% of this income is from PC and console games, 7% mobile and 6% other.  Royalty income now recognises guarantee income in full at the inception of the contract.

During the year the group invested £10.5M into the design studio with a further £3.3M spent on tooling for new plastic miniatures.  Phase 1 of the new factory went live in December.  Phase 2 is scheduled to complete in Autumn 2019 and will deliver an expanded tool room and new R&D capabilities.  The total cost of this new facility, including the purchase of land will be £14M.  The manufacturing investment doubled the number of plastic injection moulding machines they have available.

A project to extend and upgrade the Memphis facility was started in March.  They have extended the lease and agreed to expand the footprint of the facility from 100sq m to 150sq m.  They are investing £5M in new warehousing fixtures and fittings technology which should be completed in 2020.

The group have also outgrown their warehousing facility in the UK and are moving to a purpose built rented facility and will be investing £5M in new warehouse fixtures and fittings and technology.  The project will start in autumn and the current warehouse at the HQ will become their component warehouse, saving on third party costs.  Warehousing costs as a percentage of revenue have grown from 3.1% to 3.7% and this is expected to rise further to 5% following these investments. 

The group are taking steps into the media and entertainment industry and have signed a development agreement with a script writer, show runner and production company to bring one of their stories from the Warhammer 40,000 universe to TV.  This is a story based on Eisenhorn.  Additionally they have finished development and begun production on an animated series, Angels of Death based on the space marines.  They are exploring distribution methods and it might be that Angels of Death launches on their own Warhammer TV. 

There are a number of initiatives to encourage new people to the hobby.  The schools alliance programme is for students between 12 and 18 years old and gives an opportunity for hobbyists to share their passion with other students.  It was developed in collaboration with STEM teachers to complement their approach to learning.  Currently they have over 2,300 schools in the UK, North America, Australia and Asia receiving their school packs.  The group are an official partner to the Scouts in the UK and sponsor the model maker badge.  They are also involved in the Duke of Edinburgh award scheme.

Following the introduction of Blood Bowl and Necromunda, this year they launched Adeptus Titanicus, giant war machines from their Warhammer 40,000 universe, and Middle-Earth strategy battle game covering both the Hobbit and Lord of the Rings films and books, both of which exceeded their expectations. 

After an increase in the dividends the shares are yielding 3.6% but this falls to 3.2% on next year’s consensus forecast.  At the current share price the shares are trading on a PE ratio of 21.7 which falls to 20.9 on next year’s consensus forecast.

Overall then this has been a good year for the group.  Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated.  Most sectors grew, although growth in the online sector seems rather lacklustre.  There seems to be plenty of room for growth in Asia and North America and it’s good to see the group investing some of its profits into capex for the future.  The shares are not cheap, however, and the forward PE of 20.9 and yield of 3.2% seems a bit steep to me.

On the 18th September the group announced that trading so far this year has been in line with expectations and cash generation remains strong.

On the 8th November the group released a trading update to the 3rd November.  Compared to the same period last year, sales and profits are ahead.  Royalties receivable are also significantly ahead driven by the timing of guarantee income on signing new licenses.  Prelim estimates for the first half of the year are sales of at least £140M and pre-tax profits at least £55M.

XP Power Share Blog – Interim Results Year Ending 2019

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XP Power has now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year as a £700K decline in North American revenue was more than offset by a £3.2M growth in European revenue and a £3.2M increase in Asian revenue.  Cost of sales was also up to give a gross profit £600K higher.  Admin costs were up £1.9M, R&D expenses increased by £1.1M, there was a £600K increase in acquired intangible amortisation, £500K of ERP implementation costs and £1.2M of legal costs which meant the operating profit was £4.4M lower.  In addition, finance costs increased by £1.2M but tax expenses reduced by £1.3M to give a profit of £10.3M, a decline of £4.3M year on year.

When compared to the end point of last year, total assets increased by £3.9M driven by a £5.5M recognition of right to use assets, a £3M growth in intangible assets and a £700K increase in property, plant and equipment, partially offset by a £5.3M decline in inventories and a £700K decrease in cash.  Total liabilities also increased as a £2.3M decline in borrowings was more than offset by a £5.7M recognition of lease liabilities and a £700K increase in deferred tax liabilities.  The end result was a net tangible asset level of £37.7M, a decline of £2M over the past six months. 

Before movements in working capital, cash profits declined by £4.2M to £20.1M.  There was a cash inflow from working capital and despite interest payments increasing by £1M the net cash from operations came in at £21.2M, a growth of £8.2M year on year.  The group spent £2.6M on fixed assets, £4.4M on R&D and £1.9M on software to give a free cash flow of £12.5M.  Of this, £10.2M was spent on dividends, £800K on lease payments and £2.4M on repaying borrowings which meant there was a cash outflow of £600K and a cash level of £10.8M at the period-end.

Overall the results reflected tougher trading conditions in Q2.  Whilst there was growth in the healthcare, industrial and technology markets, this was offset by a slowdown in the semiconductor market and pressure on gross margins resulting from the increase in US trade tariffs on Chinese goods, historic component price inflation and product mix. 

The profit in the European business was £8.8M, a growth of £500K year on year.  The business in Europe is very diverse but heavily weighted towards the industrial sector which held up well, although some customers could be building up inventory to buffer against a disorderly Brexit. 

The profit in the North American business was £15.6M, a decline of £4.5M when compared to the first half of last year reflecting the difficulty in the semiconductor industry which is not expected to recover before 2020

The profit in the Asian business was £3.3M, an increase of £1.2M year on year driven by a technology sector programme coming back to life and strong performance from RF programmes. 

Order intake was down 1% but this was flattered by forex movements and the strength of the dollar so at constant currency, orders were down 7%.  Asian orders increased by 11%, European orders by 1% but North American orders were down 12% (19% on a like for like basis).  The majority of the semiconductor equipment manufacturing customers are in North America.  They enter the second half with an order book of £86.1M, however, which is a £4.6M increase on the year-end.

Gross margin declined by 210 basis points resulting from a combination of the higher component costs incurred in 2018 now being reflected in cost of sales, adverse geographic and product mix and the impact of Section 301 tariffs which they have not been able to fully recover from customers.  They expect the tariffs to be resolved in the short to medium term but are working with customers on tariff recovery and mitigation and expect their gross margin to benefit from this in the second half of the year.

The group completed the construction of a second factory on their existing site in Vietnam in Q1 and this is expected to add $130M of manufacturing capacity per year which will increase the capacity in Asia from $170M to $300M.  Since the summer of 2018 they have been working to ensure all products less than 1.5kw can be manufactured both in China and Vietnam and with this process now complete, Vietnam is now qualified to produce a total of 1,819 different products.  Their Vietnam facility would continue to enjoy a cost advantage over competitors with a predominantly Chinese manufacturing footprint even in the event that the Trump administration decides to levy Section 301 tariffs on power converters produced in Vietnam.

In order to take advantage of their expanded Vietnamese capacity, the group will be transferring the manufacture of all their lower power, high voltage DC-DC modules to that facility.  The manufacturing facility in Nevada will close by June 2020.  It is expected that this will result in annualised cost savings of £4M and they expect to incur around £1.5M in costs associated with the full closure of the site.

Last year the group saw significant cost inflation and lead time extensions for many of the electrical components they incorporate into their products, particularly Mosfet transistors and multilayer surface mount capacitors.  As a result of this, they increased their safety inventories significantly and secured critical components at prices above their standard costs in order to ensure they could continue to support their customers’ production requirements.  Since the summer of 2018 they have seen certain component lead times reduce but the supply of certain critical components such as Mosfets remains constrained.  They are continuing to manage their component inventory, building in a sufficient margin of safety where possible.  There has been a significant focus on reducing inventory were possible, and they have seen factory held component inventory reduce in H1 2019.

Despite being a headwind, the tariffs imposed by Trump on Chinese goods could actually benefit the group as their Vietnam manufacturing plant allows them to offer US customers products which are not subject to the 25% tariffs imposed on power converters from China.  The majority of the competition have a predominantly Chinese manufacturing footprint.  They have transferred the production of over 1,500 different products from China to Vietnam in the past year and are announcing plans to transfer the manufacture of all their lower power, high voltage DC-DC converters to Vietnam by mid-2020 which should lead to significant cost savings. 

Going forward, the board continue to see a robust performance form the healthcare, industrial and technology businesses but a combination of continued softness in the semiconductor equipment manufacturing sector and the task of recovering Section 301 tariffs present the group with a continuing challenge as they enter the second half.  The Vietnam facility puts them in a strong position to mitigate 301 tariffs and the qualification of product by their key customers once transferred is key to restoring margins to historic levels.  Margins in 2020 will also benefit from the closure of their Minden facility. 

They do not see any meaningful upturn in the semiconductor manufacturing sector before 2020, but once the recovery takes hold they expect the combination of recent design wins and the cyclical recovery to produce significant growth in that sector.  They remain conscious of potential risks arising from the global macroeconomic challenges but the board expects revenue growth in H2 notwithstanding the current softness in the semiconductor market. 

At the current share price the shares are trading on a PE ratio of 14.2 which falls to 13 on next year’s consensus forecast.  After a 6% increase in the interim dividend, the shares are yielding 4% which is predicted to remain the same on the full year forecast.  At the period-end the group had a net debt position of £50.4M compared to £52M at the year-end. 

Overall then this has been a rather challenging period for the group.  Profits are down, net tangible assets declined and although the operating cash flow improved with an OK amount of free cash generated, this was due to working capital movements and cash profits deteriorated.  The main issue is the reduction in the semiconductor market which is unlikely to change in the short term.  Additionally there are raw material issues and Trump’s tariffs are also a short term headwind, although the move of production to Vietnam could present an opportunity here.

The forward PE of 14 and yield of 4% is OK but there is also quirt a bit of debt here which is not really being repaid that quickly.  I’m conflicted about this one but think they are a little pricey at the moment.

On the 10th October the group released a trading update for Q3.  Order intake increased by 8%, 4% at constant currency and revenues were up 2%, but down 1% at constant currency.  Net debt stood at £50M compared to £50.4M at the end of the last quarter. 

Order intake in the healthcare, industrial and technology markets remains robust but there has been no notable recovery in the end markets for semiconductor equipment.  The board anticipates that the group’s performance for the full year will be in line with its current expectations. 

On the 10th December the group released a trading update for the quarter.  During the period the group has experienced some short-term disruption to shipments from the implementation of a new ERP system which will result in revenues and pre-tax profit for 2019 being below current market consensus.  The outlook for 2020 is unchanged against a backdrop of robust order intake in Q4 to date. 

They planned to transition to the new ERP system from mid-October but during the system migration and in the first few weeks of operation, they experienced some disruption to the implementation which led to shipments temporarily falling behind expected run rates.

Whilst the group has been shipping at or above normal rates from mid-November, it is now expected that the lost revenues will not be recovered in full by the year-end.  Depending on their production and shipment rates during December they estimate that group revenues for 2019 could be around £6M below their previous expectations, with their high operational gearing meaning that pre-tax profit will also be below expectations.

Order intake in the first two months of Q4 has been robust and more than 20% higher than achieved last year with the improvement seen across all sectors.

As a result of shipment rates now tracking at least in line with expectations, they expect to recover the Q4 revenue shortfall during Q1 2020.  Notwithstanding this issue, they are encouraged by robust order intake and expectations for 2020 are unchanged. 

On the 13th January the group released a trading update covering Q4 and the year.  Trading since the last update has been in line with board expectations.  Order intake was strong with an acceleration of the trends seen earlier in the quarter with the improvement seen across all sectors.  The new ERP system is now working well and the group has continued to ship at or above normal rates since mid-November. 

Q4 revenues were down 5% but orders were up 29%.  Net debt at the year-end was £41.5M compared with £52M at the end of last year, which benefited from forex movements and the phasing of working capital.  Overall the board expect revenue growth in 2020.

The Property Franchise Group – Final Results Year Ended 2018

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The property Franchise Group has now released their final results for the year ended 2018.


Revenues increased when compared to last year as a £280K decline in franchise sales was more than offset by a £1.1M growth in management service fees and a £234K increase in other revenue.  Cost of sales increased marginally to give a gross profit £1.1M higher.  Employee costs were up £406K and other admin expenses grew by £84K but share based payments were down £87K and there was no impairment of the master franchise asset which cost £500K last time.  Offsetting this was the fact there was no reduction in deferred consideration which led to a £1.2M income last year.  All of this meant that the operating profit was broadly flat.  Ban interest came down somewhat but tax charges grew by £248K to give a profit for the year of £3.4M, a decline of £229K year on year.

When compared to the end point of last year, total assets increased by £811K, driven by a £1.3M increase in cash partially offset by a £413K decline in the value of the master franchise agreement.  Total liabilities declined during the period as a £171K growth in current tax payables and a £142K growth in accruals and deferred income was more than offset by a £900K reduction in the bank loan.  The end result was a net tangible asset level of £8.5M, a growth of £1.5M year on year.

Before movements in working capital, cash profits increased by £687K to £5.1M.  There was a cash inflow from working capital but this was lower than last time and after tax payments increased by £475K the net cash from operations came in at £4.5M, broadly flat year on year.  The group spent £31K on fixed assets, £20K on intangibles and £248K on assisted acquisitions support to give a free cash flow of £4.2M.  Of this, £900K was used to repay loans and £2M went on dividends to give a cash flow for the year of £1.3M and a cash level of £3.9M at the year-end.

In a flat housing market and with challenges to the viability of high street agents starting to crystalise the group focused on winning more sales instructions, up 6%, growing their managed properties portfolio, up 7%, consolidating offices and building EweMove’s sustainable profit path. 

The traditional high street brands benefited from further development of digital marketing and EweMove grew its market share and delivered a pre-tax profit of £400K.  They invested in better optimised brand websites in 2017 and built on this investment in 2018 by encouraging their franchisees to fund local area pay per click campaigns to generate new business leads. They also invested in a bespoke CRM platform to operate across all five of their traditional high street brands.

The lettings market grew at its slowest pace for a number of years.  There is a reducing number of buy to let mortgages being entered into, marginally higher levels of managed property stock was withdrawn and there was a lengthening of the average tenancy terms. 

Going forward, the group entered 2019 with the highest level of recurring revenues ever.  The board is confident of their prospects for the year and envisage that the loss of tenant fee revenue and continued regulatory intervention will create opportunities for further consolidation and growth.  They remain confident that they can generate similar levels of cash from operations despite the tenant fee ban. 

At the current share price the shares are trading on a PE ratio of 13.5 which falls to 12.4 on next year’s consensus forecast.  After an 11% increase in the final dividend the shares are yielding 5.1% but I can’t find a forecast for the dividend.  At the year-end the group had a net cash position of £2.3M compared to £100K at the end of last year. 

On the 31st July the group released a trading update covering the first half of the year.  The traditional high street brands continued to make solid progress, generating growth in revenues of 3%.  This was driven by improvements in lettings and has been delivered despite reduced activity levels in the sales market.  EweMove generated growth in revenues of 11%.  Although the group has yet to see the full impact of the tenant fee ban which came in at the start of June, the board are confident of the actions being undertaken by their franchise network to mitigate the impact on revenues.

The group continues to generate free cash and had net cash of £2.8M at the period-end compared to £500K at the same point of last year.  The board is confident that trading will continue to be in line with market expectations for the full year. 

Overall then this has been a strong year for the group.  Profits declined but this was due to the reduction in deferred consideration last year and underlying profits increased.  Net assets improved and the operating cash flow increased slightly with a decent amount of free cash being generated.  Both the traditional brands and Ewemove seem to be performing well, although the big unknown at the moment is the effect of the tenant fee ban.  With a forward PE of 12.4 and yield of 5.1% these shares seem fairly priced to me.

President Energy Share Blog – Final Results Year Ended 2018

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President Energy has now released their final results for the year ended 2018.

Revenues increased when compared to last year due to a $27.5M increase in Argentina revenue and a $1.7M rise in US revenue.  Depreciation was up $2.8M but there was a $1.8M release of the abandonment provision before royalties and production taxes increased by $5.8M and well operating costs grew by $4.3M to give a gross profit $18.2M higher.  Staff costs reduced by $375K but there were $700K of legal expenses and other admin costs grew by $404K which meant that there was a $17.4M swing to an operating profit.  A $3.9M swing to an impairment credit meant that the actual operating profit saw a $21.3M improvement.  There was a $1.4M increase in the forex loss and a $592K reduction in loan fees was more than offset by a $1.4M increase in loan interest so that after there was a $6.4M deferred tax charge for on future tax provisions and a $4M reduction in deferred tax income from the same, the profit for the year came in at $120K, an improvement of $8.9M year on year.

When compared to the end point of last year, total assets increased by $20.3M driven by a $20.1M growth in property, plant and equipment and a $5.1M increase in trade receivables, partially offset by a $3.1M decline in other receivables, a $2.1M fall in cash and a $1.3M reduction in assets held for sale.  Total liabilities also increased during the period as a $7M reduction in the acquisition payable for Puesto Flores was more than offset by an $8.9M increase in borrowings, a $4.6M growth in drilling, workover and operations accruals, a $6.6M increase in deferred tax, a $4.2M growth in trade payables and a $3.2M increase in license payables.  The end result was a net tangible asset level of $41.8M, a decline of $196K over the past six months.

Before movements in working capital, cash profits increased by $18.4M to $14.4M.  There was a slight inflow from working capital and after interest receipts increased by $143K the net cash from operations was $15.1M, an improvement of $22.4M year on year.  The group spent $15.8M on licenses in Argentina and $7.9M on development and production to give a cash outflow of $8.7M before financing.  The group had to pay $2.7M in loan interest so had to take a new net $9.5M to cover it.  This cave a cash outflow of $2M for the year and a cash level of $2M at the year-end.

Overall group production more than doubled, reaching 2,279boepd which was driven by acquisitions and higher production rates in both Argentina and the US.  Higher average prices of $59.6 per boe compared to $50.6 last year supported the growth in sales.

The operating profit in Argentina was $9.5M, an improvement of $15.6M year on year.  The price achieved per barrel was $63 compared to $53 last year as the transition to a fully de-regulated market progressed.  In total the group produced 721.8mmboe compared to 302.8mmboe last year, the majority of which was oil.  Reserves reduced by 1,621.2mboe due to a 3,679.6mboe downward revision following reduced capex at Salta as the group focused on the higher value added Rio Negro fields. 

Well operating costs before workover expenses were managed down to $22.7 per boe compared to $34.6 last year.  Depreciation fell from $12.3 to $9.6 due to higher production from Puesto Flores which has a lower depreciation charge.  A move to a deregulated oil price environment in Argentina in early 2018 triggered the reassessment of the functional currency in the country, changing to USD.

The operating loss in Paraguay was $63K, an improvement of $28K when compared to last year.

The operating profit in the US was $1.9M, a growth of $1.4M when compared to 2017.  The price per barrel achieved was $48 compared to $42 last year.  In total they produced 110mmboe compared to 71.8mmboe last year as a full year of production from the Triche well more than offset the sale of the East White Lake wells at the start of the year.  Reserves reduced by 91.3mboe due to a 179.9 disposal. 

Well operating costs excluding royalty related expenses fell by over 40% to $7.8 per boe as the higher cost East White Lake production was replaced by the lower cost Triche operation.  This switch also had a corresponding reduction in depreciation which fell by 58% to $3.1 per boe.

Admin expenses included $700K in legal expenses arising on the settlement of the DP1002 dispute in Argentina.  This well was impaired in 2016 so consequently the outstanding accruals included in the $10.9M impairment have been reversed resulting in a gain of $2.6M. 

At the end of the year the group acquired the Puesto Prado and Las Bases concessions.  They are adjacent to the Puesto Flores and Estancia Vieja concession and include access to reserves, infrastructure and a strategic pipeline.  The acquisition was funded through additional borrowings of $4M from the chairman and the issue of new shares, netting $4.6M.

During the year the Pirity licence was extended by two years through to September 2020 in return for additional work commitments.  While the farm out process continued to attract interest, no firm agreement has yet been reached.  The group remains committed to drilling a well towards the end of 2019 or early 2020.  A geological review has been completed with a review completed in early 2019.  This has determined the prospect and well site location for the well so the exploration asset continues to be capitalised at $102M.

In Paraguay the group has entered into a farm-in agreement on the Hernandarias concession to earn the remaining 40% working interest.  The remaining work commitment on this license is for one well to be drilled before October.  As of the year-end the remaining capital commitment was $8.9M which would not be payable if the rights were relinquished.  They expect drilling the remaining commitment well on the Pirity concession during 2019.

At the year-end the group was committed to funding an exploration programme on each of the Matorras and Ocultar licence areas surrounding Puesto Guardian in Argentina.  The licenses have a combined work commitment of $2.4M.

During the year an impairment review was triggered at Puesto Guardian as a result of a reduction in 2P reserves.  Following a review no impairment was required.  Following the sale of the non-operated interest in East White Lake field during the year an impairment of $1.3M was recognised at the end of 2017.

After the period-end the group announced more share issues to accelerate the expansion programme in Rio Negro.  Applications for 43,770,415 shares at a price of 8p per share were received, raising $4.6M.  At the same time the Chairman capitalised $1M of his loan through the issue of 9,950,000 shares at the same price.  A shame the group still seems to be some way off being self-sufficient. 

At the current share price the shares are trading on a PE ratio of 692 which falls to 7.3 on next year’s consensus forecast.  There is no dividend here.  The year-end cash balance was $2M.

On the 27th June the group released an AGM statement where they maintained their target of a 2019 year-end production rate of 4,900boepd.  The province of Rio Negro has agreed to the reunification of the separate areas of Puesto Flores and Estancia Vieja fields by the inclusion in that concession of the area situated between those parts known formally as part of Loma de Kauffman.

The workovers of wells have now been progressing for three months.  The primary purpose is to stabilise the inevitable natural decline in production of the well stock.  Five workovers in Puesto Flores have been completed and placed back on production.  The group have now added a second workover rig so that work will be carried out in more than one field at a time. 

There has been inevitable disruption to production as the workovers of producing wells continues but it is expected that Rio Negro production will return to 2018 year-end levels before the end of Q3 from which point production is expected to increase from the new wells.  In the meantime production from the existing Puesto Prado and Puesto Guardian fields remains stable. 

It is expected that drilling operations will begin before the end of the European summer.  The first wells to be drilled in Rio Negro will be in the Puesto Prado and Estancia Vieja fields and will be a mix of oil and gas production, appraisal and exploration wells.  Las Bases will follow.  In Puesto Guardian it is expected that in the latter part of this year, drilling will start on a two well programme at the Dos Puntitos field.

In the US the results of the seismic re-processing look promising and it is now expected that drilling operations at Jefferson Island will start by the end of September with an initial firm two well drilling programme and further contingent wells thereafter subject to results.  In the region, production was recently shut in and production suspended due to high flood waters which have now receded with normal service expected to resume soon. 

Significant steps have been taken to progress the plans to start gas production at Rio Negro.  The first gas compressor has been ordered and it is anticipated that it will be installed and working at Las Bases by the end of September.  Good progress has also been made at the Las Bases plant itself and it is expected that this could be recommissioned by the end of the year.  Permits have been obtained to build the 16km new section of pipeline to open up the Estancia Vieja field gas to its full potential.

In Argentina the full benefit of the workover and drilling programmes will be seen in the second half.  Turnover for April and May is $8M giving a figure of around $20M for the first five months.  The estimated cash generation from core operations in Argentina after capex over the two months was $5M giving a figure of $12M for the first five months and adjusted EBITDA for April and May is expected to be $3.3M. 

On the 16th July the group released an Argentina update.  They have recently conducted a hydraulic fracturing of well PFO-16 in the Puesto Flores field.  The frac has proved to be at the high end of initial expectations.  The oil cut is 95% and whilst this is clearly a depleted reservoir, the daily test rate of oil production at 175bpd is treble the pre-frac level.  The group has now started planning for other frac candidates. 

On the 25th July the group announced the entry into a new offtake arrangement with Trafigura.  Under the arrangement they are selling Trafigura certain of their production from their assets in the Rio Negro province.  Trafigura have also agreed to make an advance to the group repayable on commercial terms.

These arrangements have created the flexibility to pay off the $3.6M outstanding on the high interest Hipotecario loan which leaves the group with $4.8M bearing a lower interest rate of 7.5%.  At the same time the group repaid $1.5M of debt owed to the Chairman’s company.

On the 6th August the group released a trading update covering the first half of the year.  Sales were 7% up on last year with EBITDA of around $8M.  Bank debt reduced to $4.8M and average group production was 8% up on last year’s average at 2,500 boepd.  With an improved second half in prospect, the group is on track for an adjusted EBITDA of $20M for the full year.

Overall then this has been a decent year of progress for the group. Production, selling price and profits all increased.  The net tangible asset level declined somewhat, however, and despite the operating cash flow improving there was still no free cash generated.   And that really is the crux of the issue here.  Despite the clear operational improvement in Argentina, the group is still not generating enough cash to be self-sufficient and is instead relying on high interest loans and equity raises.  Given this, the forward PE of 7.3 is probably about right, if a little on the high side.

Cambria Automobiles Share Blog – Interim Results Year Ending 2019

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Cambria Automobiles have now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year as an £800K decline in new car retail revenue was more than offset by an £11.5M increase in used vehicles revenue, and a £2.3M growth in aftersales revenue.  Cost of sales also increased to give a gross profit £661K higher.  Depreciation was up £407K but there was a £414K profit on disposal of assets and other admin costs were down £619K to give an operating profit £1.4M higher.  Finance expenses increased by £141K and tax charges were up £124K which meant that the profit for the period was £4.7M, a growth of £1.1M year on year.

When compared to the end point of last year, total assets increased by £50.2M driven by a £30.9M increase in inventories, an £8.8M growth in property, plant and equipment, a £7.4M increase in cash and a £5.3KM growth in receivables, partially offset by a £2.3M decrease in property assets held for sale.  Total liabilities also increased due to a £40.9M growth in payables and a £5M increase in borrowings.  The end result was a net tangible asset level of £39.4M, a growth of £4M over the past six months.

Before movements in working capital, cash profits increased by £1.3M to £7.7M.  There was a cash inflow from working capital due to a large increase in payables due to strong new vehicle deposits ahead of the plate change month, and after tax payments reduced the net cash from operations came in at £10.9M, a growth of £5.2M over the past six months.  The group brought in £2.9M on asset sales and spent £10.5M on capex to give a free cash flow of £3.3M.  This covered the £214K of interest and £750K of dividends and after the cash flow was £7.4M, the cash level at the period-end was £22.9M. 

The significant disruption incurred last year as a result of the group’s refranchising activity is now at an end and they are starting to see the benefit of these changes coming through.  The new franchises are still in their infancy but the potential earnings streams from these businesses are encouraging. 

The gross profit in the new vehicles division was £9.6M, a decline of £100K year on year on revenues that fell 0.6% despite volumes being down 23%, illustrating the significant increase in average transaction price of units sold.  The group’s sales of new vehicles to private individuals was 16% lower and the profit per unit improved by 22%.  New commercial vehicle sales transacted at low profit per unit decreased by 61% and new fleet vehicle sales decreased by 53%.  The new car volume reduction that has been experienced reflects a challenging and uncertain consumer outlook which is impacting the market.

The gross profit in the used vehicles division was £12M, a growth of £200K when compared to the first half of last year with revenues up 9% and volumes down by 9% as a result of the closure of the loss-making Blackburn site and the refranchising of volume businesses into high luxury businesses.  The gross profit per unit increased by 11%.  They have continued their strategy of increasing the efficiency with which they source, prepare and market their used vehicles which has increased the profitability of the business.

The gross profit in the aftersales division was £14.2M, an increaser of £500K when compared to the first half of 2018 with revenues up 7%.  Like for like revenues were up 3% with gross profit up £200K. 

The major property development for JLR in Hatfield was completed in December and the relocation of the separate JLR facilities was also concluded at that time  The operations are bedding in well and the Aston Martin and McLaren facilities in Hatfield have also been achieved with Aston Martin taking occupation in early April and McLaren in May.

The group spent £10.5M on capex.  They were able to secure the freehold title to the land containing their Swindon JLR leasehold property for £2.4M.  This was the last of their properties held as long leasehold.  The Hatfield property development incurred £5.9M in capex along with £1.2M of fixtures, fittings, plant and machinery costs.  A further £1M was spent on the completion of Tunbridge Wells, delivery of a specialist used car site in Swindon and other fixtures and fittings.  In December the recouped £2.8M of cash by selling the freehold property in Wootton Bassett, which generated a profit of £400K.  The site was the former Land Rover dealership which was held for sale since the relocation to the new Swindon JLR dealership.

After the period-end the group completed the purchase of land on Hatfield Business Park to develop a secure compound and preparation centre to support their Barnet and Hatfield operations which cost £3.6M.  They also secured a development plot of land in Brentwood for £5M to deliver dealership facilities for JLR, Aston Martin, Lamborghini and Bentley.  They are working through the planning process for delivery of this development with a view to taking occupation in 2021.  Over the next two years they intend to buy a freehold in Solihull for Aston Martin for £5M and invest £16M in the Brentwood development.  They also continue to review its franchise mix and has added the Citroen franchise in Oldham, the Suzuki franchise in Maidstone and the Vauxhall franchise in Warrington alongside their Peugeot franchise. 

During the period the new car market was significantly affected by the impact of changes in the emission regime and the negative impact of weak sterling on the imported price of cars.  The diesel segment has been worst hit, with diesel registrations down 29% compared to a 9% fall in the market as a whole.  The board are therefore cautious about the new car market.  They continue to take action in the used car and aftersales departments which is offsetting some of the pressures on new car sales.  They are also adding new franchises that will make a potentially significant contribution to earnings once established in their locations and the board are pleased with the early contributions from them. 

The steps taken in relation to the national minimum wage, increases in business rates, pension contributions, the apprenticeship levy, debit and credit charges are all creating inflationary pressures in admin expenses but the group has taken steps to mitigate cost increases and ensure that the cost base of the business is controlled. 

Challenges remain given the ongoing uncertainty of Brexit but the ongoing franchising and property development activities have enhanced the dealership mix and changes made last year have further benefitted the group. Despite the uncertainty of the current economic environment, the board expect that performance in the full year will be ahead of current market expectations. 

At the current share price the shares are trading on a PE ratio of 8 which falls to 6.6 on the full year consensus forecast.  After the interim dividend was kept the same the shares are yielding 1.7% which remains the same for the full year forecast.  At the end of the period the group had a net debt position of £3.2M compared to £400K at the same point of last year.

Overall then this has been a good period for the group.  Profits are up, net assets increased and the operating cash flow improved with some free cash being generated as the refranchising and investments made last year seem to be baring fruit.  New vehicle profits were down but they held up rather well given the current market and both used vehicles and aftersales saw profits increased with the former helped by more efficient sourcing.  There are inflationary issues to look out for and Brexit along with the Diesel issues make for a very difficult market but Cambria seem to be navigating it well and if anything a forward PE of 6.6 and yield of 1.7% seems quite cheap to me. Considering buying more.

On the 4th September the group released a trading update covering the first eleven months of the year.  Trading performance has been ahead of last year and current market expectations.  During the period the new car market has been significantly affected by a number of factors including the impact of the changes to the emissions testing regime.  Sterling weakness has also negatively impacted the imported price of the cars.

During the period the total new car market was down 6.6%.  The diesel segment fell by 24%.  Supply side market influences have contributed to a reduction in the group’s new vehicle sales, although this was fully offset by improved gross profit per unit in the like for like business and further outweighed by the improved gross profit per unit across the total group.  This has improved significantly as a result of the stronger mix from the new franchised outlets such as Bentley, Lamborghini and McLaren.  The disruption experienced last year during the significant refranchising activity has also not been experienced this year.

Sales of new cars to private guests were down 11.7% and total new vehicle sales were down 18% although the last year included a low margin commercial vehicle deal which was not repeated.  As a result of the improved profit per unit, however, the total profit from the division improved significantly.

Like for like used vehicle sales were up 0.8% although the total used unit sales were down 5% impacted by the significant changes in franchise portfolio mix and the closure of the Blackburn site last year.  This unit reduction was offset by improvements in gross profit per unit.  As a result of this, both the total and like for like profit from the division improved year on year.  Overall the group’s aftersales operations saw revenue increasing by 4.7%, gross profit up 2.6% and contribution up 4.7%. 

Whilst challenges remain given the ongoing uncertainty around Brexit, the group has delivered positive franchising and property development activities over the past two years that have enhanced their portfolio mix and boosted earnings capacity.  The disruption experienced in the prior year is over and they have seen the benefits coming through in the current year.  These new businesses are still in their infancy.

Easyjet Share Blog – Interim Results Year Ending 2019

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Easyjet has now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year due to a £95M growth in passenger revenue and a £65M increase in ancillary revenue.  Fuel costs were up £141M, airport and ground handling costs increased by £103M, crew costs were up £67M and navigation costs grew by £9M, although other costs were down £25M to give an EBITDA £136M lower than last time.  Aircraft dry leasing was down £71M but depreciation was up £133M which meant the operating loss increased by £199M.  Finance expenses increased by a net £5M and tax income increased by £40M to give a loss of £218M for the period, an increase of £164M year on year.

When compared to the end of last year, total assets increased by £431M, driven by a £718M growth in property, plant and equipment, partially offset by a £154M decline in cash, a £198M decrease in derivative financial assets linked to losses on fuel contracts and a £71M fall in receivables.  Total liabilities also increased during the period as a £129M decline in deferred tax and a £119M decrease in borrowings was more than offset by an £849M increase in unearned revenue due to the timing of Easter and accountancy changes, and a £623M growth in lease liabilities following the change in accounting for leases.  The end result was a net tangible asset level of £1.965BN, a decline of £722M over the past six months.

Before movements in working capital, cash profits decreased by £207M to £681M.  There was a neutral working capital position and tax payments decreased by £20M to give a net cash from operations of £571M, a decline of £193M year on year.  The group spent £452M on fixed assets and £13M on intangible assets to give a free cash flow of £106M.  They then repaid leases to the value of £85M and spent £233M on dividends.  There was a £66M net increase in money market deposits but £121M made from the sale and leaseback of aircraft which meant there was a cash outflow of £155M for the period and a cash level of £871M at the period-end.

The adoption of IFRS 16 has changed a lot of the accounting for leases.  There has been a £497M adjustment to right of use assets as well as £73M of reclassification of finance leases.  Debt has decreased by £119M due to the reclassification of finance leases to lease liabilities and the balance sheet includes a £531M adjustment for lease liabilities with £43M of additions as a result of sale and leasebacks. 

Passenger numbers increased by 13%. Capacity increased by 14.5%, mainly due to annualising of new operations in Berlin but the existing network capacity also grew by around 7%.  The load factor decreased by 1 percentage point to 90.1% mainly as a result of building loads in Berlin in Q1. 

Revenue increased by 7.3% as a result of this capacity growth and a forex benefit, although this was partially offset by the move of Easter into H2, the new accounting standard and the annualisation of prior year benefits such as Monarch’s bankruptcy and Ryanair cancelling a large proportion of their winter schedule. 

Total revenue per seat decreased by 6.3% to £50.71.  Headline cost per seat increased by 3.9% to £56.66 as a result of fuel price increases, forex impacts, underlying cost inflation, the move of Easter into H2 (£45M), investing in resilience and the £5M impact of drones at Gatwick.  Excluding fuel, headline cost per seat increased by 1.3%.  The group have hedged their fuel requirements for 72% at $579 per tonne and 58% of 2020 requirements at $660 per tonne.  During the period the average market fuel price increased by 5% to $650 although the hedging in place meant that effective fuel price movement saw an increase of 25% to £493 per tonne. 

The group have started a number of initiatives to drive yield and ancillary revenue, supported in particular by increasing availability and deployment of data and by new product development.  Investment in these has been prioritised and is now expected to support trading in Q4 as well as in the future. 

The group has made good progress in setting up its holidays business and expects to launch the offering by the end of the year, selling holidays for the summer 2020 season.  They have also made further gains with business passengers, flying 1.1M more than last year, up 15.7%.  This has been driven by the expansion at Tegel.

The on time performance was down 1 percentage point to 81% which reflects the challenges of operating with scale in congested airspace.  Performance was significantly affected by the impact of drones at Gatwick but there was a 54% reduction in cancellations in the period.

As usual there are a number of non-underlying items.  The sale and leaseback of the group’s oldest A319 aircraft resulted in a gain on disposal of the assets of £2M.  They incurred £4M in Brexit-related costs, principally due to the cost of transferring pilot licenses to Austria and legal expenses. 

Going forward the group’s headline pre-tax profit expectations for 2019 remain unchanged.  Forward bookings for Q3 are 3 percentage points behind last year and flat for Q4 with capacity growth expected to be around 7%.  Revenue per seat at constant currency in H2 is now expected to be slightly down, not helped by the ongoing impact of Brexit-related uncertainty as well as a wider macroeconomic slowdown in Europe.  This is offsetting the move of Easter into H2, the second half phasing benefit of the new accounting measures, improvements in Berlin and more disciplined capacity growth. 

The headline cost per seat excluding fuel at constant currency is now expected to down too, however.  This includes the benefit from their investment in operational resilience to manage the impact of disruption.  With jet fuel remaining where it is, the fuel bill is likely to increase by between £25M and £60M but exchange rates are likely to have a £10M positive impact on profits. 

Macroeconomic uncertainty surrounding Brexit have driven weaker customer demand in the market such that they have seen softness in ticket yields in the UK and across Europe. Given this uncertainty, the outlook for the second half is now more cautious and the Brexit delay may continue to adversely affect customer demand into 2020.

At the current share price the shares are trading on a PE ratio of 10.6 but this rises to 14.1 on the full year consensus forecast.  The shares are currently yielding 6.1% but this reduces to 4.5% on the full year forecast.  At the period-end, the group had a net debt position of £201M compared to £135M at the year-end.

On the 6th June it was announced that Chief Commercial and Strategy Officer Robert Carey purchased 2,500 shares at a value of £23K. 

On the 18th July the group released a Q3 trading update with performance overall in line with expectations.  Revenue per seat was positive with positive ancillary revenue growth and a solid Easter performance along with a positive £10M affect relating to the move to IFRS 15 accounting.  Total revenue increased by 11.4% with passenger revenue up 10.7% and ancillary revenue increasing by 14.3%.  Passenger numbers increased by 8%, driven by an increase in capacity pf 10% with load factor down 1.7 percentage points to 91.7% due to late yield initiatives and a high prior year comparative linked to Industrial action in France and Monarch’s bankruptcy.  Total revenue per seat was up 0.7%.

The headline cost per seat excluding fuel at constant currency decreased by 4% reflecting investments in operational resilience with lower levels of disruption, cancellations and delays; wet leasing fewer aircraft due to the Tegel ramp up in Q3 last year and lower employee incentive payment accruals. 

The headline pre-tax profit for the year is expected to be between £400M and £440M, in line with market expectations. 

Overall then this has been a rather tricky period for the group.  Losses increased, net assets declined and the operating cash flow deteriorated.  Some free cash was still generated, however.  There are a number of issues here.  Demand is really not being helped by Brexit, the move of Easter into the second half has not helped, there was no repeat of the one-off incidents that helped last year and perhaps more worrying is the fact that the fuel bill is starting to climb considerably.  Offsetting this somewhat is capacity growth and an improved cancellation performance.  The shares aren’t exactly that cheap either with a forward PE of 14.1 and yield of 4.5%.  Could be time to cut losses here?

On the 8th October the group released a trading update covering Q4.  They expect to deliver full year pre-tax profit of £420M to £430M which is in the upper half of the previous guidance range.    Passenger numbers for the year increased by 8.6% driven by an increase in capacity of 10.3%. Load factor decreased by 1.4pp to 91.5%.  Total revenue per seat at constant currency will decrease by around 2.7% with the second half of the year showing a 0.8% increase.  The drivers of this increase are the yield optimisation self-help initiatives delivered in Q4 and increased demand due to strikes at BA and Ryanair.

The cost for the year will increase by around 12% due to increased capacity, higher fuel unit costs and adverse forex movements.  Excluding fuel at constant currency, costs per seat will decrease by around 0.8%.  Despite storms across Europe and the technical issues experienced at Gatwick in Q4, the operational resilience initiative was a key driving force behind the strong performance.  The fuel cost for the year will be around £1.42BN and total forex movements will have an adverse effect of £14M. 

Q1 2020 forward bookings are currently in line with the same time last year and the expected capacity growth will be at the lower end of their historic range at around 2%. 

On the 8th November the group announced that it had acquired Thomas Cook’s slots at Gatwick (12 summer and 8 winter) and Bristol Airport (6 summer and one winter) for £36M. 

Zytronic Share Blog – Interim Results Year Ending 2019

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Zytronic has now released their interim results for the year ending 2019.

Revenue declined by £1.1M when compared to the first half of last year and after a smaller fall in cost of sales, gross profit was £912K down.  Distribution costs and admin expenses also saw modest falls and after tax expenses declined by £137K the profit for the period came in at £1.2M, a decline of £682K year on year.

When compared to the end point of last year, total assets declined by £1.7M driven by a £2.6M fall in cash, partially offset by a £927K increase in inventories.  Total liabilities also decreased during the period, mainly due to a £468K fall in payables.  The end result was a net tangible asset level of £24.1M, a decline of £1.1M over the past six months.

Before movements in working capital, cash profits decreased by £833K to £1.9M.  There was a cash outflow from working capital and despite a £220K decrease in tax payments, the net cash from operations was £239K, a decline of £2.1M year on year.  The group spent £322K on fixed assets and £74K on intangible assets to give a cash outflow of £127K before financing.  They then spent £2.4M on dividends which meant that there was a cash outflow of £2.6M and a cash level of £12.1M at the period-end.

The group had lower than expected revenues and profitability in the first half due to considerably slower sales of their touchscreen products into the gaming sector.  Sales to Financial, Vending and Signage saw an increase but industrial sales fell by £500K. 

The gaming revenues were affected by a slower conversion of opportunities to orders of new design projects not replacing the expected reduction in volumes from several longer running projects, which consisted of higher margin larger format products.  In volume terms, the number of touchscreens sold remained at similar levels to last year but the reduction in larger panels had a knock on effect on profitability.

Historically trading in the second half has shown an improvement over the first half and there are several projects that should improve performance as they come to fruition but at this stage the board is taking a cautious and conservative view on an increase in activity levels from the gaming sector in the second half. 

At the current share price the shares are trading on a PE ratio of 10.8 but this increases to 14.4 on the full year consensus forecast.  After the interim dividend was held the same the shares are yielding 9.3% which is predicted to remain the same for the full year.  At the period-end the group had net cash of £12.1M compared to £14.6M at the year-end.

Overall then this was a rather difficult period for the group.  Profits were down, net assets decreased, the operating cash flow deteriorated and no free cash flow was generated.  The problem is the reduction in the larger high-value displays to the gaming industry.  It doesn’t seem like the board are overly confident that this will reverse any time soon so despite the huge yield (9.3%) which may not be sustainable, I think the 14.4 PE ratio shows that these shares are not really cheap yet.  I am staying out for now.

James Latham Share Blog – Final Results Year Ended 2019

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James Latham has now released their final results for the year ended 2019.

Revenue increased by £20.2M but cost of inventories grew by £16.2M, staff costs were up £366K and other cost of sales grew by £1M to give a gross profit £2.7M higher.  Selling staff costs were up £1.1M, other selling and distribution costs increased by £555K, there was a £298K decrease in forex gains and other admin costs grew by £248K to give an operating profit broadly flat.  There was also a £224K decrease in the profit on the disposal of a property offset by a £223K decrease in pension liability costs so that after tax charges were up £343K the profit for the year came in at £12.4M, a decline of £224K year on year.

When compared to the end point of last year, total assets increased by £7M to £138.8M driven by a £2.3M growth in inventories, a £2M increase in customer lists and a £1.6M increase in cash.  Total liabilities declined during the period, mainly due to a £1.3M decrease in trade payables.  The end result was a net tangible asset level of £97.4M, a growth of £7.9M over the past six months.

Before movements in working capital, cash profits declined by £238K to £15.5M.  There was a cash outflow from working capital and after tax payments reduced by £146K the net cash from operations was £7.6M, a decline of £845K year on year.  The group spent £1.6M on an acquisition and £2.4M on fixed assets, although they recouped £1.7M from the sale of a property to give a free cash flow of £5.5M.  Of this, £478K was spent on treasury shares and £3.4M went on dividends so the cash flow was £1.6M and the cash level at the year-end was £15.5M. 

Volumes increased by 0.9% with the majority of the growth being on direct business.  The cost price of their products increased and fluctuated more than previous years but cost prices on some imported plywood have shown weakness in Q4.  Warehouse costs increased due to planned extended working hours, further investment in the racking systems and some increased rents. 

During the year there was a £700K cost associated with equalising male and female pensions and a £1.1M profit on the sale of their old Yate site.  The group will continue to invest in their warehouses and extend the working day at their depots to ensure that they meet the delivery needs of their customers.  The focus will be major racking investment in Purfleet and Thurrock and Gateshead where they have now gained planning permission to develop the site to improve the yard layout and provide new offices.  Their Fareham depot will join Yate and Leeds in working a 24 hour shift system. 

Going forward they have had a positive start to the year with sales per working day 4.5% higher in April and May, excluding the acquired Abbey Woods.  Margins have also improved compared to H2 2019.  The integration of Abbey Woods has gone well and they now have a good platform to develop sales in Ireland.  They continue to see growth in sales of added value timber and panel products, although volume in their core products is proving more challenging.  Prices on some commodity panels are showing signs of weakness, partly due to over stocking within the industry.  Despite the strong start to the year there is still uncertainty surrounding the economic outlook but the board remain confident that they are in a strong position to continue to grow the business. 

At the current share price the shares are trading on a PE ratio of 13.9 and I can find no forecast.  After an increase in the dividend the shares are yielding 2.2%.

Overall then this has been a decent year for the group.  Profits declined but pre-tax profit was up.  Net assets increased but the operating cash flow fell somewhat, although there was still a decent amount of free cash generated.  Volumes were up and the investments in warehousing has enabled improved shift patterns.  So far this year both sales and margins have improved but serious macro issues remain.  The PE of 13.9 and yield of 2.1% is probably about right and I continue to hold.

On the 21st August the group released a trading update covering the first four months of the year.  Like for like revenues were 4.8% higher and the board are pleased with the progress being made at Abbey Woods in Ireland.  Volumes improved slightly, with a good increase in their added value products outweighing the loss of some lower value commodity panel products.  Margins have improved since the second half of last year but they have continued to see some weakness in cost prices of commodity products, offset against the weakness of sterling.

Most of their customers remain positive but the board are mindful of weakening economic indicators and the further impact that Brexit may have on the economy.  Cash reserves remain strong and bad debts remain low.

Character Group Share Blog – Interim Results Year Ending 2019

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Character have now released their interim results for the year ending 2019.

Revenues increased by £8.3M when compared to the first half of last year and after cost of sales also increased, the gross profit grew by £3.8M.  Selling and distribution costs were up £1.1M but there was a £3.5M fall in the forex loss and despite other admin costs increasing by £1.3M the operating profit was £4.9M higher.  Finance costs increased by £202K and tax charges were up £873K to give a profit for the half year of £4.2M, a growth of £3.8M year on year.

When compared to the halfway point of last year, total assets increased by £18.8M driven by a £9.2M growth in cash, a £3.2M increase in inventories and a £3.1M increase in goodwill.  Total liabilities also increased during the period as a £3.7M decline in derivative financial liabilities was more than offset by a £4.7M increase in payables, a £3.7M growth in borrowings and a £2M increase in deferred consideration.  The end result was a net tangible asset level of £33M, a growth of £8.8M year on year.

Before movements in working capital, cash profits increased by £1.4M to £7.3M.  There was a cash inflow from working capital and tax payments decreased by £1.5M to give a net cash from operations of £15.5M, a growth of £9.3M year on year.  The group spent £7.3M on acquisitions, £675K on intangible assets and £286K on fixed assets to give a free cash flow of £7.3M.  Of this, £939K was used to buy their own shares and £2.5M went on dividends to give a cash flow of £4.2M and a cash level of £19.8M at the period-end.

UK sales increased whilst the international sales, excluding the US remained steady.  US sales continue to be challenging following the demise of Toys R Us but they are making good progress and should see an improvement in the second half. 

During the period the pre-school Peppa Pig range has continued to grow well, both domestically and in their international markets.  Old favourites like Fireman Sam and Ben and Holly have also performed with resilience.  The Stretch range remains popular and is trading well both in the home market and internationally.  They are also focused on capturing new licence opportunities for this range which they expect will lead to extensions to this enduring brand. 

The group will be introducing further new products and range extensions to their portfolio in the coming months such as Peppa Pig wooden playhouse, theatre stage playset and vehicle, Stretch figures, Hair Dooz, Pokemon, OMG Pets, Laser X Original Double Pack, Ballerina Dreamer and What’s in a Box. 

In October the group acquired a 55% stake in Proxy, a Danish toy distributor.  The purchase comprises an initial consideration of £294K with a potential deferred consideration of £1.9M.  The cash outflow for the acquisition includes £4.7M spent on invoice discounting and £2.3M of bank borrowings taken on and the acquisition has generated goodwill of £3.1M.

During the period Proxy contributed £357K to the operating profit.  Sales at Proxy have been adversely affected by one of their major customers (Top Toy) going into administration in January but this is believed to be a short term set back as the Nordic markets formerly served by the business are quickly absorbing this retail capacity and other existing and new Proxy customers are seizing the available market share.  Additional opportunities have also arisen for Proxy, given that its distribution footprint in this region matches that of Top Toy’s presence and they have captures the Nordic distribution rights for Little Live Pets and Laser X in succession to Top Toy.

The discussions for the refinancing of Proxy’s banking facilities have exposed an element of under-capitalisation in the business and this will be required to be addressed to ensure it can be viewed by the lending banks as an independent stand-alone entity.  An additional loan or guarantee will need to be made by the group before replacement facilities can be agreed.  Discussions are currently taking place with the management of Proxy who retain a 45% interest in the business and will need to be resolved by the end of August. 

Group trading remains in line with management expectations and market consensus.  Macroeconomic factors including currency volatility and the potential implications of Brexit will continue to influence market behaviour but overall trading remains encouraging. 

At the period-end the group had a net cash position of £19.8M compared to £14.3M at the same point of last year.  After an 18% increase in the interim dividend the shares are yielding 4.4% which increases to 4.8% on the full year consensus forecast.  At the current share price the share are trading on a PE ratio of 12.8 which falls to 12 on the full year forecast.

Overall then this was a fairly strong period for the group.  Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated.  The UK business is performing well but they are still struggling in the US, although this seems to be improving.  The Proxy acquisition is contributing but this is not without its issues, and there is a risk here that it might become a drag on results.  For now though the forward PE of 12 and yield of 4.8% looks like good value and I continue to hold.

On the 13th September the group released a trading update covering the full year.  The second half of the year has seen several factors negatively impacting the business.  The most significant has been the failure of the retail market in Scandinavia to fully absorb the sales vacuum caused by the liquidation of Top toy, Proxy’s largest customer. This loss of sales has resulted in losses being sustained by Proxy which has had a negative impact on the group as a whole.  This setback is considered by the board to be attributable to the delayed recovery in retail in Scandinavia.

In addition, the continued uncertainty over Brexit has led to a weakening of Sterling in forex markets and this has been a factor for the group’s domestic business, given that a significant proportion of purchases are in USD.  As a result this has put considerable pressure on margins and negatively impacted results for the second half of the year, and will likely continue to be a factor in the current year. 

Through a combination of these factors, pre-tax profit in 2019 is likely to be between £11M and £11.5M, slightly under the lower end of current market expectations.

A newly incorporated, wholly owned Danish subsidiary has acquired all of Proxy’s inventory and forward purchasing commitments, thereby eliminating its overdraft.  The group will provide inventory to Proxy as it received orders from customers.  This will enable the group to more directly apply the resources and support of its sourcing and purchasing teams to Proxy’s sales efforts.  This reconfiguration of financial facilities has led to a reduction in the group’s cash flow but the board believes that Proxy will return to profitable trading in the current year. 

Also a potential issue is the announcement of Hasbro’s acquisition of Entertainment One, Pegga Pig’s brand owner.  To date there has been no dialogue between the group and Hasbro as to its future intentions for Peppa but it has been agreed with Entertainment One that the group’s licence will be extended for another six months to June 2021.  It seems likely, however, that in the long term it will be taken in house. 

The group have launched Goo Jit Zu, a new in-house product line developed in collaboration with an overseas toy company and the reception in the market has been enthusiastic.  They are currently focused on capturing new license opportunities for this range.  There are also a number of other projects in development and negotiation at this time.

The board remains confident in the group’s continued profitable performance and are therefore retaining the dividend.