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Shareworld - City Confidential - January 2010

City Confidential - A Shareworld Contributor

January 2010

MANAGED SUPPORT SERVICES (MSS) – 8.625p

 

Recommendation – BUY 

We recommended shares in Managed Support Services at 9.85p in October 2008, just before the privatisation of Bradford & Bingley, the failure of the economy in Iceland and the subsequent collapse in UK share prices!  Hardly the time to recommend shares in a small AIM company which was looking to expand by acquisition.  The following months were little better, although the group did successfully raise £5.6m in February through a share placing at 8p.  The group has, however, at last managed to make its first acquisitions of note and now looks set to expand more quickly.  We believe that further acquisitions are likely in the next few months and these could prove the catalyst for the share price to make headway.  The shares should be bought.        

Managed Support Services was formerly known as Worthington Nicholls Group, a company with a much-chequered history.  However, the appointment of a new management team in November 2007 was the start of a new beginning for the group although things have not really turned out as originally planned.  Whilst the initial objectives of closing down loss-making operations, reducing costs and lowering the headcount were achieved, the poor overall economic conditions led to considerable uncertainty and delayed the group’s expansion plans.  

Following the fund raising in February referred to above, the group reviewed a wide range of potential transactions in various industries, in particular, where substantial trading entities were experiencing financial or management difficulties.  Ultimately, however, the directors decided that shareholder value could be created more easily and more quickly by building on the group’s existing building services activities.  And so, at the start of December, the group announced its first major acquisition in building services, with the purchase of Status Building Services Group for total consideration of £3.7m in cash, of which £0.7m is payable in mid 2010.  A fortnight later, the group announced that it had bought certain business assets and contracts of Workplace Engineering Limited, a subsidiary of Johnson Service Group, for £0.3m.

Activities

 

Following the latest acquisitions, the main focus of the group is on the building services market, which is both diverse and fragmented.  Within this, the group will concentrate on technical building services with high levels of added value – this market is characterised by attractive levels of contracted, recurring revenue from a relatively diverse customer base of owner/occupiers and building managers.  The group’s different trading units now operate under the MSS brand and these offer a range of services including maintenance, installation and interior fit out.  The maintenance services cover heating, ventilation and air conditioning equipment; the group’s installation teams offer air conditioning, ventilation and heating systems, electrical equipment, domestic water services and catering and refrigeration equipment, whilst the interior fit out business provides a range of services from design and planning, through to structural, external works and complete interior finishes.   

The group provides its services to a wide range of clients in commercial property (eg offices for Grant Thornton and AXA), hotels (Holiday Inn, Hilton), retail (Marks & Spencer and Arcadia Group and retail car showrooms for Audi and Ford) and the public sector (universities, colleges and prisons).             

INTERIM RESULTS/ACQUISITIONS 

The interim results covering the six months to 30 September were disappointing and reflected the tough trading environment.  Group turnover fell sharply to £7.8m (2008: £16.3m) with part of this being due to the group’s reluctance to accept unprofitable business.  Gross margins also fell, notably in the Projects business, although the group has now withdrawn from this, with exceptional charges of £1.9m being incurred.  At the pre-tax level, before exceptional items, the group made a loss of £474,000 (2008: profit £1.1m).   

The newly acquired Status provides a range of technical building services, similar to those provided by MSS, and its customer base is located primarily in London and the South East where geographic density provides operating efficiencies.  Around 50% of its revenue is contracted maintenance revenue.  The latest management accounts of Status covering the nine months to 30 September indicate that the company has annualised turnover of around £8m and pre-tax profits of £360,000.  The subsequent smaller purchase of assets and contracts from Workplace Engineering has enhanced the group’s exposure to the public sector in Southern England.    

OUTLOOK 

Although markets remain difficult, the latest reorganisation and acquisitions should provide a platform from which the group can develop.  Even after the latest purchases, the group should have substantial net cash balances of over £6.5m and these will be used to fund further acquisitions.  The group has also strengthened its senior management team with the appointment of Jamie Reynolds as chief operating officer.  He was previously co-chief executive of GSH Group, a company that doubled turnover to £200m between 2004 and 2008.  Now that the group has made its initial acquisitions, further purchases can be expected going forward and these are likely to attract further investors to the company.       

Share Price – 8.625p      Market Capitalisation - £14m

2008/09 Price Range – 16p – 5.75p     Next Results Due       - June

* - six month period ** - adjusted figures 

FT Sector: AIM

Address: One Crown Square, Church Street East, Woking, Surrey GU21 6HR

Telephone: 0800 731 1402

Website: www.mssplc.com

Aggressive Growth Portfolio IV – January 2010 (2707)

 

As we write the final column on the Aggressive Growth Portfolio for the year, it is a little disappointing to have to report that it has underperformed the two indices against which it is benchmarked this month.  Yet again, the portfolio has underperformed a rising market. 

Looking back over the year though, the performance of the portfolio has been excellent.  Starting on 1 January with £50,000, the portfolio has increased in value so that it is now worth £68,437.  This represents an increase over the year of 36.9%, pretty impressive we think given the challenging market conditions.  During the year, the FTSE 100 Share Index has increased in value so that this now stands at 5,397.8 – an increase of 21.7%.  The FTSE All Share Index has moved up to 2,754.2 – an increase of 24.7%.  It can therefore be seen that the Aggressive Growth Portfolio IV has outperformed the two indices during the year. 

The last month has been pretty quiet as far as the portfolio is concerned.  Both Bango and Redhall Group announced results during the month and these are covered in our News Update section.  Having hardly moved since we recommended the shares, Bango was the best performing share in the portfolio this month.  S & U revealed a promising trading update during the month, whilst Cosalt also announced that it had won a new contract, which firms up our belief that the company is back on the right track.   

Regenersis held its AGM during the month at which it confirmed that overall trading was in line with management expectations.  Although sales of consumer technology products such as laptops, mobile phones and the like were lower during the summer, activity has picked up recently and so the group is ahead of the prior year at the end of October.  Following the acquisition of Total Repair Services in September, the group has been working on integrating this and streamlining its activities.  Overall, this was a promising statement and we are surprised the share price has fallen as we continue to rate the shares as a buy.    

 

In order to create some liquidity during the month, we have sold some of the holdings.  Both Healthcare Locums (proceeds of £5,603 and gain of £3,005) and Patsystems (proceeds of £3,448 and gain of £200) are now looking a bit expensive on fundamentals; Molins (proceeds of £3,416 and gain of £1,163) still looks cheap but always does and Driver Group (proceeds of £3,059 and loss of £473) may suffer from a downturn in the Middle East construction markets following the problems in Dubai.  With the proceeds we have invested in the four main features this month. 

No dividend income or interest was received this month.  We have increased the stop loss limits on Bango to 45p, China Shoto to 240p and Plastics Capital to 35p.   

   

Start date: 1st January 2009 with £50,000.  Cash includes interest and dividends of £1390