Spaceandpeople Share Discussion Threads

[mg1982] 22/4/2014 12:20

Paul Scott's latest comment on this:

Finally, for anyone who missed it, this is just to flag up that the nasty profit warning from Spaceandpeople was covered in last Thursday's report here. Having had a few days to think about it, talk it through with other investors, and having read the latest broker notes from Cantors and ED, I am neither a seller nor a buyer.

In my opinion the market has correctly re-priced the stock, significantly lower, in line with a considerably reduced profit forecast for this year, and some knock-on effect into next year too. It has come as a bolt from the blue, as the company was so upbeat just a month ago, and I think that does raise questions about potential weaknesses in the company's own forecasting, and possibly glossing over negatives in telling investors what we wanted to hear?

Although as this morning's note from Cantors points out, SAL actually ran into material issues in all their main trading divisions simultaneously, and that's whacked profits for this year. However, delays will be resolved, and costs can be reduced, so it is reasonable to assume that profits (and the share price) will recover.

As a small cap investor I accept that sometimes things will go wrong. Small companies' shares tend to be much more volatile than larger companies, as they often rely on a small number of key clients, contracts, and staff. So there is a greater propensity for things to go wrong. You can analyse the figures to death, and eradicate risk as much as possible, but it's all still down to execution. So if things go wrong, then the valuation can suddenly change. We can only go on the current information that we have available at any point in time. Events will then unfold, sometimes as we expect, and sometimes unexpectedly, as in this case.

So whilst in no way trying to gloss over the fact that this is indeed a nasty profits warning from SAL, the fact is that the company remains profitable (even in a bad year), it has a sound Balance Sheet with no debt issues, and has continued winning new business. Also it has had an excellent track record over the last five years, and in my experience companies that are basically sound, but which hit a trading downturn, can usually fix the problems in about 6-12 months. The share price often starts to anticipate recovery before that. So if you like the business, the management, and are a long term holder (as I am with SAL), then it's a case of riding out the short term disappointment.

However, I do think that management will need to take a more conservative approach to forecasting from now on, and not again stoke up investor expectations of growth, when they are actually running into significant challenges.

It's an entrepreneurial company, in a niche that it effectively created from scratch, so I can live with some bumps in the road. However, the jury is out on this one for the time being, and the share price has reflected that already. The latest house broker forecasts are for 5.3p EPS this year, 8.0p in 2015, and 10.5p in 2016. The market might need a few months to get comfortable with relying on the 8.0p forecast for next year, so if/when it does, I foresee a recovery to perhaps the 100p share price.

However, if there's more bad news to come later this year, then it will mean another lurch down in price. Bear in mind also that the 4.1p dividend for 2013 is being paid this Friday, 25 Apr, so the shares have already gone ex-divi. So that's actually quite helpful in cushioning the recent blow. Management are paid relatively low salaries, and little bonuses, but instead rely on the divis themselves, so there's an excellent convergence of interests with shareholders here. So whilst I imagine the 2014 dividend (payable in April 2015) is likely to be cut, this is a company which has a history of paying out decent divis, and generating the cashflow to do so.

So overall, I'm very disappointed at the turn of events here, but am prepared to continue running with what has always been intended as a long-term holding of mine. However, I'll keep that under review, and reserve my right to sell the shares if I think more problems are looming. It doesn't pay to fall in love with any share. However it also doesn't pay to throw out the baby with the bathwater if problems arise which can be fixed.

A small final point is that management have come clean about the deterioration in trading, and 'fessed up just a week before the AGM, which is being held in central London at 10am. That's important because this is a Scottish company, so the fact that the AGM is being held at an accessible time & place for many investors, shows that they are not trying to hide away from the problems. Quite the opposite in fact, and I know that management have been on the phones talking to investors and analysts. So anyway, we'll see how it pans out after this significant setback.

I think management need to be apologetic, and to properly explain at the AGM what went wrong, and what they are doing to fix it. The worst thing to do is what I've seen before at some AGMs, where a pompous Chairman tries to shut down questioning, and gives dismissive answers to anyone trying to ask questions, rattles through the formal business, and then tries to close the meeting! This is a red rag to a bull, and I'm sure won't happen at SAL's AGM. I can't make it unfortunately, due to a prior engagement, but am looking forward to the feedback from several friends who are going, and will be asking some tough questions (which need to be asked, and more importantly, answered).

[envirovision] 22/4/2014 09:43

Catch a falling knife there are many many good and very genuine small caps out there creating adding and making genuine value for shareholders Topvest, just not this one I rather thought.

I still feel there is another few lots of bad news in the pipeline, they say bad news comes in threes with company fortunes and in the main that's proved time and time again a reasonable expectation.

Where do you expect the share price to be in a years time, higher or lower?

My reasoning tells me it's going to probably be considerably lower then today's price. Remember there are mostly no tangibles here, just intangibles goodwill and debt. According to ADVFN if one shut up shop tomorrow, net return to shareholders would be -25p, hmmm one couldn't even afford to go bust could they ! This of course means shareholders fate is likely to be one of loosing ownership as creditors (including suppliers and banks) take the necessary steps to secure whats needed, I dont fancy being a shareholder in those circumstances myself. Goodluck if you like it though

[fillipe] 22/4/2014 08:51

MD - I did exactly the same, feeling better to be in than out.

gl

f

[mister md] 22/4/2014 08:39

bought a few at 74p, should be worth the risk at these levels

[topvest] 19/4/2014 18:28

enviro - are you anti all small caps or just this one? I don't really see why this can't recover. Look at Zytronic as an example. It is a cash generative business and not in financial difficulty with a proposition that customers want.

[fillipe] 19/4/2014 17:46

bd, yes, that one really caught my eye and I think the broker must be feeling very badly let down.

f

[envirovision] 19/4/2014 17:38

Tip of an iceberg

[bigdazzler] 19/4/2014 09:33

Agreed fillipe about easy to fall into the trap of thinking a share drop is over done, when in reality there is the potential for more bad news or uncertainty.

I don't take a lot of notice of nominated brokers for various reasons one of them being they are naturally biased to a companies positive side.

However to note that SAL's nominated advisior cantor Fitzgerald has slapped on a sell recommendation and put a target price of 72 pence is quite worrying.

[poley] 19/4/2014 05:12

This one highlights what a minefield it can be investing in small caps as this one was historically one of the most predictable small caps going with a fantastic outlook. It ticked alot of boxes but then from out of the blue - wham! Also you are far less likely to get financial engineering with larger caps as there's too many heavyweights invested with eyes on the numbers and there's usually enough cash flow for everyone involved.

Obviously you'll never get the quick returns with larger caps but you wont get the 30% drops in a day with the solid moat blue chips. It makes me think whether its actually lower risk/safer to highly leverage up on a shed load of quality larger caps after a bear market with spread bets rather than go in with heavy trade sizes on small caps. There's not many small caps that people would be prepared to hold through thick and thin so below 300 mill market cap they are all to a certain extent only trades rather than buy and holds.

[fillipe] 18/4/2014 12:35

Sort of says it all.....


"I am excited with our pipeline of new products, the depth of our customer base and our focus on the bottom line and I am confident 2014 will be another record year.

Matthew Bending

Chief Executive Officer

21 March 2014"


Operating and Financial Review

"Summary and outlook

......Along with anticipated growth in revenues, we are confident that this will ensure that the profitability of the Group will continue to increase in 2014 and beyond."

Gregor Dunlay

Chief Financial Officer

21 March 2014"

[fillipe] 18/4/2014 12:12

It's easy to fall into the trap of viewing a huge drop in the share price as a fall which is overdone and due a rectifying bounce, but this drop is against a worrying trading environment background and now questions on the management.

Folks should keep very, very leery here, pending further clarifications on how future trading is going.

f

[envirovision] 18/4/2014 11:33

Yes it is pretty much worst case top vest and I do need to catch up a little however revenue and market cap mean very little.

I should add though, a leopard does not change it's spots.

[topvest] 18/4/2014 09:43

envirovision - that is definitely too harsh in my view. They have repaid the debt associated with the acquisition. The deal was therefore successful. They have grown the business very well over a long time period and paid good dividends to holders. This is their first real major stumble and it certainly appears more of a stumble than being a major problem at this stage. They may well win more business as the year progresses.

Market cap is now only £15.7m which is below this year's forecast revenue of £16.2m. With all the contract wins they should be back in a reasonable position for 2015. A hold at this level I think.

[topvest] 18/4/2014 09:36

envirovision - that is definitely too harsh in my view. They have repaid the debt associated with the acquisition. The deal was therefore successful. They have grown the business very well over a long time period and paid good dividends to holders. This is their first real major stumble and it certainly appears more of a stumble than being a major problem at this stage. They may well win more business as the year progresses.

[henryatkin] 18/4/2014 07:43

I took profits after the 2013 half year report 9th Sept:

[We have experienced significant growth in most areas of our business, however, revenue and operating profit in our UK retail operations fell by 13% to £2,212k and 27% to £438k respectively as a result of new "clear mall" strategies being implemented by some of our customers.]

I felt smug as the share price dropped 15% but gutted when it reversed back up to a higher high. I'm now feeling rather smug once again.

[envirovision] 17/4/2014 22:37

All very typical for a company that set out to buy growth paying stupid sums for overpriced intangibles (see my post 106). The chickens are starting to come home to roost and as usual the only one left paying for such stupidity is the poor shareholder.

The only question that remains is how an earth have they managed to get away with it for so long, I rather suspect this will all end in a sweep out of the board, a kitchen sink of the books and possibly fund raising.

[topvest] 17/4/2014 18:47

It's interesting that they are still forecasting £16.2m of revenue given they only did £14.6m last year. That is still 10%+ growth.

To halve profits (which is what they are now saying) means that they must have increased their cost base as a result of all the new contracts or some other reason. All a bit concerning, but not atypical for small growth companies I suppose.

The problem is it's not going to be a growth company again for at least a year, so the GARP rating has definitely gone today (down 50% since the high). It sounds to me like they have had quite a few things going the wrong way for them in 2014.

Probably a reasonable buy after today's drop for new entrants, but most of us won't have the balls to top-up after this. I'm not a seller though - lets see if they can win some more business. Good salesmen they definitely are! Question marks now about their operational management, but hopefully they will get back on track. They have repaid all their Retail debt in June 2014 so no financial issues. Good job they stumbled this year, rather than 2/3 years ago when they were loaded with debt!

[25october1969] 17/4/2014 15:52

I agree with what you say topvest and agree it is significant disappointment. I did not put the full content of my discussion with company in my response and suggest anyone looking for answers should give the company a call

[topvest] 17/4/2014 15:43

25Oct - That doesn't explain the revenue shortfall for the rest of the year though. They seem to have a number of issues at once that have gone the wrong way. The problem isn't terminal, but it is a significant disappointment.

[gac141] 17/4/2014 15:34

Just got in and got a really nasty surprise. This is a shocker of an announcement!!!!! I am sure the board are going to be asked some very searching questions!

[25october1969] 17/4/2014 15:31

For what it is worth I spoke with the company today and whilst "satisfied with the answers they gave' is not the right phrase, I understood the reasons they gave. As stated in the RNS, in Germany they were all set to go in a number of shopping malls when German bureaucracy stepped in, in the form of the Local Authority and delayed progress. Unlike a manufacturing company, they cannot increase the speed of the production line to make up for delayed opportunities. They anticipated receiving revenues over a certain number of days, these days have now come and gone and the lost revenues cannot be recouped, hence the fall in revenues.

I am assured that the problem is not terminal.

[topvest] 17/4/2014 15:23

Typical small company stuff I guess. They spend all their time completing the year end audit and not focusing on current year trends. They probably don't get financials through as quickly as a larger company. They probably wrote their comments in the year end accounts many weeks before issue and didn't circle back on stuff. Very poor - does this explain the lack of bonus to Matthew Bending? His credibility has now, unfortunately, taken a massive knock after his "record year" comments. It implies to me that the wheels were already coming off, but he is a good salesmen and probably thought it could be overcome.

On a 5% yield though and looks like they have re-assessed the outlook reasonably comprehensively. The dividend is just about covered at this reduced run-rate. I will hold, but rather miffed. Why did they move to a non-glossy annual report as well?

Their forward guidance is unusual - looks like a profit forecast!

[jashunter] 17/4/2014 15:16

It is only 24 days since excellent Preliminary Results for year to 31/12/13 were issued. Any comment on prospects for this year were positive. I cannot believe that on 24th March, when issuing Prelim Results, Management knew nothing of the several problems / setbacks listed in today's RNS. Trust in Management has been shaken to say the least! Hope there is not more to this than we're being told. On balance remaining a holder.

[j1mst3r] 17/4/2014 14:54

Sundance 13,

Yes, risk management is critical. On a related topic, the widespread use of Forward P/Es by itself these days exacerbates situations like this.

e.g. You have a chat with management and come off feeling confident about the company based on their representation corroborating your "reasonable" projected valuations. Based on this, their forward P/E of (say 12x) appears cheap. However, this assurance obtained is wont to make you underestimate the risks unseen.

A forward P/E is still a forecast - in SAL's case there was still 9 months to go in 2014! A lot can happen even between now and Dec'14.

Stegrego,

I think it is prudent to take any management representation with at least a pinch of salt and use it at most, for rough guidance. Of course, in this case a gigantic chasm appeared out of nowhere.

March 24th RNS Excerpt:
"I am excited with our pipeline of new products, the depth of our customer base and our focus on the bottom line and I am confident 2014 will be another record year." - CEO

While I would like to think management genuinely just found out, shareholders are probably justified in being rather skeptical. Side note though, he did not specify what the "record year" would be for.

Record year for biggest intra-day share price drop? Spot on.

Best,
JoeKeat