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Turning around technology November 2013

Turning around technology

Regenersis is a company of many parts, all focused on serving consumer electronics companies and their  customers with a range of support, service, repair and insurance services. In June 2011, the board outlined a three-year strategy to deliver double digit sales and earnings growth through a focus on emerging markets and advanced solutions.

The strategy has so far proved successful with the core business in repairing consumer electronics devices. Customers include most of the major names, such as HTC, Nokia, Samsung, Orange, Virgin Media, Telefonica, Toshiba and others. Regenersis provides them with technical call centres or manages returns and repairs for a wide range of products, including mobile phones, laptops and tablets, set-top boxes and televisions. The company also operates in the business-tobusiness environment where it offers secure service and repair solutions for chip and pin devices, ATMs and even MRI scanners.

Building on its success in repair, the company is rolling out a pioneering range of services called Advance Solutions. The service includes in-field testing where Regenersis is in partnership with cable operators across the world to diagnose set-top box faults in the home, thereby reducing unnecessary returns.

The recently formed Renew business unit comprises Digital Care, which provides extended warranty and insurance services to end customers; Refurbishment, which provides legitimate quality refurbished components and devices to the end customer; and  Recommence, which offers client-led buy back, repair and onward resale of devices.

Becoming global

Since 2011 the company has built and acquired significant businesses in South Africa, Turkey, Mexico, Argentina and India while concentrating on the dual aims of the strategy to expand into emerging markets and provide advanced solutions such as repair avoidance and troubleshooting. This has led to the development of niche repair businesses in the payment and terminal sector and the medical devices sector.

As a result Regenersis has approximately 4,200 highly trained employees providing high quality, high volume repair facilities in 12 countries across the world. Last year the company handled over 7 million service events.

Last year, the call centre which the company operates for LG in the UK was ranked No 1 in a benchmark study carried out by Maia Consulting and published in Call Centre Focus” magazine. Regenersis scored 70% ahead of brand leaders like IBM (68%), Sony (61%) and HP (59%).

Regenersis goes one step further in that their call centres will help train customers to get the most out of a new device. In the event of a product malfunction, Regenersis will quickly diagnose the problem and make a repair either at the customer’s home or in one of its own depots. The company manages product returns and will refurbish and repackage the products to as-new condition.

Partnerships with device manufacturers

When the user requires an upgrade to the latest model, Regenersis will remarket it or recycle the old one, working with many of the world’s leading retailers and e-tailers to ensure the best price on returned products. By using its patented In-Field Diagnostic Tools the company can reduce repair returns by up to 60%, making substantial savings for its clients.

As an extension to their customer service, Regenersis Digital Care has developed a comprehensive range of warranty extension and insurance packages for consumer electronics and home appliances. The company also works with banks and insurance companies who want to outsource the administration of their warranty programmes with customised turnkey solutions.

Since its inception in 2000, Regenersis has generated over €250m for their customers, processing over 25 million devices which has in turn diverted some 4,000 tonnes of potentially harmful electric waste from landfill.

The implementation of a new global sales force has already brought in new business following the successful integration of the HDM Group of companies acquired in 2012. Landmark contracts include becoming the Europe-wide mobile repair provider for a major OEM; device refurbishment and supply partner for Telefonica Insurance; and Digital Care and Recommence solution for a leading Polish mobile operator. New contracts were awarded in South Africa, Sweden, Mexico and Romania whilst the group’s global presence was extended to include India.

Into India and S. Africa

This year, the group acquired Landela Electronics, the largest set-top box repair business in South Africa, for £1.5m. The Indian company Digicomp Complete Solutions was bought for £4.4m giving Regenersis a significant presence in Indian aftermarket services business.  A new partnership was formed with EcoAsia Technologies to fulfil refurbishment opportunities across the group’s client base in Europe and manage global programmes for OEMs.

As a result of these developments, new business wins have progressed very well and are significantly ahead of the run rate for this time last year. The improvement was reflected in the preliminary results for the year ended 30th June. Revenues were up 28% to £179.7m from £139.9m with operating profit more than doubled to £7.1m from £2.1m. Basic earnings per share were up 216% to 10.53p (2012 3.33p) while adjusted earnings were up 21% to 16.80p (2012 13.85p).

Plenty of scope for growth

Operating cash flow more than doubled to £9.9m (2012 £4.9m). Capital expenditure and R & D rose 27% to £4.2m against £3.3m but net debt at the 30th June was down to £1.9m from £2.9m for 2012 and £7.7m for the first half of 2013. A successful 3.3m share placing at 209p last March raised £6.9m which helped reduce debt. The company also pays a dividend having recommended a final of 1.83p giving a total for the year of 2.5p, up 127%.

Executive chairman Matthew Peacock commented on how quickly Renown activities had grown from what were just plans a year or so ago. He believes the record shows a clear demonstration of the company’s abilities to deliver new organic growth and will enable that impressive growth record to continue. No wonder the three brokers who follow the company rate the shares a strong buy.

John Snowden November 2013

More scope from a tidier Johnson Service Group – December 2013

More scope from a tidier Johnson Service Group

The origins of Johnson Service Group can be traced back to 1780. Johnson Service was a textile related business which expanded over the years by acquiring other UK regional businesses such as Pullers, Zernys, Bollom, Crockatts, Smiths, Kneels, Harris Clean, Hartonclean and Johnsons.

In 1995, the group entered the hospitality services market with the acquisition of Stalbridge Linen Services and achieved UK market leadership in textile rentals with the acquisition of the Semara Group in 2000. The company undertook a strategic review in 2002 and disposed of a number of non-performing and non-core businesses. They included the Irish textile  rental business and Washroom Services. The following year the group acquired Workplace Management which formed a new division which addressed the fast-growing market for facilities management (FM).

Expansion continued by strengthening the dry cleaning units in the South of England under the Johnson brand and through the acquisition of the upmarket Jeeves business in central London together with its overseas franchising  operation. The retail dry-cleaning business of Sketchley was acquired in May 2004.

Later that year, the  corporate wear side was strengthened with the acquisition of the UK’s leading corporate supplier, Dimensions. At the beginning of 2005 DCC Corporatewear joined the group to focus on the financial services and leisure sectors.

Disposals for new focus

During 2007 Wessex Textiles, which specialised in ambulance and paramedic clothing, was integrated into Dimensions Corporatewear which resulted in significant cost savings.

Towards the end of 2007 with indebtedness and financial gearing rising, the company decided to take action which ultimately led to the sale of  the Corporatewear division and the disposal of Johnson Clothing Ltd, the leading UK supplier of clothing for people at work. This was completed in April 2008.

The group did not pay a dividend in 2008 but in 2009 paid 0.75p and has made gradual increases every year since. In 2012 the group made two acquisitions, Cannon and Nickleby, the latter being integrated into the FM division. Cannon was integrated into the Apparelmaster division and the plant at Newmarket was retained.

Since the reorganisation in 2008, adjusted pre-tax profits rose from £6.0m to £12.2m in 2009 and steadily progressed (£14.5m in 2010, £15.0m in 2011) to £16.3m in 2012.

At the interim stage for fiscal 2012-13, adjusted pre-tax profits were up to £5.5m against £3.6m H1 2012. The main change of emphasis in 2013 was the decision to sell off the FM division. The facilities management side was sold off to Bell Rock Bidco, a company specially formed to effect the acquisition. The consideration of £32.2m was on a debt-free basis which netted down to an initial £28m with a further deferred consideration of up to £2.2m.

The deal, completed last August, will enable the group to focus on the Cannon Textile Care business acquired in March 2012. The drycleaning business has been rationalised with the closure of more than 100 underperforming branches together with the disposal of the non-core Alex Reid business.

The managing director of the FM division resigned following the completion of the sale. Following completion, executive chairman John Talbot stated that the disposal of this FM side of the business represents a further step in the board’s strategy to create a single focused Textile Services business.

Good scope for dividend increases

He also commented that the strong results for the first half were in line with expectations and significantly ahead of 2012. The disposal of the FM activities will help reduce debt from £55.3m to £25.6m. This is a major step in the board’s strategy to refocus the group on the main core business of Textile Services.

The main Apparelmaster company provides clothing to more than a million industrial and food production people every week. The sale of  FM will allow Johnson the scope to buy add-on businesses and hopefully give more flexibility to increase dividends as only around 25% of its profits are paid out as dividends. By concentrating on one main business,  the company may appeal to a larger group wanting to expand their range of support services.

John Snowden December 2013

Woodford: stay or go? November 2013

Woodford: stay or go?

The news that Neil Woodford is set to leave Invesco Perpetual next April to set up his own fund management group poses a £33 billion question for investors. That is the total amount Mr Woodford now manages using his Buffett-style, long-termist value methods that he has applied for the past 25 years. And boy, has it worked.

The teenage scribblers of the press can carp about recent results, but short-term data is meaningless in value investing. Instead check out the chart below which compares Invesco Perpetual Income with the FTSE 100 over 20 years. IP income has returned £9,000 for an initial £1,000 investment as compared with £4,260 for the  Footsie.

It’s common knowledge that Woodford achieved this by taking big contrarian positions, most notably in tobacco back in the late 1990s when he bought BAT and the like on PERs of about 6. He made more than 10 times his money. Most recently, his big call has been “big pharma”, with large stakes in GlaxoSmithKline, AstraZeneca, Roche and other giants.

Woodford has got ever more impatient with short-termism. I don’t blame him. Many of the advisers asked about his funds are lukewarm. Genuinely long-term value investing will always be an uncomfortable style and is ill suited to most financial advisers, who have little real understanding of investment and are much too trigger-happy.

So the issue is: stay or go? I have met Woodford’s successor as manager of the two big equity income funds (Income and High Income) and as Head of UK Equities, Mark Barnett. He is very different from Woodford, who is aloof and arrogant. Barnett appears more pragmatic and cautious, but is still a long-term value investor like Woodford. Over the past five years, the fund he manages (UK Strategic Income) has actually done better than Woodford’s, partly because Barnett never allows a stock to account for over 5% of his fund.

I personally own IP Income and intend to hold it to give Barnett a chance.

Chris Gilchrist, November 2013

Airline industry flying high November 2013

Airline industry flying high

I mentioned to readers back in June (issue 344) that I was bullish about the US air industry — both airline  operators and the major manufacturers. It was forecast — and was in my view likely — to have an exciting year. And while it has been a great investment so far, there is still time to get aboard.

Six months on, and the three players considered back then are between 30% and 55% higher. Over the same period the airlines sector is up nearly 15% against a 10% gain posted on the S&P 500. US Airways is still in the news over their merger with American that would make them the largest airline in the world. airlines, Delta Air Lines is the serious competition for US Airways-American, Boeing is an implied beneficiary of the continuing air travel success story. There are other equally well run businesses that offer opportunities to benefit from the strong sector performance: Alaska Air Group, Jetblue Airways Corp, Southwest Airlines — and even United is back on track after its troubled merger with Continental.

Historically the air travel sector has been one of the few actively despised by investors, because of the consistent record of bankruptcies and losses. One of the key factors in their success is the expansion of hub based operations. These offer operational and flight occupancy efficiencies, the success of which is reflected in the results. Also many older jets are being retired to the Mojave desert. This adds to the cost reduction benefits provided by the introduction of a new generation of fuel efficient and comfortable planes that passengers want to travel in.

Good momentum at US Airways

US Airways has its primary hub in Charlotte, North Carolina, and others in Phoenix and Philadelphia. Routes centre across the south east US, but do cover the entire country, most key European destinations and some in Africa and Asia. US Airways was trading at about $16.50 when I mentioned it in June. Since then there has been only one dip back to this level, with the shares trading above $19.00.

Earnings announced on 23rd October  suggested revenue up 9.1% year on year, and the Q3 earnings per share beat the forecast of $1.12 by $0.04. S&P listed them with a strong buy recommendation, and a target of $26.00. The consensus of brokers listed at Nasdaq.com is $22.00,  put ranges up to $29.00. The overall view is that US Airways is still undervalued.

The chart suggests that US Airways is currently overbought, possibly because of the positive buying reaction to the  earnings report. The trials of the American Airlines merger will undoubtedly cause some more dips, and these will be the opportunities to either buy shares or sell puts for a reduced cost entry or for income.

I am looking at buying the highest put I can at 6 months or so out, for example the 20th June 2014 $29.00, and buying shares for a total of $29.70, leaving just $0.70 or 2.4% exposure to risk. The 15th November $23 calls return $0.40, cutting my deficit in half. At any fall below $20.00 I will sell puts that can be exercised to buy more shares later, but in the short term will put the position in profit with about $0.50 available at-themoney. The options spreads have widened of late, some up to 20%, making these options to live with rather than to trade regularly.

Work your way into Delta

Delta Air Lines (DAL) is also on a great trajectory, up 150% since December 2012. Nasdaq.com reports 8 recommendations, 6 of them strong buy. The consensus target is $30.00, ranging to $34.00. The protection is a little more expensive, and so would have to be bought carefully. Buy the shares first, then as the share price increases add the June 2014 or January 2015 $35 puts, with a target of 3% premium — to buy the shares and the puts for less than $36. Delta provides a good alternative if the still unfinished merger of US Airways and American Airlines puts you off.

Boeing is different to the majority of aircraft builders in that — with Airbus —  it is one of only two major commercial aircraft manufacturers. While the share price is high, the chart suggests it still has some way to go. An increasing delivery rate on commercial aircraft — up from 7 per month to 10 by the  end of 2013, and to 14 per month by 2019— and an order book of 4,800 aircraft or $345bn, suggests the future for commercial aircraft is bright.

The defence side is not so rosy though, with shortfalls in fighter plane orders and deliveries. These deficiencies are offset by the commercial side success.

Boeing’s earnings, also released on 23rd October, shot the share price up to $131.00 — on a day the S&P fell by 0.75% — shrugging off the defence sector concerns.

For a protected position in Boeing try to keep the premium to less than 2.5%. Here my strategy is to buy January 2015 $170 puts for $44.50 and the shares later as they fall after the earnings hoorah, for a total of about $174.00, a 2.3% premium that guarantees $170.00 per share for 14 months. Selling calls for about 1.1% per month, plus the dividend will reduce costs and enhance the gain over the period.

The only drawback with such a highly priced share is that the minimum required for secured investment in Boeing is $17,400, about £10,800.

Or fly with ETFs

And if direct exposure to these shares is not your cup of tea, have a look at ETFs. The only air travel ETF —  Guggenheim Airline ETF (FAA) — has been and gone, wound up in March this year. That leaves general transport ETFs, or the industrials if you want to include Boeing.

I found the iShares DJ Transportation Average tracker (IYT) with about 20% exposure to airlines; iShares US Aerospace and Defence (ITS) which includes Boeing, Northrop Grumman, Lockheed Martin and General Dynamics, and the Industrial Select SPDR (XLI), featuring both operators and manufacturers but in smaller proportions. My view is that we should leave the bargepole behind, and reach out to this sector while its good businesses are prospering and delivering good results to investors.

Peter Marshall November 2013

TMR changes its mind November 2013

TMR changes its mind

My wife and I recently enjoyed taking our motorhome for a five-week trip to Sardinia and Corsica. I did take the precaution of putting in place TMR’s recommended stop-losses and gain-locks on my wife’s and my holdings, none of which were triggered while we were away. It was difficult to ignore the idiotic financial happenings in Washington during August and September, reported incessantly on BBC World each day, but I  was confident that a passive approach to my investments was best for me.

Imagine my surprise when I updated the data used by TMR on my return in late September, to find that its previous love affair with big caps, and its disdain for small caps, had been turned on its head. TMR is now showing a distinct jitteriness towards the FTSE 100 index, with a sharp downturn in the index forecast for the middle of next year. Its forecast has a horrible resemblance in its analysis to the situation in mid-2000, just before the FTSE 100 plunged from close to 7,000 to below 3,500 over the course of three truly awful years for investors. “Sell in May and go away” could well be the advice I will be giving in my next two articles.

However, TMR is fairly sanguine about FTSE 250 midcap companies, with a mild correction shown for October 2014 lasting less than a month. And there is no sign of a downturn in the forecasts for the Small Caps, Fledgling and AIM 100 indices, all of which look to be harbouring profitable opportunities.

New smallcap selections

I have therefore looked at smaller companies that TMR says are worth investigating and the following AIM 100 companies popped out: Numis Corporation, OPG Power Ventures, Prezzo, RWS Holdings, M&C SaatchiTelford Homes and Young & Co Brewery ‘A’. Unusually, all seven are fulfilling the second of my criteria that  they should not have had more than one loss-making year in the past five. In fact none of the seven has had a  negative year in this period and all are forecast to be profitable in the next twelve months. So which to choose?

Numis (NUM; 240p; stop-loss 188p) is already a constituent of the TMR portfolio and showing a good start of 62% profit since being recommended six months ago.

OPG Power Ventures (OPG; 60.25p; stop-loss 52.5p) is a power generating company in the chaotic Indian sub-continent. The finances of power companies in India have been in a parlous state for some time. Recent across-the board rises in tariffs were a welcome shot in the  arm for all the companies: the average 13% increase in prices led to many enjoying record earnings in the past twelve months. OPG has also recently increased generating capacity so underlying pre-tax profits soared by 50% in the same period. The Indian industrial scene is not for the faint-hearted but I shall take a small tranche of the shares and hope for the present promise to be translated into solid performance.

Quality bite

Prezzo (PRZ; 117p; stop-loss 88.25p) has been a successful recommendation in the past. This popular restaurant  chain of some 211 outlets has been one of the few expanding refreshment groups during the economic down-turn. Despite a lull in footfall during the Olympics, recent expansion has led to the underlying pre-tax profits improving by some 11%. High profile outlets, such as the newlyopened one on the wonderful Kings Cross concourse, will continue according to Chairman Michael Carlton, with 25 new sites due to open in the current financial year. A lot of this success is already in the price and I don’t expect it to soar as it did when I invested first time round, but this is a solid company with good prospects. I see it as well worth adding to the TMR portfolio once more.

RWS Holdings (RWS; 761p; stop-loss 574p) is very much a niche company, albeit one  that is a leader in its field. Its core activity is commercial translating, with a particular focus on the translation of  patent applications, representing over 70% of group sales. The economic downturn led to a reduction in the  amount of R&D work worldwide, and this hit sales. However, research tends to precede recovery and the recent rising number of patent filings led to an improvement in that part of the company’s finances of some 11%. Commercial translation lagged behind at about 4% but, even so, the company appears to be on an upward trajectory. One fly in the ointment is the European Union Patent (EUP) scheme, arriving late in 2014, which will reduce the number of languages into which patents will have to be translated to just three: English, French and German. Early fears that this would affect turnover seem to have been wrong and the general feeling is that the company remains well-poised to continue increasing turnover and profit.

Ad spend rising

M&C Saatchi (SAA; 308.5p; stop-loss 232p), the advertising agency, is as famous in its own right as many of its clients. Large companies are once more shelling out for advertising space and communications budgets are on the increase. Invoiced sales and profits were up 6% in the company’s most recent report, about double the sector’s average. Performance in the UK was good with an 8% improvement, with German and Italian sales also very strong. This is very much a cyclical story with profits lagging those of their clients. At the moment those   are strongly on the up, but, as always with cyclical sectors, a close eye needs to be kept on the data, and when those data turn sour, a quick exit needs to be made.

Telford Homes (TEF; 365p; stop-loss 272p) looks to be a pretty boring success story, with the London focused residential developer showing solid success with targeted sales. Even the predicted creation of apartments in central London for 2016 is already 55% sold. It is hardly surprising that the company was able to say that forthcoming results were likely to be well ahead of market  expectation, leading to a jump of 6% in the price of shares. Not an exciting investment but a potentially solid one.

Young & Company’s Brewery ‘A’ (YNGA; 992.5p; stop-loss 745p) is another company that has been previously in the TMR portfolio, though not as profitably as Prezzo was. Breweries generally had a good summer and Young’s was no exception, turning in excellent results for early 2013. I’m going to add all six new companies to the TMR portfolio and to my own or my wife’s portfolios. This will lead us being fully invested  with little spare cash in our broker’s accounts to cover rights issues and so on, which I see becoming more widespread as the economy recovers fully.

Cruise loser

The uncertainties of the American economy put the jitters into Carnival shares and the shares fell below their stop-loss. Carnival is hugely dependent on the American love of cruising and the relative lack of forward bookings has made the shares too speculative for TMR. They have been sold for a small loss of 5%.

TMR has also recommended that I sell my holdings in Travis Perkins, one of the most successful holdings in my present portfolio. I’m a little puzzled at this advice for a profitable share, which usually only comes because the share price has stagnated and better investment is available elsewhere. I cannot see this myself, and I shall ignore TMR’s grumpy analysis. I will, however, keep a close watch on this share and, while I won’t sell, I will tighten the stop-loss a little; this is shown in the TMR holdings table.

Roy Tipping November 2013

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