Velocity Composites Share Discussion Threads

[imjustdandy] 02/6/2018 06:33

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

[mtioc] 01/6/2018 15:29

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 14:20

Excellent post . Thank you

[jonwig] 01/6/2018 11:41

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 11:33

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 09:02

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

[muffster] 01/6/2018 08:36

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

[imjustdandy] 01/6/2018 08:31

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

[vauch] 14/4/2018 19:57

What has now happened to this co ?

[podgyted] 12/4/2018 16:35

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.

[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