The mix shift in Fire Protection is what really stands out here. Moving from low-margin subcontracting to compliance-driven work is exactly the kind of strategic repositioning that often flies under the radar in small caps. The regulatory tailwinds in fire safety post-Grenfell should provide multi-year demand visibility, which typically commands a premium multiple. Your point about Davies' operational track record is well taken—his willingness to close H Peel and potentially divest Alcor shows real capital discipline. That said, I share some of Winter's concern about M&A. The 3x EBIT entry point provides margin of safety, but I'd prefer to see buybacks given the valuation disconnect rather than acquisitions that carry execution risk. Still, the asymetry here is compelling. Quality analysis, thanks for sharing.
You are right, the sudden departure of the CFO warrants an explanation. As for now, this does not invalidate the thesis for me, but will look closely at the Interims.
I'm long, but tbh I don't consider it to be a quality business, but at least it should be less cyclical than construction. I'm also not convinced of their capital allocation skills. They should rather buy back shares than reinvesting, let alone M&A. But it's cheap - although always has been.
I agree on the quality aspect - what kind of multiple do you think it deserves?
I also agree on the share buybacks, they should have launched another tender as soon as they realized the business picks up. However, judging from the re-allocation of staff in Isoler (fire protection subsid), the closure of loss-making H Peel, and the likely divestiture of Alcor I see them moving in the right direction, and that would warrant more recognition they are currently getting.
I think your price target makes sense. A fair valuation should not be lower that the current one, but it also could be twice as high. I checked it again: Since 2009, they have traded at 3-4x EV/EBIT at the low, but also 9-10. The same for EV/revenue.
Regarding the return on capital, which has always been mediocre, but which has improved lately: I think one should adjust for the high goodwill to assess return on reinvestments. Then it looks better.
The thing about a business trading at 3x ev/ebit is that I don’t feel I need the multiple to expand to enjoy owning the business. After tax this gives a c 25% fcf yield that adds enough to the equity value each year to be worthwhile. Albeit still with the caveat that the cash has to be used wisely (share buybacks are my favourite)
Well, no. That's exactly the point. You don't have direct access to the 25% FCF yield. It doesn't reach you, so to say. If there is no multiple expansion, and they don't pay either a dividend or buy back shares, your return over the long term won't be any better than with owning a PE 12 stock. And if that firm has a higher return on reinvested capital, then your total return will probably be even worse. Think about it. That's why I pointed out the capital allocation.
That’s true if the multiple you use is P/E, but I would hope the market cap would be EV plus net cash which would rise over time even if EV/EBIT (my favoured multiple) holds steady. But you might be right that in small caps might not recognise this or the business might misuse the cash.
The mix shift in Fire Protection is what really stands out here. Moving from low-margin subcontracting to compliance-driven work is exactly the kind of strategic repositioning that often flies under the radar in small caps. The regulatory tailwinds in fire safety post-Grenfell should provide multi-year demand visibility, which typically commands a premium multiple. Your point about Davies' operational track record is well taken—his willingness to close H Peel and potentially divest Alcor shows real capital discipline. That said, I share some of Winter's concern about M&A. The 3x EBIT entry point provides margin of safety, but I'd prefer to see buybacks given the valuation disconnect rather than acquisitions that carry execution risk. Still, the asymetry here is compelling. Quality analysis, thanks for sharing.
New CFO - appointed in May will leave the board with immediate effect. Can mean nothing but I don't like such news.
You are right, the sudden departure of the CFO warrants an explanation. As for now, this does not invalidate the thesis for me, but will look closely at the Interims.
I'm long, but tbh I don't consider it to be a quality business, but at least it should be less cyclical than construction. I'm also not convinced of their capital allocation skills. They should rather buy back shares than reinvesting, let alone M&A. But it's cheap - although always has been.
I agree on the quality aspect - what kind of multiple do you think it deserves?
I also agree on the share buybacks, they should have launched another tender as soon as they realized the business picks up. However, judging from the re-allocation of staff in Isoler (fire protection subsid), the closure of loss-making H Peel, and the likely divestiture of Alcor I see them moving in the right direction, and that would warrant more recognition they are currently getting.
Your discovery's interesting.
I think your price target makes sense. A fair valuation should not be lower that the current one, but it also could be twice as high. I checked it again: Since 2009, they have traded at 3-4x EV/EBIT at the low, but also 9-10. The same for EV/revenue.
Regarding the return on capital, which has always been mediocre, but which has improved lately: I think one should adjust for the high goodwill to assess return on reinvestments. Then it looks better.
The thing about a business trading at 3x ev/ebit is that I don’t feel I need the multiple to expand to enjoy owning the business. After tax this gives a c 25% fcf yield that adds enough to the equity value each year to be worthwhile. Albeit still with the caveat that the cash has to be used wisely (share buybacks are my favourite)
Well, no. That's exactly the point. You don't have direct access to the 25% FCF yield. It doesn't reach you, so to say. If there is no multiple expansion, and they don't pay either a dividend or buy back shares, your return over the long term won't be any better than with owning a PE 12 stock. And if that firm has a higher return on reinvested capital, then your total return will probably be even worse. Think about it. That's why I pointed out the capital allocation.
That’s true if the multiple you use is P/E, but I would hope the market cap would be EV plus net cash which would rise over time even if EV/EBIT (my favoured multiple) holds steady. But you might be right that in small caps might not recognise this or the business might misuse the cash.