Friday, 31 May 2013

Idox purchase by largest shareholder

Idox group logo

As a footnote to the post on 29 May, it is worth noting that on the day of the profit warning, Liontrust (IDOX's largest shareholder) were buyers of 1m shares at around 36p.  This I would imagine would be after presentations or discussions with Liontrust by the management, although no new price sensitive information would be given, they would have had an opportunity to drill down into the company's sales funnel. 

They now own just over 12% and were previously buyers at around this price back in November and had purchased a further 6m  in the intervening period.  I believe it is owned within the Smaller Companies fund managed by Anthony Cross.  An extract from the 2012 Manager's report describing the type of companies they invest in:

 The Fund’s investment approach is to invest exclusively in companies demonstrating two criteria which we believe are the key to what makes some companies successful and others less so. These are: the strength, sustainability and exploitation of a company’s Economic Advantage (its intangible strengths), and how key employees (who create this Economic Advantage) are motivated and retained, preferably through direct ownership of the company’s equity. The Fund will only invest in those smaller companies that can demonstrate that they have met these two criteria.

It is a little too early to tell, but 36p does seem to be establishing an area of support.  If the problems outlined in the trading are as they described down to delays, then the SP may well push on up from this level during the coming months.


Click on chart to enlarge




Wednesday, 29 May 2013

Idox trading statement

Idox group logo

The Company is engaged in the development and supply of software solutions and services to the United Kingdom public sector and asset intensive industries worldwide. It operates in four segments: Public Sector Software, which delivers software service solutions to mainly local government customers across a broad range of departments; Engineering Information Management, which delivers engineering document management and control solutions to asset intensive industry sectors; Information Solutions, which delivers both an information service and consultancy services to a diverse range of customers across both private and public sectors and Recruitment, engaged in providing personnel with information, knowledge, records and content management to a diverse range of customers. It also provides information management, Web development, online publishing and training services. I have a holding in my growth portfolio (epic code: IDOX)


On 1st May I wrote "...The slower start from the EIM division has concerned some and depressed the SP, so many may be waiting for the trading statement in late May before making decisions on investing or increasing their holding. If IDOX can achieve these growth numbers then a 2014 P/E of 11 looks cheap, there is obvious risk here, but this level could be a speculative buying opportunity..."

Today they released their expected trading statement and the concern that was being expressed by the market was realised in a profit warning.  They stated that in light of a slower than expected first half of the year, they now anticipate that full year EBITDA is likely to be no less than £18 million, this compares to last year's £16.7m, but market expectations of £21m.  Hence a 20% decline in the SP today.

The main cause of the decline, is the Engineering Information Management division (31% of group sales) seeing a delay in new licence sales.

If as they describe in the trading statement that the shortfall this year is due to delays, rather than lost sales, then this may be one to watch.  See my earlier post on Anite on 22 May for a company that announced a warning and then has subsequently recovered some lost ground in trading and a little of its SP, although the SP will lag the trading recovery as confidence needs to be rebuilt.


Tuesday, 28 May 2013

Technical analysis

Is technical analysis useful for a long term investor?

Technical analysis is mainly used by traders and short-term investors as an aid to determining the next direction of movement in a security, but on rare occasions can be of use to the long-term investor.

When looking at the chart of a company, it is best viewed in candlestick form.  Although some technical analysts still use the bar chart (I was still using it as recently as the late 1980s), the japanese candlesticks do a better job of showing the direction of prices.

Some basic understanding is required of a typical cadlestick.  The filled in part of the candlestick is called the body and represents the open and close price in the period; the colour will indicate whether it closed above the open (green) or closed below the open (red).  The thin lines, called shadows or wicks are the high and low price in the period.

Just because a candle is coloured green, it does not mean that the close of the period is above the previous period's close, but just above the current period's open.  This can be caused by a stock gapping down at the open of trading.  The reverse can happen when stocks gap up at the open.

Click on picture to enlarge.

Technical analysis is at its best when used to determine areas of support or resistance for a stock.  For support think of demand and for resistance think of supply.  Support on a chart looks like a floor that price has difficulty pushing down through, demonstrating there is demand for the stock at that price ie. buyers.  Resistance on a chart looks like a ceiling that price has difficulty pushing up through, demonstrating that there is supply for the stock at that price ie. sellers.

The weekly chart  below (the higher the period the more reliable the signal) of Bhp Billiton (BLT) demonstrates the use of lines of support and resistance to determine demand & supply.  An area of resistance or support is where price has reacted on a number of occassions on approching that area.

Click on picture to enlarge.

If you have ever wondered where institutions are buying or selling stocks or where they think a stock is overvalued or good value, then areas of support and resistance can be a good indicator, so long as it is supported by volume.

So how would a long term investor use this?  A reasonably useful rule is don't sell into an area of support and don't buy into an area of resistance.  I recently purchased BLT at prices between 1775 and 1779 as it fell through 2068 (previous resistance that could have become support).  As it hit the area of previous support around 1744 the candles were demonstrating that there was still good demand (green candles with longish lower wicks) and buyers with a reasonable level of volume.

So why does this work?  Well first off it doesn't always work.  Although, if we take the example above, a hedge fund may well have borrowed stock in BLT from an investment fund at say 2230p in February (paying interest to the fund), targeting this price as it has struggled to break this resistance level in the past and fundamentals were negative for the mining sector.  They then sold the borrowed stock at around that price and then looked to buy it back at around a good level of historic support, where they know funds have been buyers in the past.  So buying back at around 1750 - 1800p.

As a long term investor you can ignore all this noise and just concentrate on fundamentals, but it can just add a little edge as to where to buy or sell investments, or where to place your stop loss.

Thursday, 23 May 2013

Paypoint finals

Provides clients with specialist consumer payment transaction processing and settlement across a wide variety of markets: (energy pre and post-payment, telecoms, housing, water, transport, e-commerce, parking and gaming) through its retail networks, internet and mobile phone channels. I have a holding in my income portfolio (epic code: PAY).

Paypoint announced full year results to 31 March 2012 today and came in at the top end of expectations.  There was further good news of a special dividend of 15p per share on top of the full year dividend of 30.4p, which in itself had been increased by 14.7%.

Sales were up 4.2% at £208.5m and EPS increased by 3.8% to 45.3p.  One of Paypoint's strengths is its excellent cash flow.  Free cash flow (FCF) was 10.1% higher at £30.4m or 44.4p per share and they ended the year with net cash on the balance sheet of £46.6m an increase of £11.1m on last year, hence the payment of a special dividend.

Over the past 5 years Paypoint has generated owner's equity (ie. increase in the book value per share plus dividends per share) at a rate of 31.8% pa and FCF on book value of 29.6% pa - a creditable performance.

Although the company has a high weighted average cost of capital of 10.5%, due to its inefficient balance sheet carrying net cash, their high return on capital at over 70% ensures that substantial value is added as the business grows.

The ubiquitous signs demonstrate the coverage that Paypoint have in retail in the UK, but they are also present in Ireland and Romania; in total this represents 87% of group revenue:


Their joint venture with Yodel in Collect+ (a collection & delivery point at convenience stores for on-line ordered products), although currently loss making (£1.9m loss down from £3.7m LY), it has substantial potential for growth.  They currently handle 7.7m transactions from an estimated market size of "click & collect" of about 37m which is estimated to grow by 33% pa over the next 5 years:
Their internet and mobile payment business represents 13% of group revenue (trading in UK, France & USA), one area which many will have come across is the parking payment system:
In essence, Paypoint is a cash generative business, with a focus on returns to shareholders, operating as a facilitator in a growing market that reflects the changing way in which the public is transacting with providers of goods & services. 

Wednesday, 22 May 2013

Growth companies worth watching

Growth candidates?

There are times when it is worth looking at those shares that fall short of the growth screen due to relative strength, but pass on all the other criteria.  This may produce companies that:

  1. Have fallen off the radar screens of investors and analysts for any number of reasons.
  2. Are recovering from a short-term set-back, but the market has yet to fully recognise this.
  3. Have taken a share price hit due to sector worries that may not affect all companies.
  4. Have lost a key executive.
  5. Have a SP overreaction to an announcement - contract delays, product delays etc.
Of course the companies in question may have correctly been revalued by the market, but that should not be the automatic assumption.  It is always worth conducting some research to see whether you agree with the market value.

Relative strength is the only part of the growth screen that you should apply any flexibility to when using it. To recap we are looking for companies that exhibit the following criteria:

  • An EPS 3 year CAGR of 10% or greater 
  • An EPS 1 Yr rolling growth rate of 15% or greater
  • A maximum 1 year rolling P/E ratio of 20
  • A PEG of less than 1  (Slater version)
  • An operating margin of at least 5%
  • A return on equity (ROE) of at least 15%
  • Gearing of 75% or less
  • Interest cover of at least 4 times
  • Finally 1 year’s relative strength greater than 0
Since we are relaxing the relative strength criteria I have crossed this through.  The growth screen then produces these additional companies to my original list on 3 May:

Cupid (CUP) - a provider of online dating services
Pan African Resources (PAF) - a South African gold mine
Anite (AIE) - handset and network testing systems for the wireless market
Premier Oil (PMO) - oil & gas explorer
Brightside (BRT) - insurance broking & financial services

Some brief comments on those companies:

Cupid Market Cap: £57.4m; 1 yr RS -71%
CUP has grown sales over the last 3 years by 110% pa, while their EPS over this period has been 103.5% pa making 9.63p (adj.) last year. The stock crashed from 114p to 49p in late March on allegations that the company produced fake profiles on its dating site.  The company denies this and has instigated an internal audit and said it may take legal action.  Later in the same month it parted company with one of its joint brokers after the stock suffered from large amounts of short-selling.  The stock has since partially recovered to 69p and is on a 12 month rolling forward P/E of 3.7 with EPS growth this year to December expected to be 82% and next year 13%. 

Pan African Resources Market Cap £269m; 1yr RS -17%
PAF has grown sales and EPS over the past 3 years by 24.1% pa and 47.9% pa respectively making 2.01p last year and is well known as a low cost producer, with a production cash cost per oz of approx. $750.  In December PAF, a 100,000 oz pa gold producing mine, purchased Evander mine a 75,000 - 100,000 oz producer for approx. £114m. 50% of the price paid by a rights issue at 14p.  By late January the SP had moved up to 21p as this acquisition was seen as transformational for the business, undertaken at a very good price. Two events in February caused a SP decline - on 27 February the CEO unexpectedly resigned and in early February gold started a major retrenchment in price from $1650 to just below $1400 today. The SP fell to below the rights issue price to 13.6p, but has since recovered a little to 14.75p where it currently trades on a 12 month rolling forward P/E of 4.6, with EPS growth this year to June expected to be 10% and next year 51% (with the full effects of owning Evander).

Anite  Market Cap £385m; 1yr RS -14%
AIE has grown sales over the last 3 years by 10.8% pa, while their EPS over this period has been 26.8% pa making 5.26p (adj) last year. In early March they released an interim management statement stating that order intake was behind that of last year and that Q3 had started with the same trend, causing the SP to fall almost 30% to 113p over the next month.  In early May they announced that Q4 was a strong end to the year, better than they were expecting and consequently they expect profits for the full year to be towards the top end of market expectations.  The SP has risen to 128p, but still well below the 52 wk high of 163p.  It currently trades on a 12 month rolling forward P/E of 14, with EPS growth this year to April '13 expected to be 49.5% and next year 17%.

Premier Oil  Market Cap £2.02bn; 1yr RS -9%
PMO has grown sales over the last 3 years by 31.4% pa, while their EPS over this period has been 27.7% pa making 50c (adj) last year. The major event that seems to have affected the SP, is the softening of the crude oil price this year following the higher prices of last year.  The other depression on the SP is the substantial capital outlays that are required in their exploration programmes, such that they have never produced any free cash flow in the last 4 years, with result that debt has increased to $2bn from net cash of $121m in 2008.  CEO Lockett though does expect operating cash flow to increase to $2bn (2.5x 2012's level) by 2016 as the Catcher development in the North Sea begins production.  They will though have higher exploration spend requirements, as they develop their interest in the Sea Lion prospect off the Falklands. The SP at 381p has been stuck below 400p for much of the past year and trades on a 12 month rolling forward P/E of 7.9, with EPS growth this year to December expected to be 42.5% and next year 11.5%.

Brightside Market Cap £110m; 1yr RS -2% 
BRT  has grown sales over the last 3 years by 27% pa, while their EPS over this period has been 22% pa making 2.56p last year. The only negatives appear to be the softening of motor vehicle premiums which will affect the commissions that a broker like Brightside will make, the statement that their declaration of a maiden dividend required approval from their banks and that they are only followed by one analyst (although that could create an opportunity for value).  The SP at 24.5p represents a 12 month rolling forward P/E of 7.2, with EPS growth this year to December expected to be 27.6% and next year 6%.

With the exception of  CUP (which appears to be in danger of losing client trust), all of the above are companies with reasonable track records providing good returns that probably are worthy of further analysis to see whether there is an opportunity for good value.  I have a holding in AIE and PAF in my growth portfolio.

Tuesday, 21 May 2013

Telecom Plus finals



Trading as the Utility Warehouse, Telecom Plus PLC provides a range of services to households and small to medium sized businesses. The Company is engaged in the supply of fixed telephony, mobile telephony, gas, electricity and Internet services through independent distributors. I have a holding in my growth portfolio (epic code: TEP).

A good set of results with revenue growing 27.6% to £601.5m, profit before tax was up 12.7% to £34.6m and EPS increasing 14.5% to 38.7p. Average revenue per customer showing an increase of 14.5% to £1,363. The full year dividend was increased 14.8% to 31p per share.

They currently have a market share of around 1.5% of UK households, which is a reasonable indication of the the scale of the organic growth opportunity available to them.

I have held this investment since June 2008 and it is a good example of reward for patience, in an investment of a well run company, as the graph below shows:


This demonstrates that investing is not a sprint, but a long marathon, where there are times as an investor, you need the conviction to stay with a holding, despite the noise from the market.  This is not buy and forget, but buy, monitor and review.  Patience, in addition to rational and independent thought is required. 



Vodafone finals

Vodafone Logo

Vodafone the second largest ( behind China Mobile) mobile telecoms company in the world. I have a holding in my income portfolio (epic code: VOD).

VOD announced their prelims. today.  No great surprises, but underscores the problems that the business has in Southern Europe - service revenue down there almost 17% to £9.6bn and an impairment charge (assets worth less than their book value) of £7.7bn.

In summary, Group revenue was down 4.2% to £44.4bn and down 1.4% on an organic basis. Adjusted operating profit was above the guidance they gave in early February, up 9.3% at £12.0bn. Adjusted EPS was up 5.0% at 15.65p.  These adjusted figures exclude the impairment charge for Southern Europe mentioned above.  Earnings reported (including all exceptional items) were £0.4bn compared to £7bn last year, although last year benefited from the sale of two associated companies for £3.7bn and suffered a £4.1bn impairment charge.  Dividends for the full year are 10.19p up 7%.

Free cash flow for the year was £1bn compared to £3.7bn last year.  Although in addition to this, associate dividends received were £4.8bn compared to £4bn last year.

It is clear that associate dividends (the majority being from Verizon Wireless [VW] in the USA) were critically important for the payment of dividends and share buy-backs totalling £6.4bn.  VW have declared a dividend payable in June and VOD's share will be £2.1bn, to be held within the company thereby reducing net debt, which stood at £33.8bn.  At this level the company's gearing is 47%, with debt at 2.5x EBITDA and operating cash flow covering at just 28% (although 42% if you include cash received from associates).  This is a much weaker position than they have been in previously and, their decision to retain the VW dividend rather than use it for special dividends or share buy-backs as in the past, is understandable.

CEO Colao has stated that the dividend policy going forward is to at least maintain the pay-out per share.  The growth in dividends over the past 5 years has been 7.1% pa. and the investment currently offers a yield of 5.1%, although the days of above inflation increases may be over, until an economic recovery is seen in Europe.


Monday, 20 May 2013

Essentra growth portfolio candidate

Filtrona plc

An international supplier of specialist plastic, fibre and foam products with four principle operating divisions – component & protection solutions, porous technologies, coated and security products and filter products. I have no holding in this company (epic code: ESNT). Previously known as Filtrona (epic code: ESNT)


Full/FTSE 250
Food & Tobacco
Market Cap
Share Price
Norm. EPS
Historic P/E
Est. 2013 growth
Prospective P/E
Est. 2014 growth
Prospective P/E
Rolling PEG
Historic Yield
Operating Margin
5 yr BV + Div return
5 yr FCF return on BV

This is the fourth company from the growth screen and was formerly part of Bunzl plc, demerging in June 2005 to became a separately listed company. Many people will know them as the supplier of filters to the cigarette market, although today this represents less than 36% of sales and less than 25% of operating profit.
Many on the executive board have been with Filtrona for some time, with the notable exception of the CEO Colin Day, who joined in April 2011 from Reckitt Benckiser where he had been CFO for 10 years.  Day had a good reputation at Reckitt Benckiser and during his tenure grew earnings by 18% pa and oversaw a share price rise of 15% pa.
Filtrona are an acquisitive company, with their most recent purchase completed this month for Contego Healthcare, specialising in plastic fibre & foam products to the pharmaceutical and healthcare market at a price of £160m (11.5x operating profit).  They financed this purchase through a placing, issuing an additional 9.99% of their then issued shares.
Filtrona earn good operating margins and a healthy return on equity, demonstrating that there are probably high barriers to entry to their various market niches.  It is worth noting though that operating margins did decline slightly last year by 40 basis points and free cash flow (FCF) at £31m was substantially less than 2011’s £50m.  This FCF decline was due to a much higher spend on capital expenditure that was double the rate of depreciation, leaving one to assume that much of this higher spend was due to expenditure on expansion.  An example of this is Moss, Skiffy and Alliance their US based Component Distribution business, that opened a new office, plant and warehouse in Houston, doubling the size of the facility to underpin future potential growth.  Consequently net debt has increased from £144.9m in 2011 to £163.5m in 2012 resulting in net gearing of almost 70%, although interest cover is strong at 8.2x and debt/EBITDA at 1.39 and operating cash flow/debt of 45.3% are acceptable.  
Their 5 year return on book value is respectable in both terms of earnings and cash, demonstrating both good conversion of profits into cash and improved shareholder value.
Filtrona has an estimated weighted average cost of capital of 8.6% and earn a good average return on their capital employed of 23%; the wider this gap the higher economic return that shareholders will experience and Filtrona perform well in this respect.
Filtrona though is an expensive share at 26.9x historic earnings and 20.3x this year and you will be paying almost 7x book value.  For that though you receive an investment in a well run company that produces good returns, well in excess of their cost of capital.  On a discounted cash flow basis Filtrona have a fair value of about 700p, using a cost of equity of 11.6% and free cash flow (FCF) growth of 20% over the next two years, 15% for the following 8 years and 2.5% in perpetuity. I have assumed a starting sustainable FCF of £50m (similar to 2011, rather than the depressed 2012 number). 
In summary Filtrona is a high quality growth company, run by a fairly new CEO with a strong track record from the past, but they are currently fully valued.   

Friday, 10 May 2013



Taking a break for a week back on Monday 20th May.


Globo growth portfolio candidate


A technology innovator delivering mobile, telecom and e-business software products and services. I have a holding in my growth portfolio (epic code: GBO).

Software & IT Services
Market Cap
Share Price
Norm. EPS
Historic P/E
Est. 2013 growth
Prospective P/E
Est. 2014 growth
Prospective P/E
Rolling PEG
Historic Yield
Operating Margin
5 yr BV + Div return
5 yr FCF return on BV
0% #
The third company from the growth screen, produced in my post of 3 May, is Globo a small fast growing technology company. Sales and earnings last year grew by 28.3% and 89.4%, but if you exclude discontinued operations (they sold 51% of their Greek operations last year) they grew by 67.3% and 52.8% respectively. Over the last 3 and 5 years they have grown turnover at a compound annual growth rate of 35% and 39% respectively.
As I mentioned in my post on 29 April they have an important footprint in the BYOD (bring your own device) market. The market size is about $68bn and expected to grow at about 15% pa over the next 5 years, with North America representing approximately 36% of the total market.
By most metrics they would appear to be good value: low historic & prospective P/Es, a low P/BV and an earnings yield (operating profit/enterprise value) of 12%. The one fly in the ointment is the lack of free cash flow (FCF)#. Last year was the first time that they had generated any FCF, but even that small amount (€1.5m) was lost as the Greek subsidiary took €6.7m cash with it when it was sold.
Globo has net cash on its balance sheet amounting to €14.2m; it raised €11.4 net through a placing in April 2012 this followed a placing of €19.4m net in 2011.
The business will need to demonstrate good cash flow, before a major rerating occurs, but that may come quite soon if there are positive benefits from two recent agreements. In February of this year they signed a contract with one of the largest electronics distributors in the US – Ingram Micro (NYSE: IM) and in April signed an agreement with Fujitsu, to enable their products to be sold through the Fujitsu Cloud Store, targeting the UK & German markets.
So in summary, Globo is an exciting growth company in an expanding market at a cheap price. The risks are - that it has yet to turn results into FCF; that a much larger competitor such as Cisco affects their growth aspirations, or causes them to enter a price war and they then spend inordinate amounts of expenditure on R&D or marketing to protect their position – with the result that substantial FCF is never generated.