Monday, 13 February 2017

Hayward Tyler update the market

"Successful completion of loan note raise"

Time to restock and take note as to what the f*ck is happening here!

The share price has been decimated from 95p in October 2016 down to 46p today but has the market finally been appeased?

If you follow my posts on LSE then you will know I said last time I didn't expect a new repayment date beyond 31 March even though I secretly hoped it would be to tie in with the relaxed covenants.

So while it's disappointing they could only extend four weeks, we have however raised more from the loan note than we announced we were going to previously!

The £3.0m of short-term borrowings due under the RCF was to be paid by 31 January 2017 so presumably they have been hammering out an agreement since then and two weeks late here are the amended terms. The fear driving HAYT lower was a breakdown in communication which might lead to something altogether less desirable. But that's not what today's update reveals.

We have raised £0.6m (£0.4m was mentioned last time) which leaves a potential £0.3m worth of loan notes we can further draw upon. Hopefully we don't have to from now on!

Together with the £2.1m cash at hand mentioned in a company update from mid December, it places us a whisker away from the £3m total due in two weeks time. Cash-flow must have been tight and this is a concern I think the market has been and will now continue to be aware of. The questions of tight cash-flow / generation may prevail until final results are released and we can get a better understanding of how the company has performed.

But I expect this will be share price bottom given the imminent repayment of the £2.4m loan. Next week if they hope to get it in prior to week following (27th-28th).

13 February 2017

Successful completion of loan note raise

Hayward Tyler Group plc ("HTG", the "Company" or "Group"), the specialist engineering Group, comprising the operating companies of Hayward Tyler and Peter Brotherhood, is pleased to announce the successful completion of its latest loan note issue at £0.6m. The loan notes carry a 1-year term and pay interest at 6.75%. Proceeds of this issue will be used to reduce the Company's revolving credit facility ("RCF") with Royal Bank of Scotland ("RBS") by £0.6m.

The Group continues to have a supportive relationship with RBS, which has now agreed to extend the repayment date of the remaining balance of the £2.4m short term borrowings under the RCF to 28 February 2017.

Further updates regarding the repayment of the £2.4m short term borrowings will be made in due course.

China Car Sales for January stronger than expected

As expected sales for the first month of 2017 are down from December's record highs

A range of factors were expected to contribute to a dampening of data. The Chinese New Year was almost a week earlier I believe, many people therefore had their holidays around 7-8 days earlier than last year (my holiday came much earlier) and when that happens hundreds of millions of people travel the length and breadth of the country to return home to be with their families (or fly somewhere warm for two weeks). As a result major cities and economic / business hubs become deserted and the streets are literally deserted. It's not unusual in China, it happens every year, but at different times according to the Lunar Calendar. Results were also impacted by the anticipated removal of tax breaks late last year which was a major reason for record sales in December.

"Total Vehicle Sales in China decreased to 2520000 in January from 3057300 in December of 2016. Total Vehicle Sales in China averaged 925965.41 from 1997 until 2017, reaching an all time high of 3057300 in December of 2016"

Note the following article talks about car sales GROWTH and not actual month-to-month comparison. January sales still way up on 2016 as the chart from the link above suggests. Otherwise a bullish write-up. Yale Zhang, managing director at consultancy Automotive Foresight, said January’s sales figure was better than market forecasts, as analysts expected a decline in year-on-year sales because of the Lunar New Year holiday.

I liked this little snippet "The country's vehicle market expanded by almost 14% to just over 28m vehicles last year"

This article compliments by adding "Looking at it another way, China bought more cars last year than there are people in Australia, and a third of those were SUVs". Just lol. Incredible right?

Sales growth for battery electric and plug-in hybrid cars also dropped last month as Beijing requires all automakers to re-apply for their models to receive subsidies under a stricter regime following allegations of subsidy cheating.

"Factory owners can't sell cars they have now as they are not on the list, and are worried they won't get the subsidies either," said Xu Haidong, CAAM's assistant secretary general. "This has had an impact on new energy vehicles' sales and is the reason behind the big drop-off."

Overall if we check how our PGM metals are performing today in the wake of results they are down having retreated from recent highs along with other commodities like gold and silver. USD strength is behind this in my view. I would hazard a guess that Trump in the media abroad, behaving 'properly' (or as best as can be hoped) is a positive sign for USD strength going forward. It would therefore be wise to sell down precious metal related positions prior to these events. Trump has not stood by his America first rhetoric on a number of occasions during 'diplo-meets'.

Trump managed to avoid "repeating accusations that Japan was one of several countries devaluing their currencies to the disadvantage of the U.S." in the meeting with Abe.

"Abe and Trump also agreed to hold an economic dialogue after Trump withdrew the U.S. from the Trans-Pacific Partnership agreement. Market sentiment also received a boost after Trump agreed to honor the "one China" policy during a phone call with China's leader Xi Jinping late last week."

But I would think once the media frenzy cools and markets take stock, economic data will continue to lead the USD lower. US sentiment is also riding high following a ramptastic remark made last thursday, that certain posters across LSE would be proud of lol. He said he would be announcing something over the next two or three weeks that would be “phenomenal” in terms of tax, without providing any additional details.

Despite Dollar dominance over the Euro and Sterling which is a trend likely to continue, all three will likely remain inferior to rising precious metal prices expected to continue as this year progresses.

I hold LMI, SLP, FRES, RRS, CMCL, SHG and a couple of explorers.

Tuesday, 27 December 2016

Precious Metals Outlook – analysis and discussion

It’s no secret palladium has performed poorly in the lead up to Christmas. Since it peaked at $776/oz on 1st December, (60% up over 11 months) support has fallen away rapidly with the metal trading down at $654/oz. Platinum has by comparison enjoyed a relatively stable month having already fallen in the weeks earlier. The reasons behind this correction are at this point difficult to determine given lack of information but I doubt Nymex contracts demand for March delivery suddenly collapsed. More likely palladium prices are correcting their October-December rally, a move overdue given that other precious metals have been trending lower.

Around the 21st December an article titled ‘Chinese tax breaks do nothing for palladium price’ was published. This is the news that China has decided to extend tax breaks on the purchase of small vehicles into 2017. The Chinese tax rate on such purchases has been 5% since October 2015 and will be lifted to 7.5%, offering incentive as it remains below the usual 10% rate. Buyers pay the vehicle-purchase tax, which is applied to vehicle prices before the 17% value-added tax.

Many analysts were predicting the tax break would be left to expire at the end of the year and consequentially demand for small vehicles would be impacted. Approximately 75% of palladium demand comes from the auto-catalyst sector, specifically in gasoline engines and the two largest markets are the Chinese and US given diesel’s lack of market presence. Platinum loads are higher in diesel engines, but on a proportional basis demand from the auto industry is roughly 40% with jewellery responsible for the bulk of the remainder. So this move should be a positive signal for palladium in the short term as it will continue to encourage price-sensitive buyers of gasoline fed vehicles.

Moody’s Investor Service suggests the extension “should keep vehicle-purchase prices in the world number one auto market chugging along”.

The ratings agency believes owing to the tax-break extension, auto sales growth in 2017 could be higher than its previous expectation of 2.7%, which reflected the expiration of the tax break, although growth in 2017 will be slower given the reduced tax break and "potential pull forward of demand to 2016 from 2017 because of the expectation that the tax break would expire." While the US market has seen strong growth in recent years, China's car industry recorded a 18% jump in sales in June and may have grown by double digits during 2016 to more than 23 million vehicles.

Looking back a little further the Chinese government previously cut the vehicle-purchase tax to 5% from 10% between 20 January 2009 and 31 December 2009. It later extended the tax-relief period to the end of 2010, but raised the rate to 7.5% exactly as we are seeing now. The 2009 tax cut stimulated year-over-year auto sales growth to 45.5% in 2009 and to 32.5% in 2010 from 6.6% in 2008, according to the China Association of Automobile Manufacturers.

The markets reaction to the news suggests little short term impact, given buyers of palladium pushed prices to year highs only 2-3 weeks prior to this decision when it was expected the tax break would expire and auto-catalyst demand would subside in 2017. The market is instead being pulled higher and recently sold lower by greater forces and I’m of the view that short-term tax decisions bear little consequence to the trading price of purchasers who demand physical palladium. Norilsk are buying back palladium at spot prices to ensure long term stable supply to its customers and the transparency surrounding this development will no doubt be feeding into other investor rationale.

I would like to highlight segments of recent PGM market analysis released by Heraeus to close. Ongoing Dollar strength, the weakening Gold price, weak Chinese demand in the jewellery sector and a currently sluggish demand from the automobile sector, especially for diesel engines are the main reasons for current platinum weakness. Interesting to note the Platinum-Palladium spread fell to a level not seen since April 2002. A further convergence of the prices could therefore not be entirely unreasonable given stronger growth for gasoline engines in the coming year and the spot price is trading below major platinum producer costs. Last point worth considering “the Nymex short positions reached the highest level since February 2016, just under 1.28 million ounces.” How many more shorts will pile in now that Platinum are trading off 9 month lows?

Regarding Palladium’s recent surge to levels not seen since Autumn 2015 it should be noted that the news about restricted liquidity in bullion “is probably the main driver”. Rhodium is currently having its best quarter and according to the analysis even at current prices there is “a lot of buying interest” thanks to strong demand from the chemical and automotive industries. Iridium continues to trade at a high level also, with relatively small quantities traded at a very high level. Over the medium term liquidity issues “would indicate a further price rise”.

Monday, 15 August 2016

Platinum Sector Developments

Two developments have caught my eye today.

Firstly news that Miner Anglo American has come under pressure by its largest investor to sell its platinum mines to a state-backed vehicle. This has pushed the share price higher in early trading and it's no surprise given their open intentions to buy back platinum operations in the national interest. South Africa's pension fund the Public Investment Corporation (PIC) will likely not relent on this course given the delicate balance of platinum supply in the country. The PIC is reportedly looking to roll its other platinum interests into a new national mining company to rival the other majors in the country and this acquisition would fit the bill. Whether or not this deal ever comes to fruition it shows the appetite for platinum by national backed vehicles like the PIC. Given our profitable operations and low market valuation we may one day be the focus of a hostile takeover although more likely we will see institutional buying in the lead up to talks I would think. Despite being a small operation with limited future expansion prospects we are very profitable and would be a sensible addition to PIC's portfolio of assets given they are looking to sweep up platinum operations.

The second item for discussion is news that Zimbabwe are tightening regulations in the mining industry which will potentially impact platinum mine investment in the country. Zimbabwe produces around 8.5% of the world's platinum, the world's third largest producer and in terms of palladium is ranked fourth largest.

"A report by Reuters over the weekend says the draft bill, which has been more than a decade in the making, includes a provision that authorities will only issue mining rights to companies listed on the Zimbabwe stock exchange."

The majors operating in Zimbabwe are primarily platinum group metals companies such as Anglo American Platinum, Impala Platinum through its Zimplats subsidiary and Aquarius Platinum but none are currently listed on the Zimbabwe stock exchange. Foreign companies must also sell a majority stake (51%) to local investors under the country's indigenization laws. Recent developments suggest a deepening protectionist trend emerging in the country.

The Zimbabwe government earlier this year revoked the licences of all diamond mining companies operating inside the country. They consolidated diamond mining in the country's rich Marange fields under a state-owned entity. Foreign miners have also been ordered to return mineral leases which the state says is not being developed at 'a fast enough pace'. In January last year the country introduced a platinum export tax but suspended it once majors Amplats, Implats and Aquarius agreed to support local metal processing prior to export. Such government backed moves to control the industry heightens investor risk and will likely result in reduced investment, with neighbouring producers such as South African companies benefiting.

Friday, 18 March 2016

With the Malaysian Ringgit rising is it now time to invest in Malaysian small-caps?

I've always fancied MobilityOne (MBO) ever since that fateful week in January 2015 when the stock bounced off it's 52 week low, ending the month more than 100% higher. What follows is a breakdown of the key indicators.

The long term trend looks positive, demonstrating consecutive revenue growth every six months in all but three of the fifteen HY periods assessed. The company explored new avenues in the wake of the financial crisis and managed to mitigate the slowdown in the global economy.

MobilityOne's revenue stream has been growing from strength to strength but what of it's profits? Are the company products and the way in which it trades generating profits if any? I've compiled the figures for revenue and the gross profits during each of the 6 month period since 2008. What the chart shows is a parallel correlation between the revenue and the gross profit booked. The chart figures are in (GBP) millions, with the left-side measuring revenue and the right-side gross profit. As revenue has increased so has gross profits.

We should also take into account that the value of the MYR against the GBP (in which the accounts are reported) increased from 2008 up until 2010 rather quickly and remained stable until around mid 2013 before it began to lose value. Gross profits appeared stronger perhaps in part to the stronger currency exchange. More recently the MYR has lost purchasing power against the GBP and we saw that reflected in weaker gross profits despite record revenues in the first half of 2015. The second half results may suffer as a result of the extreme currency fluctuation during the latter half of the year. However since the start of the year the MYR has strengthened and regained some its losses which should reflect well in the first half 2016 results to be released in September.

The company have had a mixed performance in recent years, struggling to keep above water in some periods, but now appear to be on a stable growth platform. The loss booked in H213 was particularly bad due to the write-down of loss-making assets the company disposed of following a policy shift towards domestic trade. They also suffered from impairments in the first half of 2014 which impacted profits. During slower periods MBO have accessed loan facilities and received the support from Directors through in-house loans providing cheap access to finance. They have had no problems in paying down these facilities as will be illustrated a little later.

Operating profits are often squeezed due to the high cost of sales involved, continuing product research & development and previous expansion into emerging markets. The latter factor in particular has drained positive net cash-flow in an effort to expand into new territories, specifically Indonesia, Cambodia and the Philippines. The company have now disposed of their loss-making ventures and written down assets, stripping out excessive waste and are beginning to gain traction in the domestic market with operating profits booked in the past three periods.

The assets & liabilities make very interesting reading and I would encourage those interested to check out the FY 2013 accounts in order to understand the reasons why Net Assets fell considerably in the second half of 2013. The charts below show Net Assets fell considerably and have held around the same level for two years. Net Current Assets held have occasionally dipped into negative territory however more recently appear to be strengthening towards levels last seen in 2008-09.

This chart better illustrates the Net Current Asset position. The value of net current assets is often the preferred indicator of company health as it deals with working capital and other measures that affect the company's short-term financial health. Whilst net assets have suffered in the past due to writedowns the company has boosted it's short term net capacity. More on this later.

Here's the growing Net Current Asset value over the Net Asset position which appears to have bottomed. Fundamentally, Net Assets shouldn't suffer another shock as the value attributed to such has been much reduced. Add to this the company recently sunk £330k into purchasing new headquarters in Kuala Lumpar which is a hard asset. The Net Asset position doesn't reflect the impressive growth the company has experienced nor the increasing current asset position away from non-current assets. In June 2008 current assets were worth just £1.55m and by June 2015 they were worth almost £4.0m!

Cash held on the balance sheet at the end of each 6 month period has increased steadily for the most part besides H113. A steady trend upwards. The amount of debt held fluctuates as the company draws down on short-term loans and repays when it is due. Net debt peaked in the second half of 2011 at more than twice the total cash held. Since then Net debt fell to £442k in the first half of 2014. It shot higher in the second half of the year owing to a property purchase, increasing receivables and short term loans to cover the cash-flow. Crucially we saw a huge reduction in net debt over 6 months from £1,443,112 at H2 2014 to £734,128 today!

The chart suggests the BoD have a 'cash-retention' policy where possible to increase the amount held at every half year interval. This has it's benefits, providing easy means of cash-flow and shoring up current accounts. It also looks healthy on the balance sheets. We can also deduce that the company prefer to use free cash-flow to reduce loans rather than significantly increase the sums of cash held. The company has a large trading account surplus and inventories to boot which fluctuate according to demand and are partly responsible for the net debt swings.

If we focus on the non-cash current assets it's clear again that the scale of the company operations have increased significantly over the past 7 years. Inventories made up a greater proportion of ITOR in 2008 but due to lack of trade the company had relatively little Trade & Other Receivables due. But the trend began to improve in 2010 about the time loans increased and Net Debt also. ITOR peaked in H1 2011 whilst Net Debt peaked in the second half of the year. Inventories have since then been depleted whilst cash has continued to increase on the balance sheet. We saw one anomaly in H214 as loans increased and Net Debt also reversed it's falling trend. At this time the company took out a loan for the new headquarters in Kuala Lumpar. It also appears that Trade & Other Receivables spiked up at the same time which was unfortunate, most probably a series of late or due payments resulting from the company changing it's growth policy to domestic markets. Results in H1 2015 showed this to be an anomaly as Net Debt fell at the fastest pace on record helped by a strong operational performance and the collection of Trade and Other Receivables.

This chart shows a clear correlation between the Inventories & Trade Receivables less the Trade and Other Payables (we will call this Net ITOR) in comparison with the Net Debt position over the past 7 years. What we see are clear parallels between a rising Net ITOR and a rising Net Debt position. We know that because the greater proportion of ITOR has been receivables due rather than stocking up on inventory, the company has financed cash-flow through short term loans (expanding Net Debt). What the chart doesn't illustrate is that as both Net ITOR and Net Debt have fallen in tandem, the balance sheet has actually expanded. The company are moving towards Net cash and an even ITOR/TOP balance. I would hope to see a Net Cash position in the coming years.

Net Operating Cash-Flow is what the company generates from it's operations after interest among other things. Crucially it does not included Finance and Investing cash-flow, such income and expenditure like the purchase of property and the draw-down of a loan. This is purely an operational performance indicator. It is normal for it to fluctuate between each half. What the figures show is that operations were loss making for about 4 years but have since performed well aside from in 2014. Net Current Assets and Net cash-flow from operations were at their highest point since 2009.

The chart below better illustrates the trend. You would expect Net Current Assets and Net Debt to show similar correlations and they do. However we can also see a similar trend with the Net Operating cash-flow and Net Debt. If cash-flow from operations is strong in the period Net Debt falls. When the company are short of cash the Net Debt increases. What's exciting is that the company are headed towards another strong finish (H2 2015) which should see Current Assets increase, strong Net Operating cash-flow reducing the company's reliance on short term loans. In other words a reduction in Net Debt. All this will help reduce financing costs (interest).

I'm keen to reiterate this company are valued at £2.5 million on AIM. The markets should in theory forward value the company earnings and trading outlook. Instead this stock has been left largely ignored since June-July 2015. There was a large bounce on increased trading in January 2015 but otherwise volumes in general have been poor ever since November 2013.

If you take the operating profit figures it correlates well with the falling share-price over this period. More recently we have seen a return to profits but as yet this hasn't been reflected in the market value. The ringgits devaluation and general market weakening since the Autumn 2015 has kept investors at bay. Small-caps have suffered greatly. High growth countries such as Malaysia and its neigbours should do well in the coming decade compared to the ailing US whose economy is plagued with all manner of social and economic issues. Europe is an even greater concern.

More to the point, I would choose long established companies such as MBO that are largely ignored by investors, have only recently begun to report significant amounts of profit (in comparison to their market value) and are cash positive or are moving quickly towards it. Whilst MBO has seen it's net asset position (in particular non-current assets) fall as a result of failed ventures abroad it has responded well looking to capitalise on domestic share and expand its business through profitable trade. As a result, operating profits are improving, free cash is reducing the net debt position very quickly and the company are in a position to boost revenues through existing market places. I expect this trend to continue and will gain market recognition in the coming years.