Is this AIM-listed asset/energy support services groupa genuinely evolving turnaround, or does a 6% prospective yield imply the market has justifiable doubts?
I initially drew attention as a potential recovery play in January 2016 after Lakehouse had plunged below 40p from a 90p flotation price in March 2015, its property-related sub-contractor services hit by a diktat to landlords to reduce rents by 1% annually for the next four years.
Energy services were also running into landlord constraints, hence lower margins for insulation contracts and delays installing smart meters. Investors dumped stock in a sense they had been misled by an early January 2016 update that things were in line.
The drop below 40p implied a price/earnings (PE) of 4 based on revised forecasts by Peel Hunt, Lakehouse's broker, and a prospective yield of 7.5%, yet the table shows how the year to end-September 2016 actually resulted in big losses.
That August, with the stock down to 26p after a third profit warning - an old adage suggests is the trigger to "buy" - I was encouraged how Bob Holt, the founder of , a successful support services group, had decided to become executive chairman. I thought the stock "still speculative but favouring upside" amid a challenge to reduce £30.6 million net debt.
Those results seemed a classic clear-out and, although profit/earnings have been downgraded by 18% for the latest financial year, and by 12% in respect of 2018, it appears to mainly reflect a disposal.
The proceeds mean expectations for the dividend remain at 2p and 2.5p per share, hence a 6% yield with the stock currently at 40.5p. Its fall from 52p mid-year suggests the market perceives risks given Lakehouse's orientation towards local authorities and housing associations; both of which face spending constraints, also Labour party rhetoric tending against private sub-contractors.
Disposal, debt reduction and cash flow should support dividends
Interims to end-March 2017 showed net debt of £24.7 million, having blipped up and down e.g. with deferred consideration payments for acquisitions, a legacy of rapid expansion.
Holt asserted last June that, after a strategic review, the group's core businesses of compliance, energy services and construction were performing well, although property services had declined from 37% to 20% of group revenue, like-for-like, hence interim group revenue was 11% lower at £149.8 million, despite the three other divisions advancing 14% overall.
The market had been concerned about operational cash flow conversion but this had mitigated to a 12% outflow versus 170% in first-half 2016 year.
Since an April 2017 dividend payment the board has opted to defer an interim payout, but "we maintain our policy of paying a progressive dividend, so the subject will continue to be reviewed during the second half."
This is crucial because dividends are the prime support until earnings recovery is established, also considering £64.3 million goodwill/intangibles within £47.9 million net assets. The end-March 2017 balance sheet had only £0.3 million cash versus the cash flow statement, showing £4.6 million paid as dividends during the 2016 financial year, also £4 million proceeds from bank borrowings during first-half 2017.
The current sale of Orchard, a consultancy business helping companies with energy procurement and usage, for £12.4 million with an estimated £5 million gain on book value is said to help reduce debt, but also looks welcome to secure payouts.
Medium-term sale of property services also?
Strategically, the sale of Orchard is said to enable focus "on the group's operative-focused activities within its compliance and energy services divisions", which sounds a bit odd not to mention property services.
You quite wonder if the board is open to offers for the property services side; cited as "a significant operational turnaround, given the challenges in roofing in 2016", currently stabilised albeit with some risk of further write-downs until legacy contracts are closed out in the current second half.
My reading is that management will continue to pursue a turnaround, but if property services lag other divisions to dirty results reporting then a sale looks possible.
Given net debt of £24.7 million at end-March, further debt reduction and cash-resource to develop the better-performing activities also make returns to shareholders, might improve the stock's rating. The group does have a £35 million bank facility so there is no near-term pressure to cut debt.
Income statement is no great shakes
Looking back at June's interims to end-March 2017, cost of sales marginally increased like-for-like from 8.79% to 8.96% of revenue, and "other operating expenses" from 7.47% to 8.38% of gross profit; which to an extent may reflect operational gearing with the fall in turnover, i.e. some costs being difficult to cut proportionally.
Yet like-for-like interim operating profit slumped 49.1% versus turnover down 10.7% to £149.8 million, so cost control should be a priority. A bit further down the statement, exceptional costs jumped from £0.6 million to £1.1 million, not massive in context but higher even so. Amortisation of intangibles edged down 5.4%, albeit a substantial £5.3 million in context, hence a £2.8 million operating loss on an IFRS3 basis then £0.8 million net finance costs extended the pre-tax loss to £3.6 million versus £1.8 million like-for-like.
So, even setting aside the discrepancy between statutory and normalised profits, the income statement conveys there is "plenty yet to do", part-explaining why the stock has been a roller-coaster back to its level a year ago. As proclaimed in the interim results highlights, cash flow has at least levelled from a £10.6 million outflow on operations.
|Lakehouse - financial summary||Broker forecasts|
|year ended 30 Sep||2012||2013||2014||2015||2016||2017||2018|
|Turnover (£ million)||152||192||302||340||334|
|IFRS3 pre-tax profit (£m)||3.9||4.1||0.1||3.2||-33.3|
|Normalised pre-tax profit (£m)||4.2||4.6||4.4||11.8||-9.9||5.5||8.6|
|Operating margin (%)||2.9||2.5||1.8||3.9||-2.8|
|IFRS3 earnings/share (p)||1.8||1.9||-0.2||1.7||-18.6|
|Normalised earnings/share (p)||2.0||2.2||2.5||8.2||-4.0||2.7||4.3|
|Earnings per share growth (%)||10.2||15.2||228||56.4|
|Price/earnings multiple (x)||-10.2||14.9||9.5|
|Cash flow/share (p)||2.1||2.3||3.7||13.1||-2.6|
|Dividend per share (p)||2.9||2.0||2.5|
|Covered by earnings (x)||1.4||1.7|
|Net tangible assets per share (p)||1.3||-11.6|
|Source: Company REFS|
Funds raise exposure
Between March and July this year, announcements show funds such as, and Harwood Capital - all operated by Christopher Mills, a US/UK smaller companies specialist - increasing exposure through 10% to 15.24% as of last July; which is encouraging because these funds are effectively locked in - selling would drive the price down against their interests - thus demonstrating conviction.
So, although Lakehouse appears unloved by the market and its updates convey a sense of "plenty remains to be done", the long-term case looks intact and a 6% prospective yield fair compensation for the holding risks.
Fears of a Conservative party leadership contest and a Labour government before 2022 appear overdone. Thus, Lakehouse merits accumulating by patient investors: a chance to lock in attractive yield with capital upside as progress with the turnaround reduces risk.
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