Company Description
Created following a refinancing in 2004 CEPS Plc is an AIM-listed investment company with a strategy of acquiring majority stakes in profitable and steadily growing entrepreneurial companies. These then continue to be run on a stand-alone basis but with the financial and management support of CEPS. The company currently operates through two divisions; Sale of Goods and Rendering of Services.
The Sale of Goods division comprises Northamptonshire-based Davies Odell and Cheshire-based Friedman’s. Davies Odell designs, sells and distributes body armour products, matting products and a range of footwear repair products. The body armour products are designed for use in a range of power sports applications including motorcycle, ski & snowboarding and equestrian – the latter also being a key market for the businesses matting products along with the dairy industry. The footwear offering mainly consists of heel leather components for specialist quality shoe manufacturers, which are imported from the Far East for sale in the UK and Europe.
Friedman’s is a specialist textile importer, converter and distributor of plain and bespoke Lycra-based material. Its primary market is swimwear and dancewear manufacturers.
The Rendering of Services division comprises the Sunline business which incorporates Loughborough-based Polywrap and Redditch-based Lettershop. Polywrap provides production, wrapping and mailing services for predominantly paper-based direct mail, whilst Lettershop provides laser printing and associated services including data processing management and guillotine, folding and envelope enclosing.
CEPS is continuing to review additional investment opportunities but is doing so patiently – believing that valuations do not as yet adequately reflect the economic outlook.
Financials & Recent Trading:
CEPS announced results for the year ended 31st December 2008 on 23rd April. These showed an increased profit from ‘Rendering of Services’ as margins were improved, mixed with a very slight decline in the Sale of Goods division despite an 11% increase in revenue. This decline was largely attributable to the Friedman’s business being impacted by the weakness of Sterling against the Euro; with most of its material purchases made in Euro’s and costs proving difficult to pass on to recession-struck UK customers.
Overall, post-tax profit attributable to equity holders of the company was increased 27% to £624,000 on the back of a 9% increase in revenue to £16.80 million. Earnings per share rose from 6.32p to 7.51p.
During the year £156,000 of cash was generated, even after £686,000 of bank loan repayments and net debt was reduced from £3.25 million at 31st December 2007 to £2.92 million. At year-end net current assets totalled £508,000 and net tangible assets £312,000.
However, in the results statement the company noted it expects a “difficult” year in 2009, with the trading start to the year reportedly challenging and the company seeing much of the trading uncertainty it anticipated in the second half of 2008 manifesting itself.
Management:
Non-Executive Chairman Richard Organ was a founder investor in CEPS and has significant experience of manufacturing and marketing in the footwear and clothing industries gained with C & J Clark Ltd and Coats Viyella Plc.
Managing Director Peter Cook has held senior commercial and financial roles in both public and venture-capital financed companies. He has extensive experience, both in the UK and overseas, of various business sectors including engineering and construction, hire and leasing, information technology, manufacturing, oil and gas exploration and production service industries.
Finance Director Geoff Martin is a Chartered Accountant with experience in the profession, in commerce and overseas.
Non-Executive Director David Horner is founder of UK small company specialist Chelverton Asset Management Ltd. He also has particular experience in the areas of corporate recovery and corporate finance.
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Bull Points:
• Strong operational gearing
• Profitable and cash generative – reducing debt
• Economic conditions likely to result in attractive investment opportunities
• Recent signs of sterling regaining some strength
• Directors interests aligned with shareholders – they own over 22% of the equity
Bear Points:
• Permanent placement market is very week
• Expects a “difficult” year in 2009, with the trading start to the year reportedly challenging and outlook “unpredictable”
• Access to new credit in the economy remains difficult
Forecasts:
|
Year to 31 December |
Sales |
Pre-Tax Profit/(Losses) |
Earnings Per Share |
PE Ratio |
|
2007A |
£15.39m |
£0.745m |
7.24p |
2.8 |
|
2008A |
£16.8m |
£0.907m |
7.51p |
2.7 |
|
2009E |
£17.0m |
£0.907m |
7.5p |
2.7 |
Source: Company accounts & UKMicroCap.com
|
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Recommendation:
CEPS is not a short-term play as the company itself admits it faces a difficult year in 2009. However, this is a company which showed during 2008 that it can deliver in tough conditions and as a result it deserves to trade on a much higher earnings multiple than a low-cycle 2.7. There is debt, which may deter some but interest cover was a comfortable 4.8 times in 2008 and the company was solidly profitable and cash generative. In time, we believe CEPS will be re-rated and on the basis of higher earnings and as such, like recent recommendation ReThink Group (incidentally up from 8.25p to 11.75p since its recommendation last month), this is another stock we regard as one to BUY and tuck away.
Key Data
EPIC:
CEPS
Market: AIM
Spread:
17p –23p (26%)
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