Look-ʞɔɒꓭ to July 2018

In this series of articles, I look at my past writings and critically analyse them with the benefit of hindsight.

SRT Marine Systems (SRT)

I wrote a very sceptical interpretation of a post year-end delay in contract announcement severely impacting revenue and profitability. I questioned revenue recognition policies and the limited share price reaction.

Subsequently, risks around revenue recognition, particularly on overseas projects (the “systems” business), were highlighted in their recent annual report and audit. Although the auditors judgement was that the accounts were true and fair, they reported a material uncertainty related to going concern related to the company’s systems business prospects, and an emphasis of matter on the recoverability of receivables and accrued income from such business.

I remain of the view that the company’s system business is a dirty and risky affair, the profits from which should be valued with a very significant risk premium. The question (which I can’t answer) is whether the share price valuation reflects this adequately. Some more cash on the balance sheet would certainly help.

From a pure share price perspective, a year ago would have been an excellent time to buy with the price up from 25p to 38p.

United Carpets (UCG)

I wrote the following about the outlook statement in the FY2018 results:

A clear profit warning for YTD and H1, but really no worse than I expected. Now the world cup is finished cash should be building again and I would guess we’re looking at another special dividend in the next 12 months. Of course it remains exceptionally cheap, especially on an EV basis.

The market indeed took the trading statement within its stride, as it did a re-iteration in the autumn AGM statement. It was the H1 report that really hit the share price (and perhaps Graham Neary’s share sales), with profits down by three quarters. My speculation of a further special dividend was dead wrong. FY2020 looks better, but not significantly so.

Impax Asset management (IPX)

On 31st July 2018 I wrote that Impax may have become overvalued at 271p. Then, in a follow up article last month I wrote that they may now be good value at 244p.

Re-reading last month’s article, I think all that is left to comment on is whether it really makes sense to sell at 271p, miss out on 4.5p of dividends and then buy back at 244p. Now clearly if I could reliably repeat that gain then yes, it would be worth it. But there is always a risk that valuations of good companies like this will never come back down and you therefore miss out on years of compounded gains far in excess of a potential quick profit.

On balance I believe that trading this share reduced my exposure to potential (and, for a while in Q4 2018, actual) large stockmarket falls and the fact I was able to buy back at a lower price after a rise of 24% in assets under management validates my original thesis that IPX goes through phases of irrational over and undervaluation.

Bonmarché (BON)

In response to their trading update I wrote:

…update seems OK. Online now seems to have grown to a proportion of the business where it can compensate for store LFL falls, stabilising revenue now and hopefully in the future. However online growth may be starting to slow already and store sales may have benefited from good weather. Yet I have much more trust in the current management than the previous one when they say things like they were up against strong comparatives. No indication of margins – they had done well with these in the last results so not sure whether to hope this has continued. (I hold)

Reading the statement again it does seem relatively benign but I was right to pick out the weather aspect. Looking back it was September when the wheels really came off and I should have sold then. In the event I sold on 13th December update at an average of around 48p. This was significantly above the 44.5p close, or the sub-4op of the following days, let alone the 11.4p takeover by Spectre which itself now looks very generous.

Looking further back, the major error that caused me to buy in the first place was not recognising the degree to which their low operating margins indicated the weakness of their proposition compared to other retailers.

Other

I discussed how the interpretation of the “significant size” hurdle to be an elective professional for spread betting purposes (avoiding margin and close-out regulation), actually could select for recklessness, and opined that there was no need to worry about the impact on wider share prices due to forced sales under the new rules. In the event, the spreadbetting firms are trading significantly cheaper than July 2018 when the rules were already known, with larger falls for the lower-quality operators.

I got fooled into thinking an RNS statement was a real RNS statement, whereas in fact it was RNS-Reach. I’ve been very careful ever since!

I made some vague comments about SafeStyle.

I moaned about Walter Greenbank (WGB) issuing a trading update at 4:27 with a bizarrely precise adjusted PBT forecast. They then issued another trading update 6 trading days later, although the did manage 7am that time. In the event their results just scraped in at the bottom of their range, perhaps aided by a jumbo £1.7m restructuring and reorganisation charge. Despite falling back considerably, the share price has been rising since April and is now above the price a year ago.

I expressed surprise that Intu Properties (INTU) rents were still rising with no reported stress. On 3rd May 2019 they reported CVAs above expections with rents expected to fall 4 to 6%. The share price has halved over the 12 months.

I talked about Seeing Machines (SEE) following an announcement of a new OEM but not really to much end. It would have been a good time to sell.

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