Happy Easter! Here is a section of what we discussed this week:

Billington Holdings (BILN.L) - Full Year Results

EPS comes in dead on forecast. Cash flat, but average cash balance up significantly:

Strong cash balance of £21.7 million maintained at year end (31 December 2023: £22.1 million) and the Group is debt free

Average daily gross cash balance of £21.9 million during the year (2023: £9.2 million)

There’s a 25% increase in the dividend, but no special dividend this year, as they said that was related to one-off gains from falling commodity prices last year.

However, the sting is in the tail of the outlook statement:

In the current year, revenue and margin recognisable on contracts is anticipated to be significantly weighted towards H2 2025 with a number of large, profitable contracts, commencing in H1 and forecast to be substantially complete in H2. Therefore, in order to reflect current market conditions, we are now reducing our 2025 market expectations to revenues slightly ahead of 2024 and a profit before tax of £7.25 million.

That’s a very cautious outlook, with H2-weighting and a 33% reduction in PBT compared to 2024. Their broker, Cavendish, translates this into 40.8p, down 27%, so this is a pretty big reduction. They say:

With some cautious outlook comments, we reduce our FY25 revenue forecast by £20m to £115m, with a 23.7% reduction in adj PBT to £7.25m, leading to adj EPS of 40.5p, down 27%. This results in year-end net cash of £20.3m, a £1.6m reduction. We introduce new FY26 forecasts with YoY revenue growth of 8.7% delivering a 10.5% EPS increase and an increase in net cash to £23.7m.

The company claims that they are still very busy and indeed running at capacity, looking to expand facilities at several subsidiaries in order to avoid turning away business. The issue lies in the main steelwork part, where companies like Severfield have been so desperate to win business to cover their overheads that they will accept much lower pricing. Billington are also facing delays with some awarded contracts, particularly public sector works that are on hold due to the ongoing spending review.

If the market is truly this challenging, now would be the ideal time to deploy that cash balance and acquire struggling competitors that possess unique capabilities. On the IMC call, they mentioned nuclear a couple of times, so we wouldn’t be surprised to see something happen in this area.

Given the size of the cash balance and that the price had been falling due to the well-publicised issues at Severfield (Billington confirms that they have no similar problems), we would have expected the share price reaction to be relatively muted. However, it fell in line with the EPS drop, perhaps suggesting that the market doesn’t believe they will be able to use that cash balance to enhance earnings.

Management are certainly conservative here. However, that also makes them straightforward and transparent. It is fairly rare for a company to give forward revenue and profit guidance in their update. They have a cautious, well-managed pension fund, which the company is seeking a buyout for, in order to return the £1.8m surplus to the company. Pretty much every other company in the market would be excluding the £1m a year or so of SBP, so you can add on 10% or so to EPS to compare with most other companies.

Some will be put off by the profits warning, expecting worse to come. However, investors are getting a great business, that is simply unable to fully counteract the short-term industry weakness and public sector project delays, for a cash-adjusted P/E of less than 5 and at a discount to TBV.

Gear4Music (G4M.L) - Asset Purchase and Trading Update

Gear4Music are taking stock from GAK administrators at a big discount. This is even better news as it represents the death of a major competitor. They also say:

The Group is pleased to report that the marked improvement in UK and European like-for-like sales in the latter half of March has been sustained over the first two weeks of April, with a return to double-digit sales growth over the last 30 days providing the Board with further confidence in the outlook for the year ending 31 March 2026.

Gear4Music has never seemed particularly keen to give investors the full picture, so it is no surprise that they forgot to mention that they are referring to the expectations that were slashed by 40% just two weeks ago. That they needed two weeks of strong trading to give them confidence in their much-reduced outlook is perhaps more worrying than it initially sounds.

Jarvis Securities - Sale of Brokerage & Delisting

This announcement is a bit of a shocker:

…has today executed a conditional sale agreement disposing of its retail execution-only brokerage business to Interactive Investor…for a consideration of up to £11,000,000 payable in cash.

Only £9m of this is a firm commitment, with the rest contingent on the number of clients being transferred. Some SCLers use X-O as a broker and are decidedly unhappy about the change to what would be a more expensive fee structure for them at Interactive Investor. This means that many customers will leave, which could prevent the deal from proceeding at the agreed price, or at all. From comments elsewhere, it also seems that not everyone is being transferred. Some people have been left without a broker.

We can only imagine Jarvis’ hand has been forced by the FCA, otherwise, why sell a business that generates £4m annualised PAT, even after paying a load of fees for a never-ending review, for £9-11m? We are used to the FCA actively harming investors’ interests by now, but this is probably a new low even for them. As they have now appeared to have morphed from a chocolate teapot to a poison-filled chocolate teapot, the FCA could do the same to anybody using a smaller broker at any moment.

Understandably, the market has reacted very negatively to the news that they have been forced to sell a highly cash-generative business for around 2x annualised earnings, with the shares down almost 75%. It is unclear whether the significant cash balance is included in the deal, but this suggests otherwise:

For the twelve months ended 31 December 2023, the revenue attributable to the Execution Only Business was a maximum of £8.55m and the Execution Only Business had nil gross assets.

There is a potential cash return, but only after a delisting, and we can see the fees associated with the wind-down of the rest of the business (Model B clients) being significant. For many, the delisting is the killer as it will kick the shares out of ISAs. SIPPs are more nuanced, with many brokers allowing unlisted stocks to be held after delisting. Ironically, Interactive Investor is one of the ones that claims that their SIPP cannot hold unlisted stocks, and it is unclear what they would do following a delisting.

Jadestone (JSE.L) - Sale of Sinphuhorm

…announces that it has divested its 9.52% interest in the producing Sinphuhorm gas field onshore Thailand to PTTEP HK Holding Limited, a subsidiary of PTTEP, Thailand's national oil and gas company, for a cash consideration of US$39.4 million, with a further US$3.5 million in cash payable contingent on future licence extensions.

Given the varied cost structures, it is not a straightforward comparison across all their assets, but it is worth noting that with this deal, they’ve sold 5% of their net boepd production for 30% of their market cap.

Renold (RNO.L) - Trading Update

It seemed like good news here:

The Board is pleased to report that the Group maintained positive momentum through the final quarter and consequently expects to report adjusted operating profit and EPS for FY25 ahead of current market expectations, a third consecutive year of record performance.

However, when we look at the details from the updated Cavendish note, it’s only a 3% upgrade to this year and nothing for the following year. Net debt is up slightly, although partly due to property purchases.

They are unable to predict the impact of tariffs, hoping to pass on costs to customers:

The Board is closely following the fast-evolving tariff backdrop, as negotiations between nations continue. Given the volatile nature of the situation, and with potential timing for implementation of tariffs uncertain, the impact to Renold is currently difficult to predict.…we would expect that any incremental tariff related costs would be borne by its customers.

Calling a one-off 3% upgrade with no tariff impact yet modelled seems to certainly be stretching the idea of trading “ahead”, and those who don’t read the note could easily be misled by such irrational exuberance. The subsequent share price rise suggests that at least a few were taken in.

Speedy Hire (SDY.L) - Trading Update

This starts off well:

The Group has performed robustly in the period against a challenging market backdrop and the Board expects to report results for FY2025 in line with its expectations.

But then, the rest of the update reads like a profits warning:

As a result of higher average net debt during the year, interest costs are slightly higher than previously anticipated, driven primarily by investment in the core and specialist hire fleet needed to satisfy new contract wins.

In response to the Autumn Budget increases in employment taxes, the Group has accelerated several planned depot closures and restructured various support roles within the business. The savings of both these actions are expected to be in the region of £3.5m p.a. The cost of the initiatives taken will be presented within non-underlying items in FY2025.

Which Panmure Liberum interpret it as such:

We reduce FY 25 and 26 FD EPS by 22% and 25% reflecting changes including higher interest. We nudge down our FY 25 net debt (excl. leases) estimate from £115m to £113m to reflect guidance.

It appears that the interest rate they are paying has increased massively on refinancing, with lower debt but higher costs. A higher interest rate could be explained in several ways:

• Lengthening the term, especially on the private placement debt, which is seven years

• A higher loan amount leading to less asset backing. Indeed, they don't make it clear that some or all of it is asset-backed at all.

• A higher unused portion of the RCF leading to higher non-usage fees.

It seems entirely bizarre that a company can issue an in-line trading update and then have its lead broker cut EPS by 25% on the same day. We feel that this is the sort of thing the FCA should be looking into, not spending all their time trying to destroy all competition for customers of share brokers.

Making things even more confusing is that Dowgate (who came in below consensus when they were appointed recently) don’t make any changes to their forecasts. Neither do paid-for research providers, Equity Development. Although here they continue to fall, huge adjustments between statutory and preferred measures. Perhaps Panmure Liberum have gone out on a limb and is saying they disagree with the adjustments the company are applying. Either way, it doesn’t give a lot of confidence in the company as an investment proposition, despite the discount to NTAV. Still, at a 13.8% dividend yield, they are slowly liquidating and transferring the risk to their lenders.

That’s it for this week. Have a great Easter weekend!