Petards Share Discussion Threads

[21trader] 22/1/2015 12:17

Nice summary EC.

[mikeh30] 21/1/2015 16:40

I think we all got bored trying to figure it out.They also own over 10% in cash shell SPR.Also I'm still miffed about the below:http://ted.europa.eu/udl?uri=TED:NOTICE:317531-2014:TEXT:EN:HTMLIt's the only contract peg have never officially released or officially commented on. Every other contract online matches the value in the corresponding rns. This one has a potential value of £9m with extension years and add ons.

[tiltonboy] 21/1/2015 16:34

Only Peel's jobbing out of a bit of stock. We never did get to the bottom of their holding!

[mikeh30] 21/1/2015 16:32

Holding rns

[tiltonboy] 21/1/2015 16:05

Amazing that each tick-up brings out a few more sellers. I suppose its the price you pay when you get third rate brokers place out your stock. It would be interesting to have a good look at the register to see where the stock is held, and who is doing the selling!

[effortless cool] 21/1/2015 15:52

Strangely enough, that 125k at 12:08 wasn't me. I bought in a few blocks last week and the week before.

[rivaldo] 21/1/2015 14:45

Good thread EC, cheers.

Encouraging to see your buy caused a tick up.

[tiltonboy] 21/1/2015 14:25

EC,

Excellent summary. Nothing that I can particularly add to that, other than to say that contracts tend to be lumpy rather than regular.

If they can gain critical mass, and show that they are getting regular, repeat business, then it will be at that stage they might get a re-rating.

For the moment, I intend to trade part of my holding between 11-15p if I get the opportunity.

[effortless cool] 21/1/2015 13:10

New thread:



With apologies to 29howard, but I like more content in the header.

Hopefully, it will maintain the high standard of contribution seen on this thread.

[mikeh30] 21/1/2015 13:08

Great stuff.I will now post any further research to this thread.

[effortless cool] 21/1/2015 13:07

Wow - you were quick off the mark! I'll add a link to OD's post(s) later today (tonight).

[mikeh30] 21/1/2015 13:05

Have you read some of OD's post regarding breakdown of contracts?

[effortless cool] 21/1/2015 13:03

I will update the header from time to time as new information emerges. Please let me know if there is anything you want added to the header.

Whilst I cannot constrain what is posted on this thread, I would welcome bull and bear views, so long as they contain meaningful content and are presented constructively.

Historical forecast information will be transferred from the header for time to time, to this post below,

================
Update 2014 H2
================

A slightly disappointing set of full year results from PEG yesterday:
- They did not deliver on their expectation at the half year to convert over one third of their order book to revenue in H2; they missed this by some margin and H2 revenue was actually £0.9m below H1.
- Although consensus profitability was achieved, they needed to capitalise £0.7m to do so; this is a much higher level of capitalisation than seen in the past or predicted for the future.

Following these results, I have reduced my projection of 2015 revenue to £12.4m. The order book remains around the £20m mark and on the other thread, there is a post on the Beaufort Securities analysis that suggests that the company “aims to deliver over 50% of the opening order book during 2015”. Thus, subject to any material new contract wins, the risk to my revenue projection would seem to be slightly on the downside.

My projected profit for 2015 is £593k, which is down 11% from previously. In arriving at this, I have assumed the improving trend in gross margins continues, using 35% in my projections to reflect the change in mix away from MOD work. Note that profitability is very sensitive to this assumption.

Using the same valuation basis set out above, my valuation reduces to 15.3p per share, after adjusting for convertibles, options and cash.

However, with revenue momentum having stalled, and the company yet to demonstrate that they can deliver gross margins of 35%, I view this as only a hold for the time-being.

===================
Update 2014 H2 v2
===================

I have revised my forecasts to reflect the 28 July 2015 trading update.

The main changes were to reduce my revenue forecast again, down to £11.8m (was £12.4m). offset by an increase in my projected gross margin from 35% to 37.5%. My projected PTP increased slightly to £614k (was £593k).

Using a target PE ratio of 8 and adjusting for cash, options and convertibles, this gives a valuation of 15.7p per share (was 15.3p). My projected PBT is lower than broker forecasts, so hopefully errs on the prudent side.

I am feeling a lot more comfortable with these, based on the information in the update. Achieving a higher gross margin is critical to PEG. Indeed, if they can get these to 40%, which was the norm up to the end of 2013, would increase my valuation to more than 20p.

================
Update 2015 H1
================

I was very pleased with the 2015 H1 results announced on 8 September. Profits of £356k were well ahead of my forecast of £123k; this was almost entirely due to actual revenue being £6.1m against £5.4m forecast. Encouragingly, this was achieved without repeating the spike in capitalised costs that underpinned the 2014 H2 result.

The RNS guides to H2 revenues of £7.5m (40% of just under £19m), so I have gone with that but, given the lack of any clear growth trend, pitched my 2016 projections somewhat lower. Gross margin jumped to 36.4% in 2015 H1, and I have assumed 36.5% throughout my projections.

The outcome is as follows:
2015: revenue £13.6m, PAT £779;
2016: revenue £13.4m, PAT £712.
2016 has upgrade potential.

I have enhanced my valuation basis as follows:
- Normalised for tax
- Increased my target PE ratio from 8 to 10 to reflect the tax normalisation
- Adjusted the valuation to reflect the net deferred tax position.

Using the same valuation basis articulated in the header, my valuation increases to 19.1p per share, after adjusting for convertibles, options and cash. This represents a 48% premium to the current mid-price of 12.875p. On that basis, I consider PEG a BUY and have increased my own holding to 350k shares at an average of 12.0p.

There is one proviso, however. Having now apparently achieved a level of operational stability, PEG needs to sort its strategy out. Currently, cash is slowly accumulating on the balance sheet but the company seems unable to articulate what will be done with it.

The existing business does not seem able to deliver meaningful growth, so one possibility is to buy growth through acquisitions. To my mind, however, this increases the risk profile unacceptably. I would rather they carried out the capital restructure and started paying dividends.

My preferred option, however, would be for them to put the company up for sale. It is simply too small and unexciting to justify an existence as an independent quoted entity, and almost certainly worth more to a bigger business that could cut out a large proportion of the administration costs.

================
Update 2015 H2
================

Forecasts updated to reflect full year results. My projections are as follows:

Revenue
2016: £13.1m
2017: £13.4m

Pre-tax profit
2016: £788k
2017: £819k

Cash
2016: £3.6m
2017: £4.5m

Updated target price of 19.1p per share, based on a PE ratio of 10 and adjusted for surplus cash, etc.

================
Update 2016 H1
================

Forecasts updated to reflect 2016 H1 results. My projections have improved, as follows:

Revenue
2016: £15.2m
2017: £15.8m

Pre-tax profit
2016: £1,023k
2017: £1,081k

Cash
2016: £2.7m
2017: £3.6m

One significant uncertainty with the valuation of PEG relates to deferred tax assets. At 2016 H1 they have recognised deferred tax assets of £429k and at 2015 H2 they had unrecognised deferred tax assets of £1,906k. My projections assume nil tax paid, with a corresponding reduction in recognised deferred tax assets, exactly offset by a corresponding recognition of previously unrecognised deferred tax assets. That means deferred tax assets stays the same, but unrecognised deferred tax assets reduce by the amount of tax that would have been paid at the normal UK corporate tax rate. I have then valued the remaining unrecognised deferred tax assets at 25% of their face value.

Updated target price of 22.9p per share, based on a PE ratio of 10 and adjusted for surplus cash, convertibles, tax, options, etc.

I hold 300k PEG shares at an average of 12.25p and have a realised profit of £8.5k.

[mikeh30] 21/1/2015 13:01

Nice summary.Good to have a new thread

[effortless cool] 21/1/2015 13:00

[With apologies for the greengrocer's apostrophe in the thread title]!

Petards Group’s (PEG) principal activities are, to use its own words: “the development, supply and maintenance of technologies used in advanced security, surveillance and ruggedized electronic applications”. For the most part, this seems to mean CCTV on trains and surveillance equipment for the defence industry.

It is a small company – current market cap about £4.1m at 11.75p per share, although its share price has achieved more than twice the current level as recently as 2013.

Revenues peaked at £12.1 in 2011 and then fell away dramatically in 2012 (£9.1m) and 2013 (£6.3m), with the company falling into loss for 2013 H1. This triggered corporate action in the second half of 2013, when major shareholder Water Hall carried out a reverse takeover.

Since then, revenue has recovered, with 2014 H1 revenue of £7.2m being the highest for any half year during the period I have reviewed (back to 2010 H1). Although some gross margin has been sacrificed to achieve this revenue growth it has not stopped the company moving back into profit, with comprehensive income of £273k for the first half, giving a half year EPS of 0.79p.

Valuing this company is tricky; some of the reasons for this are listed below.
- It is not clear whether the revenue growth trend is sustainable. The latest trading update (12 Jan 2015) indicating it may be flagging, with full year revenues “slightly lower than anticipated” and the order book ”in the region of £20m”, as opposed to “in excess of £20m” at the half year. For my projections, I have assumed growth of a only a few percent each half year for now.
- Gross margin was around the 40% level for every half year through to 2013 H2. For 2014 H1, however, it fell to 27.4%. The half year results put this down to “the SMRE contract” (defence related) and “some of the one-off rail engineering services which were competitively priced in order to gain market position for potential future equipment orders from those customers”. It remains to be seen whether the margin given up can be recovered in practice, so I have assumed 30% in my projections until I see some evidence that it can be.
- The balance sheet is strong, with net current assets of £1.8m and cash of £1.5m. However, there is a £1.5m liability in respect of convertible loan notes that may be converted to shares at 8p and mature in September 2018. The scale of these convertibles, relative to market cap, along with a plethora of options, mean these must be taken into account in any valuation.

My projections show revenues of £14.6m for 2014, rising to £15.2m for 2015, generating profits of £609k and £663k, respectively. The company also throws off cash over this period, with cash of £3.6m at the end of 2015.

I tend to value companies based on earnings for the next two half years, i.e. 2014 H2 and 2015 H1 for PEG. I project EPS over this period at 1.85p, giving a valuation of 14.8p. However, after adjusting for convertibles and options this comes down to 11.1p. Finally, crediting for cash held at the end of the period takes it back up to 16.1p.

I am only using a PE ratio of 8 because this company is on the cusp of profitability. It needs to demonstrate an ability to continue to grow top line, in my view, to justify a higher multiple.

In summary, I view the company as somewhat undervalued at present, with the possibility of considerable upside if it can grow revenue materially. Downside looks limited, so long as revenue can be maintained close to current levels.

One negative to consider is corporate governance. There only seems to be one independent director, who is not the Chairman, and the Abdullahs (Rashid – Executive Chairman and Osman – Executive Director) would appear to be in a position to exert undue influence.

================
Update 2016 H2
================

2016 full year results showed revenues of £15.3m, well above both my and consensus expectations. However, after adjusting to reflect the actual revenue, profits were £0.1m down on my expectations. This reflected a marginally better than forecast gross margin being more than offset by higher than expected administrative expenses.

I have updated my forecasts accordingly, and these are shown below.

Revenue
2017: £16.6m
2018: £17.7m

Pre-tax profit
2017: £1,095k
2018: £1,275k

Net cash
2017: £1.6m
2018: £3.0m

Given the top line growth, I have revised my target PE ratio up from 10x to 12x. This gives a target price, after adjusting for surplus cash, debt, convertibles, tax, options, etc of 23.4p.

At 18% below today's mid-price of 28.5p, I view PEG as a SELL. I would need a target PE ratio of 15x to justify the current market price and, notwithstanding the very positive outlook statements in the recent results, I simply cannot justify that.

I have taken my own advice and realised the remainder of my holding for a total profit of £56.2k and a 52.5% IRR.

I will keep modelling the share for the time being and may come back in if the price drops back again. In the meantime, good luck to continuing holders.

================
Update 2017 H1
================

I have done a 90% update on my valuation model to reflect the interim results, but did not continue with the (time consuming) last 10%, as it was clear that the model would not come close to showing value at current prices.

With what I consider a stretched valuation, and the prospect of 14m convertible shares overhanging the market in one year's time, I don't have any continuing interest here, and do not intend to continue monitoring PEG.

Good luck to holders.

================
Other information
================

Contracts tend to be large, long-term and irregular. Opaldouglas posted a useful summary on the other thread.


Company website


Major shareholders


Historical forecasts are transferred from the header to post 2 from time to time.

[tiltonboy] 14/1/2015 19:13

I'm not certain that the non-defence stuff fits in with Cohort.

[mikeh30] 14/1/2015 18:43

Tilton - we would be a good acquisition for Cohort plc IMO.At 30pps :)

[rivaldo] 14/1/2015 08:08

Good to see a tick up on a buy of just 1,000 shares :o))

Hopefully the run up to the results in March will be good, now that we know PEG are on track for 1.8p EPS and a P/E of 6.5.

The core results themselves should now show a PBT of £0.6m compared to a loss of £0.7m last year, so this huge improvement may well in itself provoke a very nice re-rating.

[tiltonboy] 13/1/2015 11:13

Given there is no chance of a dividend, without a capital re-organisation, I wonder if we are better served in looking for a bid for the company. I'm not an accountant, so not sure what the tax-losses might be worth to another company, but surely that will be better than bumping along as a £15m turnover company, relying on lumpy contracts.

Somebody want to offer me 20p!

[the oak tree] 12/1/2015 15:04

I'd agree the current cap keeps it off the radar of most investors. So for me there is very little reason to hold this unless you think the company will really perform. Its had a few years of low sales and needs to get back to the £18m plus sales years , hopfully with some decent margin. Then it gets the double whampy of being noticed and also undervalued.

Will it? Well if it puts together a decent performance in 2015 then many might see its turned the corner. If not I suspect the downside isn't too much given the valuation. Its in a fairly good market and has a constant order book of £20m (that figure was quoted at the half year results and again today). So its products are wanted.

Last years results announced end March. Look forward to reading them and trying to understand the margin differences from its different product markets.

[tiltonboy] 12/1/2015 14:41

I'm not unduly concerned on the share options as the net dilutory effect is only about 5%, and it does bring some cash in.

[adamb1978] 12/1/2015 14:36

Tiltonboy - yes, I agree that most sites will quote undiluted, however that's precisely why you should do the numbers yourself rather than rely on third party sources!

Based on the figures, it looks like they're pretty certain to be converted...however until they are, the company needs to keep the £1.5m cash which it has in the back so that if the converts dont convert, they have the capital to repay them

[adamb1978] 12/1/2015 14:27

OK, so those figures above should be a little worse as I didnt realise that the Adbullah's were awarded 2.85m options in Nov 2013 as a result of their unvested options in the previous company. On the flip side, at least their salaries are low!

Anyway, thats about 2/3 of the current share cap either outstanding as options owned by the Adbullah's or would be issued from the loan notes, so you can see why the price has been held back. Question is just whether its been held back too much......

[tiltonboy] 12/1/2015 13:55

Adam,

I think you will find most will use the undiluted EPS figure because a) there is still some time to go, and no certainty on when they will be converted, b) it suits to quote a lower market cap to make them look cheaper, or c) some still do not fully understand them.

I go one step further and attribute a tax charge, albeit they are unlikely to pay tax for a long time, due to the available losses.

I have had dealings with RA, hence my general caution.