Shares in communications provider Maintel Holdings (LON:MAI) fell 30% as the company issued a dismal trading statement, warning on lower profits and also cutting the dividend in half.
This will no doubt come as bad news for longer term holders, as the share price has disappointed for some time. Listed in 2004, the price topped 10 a few years ago, but since then the slide has been sharp. In the last year, the shares have lost half their value and unlike many others did not regain anything following the General Election result. It comes as no surprise that this share has been badly affected by Brexit and the subsequent uncertainties.
What’s gone wrong at Maintel Holdings?
The bad news comes in a trading update which covers the period to 31 December 2019. We are given the warning first, for the following reasons:
The protracted delay in the announcement of the new public sector procurement frameworks significantly reduced the number of available bids during the period. Whilst Maintel was awarded a number of such contracts through this channel in Q4, they were awarded too late in Q4 to deliver sufficient revenue in FY2019
· The continued political and economic uncertainty in the run up to the December general election also resulted in delays to project implementation and the securing of new contracts
· As a result of two of the group’s partners losing four contracts between them, managed service revenue to the Group reduced faster than expected. The Board is confident that the contract renewal profile for 2020 does not represent a similar risk.
This seems pretty standard at present and illustrates some of the risks inherent in these businesses. The profit impact is quantified:
For the year ended 31st December 2019, the Board now expects revenue of approximately £123m and adjusted EBITDA of approximately £10.8m excluding IFRS 16 adjustments and approximately £11.7m including IFRS 16 adjustments.
The previous expectations are not mentioned here, but a broker note (available on Research Tree) gives us estimates of revenues £133m and adjusted EBITDA £14.0m, so this appears to be a significant miss.
Maintel: A transforming business
Maintel are quite a difficult business to analyse. They have plenty of moving parts, as communications services can cover a wide range of services and across different types of enterprises, from public to private. The seeds of transformation are underway as the company progresses towards more cloud-based solutions. This is a popular theme with investors as the cloud promises high operational gearing and barriers to entry with a more reliable stream of revenues as customers pay regularly instead of one-offs.
On the downside, several companies across the world are also competing and on the quiet Amazon have been building up their capabilities.
What the basic picture shows is that Maintel have been quite successful at building revenues, but not profits:
It appears that very little of these are organic, and this has been achieved by a string of acquisitions. Some of these have been large relative to the company: Azzurri Communications was acquired in 2016, for a headline price of £48.5m. This allowed the company to double its revenues year on year.
Remarkably, not much dilution has taken place. The Azzurri acquisition was half debt and half equity, but there has been little other movement in this sense. Many of the other acquisitions were much smaller and paid out of existing resources.
There is also a large divergence between the adjusted EBITDA figures and statutory net profits. This is because the depreciation charges are high as the goodwill and intangible assets are amortised. This could lead to a wide range of interpretations: that the statutory results do not reflect the ‘real’ profitability, but at the same time the depreciation charges should be taken into consideration as they represent monies already paid.
Balance sheet woes
One thing is for certain, and that is the acquisitions have had a less flattering effect on the balance sheet. Intangible assets make up over half of all assets, and the net tangible asset position is highly negative. Current assets are also less than current liabilities (current ratio 0.68 on the last accounts), which is fine for those business financed by their suppliers, but that does not appear to be the case here. Invoices issues on average take 54 days to settle.
Debt is financed at a relatively cheap rate of 1.7-2.85% + LIBOR, and there appears to be some headroom with a projected amount of £26m in April 2020.
One problem has been the payout of dividends which has proved quite expensive. The policy was successfully progressive, but the costs came to almost £5m last year. It does seem possible that this could have been still maintained this year, but it may be more prudent to reserve the cash for unforeseen circumstances. Unfortunately it does seem that this dividend in part was underpinning the share price.
Are Maintel Holdings shares good value?
Despite the balance sheet, there are several good points about Maintel. Their range of products is wide, and unlike other smaller companies they do not suffer from customer concentration (there is not a customer which accounts for over 10% of revenues).
They generate cash in excess of the profit figures owing to depreciation charges, and there is some debt discipline as their facility automatically shrinks in size. A clean Brexit may clear up much of the uncertainty relating to their contracts.
However, profit warnings seem to be common here and the share price has lurched from one low to another. With many intangible assets on the balance sheet, more deterioration in business may lead to further write-downs. There is also plenty of competition in their areas.
I don’t particularly have any firm views or knowledge on this. The valuation of £40m makes the earnings multiple fairly low even on the reduced profit figures, but I don’t have much conviction to take a position. 3/5.