A share tip circled in a newspaper share listing

Hargreaves Services update confirms underlying value

A share tip circled in a newspaper share listingDisclosure: I own shares of Hargreaves Services.

Yesterday’s update from Hargreaves Services (LON:HSP) triggered a surge of buying that lifted the shares nearly 10% and resulted in twelve times the normal number of shares changing hands.

So what triggered this burst of enthusiasm for a stock that’s been comprehensively out of favour?

The firm published a strategic update which confirmed the underlying value in the shares that I discussed following the firm’s interim results. You can read the full update here and see the presentation here, but I’ve summarised the main highlights below:

  • Core business: Hargreaves is going to bring forwards the closure of the majority of its mining business. The group will focus on core businesses of coal distribution, industrial services, transport and earthworks/infrastructure going forwards. The board’s view is that these should be able to generate an annual operating profit of £10-£15m in the medium term.

    Taking the mid-point of this estimate and assuming tax and further deductions of about 30% implies post-tax profits of £8.75m. That’s equates to a P/E of around 7 at the current £55m market cap. That seems about right.

  • Property & Energy: The firm has 18,500 acres of land in the UK. Work is underway on a number of housing and energy projects. The energy projects are listed as energy from waste, onshore wind, exploiting existing grid connections and solar.

    The board is targeting £35-£50m of “incremental value” from property and energy over the medium term. That’s considerably more than I estimated previously and on a conservative estimate represents half to two-thirds of the current market cap.

  • Realising value from legacy assets: Hargreaves still has considerable stocks of coke and coal plus surplus plant and equipment which is believes have a net realisable value of £66m. — that’s more than the current market cap.

    There is some uncertainty about this amount due to the potential for writedowns on the firm’s loans to the Tower Colliery joint venture. But Hargreaves plans to liquidate these surplus assets by the end of May 2017. The firm does have a good track record of generating cash from surplus and legacy assets, so I’m reasonably confident this will be handled well.
  • Net assets of £140m: Hargreaves’ update yesterday said that the group’s net assets at the end of March were £140m, comprising £52m (core trading), £22m (energy/property) and £66m (releasing value from surplus assets and inventories).

In my view, the current market cap is about right for the firm’s ongoing business. On top of this Hargreaves’ property portfolio and surplus assets have the potential to generate perhaps £80-£100m of one-off gains over the medium term.

My mistake with this investment was to buy too soon. But based on yesterday’s update I’m happy that I decided to average down and intend to continue holding. I believe there could be substantial upside from the current price of 170p.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Lamprell delivers solid results but faces uncertain outlook: what should I do?

Onshore oil installationDisclosure: I own shares of Lamprell.

Yesterday’s results from Dubai-based oil rig builder Lamprell reported a net profit of $66.5m, ahead of forecasts for $59.4m. The firm’s balance sheet remains strong, with year-end net cash of $210.3m.

As I discussed in December, my concern is over what happens when the firm’s current order book starts to empty. Yesterday’s results provided a bit more detail on this.

Lamprell currently has an order backlog of $740m, of which 90% is attributable to 2016. That’s a big decline from a backlog of $1.2bn one year ago, but I can live with that in the context of the industry-wide downturn.

A more serious concern is that just $74m of revenue is attributable to 2017 and beyond. Investors need to pin their hopes on Lamprell’s bid pipline, which the group says is marginally higher than last year at $5.4bn (2014: $5.2bn).

Lamprell says it has massaged and reshaped the bid pipeline to focus on opportunities closer to home in the Middle East. As I’ve suggested before, Middle Eastern producers with low cost production (mainly NOCs) have not cut back as much as the supermajors and indepedent E&P companies.


Lamprell has modernised its facilities and is currently busy. The group is playing to its strengths, and focusing on core customers close to home. Despite all of this, I fear that 2017 could be painful. However, having halved my position in December, I’ve decided to sit tight and continue to hold.

But I’m still a little nervous.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Fifty pound note

Sales wobble but Laura Ashley delivers cash for patient shareholders

Fifty pound noteDisclosure: I own shares of Laura Ashley.

Laura Ashley delivered a second interim set of results today, covering the last 52 weeks.

These are effectively annual results, but because the group has changed its year-end date from 31 Jan to 30 Jun this year’s final results will actually cover 17 months.

This firm is a portfolio holding of mine, so I was very interested in today’s results.

Quick view: Profits were down slightly, but like-for-like sales in the core UK retail division were up. Overall my impression was that the 8% dividend yield remains safe and continues to be backed by free cash flow.

After an initial wobble this morning, it appears the market agreed with my view. The shares closed up slightly a few minutes ago. I continue to hold.

In more detail

Pre-tax profits before exceptional items were £20.7m for the 52-week period, down from £22.9m for the 53-week period last year. The decline was partly due to having one fewer week and partly the result of poor trading in the firm’s franchised international division — mainly in Japan.

Laura Ashley’s UK chain of retail shops performed well, and like-for-like sales rose by 4.8%.

There was a welcome 3.1% reduction in operating expenses.

For me, Laura Ashley’s appeal likes in its strong free cash flow and similarly strong balance sheet. These appear to remain intact. The cash flow statement requires careful reading as the dividend is included in the operating cash flow section, which confuses most online data services (dividend payments are normally listed in the financing section of the cash flow statement):

Laura Ashley cash flow stmt

However, said careful reading shows that operating cash flow was £25.1m over the last 52 weeks. Of this, £19.2m was free cash flow (excluding the purchase of the group’s new Asian HQ building in Singapore). From this free cash flow, £14.5m was paid to shareholders as dividends.

Today’s results confirmed another 1p interim dividend which takes the payout for the last year to 2p per share. That’s an 8% yield, backed by free cash flow. What’s not to like?

The balance sheet also remains strong, with £17.1m in cash. There’s no debt except for the £19.7m mortgage on the aforementioned Singapore office block. This purchase continues to divide investors, and does seem strange.

Despite this, I see no reason to suspect any foul play. Singapore isn’t China — the building exists and is located in a regular commercial district. Laura Ashley will no doubt let out any parts of the building which aren’t required for its Asian headquarters.

Final word: Laura Ashley had a fairly unexceptional year, but the firm’s finances remain healthy. I believe that there is potential for further expansion in Asia. This will be done through the firm’s wholesale/franchise model, meaning that the risk to shareholders should be low.

I continue to hold.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A falling knife.

Stanley Gibbons Group: coverage archive + updated outlook

A falling knife.Disclosure: I have no financial interest in any company mentioned.

One of the biggest investing disasters of the last year — among real businesses, not obvious joke stocks — has been stamp and collectibles dealer Stanley Gibbons Group (SGI.L).

The bad news came to a head on Monday when the firm announced a £13m placing and open offer at just 10p per share — a 50% discount to last Friday’s closing price.

Without wanting to blow my own trumpet, I’ve been consistently flagging up the risks with this stock since September 2014. The shares have fallen by 94% since then. I thought it might be worth gathering together a record of my coverage of the stock in order to show how the problems unfolded:

My record isn’t always this good. But the signs were there. Rising debt, poor cash flow, excessive spending on acquisitions and an accumulation of potentially overvalued stock.

I think it’s this last point that has persuaded investors to sit tight when they should have bailed out. Stanley Gibbons net tangible asset value has been a cornerstone of the value investing case for the stock.

The problem is that these tangible assets are stamps, autographs, rare coins and old furniture. In other words, objects with zero intrinsic value whose market value is highly subjective.

Stanley Gibbons is known in the trade for its high catalogue prices, which many other dealers consider excessive. I suspect the firm may have started to believe its own marketing. Rare stamps won’t climb in value for ever, just like stocks don’t. The rare stamp market crashed back in the 70s/80s, and I suspect prices are falling again, as the China-led boom cools.

I’m not suggesting the firm’s inventories aren’t worth anything. Clearly they are, and the fact that they are booked at cost should provide some downside protection. But the firm recently commented that it is targeting:

a return to more disciplined buying and selling strategies which should help to improve the stock profile, restore the stock turnover to more normalised levels and thereby reduce the holding costs

To me this suggests that buying and selling have become undisciplined and that the firm may be burdened with stock it’s struggling to shift.

What next?

I’m pretty sure some value will emerge from the wreckage of Stanley Gibbons. If I did hold the shares, I’d probably take part in the open offer.

As I don’t own any, I intend to wait until the placing and open offer have completed and until Stanley Gibbons has published its next set of accounts. I’ll then take a fresh look at whether this could be a good turnaround buy.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A falling knife.

Worldview takes control of Petroceltic debt: what next?

A falling knife.Disclosure: I own shares of Lonmin.

In Las Vegas, they say don’t bet against the house, because the house always wins.

On the AIM Casino, it’s the lenders against whom you shouldn’t bet. They always win.

Over the last year or so, we’ve seen this with African Minerals, Petropavlovsk, Afren and Lonmin.

It now looks very likely that oil and gas firm Petroceltic will be the next firm to join this club. Earlier today, the firm’s lenders sold 69.44% of Petroceltic’s debt to Sunny Hill Limited at “a significant discount to face value”.

Sunny Hill is a company that’s owned by Petroceltic’s largest shareholder, hedge fund Worldview Economic Recovery Fund. Worldview recently made a very generous 3p per share offer to Petroceltic shareholders, but this was slapped down.

Inexplicably, the shares continued to trade at 10p on the morning after this offer was made. As I warned at the time, this provided a golden and probably final opportunity for shareholders to retrieve some value from their shares.

That door has now closed — permanently, I suspect. The shares are currently suspended as a result of Sunny Hill’s petition to an Irish court to appoint an examiner to the firm. This is similar to adminstration (UK) or Chapter 11 protection (USA).

Today’s announcement from Sunny Hill suggests that Worldview will now arrange a debt for equity swap for the remaining 30.66% of Petroceltic’s debt it does not already own.

Remember, a firm’s lenders have a right to be made whole (if possible) before equity investors are entitled to anything at all.

Petroceltic’s banks have already taken a substantial loss on this debt — it was sold to Sunny Hill at a “significant discount”. In my view, there is no way that the banks will let existing shareholders walk away with any value unless they are willing to stump up significant fresh cash.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.