£’ 000s
Profit for YE 31-03-21 280
Add back loss making discontinued operations 919
Add back 1 off property abandonment costs 3,197
Add back one off litigation costs 1,560
Take of CorpTax on add backs (1,702) 30% Non allowed lunches?
Actual Profit 4,254
PE of 15? 63,810
Current Mkt Cap 40,400
Undervaluation Circa 50%
Or take the Buffet methodology and 10* pre tax. After adjustments - as above. (Though do not add back the lunches) Normalised Pre tax £6,307k Gives a similar valuation and MoS
Against that
There is basically no value in the balance sheet with Intangibles dwarfing all other categories.
Debtors seem well provided for, based on the company policies. But collection is slow. Though management see themselves as collecting better than the average in the industry.
Borrowings are high and there does need, IMHO, some demonstration by management that they can manage this and generate a positive cashflow to replace the negative cashflow that they have incurred seeking growth.
They owe a lot to the fee earning partners. Exactly how these arrangements work is not clear, and I would not expect them to be, but this could very well be a “where are all the shareholders yachts” scenario.
The tax rate seems high. There is a shed load of tax exempt items. Whilst these might be very reasonable business items, exempt tax items are invariably an area where management can be looking after themselves at the expenses of shareholders.
The company records income tax rather than corporation tax in the accounts. Makes you wonder about the CFO and the auditors.
The 2 directors are very well paid for the results they are currently delivering.
This is certainly not a Ben Graham investment. There are no real assets in the business and the intangibles are not worth much to any other party. I asked a few lawyers for their opinion on Ince and I had to ask a few before anyone even knew who they were. And even the one who did know them didn’t have any opinion on them.
I also do not see this as a Buffett GARP investment. I don’t think at the moment there is sufficient proof that this is a good business and the growth that exists has seemingly been almost entirely bought. And additions may be costly.
This is also not a Gabelli or Bakshi investment. There is no immediate catalyst to create action.
To the extent it is anything it potentially fits the Schloss model of a not great business, perhaps even a below par one with the potential to raise itself to average and to benefit significantly from that delivery and rerate. I have therefore taken a small position
From my perspective a couple of years of focussing on the company as it stands. Making it successful and operating well could potentially deliver very real changes in both profits and perception. Should this begin to happen I will add as a couple of years of incremental success will significantly change both the business, the balance sheet and the rating. Should these fail to be delivered I will sell. When taking on a Schloss investment it is important to remember that he did suggest that in may cases reversion would take up to 4 years. It of course does not have to take that long but any Schloss style buy needs to be on the basis of a long hold.
Average in 57.9p