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Sweett Group (CSG)
Edmond Jackson's Stockwatch: Sweett Group
By Edmond Jackson | Thu, 4th July 2013 - 23:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
AIM-listed Sweett Group (CSG) looks interesting partly as a long-term play on Asia Pacific while sentiment is currently cautious. Even if China's challenges worsen in the short term, it is likely to offer superior growth potential to most parts of the world.
This dilemma helps explain why the property and infrastructure professional services group rose from 18p in the new year to a one-year high of 28p in April, then fell back as fears grew about Chinese credit issues impacting its economy and the wider region.
Sweett has blipped from 19p to 23p however following 2 July prelims for the year to end-March 2013 that show a 2011/12 pre-tax loss of £1.0 million being turned around into a £1.8 million pre-tax profit, for earnings per share (EPS) of 1.9p supporting a dividend of 1.0p. Excluding £1.5 million exceptional administrative expenses and £0.5 million amortisation, pre-tax profit was £3.7 million and EPS 3.7p. So at the very least the historic price/earnings (P/E) multiple is just over 10 times and could be viewed at six times, although Company REFS shows Sweett averaging a single-figure historic P/E during each of the last five years, reflecting caution over cyclicality.
|Year ended 31 March||2009||2010||2011||2012||2013||2014||2015|
|FRS3 pre-tax profit (£m)||2.2||2.12||2.34||-1.02||1.8|
|Normalised pre-tax profit (£m)||4.31||2.91||3.29||0.19||2.9||3.3|
|FRS3 earnings per share (pence)||2.8||2.5||2.6||-2.1||1.9|
|Normalised earnings/share (p)||6.41||3.86||4.11||-0.26||3.26||3.33||3.6|
|Cash flow per share (p)||3.7||7.98||0.78||-3.54|
|Capex per share (p)||2.75||1.37||1.43||2.11|
|Dividend per share (p)||2.5||2.3||1.3||0.5||1||1||1.04|
|Net tangible assets per share (p)||27.5||23.2||16.9||14|
|Source: Company REFS.|
Since the shares tested 50p in 2011 and the company has shown itself capable of making at least double its recent profits, Sweett Group is interesting to watch for ongoing recovery: the chairman describes a doubling of the dividend to 1.0p as "a major sign of the board's confidence in the future".
This beats pre-results expectations for the dividend to be held at 0.5p also for the 2013/14 year. If the board can build on this 1p payout then the prospective yield could be over 5% and with decent earnings cover. I note this not altogether for income purposes, but because the market is likely to re-rate the shares if the dividend grows. Broker forecasts remain cautious, yet management seems out to prove a few points.
Management says it is in the second year of a three-year strategy to capitalise on its global platform, grow the group's presence and services, focus on cash and improve margins - also re-allocating into fast-growth regions. It's pretty much what they should be doing any time but as a response to challenges two years ago it shows clear objectives. Annual savings of £2 million have been realised.
Group operations involve white-collar services such as cost management, programme and project management, advisory, and consulting - so ought to eventually benefit from an emerging recovery trend in UK construction, if this continues. Latest news that the UK service sector is growing at the fastest rate for two years is a broad yet positive sign.
Geographically Europe (including the UK) represents about 52% of revenue; Asia Pacific 32%; the Middle East, Africa and India 15%; the remainder from investments (mainly UK PFI projects). Asia Pacific is regarded as the main growth market with revenue up 13.5%, however Europe is the chief profits contributor at £2.6 million (after amortisation). Asia Pacific is near £600,000 and the Middle East segment has returned to a near £800,000 profit after a £1.2 million loss last year.
Similarly investments yielded a £500,000 profit after a £700,000 loss. Ongoing investment in new resources in Asia Pacific helps explain its relatively modest profit contribution. The order book has grown by £10 million since August 2012 to stand at £100 million at end-May 2013, with a healthy split across regions.
Last September, management anticipated fluctuations in the Chinese economy, however they "believe that it will continue to grow significantly over the long term and will enable the group to benefit from cross-selling opportunities with international clients". Although the Chinese construction market continues to slacken, management says it is securing business and in Hong Kong its transportation team is involved in four of five major upgrade programmes.
Asia Pacific still needs to bulk up its contribution to Sweett's profits given there are risks to the main driver, Europe, if the eurozone debt crisis hurts business confidence again. Management has also previously blamed Middle Eastern project postponement and cancellations on the Arab Spring, so if Egypt and/or Syria depress regional sentiment then an otherwise good recovery here could be compromised.
The encouraging aspect is that these risks provide an attractive valuation range to consider Sweett, after its costs have been cut to cope with lower activity in the developed world yet also expand in growth markets. Ultimately revenue/profit will determine value more than media scare stories on China and Egypt: trading in the first four months of the current financial year has been in line with expectations and "business sentiment in our main areas of activity is becoming more positive".
Net debt has reduced from just over £10.0 million to £7.1 million and since the largest financing needs are in Asia and China in particular, management is considering alternative funding in Hong Kong for more direct access and less exposure to currency movements. Cash flow and gearing covenants were infringed at end-March 2012 although a waiver was granted. All covenants were met during the last financial year and at end-March 2013 the group had £3 million undrawn credit lines.
For more information see sweettgroup.com.
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