N+1 Singer - Small-cap quantitative research - Re-run of the value screen and 9 focus stocks
We have completed another periodic refresh of our value style screen, first established in our note of 26 May 2015. As usual the screen selected the 25 stocks exhibiting the most extreme value characteristics from our universe, and we have chosen 9 stocks to focus on. Since inception last year the screen has marginally outperformed the main small-cap index by 1pp and underperformed the micro-cap index by about 3pp. The EU referendum result arose in the latest period and resulted in significant short-term underperformance, which has not been recovered. The new basket was struck before the US election result.
LVD RAV GOAL BOOT VTU TEF BILN CARR
10 Nov 16
N+1 Singer - Support Services - Week ahead – Caution ahead of updates from Lavendon and Speedy
We are expecting news from both Lavendon (half year trading update – 14th July) and Speedy (AGM statement – 13th July) next week. Having highlighted our concerns on 27th June regarding the outcome of the EU Referendum, we are cautious ahead of next week’s announcements. We expect both Speedy and Lavendon to signal that it is too early to predict the full repercussions of Brexit, in line with recent statements from many construction and housebuilding companies. Despite this, recent data suggests that the construction market is already beginning to feel the impact of Brexit uncertainty, with the Markit UK Construction PMI registering its weakest reading for seven years in June (46.0 vs. 50.7(F) and 51.2 last). The construction market accounts for c.49% of Lavendon’s sales and c.48% of Speedy’s. Both Lavendon and Speedy have customers across all tiers (major contractors down to SMEs). The outlook for both UK businesses is therefore highly uncertain and whilst we leave our forecasts unchanged, earnings risk is clearly to the downside. Negative sentiment towards both companies’ shares is likely to persist in the short term, but we believe that tangible book value should provide a sensible share price floor. We therefore set our price targets accordingly (FY1 tangible book values: Lavendon – 114p, Speedy Hire – 35p) and remain at Hold in both cases.
Lavendon Group Speedy Hire
08 Jul 16
Dechra Pharmaceuticals (DPH LN) Acquisition of Putney adds growth, scale and value | Imagination Technologies Group (IMG LN) Further cost savings drive significant upgrades | Lavendon Group (LVD LN) Downgrading on Middle East outlook | M&C Saatchi (SAA LN) Upgrades to FY16 EPS
LVD DPH IMG SAA
18 Jun 16
Re-run of the value screen and 10 focus stocks
We have completed another periodic refresh of our value screen, first established in our inaugural quant/screening note of 26 May 2015. As usual the screen selected the 25 stocks exhibiting the most extreme value characteristics (based on 2016 consensus P/E and latest price to tangible book ratio) from our universe, and we have chosen 10 stocks to focus on. Since inception last year the screen has outperformed the main small-cap and micro-cap indices (by about 8pp and 3pp respectively) and has proved to be pleasingly defensive.
LVD ABBY AUG BILN CARR CGS GOAL BOOT RAV VTU
09 Jun 16
Solid start to FY’16, but we remain cautious on the Middle East
This morning’s Q1 update highlights a solid start to FY’16, in line with expectations. The main bright spot was the UK which saw strong growth in volumes after a number of quarters of lower YoY volumes in FY’15. The Middle East benefited from an enlarged fleet which drove acceleration in revenue growth as growth in the UAE, Kuwait, Oman and Qatar more than offset a decline in Saudi. Additional fleet investment in FY’15 has impacted margins, but this is expected to improve over the course of the year. Lavendon’s share price has fallen around 6% since we moved to Hold on 18th March. The Group’s valuation looks undemanding, and we believe attractive on a medium to long term view. In the near term, however, we expect Middle East uncertainty and the resultant risk to consensus forecasts to continue to weigh on the shares. We therefore remain at Hold.
14 Apr 16
Debenhams (DEB LN) Good strategic progress, interims slightly better than expected | Entertainment One Ltd (ETO LN) Takeover speculation | Lavendon Group (LVD LN) Solid start to FY’16, but we remain cautious on the Middle East | Renold (RNO LN) Year end guidance above market expectations | Scapa Group (SCPA LN) Trading ahead of expectations; Healthcare strong
LVD DEB ETO RNO SCPA
14 Apr 16
Downgrading on Middle East outlook
We believe that Lavendon is a good quality company, with a strong management team and an attractive UK business. However, we have near term concerns over payment terms, pricing pressure and the economic outlook for the Middle East in a period of sustained low oil prices. We therefore make significant pre-emptive downgrades to our FY’17 forecasts (downgrading PBT by 16%) and introduce an FY’18 PBT forecast 16% below consensus. After these downgrades, Lavendon’s valuation looks undemanding, and we believe attractive on a medium to long term view. In the near term, however, we expect Middle East concerns and the resultant risk to consensus forecasts to continue to weigh on the shares. We therefore move to Hold from Buy with a new target price of 151p (from 244p).
18 Mar 16
Final results slightly ahead; Middle East concerns persist
Lavendon’s full year results are slightly ahead of our expectations, with adj. PBT of £38.5 vs. our forecast of £37.8m and £34.1m last year. Strong revenue growth in the Middle East and a notable margin improvement in the UK were the key performance drivers in FY’15. In our preview note yesterday, we said that we expected the Group to maintain guidance at this early stage in the year driven by continued growth in the UK, but that payment terms and pricing in the Middle East were likely to have deteriorated further. Today, the company has confirmed that this is the case. Guidance has been maintained and the company notes increased uncertainty in the economic outlook, with an increased working capital requirement in the Middle East moderating the rate of investment in the region. It is encouraging to see a further improvement in returns across the year, but we are also cautious on the Middle East and see potential risks to outer year forecasts. However, we believe that after significant price falls, any weakness originating from the Middle East is more than priced into the shares. We remain at Buy on valuation grounds.
25 Feb 16
Anticipating in-line outlook, but Middle East concerns likely to persist
Lavendon’s full year results are due out tomorrow. The results should contain no surprises after the positive trading update on 14th January in which the Group indicated that results were expected to be at the top end of expectations. The focus will be on the outlook statement, with recent share price weakness highlighting investor concerns. In the UK, we expect Lavendon to reassure and to continue to deliver growth. In the Middle East, we believe investors’ concerns have some foundation and would not be surprised to see a further deterioration in both pricing and payment terms. Overall, at this early stage in the year, we expect earnings guidance to be maintained. However, with spending cuts being implemented across the gulf states, we see potential risks to outer year forecasts. We estimate that a Middle East sales downgrade of 50% would put the Group on an FY’17 P/E multiple of 11.8x (sub-sector: 10.4x). We believe the quantum of any downgrade would be much smaller than this and therefore continue to see value in the shares.
24 Feb 16
Value screen refresh with new focus stocks
We have re-run our value basket, first established in our inaugural quant/screening research note of 26 May last year. As previously the screen produces a basket of 25 value stocks, and we have selected 10 stocks we know well to focus on. To date the value basket has performed exactly in line with the microcap index and outperformed the smallcap index by about 9pp. Our original 10 focus stocks outperformed the basket by 2.2pp. We will continue to monitor performance of the basket, and refresh it again in 3-4 months’ time.
LVD AUG AVG CGS GOAL HAT BOOT MMH RAV SGI
15 Jan 16
Dialight (DIA LN) Trading update – underlying in line | Entertainment One Ltd (ETO LN) Canadian Pensions joins the board | Small-cap quantitative research Value screen refresh with new focus stocks | T. Clarke (CTO LN) Encouraging FY update, cash ahead of expectations
LVD DIA ETO AUG AVG CGS GOAL HAT BOOT MMH RAV SGI CTO
15 Jan 16
FY15 results to be at the top end of expectations
Lavendon has issued a full year trading update that states that the Board expects results for the year ended 31st December 2015 to be at the top end of market expectations, with profitability, margins and ROCE continuing to improve. The main concern for Lavendon in recent months has been over the outlook for Saudi Arabia. However, revenue continues to grow in the Middle East, increasing 10% in Q4 and 7% across the year. Pricing pressure seen in Saudi continues to be more than absorbed by strength in the other regions, especially Qatar and the UAE. Notably, the Group saw a return to growth in Q4 in the UK, with revenue increasing by 1%. Lavendon has used 2015, a time of market uncertainty to invest for growth in 2016 and we should start to see the benefit of the accelerated capex programme coming through in FY’16. Whilst Saudi remains a concern, on an FY’15 P/E multiple of 7.4x and trading at a discount to book value (130p in FY’14 vs. the current share price of 127p), we believe the shares are undervalued.
14 Jan 16
Cambria Automobiles (CAMB LN) Positive start to H1 including Used underpins recent forecast upgrades | easyHotel (EZH LN) UK expansion kicking off | First Derivatives (FDP LN) Partnership with analytics provider to US utilities sector | Goals Soccer Centres (GOAL LN) In line update and further management changes | Lavendon Group (LVD LN) FY15 results to be at the top end of expectations | Restaurant Group (RTN LN) Cautious update prompts move to Sell on valuation grounds | WYG (WYG LN) Forecasts upgraded for Signet acquisition
LVD CAMB EZH FDP GOAL RTN WYG
14 Jan 16
Encouraging Q3 update
This morning’s Q3 update confirms a period of continued revenue growth and improved profitability, margin and ROCE (now firmly above WACC). Group rental revenue in the nine months to 30 September was up 1% and the Board remains confident of delivering its profit expectations for the year. Encouragingly, the Group has continued to see growth in the Middle East, with a wider regional spread offsetting pricing pressure in Saudi. We continue to believe that Lavendon’s shares are undervalued on a Cal ’16 EV/EBITDA of 4.0x vs. the sector on 4.6x, and on a Cal ’16 P/E of 7.3x vs. the sector on 12.4x.
17 Nov 15
Positive outlook underpinned by fleet investment
After recent warnings from HSS Hire and Speedy Hire, share prices in the equipment hire sub sector have been under pressure at a time of wider market turmoil. On Friday, Lavendon broke the trend, reporting a solid set of interim results that were in line with expectations. The second half is said to have started well, the targeted capex programme should drive further revenue growth, returns continue to improve and, in our view, the medium term outlook is positive. We consider the shares attractively valued, trading on a Cal ’16 EV/EBITDA multiple of 4.8x, in line with the sector and on a c.7% discount to the sector excluding HSS.
02 Sep 15
In line interim results highlight a period of improved profitability
This morning’s interim results are in line with our expectations. Continued improvements in profitability drove an increase in underlying operating profit of 13% YoY. Underlying PBT was up 18% to £14.5m and underlying EPS increased by 17% to 6.60p. Significant improvements in ROCE (up 210 bps to 12.7%) are encouraging. Trading in H2 has remained in line and the Group remains confident of achieving the full year forecasts. Outlook is encouraging after recent disappointments in the sector and strong growth trends in the Middle East and France continue. However, we note a change in the mix of activity in the Middle East, with Saudi cooling. The capex programme remains on track, with an additional £20m announced at the pre-close. We expect a strong second half and conservatively leave forecasts unchanged.
28 Aug 15
Lavendon Group (LVD LN) In line interim results highlight a period of improved profitability | Restaurant Group (RTN LN) In line interims; soft start to Q3; no forecast change | Summit Therapeutics (SUMM LN) Q2 2016 results highlight continued development progress
LVD RTN SUMM
28 Aug 15
Forecasts nudged up after reassuring update
As expected, yesterday’s update was reassuring, with strong growth in the Middle East and France and a return to growth in Germany. In our recent note we said that upgrades would be driven by further fleet investment. We are therefore encouraged by Lavendon’s accelerated fleet investment (£20m brought forward from 2016) and remain supportive of the Group’s strategy. We have refined our model to reflect the H1 trends and slightly upgrade EPS by c.4% for FY’15, c.2% for FY’16 and c. 1% for FY’17. We reiterate our 244p TP and Buy recommendation.
17 Jul 15
In line trading update
Lavendon has issued a positive Q2 trading update this morning. Group revenue for H1 was +3% on a constant currency basis and excluding ex-fleet equipment sales. Profitability and margins have continued to improve, driving ROCE further above the Group’s WACC. In our note on Tuesday we cited that fleet investment would underpin further revenue growth for the Group. Today’s update confirms that fleet investment will be accelerated to bring forward c.£20m from 2016 to 2015. As we said in our recent note, we favour companies with diverse end markets and geographies, and today’s update reinforces our view. UK revenue declined slightly in H1, but this was more than offset by growth in Europe and the Middle East and we expect the UK to return to growth in H2 post a likely General Election effect. We expect to retain our forecasts and remain strongly supportive.
16 Jul 15
Upgrade potential finally in sight
We initiate coverage on Lavendon with a Buy recommendation and a target price of 244p. The recent flurry of profit warnings from sector peers has weighed on Lavendon’s share price, down c.8% since 1st July, making it the worst performer that hasn’t issued a profit warning. We anticipate an in line trading update on the 16th July and see value in the shares, with significantly improving returns and a focus on revenue generation. Lavendon trades on a one year forward EV/EBITDA multiple of 4.7x vs. the sector average of 5.4x, leaving Lavendon at an unwarranted discount of 14%.
14 Jul 15
Equipment hire shakeout presents opportunities
It has been an exciting couple of weeks for the equipment hire subsector. Recent IPO HSS Hire warned, blaming the weather and the General Election. Northgate hit a wall of depreciation and currency headwinds while also flagging internal issues in its UK business. Worse still, Speedy Hire collapsed for multiple company-specific reasons, prompting the resignation of newish CEO Mark Rogerson. It is unlikely that recent profit warnings from Speedy and HSS are entirely unrelated but the common theme is most likely to be a temporary General Election effect. Despite the strong performance of the past few years, in our view the cycle has further to run with recent share price movements creating some attractive opportunities. We are strong supporters of Lavendon (Initiated as Buy), Northgate (Hold to Buy) and Vp (Corporate).
LVD VP/ AHT HSS SDY NTG
14 Jul 15