Mountfield Group – Cashing in on a 5G Bonanza #MOGP
Mountfield Group (MOGP) – Latest share price: 2p, market cap £5.3 million
Readers of Cube will recall that I wrote about micro-cap tiddler Mountfield Group (MOGP) back in April 2019 concluding that I liked the niche offering and cheap valuation, particularly given that a prior recent trading statement in March 2019 and a subsequent contract win intimated record turnover was anticipated for the year ending Dec 2018 alongside an equally record high order book; management accordingly noting “buoyant demand” for their services despite the various known macro and political headwinds in the UK.
Full year results issued today for the year ending 31st December 2018 have hopefully cheered investor spirits further.
Sales are up 28% from £12.7 million in 2017 to £16.2 million, closing in on 2008 numbers when Group turnover was £17.44 million.
Gross margin is 15%, slightly down from the 17.5% in 2017 due to lower margins on some of the larger contracts. This is still an exceptionally solid gross margin for this sector.
Operating profit is up 25% from £0.9 million to £1.1 million (operating margin steady at 7% and up from 4.9% in 2016)
The above provides earnings per share (EPS) of 0.27p up 6% from 0.254p in 2017 putting the Group on a PE of 7.7. It should be noted here that FY18 earnings would have been a lot higher if it wasn’t for a non-recurring tax charge (deferred tax debit reversed) of £0.2 million.
Management have also noted the order book remains very strong going into 2019 with it sitting at a record high of £16.4 million and with the proposed roll-out of the 5G network by the telecoms industry the Group looks well placed to leverage its strong reputation in this space.
Great, so aside from the headline numbers what do I like and why should I continue to invest?
Reviewing the balance sheet, I am pleased to see that shareholder’s equity has risen from £5.9 million in 2017 to £6.04 million, with tangible equity now at negative £0.84 million (up from negative £1.52 million in 2017) further strengthening the balance sheet since the strategic changes implemented by the Board in 2015. Cash and cash equivalents have also doubled to more than £1.2 million and total borrowings are further reduced from £1.22 million in 2017 to £1.17 million leaving the Group in a much-improved net cash position of £0.07 million; the first time the Group has been in a net cash position for over 5 years.
A few other investors have highlighted to me concerns regarding trade and other receivables which more than doubled between FY 2016 and FY 2017 from £1.8 million to £3.65 million and had further increased to £3.92 million by the HY to June 2018. Digging further into the numbers in the 2017 annual report, actual trade receivables (excluding retentions, prepayments etc) rose from £0.22 million in 2016 to £1.17 million in 2017, a giddy 500+% increase despite turnover rising 32% during this period. There has also typically been quite a large inter-year movement in overall trade and other receivables each year with a big increase at each HY dropping back to reduced levels by each full year although these numbers skewed by retentions and amounts recoverable on long term contracts.
Looking at today’s results, ‘trade and other receivables’ are down from £3.65 million to £2.4 million with actual trade receivables down from £1.17 million in 2017 to £0.65 million. Trade receivables are however deemed as ‘good quality’ current assets that you typically expect to rise in line with sales. ‘Amounts recoverable on long term contracts’ have dropped from £1.86 million to £1.0m million which is good news as these specific receivables (typically the amount by which recorded turnover is in excess of payments on account) can contain sometimes contain subjective profits and/or give the auditor a headache. It can also be used for accounting shenanigans such as capitalising mobilisation costs which should have otherwise gone through the P&L.
Negative working capital has also quite rightly been flagged as another concern by investors; this slightly precarious situation for any contractor has existed since at least 2014 when the Group had negative WC to the tune of £2.35 million but improved considerably to less than £1 million by FY 2017 and now stands at negative £0.88 million (as of Dec 2018). Based on the current strong trading and outlook for the Group, I anticipate further ongoing improvements in all aspects of the balance sheet.
Cash is king and there is further good news in the cash flow statement with Cash from Operations (CFO) up from £0.55 million in 2017 to £0.98 million giving free cash flow of approx £0.7 million taking into consideration tax, capex and interest costs of just £282,000 (excluding the non-recurring tax charge). This improved cash flow position results in a very respectable FCF yield of circa 13% and FCF margin of 4.3%.
The Company Articles of Association state with respect to dividend policy that:
Whilst disappointingly no mention has been made by the Board of a dividend, I understand it is under consideration and hopefully investors will see a dividend over the course of the next 12 months.
Items for further investigation / research
The Company has announced the AGM will be held on 9th July 2019 at the offices of DAC Beachcroft LLP at 100 Fetter Lane, London EC4A 1BN. If readers of Cube haven’t already seen it – here are 5 good reasons for investors to attend AGMs!
Items requiring potential clarification by management and hence are possible AGM topics include:
- Amounts recoverable on long term contracts. As noted above such sums can sometimes hide capitalisation of mobilisation costs or other such costs and hence I am keen to further understand its composition.
- Intangibles. A big proportion of the balance sheet is still propped up with intangibles in the sum of £6.87 million although no breakdown of these intangibles is provided in the accounts. Such intangibles are likely to consist of goodwill, trademarks and customer lists etc and it would be good for investors to have some better clarity on this.
- Customer overlap between MBG and CAF. I understand there is very little customer overlap between CAF and MBG and that each of these businesses have their own separate client bases, however, I am still to understand the overlap that does exist and how the two businesses cross-sell their services.
- Board Composition. Only one NED on the Board.
- Overseas risks/opportunities. Keen to understand the capital intensity of non-UK projects and other related risks / opportunities.
- Diversifying/broadening the shareholder register. As detailed in my write up from April 2019, the Company is currently 55% owned by the management team with no institutional shareholders on the register. I believe there is a desire to broaden the register and this is initially one for their Broker/NOMAD (Cairn Financial Advisers LLP) although it is not out of the question for retail investors to try and introduce the Company to some of the quality small cap funds such as Miton, Herald, Gresham House and Downing.
- Delisting. A real risk for any sub £10 million mcap company.
Summary / Conclusion
In summary, I am very pleased with today’s results which show great operational progress and a very positive outlook for 2019. Since April 2019 the share price has also gathered some upward momentum rising almost 50% from 1.35p to 2.0p.
This seems like a business operating in a sweet spot and I perceive the Group to still be undervalued despite the rerating of recent months. Excluding the non-recurring tax charge the Group is on a net cash adjusted PE of <6 and I maintain my short-term valuation of £7 million which is likely to be conservative given the positive outlook. With ROCE / ROIC at circa 20% this is a very small but quality business that I am happy to be invested in.
I encourage any investors to attend the AGM in July, show their support and meet the management team.
Please feel free to post your comments and observations below!
At the time of publication, the author hold a long position in the company mentioned.