600 Share Discussion Threads

[kazoom] 10/7/2017 11:41

Yes very much looking forward to your write up hastings.

CJohn, understanding of pension scheme surpluses is very much a minority interest sport, so I won't drone on at too much length, but I do very much disagree with your views in this case.

I can understand (although not wholly agree with) your argument that the existence of the DB pension fund, even in surplus, is a negative in the sense that it adds an area of volatility outside of the core operations of the business.

But that very fact is one of the reasons that the pension fund has a 'tangible' value.

There is something of a consensus that pension deficits are at their cyclical (long cycle) worst, but that's not a universally held view - who knows how life expectancy may change over the next 20 years for example.

If think we would all accept that a company with a fully funded DB scheme is £10m better of that one with a £10m deficit. By the same token a company with a £10m surplus is £10m better off that one that is only fully funded; there is no binary point (ie zero) where the +ve/-ve balance suddenly becomes irrelevant.

And whilst I would agree that it is hard to crystallise the surplus to the benefit of the company, it is not impossible by a number of means (which in the case of an acquisition could involve merging of schemes. As the pension surplus grows (as it is likely to continue to do so) this becomes a more attractive proposition as well as potentially easier to do so.

I'm not suggesting, by the way, that such a crystallisation event is likely in the near term, merely that the pension surplus does have an economic value.

In terms of the relation to other non-current assets on the balance sheet, I don't think I was being ingenious at all. Initially I was specifically looking at the "liquidation" valuation of the balance sheet, where the pension surplus may even be more fungible than some of the other assets.

But even in the case of value to an acquirer the argument still stacks up. As above the surplus may (or may not) have specific value to an acquirer. If you consider other assets that may not have an easy resale route, yes they absolutely have a real value in the sense that they contribute to the earnings of the company, but that's already accounted for in any earnings ratios considered so IMHO you can't really count them twice.

(As might be clear I have a degree of scepticism of putting to much emphasis on balance sheet valuations.)

Just one further point (if anyone is still awake).

I'm not sure if I misunderstood your comment - "And so for your EV calculation, you would need to ADD, not subtract. " . Not so - when considering Enterprise valuation you are essentially separating the operational business from any non-core liabilities (mostly commonly debts , but could include other liabilities) and assets (most commonly surplus cash, but again can include other assets that have a value).

Anyway it doesn't really matter a hill of beans whether you and I see eye to eye on this, but I thought it an "interesting" area to come back on.

Who knows, how to value pension surpluses may become a less minority interest over the next few years.

[rhomboid] 07/7/2017 15:42

Hi Hastings
I'll look forward to reading it, I'm sure the scale of the turnaround here has eluded nearly everyone 🙂

[cjohn] 07/7/2017 10:05

Brilliant, Hastings, I look forward to it.

[hastings] 07/7/2017 10:02

Just finished speaking with the FD.Will have a piece out early next week for those interested.Happy to be holding.

[mike24] 06/7/2017 00:27

A lot of UK manufacturers now looking to source more parts/products
at home, the biggest being JCB how many are aware of them recently receiving
their biggest ever order, for the US army 1600 machines worth
$142mln on top of 4000 machines delivered to armed forces in 57 countries

[kazoom] 05/7/2017 16:44

I don't really know Simon.

The industrial machinery subsector looks like a sensible place to look :



but with so-many of the small caps not turning a profit it's hard to judge what the benchmark might be. (Maybe you have to look at PSR or Price:Gross Profit to get some kind of benchmark).

Would be interesting to know who they think their peers are!

[simon cawkwell] 05/7/2017 13:45

kazoom,

I know that SIXH's management reckon they are rated well below their peers. But who are their peers? And what are their PE ratios?

Simon Cawkwell

[my retirement fund] 05/7/2017 11:49

Ahh my error regarding pension fund. I seemed to have hotten confused.I think someone would need to offer above 25p to take this out and it will be very palatable to a suitor given how easy the pension liability could be dealt with.

[kazoom] 05/7/2017 10:56

Hi CJohn - I guess you are probably refering to my assessment of the pension surplus at 9p / share. (6p net of tax).

I absolutely agree that it is unlikely to be crystalised and certainly not at near par.

But then the same is usually true of most (non-property) non-current assets on balance sheets. So I don't think it is unreasonable to include it in an assessment of the Enterprise Value.

I think it is important to consider the EV, because in taking a superficial look at the PE of 8, it is very easy to lazily think - "ah yes PE of 8, but net debt is virtually the same as market cap, so really the PE is about 16".

Not true of course, but I think this kind of figure gets into the back of peoples minds.

So what is the EV?

(Based on yesterdays close and the figures in the AR, my take would be :

Shares in issue : 104.4 m
Price : 14.5p



Market Cap : 15.1
Net Debt : 13.7
Pension : -6.0 (net of tax)
PPIX -1.7 (held as an investment not associate)

EV 21.2

Earnings
PBT (underlying) 2.12
Add back net Int 0.94

EBIT 3.07
Net of tax (19%) 2.48

So an EV/"EBI" ratio (ie the "debt free PE") of 8.5

Using the mark to market SIXH share price and that of PPIX brings the market cap to 16.7 and the PPIX holding to -2.1 so an updated EV of 22.3 and a EV/EBI of 9.0

With a strong order book pressaging growth (accepting as you say that long term visibility is obscure), it might not be unreasonable to consider a ratio of say 12?

This would imply a fair value EV of £29.8m translating to a share price of 23.2p - still potentially 50% upside on the current price. (And arguably this is a relatively conservative view).

So will we get that upside?

Not all of it any time soon I suspect, with the low market cap a "boring" business, debt and lack of dividend together with the perception of this as a "value trap" - it's not easy to see what will attract the wider market. (But a third party bid could be a possibility).

There's no indication that dividends are on the managements mind ever, so that looks unlikely to be an "outer". Perhaps delivery of another strong year as the order book might lead us to hope for and the debt starting to come down will act as a trigger.

On the basis that I tend to take a three year view, this is still very much a buy in my book, but I suspect it is not racy enough for many.

[simon cawkwell] 05/7/2017 10:24

kibes,

I have just spoken to the FD. I have no doubt that SIXH is far too low. It should be more like 25p.

Simon Cawkwell

[kibes] 05/7/2017 10:04

Bought some of these yesterday just following Evel Knievel's tip. Results look quite encouraging to me.

[cjohn] 05/7/2017 09:50

Hi Buywell, much of the debt is dollar denominated and hence the drop in the pound post the Brexit vote has inflated the sterling value of that debt.

Debt was down over 700k in the second half and edged down for the year, in spite of inventory increases to support the increased trading and order book.

It's worth noting that payables ie creditors also decreased markedly again, as per last year. This is not likely to continue and will probably reverse, so we are likely to see continuing drops in debt, assuming trading holds up.

Tnagible gearing was down markedly meanwhile. This was no surprise, given the increase in tangible assets, resulting from the 2m or so profit and the increased value of the PPIX shares. (Worth noting that PPIX has gone on increasing in value since the year end.) The company now has nearly 6 million sterling of positive tangible asset value.


There have been some over optimistic comments on here regarding the pension surplus. This cannot be included in any serious measure of asset value, as the surplus can not accrue to the company except in certain vanishlingly unlikely circumstances.

The pension schemes are now in considerable surplus on the conservative technical provisons basis. However, should the company try to sell off the pension scheme to an insurance company, for example, they'd have to pay a significant premium over the tehcnical provisions calculation. This might happen at some future point - for example, if discount rates rise, This would be a positive move, insofar as the pesnion schemes are, in view of their size, a millstone and msut give pause to any potential buyer of the company.

The future order books look very good. However, a note of caution: visiblity is never high or long in this business!

[noirua] 04/7/2017 22:29

A lot of AIM stocks have generally weakened since May. Company looks to be moving in the right direction now at least. Needs even more patience in the present market.

[napoleon 14th] 04/7/2017 21:53

Yep, I used to get the FT daily.
Not even interested in web subscription now......

[kazoom] 04/7/2017 21:40

For interest, they also today produced the full AR document which has more detail on some points of interest. Available here

@hastings - If it hasn't been asked before; in your chat, would you be able to explore the rationale behind the ProPhotonix investment?

"Despite the group owning greater than 20% of the share capital of Prophotonix, the directors have accounted for it as an investment as opposed to an associate. This is because there is no representation from the Group or the Company on the board of Prophotonix and therefore significant influence may not be exerted over key strategic decisions."

Seems like a slightly strange thing therefore to have done, but maybe the rationale was covered at the time?

[hastings] 04/7/2017 20:50

Lined up for a chat with the FD at the end of the week, so will write something in due course.
Despite closing up on the day, the shares remain very lowly rated, even taking into consideration the sector where discounts can be the norm.

A PER for the current year of 7 falling to 6 with debt also set to make a more marked reduction certainly looks attractive enough, while the NAV according to FinnCap is expected to move from the current 48p per share to 55p by 2019.

Little exposure to Europe isn't a bad thing either and I will be interested to hear more on prospects further afield such as away from the core US market.

[varies] 04/7/2017 15:38

On a closer look at the results I see the answer to my own question.
Non-current assets include investments valued at £1,653,000 (cf £496,000 on 31.03.2016). This is obviously the holding in PPIX.
I was surprised to see the SIXH share price lose a large part of its gain by 11am and bought some more at 14.2p This looks a sound move as I write and I think that today's figures should attract more interest if reported in the press. None of the newspapers are likely to do so but the Investors Chronicle should.
It is a shame that the FT takes so little interest nowadays in smaller British companies.

[kazoom] 04/7/2017 10:48

Yeah not 8p.

9p I think.

Estimated Mar-17 surplus on the uk scheme 10.8m
Deficit on the US scheme 1.03
Net 9.5m

104.4m shares in issue.

But don't forget this would be taxed @ 35% if returned to the company.

[my retirement fund] 04/7/2017 10:19

Thanks zho just read his comment. The statement about the pension fund I feel is wrong. I wish it was an 8p surplus!

[my retirement fund] 04/7/2017 10:17

Someone must have placed a large sell order fir this to be falling back like this. Good opportunity to accumulate tho.

[zho] 04/7/2017 10:12

Comment from Simon:

[kazoom] 04/7/2017 10:03

Buywell :

"A small profit against the written down value of the Letchworth property of £0.1m was achieved on the sale in July 2016. "

[buywell3] 04/7/2017 09:56

I have just read the results

The Lechworth ptroperty was sold for £2M

I assume this results in the special item of £1.1M in the financials

Without this item the profit would have been under £1M less than 2016

Comments please

[hastings] 04/7/2017 09:28

Well it should do Varies, added a few more myself and I don't usually average up!