Investment research into UK Stocks by Walbrock Research

[Walbrock Research]

A look at Premier Oil

Premier Oil is at peak or near all-time highs valuation, depending on your perspective.

If you look at equity alone, then PMO shares at down 90% from 2011 peak.
When you include debt and equity together, minus cash, then PMO is at all-time highs! http://bit.do/dGQrC

 

[adamg1987]

Premier Oil is at peak or near all-time highs valuation, depending on your perspective.

If you look at equity alone, then PMO shares at down 90% from 2011 peak.
When you include debt and equity together, minus cash, then PMO is at all-time highs! http://bit.do/dGQrC

Would you say its not going to go any lower?

 

[Walbrock Research]

Greene King, a dividend investment

Greene King, the 218-year-old pub operator from the UK has seen their share price fell by 40%. The stock is currently yielding over 5% and has always been a consistent dividend payer.

Here are some good reasons why I think Greene King is a safe business for your portfolio:
1. The pub has solid freehold properties worth £3.2bn that easily cover net borrowings of £2.1bn. In fact, the excess £1.1bn covers 64% of their market capitalisation. https://imgur.com/gallery/F7O7ab0
2. EBIT Yield of over 8% is above historical average meaning undervaluation.
3. Using the earnings power value, the stock is 40% undervalued.

However, investing now would risk you losing a further 10%-20% of share price because:
1. The monthly share price is in negative sentiment, which requires time to give definitive direction https://imgur.com/gallery/O5YWHD3
2. Due to high inflation, eating out and having a pub is the first to get the cut from households when wages fail to keep up with inflation.

RECOMMENDATION
The shares could drift towards £5 or £4.50 in the next three or four months. But, don’t worry this represents a buying opportunity.
So, put Greene King on your bucket list.
Feel free to leave questions.

 

[Walbrock Research]

Is Interserve the new Carillion?

Since I cover this stock and given the demise of their share price people want to know if the stock is super undervalued.
The update clearly states the company is struggling with disposing of their waste assets and it is likely to cost significantly over £160m. Whatever “significant” means are anyone guess until management clarifies it in further RNS.

Below is the valuation/write down on each Interserve division:

EQUIPMENT SERVICES

This is Interserve high-value asset, but how much will it fetch in the market?
First, the average operating profits growth comes to 24%, but last year growth slowed to 9.2%.
Second, it has net assets of £226m, comprising of £290.8m in assets and £64.4m in liabilities. So, we can assume the company holds little debt apart from payables, some provisions and pension deficits.
Third, it has a high EBIT margin of 21% and makes 16% return on assets. With £48m in operating profits, deduct 20% for taxes which leaves it with £38.4m in after-tax profits.

Verdict
Based on the above assessment, I would attach a 13-times multiple on after-tax profits giving it a £500m valuation. That is higher than their current valuation and twice the value of their net assets.
The reasoning behind this is because of the high EBIT margins (20%+) rather than the group average of 2%-3%.

The downside is we don’t know how much operating leases that equipment services are responsible for!

UK Support Services

Their most profitable division and biggest division.
First, the average profits growth is 23.2%, but last year it saw a decline of 12.36% meaning either things have gotten worse or this was a blip. I suspect the former!
Second, it has NEGATIVE net assets of £11.1m, comprising of £372.4m in assets and £383.5m in liabilities. So, you can bet it has a lot of obligations attached.
Third, the EBIT margin saw a gradual improvement to 4.5% and it makes a decent return on segment assets of above 20%.
Fourth, after-tax profits would come to £64m.

Verdict
Given that it is responsible for a lot more liabilities and requires increasing capital to grow profits, but produces lower EBIT margin, then it is wise to attach a lower multiple.
So, I would give it a 4 to 7 time after-tax profits valuing it between £256m and £448m.

International Support Services

A former shining star.
First, this division average 18% profits growth, Today, it is producing zero profit growth.
Second, it has net assets of £55.2m, comprising of £128.6m in assets and £73.4m in liabilities.
Third, this division was Interserve best division with EBIT margins of 15%, but has fallen from grace. Now, it earns a measly 3%, along with negative returns. With £8.2m in operating profits and deducting 20% tax gives it £6.8m in after-tax profits.

Verdict
At best, potential bidders would pay no more, then the division’s net assets of £55.2m. The reasoning is lower EBIT margin.

UK Construction Services

First, it has average 33% negative profits growth, which saw their operating profits fell from £24.5m to an operating loss of £3.1m, despite increasing revenues.
Second, it has net liabilities of £179.2m, comprising of £255.4m in assets and £434.6m in liabilities. My suspicion would be that this division carries the bulk of the company’s liabilities.
Third, this division has negative EBIT margins.

Verdict
If Interserve sells this division, it would be a “write-off” division leading to a provisional impairment. Therefore, expect a writedown of £200m-£300m. Sometimes, these writedowns are not free of charge because the company wants to pay off some debt, therefore they would issue new equity or do a Rights Issue.


International Construction

A turnaround division.

First, despite negative average profits growth of -2.8%, their latest profits growth is around 30%!
Second, it has net assets of £63.6m, comprising of £63.6m in assets and £0m in liabilities.
Third, EBIT margins have recovered to 5.69%. With £16.9m in operating profits and deducting 20% tax gives it £13.6m in after-tax profits.

Verdict
This is an improving and recovering division with zero liabilities attached. Also, it has a decent EBIT growth and improving returns on segment assets. I would give it a multiple of 11 times after-tax profits valuing it at £149.6m.


Adding it all together

Adding all the sums of its parts gives Interserve a valuation of £806.8m.
https://imgur.com/gallery/zcTd4U8

However, the group has net debt of £274.4m and pension deficits of £52.4m. After these deductions, Interserve has a valuation of £480m. Current market value has tumbled to under £300m.
But, the above information is based on last year.

Have the 2017’s interim results change Interserve’s valuations?

Support Services

Starting with their UK Support Services, H1’s 2017 operating profit has fallen to £29m from £43.2m. I estimate the full-year number to come in at £55m, down from £80.8m last year. So, it leaves after-tax profits of £45m.
Also, I will lower the multiple ranges from 3.5 to 6.5 times, valuing it between £157.5m and £292.5m.

Their International Support Services saw operating profit (almost) wiped out as it comes in at £0.9m down from £6.5m, though it was an improvement from a loss of £0.3m in H2 16. Management is optimistic due to increased workload, but for prudence, I will knock £5m and value this division at £50m.

Construction

Their International Construction saw profits increased to £8.3m from £6m, a 38% increase. This will add more value to the business. However, there is growing political risks as operations are in the Middle-East, so I will leave valuation unchanged at £149.6m. Otherwise, it would increase to £200m!

Meanwhile, the company’s UK Construction saw an operating loss of £2m from a £4.5m profit. With the waste business disposed of, I suspect net liabilities to fall, but I don’t have confirmation of this. But, I will it the benefit of the doubt and improve writedown provisions from £200m-£300m to £140m-£240m.

Equipment Services

This division performance remains relatively unchanged, but operating margin has fallen slightly. Valuation unchanged at £500m.

Overall Results

Here is the table showing sums of its parts on my forecast 2017:
https://imgur.com/gallery/ajAu6eZ
Putting it together, Interserve’s sums of its parts is down to £734.5m. But, with net debt rising to £500m and an estimated pension deficit of £75m, the market equity has fallen to £159.6m from £480m!
Higher debt levels have taken a lot of value in Interserve business making it expensive.

Hope this explains the Interserve business clearly.

 

[Walbrock Research]

Capita declining share price didn’t happen because of problems in the past few years, but occur much earlier (you are talking about the time during the financial crisis). By using secondary metrics like Sales per employee, you would have noticed that productivity per staff has stalled and was experiencing a gradual decline.

Another interesting observation, which could disrupt the way we analysis market valuation is to pick the most important financial/non-financial data. For Capita, it is their employees.

So, what you do is divide the employee numbers by market capitalisation to get market capitalisation per employee. Then you divide employee numbers by normalised profits to get normalised profit per employee.
Next, divide Market Capitalisation per employee over Normalised profit per employee to get multiple. Much like the PE ratio, a low number signals cheap valuation and vice-versa.

You measure that against Capita’s share price to achieve this correlation.

This gradual internal inefficiency has led to their share price decline.

 

[Walbrock Research]

Ideagen mystery cash flow generation explained

Don’t know much about technology, but net cash generation coming from depreciation and amortisation.

Another interesting observation is since 2013 net cash earnings totalled £18.4m, but capital expenses came to £46.8m. This produces a deficit of £28.4m.

How did they meet this cash shortfall?

By issuing share proceeds totalling £34.2m.

If you visualise it in your mind, you can see three-fifths of Ideagen total cash inflows coming from shareholders and market investors.
Another way to evaluate Ideagen growth prospects is for every £1 generated internally, it needs to raise £2 externally.

 

[Walbrock Research]

Lok n Store Group

Share price: £3.75 (up 3.4%); Market Cap.: £109m.

Preliminary results

This self-storage company saw revenue increased by 3.7% to £16.65m, as LFL is up by 5.6%.
Profit after tax rose to £3.17m, up from £2.46m last year, an increase of 28.8%. Looking at it in detail, we see operating profit fell to £4.26m from £6.228m. That’s because last year it was helped by net settlement proceeds of £1.94m.
So, excluding for net settlement proceeds, operating profit remains unchanged.
Unsurprisingly, the rise in property valuation fell from £17.7m to £7.7m, reflecting a slower price appreciation.


Some would ask this question:

Is this a change in wind direction or a minor correction in property value?
The chart below shows this is the first time Lok n Store has reported a smaller increase in property gains.

See “Market Valuation” for the effects of lower property gains.

Divisional Breakdown

The majority of Lok n Store revenue income comes from self-storage and the rest is a mixture of document archive, retail sales (boxes and duct tape) and insurance. The breakdown is below:

Ignoring profits, the revaluation of property is a better business than renting out self-storage units. That’s because asset turnover decreased from 0.15 to 0.11, a falling ratio means revenue generated grew slower than the rise in property value.
For more proof, UK property prices rose by 5% last year, compared to unit price rise of 0.8% down from 2.2%. But the occupancy rate rose by 6.5% to normalised occupancy rate to 69.8% (Stripping out stores which have opened or moved in the last 3 years) up from 64.5% in 2013.



Other Financials

Net cash profit rose to £5m from £2.8m, thanks to lower receivables cash outflow of £2m and no one-off item. If we look at 2014 and 2015, it made £5.2m and £5.6m. It puts the improvement into perspective.
Net debt saw an improvement of £17.4m from £23.5m helped by proceeds from treasury shares of £9.9m. Also, this helps cash balance to £11.4m as it brings down the loan to value to 14% from 20%.
They made a profit from the sales of treasury shares since they bought it for £1.52 per share and sold it at £4.05 per share. Not a bad investment!

Historical Performance

Lok n Store valuation isn’t necessarily based on how much profits get made or sales generated, but it relies on the pillars of the two “Rs” revaluation and reclassification of land and property value.
If you look at their annual report (see note 10/11 on property, plant and equipment) there are four different categories on land and property value, these are: -

1). Additions; - land and property directly acquired;
2). Reclassification; - that is the conversion of development property assets to land and property;
3). Revaluation; - the revaluation of existing land and property portfolio based on the change in property prices;
4). Disposal of assets.

Below is the breakdown in the change of land and property value for 2015, 2016 and 2017:

For the sake of context, Lok n Store land and property value rose from £51.4m in 2014 to £87.5m in 2017, a £36.1m change in value.
The cash outflow for acquiring these assets totals £13.7m and two-thirds came from revaluations of existing property.
Important: - If property value falls in the UK, then the domino effect of Lok n Store’s market valuation is huge because revaluation is why the shares are rising.

Last year, their development of property assets dropped to £500k from £14m in 2014. It made investors wonder if the company was taking a conservative approach. Now, it has added £4.67m of developmental property to their portfolio.

Market Valuation

The usual PER of 30 times is a misleading indicator for self-storage companies.
A better indicator of under/overvaluation is to use the price to tangible assets ratio.

This graph above paints a picture of more upside to come, but there is a word of warning!

Caution: Lok n Store didn’t revalue their property assets back in 2005 and 2006 which inflated their price to tangible ratio!

For example, in 2006 their tangible assets were valued at £25m and they spent just £9m in capex. The market cap. was £39m. So, 39/25 = 1.56 times.
In 2007, they revalued their tangible assets from £25m to £76m. Overnight, the ratio fell to 0.8 causing undervaluation in the shares and caused the share price to rise by 50%.
Therefore, I conclude that last year the price to tangible ratio was at an all-time high of 1 time.

A secondary measure that could be useful is the NAV/Net Cash from Operation ratio. It’s a measure of how the rise in Lok n Store NAV correlates to their operational performance.

Indicators that will move Lok n Store share price

The obvious mover of Lok n Store share is identifying the trend or the increase/decrease of property revaluation, this is obviously linked to the UK property prices. Given that PE ratio is in the 30s, then a decline in value would be intrinsically bad for the market value of the self-storage business.
My second factor is the occupancy rate and price increase of renting out storage. Although it plays second fiddle, the demand for more self-storage is a sign that Britain is spending too much money on things. A reflection of a consumer society.
Lastly, this factor affects both the first and second, that is a recession.

Final Thoughts

Lok n Store depends heavily on property revaluation to keep their share price high. Earnings and revenue are secondary measurements.
Right now, the market capitalisation has risen faster than the value of their property portfolio, causing valuations to be on the high side.
A lower property revaluation number does bring some concerns. Therefore, I feel the shares have raced ahead.
At best a hold, and don’t expect to see much in the way of share price appreciation.