Category Archives: Investment

Articles on investment topics, published on this website and on clients’ sites.

CCTV security camera

Will IndigoVision stay true to form and rebound?

CCTV security cameraDisclosure: I have no financial interest in any of the companies mentioned but intend to buy shares in IndigoVision within a few days of the publication date of this article.

Small cap IP video security specialist IndigoVision has a history of inconsistent performance, which appears to be due to the lumpy nature of its orders.

This is a fairly common problem with small caps, but means that the firm appears to veer between profit growth and profit warnings with some regularity.

While frustrating for long-term shareholders, this does appear to present an opportunity for value investors. Indigovision has a strong balance sheet and has historically generated attractive returns on capital.

Buying when the shares are cheap and waiting for earnings to recover could be a sound strategy.

Is now the time?

I mention this now because IndigoVision’s last update to the market was a profit warning. The shares have fallen by 35% so far in 2015 and by 52% over the last year. IndigoVision stock currently trades at a post-2011 low of 230p.

This leaves the shares trading on an attractive historic valuation, given last year’s strong results*. Here’s the usual extract from my investment spreadsheet, which I populate when reviewing a company with a view to adding to or selling from my value portfolio:

TTM P/E TTM P/FCF TTM yield PE10 P/B P/TB P/S Current Ratio Dividend cover FCF dividend cover Cash interest cover Net gearing
8.40 10.40 3.30% 15.2 0.9 0.91 0.35 2.4 3.5 1.8 1109 -10.20%

*IndigoVision reported results over 17 months in 2014, in order to move its accounting year-end to 31 December from 31 July previously. To get 12-month figures, I’ve crudely normalised last year’s earnings and free cash flow by multiplying the reported figures by 12/17.

In keeping with my increasingly quantitative approach to investing, I am placing a lot of emphasis on the historical numbers. After all, nothing fundamental has changed in the business, so there is no real reason to think that this level of earnings cannot be regained.

Historic growth and forecast earnings?

I don’t completely ignore the outlook for a stock or its past performance. Here’s how things stand at present (30/06/15) for IndigoVision:

Fwd P/E Fwd yield 5-yr average ROCE 10yr eps growth 10-yr divi growth
12.1 2.75% 13.80% 0.40% 6.20%

You can see that while long-term return on capital employed (ROCE) and dividend growth are strong, earnings per share growth is not. However, due to my (hopefully) well-timed entry at a low point in IndigoVision’s cycle, this may not be an issue.

What about the story?

I’m not a purely quantitative investor.

My investment spreadsheet also contains a section of note, where I provide note down the context and my moderately subjective interpretation of the figures above, plus my investment decision.

I ensure that I have a general idea of what a company does and any obvious problems or opportunities it faces. In IndigoVision’s case, I like that its revenues are widely distributed across a global customer base in many industries.

I also see the merit in its video over IP (Internet Protocol) approach, which (for non-techies) means that everything is digital and can be integrated with the firm’s powerful analytics and management software. InidigoVision’s products can operate over any standard data or mobile broadband network, making connecting up remote locations a doddle, I’d imagine.

However, I try not to predict the future in too much detail. This is a pastime for growth investors, in my view.

I prefer the traditional value investing approach of buying a proven good business at a low price, and then waiting for something good to happen.

It’s with this in mind that I plan to buy shares in Indigovision in the next day or two. When I do, I’ll add details of my holding to my value portfolio.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.


3 reasons why it may be too late to invest in housebuilders

HousebuildersDisclosure: I have no financial interest in any of the companies mentioned.

The big housebuilders have proved to be a spectacular investment. Barratt Developments, for example, has risen by 500% in five years.

Even if you were late to the party and only invested one year ago, you would still be up by almost 75% at the time of writing.

Of course, housebuilders are cyclical businesses.

Bulls tell me that they remain reasonably priced, but I’m not convinced. I believe housebuilders are starting to look expensive.

Indeed, while housebuilders’ profits may continue to rise for a little longer yet, I reckon the warning signs of an advanced bull market are starting to appear.

1. Gazumping

If you live in the south east, you’re probably familiar with the reality of home buyers gazumping each other. It’s when a seller reneges on a previously agreed deal to accept a higher offer from another potential buyer.

What you might not realise is that this is starting to happen among developers and builders, too.

Last week, small cap housebuilder and developer Inland Homes announced a £19m land sale to “a major housebuilder”. The sale was for 205 residential plots, with planning permission, at the firm’s Drayton Garden Village project.

The interesting this about the sale was that in March, Inland reported being “very advanced in our negotiations with a substantial institutional investor in the Private Rented Sector” for the sale of the same plots.

According to Inland, these discussions were suspended as a result of “the significant offer received from the major housebuilder.” That sounds like large-scale gazumping, to me. The housebuilder was willing to outbid another major buyer to secure the land.

2. Affordability is plummeting

Affordability is now nearly as bad as it was at the peak of the last boom, in 2007/8.

The grim reality of this situation was brought home to me in a recent blog post on John Kingham’s excellent UK Value Investor website.

Like me, John very much relies on quantitative methods to determine whether an investment is cheap or expensive, rather than sentiment or subjective views on the future. John points out that according to the Halifax house price index, house prices are currently 5.1 times higher than the average earnings of home buyers.

That’s considerably above the long-term average (since 1983) of 4.1, and closing in on the 2007 all-time high of 5.8 times earnings. As John points out:

Since 1983, the UK housing market’s price to earnings ratio has been lower than it is today more than 87% of the time. The only time the ratio has been higher was during the absolute peak of the pre-financial crisis property boom.

The reality is that house prices have been supported by low interest rates and the outrageous and reckless use of taxpayers’ money (via Help to Buy, for example). Liquidity in the market has also fallen, as the ‘haves’ — existing homeowners — opt to stay put rather than sell for lower prices.

The final ingredient required to support prices has been the booming private rental market, which provided housing for the rapidly rising number of people who cannot afford to buy. This too has been supported by taxpayers’ money, in the form of housing benefit.

These trends won’t continue forever. At some point, house prices will weaken or stagnate. Otherwise, the housing market will shrink to include only an affluent minority of the population…

3. Land prices rising?

My third point is that people with decent land to sell are reporting strong growth in profits from land sales to major housebuilders.

Back in March, listed developer Henry Boot reported a 26% rise in operating profits from land development. That means buying land and developing it to the point of planning consent, before selling it onto major housebuilders.

Results like this suggest to me that housebuilders are buying more land and paying more for it.

A classic top?

In the UK at least, housebuilding is and will probably always be heavily cyclical. On the upward leg of the cycle, house prices rise, demand grows and housebuilders increase the number of houses they build. Share prices and dividends (a.k.a. cash returns) rise rapidly, as we’ve seen recently.

At some point, demand is satiated and/or prices start to become unaffordable, which dampens demand. Housebuilders are then left with more houses to sell than they really need. They are forced to cut prices to sell completed stock and — naturally — slow or pause their pipeline of new developments. Share prices and dividends fall rapidly, as we saw after 2008.

At the bottom of the cycle, housebuilders can be found trading for less than the book value of their land and completed houses. That’s the time to buy, in my view.

Current valuations of more than two times book value hold no appeal for me, however high their accompanying dividend yields might be. P/E valuations are largely meaningless, as housebuilders earnings are not sustainable or stable over a 5-10 year cycle.

I’m certain we are getting close to the top of the market, but that doesn’t mean we’re there.

It could be three months or three years. In fact, that range of time would be my best guess.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Shoe shop

Is Shoe Zone PLC a supermarket alternative?

Shoe shopDisclosure: I own shares in Shoe Zone.

After disappointing investors with an early profit warning in April, less than a year after its listing, Shoe Zone PLC (LON:SHOE) appears to be back on track.

At sub-200p, the shares look more attractive than they did before April’s slide, too.

At least that’s the conclusion I came to after reading the firm’s recent interim results. Shoe Zone appears to be cheap, profitable and cash generative. Its balance sheet looks strong and the shares have an attractively high dividend yield.

These are attributes we used to associate with supermarkets, but no longer do.

Low prices, high margins

There’s no doubt that Shoe Zone’s shoes are cheap. This makes the firm’s gross margin of 60.5% all the more impressive. This suggests a firm grasp on manufacturing costs and an efficient supply chain.

Unlike some retailers, such as AO World, Shoe Zone’s profits are not eviscerated by administration and distribution costs. The firm’s trailing operating margin of 5.9% is pretty pleasing too — remember, this is a ‘pile them high, sell them cheap’ retailer.

Shoe Zone’s strong balance sheet helps ensure that this operating profitability is converted to post-tax profits and dividends. According to the firm’s latest accounts, net cash is £5.9m and debt is zero, although there is an employee benefit liability (pension, I assume) of £6.5m.

A current ratio of 2 is also impressive for a retailer, many of which maintain lower current ratios as they receive payment in cash for goods sold before they have to pay their suppliers. Negative working capital (current assets minus current liabilities) is quite common with big retailers such as supermarkets.

All of this leads to a forecast dividend of 9.45p per share for the current year. This gives a prospective yield of 5.0% and should be covered almost twice by earnings.

Stores vs. online

Shoe Zone’s store portfolio is constantly being refined to improve performance and Shoe Zone seems to have a firm grip on costs.

The company says that rents fell by an average of 28% after renewal over the last six months. Store fit-out costs seem likely to be low (take a look at a Shoe Zone store next time you pass one) and a shift towards larger format stores is helping to control wage costs.

As supermarkets and corner shop owners know all too well, larger store formats require fewer employees per unit of space/merchandise than small stores.

Things are going well online, too. Internet sales rose by 30% during the first half, through a combination of eBay, Amazon and own website sales. Customer returns are just 10.5% of sales, which is well below the average for online fashion retail.


Shoe Zone shares trade on a trailing P/E of 12.1 and a 2015 forecast P/E of 10.4. That doesn’t look expensive, given that the latest consensus forecasts suggest earnings per share should rise by around 12% in 2015 and 2016.

Shoe Zone’s modest valuation, cash-backed high yield and healthy profit margins are the key to its appeal, for me. Given current growth forecasts, I can see the potential for a double-digit total return over the next year or two.

As a result, I recently added some Shoe Zone stock to my value portfolio.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

Should I add RPS Group Plc to my value portfolio?

Offshore oil or gas platformDisclosure: I have no financial interest in companies mentioned in this article.

I recently considered adding consultancy group RPS Group Plc (LON:RPS) to my value portfolio. This firm specialises in energy and infrastruture consultancy, with a particular emphasis on oil and gas.

I was attracted by RPS’s seemingly modest valuation of 10 times 2015 and 2016 profits, and its 4.2% yield. The firm’s strong presence in the Middle East, where cutbacks from the oil price collapse seem less severe than among the big oil majors, was also attractive.

However, when I delved deeper in the numbers, I was not convinced that RPS is a genuine value opportunity.

1. Focus on acquisitions

RPS’s stated strategy is to expand by acquiring smaller companies operating in the same, or complementary, sectors. The firm committed £58m to six acquisitions in 2014. That’s 11.5% of its reported fee income of £505m.

This strategy has generated rising revenue, but not rising profits, which have stagnated since at least 2009. Constant acquisitions have also left the firm with a backlog of deferred consideration, which stood at £26.7m at the end of 2014.

Deferred consideration is payment that will be paid for previous acquisitions, if they meet performance targets. RPS has £17.2m of deferred consideration potentially due for payment in 2015. That’s quite material for a firm which reported operating profits of £50.4m in 2014.

RPS reported a cash balance of £17m at the end of last year, suggesting that additional debt may need to be drawn down to meet these deferred consideration payments.

RPS’s acquisition-led growth strategy might be acceptable if it generated high returns, but I’m not sure that it does.

2. Costly acquisitions?

RPS has a five-year average return on capital employed (ROCE) of 10%, which doesn’t seem exceptional for a knowledge-based business. In contrast, the firm’s larger peer, WS Atkins, has a five-year average ROCE of 24.6%.

One possible reason for this could be that RPS is paying slightly too much for its acquisitions. This might result in large chunks of intangible assets bulking up its balance sheet, but generating sub-par returns.

RPS’s earning per share growth appears to support this theory. The firm’s 10-year average earnings per share growth is just 5.5% per year, using reported earnings. These include amortisation of acquired intangibles — in other words, the write down of goodwill paid for acquisitions.

Although RPS likes to emphasise its adjusted profit figure, which excludes these amortisation costs, these represent actual cash paid out for acquisitions. According to the 2014 income statement, Amortisation of acquired intangibles and transaction related costs”  was close to £20m in both 2013 and 2014.

That’s a big chunk of the firm’s profits each year. RPS’s operating profit was £51.4m in 2009, since when it has remained below this level, in part due to the costs described above.

Shareholders may want to ask if these constant acquisitions really adding enough earning power to the business to justify their cost.

3. Financial strength?


FInancially, RPS appears quite strong at first glance, with net gearing of just 19%. However, net debt doubled from £32m to £73m last year. Looking at the balance sheet, RPS’s current ratio of 1.5 is also decidedly average. I’d prefer to see this closer to 2.

Free cash flow isn’t amazing either. Excluding last year’s acquisitions, the firm’s dividend was barely covered by free cash flow, which of course was heavily negative when acquisitions were included. I’ve already mentioned the pressure on cash flow created by a constant stream of deferred consideration.

RPS may be a good company, but it doesn’t seem a particularly compelling investment at the moment, in my view.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A share tip circled in a newspaper share listing

Did I sell Tullett Prebon Plc too soon?

A share tip circled in a newspaper share listingDisclosure: I have no financial interest in companies mentioned in this article.

In June 2014, I bought shares in interdealer broker Tullett Prebon Plc (LON:TLPR).

At the time, the firm’s stock was languishing well below 300p — I paid 282p for my shares. This put the stock on a forecast P/E of around 8, from memory, with a prospective yield of about 6%.

These seemed attractive value credentials, and a closer look at the firm did not reveal any major problems, other than somewhat languid performance. This appeared to be caused by two factors:

  • A lack of market volatility (which stimulates trading)
  • A technological shift away from voice broking and towards electronic trading in many of the firm’s markets

I was also encouraged by the acquisition of oil broker PVM, which was announced shortly before I made my purchase. All in all, it seemed like a good company suffering from poor sentiment, which was made worse by the impending departure of its charismatic CEO, Terry Smith.

That’s the buy, what about the sell?

Tullett shares now change hands for around 400p, having risen strongly over the last six months.

Earlier this week I decided to sell my holding, for a net gain of 42% in one year. The question is whether I sold too soon.

Tullett is still exhibiting strong momentum, and you could argue that it may have further to run. However, I’m a value investor, and my purchase was based on the firm’s shares being unwarrantedly cheap. That’s no longer the case.

While its current P/E of about 12 is hardly overpriced, the yield has dropped to 4.2%. Tullett no longer looks all that much cheaper than peer ICAP, when that firm’s superior operating margin (9.3% vs 6.8% for Tullett) and stronger forecast growth are taken into account.

It’s entirely possible that I sold my Tullett shares too soon — it’s a classic problem for value investors, who tend to buy too soon and sell too soon.

However, I’m happy to lock in a 42% gain in one year and perhaps leave something on the table for the next person. Tullett is only expected to deliver earnings per share growth of about 5% this year and in 2016, which doesn’t seem likely to prompt a further re-rating of the shares, in my view.

Taking a wider view, it seems inevitable to me that all but the most specialist voice broking services will gradually be replaced by electronic trading. There is a useful slide in the 2014 analysts’ presentation which illustrates how Tullett sees the market changing in this direction.

Although Tullett’s yield remains attractive, I’m running this portfolio to try and maximise total returns, with a bias towards capital gains. So I sold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.