Simon’s Small Cap Updates (30 Jan 2020) – #AUK #HYNS #NWT

Simon’s Small Cap Updates (30 Jan 2020) – #AUK #HYNS #NWT

At the time of publication, the author holds a long position in all of the companies mentioned.

Investors were provided today with updates from three companies, two of which have been long-standing constituents of my portfolio for a few years:

  • Aukett Swanke (AUK)
  • Haynes Publishing Group (HYNS)
  • Newmark Security (NWT)

Let’s take a brief look:

Aukett Swanke (AUK) – Latest share price: 2.8p, market cap £4.3 million

Aukett Swanke last provided an update to the market in early November 2019 noting that subject to IFRS 9 and 15 the Group would achieve a profit for the year to September 2019. The release of the full year results today confirm that the Group did indeed return to profit, delivering a PTP £0.292 million (net profit of £0.332 million after tax credit), a highly commendable performance after two prior years of losses including a thumping £2.4 million loss in the year to Sep 2018.

Year-end cash stood at £1.14m or 35% of the market cap at yesterday’s prices with the Group’s net cash being £0.82m, the highest since 2015.

Given the rather dire macro backdrop for the sector over the last year or so, this is a solid performance helped in part by lower fixed costs including office costs which are now generating annualised savings of circa £400k per annum since May 2019.

This is always going to be a cyclical business, but its managed very tightly and trades at a discount to its peer group. I maintain a minimum valuation of circa £6m based on a notional Price/Sales ratio of 0.5 offering some further good upside but only likely in the event of M&A and/or ongoing good trading going forward. The Group did pay a dividend from 2013 to 2016 and a reinstatement of the dividend would also help with the valuation; the management noting dividend reinstatement as now being a high priority.

House broker FinnCap have released a note today stating that forecasts still remain under review.

With the shares up over 100% since January 2019, I am happy to continue to hold and believe that some sort of Corporate Action is inevitable over time which could see the Group sold for £8-10m if trading continues to progress well over the next 12-18 months. The outlook looks solid for 2020.

Haynes Publishing Group (HYNS) – Latest share price: 423p, market cap £63 million

Haynes last updated the market in early December by means of a trading update noting adj. PBT would be up 37% on H1/19 and that trading had been ‘strong’. This followed news on 15th November 2019 that the Group had put up the ‘For Sale’ sign noting that the Board believed the “future will be best secured by the whole Group becoming part of an organisation with the financial resources to invest for future expansion”.

Today’s half year results to November 2019 show adj. PBT up 44% to £2.3 million generated from sales of £19.0 million. Revenue from digital products and technical data solutions now represents 60% of sales, up from 53% in H1/19 and 46% in H1/18. House broker Panmure Gordon have FY sales forecast as £38m with adj. PBT of £5 million leaving £2.7 million of PBT needed in H2 which is always typically the stronger half.

With respect to an update on the formal sale process, the Board have noted that the process is ongoing and “an announcement will be made in due course“. This sounds encouraging as they could have just said the process was ‘ongoing’.

With their digital revenue primarily contracted and recurring in nature and applying a fairly modest 3 x sales multiple (to just the Group’s digital revenue) implies a valuation of circa 450p/share, leaving the Group’s traditional printed manual business (consumer and automotive) which generates £16 million of sales thrown in for free.

A formal sale process can take many months and there is always the potential that no buyer comes forward. Given Haynes’ strong foothold in Europe for automotive data, recurring revenue, improving margins and strong growth potential, I expect to see an overseas buyer come forward but investors will have to be patient.  US listed SnapOn ($US 3.7 billion sales) and AutoZone ($US 11.8 billion sales) certainly look like potential suitors.  In the interim, the Group continues to make solid progress and I am pleased to see that they have finally sold their Sparkford HQ for £2.5 million.

Net cash is up 6% to £5.2 million following 17% growth in cash from operations but I note the IAS 19 pension deficit has further increased to £25.1 million (from £23.8 million), primarily due to a lower UK disocunt rate being applied.

The share price is up 100% over the last 12 months and I am happy to retain my shareholding whilst awaiting the formal sale process to conclude which I hope will result in a valuation of 500p-600p per share for investors.

Newmark Security (NWT) – Latest share price: 1.4p, market cap £7 million

This is a small holding for me following them presenting to investors at Mello last year.

Half year results today show sales up 3% to £10.1 million with PBT up 20% to £0.6 million giving EPS of 0.23p.  Sales from their Electronic Division are up strongly offset by a poor performance from their Asset Protection Division (SafeTell) which saw sales down 36% over the half year.  “Overall, the Board expects the Group to show a marginal reduction in revenue for the full year when compared to last year but with an improved level of operating profit”.

I am primarily interested in their Electronic Division (Grosvenor Technology) which includes their Human Capital Management (HCM) segment selling timeclocks (GT Clocks) into various geographies including the US.  This segment saw sales up 60% over the period with 111% growth when looking at just sales into North America.

Cash is down from £1.04 million at FY19 to £0.4 million at HY20 which is not ideal but not a concern for me at this stage.

I would like to see the Safetell business sold so the Group can focus solely on their Electronic Division.

A decent update and one that I will maintain as a small holding whilst I continue to review the business and attend the AGM later this year.

 

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  • comment-avatar

    Hi Simon,
    Don’t you think Haynes pension deficit at around 40% of mkt cap will have a major influence on the price a buyer may be prepared to pay? Dave

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  • comment-avatar

    Hi Dave
    – its a good comment. Research published by CASS Business School back in 2017 showed that the presence of a pension deficit definately impacted the payment currency of the bidder (ie the mix of cash / stock offered) with less cash likely for any deal where the acquired business had a deficit. It also impacted the takeover premium the acquirer was willing to pay so in summary you are correct.

    I am not clever enough to come to a satisifactory conclusion on what discount to the premium would be applied in the case of Haynes where the deficit is large compared to the mcap and would welcome any other views from readers. Thanks Simon

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    Hi Simon/Dave

    If i was a prospective buyer of the Whole of Haynes ,i might consider it a bit of a nuisance ,but one thats not a big immediate issue, after all i’m buying a cash generative business that on current cash in the bank plus the sale of the Sparkford site on a 12month view with ongoing cash generation and no dividend payouts should have 10million or so on deposit.This gives a very a nice cushion.
    So i would say 12-14 million Max of my offer price so say 80p a share ish .

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    A lot will depend on whether there’s more than one prospective buyer.
    I would have thought your range of £5-6 about right Simon.maybe lower end if only one offer on the table ,if theres competition who knows could still surprise as Haynes market cap v small beer compared to the other players in the field.
    This is where Europa Partners have to earn there corn hopefully.

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