..as we have had a few results from small cap. stocks today which I have mentioned in the past. The first one was one I wrote up recently when I looked at some "cheap" retailers, SCS Group the sofa and carpet retailer. They announced final results today which looked OK and had a reasonably upbeat current trading statement, but with a hint of caution going forward given tougher comparatives. They are however opening new stores and concessions in House of Fraser so this should help to boost overall growth.
The numbers saw revenues which seemed a little behind forecast but the adjusted earnings came in ahead at 13.75p which is also ahead of the current years forecast. Given this and the positive start to the current year I guess this may leave scope for upgrades which is usually positive for lowly rated stocks such as this one trading on 11.4x at 157p.
On the dividend they achieved their IPO goal of a 14p dividend with an 11.2p final in these figures. This alone gives a 7%+ yield while the forecast unchanged 14p for the current year potentially gives a near 9% yield. This is backed up by £21.2m of cash on the balance sheet. So with a positive start to the year against an improving consumer background this one should be OK in the short term. However, as it is not the great quality and did go bust in the last recession it may not be one for the long term.
However in brief talking of quality for the long term we also had another set of record results today from the AIM listed flooring provider James Halstead (JHD). This is a good quality company but it is expensively rated at 25x given the quality and the steady delivery of rising profits earnings and dividends in recent years. So I'd definitely suggest holding this one for the long run, but it might be worth waiting for another downturn to see if you can pick it up more cheaply if you are not currently in it.
Finally on the talk front I note some interesting results from Netcall (NET) a software as a service provider in the customer engagement sector or contact centres to you and me. The results seemed to be in line but the main surprise was on the dividend where they announced a 2.2p dividend against the 1p full year dividend expected which unusually they pay jsut annually. This did however include an in line 1p payment plus a special of 1.2p which is part of a three year plan to bring their cash down £10m. Again not the cheapest in the world with a PE of 18 to 19x but it does now sport a 4%+ yield with the special dividend. It also seems to be reasonable quality and is currently trading well so might be worth a closer look.
...as it were as I'm doing a quick write up on a stock that has been scoring well on the Compound Income Scores (CIS) recently. This follows on from my post last week called In praise of models & humans. In this I looked at some of the evidence for models being superior to humans. On that basis I thought I would to take a closer look at a stock which, although it scores well with a CIS of 91, I have been generally sceptical of due to my knowledge of its past, to see if I'm missing something due to my bias. Worth noting that it also scores well on Stockopedia's Stock Ranking system with a score of 95.
I say knowledge of its past as this one Norcros (NXR), which has been listed before its current incarnation and at the time was a much bigger company which generally disappointed, thus potentially clouding my view. It was put out of its misery as a listed stock last time around in 1999 by a venture capital backed management buyout, which may well have been a good deal for them as old economy stocks were way out of fashion back then and selling on cheap ratings. Having been tidied up and restructured it was then foisted back on the market with great timing (for the management and VC's) in July 2007 at 78p just in time for the credit crunch and housing crisis.
This then caused the shares to slump to around 5p by the end of 2008 which is probably why I'm still biased against it! The other negative feature is the fact that they are still weighed down with a large pension fund deficit which is a throw back to their former glory days. The Norcros Defined Benefit pension scheme has liabilities of £441.3m and an IAS19R deficit of
£44.3m at the end of FY15 which is significant in the group context and their market cap. of around £120m. This is I believe having a triennial review at the moment so this could lead to more payments and they also I believe have net debt of around £15m.
Since hitting their 5p low however it has gradually recovered to the current 20p level (see chart at the end) and does now seem to be (perhaps unsurprisingly) quite cheaply rated on around 8.5x with a reasonable 3% yield. The management also seem to have a plan to double turnover in the next few years, although this is largely expected to be driven by debt funded add on complimentary acquisitions. This is not without its risks but so far the deals they have done look reasonably sensible and since they are using debt it should enhance earnings, but would raise the risk in a downturn.
At the end of the day this one which makes Triton electric showers and other items for bathrooms plus ceramic tiles and as such is a play on the growth in the housing market and any pick up in consumer related DIY / repair and maintenance largely in the UK but also in South Africa to a lesser. It seems that the housing market and DIY demand are continuing to grow in the UK and consumer incomes are finally picking up in real terms. However given their skill in coming back to the market it 2007 I was also a bit perturbed to see the management selling shares in July, although the CEO still has a £1.5m stake and there are some reasonable institutions holding it like Miton, Schroders, Artemis, Standard Life and Jupiter.
So that's a brief background to it, have to admit I'm still in two minds about it, but it does look cheap and if the macro background remains benign then maybe it could re-rate and get to 25p to 30p range. If you are not put off by my doubts and like the sound of this one then there was also a recent sponsored note from Edison which looked at it in some detail and gives their views on valuation comparisons with other similar companies. You can download a copy below if that is of interest.
In particular after a day when there were revelation about VW fiddling their emission tests in the US it is perhaps worth starting with bumper interim results from S & U (SUS). This saw a continued strong performance from their Advantage car finance business which saw profits up by 32% on the back of a strong car market in the UK. The other significant feature of these results was their disposal of the home collected credit business in the period with the proceeds of £82.5m being used to fund a special dividend of £1.25 which equates to 5% at the current share price of 2500p. The first interim dividend (they unusually pay three dividends per year) was also increased by 18% from 17p to 20p. Current forecast are for only 11.7% underlying dividend growth to 73.8p, so if the current rate of increase is replicated in the rest of the year then a total of 78p looks possible which would leave them on a reasonable 3% or so yield at 2500p.
I estimate this will leave them with no debt and may be a small cash position versus the £65m or so debt that they had previously. The management say the disposal is transformational as it allows for further investment in the rapidly growing and profitable consumer motor finance business and by taking it into the SME market. In addition to this theyare also talking of investing into what they describe as other specialist finance businesses with growth potential. Of course it remains to be seen what other areas they choose to invest in which does introduce an element of uncertainty and risk but also opportunity for earnings enhancement as cash / debt facilities are utilised.
As you can see from the chart below the shares, which are up 5% or so this morning to around 2500p, has been something of a ceiling on the share price in recent months. So it will be interesting to see if this will continue to be the case before any further details of how they are investing the cash emerges or if there is enough in these numbers to prompt a break out. I guess time will tell but on around a mid teens PE maybe it too early for a break out just yet especially
once it goes ex the special dividend.
Meanwhile we have had updates from two more stocks which feature in the Mechanical Compound Income Scores Portfolio. First was a positive Q1 update from IG Group (IGG) who benefited from a strong August against a weak comparative as nervous financial markets gave clients much more reason and opportunity to trade. Perhaps the poor weather in August also encouraged domestic customers to trade more rather than being distracted by nice weather and out door pursuits.
The shares like markets have been trading sideways this year as their earnings were down slightly and the dividend was flat at their last year end in May and they were looking fairly fully valued as a result on a 20x+ PE. However with this good start to the year and a resumption of growth forecast as their new broking business gains clients then they may be more interesting again now with a prospective rating is closer to a mid teens PE and with a dividend forecast to grow again to give a yield of just over 4%. Looking at the chart though it looks as though 740p to 800p or so may be the trading range for now until we see how the rest of their financial year develops, but so far so good and it has a Compound Income Score (CIS) of 84 before any changes on the back of today's update.
I mentioned the weather above because the other announcement of interims today from AG Barr (BAG), the Scottish drinks producer, included a weather related profits warning and as a result they now expect their full year results to be broadly flat, which probably means slightly down. So this could take earning from the current forecast of 30p back by around 7% to last years 28p. The dividend was however raised by 8% in line with current forecasts suggesting that they will still deliver the expected 13.1p dividend. The share have fallen by 5% or so to 532p this morning to reflect this set back which will leave them on a fullish looking 19x with a lowish 2.5% yield. So not a lot to get excited about on the rating front although this is a quality business so it may be worth watching to see if they drift off more as this is not really a fundamental problem with the business as such and they will have weak comparatives next year as opposed to tough comparatives this year.
It still has a CIS of 87 reflecting the quality and growth, but after today's results and growth set back this may slip a little once the down grades are reflected in the data although dividend growth still seems likely. Technically it has just broken below its 200 day moving average and 500p looks like the next medium term support level so probably no rush but worth watching and revisiting perhaps if it should get down there or even into the 450 to 500p range.
...which is one of the stocks that made it into the Mechanical Compound Income Scores portfolio (MCIS) as it had been scoring in the top decile back in April this year. Since then they had put out a positive year end update back in July which I wrote up at the time. It seems that their their turnover came in as expected being up by nearly 46%, with 6% like for like growth and expansion in the operating margin to 4.8%, which is close to their previous high of 4.9% achieved in 2010.
This translated into earnings per share of 7.7p which was 10% better than the 7p guesstimate I came up with in July, but a little shy of the 7.95p that analysts had moved up to post the last trading update, so maybe scope for a small bit of disappointment there. Otherwise the dividend seemed to be in line with forecasts at 2.5p which was up by 150% from last year.
The balance sheet and the level of the debt was the other factor which needed watching post the trading update in July given their acquisitions in the food service area in the last year and the increased capital expenditure they were flagging. This came in at £21.3m at the year end which compares with a market cap. of around £130m and apparently equates to about one times pro forma annualised EBITDA of the Group. That seems fine, but is worth bearing in mind and keeping an eye on if they should make more acquisitions for cash this year.
On the outlook the appropriately named Non Executive Chairman, Peter Baker, suggested that the group still have aspirations and the capabilities to grow further although he also suggested that the economic and market environment remained challenging. They seem to be alluding to and it seems to me that more acquisitions may be on the cards which may be an opportunity for further diversification and earnings enhancement, but not without its risks and the funding will need watching, but I guess they could issue shares if they saw a larger opportunity now the shares are more highly rated.
Talking of which, having had a spike up to around 105p to 110p recently, it seems that there may not be enough in these numbers to move the shares on from here today in the short term. However at 102p today's figures leave them on a fair looking 13.25x with a lowish 2.5% yield. On current forecasts for the coming year, assuming no changes on the back of these results, the shares are on around 11x with a 2.75% suggested yield.
This seems fine but given the run up in the shares and the lack of further icing on the cake in the figures, I suspect it might consolidate in the short term. So personally I would be tempted to take profits if I held them and the Compound Income Score has come down to 79 recently so it is also at risk of exiting the MCIS portfolio at the next quarterly review at the end of September. Otherwise it looks like a reasonable hold for the medium term as part of a diversified portfolio.
I thought I would take another look at models as the BBC are doing a series of features and programmes this week about robots and the possibilities offered by artificial intelligence, including this piece titled: Intelligent Machines: The jobs robots will steal first.
Regular readers will know that I have been developing and running an on going experiment with my own Scores Model which so far has been performing well. So with that in mind I thought I would revisit the case for using models in investing as it has been proven in many different fields that models or algorithms can often outperform experts and even when the experts have access to the models the models tend to act as a ceiling to prediction performance rather than a floor.
Don't take my word for it as there was a great white paper a while ago from Wesley Gray the Author of one of my favourite recent investing books Quantitative Value. On his site Alpha Architect as well as great research like this they also offer some free screening tools too. In this paper he looked at much of the background to the case for systemic decision making, giving examples of experts versus models in section 4.
However don't despair because before that in section 2 he did see a place for experts in the research, development and assessment of models, just not in the implementation as shown in this graphic below from the paper.
With that in mind I have been assessing my own Scores model as it has been implemented in a mechanical way and I do have a tweak to it that I plan to introduce at the next quarterly review at the end of this month - so watch out for that and if I get around to writing it up in more detail. If you are not interested in my model or don't want to develop your own then I would also recommend Stockopedia and their Stock ranking system, if you are not familiar with it, as the humans there have done a great job in developing a successful model for identifying stocks which are good value, quality and have momentum. It is a subscription based service but you can read more about it and get a two week free trial by clicking the link above if that is of interest to you.
Talking of models I note that there is also a ranking system for human models at a website called models.com where you can check out their rankings for models of the year 2014 and lots of other categories too if that is of any interest. Finally given the subject today I can't finish with out a bit of media to go with it. So on the visual front there was a good series recently on Channel 4 called Humans - which was about synths helping with domestic and other chores which was quite entertaining and worth catching up with if you missed it. While on the audio front this one seems appropriate. <END>