Shares in building company Bilby (LON:BILB) today fell 40% as a trading update detailing issues with one of its companies has led to a wipeout of an increased profit expectation:
This has been a rather savage move, but it seems that this is not uncommon. Bilby has only been listed since 2015 but investors have been on a rollercoaster ride already. Floated at 62.5p, shares quickly ascended to 150p before crashing back down to 40p in 2017. Since then they have been showing signs of testing the 150p level again before the end of last year when another profit warning dropped its price considerably.
Bilby may not be well known to the public. Based in Waltham Abbey in Essex, they describe themselves as a ‘leading supplier of gas heating and general building services in London and the South East’. Via different companies, they are literally facilities managers for business, picking up contracts across local authorities and other government departments.
As with many companies coming to market, monies raised have gone towards expansion, with Bilby covering a much wider range of services than before, instead of organically growing, acquiring companies instead. And with just 15 of 33 London boroughs served, there seems to be ample room for more business.
The warning comes in a trading update RNS. It starts:
The second half has seen a continuation of certain challenging customer circumstances originally announced in the interim statement in December 2018.
As previously announced P&R, one the five companies within the Group, gave notice of termination of its contract to supply building maintenance services for Ministry of Defence properties and is still subject to dispute and resolution proceedings. Additionally, delays to a major gas installation contract have continued and the Company remains in active discussion with the organisation regarding a resolution. As a result, P&R, through which the Company was undertaking both contracts, will now report a significant loss for the full year.
Helpfully this is quantified:
Accordingly, the Board expects the trading losses and associated write offs at the division to lead to the Group reporting a positive EBITDA of between £2.0 to £3.0 million before non-underlying restructuring costs and losses associated with the termination of the contract for Ministry of Defence properties. Whilst the future of gas services within the P&R division is now being reviewed, it remains a core service for the rest of Group.
This is where people may be worried. A check on the previous year accounts show underlying EBITDA as £6.29m. Assuming that the same underlying measure is used, that means the losses must be fairly large.
A quick scan of the accounts shows the business to be not in terrible shape. The last year has seen the cash position deteriorate heavily but the majority of this is due to working capital movements. There has been a marked deterioration in the quality of assets:
Accrued income has doubled here, and trade receivables that are past three months due have almost trebled. Whether this is due to the problems at P&R is up for debate, but these are not good signs. There appears to be sufficient room for more borrowings under the RCF and bank loan facilities.
One particular risk to be aware of here is customer concentration. With Bilby marketing themselves to local authorities these contracts tend to be big in nature. The accounts state that the biggest customers account for 12%, 8%, 7% and 6% of revenues. In other words, four customers make up a third of business.
Post-interims the company has acquired another company (Dunham) which is an electrical specialist for up to £1.4m + 250,000 shares, and is still eyeing up further acquisitions. Whether they might be able to after today’s announcement is another matter.
Visibility of revenues is huge here, which infers that many clients have multi-year commitments. With £270m visible, that is several years worth of work for Bilby. Although it should be noted that revenues do not equal profit.
This sector makes me nervous. Margins are thin here – Bilby’s average over the years seem to be about 5%. Contracts with government for routine services are often heavily weighted on price, and there are many firms that can provide the same service. Thus, quoting too low can quickly create problems, as it did for Carillion.
Here, it seems that Bilby have fallen prey to the same thing. I cannot think of many other reasons why it would choose to give up a government contract voluntarily apart from the reason that it was making a loss on it from quoting too low. The dispute that follows seems to explain this, because naturally if one signs a contract, it is expected to be honoured.
Another problem is management credibility. The interims contained this:
Nevertheless, we anticipate that revenues and EBITDA will still exceed those achieved in the preceding year.
With Research Tree estimates going as high as £7.1m for EBITDA, something is clearly very wrong.
The problems with the MOD contract would surely have not only developed in the past month. The increasing build up of accrued income and receivables over 3 months old potentially pointed to some type of problem.
The continued acquisitions will almost certainly mean some more reliance on debt. EBITDA is before adjustments, all of which appear to be cash – acquisition costs, share-based payments, and such. It is hard to imagine a decent cash flow here this year, let alone any money for a dividend.
The business itself does not have much of a moat, save for the fact that it has contractual agreements with customers. But on the other hand, the market valuation is particularly cheap now at just £14m, especially if you are prepared to believe what is happening is a temporal blip.
I am inclined to think that further pressure on council spending will put further pressure on these types of services in the future, and Bilby may benefit from that by acquiring new contracts, or alternatively they might be bumped off their existing ones if they are undercut. No real opinion to which way it may fall, but gut believe is that it may get worse before it gets better. 2/5.