Weekly Market Commentary | 03/10/23 | PZC, YU, SCE, GTC | Solving Greenspan’s conundrum

Bruce uses Sharepad to look at recent movements in the US long bond yields USTSY10 and the bondholder total return TLT ETF. Companies covered, PZC, YU, SCE and GTC.

The FTSE 100 fell -1.8% in the last 5 trading days to 7613. The Nasdaq100 and S&P500 were flat and down -0.75% respectively. The FTSE China 50 fell -1.6% as did the Nikkei 225. The former is down -7% YTD, while the latter is up +22% in Yen terms YTD. The US 10Y bond yield has risen to 4.6%, and the shape of the current yield curve (green line in the chart below) is becoming less inverted than 3 months ago (blue line).

The US yield curve has been inverted since April last year (chart below) but finally seems to be returning to normality (i.e. 10Y higher than the 2Y). There are only two ways an inverted yield curve can revert to upward sloping: i) a recession arrives, and the Central Bank is forced to cut short-term interest rates ii) sustained inflation and a strengthening economy cause a sell-off in the 10Y bond, so that the long end yield to rise above the 2-year rate. The second option is currently happening. The 10Y has risen from below 3.5% in March this year by 100bp to 4.6% last week.

That means the ‘risk-free’ rate is rising. We may be in for a few months similar to 2022 when both equities and long-dated government bonds did badly. The iShares exchange-traded fund that tracks the long-dated Treasury index (Sharepad ticker TLT) is now lower than it was at the low in October last year. The TLT is a total return index, which adjusts for income received, so bond investors are losing money even adjusting for the coupons that they receive.

For several years before the GFC, Alan Greenspan lamented that his rate hikes couldn’t shift the 10-year bond yield higher, in what he famously called a conundrum. Mervyn King said something similar in his book, The End of Alchemy, pointing out that Central Bankers were responsible for short-term interest rates, but were not in control of the 10-year bond yield. It looks like the Fed under Jerome Powell has at last solved this conundrum and is taking the punch bowl away from the party. 

This week I look at PZ Cussons FY May results Yü Group H1 June results, plus a couple of brief comments on voluntary disclosure at Surface Transforms and Getech Group.

PZ Cussons FY May 2023 Results

I was curious to see how this consumer brands business with operations in Nigeria was doing, after the well-publicised problems with the weak Naira. Sharepad shows the Nigerian currency (FX: USDNGN) has devalued from 450 to the US dollar to almost 800.

PZC statutory revenue was up +10.7% to £656m and PBT was down -4.2% to £62m. Excluding acquisitions, revenue growth was +6%, which consisted of volumes declining by -6%, but price/mix growth of +12%.

The company reported net cash of £6m. However, the results are to the end of May, while the big currency devaluation came a few weeks later in mid-June. Helpfully the company has provided a calculation showing that that if FY May 2023 profits had been translated to GBP at the devalued rate, the Group’s adjusted operating profit would have been £14.7 million lower. The devaluation would also have reduced African revenue by around £100m to £153m. As of the 31 May year-end, there was £204m of cash in the Nigerian subsidiary, which they couldn’t upstream to the group because of Nigerian capital controls. The Nigerian Central Bank liberalised the foreign currency regime in June, which meant that PZC could take money out of the country, but the forex rate collapsed by half. So that net cash balance of £6m reverses to around £100m of group net debt following the Naira devaluation.

Minority buyout: PZ Cussons management have responded to the turmoil by announcing in early September that they would look to buy out the minorities (26.73%) of their subsidiary PZ Cussons Nigeria Plc for £23m and then de-list the business. Having a separate minority listing in a developing country’s stock market was once viewed as a way of raising the group’s local profile and used to reward local employees with shares in the locally listed entity. Buying out the minorities should simplify the governance structure though.

Outlook: Management expects to deliver FY May 2024F results in line within the Bloomberg PBT consensus range, which they helpfully supply (operating PBT £61.5m to £68.2m). They expect more benign input cost inflation and are currently seeing modest y-o-y growth in Like for Like group revenue, plus an improved operating margin. (11.2% FY May 2023).

Auditor change: They have changed their auditor from Deloitte to PwC, which is expected to be proposed to shareholders at the Annual General Meeting in November. I wouldn’t normally comment on that, but one of the notes is a “correction of errors” which are non-cash items relating to intangible assets. The first is an increase in goodwill of less than £5m as at June 2021, the second is a reduction of goodwill of £3m so in all about £2m net. These aren’t material, but I’ve noticed that often these errors can occur when other things are going wrong.

Other items: There’s also a goodwill impairment of their Sanctuary Spa brand, resulting in a charge of £16.5m. The brand is now carried on the balance sheet at £63m. There’s some sensitivity analysis around that, if the gross margin declines by 2.5% that would increase the impairment charge by £8m. Similarly, if the gross margin increases by 2.5%, that would reverse £8.5m of the impairment charge that’s been taken. The figure is not split out for each brand but the group’s gross profit margin has ranged between 35.5% and 39.5% over the last decade. Another of the group’s brands, Rafferty’s Garden has seen a writeback of impairment, which means the group’s intangible impairment charge net of that writeback is £12.3m for FY May 2023.

There’s also a small pension deficit of £12m on the face of the balance sheet. Oddly there is a £33m charge in the statement of Other Comprehensive Income (i.e. below the PBT line) for remeasurement of retirement obligations. I wonder if PZ Cusson’s pension valuation suffered during the Truss/Kwarteng mini budget gilt sell-off last year.

Valuation: The shares are trading on 14.7x PER May 2024F, dropping to 10.7x PER two years later in May 2026F, as profits are forecast to grow at +20% in those years. They are trading on below 9x EV/EBITDA versus 12x the same ratio for Unilever and 16x for P&G.

Opinion: The problematic Nigerian business, which represents around a third of group revenue, ought to begin benefiting from higher oil prices (driving rising disposable income in the country). I own this, having bought into the turnaround story too early. The performance over the last 10 years has been very disappointing, however in the previous decades this has been a multi-bagger, growing from a market cap of around £1m in the 1950s to a market cap of well over a billion at its peak in 2013.

Yü Group H1 June results

This supplier of gas and electricity, and installer of smart meters reported revenues +51% to £195m and PBT +62% to £8.9m. Net cash was up +133% to £37m.

History: Founded by Bobby Kalar, the current Chief Executive, this business started life as Better Business Energy, to help broker energy prices to SMEs, initially focussed on the care home sector. It received a licence from Ofgem to trade gas and electricity licences in 2012. The sales process involves buying data to drive lead generation, followed by direct telesales. Commissions are paid upfront, but contracts are frequently broken in the sector and energy brokers routinely have to rebate suppliers if they have been over-optimistic of customers’ energy usage.

The company listed in 2016 raising £7.5m at 185p per share. That gave it a market cap of £26m on admission. Everything seemed to be going well, until they announced a trading statement in October 2018 which identified “several areas of significant concern” including

  • Recognition of historic accrued income
  • Impairment of Trade Debtors
  • Gross margins versus prior expectations

In other words, management warned that invoiced revenues, as well as revenues accrued against invoices not yet sent out, were overstated.

Management estimated that would lead to £10m reduction in profitability (versus FY Dec 2018 expectations of c. £4m statutory PBT, which reversed into a £7m loss for that year). The share price collapsed from around £10 per share to 50p in Dec 2018. The Financial Conduct Authority (FCA) launched an investigation. The regulator’s and investors’ reaction was understandable, given there were some similarities with Woodford-backed Utilitywise, which went into administration in early 2019. Trading at YU. did recover, but the shares then hit an April 2020 pandemic low of 56p. Since then, management have rebuilt trust with consistent results, which has helped the shares recover to close to £10 per share.

Outlook: The board expects strong revenue and margin continuing into H2, which means adjusted EBITDA is should exceed £33m for FY 2023, substantially ahead of expectations. They also say that they have a scalable “platform”, and are confident in continued significant growth in FY Dec 2024F. There’s an ambition of £500m revenues and they now expect to beat their 5% EBITDA margin target.

Investors: The founder and current Chief Exec still owns 52% of the shares. Premier Miton own 6.5%.

Valuation: SP Angel increased revenue forecast by 5% for FY Dec 2023F to £42m and doubled forecast PBT to £28m. They are now forecasting diluted EPS of 133p and 141p FY Dec 2024F and FY Dec 2025F. That gives a forecast PER of 9x next year and 8x Dec 2025F.

Opinion: Tricky one. CashRoCI has been volatile, troughing at -145% in 2019 but recovering to 97.3% in 2022 (3-year average is -4.8%). Aside from that and a poor Altman Z score, Sharepad’s Financial Health Indicators are positive.

I think I would need to spend time going through the Annual Reports to really give myself comfort that the accounting problems are well in the past. I would also be nervous if the founder sold down his stake. On the positive side this does seem to benefit from rising energy costs and has done well since August last year, so could be a source of uncorrelated risk.

Surface Transforms H1 Jun 2023

A brief mention of this carbon fibre ceramic car brakes business. Cockerhoop on Twitter pointed out that their broker, Cavendish, had lowered FY 2023F revenue forecasts by -20% to £13m. The broker has maintained 2024F revenue forecasts of £30.5m, but slashed EPS next year by -29% to 1.5p. Sharepad’s financial health indicators (Piotroski F, Beneish M) are indicating weakness.

I’ve included Surface Transforms full outlook statement below, to compare that with the forecasts changes above:

“The steady growth in production seen throughout 2023 is expected to continue. Whilst H1-2023 has been operationally challenging the Company has delivered considerable strategic progress. We have engineered a solution to our technical problems and brought in additional furnace capacity designed to our know-how. Productivity efficiencies and capacity improvements are expected to continue through 2023, a target break-even in the second half of the year, with profitability in Q4.

We have continued to invest to reach, initially £50m sales capacity in 2024 and £75m sales capacity in the following year. Of greatest importance our customers have understood our issues, including immersing themselves in our capacity plans, and remain committed to awarding the Company further business. We are appreciative of shareholders support through this learning curve.”

I find it particularly odd that the broker is forecasting £30m of revenue, while the outlook statement mentions the figure of £50m in 2024F. Cavendish haven’t published forecasts for Dec 2025F, however, the company mentions £75m of sales capacity that year. True enough, “sales capacity” may not be the same as budgeted sales; in which case then, why not mention both figures in the outlook statement?

Valuation: The shares have a poor track record. Following last week’s RNS update and new forecasts, the shares are trading on 18x PER and 2.1x Dec 2024F forecast revenue.

Opinion: We are seeing a growing trend of companies issuing “in line” or vague commentary in their text, then asking their brokers to reduce earnings. Whenever I see this type of behaviour, I will draw attention to it. I may be old-fashioned, but I believe that investors should be able to read a company RNS and have enough information to make a buy or sell decision, without having to refer to a broker’s note. Interestingly Sharepad’s quality indicators for SCE like RoCE and EBIT margin are also negative.

SCE may achieve those revised forecasts, but I tend to avoid investing in companies where the quality and financial health indicators are red, with poor voluntary disclosure decisions.

Getech H1 Jun 2023

Staying on the theme of voluntary disclosure, a brief mention of Getech. This company helps extraction companies find resources underground. They have less than £10m market cap and are loss-making, so normally I wouldn’t mention them.

However, Mark Simpson who I share a podcast with, spotted a fun disclosure at the bottom of their going concern statement. The comment in square bracket, bold added by myself, was presumably left in by mistake:

In making the going concern assessment, the Board has considered the Group budgets and detailed cash flow forecasts for the next 12 months … Consequently, the Directors are fully satisfied that it is appropriate to prepare the accounts on a going concern basis. [Andrew – has this process been done and was this what we saw today?]”

Opinion: The “Andrew” who is being referred to is presumably Finance Director, Andrew Derbyshire. This comment doesn’t really help the investment case of a loss-making company and leaves investors in some doubt about whether the going concern analysis has been done. A demonstration that it can be worth reading the going concern statement of companies, if not for a view on the next 12 months, but sometimes purely for entertainment value of “bloopers”.


Bruce own shares in PZ Cussons.

He co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com

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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.