A quick update on PGY. The main announcement is a profits warning sending shares down close to the 52 week low of 3.62p. As stated in the earlier interims, results were heavily reliant on trading activity in the second half of the year, which according to the statement reproduced below has been disappointing:
Significant strategic progress continues to be made, with a new, experienced senior management team now in place, and revenues over 50% up on the prior year, at an annual run-rate of some 70m. In our Interim Results on 27 March, we stated that the outturn for the year to 30 June 2015 would be heavily dependent on trading in the final few months, which are critical months for sales across the major businesses in the Group. Although almost all divisions are trading profitably, the final few months' trading is expected to be disappointing with ebitda, after central costs, markedly below expectations. Actions are in train both to address the underlying business performance and to establish the platform ever more firmly to facilitate future growth. Results for the full year will be released during the first two weeks of September.
Revenue levels have exceeded expectation and most divisions are running profitably, however EBITDA is markedly below expectations, markedly suggests it could be anywhere between 10 and 40%. Without further information it’s difficult to pinpoint why trading has been lacklustre, but it could have several contributory factors. Progility Technologies, a key division based in Australia is heavily focussed on the O&G and mining industries both are in a malaise which may have impacted trading. We must also take into account the following from the previous interim statement:
“We also expect the impact of our new business units in India and the UK to contribute only marginally to second half performance while we re-position them."
It’s difficult to predict with the impact on EBITDA, in my earlier post I predicted a figure of around 2.4mn on a 52.5mn revenue figure. Given that we know that the revenue run rate is circa 70mn then this suggests much higher costs than anticipated and I would hope that many of these costs will be one off, integration related and non recurring
There were signs that cash flow was not as expected before the profits warning when PGY announced the following a "further tranche of £500,000 of the redeemable loan stock to meet general working capital requirements."
Although the announcement is disappointing at this stage it's not catastrophic, what alarms most investors about PGY is the loan note structure. I’ve had several conversations with investors about the potential impact of continued PGY under performance in relation to the loan notes. Theoretically if the loan notes cannot be paid to the holder (Wayne Bos and the concert party) PGY could end up in a debt/equity swap or other corporate action affecting minority share holders. However, if the company fails to such an extent it would leave limited assets, certainly less than the DNY capital provided to expand the group. The only way Bos could do this and to leave minority shareholders high and dry would be to receive a cash injection from new shares/other loans. He could then call in the loans, whilst delisting he could simply wind up the unprofitable divisions to wipe off debts leaving a debt free 100% private entity. This is a risk which should be monitored on an ongoing basis, although the last RNS suggested that most divisions are trading profitably suggesting that deterioration into a situation as described above would take some time. However this still constitutes a risk, which needs to be added to the investment case.
Profit warnings are great levellers that stop you drifting towards confirmatory bias. I’ve spent time looking revisiting my initial investment thesis and looking through the most recent accounts. What did strike me at the time was that the Indian Unify deal seemed to be unbelievable bargain. Unify was an established business with a revenue of GBP19.9mn and a pre tax profit of GBP1.1mn and it was purchased by Progility for EUR 1mn. At the time of purchase Bos stated that
"Our plan is to re-structure Unify India, transitioning the company from being an original equipment manufacturer to becoming a tier one re-seller and distributor of products in Asia. This process will be disruptive to the business over the short term and this has been reflected in the acquisition price paid, however, we are confident that Unify India, when re-branded as part of the group, will become an important strategic addition to Progility.”
The statement above maybe a true and accurate reflection of the transaction and the acquisition may reflect the true market value of Unify. Unify may not have been generating GBP1.1mn pre tax profit on a regular basis. It may have been a declining business and Bos has been sold a lame duck. What we do know is that PGY have since valued the Unify acquisition over GBP3mn via the P&L, despite the earlier statement clarifying that Unify was only marginally contributing to overall revenue in 2015. Not exactly a red flag but again a sign of aggressive accounting practices, which need monitoring.
The only other news of the period was that the concert party, namely Lisa Vecchio on behalf of husband Mario have sold 2% of their holding taking the concert party to just under 85% of the outstanding stock. Also PGY also found, rather out belatedly, that NED, John Caterer has held 0.006% of the company since buying shares for 0.8p in July 2014.
PGY now needs that cross selling in its divisions is a reality. It needs to validate that hospital and healthcare clients want communications equipment and medical devices. It needs to provide evidence that its blue chip clients will use both PGY’s recruitment and training services. PGY needs to demonstrate that not only is it capable of achieving top line revenues but also achieving bottom line growth.
From a value perspective PGY still looks cheap at four times earnings. From a fundamental perspective the balance sheet looks like a car crash with minus 10 million in net tangible assets. PGY needs to prove the model which Wayne Bos has built over the past couple of years by generating net cash.
Disclosure: Long PGY with a 4% portfolio holding
Significant strategic progress continues to be made, with a new, experienced senior management team now in place, and revenues over 50% up on the prior year, at an annual run-rate of some 70m. In our Interim Results on 27 March, we stated that the outturn for the year to 30 June 2015 would be heavily dependent on trading in the final few months, which are critical months for sales across the major businesses in the Group. Although almost all divisions are trading profitably, the final few months' trading is expected to be disappointing with ebitda, after central costs, markedly below expectations. Actions are in train both to address the underlying business performance and to establish the platform ever more firmly to facilitate future growth. Results for the full year will be released during the first two weeks of September.
Revenue levels have exceeded expectation and most divisions are running profitably, however EBITDA is markedly below expectations, markedly suggests it could be anywhere between 10 and 40%. Without further information it’s difficult to pinpoint why trading has been lacklustre, but it could have several contributory factors. Progility Technologies, a key division based in Australia is heavily focussed on the O&G and mining industries both are in a malaise which may have impacted trading. We must also take into account the following from the previous interim statement:
“We also expect the impact of our new business units in India and the UK to contribute only marginally to second half performance while we re-position them."
It’s difficult to predict with the impact on EBITDA, in my earlier post I predicted a figure of around 2.4mn on a 52.5mn revenue figure. Given that we know that the revenue run rate is circa 70mn then this suggests much higher costs than anticipated and I would hope that many of these costs will be one off, integration related and non recurring
There were signs that cash flow was not as expected before the profits warning when PGY announced the following a "further tranche of £500,000 of the redeemable loan stock to meet general working capital requirements."
Although the announcement is disappointing at this stage it's not catastrophic, what alarms most investors about PGY is the loan note structure. I’ve had several conversations with investors about the potential impact of continued PGY under performance in relation to the loan notes. Theoretically if the loan notes cannot be paid to the holder (Wayne Bos and the concert party) PGY could end up in a debt/equity swap or other corporate action affecting minority share holders. However, if the company fails to such an extent it would leave limited assets, certainly less than the DNY capital provided to expand the group. The only way Bos could do this and to leave minority shareholders high and dry would be to receive a cash injection from new shares/other loans. He could then call in the loans, whilst delisting he could simply wind up the unprofitable divisions to wipe off debts leaving a debt free 100% private entity. This is a risk which should be monitored on an ongoing basis, although the last RNS suggested that most divisions are trading profitably suggesting that deterioration into a situation as described above would take some time. However this still constitutes a risk, which needs to be added to the investment case.
Profit warnings are great levellers that stop you drifting towards confirmatory bias. I’ve spent time looking revisiting my initial investment thesis and looking through the most recent accounts. What did strike me at the time was that the Indian Unify deal seemed to be unbelievable bargain. Unify was an established business with a revenue of GBP19.9mn and a pre tax profit of GBP1.1mn and it was purchased by Progility for EUR 1mn. At the time of purchase Bos stated that
"Our plan is to re-structure Unify India, transitioning the company from being an original equipment manufacturer to becoming a tier one re-seller and distributor of products in Asia. This process will be disruptive to the business over the short term and this has been reflected in the acquisition price paid, however, we are confident that Unify India, when re-branded as part of the group, will become an important strategic addition to Progility.”
The statement above maybe a true and accurate reflection of the transaction and the acquisition may reflect the true market value of Unify. Unify may not have been generating GBP1.1mn pre tax profit on a regular basis. It may have been a declining business and Bos has been sold a lame duck. What we do know is that PGY have since valued the Unify acquisition over GBP3mn via the P&L, despite the earlier statement clarifying that Unify was only marginally contributing to overall revenue in 2015. Not exactly a red flag but again a sign of aggressive accounting practices, which need monitoring.
The only other news of the period was that the concert party, namely Lisa Vecchio on behalf of husband Mario have sold 2% of their holding taking the concert party to just under 85% of the outstanding stock. Also PGY also found, rather out belatedly, that NED, John Caterer has held 0.006% of the company since buying shares for 0.8p in July 2014.
PGY now needs that cross selling in its divisions is a reality. It needs to validate that hospital and healthcare clients want communications equipment and medical devices. It needs to provide evidence that its blue chip clients will use both PGY’s recruitment and training services. PGY needs to demonstrate that not only is it capable of achieving top line revenues but also achieving bottom line growth.
From a value perspective PGY still looks cheap at four times earnings. From a fundamental perspective the balance sheet looks like a car crash with minus 10 million in net tangible assets. PGY needs to prove the model which Wayne Bos has built over the past couple of years by generating net cash.
Disclosure: Long PGY with a 4% portfolio holding