600 Share Discussion Threads

[noirua] 01/2/2018 15:48

Only quietly pushed with a little finger by EK; engineering machinery is a sector that is quite heavy going and affected by exchange rates as an added factor. The share price has been steadily rising from 8p in the last 18 months and that is a good sector performance and beats most. Must not forget it is a micro-cap at around £20m and the 2014 high of 24p looks a reasonable first target - may take awhile though.

[1gerryp] 17/1/2018 22:24

Front page of today's Times shines a light on the pension surplus in terms of the reduction in life expectancy of northern workers. So, a one year reduction equates to what(?) 2%/3%/4% reduction in liabilities - I don't know as I'm not an actuary, but there must be a significant impact. If they have also been able to persuade some deferred pensioners to transfer out this would also have an impact. Will be even more significant if the trend in life expectancy continues.

[hastings] 11/1/2018 08:09

Latest manufacturing news along with US markets improving should bode well for sixh, one would assume.

[hastings] 03/1/2018 09:20

Interesting movement today on the back of a flurry of buys. Tipped somewhere?

[dan_the_epic] 27/11/2017 21:13

Good point Cjohn

[cjohn] 22/11/2017 13:32

Returning to the subject of debt.

It seems to me that suppliers would worry about SIXH's cash position. (Solvency is much less of an issue,) And that SIXH went for the equity raise, instead of taking on further debt, precisely to reassure suppliers and clients in the UK of their liquidity.

They need to get into a virtuous cycle. If operational cash flow goes towards paying down debt rather than building up stocks, then creditors will be more relaxed about payment dates and the cash position will improve further etc

[cjohn] 22/11/2017 08:42

I remain a cautious holder here. If they do as well as they say they are going to, there's considerable upside.

[cjohn] 22/11/2017 08:41

Hi Kazoom and Hastings, thanks for your kind and informative replies.

Sometimes,I don't signal irony very well! "Also I don't see they can go on reducing payables",... was sarcasm. So I agree with you on this one, Kazoom

The most optimistic possibility would be that they're actively paying off more quickly to get better terms. I'd like to see another half, before coming to conclusions.


Ok, what you say about the order books makes sense, though I don't see what they'd gain by any attempt to mislead.

My own feeling is that we still don't have enough of these claims about the order book to come to firm conclusions. It could just be chance that they've pronounced strong order books and then trading has deteriorated or some orders have been cancelled. I guess forward books are only for a few weeks??And world machine tool sales seem particularly unpredictable, with quite marked swings in growth/decline.

If this realtively benign reading of the situation is the case, it still suggests they haven't learnt from previous experience.




all best

CJohn

[kazoom] 21/11/2017 23:32

Thanks CJohn, for a well thought out reply as ever.

"The management sound particularly confident currently; they tend to be over-optimistic however."

Yup that pretty much encapsulates my current waning interest / growing scepticism.

On the pension, I have to confess that I hadn't actually looked at the latest numbers and was basing my comment on the quote from the FD.

On reflection I think that there are actually two "buyout" valuations :

1 - The cost of buying matching annuities individually for each prospective pensioner less the net assets (which I think is effectively the conventional measure) and
2 - The amount for which the scheme could be sold to an enterprising insurer prepared to take on the risk in return for the probable gain. (This would require some ironclad underwriting to get past the trustees I would imagine)

Even if diminished the second measure sounds like it would be positive.

Anyway back to matter operational.

I cannot buy the idea that the short term nature of the order book explains the mismatch between order book and revenues, that would infer that the order book is artificially high every time they report on it and very negative in the intervening periods. (I am aware that companies massage order book to ensure that everything possible is signed before the end of a reporting period, but some of the figures I quoted were in between figures).

If the next HY does not deliver a substantial improvement in revenues I think it will categorically demonstrated that the order book is "unreliable" (I was about to use other words but I think they might have been considered defamatory.)

On the cashflow you say : "Also I don't see that they can go on reducing payables."

I do not believe that any company actively sets out to reduce payables, so if payables are reducing whilst the amount of stuff they are buying is actually increasing, this suggests to me that suppliers regard them as a bad risk and will not offer them extended payment terms.

I'm afraid that every turn makes me more wary about this as an investment, which is really not where I wanted to be; in terms of what they do it's something I wanted to believe in.

[hastings] 21/11/2017 13:45

Hi CJohn, good to read another of your posts which I always find most interesting, particularly as you appear pretty well versed in all things 600!

You are right of course regarding EV as opposed to purely concentrating on a PER, although we can throw in EBITDA for good measure, particularly given where we are or hope we are at present.

Interestingly, Hardman has today released a very substantial and interesting initiation note (still reading through) which although some will often sniff at, invariably proves most worthwhile.

Two very small extracts for interest given what has been mentioned here which further highlights the potential upside.

*The risk/reward profile is favourable, and
the shares are compellingly valued on most methodologies.

*Valuation: The shares are attractively valued trading on calendar 2018 EV/sales
and EV/EBITDA of 0.6 and 7.3 times compared with sector averages of 1.0 and
7.7 times respectively. Recent industry wide M&A transactions further suggest
inherent value within the group with a ‘sum of parts’ valuation of around 35p.

[cjohn] 21/11/2017 11:27

Hi Hastings, it seems to me that we should be looking at earnings to enterprise value, rather than a simple PE, given that there's still 12.1 m sterling debt here....

BTW Tangible equity - discounting the pension surplus - is at now at about 7m. It's up a million on the half. The sterling value of US assets was down because of the weakening dollar; there was 1.1m of new equity and there was about 1m in profit.
That means tangible gearing is now down to around 170%......

[hastings] 21/11/2017 10:13

Interesting if brief comment from FinnCap in this article from yesterday.
Given it is "hoping for an upgrade in figures later this year" then perhaps we would see EPS moving up from the current 2p forecast which at current levels would provide for a PER of little more than 6!
Throw in the increasing possibility of a resolution to the pension issue, then there could be some decent upside from here.

[someuwin] 21/11/2017 09:04

"It’s heart-warming stuff

By Evil Knievil 20 November 2017

600 Group (LON:SIXH) this morning report their six months to 30th September 2017. These figures are not stellar but they are very encouraging. There are a couple of exceptional items but, allowing for these, EPS is at 0.8p per share. Doubling this to 1.6p for a full year gives a PE of 10 at 16p. At 16p SIXH is capitalised at £17 million in contrast to tangible net asset value of the order of £38 million. This share price is far too low. 25p would be more in point."

[cjohn] 21/11/2017 07:58

Hi kazoom, a series of interesting posts from you.

1. You make a good point regarding increased order books not translating into much higher sales. The answer to this conundrum is I think that visibility is pretty limited: ie order books are only for a short period ahead. Another reason perhaps why a low rating is justified? The management sound particularly confident currently; they tend to be over-optimistic however.

2. Which brings us nicely to the pension surplus. Given that on a technicial provisions basis, the surplus has shrunk over the last 6 months, it's slightly surprising to read that they are now in surplus on a buy out basis, when they weren't at the full year. (different assumptions....) Even so, the buy out surplus must be pretty small, so although I'm a holder, i remain sceptical of possiblities here for shareholders. I do take your point again that waiting might produce an even larger buy out surplus. And I fervently hope to be proved wrong on this issue....

3. Debt was down 1.6m after 2.6m funds raised. Operational cash flow went into buying more inventory: up 900k and paying off bills: payables were down 700k. Capex was a few hundred thousand.

Increased inventory reflects the higher order book, but also - less positively - the wider range of products. My guess is that inventory is more likely than not to level out now.

Also I don't see that they can go on reducing payables. So assuming the higher order book does translate into an uplift in sales, there should be decent free cash flow this half.

[kazoom] 20/11/2017 19:22

For the purposes of spurious transparency, I should just confirm that actually I am still invested in SIXH - to the tune of 10 shares.

I was forgetting my policy of leaving a residual holding in my CREST account so that I can remain on the share register.

Anyway - I would really love to be proven wrong here, so it would be great to read a robust counter case.

[kazoom] 20/11/2017 19:15

Interesting articles from you both, thanks.

I particularly liked the title of the investorschampion one : "600 Group (AIM:SIXH) it’s looking more encouraging for the pension scheme with a business".

I was musing earlier whether to tweak CJohn, how argues that despite being in surplus the pension should be regarded as a liability to the company.

I'm beginning to form the view that in fact maybe the company should be regarded as a liability to the pension fund. ;-) If the two were listed separately, I think I know which one I would be invested in.

On that subject Hastings's article provides an informative quote from the FD :

"One way to do that [release value from the pension scheme] is going with a buy out option with an insurance company. That is something we are looking at and it could give a surplus back to the company after such a process is complete.

We are exploring this as it is very much a competitive space where a number of players would be interested in our scheme. "


Personally, because I believe that with patience the company could extract much more than this, I think this would be bad news (at least for part of my original investment hypothesis - read back a few pages.)

The FD's comments confirm that the scheme is now in surplus on a buyout basis (the most stringent test) and left alone growth in "profits" from the pension scheme look set to continue to outstrip profits from the underlying company.

The FD is keen to emphasise that they are committed to reducing debt, but with debt only down by £1.6m despite £2.6m of fundraising (sale of assets, new share placement) - so the company is still leaking cash - it seems the only way at the moment to continue to reduce debt will be to sell of the pension surplus on the cheap to an insurance company who will then reap significant rewards.

And then there will be nothing left to sell. Oh apart from the company's products - apparently they are doing a great job getting people to order them, but getting people to actually buy them seems to be much more problematic. (See my post of earlier today.)

I do not normally like to "stick the knife in" to a company that I have sold out of, but in this case I can't help feeling something is wrong unless there is a valid reason why aggressive growth in the order book over the last 14 months (or more) has not translated into sales.

However, the price is up today on these results, so were I still a holder I would be selling now.

[hastings] 20/11/2017 17:23

Also penned following speaking with the FD.

[kazoom] 20/11/2017 13:00

I've only just had a quick look, but one thing that puzzles / troubles me is this :

In Sep-16 they told us their order book was up 20% YoY
In Dec-16 it was +30% YoY
In Jul-17 it was +42%
And now it is up 36%.

Yet we see revenue growth of only 7%.

I cannot square that unless :

A - their book to bill is astronomically long and therefore 'jam' is just around the corner. or
B - The order book is so soft that the majority of orders get cancelled prior to delivery.

Is there something I am missing here?

[cjohn] 20/11/2017 10:44

So the results today see a rise in revenue of 7%, and order books up 36% on last year. Very promising.

As guessed at the time of the recent small equity raise, this was used to pay down working capital debt (in the UK) and maintain headroom with the existing debt facility with HSBC.

As ever, operating cash flow, 1.5m sterling before working capital changes, has been used up in increasing stock levels, to support the increased order book. Irritatingly, payables were down: ie they are paying off their creditors more quickly than they receive payment. Is this to get better terms?

So debt is down 1.6 m to 12.1m sterling. But they realised 1.5m in selling the Prophotonix shares and they had the 1m equity raise. So once again, shareholders' equity (not including the pension surplus) is up, but mostly in the form of stock!

In the next half, I'd dearly like to see the increased trading not being matched by an increase in working capital.

But to be fair, these were pretty promising results for SIXH. I remain a holder.

[dan_the_epic] 19/11/2017 17:10

Appreciate that hastings but a bit off from the company to be telling individuals when the next results will be when they haven't told the whole market!

I presume not an issue as nothing price sensitive, but still not best practice.

[hastings] 19/11/2017 16:42

Hi NTV, I've a call lined up with them tomorrow, so I will be penning a piece following on from my last article.

[ntv] 19/11/2017 15:23

how do you know that hastings?
was hoping for a top up before they came out

[hastings] 19/11/2017 11:29

Interim results tomorrow, if all as expected the shares should surely see an uplift from the current level.

[cjohn] 27/9/2017 11:23

Hi Kazoom, thanks for your excellent overview of the debt situation.

My own feeling is that the large - and to me, very surprsiing - increase in the order book, has left them having to finance a working capital increase that would have left them close to their headroom if financed solely by debt.

You'd still expect, on the figures given, that cash flow should be quite positive, once the adjustment upwards in working capital haas stabilised.