Velocity Composites Share Discussion Threads

[jonwig] 05/11/2018 08:00

I haven't followed this company for a long time, but it's sad to see a niche bit of UK industryu tearing itself apart.

[yump] 04/9/2018 17:38

Strange posts, are you a bot still being programmed ?

[yump] 04/9/2018 08:13

Why not make it 1p - that would be a funnier post.

[yump] 04/9/2018 07:12

I wonder if Brexit is causing this compendium of delays ? One of the problems of being way back in the supply chain is you have little control.

[yump] 30/7/2018 16:04

Decided to put a toe in recently. Its a proper industrial business, the composite market appears to be in growth, their revenue is growing quite fast and they're getting contracts, so its not like a new widget business, trying to convince customers that their widget is better than others.

Just the minor! issue of profitability to deal with... so I'm making an assumption that they've done their viability sums correctly, with some wriggle room.

Can't imagine its going to be easy though - setting up businesses in different EU countries with the instability of Brexit / possible exchange rates etc. etc.

[yump] 09/7/2018 08:31

fwiw I think its rare to find much detail about specific sales gains, losses and costs in any smaller businesses, even though most of it is probably not competitively sensitive. Most small businesses start up with basic financial reporting and its only when they are floated that the need for more detail becomes apparent, although they're still not obliged to do it.

I'm still looking into VEL, but they certainly don't appear to be in the group of smaller tech. businesses that BS their way through. There doesn't seem to be any hype here.

Lack of clarity isn't really in the same league as BS !

My main concern is whether its potentially interesting enough to gather more investors IF it grows into profit and whether its very much at the mercy of events in its markets, that are at least 2 steps removed.

[mtioc] 06/7/2018 14:26

Another mixed bag in recent interims. My initial thoughts.

1. Sales: encouraging growth on H117 and positive outlook. £28m guidance (24%yoy).
2. GM: very disappointing with no real explanation (see below). Suspect it inefficiency at Fareham with ramp up. It would be much easier if we could see site by site performance. VEL effectively sells labour and machine capacity. Some hint that customers have "booked" it and not delivered (and therefore not paid).
3. O/H: also really disappointing increase again with no real explanation. To increase overheads when underperforming is brave at best.
4. Cash: encouraging.

This is another "jam tomorrow" announcement. My (and the market's) patience is wearing thin. Share price will depend on new wins and H2 performance.

I was disappointed in the quality of the interim report (and VEL's reporting in general). Both the chair and CEO reports are vague and basic. I realise there may be commercial reasons for a lack of candour, but if I compare VEL to a XP Power, a long term holding, the contrast is stark. XP Power's reporting allows the private shareholder to understand the business and its drivers (e.g. KPI reporting etc..), without providing detailed commercial information. VEL does not. For example, the chair says the business is looking to increase sales and manage costs, which would not win prizes for insight. The CEO's report is not much better. It appears the house broker gets more detailed information, which at least allows a better analysis of a confusing picture, but this is not generally available to private investors. I don't think the private/institutional shareholder information asymmetry reflects well on the Board (or should be allowed). When the non publics and top 3 institutional account for 68% of the shares, perhaps the Board does not care as much as when the shareholder base is more diversified.

I will wait and see, but am more negative - it appears that the rate of progress is slower than forecast and the governance picture is not encouraging.

MTIOC

[yump] 06/6/2018 10:52

Held off buying for the moment, have to see if I live to regret it. Last few years have been diving in too quickly with some stocks, before there's any change of trend. At least that's my rationalisation if the price escapes ;-)

[yump] 02/6/2018 10:25

Thanks for the detailed posts from everyone - very helpful. Was looking at this a while ago when the share price was spiky and didn't do anything. Think I might get a 'starter' stake next week sometime. It doesn't seem a big ask that if revenue keeps rising at this rate and the gross margin rises a bit, then some decent profits will appear, even if it takes a year or so.

[imjustdandy] 02/6/2018 07:18

I think we could see much more work coming through from Boeing . Good times ahead here. Only 35m shares in issue

[imjustdandy] 02/6/2018 05:33

Good mention in today's Daily Mail. Interest gradually returning here. Hopefully see this head back above £1 again shortly.

[mtioc] 01/6/2018 14:29

I have not looked at working capital in detail. While their customers are blue chip they are astute and do not pay quickly. I think debtor days are C. 60. The business has cash and there was a comment that they had sufficient resources to grow with two facilities. On that (superficial) basis, they should be fine.

I do not fully understand costs of new facilities (capex plus loses to break even), so cannot really comment on sufficiency of funding for future facilities. However, give the more cautious plans, when they do open another they should be able to find with cash and debt.

The short term key is keep growing run rate revenues and the order book.

[imjustdandy] 01/6/2018 13:20

Excellent post . Thank you

[jonwig] 01/6/2018 10:41

MTIOC - thanks for your detailed analysis. I think the working capital situation is quite adequate to scale up the business. Would you agree?

The 'real' trading spread is about 56-62.5, so not quite as bad as it looks, but buying in size is a different matter!

[mtioc] 01/6/2018 10:33

I have revisited VEL.

For obvious reasons it is difficult to value. If we assume that it will make £26m of sales in the current year. This is a mid point between contracted and potential from April up-date. If we further assume that the GM is 20% (some improvement from PY is hinted at in up-date), the GP would be £5.2m. If we also assume £3.7m of overheads (no change from last year, so may be generous), EBITDA would be c. £1.5m. The EV is c. £14m (Market cap minus cash), which implies a 9.3x multiple, which is pretty full for a business with a "patchy" track record in its short life as a listed company.

If we "annualised" the second half (again, I know, lots of assumptions)it could produce £30m, £6m and £2.3m, which suggests as 6x EBITDA multiple, which could be attractive. I am normally very suspicious of such "annualisations", but in this case with long term contracts based on long term build programmes, it could be justifiable.

As per previous my previous posts, the key commercial consideration is whether VEL can make the Fareham facility as profitable as the Burnley one (i.e. is there a roll out model?). While the information is scarce, they appear to be making some progress with this. The recent 737 win is for an existing tier 1 supplier, but it is out of Fareham and into the Boeing supply chain. It appears the management will not develop more sites until they have "proven" Fareham, which I think is sensible but may not please those who want a rapid "growth" scenario.

As far as I can see, it is only Mark Mills, the chairman, who is buying. I understand that he has done very well in both the quoted and unquoted arenas, so I would not read too much into the amounts. However, he has been consistently successful and now owns c. 6% of the business, so overall I am encouraged.

I note the 15% spread, which makes VEL very difficult to trade in the short term. For the longer term investor, I suspect the bet is whether VEL can make £4/£5m EBITDA in the next couple of years and prove the outsourced composite model. If it does, the current £14m EV could appear a very attractive entry point. Certainly not without risks, so DYOR.

We will find out more with the half year trading up-date at the end of the month.

[imjustdandy] 01/6/2018 08:02

Directors bought £50,000 at 55p , order book strong and now being converted to firm contracts. Confidence returning at last

[muffster] 01/6/2018 07:36

Um, why do you say that? What supports that?Give some fundamentals....

[imjustdandy] 01/6/2018 07:31

Should be heading back to £1 soon . Drop has been overdone this past 5 months

[vauch] 14/4/2018 18:57

What has now happened to this co ?

[podgyted] 12/4/2018 15:35

Looked at today - 15%, yes, 15% spread - uninvestable.

PT

[sidam] 02/3/2018 14:41

Here is the note. It is a bit long. I hope it is of general interest.

27 February 2018
Velocity Composites (VEL.L)
Price: 70p
Market Cap: £25m

Velocity (VEL) was one of my favourite stocks for 2018. At the end of last year, the shares rose sharply, but the fell after the results as estimates were cut and again after the AGM statement. The reasons for the early reduction were partly for positive (possibly very positive) long term reasons and partly negative, but there was no further reduction in estimates after the AGM. The purpose of this comment is to look at the current projections, compare the difference with those previously published and to try to ascertain whether the shares can be considered a buy. If you read to the end, you will see that I am still very bullish.

Velocity manufactures advanced carbon fibre kits, which are used by Tier I suppliers to produce components for the major aircraft manufacturers. Management state that they are unique and are the only company worldwide to offer this service. Their USP is the reduction in waste by using their proprietary software to cut the carbon fibre rolls. There can also be a reduction in the rejection rate of finished components. The AIM admission document describes further significant benefits. It is worth reading for background and can be found on the company’s website.

The company joined the AIM market last year to raise capital. The company’s facilities are replicable and the new capital would enable new sites to be commissioned in Europe. A secondary consideration was the status accorded to publicly traded PLC. This has proved to be the case and is discussed in more detail below.

The results for last year are roughly as expected in that adjusted profits were in line. However, revenues were higher than expected, but gross margins were well down. There also unexpected and large marketing expense outside Europe. That will continue and is one of the reasons that profits and EPS for the current and next year will be lower than original projections.

That is potentially, and likely, to be very good news. It was publicity from the flotation that led a number of non-European groups to approach VEL and ask for quotations. Management indicated that the most likely area to build a plant would be Asia where there were some nine hubs each of which was as large as the UK market. A site in this area is possible this year but more likely next. The first non-UK site will almost certainly be opened in the EU.

The AGM statement reiterated this factor. I quote “Since IPO, the Company has won significant new business and momentum remains firmly with the Company as they are approached by more and more potential customers looking for significant savings versus their existing processes. Velocity has started to benefit from economies of scale and this will drive further cost savings, both for the Company and its customers.
The Board remains excited about the prospects for the Company and this has been reinforced by recent additional industry accreditations that provide the Company with access to new platforms and programmes. In addition to the above, we continue to expand the customer base, including for programmes to be delivered to customers in Europe and beyond. The scale of composite production in these locations dwarfs the UK market.”

In the latter context, virtually all historic revenues have been generated in the UK.

The original projections were for EPS of 8.5p and 13.5p for the years ending October 2018 and 2019 respectfully. With a share price of then around 95p, there appeared very large upside as in January 2019, the current year PER would have been 7. That would have been ridiculous given the growth rate and the likelihood in the medium term of a growth rate of 20% made up from a 10% growth in industry demand and 10% from increasing market share.

However, those projections have been reduced and the EPS estimates are now 5.5p, 10.6p and 13.0p for October 2018, 19 and 20.

As one would expect the drivers for profitability are revenues growth and margin recovery. The AGM statement added “developments have had an impact of approximately £2m on the visibility of this year's revenue outturn, but management is confident that further work can be won to replace that and bridge the gap in order to meet market expectations for the year ended October 2018, if market conditions and customer demand remain stable.”

Looking at the numbers in more detail, there is no change in revenue estimates for the current year but those for 2019 have been increased by almost 10%. That is almost certainly from the first non-European site. Gross margins are now lower, however these are expected to be more in line with the historic levels. Previously these had been projected to rise significantly, which with hindsight does look a bit strange. Marketing costs will increase as mentioned above and depreciation is forecast to increase in both years. The tax charge is expected to be lower. There were no previous estimates for 2020 as far as I am aware.

The move into Asia and potentially into North America, from where there have also been requests, is likely in my view to maintain a 20% (plus?) growth rate for a longer period. On that basis, I consider that the shares should justify a PER in the range of 12 to 15 (a long term PEG of 0.6 – 0.75).

However, if current projections are now accurate, in January 2019 the current year PER would be 6.6. A PER of 10, would give 50% upside and 12 would give over 81%. In addition, maiden dividends are projected for the current year.

Management have stated that the results will be H2 weighted and that Q1 normally is the quietest, so it appears that there is some seasonal weighting not just growth.

I consider this should be a winner. The safety play is probably to wait for the interim results, but I have recently added and it is now one of my largest holdings. I hope I am right.

[jonwig] 02/3/2018 12:10

sidam - I'd very much appreciate reading your notes. Posting them here would help new arrivals in the future.

Although I sold my holding a while ago (it was never meant as a long-term investment) it's still on my watchlist.

[sidam] 02/3/2018 09:58

Interesting that the house brokers estimates have not changed following the AGM statement. There is the risk that the company wil not be able to generate sufficient additional business to clawback the stated shortfall, but if current estimates are correct the shares look to me to be stupidly cheap. I have written some chat to put my thoughts down and to send to my friends. This looks at the change in original estimates etc. It is rather long 2 pages. I can copy and paste it here, if anyone wants me to do so, or if you let me have your email, I will send you a copy.