Balfour Beatty plc proves that profit warnings come in threes…

Glass skyscraper buildingThe old City adage says that profit warnings come in threes, and the case of Balfour Beatty plc (LON:BBY) suggests this might be true.

Shares in the beleagured construction and engineering services business slid by more than 20% when markets opened this morning, after the firm said that UK construction profits would be a further £75m lower than expected – in addition to previous warnings that profits would be £35m lower than forecast.

The group continues to lack a CEO — something chairman Steve Marshall told analysts this morning would be resolved soon – and has clearly created an unholy mess for itself in the UK, presumably by bidding too low in an effort to win work, and then remaining in denial until forced to face facts.

However, the sale of the Parsons business will bring in some much needed cash, and a rebased dividend will ease the firm’s committed outgoings: could now be the time to buy back into Balfour Beatty?

In a new article for the Motley Fool this morning, I took a closer look at the numbers: you can read the full article here.

Is Trap Oil Group PLC Being Readied For Sale?

Oil rigs in North SeaTrap Oil Group PLC (LON:TRAP) published its half-yearly report on Monday, triggering a slide that has left the firm’s share price down by 15% so far this week.

Following the recent, broadly positive, news on cost-cutting and gravytrain disembarkation  by senior executives, the half-year results were disappointing.

However, some aspects of the figures suggest to me that the company’s strategy may now be focused on maximising its attraction to potential buyers within its North Sea peer group. This approach might yet deliver results for long-suffering shareholders.

Production – Athena

The big disappointment was Athena: I think it’s probably fair to say that most shareholders didn’t realise how far production had deteriorated during the first half of the year, a situation made worse by severe weather preventing oil being offloaded from the FPSO and sold for a period early in the year.

Production levels for the first part of the year were not specified (why the hell not?) but the scale of the production decline caused by the failure of the A2 well pumps is clear from the fact that the amount of oil being sold has fallen from ‘multiple [tanker] loads being delivered for sale each month‘ to ‘on average … less than one tanker load per month‘.

As a result of this, Trapoil impaired the value of Athena by £4.7m, pushing the firm into a first-half loss, and taking total historic losses to £35m — something that could be advantageous for tax purposes to a potential acquirer.

However, the short-term effect of Athena’s poor performance on cash flow is obvious, and in addition, Trapoil is now required to fund its share of the costs of the workover being performed by Athena operator Ithaca Energy in October.

To meet these costs and preserve its cash pile, Trapoil raised £2.3m by selling around half of its stake in IGas Energy.

Latest NAV per share?

Cash flow should improve in the final quarter, once the Athena workover has been completed.

Ignoring the value of its non-current assets — data and exploration intangibles, plus property and plant, all of which would be hard to realise any value from — my reckoning of Trap’s net asset value is £16.9m, which I calculated as current assets – total liabilities.

This equates to a NAV per share of 7.4p per share, approximately 13% above the current 6.55p share price.

Exploration upside

There were two potentially positive pieces of news relating to exploration and appraisal drilling.

Trapoil is expecting a decision by the end of September from Valleys farm-out partner Total, regarding that firm’s decision on whether to drill an exploration well in these blocks. If Total decides not to drill, it has agreed to compensate Trapoil for the lost opportunity.

Secondly, Trapoil now says it is planning to drill Kratos (a new location for the prospect previously known as Niobe) in H2 2015.


The reality is that Trapoil has a sizeable amount of cash, but is too small to do much with it. Athena production is expected to end by 2017, an unless either of the two exploration options mentioned above deliver the goods, the firm could be left with nothing much except a dwindling cash pile.

However, the outlook isn’t necessarily that grim: at its current distressed price, Trapoil could be a useful acquisition for a slightly larger North Sea firm, which would benefit from its £35m of historic losses and — if the acquisition could be funded by shares — from Trapoil’s £16m cash pile.

In my view that’s the most desirable outcome, and I wouldn’t mind betting that 18.6% activist shareholder Peter Gyllenhammar has something similar in mind.

However, this is only conjecture, and I wouldn’t hold your breath…

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

Mothercare plc bows to inevitable and raises cash (plus noses in the trough)

Fifty pound noteThis morning brought news that Mothercare plc (LON:MTC) has bowed to the inevitable, and launched a £100m rights issue to sort out its debt pile and fund the restructuring of its UK store portfolio, which contains far too many loss-making stores with costly, long-term leases.

In a new article this morning, I took a closer look at the news and explained what it means for UK shareholders in the mother-and-baby ware company: you can read this article here, on the Motley Fool website.

Noses in the trough

However, it’s also worth noting that today’s news is a reminder (if one were needed) of who really wins when companies get into trouble. Hint: it’s not shareholders.

Mothercare plans to raise £100m from shareholders, of which it expects net proceeds of just £95m. This means that a whopping £5m, or 5%, will go to Numis Securities, J.P. Morgan Cazenove and HSBC, who are organising the rights issue for Mothercare.

Given that the new shares are being sold for 125p — a 34% discount to the theoretical ex-rights price of 189p — it seems unlikely that Mothercare will fail to raise the full amount required. This does rather leave you wondering (especially if you are a shareholder) about exactly how much value you are getting for the £5m in fees and commissions being paid to these City institutions.

Nice work if you can get it…

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any investment decisions.

Tesco PLC: don’t say I didn’t warn you

Tesco Tiverton store

“Tiverton, Tesco – – 85534″ by Martin Bodman – From Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons –,,

News that Tesco PLC (LON:TSCO) may have overstated its expected first-half profits by as much as £250m (or perhaps more) dominated the news yesterday, leaving the firm’s shares hovering around the 200p level.

Without wanting to blow my own trumpet, this was a demise I predicted just one month ago, when I suggested that Tesco’s shares could be worth as little as 200p.

Although I didn’t predict the company’s accounting snafu, I did take the view that historical profit levels were unsustainable, and that declining sales volumes also needed to be factored into the firm’s valuations.

Following yesterday’s news, I took a fresh look at whether Tesco’s shares yet qualify as a buy, in a new article for the Motley Fool, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any investment decisions.

Why is Stanley Gibbons Group PLC giving away 7.5% to new investors?

StampsImagine being told that if you invested £50,000 in a certain equity investment fund, the fund’s manager would throw in a ‘bonus top up’ of 7.5%.

Sounds unlikely, doesn’t it? Yet that’s exactly what AIM-listed stamps and collectibles firm Stanley Gibbons Group PLC (LON:SGI) is promising its clients.

The firm, which is one of the world’s oldest and most influential stamp dealers, has marketed its stamp investment products with increasing intensity in recent years. The fact that its investment products are not regulated by the FCA means it can make sweeping and dramatic claims about cost and performance, with no hint of a disclaimer.

For example, a recent marketing email I received from Stanley Gibbon’s Group Investment Director, Keith Heddle, contained this gem*:

Those 30 stamps that were worth a total of £861,000 in 2005 are now worth £1,775,500.

That’s a 106% return in 7 years.

Imagine more than doubling your money in 7 years. And using rare stamps to do it.

Isn’t it time you found out more?

*I hasten to add that I am not suggesting that Stanley Gibbons’ marketing is in any way misleading or inappropriate. I am merely commenting on the freedom with which unregulated investment schemes can make more compelling advertising statements than their regulated equivalents.

Another email I received this week boasted that Stanley Gibbons offers “flexible investment structures with no management, transaction, valuation, storage or insurance charges” along with “a surprising rate of capital appreciation and consistency of performance over the long term”.

No mention of previous stamp price bubbles which have burst, as happened in the 1970s/80s.

However, the point I’d like to draw your attention to is the comment about ‘no management [or] transaction … costs’ and that 7.5% ‘bonus top up’ the firm is now offering new investors.

How does it all work — and how does Stanley Gibbons make money from its investment customers?

The 7.5% ‘bonus top up’

There are two reasons why Stanley Gibbons can offer customers a 7.5% bonus and still expect to make a profit on the deal.

1. Price taker or market maker?

The annual Stanley Gibbons catalogue is an influential guide to the price of rare stamps. This means the company is, to some extent, a market maker, setting the prices of rare stamps and thus influencing both auction sale prices and retail sale values.

It is, therefore, in Stanley Gibbons’ interest for the prices in its catalogue rise as fast as the market will bear. This requires a regular influx of new cash into the market, to drive price inflation and enable previous investors to make a profitable exit. Hence the logic of a 7.5% bonus.

2. Profit ‘sharing’.

Stanley Gibbons offers two investment products, The Capital Growth Plan and The Flexible Trading Portfolio. In both cases, the firm charges no up-front fees, but takes its cut at sale time: the firm charges a sliding percentage of profits when it sells your stamps.

When you put money into one of the company’s unregulated investment schemes, the price you pay is the current Stanley Gibbons catalogue price.

When it comes time to exit your investment, Stanley Gibbons provides four options for its Flexible Trading investors:

  1. Place the stamps into an auction of the company’s choice, usually one of its own. You’ll pay the usual auction fees (typically around 20%, in my experience of antique and collectible auctions).
  2. Sell the stamps on your behalf, listing them at the current Stanley Gibbons catalogue price. You, the owner, will receive a sliding share of the profits, depending on how long you’ve owned the stamps. This ranges from 30% (up to 1 year) up to 80% (over five years). Any stamps unsold after 12 months will be purchased by Stanley Gibbons for 75% of the current catalogue price (see 3).
  3. Stanley Gibbons will buy your stamps from you for 75% of their current catalogue price. This is likely to be the only choice if you need to sell quickly, but means that your stamps need to have risen by 33% in order for you to break even.
  4. Post the stamps to you for you to sell yourself. In theory, this might be a good idea, but anecdotal evidence suggests that other, less prestigious, retailers often find it hard to match Stanley Gibbons’ catalogue and retail prices.

The exit terms are slightly different for Stanley Gibbons’ Capital Growth product, but the choices are similar. I’ve no idea of how liquid the market for the firm’s investment grade stamps is, but what investors may not appreciate is how generously they will share any profits with Stanley Gibbons, which benefits from being both a major dealer and a price setter, via its catalogue.

If prices have fallen, Stanley Gibbons won’t make a profit directly, but they will have had the use of your cash during the investment period, and they may have sold you the stamp for a 33% markup having paid a previous investor 75% of its catalogue value…

Nice work if you can get it.

Are Stanley Gibbons’ shares a buy?

Stanley Gibbons’ investment products are only part of its business: it remains a very important dealer, buying and selling from major collectors the world over.

The firm’s shares have been on a tear in recent years: today’s 275p share price is 96% higher than five years ago, although the shares have fallen by around 25% from their March’s 375p all-time high.

Turnover has risen by an average of 22% each year since 2009, while profits rose by an average of 7.5% per year until last year, when they fell, due to heavy investment in acquisitions and new IT platforms.

Analysts are bullish about next year and the firm’s shares trade on a 2014/15 forecast P/E of just 11.5, with a prospective yield of 2.9%.

However, my concern is simply that the firm’s rising revenue and profits are built on a bull market for an asset with no intrinsic value or use. For example, according to the firm, rare, investment-grade Chinese stamps have risen in value by around 500% since 1995, while their British equivalents (both defined by indices compiled by Stanley Gibbons) have climbed around 400%.

Given such strong, long-running gains, some degree of pull back, if not a full-blown crash, seems likely at some point, as happened during the 1970s and 80s, when rare stamps did fall in value.

It’s rather like a castle built on sand, in my view: I believe Stanley Gibbons’ cheap forecast P/E should be viewed in much the same way as those currently enjoyed by housebuilders — an inappropriate, and potentially misleading, way to value the stock.

An alternative valuation would be the firm’s net tangible asset value, which is just 110p per share — and even that could fall if the value of stamps (inventories are running at around £40m, historic cost) were to fall.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any investment decisions.