Weekly Commentary 10/01/21: What’s new in 2022?

Bruce looks at how 3 ideas he crowded sourced from readers did in 2021, and asks for suggestions for 2022.  Plus 4 companies that have been busy with corporate activity (acquisitions, approaches, disposals).   

The FTSE 100 was up +1% in the first week of 2022 at 7,450. Markets in the US were less positive with the S&P500 down -1.5% and the Nasdaq 100 selling off -3.4% last week. The US Govt bond yield rose sharply to 1.71%, as the minutes of the Fed meeting in December were published. My feeling is that Central Banks in the US and UK need to raise rates to maintain their credibility in the face of rising inflation and speculative excess in financial markets; this may well cause a market “wobbly” (or taper tantrum if you prefer).

Ideas from last year Last year I crowdsourced some suggestions for 2021 from Twitter. The point of SharePad is that investors take responsibility and do their own research rather than blindly following “tips” in this weekly update or from anywhere else. But sometimes it can help to see what ideas other investors own.

Andrew at Fund Hunter sent me several suggestions last year, and I looked at Gooch & Housego, the precision instruments company, from his list. The share price was flat in 2021. Although a quality company, I highlighted a couple of issues with GHH that I didn’t like: i) they had repriced the options in their LTIP scheme ii) the valuation was expensive on 40x 2020 reported earnings. I should say that Andrew really specialises in analysing funds, rather than individual stocks so perhaps it is understandable that he didn’t do as well as the other two chaps below.

Carcosa chose Cenkos, the stockbroking firm, correctly spotting that the pandemic has led to a windfall of equity capital raising which continued into 2021. Cenkos peaked in April at 95p, trebling from their March 2020 low of 30p – but suffered a more difficult second half last year. By H2 most of the companies that needed to raise equity in placings had done so and the IPO market hasn’t been particularly frothy in the second half of last year.

I said that the longer-term prospects for stockbroking are unfavourable. Add to this that staff tend to own a large amount of shares and are natural sellers into the market, and it is unlikely that Cenkos, or competitors like FinnCap (shares also +39% in 2021) will trade at a premium valuation. CNKS is currently on 1.3x revenue and 5.5 EV/EBITDA and FCAP 1.2x revenue and 4.8x EV/EBITDA. For 2022 he has suggested Avation, the aircraft leasing company that has had a difficult pandemic but may now benefit from the virus waning or Equals, which was Glasshalfull’s pick below. He points out his conviction levels are much lower, which I think is an interesting observation in itself.

Glasshalfull suggested Equals, which was up +130% in the year. I agreed and wrote at the time that this was my favourite of the three picks…however I then didn’t buy any! What held me back was competition from Revolut, Monzo, Starling and Wise could have restrained the recovery at Equals, but my fears proved unfounded because that didn’t happen last year. Well done to him, and any others who did take the plunge and buy shares in Equals. For this year he is still keen on Equals (the chart has formed a nice bowl), other stocks he mentions are Smartspace, 1Spatial, RBG Holdings and M&C Saatchi which he highlighted at the start of last week, before they made public an approach from Vin Murria (see below).

This week I look at the Creightons H1 to September which the company published on 30th December, Georgia Capital disposal of their water utility and SDI’s small acquisition and trading update, which has led to a +22% increase in the broker EPS forecasts for FY Mar 2023F. I start with the bid approach for M&C Saatchi from Vin Murria and AdvancedAdvT.

M&C Saatchi approach by Vin Murria

M&C Saatchi put out an RNS confirming that it had received a preliminary approach from AdvancedAdvT Limited, a vehicle connected with Vin Murria (she owns 13.2% of the shares). James Corsellis and Mark Brangstrup Watts of the AIM listed acquisition vehicle Marwyn are on the shareholder register of AdvancedAdvT. Brangstrup Watts is the only investor that I know of who has a degree in Theology, a far superior subject than Economics, when it comes to investing in the real world.** None of the unscientific hocus pocus around “efficient frontiers” or dubious shibboleths of “efficient markets” that the Economics priesthood believe in.

The approach may or may not result in a formal offer. AdvancedAdvT released an RNS in response saying that a merger would create a “data, analytics and digitally focussed creative marketing business with a strong balance sheet and additional management expertise” – which sounds similar to what Sir Martin Sorrell (Finance Director for Saatchi & Saatchi in the 70’s and early 80’s before leaving for WPP) is trying to achieve at SFOR.

Vin Murria owns 12.5% of SAA shares in her own name, and a further 9.8% of SAA shares owned through the AdvancedAdvT vehicle. She has been on the Board of M&C Saatchi since March 2021, following her stake building and is currently deputy Chair. Her previous experience is founder and CEO of Advanced Computer Software (2008 to 2015 when she it was sold for a 20% premium in cash) plus non exec of both Sophos (bought for cash at a c. 40% premium at the start of 2020) and Zoopla (again bought for cash a c. 40% premium in May 2018).

Recent history M&C Saatchi investors have had a torrid time, with the company getting itself into a muddle with an ill-judged options incentive scheme which they will now settle in cash after making last year arranging new banking facilities. The FY Dec 2020 Annual Report was only published in September, a couple of weeks before the H1 to June results came out. The shares fell to below 30p in the April 2020 market low, but have since recovered to 165p at the start of this month.

Current trading At the H1 June results net revenue (after re-billing costs to clients) was up +14% to £118m (like for like after disposals revenue was +21% at H1). H1 statutory PBT was £4.8m vs a £5.6m loss H1 2020. They had £32m of cash net of bank borrowings (so excluding lease liabilities and option liabilities of £36m to be settled in cash). Since the H1 results, the company has put out a couple of RNS statements in November and December, saying that trading was ahead of expectations.

Valuation The shares are currently trading on FY Dec 2023F PER of 20x. The recent history of profitability is not encouraging because of the well-publicised problems, but using SharePad to go back earlier we can see that RoE was over 35% for the 3 years between 2015-2017.

Opinion This looks like a low risk, low upside trade. Even if the deal falls apart, momentum is strong with the business given the two positive trading updates at the end of last year. I’m not getting involved for the limited upside though. Well done to anyone who bought close to the bottom during the dark days of April 2020.

Creightons H1 to Sept

This toiletries and fragrances business finally announced H1 results to September just before their required end of December mandatory reporting date. As discussed previously, I am not impressed by management selling shares in October and November, then announcing H1 results between Christmas and New Year. Sales were down -7% to £30.0m and statutory PBT was down -22% to £2.3m. Diluted EPS was also down -22% to 2.6p.

The voluntary disclosure is worth paying close attention to. The headline says “excellent progress in offsetting the loss of the ‘one off’ £11.5m hygiene sales over the same period in the previous year.” This is no doubt true, but last H1 when sales grew by £8.6m, management chose not to quantify that £11.5m ‘one off’ benefit from hand sanitiser. Instead, last year they wrote that “the increase in hygiene sales [£11.5m] was partially offset by a reduction in sales to private label and contract manufacturing customers.” That phrasing is factually correct but for me too clever; I think they should have made clear to investors that the hygiene sales were more than the total £8.6m increase in group sales last year.

Inventory provision Given the exceptional nature of hand sanitiser sales to the Department of Health and Social Care (DHSC) one concern has been that CRL management may have over ordered stock, and be stuck with excess inventory that they will have to write down. Management did mention an increased stock provision at the FY results in July, but didn’t quantify this. They’ve recently made a couple of acquisitions: Brodie & Stone (September 2021, £5m consideration) plus Emma Hardie (July 2021, £5m consideration) which would explain the increase in inventory to 44% of sales and receivables 52% of sales in September. I’d suggest these numbers are worth keeping an eye on though. It looked odd that at the beginning of lockdown customers cancelled orders, which hit sales, but the inventory on the balance sheet did not increase.

Related party At the FY Mar 2020 results, CRL bought a free hold property in Peterborough owned by Chairman William McIlroy in a related party transaction (he also owns 24% of Creightons shares). I’ve seen similar at other small companies. But it did have the effect of shifting rental costs from “above the line” overhead to “below the line” finance cost (paying the mortgage on the purchases) which in turn flattered operating profit growth +29% to £3.8m in the FY Mar 2020 results.

No outlook As usual, the company has not provided an outlook statement. Again I’m happy for management to not provide guidance, but there should be a level playing field for all investors. Management insiders sold shares in October and November, when the price was above the current level.

Aspirations At the FY results management reiterated their £100m sales aspiration in the next 3 years (ie FY March 2024 versus £62m FY March 2021). Within that they would like to be selling £40m+ of their own brands. They expect digital branded sales to rise to £25m (v £1.4m FY March 2021). These are not direct to consumer sales from their own website, but instead selling through digital platforms that distribute health and beauty brands. They also mentioned acquiring brands worth £20m (and have paid £10m in two separate deals in the last 6 months).

Share options scheme There is a generous share options scheme approved by shareholders in 2018 which can award options at up to 15% of the group’s share capital. Management confirmed at the FY presentation a c. 1-2% share dilution a year from the incentive scheme, plus up to 5% further dilution for offering targets CRL shares as an acquisition currency.

That said William McIlroy, the Chairman, takes a fixed salary of just £26K, supplemented by a bonus of £265K. Bernard Johnson was paid less than £100K in fixed salary and waived half (or £132K) of his bonus of £265K in for FY Mar 2021, which meant the company could increase bonuses available for other employees with no impact on profits. Creightons has been a strong performer over the last 10 years, a 45 bagger from a tiny market cap, so it’s understandable that management should be rewarded.

Valuation There are no broker forecasts in the market. The shares are trading on 14.5x historic earnings (v 24% RoCE). Assuming that they come close to their aspiration of £100m sales and £10m PBT in FY Mar 2024 the market cap of £60m looks undervalued at first glance (but see my opinion below). There will be webcast on 12 January 2022, register at this link: https://bit.ly/CRL_H122_webinar

Opinion I own the shares, and view CRL’s track record as a real entrepreneurial success story, growing revenue and increasing RoCE. They’ve done a good job at presenting to amateur investors, for instance doing many presentations on PI world. But if I was the Chairman, with a large stake, then I would begin considering which city fund managers might one day want to buy that stake… and to think carefully about CRL’s voluntary disclosure, option awards and timing of insider selling and results announcements.

Georgia Capital disposal of business

This Bank of Georgia spin off, trading at a c. 50% discount to accounting book value announced a disposal of 80% of its water utility business for $180m. It’s a complicated structured deal with the buyer, Aqualia, granted a put option and CGEO owning a call option, both exercisable in 2025 or 2026 over the remaining 20% rump. The initial purchase is 65% of the equity rising to 80% in a second stage. Aqualia is seeking to own CGEO’s water utility business (18% of CGEO’s NAV), not the renewable energy business, and there is a $250m green Eurobond maturing in 2025 issued by the combined Cash Generating Unit (CGU) with restrictive covenants which has complicated the deal.

The important implication though is that the deal values CGEO’s water utility business at $225m (or £167m) a c. 30% premium to the value carried on its books at 30th June. CGEO’s market cap is £329m. The FY 2021F annualised profits of the business being sold are c. $30m, so the disposal was at a multiple of roughly 10x last year’s earnings. Edison, the paid for research house, says that the deal represents a 2.7x Multiple on Invested Capital and a 20% IRR.

Caveat venditor I would caveat the above with an observation from the financial crisis: companies with hard to value assets tend to sell what they can, not what they should. Hence distressed sellers like Barclays and Lehmans sold their valuable fund management businesses and Royal Bank sold its Bank of China stake in a panic. The BGI ETF business that Barclays sold in 2009 to Blackrock is now worth more than the whole of Barclay’s market cap.

Proceeds Fortunately CGEO has plenty of capital and is not a distressed seller. Management held a Capital Markets Day in November 2020, saying that they intended to sell one of their portfolio companies within 18-24 months. Irakli Gilauri, Chief Exec of CGEO says in the statement that the proceeds from the sale will be used for a combination of share buybacks, investment and lending to portfolio companies (noting that $95m is likely to go on refinancing of the $250m green Eurobond). This refinancing should take place in July 2022, at which point the renewable energy business that Aqualia doesn’t want will revert back to CGEO ownership. The board expects to hold a review in Q1 of this year to allocate the rest of the proceeds from the sale.

Valuation The deal would have been easier to understand if CGEO had split out the Enterprise Value (equity + net debt) in the press release, for both the business that they’re selling and the renewables business that they’re retaining. They say that they’ll include detailed financial information in a forthcoming shareholder circular.

I’ve shown a table of the divisional NAV (portfolio value less net debt) in Georgian Lari and GBP, and in the rows below on a per share basis. That Water Utility in red is updated for the sale price.

The valuation uplift from selling the Water Utility business at a premium isn’t very significant on a group basis (£845m portfolio value or £675m NAV after deducting net debt). What it should do though, is give greater confidence that the 1450p NAV per share (cell bottom right) is justifiable, and perhaps narrow the discount versus a market price of 683p.

Opinion Selling 80% of a business unit, to receive $180m, half of which then is used to make a shareholder loan to refinance a bond partly issued by a business that the buyer doesn’t want, does require a cold towel wrapped around my head. I wonder why the buyer doesn’t want the renewable assets, which is a hydropower dam at the bottom of the Mestiachala glacier** in Svaneti, plus some windfarms. Notwithstanding the complicated nature of the deal, this looks positive.

I own the shares as my investment thesis with CGEO is that i) it’s valued attractively iii) plenty of growth potential iii) should become easier to understand as management sell off the parts that they don’t want. The shares were up +10% in response to the announcement.

SDI acquisition

SDI the maker of digital imaging scientific instruments announced a small acquisition: Scientific Vacuum Systems (SVS) of £4.9m total consideration, including earn-out. SVS revenues for FY September 2021 were approximately £2.5m (so the price paid was c. 2x historic revenues) and PBT of £0.7m (so paying 10x historic earnings). The RNS also said that its Atik Cameras division has received a further firm order for cameras to be used in PCR machines, for delivery in FY 30 April 2023.

Broker note FinnCap published a 13 page broker note on the same morning, saying that the acquisition would be paid from existing cash £4.3m (FY Dec 2021). The broker says there’s a further £17m undrawn bank facility (plus up to a £10m accordion) so plenty of headroom for further acquisitions if the right opportunity comes along.

FinnCap expect the deal to increase EPS by +15% in FY Apr 2023F. Including the PCR order the broker has raised their group EPS forecast by + 4% FY Apr 2022F to 6.9p and +22% FY Apr 2023F to 6.4p (so there’s still a 7% decline next year as the “one off” PCR orders fall away). But the shares now trading on 33x FY Mar 2023F.

There’s all sorts of interesting details on Ion Beam Milling systems and Physical Vapour Deposit equipment, in FinnCap’s note, but it’s not my area of expertise. Martin Flitton (aka @privatepunter) phoned up and spoke to management, he has added some additional colour on his website.

Opinion I’m a long-term holder. I can understand investors not wanting to open a new position at above 30x earnings, but this seems like a management team that has earned that premium rating. The natural comparator company is multi-bagger Judges Scientific also trading on c. 35x FY Dec 2023F PER (and which released a positive RNS on Friday saying that organic revenue, accelerated in the second half to reach double-digit growth for the FY). I like the SDI story and continue to hold.

Bruce Packard


The author owns shares in Creightons, Georgia Capital and SDI

*Only investor, other than me, who has a Theology degree.

** On page 12 of the Alpine Ski Club 2012 newsletter I wrote up my adventures exploring this part of the world, with a picture of me skiing with some cute bear cubs and invoking the spirit of Douglas Freshingfield to a recalcitrant Georgian mountain guide. https://www.alpineskiclub.org.uk/newsletters/

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