Van Elle Holdings Shares Rise 10% Despite Mild Profit Warning

By | April 26, 2019

Here is an oddity: a company can warn on profits, yet its share price goes up instead of tanking. That’s what happened today to Van Elle Holdings (LON:VANL). In early trading it might have seemed like a familiar pattern might emerge, but there has been a remarkable comeback:

Given the low of 42p in early trade, this provides a nice boost to anyone would could have got in at that price. Whether there will be profit taking at a later date remains to be seen.

Van Elle is a smaller geo-technical engineering company providing piling services as well as specialist foundation services in the preparation of grounds for development. Almost immediately we might recoil at this: a similar company, Keller has been issuing its own profit warning, although much of this could be attributed to woes in overseas markets, a problem that Van Elle does not have.

That being said, as a contractor Van Elle does suffer many of the other problems that blight the sector such as reliance on big contracts, vulnerability to contract delays and cost-overruns as well as the larger macro factors. It has only IPO’d relatively recently, and in this short period of time it has already issued a prior profit warning as well has having to book in a £1.9m loss from the demise of Carillion – a significant cost relative to the size of the company.

So it could be said that most of the bad news is already in the share. Since opening at 100p, the shares quickly reached a high of 138.5p and since then the shares have de-rated quite a bit. They sit on a relatively modest forward multiple, but then again most companies in the sector do as well, reflecting the uncertainty around.

The Warning

The warning comes ahead of the full-year results. Here is a bit of a mouthful:

In terms of current year performance, the Group has experienced a level of uncertainty in its markets, particularly in the infrastructure sector, in the latter part of the year. This has meant that, despite encouraging progress in winning work, some contract award and start dates have been delayed by customers. As a result, whilst volumes in the fourth quarter have been the strongest of the year to date, sales for the full year are expected to fall short of levels previously expected by circa 3%. This reduction in forecast sales for the current year is expected to result in the Group delivering full year adjusted PBT slightly below the lower end of the range of market expectations.

To be fair much of this was already known, as in the half year report we already had a warning on profits.

Despite this, there are signs of progress:

In addition, cash management has been good and will result in net debt at year-end improved against previous forecasts and below the £5.6m reported at the end of H1.

Ad the outlook sounds good:

Looking ahead, the fourth quarter run-rate is expected to remain solid into the forthcoming year, as recently secured contracts mobilise and with ongoing enquiry levels remaining strong. Reflecting the improved commercial approach, which is focussed on longer term partnerships, the Group has a record current order book of £35m (April 2018: £25m) and is preferred bidder on a further £25m of contracts. This includes approximately £10m of Smart Motorway schemes, secured in the fourth quarter, and a record order book of £12m in the housing sector for the Group’s integrated piling and foundation solutions for national housebuilders.

A record order book is a good catalyst for a share price burst, as we have seen with companies such as TClarke (LON:CTO), although one things that investors dislike is the non-recurring nature and lumpy nature of the projects.

The Business

One thing that is apparent is that there is quite a large downturn in the business: profits have dropped by quite a long way, despite the bullish nature about how the business could be scaled.

Additionally there is the worry that things have unwound after the IPO. Operating margins in the business were historically decent at over 10%, on a reduced profit figure these figures are declining. It might be too soon to tell whether this is a trend, or a competitive response but many contractors do not earn large margins.

One thing that has gone up here are the company assets:

Much of the assets have been acquired under finance leases, and there are something like £17m in these commitments sitting on their balance sheet. The capital turnover ratio has reduced as the increase in assets are not being met by an increase in income. For the next year the figures will be worse because turnover falls.

However, this lends itself to being a decent position in terms of asset backing: the company owns freehold property to the tune of almost £6m, and with only a small amount in intangible assets, the net position here is very positive. In fact Stockopedia reports that the book value per share is higher than the current share price.

One thing to watch is capex. The IPO released a modest amount of cash for the company, but it does seem that the around 50% of operating cashflow is eaten up with this. In addition there are hefty payments for finance lease creditors. Combined, there are a net cash outflow last year, although with a end-year cash balance of £10m there is plenty of headroom. According to the last report, the capex programme is close to completion which should stem the flow from this. Whether this still applies remains to be seen, as growth here may be difficult without associated capex.

The company appear to be tightly managed, with realistic pay levels. Levels of debt and asset backing are sustainable and of little immediate threat.

Comment

The valuation of the company here is cheap. Here are the metrics from Stockopedia:

However, it is important not to be seduced on value alone, as what is cheap today can obviously get even cheaper. Companies such as this are also very dependent on macro factors. In recent years there has been almost endless amounts of money going around, which has made construction quite viable. A further increase in liquidity and relaxing in monetary policy would enable this to keep going.

If things went the other way a lot of companies such as Van Elle could see trouble. Money would flow away from construction and hence reduce demand for services. The concentration in both geography and customer may see Van Elle struggle. Whilst the balance sheet is strong, things can unravel quickly. Additionally, the share price here would be highly correlated to other shares which rely upon similar factors, which is something to consider when putting it in a portfolio.

Perhaps it is no surprise that the share price jumped a little, with the book value providing a natural floor it does seem that the order book increase will see this years figures providing a softer metric for next years comparisons which should show an increase, perhaps a good one.

Overall my feelings are neutral on this. 3/5

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