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Eavesdropper's Dogged Investment
October 2010 - Issue 2
Contents at a Glance
- Market Comment & Strategy
- Share of the Month:ASHTEAD
- Share of the Moment:K3 Business Technology Group
- Sniffing Around:Hogg Robinson
- Penny Spec:Plant Impact - feeding the world
- Straight from the Kennel:LO-Q
Rally fades as investors seek safe havens
September's rally faltered as investors shunned equities and looked instead at safe havens, sending gold and the Japanese Yen against the US dollar to their highest levels in many decades. The Swiss Franc also hit parity with the US dollar for the first time in 10 months. Investors generally chose to ignore better than expected US retail sales an business inventory figures.
We've been impressed by the resilience of UK small companies in current volatile markets. The prospect of rising Government expenditure cuts is pointing to an economic downswing, which conventional wisdom defines as the time to ditch your small company shares. Yet there has been no sell-off. Indeed, the relevant indices have been quite firm. The reason , of course, is that things have changed. Small companies have become flexible and are well up with the latest technology. They have not been slow in exploiting the opportunities created by Globalization, and have diversified geographically, thereby reducing their exposure to the UK economy. Their inherent ability to act quickly to changing conditions has the effect of reducing risk, which is feeding through to higher share prices.
Building on Recovery in the US Non-Housing Market
The group offers a range of construction equipment on a rental or lease basis mainly to companies in the non-residential construction sectors. Its main market is in the USA where it operates under the name of Sunbelt. In addition to the main business, Sunbelt Rentals offers equipment for events such as the Super Bowl. In the UK, Ashtead operates under the name of A-Plant. There is also Ashtead Technology which is focused on the oil and environmental testing industries, with operations not only in the UK but also Singapore and Canada. The year to 30/409 was bad year for the group as recession took hold. Worse still. performance was hit by an exceptional restructuring charge amounting to £86.6m. Before exceptionals, pre-tax profits fell 22% from £112.5m to £87.4m. At that point analysts were forecasting pre-tax profits of £25m for the year ending 30/4/10. In the event, forecasts proved to be somewhat optimistic: the company reported pre-tax profits of £5m, although it did say that conditions improve in the 4th quarter.
The good news is that President Obama's US$50bn (approx £32.6bn) infrastructure plan to tackle unemployment is helping to boost the US construction sector. With 80% of its revenues coming from the US, Ashtead stands to gain from any increase in building and construction activity. Indeed, it has been amongst the first to benefit from the upturn and recently reported a 70% increase in pre-tax profits to £14m for the first quarter of the current year which eds 30/4/11. The Chairman confirmed that the company was securing more business than some of the local businesses as it is better able to deal with large infrastructural projects.
The current consensus is that pre-tax profits for the current year could be set to recover to around £12m and then rise substantially in the year ending 31/4/12. The figures imply that the shares could be trading on a forward PER of 16.5. On the face of it, this is not cheap. However, we think that it is possible that Ashtead's recovery could be much stronger than forecast. It is, after all, in the right sector in the right market at the right time.
Consider as a speculative buy.
Price: 109.5p Bid 109p Offer 110p; Sector: Support Services ; Market Capitalisation £553.2m; Epic AHT
(We last met with the management on 19/2/10.)
K3 designs and implements supply chain solutions, mainly based on Microsoft, for small and medium enterprises in two sectors: retail and manufacturing. A key element in its business model is that it is the client's channel to market, delivering its own software modules around core products.
This business model gives K3 a considerable advantage over its competitors. Owning and developing its own intellectual property results in higher margins and a sharper competitive edge. The demand for software is increasing, thus providing the group with ever greater opportunities.
K3 has changed its year end from 31 December to 30 June and has just reported the results for the 12 months to 30/6/10. It achieved a good performance in a difficult trading environment. Pre-tax profits rose from £3.2m to £6.6m on revenues up from £36.4m to £43.8m mainly through organic growth, but acquisitions contributed a useful £1.3m. Earnings were up from 15.6p to 20.1p. Elsewhere, strong cash flow resulted in a reduction of debt from £15.8m to around £11m.
The Chairman expressed his confidence in the group's short and longer term prospects. The new business pipeline remains encouraging. High levels of predictable growth and ongoing high cash flow put the company in a good position to take advantage of opportunities in the IT sector. We think that pre-tax profits in the year ending 30/6/11 could be set to rise to £7.8m, implying that the shares are currently trading on a prospective PER of 7. Given that a further rise in pre-tax profits is anticipated in 2011/12 the shares look undervalued.
Price 140p Bid 139p Offer 141p; Sector: Support Services; Market Capitalisation £35.7m; Epic KBT
(We met with the management on 13/9/10. K3 is quoted on the higher risk Alternative Investment Market.)
Recovering fast, looking good
Headquartered in Basingstoke the group, which was established in 1845, is an international corporate travel management company. It services over 300 substantial clients in 25 key markets throughout Europe, North America and Asia Pacific. It also operates Spendvision, an expenses management company, in which it is the majority shareholder. The group's global reach encompasses 120 countries.
Business condition have been difficult since the onset of recession in 2008 and Hogg's revenues have slipped back. The balance sheet, however, has remained strong on the back of the highly cash generative nature of the business, helped by rationalisation and cost cutting measures. There are strong signs that growth is returning to the sector. The group's worldwide base, in particular its exposure to Far Eastern markets, mean that it is not over exposed to economic downturn in the UK.
The results for the year ending 31/3/10 were encouraging. Pre-tax profits rose from £15.4m to £21.2m on sales down 7% from £251.3m to £326.8m. Earnings per share improved from 4.21p to 5.23p. Market conditions generally improved towards the end of the financial year and this trend has continued into the first quarter of the current year. IATA, the International Air Transport Association, reported strong growth in air travel, following the chaos caused by the Icelandic volcano. There is also some indication of a return to premium travel after a switch to cheaper travel as businesses were hit by the downturn beginning in 2008.
We think that pre-tax profits in the current year ending 31/3/11 could be set to emerge at around £28m, implying that the shares currently trade on a prospective PER of under 5. Given that further progress expected in 2011/2012, the shares are beginning to look very under rated.
Price: 29½p Bid 29p Offer 30p; Sector: Support Services; Market Capitalisation £90.8m; Epic HRG
Plant Impact is involved in developing and marketing ecologically friendly crop nutrition and production products. It's very much occupied with field trials and profits are still a long way out, but the prospects look good. In Edition 1 we highlighted Sirius, which prospects for Potash. We thought that the shares were attractive because Potassium helps to increase plant growth and there are worries that growing populations could lead to food shortages.
Sirius's shares zoomed from 2.6p to over 8p. The point is that what drives Sirius - the need to increase food production - also drives Plant Impact. What if their shares went up went up 300% like Sirius? It may not happen straight away, but it's quite likely in due course.
We think that the shares look a good buy at current levels
Price 21.25p Bid 21p Offer 21.5p; Sector: Chemicals; Market Cap: £9.7m; EPIC PIM
(Plant Impact is quoted on the higher risk Alternative Investment Market. See important notes.)
The other day I went for my usual afternoon stroll and happened to run into Lucky, the world's unluckiest dog, who I met a couple of weeks ago.
He was reading a holiday brochure, which he'd obviously found in a dustbin.
I could see that he was impressed by the bright sunny photos of gleaming white hotels in countries with warm climates.
He looked up. "Why don't dogs have holidays?" he asked.
"Well, " I said. "Having a holiday sort of presupposes that there's some kind of work in the background that you're in need of taking a break from. Dogs generally don't work, so they don't have holidays. Besides, we can be quite territorial and don't need holidays."
Lucky stared at me. "Are you mad?" he exclaimed. " I'd give anything to have a decent holiday.!"
"Go on then, " I said. "It's easy. - but, did I mention money? You have to pay, you know."
"Are you saying that the bottom line is that I'd have to work if I wanted to get away?" he asked.
I nodded. He went on: "I don't mind, but I wouldn't want to miss having a nap every afternoon."
I shook my head. "I think you've failed the attitude test for gainful employment. I suggest you forget about holidays."
Lucky shrugged. "It's more fun to deal in shares. Much better than having holidays. All of the places featured in the brochure were too hot anyway. That's the worst of having a permanent fur coat! By the way, what happened to Royal Bank of Scotland? I sold mine at 45p."
"I bought a few at 46p and sold then yesterday at 49p - a small but useful turn." He sighed. "I never have any luck. If I had a shirt I'd be sure to loose it."
"Why don't you buy some LO-Q?" It's a company involved in the development and application of virtual queuing technologies.
These are used in those huge holiday theme parks all over the world so that people don't have physically to queue up for rides and can walk around and spend more money. It's a great idea. Visitors carry round small communications devices called Q-bots which tell them when it's their turn."
"Why can they just fight one another for a place? It's free, good fun and good exercise," says Lucky.
"Trouble is that fighting for places doesn't make any money. The shares peaked at 137p in May , but have slipped back to 104p on news of the slowdown in the holiday sector.
The house broker says that pre-tax profits look set to reach £2.5m in the year to 31/12/10, a prospective PER of 9. I think the shares look cheap."
"OK," he said. "I'll join the queue and buy some."
Lo-q :Price: 104p Bid 102p Offer 106p; Epic LOQ
(Lo-Q is quoted on the higher risk Alternative Investment Market. See important notes below.)