Velocity Composites Share Discussion Threads

[mtioc] 30/1/2018 13:29

Sidam

Thanks very helpful. I tracked down an old brokers note to see where they expected to be at YE.

It is very clear that the key driver of revenues and profits is expected to be the A350 production ramp up and VEL's ship-set value on this programme. A very minor profit wrinkle at this stage does not worry me.

My main worry in the points listed above is cash. The forecast in June 17 for the year end Oct 17 (i.e. 4 months away from forecast) was for working capital movement of -£1.6m. It was actually c. £2.7m or a £1.1m difference (c. 70% higher than forecast 4 mths before). The difference was not broken out. Taking trade debtors first, they were £4.65m or 79 days. Assuming 60 day norm (payments 45 days from month end plus average of days outstanding in month - 15) this suggests a "normalised" trade debtor balance of £3.51m or a difference of c. £1.1m (which is probably too neat). The other working capital items: inventory, creditors and other debtors were either as expected or, more likely, the differences netted themselves out.

For marginally profitable businesses with significant development capex, control of cash is vital. If this repeats, it would be a concern.

Interesting re results note. The company appears to give institutions much more detailed information than private investors. Also, the results report itself was not slick or that informative. Again, if this continued, a lack of enthusiasm for private investors would be a red flag.

For me, it is too early to conclude, so let's see how VEL gets on. Thanks for your posts, they certainly improved my understanding of the business.

MTIOC

[sidam] 30/1/2018 12:11

MTIOC

My broker arranged for me to obtain the results presentation and some notes on it. The new business contract and the sites and projects came from those. The cost of sales could have risen - ie margins fell - because production workers and systems were not as productive making one off sets rather than multiple sets. Therefore, their cost per unit of output were higher.

On modelling, I have not used my own forecasts of revenues, but those of the brokers - just to make sure it makes sense.

[mtioc] 29/1/2018 18:27

Sidam

Thanks for your response, which was very interesting.

1.GM
Where was the comment re contract versus spot pricing differential?
Not sure what has driven COGS rise. Could be one offs, materials (but unlikely given stronger £) or manufacturing labour in COGS but not variable.
Not sure sales/employee is too meaningful, but I was just trying to get a feel for sales versus labour.
Overall, this has been poorly explained if at all.

2.Cash
Yes, I included other debtors in my calc. I think if you strip these out and only look at trade it is c. 79.5 days, which is still a high, but I suspect understandable for "blue chip" customers on long term contracts. (Vel should factor this into margin.)
Nevertheless, both are a cash costs. I appreciate there has been a lot going on in the cash flow for investment and from financing, but not to comment on a £2.4m outflow from cash from ops is again a bit odd/remiss. I missed development expenditure capitalisation, thanks. May be justified depending on its nature, but again no commentary that I could see.

3.Non execs
I suspect share payments in the year pre and at IPO may have inflated non exec "emoluments". Again, these should have been split out more clearly than note 6. Increases in wages etc.. for non execs in FY17 may be full year of one of them and would need to check joining date.

4.Customers
Where did you get your info re Safran, GKN and GE? I may have missed it in various docs, but it is very helpful.

Like you, I don't think there is a panic. The reporting is bit clumsy and could do with crisper financial commentary (e.g. KPIs headed "Balance Sheet" and 4/6 are P&L related). Ultimately, VEL's performance will be driven by ramp up of major airframes (e.g. A320neo and A350) and increasing VELs shipset value on them.

Not sure I know enough to model properly!

Thanks for your post - it was very helpful.

MTIOC

[sidam] 29/1/2018 17:52

to MTIOC

Thanks for your analysis, it made be go back and do my numbers in detail rather than just skim. However, here are some comments.

Gross margins were down substantially. However, management did indicate that they expected margins to increase in the current year and that they were happy with the projection of 23% in the brokers projections. Time will tell! In addition they did say that this was primarily problems with a new contract and in particular with intermittent requests for deliveries against expected deliveries. This happened in H2 when gross margins fell to 16.5% against 20.8% in H1. They also added that this had led to a change in their future contracts. Now there will be two sets of pricing. A price for contracted volumes and a higher price for single kits.

I have never really used sales per employee but perhaps I should look at that. In this case, my guess is that a very substantial part of the costs is raw materials. If I am correct, then Oct 2017 would have a big difference in foreign exchange against 2016. VEL sources composite rolls form the UK ,France and the USA so this could be a factor.

I agree on cash flow and there was a change in the accounting treatment of development expenditure which is now capitalised. The net was £317K. I do not like that. However, £1.2m of the increase in trade receivables was categorised as other.
Do you know what that was? If not I will try to clarify. If you take that out, the days look more reasonable.

I will also try to clarify non execs pay. The execs look a bit low.

They have now got Fareham from 1 machine and one shift to 3 machines and 2 shifts with the possibility to going to three shifts. I think that suggests that they can open further sites.

Safran started the year at over70% of sales but was below 50% from July and by October was down to around 45%. The next big client is GKN 25%? followed by GE.

They do all the work for Safran which is still growing. For GKN they do some projects at several sites and for GE 70% of the work at one site. So there is room for growth.

The reason I like this company is the growth in possible/projected revenues - 46% last year, 60% this and 40% next. I consider (HOPE!!!) that this will filter down to the bottom line. If so, the shares should be very highly rated.

Thanks for your input and the underlying message READ THE NOTES - it made me to properly build my models.

Any and all comments appreciated.

[death by donut] 29/1/2018 10:09

+1 , two great posts above , thanks.DbD

[jonwig] 29/1/2018 06:19

@ sidam, MTIOC - thanks for the last pair of comments ... very helpful analysis.

[mtioc] 28/1/2018 16:28

Sidam, one thing is certain: the stock does not love you.

I've now had a look through the latest financial statements and, as usual, the more interesting bits are in the notes rather than in the blurb at the front.

Sales broadly as expected, but gross margin down from c. 24% to 18% apparently due to slower ramp up at Southampton facility. Not sure this is consistent with sales increases. Also, sales per manufacturing employee (see note 6) are up to £287k in FY17 versus £238k in FY16. More likely there are increase costs expensed against the ramp up or in general overhead, but this has not been clearly explained.

Cash flow was pretty grim. Huge increase in trade receivables. I calculate debtor days at 105 (there are various ways of doing this). Only 10% or so are overdue and even then the bulk are 3 months or less (see note 14). The major cost is labour, which is paid monthly or possibly even weekly in some cases. It is not surprising dominant customers take a long time to pay, but I would have expected 60-70 days. If c. 100 is normal, it raises questions about the model. With that spread, if it grows it will "suck in" cash. Converting debtors to cash is pretty topical at the moment. Cash flow from operations was £2.4m negative, but that included c. £950k of exceptional costs. Not a panic at the moment, but definitely something to keep an eye on in subsequent results.

The board also seems odd. It is refreshingly small at two execs and two non execs. However, the ongoing non execs appear to be paid c. £400k combined pa and the execs £265k combined. There could be "one off" transactional or share payments in this. If not, it raises the question of the non execs real time commitment and roles.

Overall, I am very cautious about further international expansion until the group proves its current model is profitable and cash generative. In any multi-site roll out, the move from one to two sites is the most difficult. Before then, the key managers are effectively on site the whole time. After that, they need to be able to manage remotely, which presents different challenges. These are increased many fold when expanding internationally.

Also, we were told Safran is 54% (Note 4 combined with p36 listing doc). Suspect customers B and C include GE and Lockheed (see US$ receivable build up). This emphasises the customer concentration, which to be fair, we were told about in listing doc.

Overall, the announcement raised questions. I suspect I will hold (based on favourable macro picture) but will certainly not add until things become a bit clearer.

Hope this helps.

[sidam] 25/1/2018 17:34

I should clarify my earlier comments on seasonality. I am sure that the business is not seasonal except possibly for holiday shut down reasons. However, management indicated that both revenues and profits should be higher in H2 against H1. The reason is that the business is still growing and new business is expected. They stated that there are firm orders covering 85% of this year’s projected revenues, which is in line with their usual expectations at this time in their year.

However, I did say that part of the shortfall in this year’s projections was lower margins than historic. Management indicated that the fall last year was due to exceptional factors on new business and they said that their target for this year was margins of 23%.

The main factor will be the expense to meet potential new non European business in Asia and the US. They said that there are a number of hubs in Asia which are each as potentially large as the UK market. This has been driven by request from potential clients following the AIM listing.

They expect one or more hubs in the EU this year and the first Asian hub this or next year, but not in China. Asia is not in this year’s projections. Each Fareham look alike as a starter would cost about £1.5m plus working capital.

I love this stock and hope this comment is of help.

[jonwig] 25/1/2018 07:09

Velocity Composites plc ... announces that it has been notified that on 24 January 2018, Mark Mills, Non-Executive Chairman of the Company, purchased 50,000 ordinary shares of 0.25 pence each at a price of 95 pence per Ordinary Share.

Following the Purchase, Mr. Mills has a beneficial interest in 1,934,024 Ordinary Shares representing approximately 5.40% of the issued share capital of the Company.

[jonwig] 23/1/2018 14:41

Thanks all for the recent posts. I must say that I misread the factors which drove the share price fall. However, as pointed out, future growth is bigger than originally anticipated, and capacity has to be bought. I hope the current management are able to manage the expansion.

If the AGM is in Burnley, I'll be there. If Fareham or London, not.

[wjccghcc] 23/1/2018 10:57

Broker downgrade of 2018 PBT forecast by 36% and reduction in price target from 144p to 125p might have something to do with it. Now on a PE of 20 for FY18 which is probably about right given the risks of the H2 weighting IMHO.

[bobmonkeyhouse] 23/1/2018 08:35

Decent results, in line pretty much. I don't see any reason to need further funds, balance sheet is strong, plenty of cash there.

Naybe just a forced seller in the market

[jonwig] 23/1/2018 08:18

Share price spooked by possible fundraising? What else could it be?

EDIT - I've added.

[jonwig] 23/1/2018 07:14

Some outstanding results here:



They say 'in-line', but appear to have beaten FinnCap's estimates on an adjusted basis. The important thing is the outlook, as 2017 was never going to be profitable. Capital spending is going to be huge this year (new Europe facility being planned), and I suspect they'll be looking to raise more funds:

As the global growth opportunity continues to be explored by the Company, we will seek the most appropriate funding route available for both the investment into those new territories and in particular the support of our cash flow to facilitate the purchase of materials for kitted supply to our customers.

No dividend, but who cares?

[jonwig] 18/1/2018 11:50

The share price rose at just about the time this was released:

Dubai’s Emirates Airline has signed an initial agreement to buy 36 Airbus A380 aircraft, including 20 firm orders and the option for 16 more in a deal valued at $16bn, marking a critical win that will salvage the super-jumbo jet programme.

The deliveries, expected to start in 2020, will guarantee production of the plane for at least another decade, said John Leahy, Airbus’ sales chief.

“I’m personally convinced more orders will follow Emirates’ example and that this great aircraft will be built well into the 2030s.”


The A380 was in doubt since November, when the orders appeared to be cancelled. It's one of the key models which will trickle all the way through the supply chain.

[nurdin] 03/1/2018 15:44

Great moves last few sessions.

Thanks for posting that link jonwig...could be behind the recent rise

[death by donut] 03/1/2018 10:44

Prelims 23rd Jan.

[jonwig] 30/12/2017 08:20

$60bn rush for Airbus orders:



From my pretty basic understanding, VEL should be a big beneficiary.

[jonwig] 20/12/2017 11:37

No, I don't think so. Finncap's estimates for eps are 2017: 1.2p, 2018: 8.5p, 2019: 13.2p, which would make the shares cheap if achieved. But the scaling up has to be realised, and this will gradually become clearer.

[ashehzi] 20/12/2017 11:03

Is it a buy and sleep for an year share?

[jonwig] 28/11/2017 07:27

Thanks timbo. Yes, a miss of expectations sure would have a big impact.

[timbo003] 28/11/2017 07:21

There was a small write up in last night's London Evening Standard, which may explain the renewed interest yesterday afternoon:

[jonwig] 02/11/2017 14:56

Yesterday:

Velocity Composites plc, the leading supplier of advanced composite material kits, providing engineering value-solutions for the global aerospace industry, announces that it has been notified that today, Mark Mills, Non-Executive Chairman of the Company, purchased 58,824 ordinary shares of 0.25 pence each ("Ordinary Shares") at a price of 85 pence per Ordinary Share (the "Purchase").

Following the Purchase, Mr. Mills has a beneficial interest in 1,884,024 Ordinary Shares representing approximately 5.26% of the issued share capital of the Company.

And today:

Velocity Composites plc, the leading supplier of advanced composite material kits, providing engineering value-solutions for the global aerospace industry, announces that it has been notified that today, Peter Turner, Non-Executive Director of the Company, purchased 55,555 ordinary shares of 0.25 pence each ("Ordinary Shares") at a price of 90 pence per Ordinary Share (the "Purchase").

Following the Purchase, Mr. Turner, together with his wife, has a beneficial interest in 55,555 Ordinary Shares representing approximately 0.16% of the issued share capital of the Company.

A modest recommendation!

[jonwig] 01/11/2017 09:15

FinnCap this morning on the trading statement:

The year-end trading update reads positively, with the group continuing to see a significant year-on-year increase in operations and profits, and having traded in line with expectations. No change to forecasts or price target, but with continuing strong conviction that the group’s growth trajectory is achievable. The low share price rating offers significant upside as the group delivers on its stated scale-up strategy.

[nurdin] 30/10/2017 14:17

They have already said they are confident of meeting 2017 forecasts so I personally am not worried there.What surprises me is the big jump in earnings forecast for 2018 but with no IPO costs and the Farhem factory set up expenditure mostly absorbed in 2017,then anything is possible.

I have taken an initial position today.