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You can't deny it - since November it has been a pretty unpleasant time to be an Xchanging investor and since the results even more so. I wrote a few days ago that volumes were low so there were no big changes in positions. Having seen the continued slide I have looked again and, as is often the case, by looking elsewhere you seeing something quite different. The following large investment houses have reduced their positions in Xch since the beginning of this year: on 26 Jan Blackrock reduced their holding from 9.7M to under the disclosable threshold, on 28 Jan Artemis went from 36.6M to 30.6M, on 30 Jan, L&G went from 11.7M to 9.7M, on 11 Feb FIL went from 24.6M to 24.4M and on 03 Mar JP Morgan went from 12.2 to under the disclosable threshold. That is some headwind for a share and therefore not surprising that we have seen a drop. The question is why are these fund manager selling. If I had to make a stab at an answer it would be as follows: they have not seen the growth in 2014 that they hoped but equally they are constrained by their in house risk management policies - if a share drops too much they drop it. Having said all that finding out that the big boys had been unwinding their positions made me somewhat nervous so I decided to rematch the 2014 results presentation. Its a 45 mins presentation and I watched it twice all the way through including rewinding to listen more carefully to some bits. The long and short is that I felt a lot more comfortable after watching it and also revisiting some of the historic numbers. Revenue: 2012 - £527.9M 2013 - £526.4M 2014 - £406.8M Profit: 2012 - £50.4M 2013 - £55.5M 2014 - £55.8M Margin: 2012 - 9.5% 2013 - 10.5% 2014 - 13.7% EPS: 2012 - 10.39p 2013 - 10.30p 2014 - 11.86p Leaving revenue aside this is a dream story: profit is up over 10%, margins are up by nearly 50% and EPS is up by 15%. The worries are therefore revenue centric and are exacerbated by the referral of AgencyPort to the CMA. So what did Mr Lever have to say on revenues. Well BPO will have a last year of headwind as two slugs of revenue drop out, meaning £28M will drop away; they have however committed to hold the BPO profit stay although new sales may not fully make up the revenue shortfall. They are however remaining committed to growing the overall revenue in 2015 with the two remaining sectors namely Technology and Procurement. The story in procurement is probably the best as many of the sales required were done in the back end of last year.
going well so far - mind you did you see all those bloody sells at the end of today. Hopefully thats the reason for the 10% drop since I bought - more worrying is who and why have they offloaded. Why do I always promise to set a stop loss and never do!
Phoenixchi, Thanks for your kind words ref the write up. It sounds like you and I have the same question mark over their sales ability and I would certainly agree with the historic overemphasis on procedure and process. Where our view differ is on whether they will be able to nail sales going forwards. I think they will, both because, with the restructure complete, it is now going to be pretty much their sole focus and secondly because, as mentioned in my post, I think that they have been doing better in Sales than they are being given credit for but that this has been masked by it being numerous smaller deals and by the headwind of large contract dropping off which result in a net fall in revenue. Having said all that Sales has always been their weak spot so you may turn out to be right. Good luck for making the quick to medium 10%, I certainly think you will see within the next 3 months. Best wishes, ElProf
CORRECTION- Sorry a number of typos in my posts. For most it is pretty easy to work out what I meant to say but in Part 2 at the beginning of the last paragraph it should read ' So in short the SHARE PRICE is back where it was 2 years ago' not 'REVENUE'.
Great write-up, ElProfessor. I have inside knowledge of this company but can't, as yet, say how (for non-business reasons). Your key point which is spot on, though, is 'how good will they be at selling'. Well, sad to say, my view is that they will be poor. There used to be a huge culture within Xchanging of procedure and process - even by today's standards. It was a hangover from their early days where process and procedure formed the basis of their successful outsourcing. But process and procedure became a total obsession to the point where staff creativity was ignored. I fear the same thing still happens when they go to sell their products. Because they over-analyse and examine every possible lead before taking any chances and trying for a sale, they end up almost shutting out opportunities before giving them a fair crack. Hopefully, I will be wrong and I am about to buy back in but only, I am afraid, to try to make a quick- to medium 10% profit. Not one for the long-term for me.
Part 3 In short I am confident that the selling is well overdone. The volumes do not see to be larger enough for it to be a fund unwinding its position and I think it is just an over-reaction magnified by this being a small cap stock. I also think that the market is fully pricing in the CMA rejecting the Agency Port acquisition. When the acquisition was announced initially the stock has been languishing at around £1.50 and then initially soared to around £1.65 before slowly climbing to the £1.90 high. If Xchanging does get the green light then I think two things will happen: firstly the stock will jump c10% on the news and secondly it will be the confidence boost that will drive the stock upwards from there to the kind of price the analysts are agreeing on (£2.00). If the acquisition gets the red light then there may be a knee jerk reaction of a small fall on the day but as I say, I think that result is priced in, which is perverse as I judge that to be the least likely outcome. Interestingly the revenue from Agency Port is only £20.5M p.a. so the impact on the Xchanging revenue would be minor and it would generate a cash pile of £60M as Xchanging sold AgencyPort on. The current valuation of Xchanging is £330M which equates to £260M if you take out the £60M and that strikes me as ridiculously cheap for a company with margins at 13.7% and generating £58.8M of profit.
Part 2 ...were accounted for with (where Xchanging was operating a contract as 'Principal' rather than 'Managing Agent' then all of the client's spend was accountable as revenue) and with the Technology division booking as revenue reseller activity (again good for revenue but a killer for margins). In short Xchanging was buying revenue at the cost of profit. Margins of upwards of 13% is a fantastic position to be in because it means that as Xchanging does now grow revenue then a good slug of that will drop into profit. Actually there is a second benefit to flag and that is that Xchanging's restructuring to get to this level of margins has been a costly exercise, as is always the case for such activities, and last year we saw another exceptional related to restructuring, this time of £10.3M, which we will not have this coming year and should therefore see far more cash dropping through as well. The other important part of the Xchanging journey that is now complete has been its reposition from being a BPO company with a bolt on of technology and procurement to being a technology and procurement company with a cash cow legacy of BPO. The big if is now how well it can sell the technology that it has spent a fortune in developing (I am thinking particularly of Xuber) but if it does then much of the cost has been borne so the profit margins will be enormous. This brings me onto the perennial question for Xchanging which is how good are they at selling - the answer to that question is what will determine how successful they are going forwards. It is easy to be overly critical here but we know that they are not hunting the enormous deals that they used to (BAES, DB, Llloyds, United Biscuits, Boots) but are following a deliberate strategy of lots of smaller contracts; these by definition are not headlines grabbers and so will not cause sudden share price spikes. Over the past few years Xchanging have been pulling in these types of contracts but this has been masked by the headwind of the enormous ten year contracts coming to the end of their lives and therefore causing big revenue drop offs. Most of the big deal have now been exited so that headwind will fall away leaving the steady stream of contract wins to generate a growth in revenue. So in short the revenue is back where it was two years ago but the transformation in the company since then is remarkable. Page 44 of the powerpoint back that was used at presentation of full year results (it is easy to find online) is worth looking at as it summarises all that has been done over the past four years and it is pretty impresssive. You mention the purchase of 280,000 by the director Chirag Shah, earlier in the week and I agree that this is a reassuring sign of confidence from inside the company. There is also the purchase back in Sep 14 to consider of 50,000 shares by Geoff Unwin, the Chairman, which is important because he was buying at £1.85.
Moljen, Good to hear from you: I thought that everyone else who had ever been on this board had died! Even more well done to you than when I last wrote it for having crystallised your profit; I did not and am kicking myself for it. So what has actually happened and what is the company worth? Well for once, probably more by luck than judgement, I think the analysts have got it about right with consensus being just shy of £2.00. What we are seeing at the moment is the classic problem of the small cap stock, namely it is not that traded so can swing disproportionately. The stock held up fine to the October announcement of the CMA review of the Agencyport acquisition and even managed to hit a new high but when it was then announced that the acquisition was not going to get the green light at the Phase 1 stage but go to a Phase 2 Acquisition the market seems to have had enough. On top of this there has been the failure of Xchanging to be extended in their worker compensation service in Australia for New South Wales state; the shares reacted particularly badly to this in Nov 14 and fell 4.4% on the day of the announcement but I think the actual damage to the share price has been greater as it has hit confidence. The reality is that this was not a major contract for Xchanging, they were providing just 5% of the worker comp for NSW. NSW had 6 providers and decided to rationalise so got rid of the two smallest, one of which was Xchanging. This was clearly not a service issue which would have been worrying or other reasons. Where I do have a slight worry is over senior management's judgment on the investments that they made ahead of any commitment from the customer; the exceptional write off with the loss of this contract is £7.1M of which over half is for software development, that seems a bit punt to have taken when you were one of the small providers. The reaction to full year results is something that I find strange. The week before the shares had got briefly back up the mid 160s and here we are a couple of week after results at the mid 130s. Actually the results did not herald any bad news and to me were pretty positive for the emphatic statement that the transformation of Xchanging is now complete and for my part I think that they have done exactly what they said they would in 2014. They flagged, this time last year, that 2014 would be a year where a number of big revenue lines would fall away (XHRS, XTB, LME) and that they would therefore have a declining revenue but that they pledged to keep profit constant and then position themselves for growth again in 2015. Low and behold profit has been kept constant (well officially it is up but by so little as to being irrelevant) and with the significant revenue reduction the upside is that margins are now a very respectable 13.5%; if you cast you mind back to the end of the David Andrews era, yes revenues were up in the £700M but this was window dressing from how procurement contacts w
Currently sitting on a 20% loss on this share. I'm tempted to go back in, but company has spent it's cash pile and it may be some time before I break even.
Well the Sept plan didn't quite go as expected either here or elsewhere :-) However have kept an eye on these and yesterday's Director Buy was enough to bring me back with 3,567 (£5K) here so here's hoping for a quick run back up to the £1.80 to £2.00 range. You still in here Prof?
Sold at 180+ a few months ago but like this one and looking to get back in. The referral over recent acquisition to the CMA seems to explain part of recent fall. If all ok then this could take off again, Liberium say 220ish so alot of potential upside. Any views???
Prof - little bit more one tranche at 1.62 and another at 1.73. Tend to agree will go above 200 but think I've an okay chance that it'll still be here or hereabouts in a couple of months. So the cunning master plan is to try an make a quick wedge in this period elsewhere (put the proceeds into VOG and COMS and have a little left in reserve) and then step back in a couple of months prior to YE. I think I need to get into the habit of banking some profit and buying back on dips - also have GVC, DSG and CEY showing 20% 4 figure gains and from experience know that if I had sold any of these after little spurts up I could by now be sitting on an extra £10K from the last 12 months. Mind you it's all part of the onwards and upwards learning curve so hopefully all bodes well for the next 12 months. Atb and have a good weekend.
Moljen, It is a difficult one to call! On the one hand the old adage of 'a paper profit is not worth anything' springs to mind which has me agree that we have seen a good rise of late (you mention three months so I guess you bought c150p) however, and I have been tempted to exit some in the 180s, I think we have further to go. Today is the top close (well equal to yesterday) for 4 years and we came within .25p of the top intraday. I can understand that the share might take a breather but I think it will break the 190p shortly and then drive, with fairly little resistance, through 200p. I will exit some at that point, some more at 210p and quite a few more at 220p which is where I predict/ hope we will be by the time full year results are posted in Feb 15. Well done in any case to you for crystallising a profit. Best wishes, El Prof.
will continue to watch - been a nice 3 months but decided better short term options about. Bet that comment comes back to haunt me :-)
Hip hip hooray, nice too see this looking positive again. A while back we had a discussion on what they would do with all the cash in hand, and I know your big worry was they would fritter it away or purchase unwanted technological developments, well we now have our answer and thankfully they have done neither of the above. The market makers do seem to like the acquisition of 'Agencyport Europe', and if they like it that should mean good news for us. Nice to see this share back on track and hopefully some growth in 2014 as well as 2015.
Sometimes you get a week that makes you feel good; last week was one of those with the share price up every day and then a meteoric 10% rise on Friday. It makes me almost forget that it rained like mad last night when I was at an outside BBQ and that it is trying to do the same today as I do the garden; besides the plants all needed a good soaking! So what's new? The answer is 'quite a lot'. Let's start with the old adage of 'The trend is your friend' (ignoring of course the opposite adages which in investing there is for any adage, in this case it would be Buffett's 'Be fearful when others are greedy and greedy when others are fearful). SInce the full year results in Feb the trend has been downwards bottoming at 146p. Since late May we saw it stabilise and drift very slightly upwards with the interesting spike to 165p on 19 Jun before then falling back off to where it was before. What this week has done is set a powerful upward trend which I think we will see going on for a while now, although that obviously does not preclude short term fall backs. The second point to make relates to the reason why we saw this drift down post the Feb full year results. The market had driven Xch's share price up over the previous few years since its nadir at sub 50p first because it realised Xch was not going to breach its banking covenants, then because it saw Xch was actually cash generative, then because Xch restructured itself which meant both that people could understand what had been until then an unnecessarily complex business and that costs were slashed thereby making it even more cash generative and finally because it appeared to be returning to growth. The statements that accompanied the Feb full year statement referred to 2014 being a year of consolidation before returning to growth in 2015 with the result that there was a question over where that growth would come from. These two acquisitions go quite some way to answering that with Agency Port Europe alone bringing £18M of revenue and £5m of EBITDA to the table and that is before you take into account the cross selling opportunities and the cost synergies which Xch are quite rightly going to work on. The third point, and I am always conscious when I lean on analysts' target prices that I often write what a low opinion I have of them, is that on Friday Liberum raised its target from 195p to 210p and Investec from 210p to 255p (although you have to remember Investec are the inhouse broker so possibly conflicted) which means consensus has now moved up to 195p across all anaylsts. I am not sure when these two upgrades were done but I think they may been written once the Total Objects deal was known but not the Agency Port in which case we could see a further upgrade (although probably not from Investec who are already rather bullish). I would also expect that early next week we will see a number of the other analysts upgrade their targets and so consensus could well move north of 200p.
Thanks very much for your candid and honest reply, it does seem that all the restructuring has taken its toll. The box ticking doesn't sound a surprise when the top two guys are accountants. I hope things in the future improve for you as I'm sure we all want the company to do much better. Cheers PP
To answer your first question; no, not really. I transfered after 5 years from the London office in Leadenhall Street to Chatham. I just missed out on their move to the new place at Cannon Street. With regards to the vibe, only talking with a relevance to my department of course is not too great. I think we have felt the effect of management but only from a box ticking, stat recording point of view - management do like their spreadsheets!!! I did recieve the 200 shares back whenh they went public but i sold them at 285 about a year after they listed.
Do you enjoy working at XCH, is there a positive vibe and have you felt the changes within the company that the board have put in place over the last 12 to 24 months. Always find it interesting to see how some working within a company interprets that company. And if you don't mind me asking have you bought shares in the company. Apologies in advance for the nosiness. Cheers PP
Months of crap and now I've got XCH, COMS and CEY all apparently coming to boil. Already broken rule and piled heavily in one go into QPP (looks like paying off) rather than spreading the cash over time but these are really beginning to look good and the Directors buy could be the final ratification. God do I have some decisions to make this weekend!
ElProfessor you appear to have a more indepth knowledge of this company that i do and i've been working at Xchanging since 2005.
Once again a very well written and in depth reply, you must spend a lot of time reading up on anything new and old on XCH, your knowledge of this company is impressive. I do agree with you that the SP is near a low and it is definitely looking oversold. Lets hope for some positive news and a steady trickle back up. Likelihood is for now that we will get neither but the company is looking much stronger, cleaner and leaner. Eventually the share price will head to where it deserves to be. Again many thanks for your thoughts and opinions.
Sorry last line got cut off. What I was going to write was 'Think SP near the low'. We saw this last year when the SP hit a high of 150p post results and then drifted down to low 120s i.e. c20%. If you take the high of 186 this time (accepting that we saw an intraday high for a buy of 189.75) then we are now also 20% off. A mixture of sideway and upwards from here on in with hopefully a Q2 results which will outperform market expectations (which I think it will both because I think the mkt is being too pessimistic on what it is hearing and because the tone of the Q1 which stated they expected a stronger H2 sounds to me that they have a good sales pipeline but are being cautious in not over-declaring until they get them over the line.)
HI Ping Pong, Your point regarding the volumes is an important one. Xch is rarely a high volume share, so all it takes to move it strongly either way is a big player taking or unwinding a position. I have no specific insight as to what is going on but if I had to guess I would suggest that a player is unwinding a position having expected more buoyant annual results. The recent poor performance is frustrating rather than worrying. All the news coming out is neutral to good and it it interesting to see the analysts consensus unchanged post results at c 185 with Investec and Espirito Santo both at 200 and upwards ( as you will know I have a pretty low opinion of analysts but it is interesting that while usually they mark down their estimates as a share price falls they are not doing so). The David Andrews model for Xch was a company built on very large Enterprise Partnerships that ran for c 10years. Ken Lever, as well as inheriting a weak balance sheet, came in at a time when most of these big deals were in their twilight years. The ending of the big deals has meant a significant fall in revenues. This has been countered in two ways, one by cutting much of the bloated cost base that existed in Xch as a result of a highly complex structure, and in many cases overpaid, middle to senior management as well as by shutting firstly Hanover Square and then Leadenhall Street. (On the subject of Leadenhall Street, Xch got a lucky break with the £25M to exit their lease early, which meant that the move to the new office, with less staff and better infrastructure has been cash positive from day one and will reduce costs signficantly on an ongoing basis.) Revenue is down but costs are down a lot faster which means profits are up (or underpinned in 2014 when there is a big tail of in revenue from XTB ending) and Xch is actually now a strong cash generator. This leads me onto the second point of how the ending of the large contracts is being countered and that is by using the large amounts of cash generated for significant investment in new technology particularly in the Insurance space. Xch is repositioning itself from a BPO company based on a few large contracts to a Tech Company that also does BPO and with an extensive customer base albeit on smaller contracts. The real strength of the Xch position remains that it is hard wired into the London and therefore Global Insurance market. This market was in the dark ages from a tech point (think large leather contract folders being walked around the city) and Xch has been a key player in moving the market. At first they hit signficant resistance now most people get the need and Xch is in a unique position to continue to make more tech needs apparent and then to satisfy them. So in short: revenue down, costs down even more therefore lots of cash. Cash reinvested in tech to generate new small contracts. Key question is can Xch sell which I think it can now it is focused on smaller deals. Think SP is near t
I should have also added is it down to very low volumes.