Small Cap Value Report (30 May 2014) - CFYN, WSG, HSP, APC

30th May '14 by Paul Scott

12 comments 16882 reads

Good morning! A quick whizz through the morning's small cap trading statements & results, as usual. I'll have to finish by 10am this morning, as am off to another investor lunch in London.

Caffyns (LON:CFYN)

Results from this micro cap car dealership caught my eye first thing. The most striking headline number is that underlying EPS shot up from 37.3p last year to 75.5p for the year ended 31 Mar 2014, a 102% increase! So at 570p to buy at the open that put it on a PER of only 7.5, although I note that the shares are already up 40p to 610p to buy at the time of writing (08:12).

As usual with car dealerships, the profit margin is small, since large turnover is generated by new and used car sales. However car sales are very buoyant at the moment, and it's the follow on servicing work that is the lucrative part.

The total dividends for the year have been hiked 50% to 18p, which is very positive. That's a 3.0% yield based on the 610p per share buying price right now - not bad, considering it's rising strongly.

The main things I don't like are the net debt, of £11.9m, and a pension deficit shown at £11.4m at 31 Mar 2014. The deficit recovery payments are not onerous though, at £358k in the current year, rising 3.4% thereafter, so that looks OK - an irritant rather than a deal breaker.

On the positive side the company operates mainly from freeholds. Can I just say that it may be fashionable to regard freeholds as somehow "inefficient", and I often hear people say, "they're not a property company, so why do they own freeholds?". I could not disagree more! Personally I love freeholds, the more the merrier - mainly because they hugely de-risk investments. Banks will lend against them, even when the business is trading at a loss, so companies with freeholds tend to survive recessions, whereas their more efficient competitors go bust.

Also, why give away some of your profit to a property company? If you lease your property, then every five years the freeholder hikes the rent up (sometimes massively). That's a big drag on profitability over the very long term. So a company that operates from freeholds gets a bigger & bigger competitive advantage over time,…

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tads

30th May '14

re. HSP, perhaps it's a get rich slowly situation. Think I'll stick with them just now.

Cheers

Mike

bsharman

I read in April that two of the largest remaining operational coal mines in the UK will close down within 18 months - Kellingley Colliery in Yorshire and Thoresby Colliery in Nottinghamshire. There will only be one deep coal mine in Britain by the end of 2015... How will this effect Hargreaves Services (LON:HSP) ?

FREng

Paul

How do you hold free cash? Do you leave it as cash, or hold it in a liquid interest-earning fund?

jonesj

I could overlook Hargreaves remaining unfashionable if they paid a decent dividend. The current payout amounts to less than a sixth of earnings.

jjis

Re Hargreaves Services (LON:HSP) the shortfall was a production delay on the start up of the open cast mines and due to wet weather earlier this year. However, presumably the coal remains in the ground so it should be dug up in future. On the dividend it might not be that high but they have said they are going to bring the cover down dramatically so if they hit earnings forecasts then the dividend should increase strongly over the next few years as I wrote about on here earlier in the year and an update on my Blog today, if that is of any interest.

Website: Compound Income?

charleyduck

Hi Paul,
APC - Looks good growth. I wonder if perhaps there might be a read across to PhotonStar LED? (the ones that blew you out of a visit at short notice last year !!)-- their new Halcyon range is due our in a month or two...
Have a good weekend !!
Mike

Richard Goodwin

I like the story at WSG and also the fact that keep finding partners to put in additional equity - it implies that the partners believe the story. I met some of the Directors at the Investor Show and they were convincing. I wish the the non-airport business was higher quality with ongoing sales rather than being project based though!

fek47

Paul,

From recollection when I looked the last time, I think there is something funny about Caffyns (LON:CFYN) 's preference shares, i.e. that unlike most preference shares they carry voting rights, and so give the Caffyn family much more control over the company that their %age of the ordinary shares would suggest.

I can't remember the details, but if you're going to investigate further you might want to take a look at this - I might be barking up the wrong tree, though.

Francis

cig

Re freeholds, the "free rent" is at the expense of locked up capital, plus exposure to a market which is not their business. If the company needs to move the friction may be higher than renting (though sadly UK commercial leases are not a model of flexibility) so as to keep people in suboptimal premises longer than they should. Also while it obviously makes them more resilient, too much resilience can support complacency, so you can get a structurally loss-making operating business kept alive longer than sensible by the implied profits of the property side of the business, possibly until it's too late and the value of freehold gets consumed by the losses of the main business.

I'd rather see companies first reduce debt (to zero if need be), second negotiate better terms with their suppliers (prompt payments against discounts, should be popular), before contemplating entering the property business. These measures get you similar advantages regarding resilience -- you are in a good position to borrow a little bit starting from a low debt position, or to get your suppliers back to industry standard terms, if need be, without the distraction of running a little REIT on the side.

Beginner

I think Hargreaves Services (LON:HSP) may have more prospects than suggested. They have an engineering division that offers support to coal burners across the world, notably in India and China. They are also now involved in running down UK Coal, and could well snaffle some of their assets in the process. On top of that they have considerable surplus property holdings. Coal must have more of a future than is being suggested, though I am biased as I burn a lot of the stuff at home!!! If the price falls much further the yield will rise and make this quite attractive as a very long term punt.

(Thanks Paul. Great report as usual. Please don't take down your old site. I still look back at it regularly and learn from doing so. If nothing else it is proof of just what an astute young man you really are!)

Paul Scott

Francis,

"I think there is something funny about Caffyns (LON:CFYN) 's preference shares, i.e. that unlike most preference shares they carry voting rights, and so give the Caffyn family much more control over the company that their %age of the ordinary shares would suggest."

Thanks very much indeed for this - you're absolutely right.

The Preference Shares have little financial impact, but as you correctly state, one class of the three types of Pref Shares carry voting rights, which give the holders a disproportionate level of control over the business.

This type of arrangement is very unusual, and frowned upon by most people.

However, in this case I can't see that the family are doing anything untoward, and their increasing the ordinary divis by 50% gives me considerable comfort. However, it should really be seen as a private company that happens to have a Listing.

Thanks again for flagging this important point.

Regards, Paul.

slord54

31st May '14

Paul,

Excellent reports - been reading daily every day since I found you earlier this year - most importantly never stop stating your honest opinion regarding stocks, especially those 'story stocks' that may have considerable bulletin board holders with blinkers on.

Thought you may enjoy the following, it's the new fund from Terry Smith and as usual he is pretty funny in taking a side swipe at all the usual fund management practices:

http://feetplc.co.uk/docs/default-source/direct-investor---t-class-(1-amc)---application-forms/fs0514d_feet_owners_manual_v7_web_sprds.pdf

For the record I hold a small holding in the regular Fundsmith fund (my only 'fund' holding), otherwise I'm 90% trackers and 10% active/for fun/small caps/U.K equity.

Small Cap Value Report (30 May 2014) - CFYN, WSG, HSP, APC

Caffyns (LON:CFYN)

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Paul Scott

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