The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
What does the price now have to do with the price in 2012/13?
https://www.tradingview.com/x/XV25tyhZ/
The answer is... nothing.
We're right into the apex of this triangle with strong fundamentals. I admit I'm expecting a break out to the upside in the short term.
Tricky, I believe I covered that in the previous post...
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- the business states amortisation & depreciation due to legacy contracts will tail off over the next few years. FY22 similar level… but when that happens the free cash flow will go straight to the bottom line. Honestly, I’d prefer they just write it off in one go… it would be easier to see where we land.
Totally has also delivered year on year revenue growth. There’s little to complain about.
There’s no wool to pull…
- the business states amortisation & depreciation due to legacy contracts will tail off over the next few years. FY22 similar level…but when that happens the free cash flow will go straght to the bottom line. Honestly, I’d prefer they just write it off in one go… it would be easier te see where we land.
Totally has also delivered year on year revenue growth. There’s little to complain about.
I think this is worth stating again for insights and discussion:
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Free cash flow is the money which after all costs the business gets to keep. This year 7.8M and the cash balance grew by 5.9M because they choose to repay HMRC (I think)
A dividend currently costing the 0.5M is
- easily sustainable and fully expected to increase over time
- negligible to the cash flow
- has limited impact on any acquisition they may choose to attempt
So a business 14.8M in cash at last report growing by over 7M per year and zero debt has plenty of options to finance an acquisition and fully invest it their business should they choose to do so.
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Therefore, given a price to free cash flow below 10 and 1/4 of the market cap in cash this business is currently undervalued.
The real question I have is, how will the cash be put to use?
Free cash flow is the money which after all costs the business gets to keep. This year 7.8M and the cash balance grew by 5.9M because they choose to repay HMRC (I think)
A dividend currently costing the 0.5M is
- easily sustainable and fully expected to increase over time
- negligible to the cash flow
- has limited impact on any acquisition they may choose to attempt
So a business 14.8M in cash at last report growing by over 7M per year and zero debt has plenty of options to finance an acquisition and fully invest it their business should they choose to do so.
This is why price action doesn't concern me at all while the business continues to move in a growth direction. The balance sheet and news will forcibly move the share price.
I personally choose to invest in this business because it's stable, they do what they say they will do and have earned the trust of those with which they partner. This translates into reduced long term risk even if the growth goes away and I therefore have no plans to sell unless something fundamentally changes.
The dividend is affordable and likely to grow, and the business is clearly undervalued when compared to the free cash flow (the only financial metric that really counts at this stage)
The following statements from p.11 of the annual report matches exactly the understanding I gained from reading the white paper.
Changes to commissioning processes – the White Paper The Future of Health and Care published February 2021 On 11 February 2021, the Department of Health and Social Care published the White Paper Integration and Innovation: working together to improve health and social care for all.
The White Paper represents a shift away from the focus of competition which underpinned the 2012 government reforms. At the same time as removing some of the competition and procurement rules, it gives the NHS and its partners greater flexibility to deliver joined-up care to the increasing number of people who rely on joined-up services.
At the heart of the changes is the proposal to establish integrated care systems (ICS), which brings huge opportunities for faster decisions to be made to deliver changes to care as changes in demands are seen from the public. The new systems should allow and enable flexibility for geographical areas to determine the best arrangements for their populations and to work with trusted, respected partners to deliver targeted high-quality services without the need for lengthy procurement processes.
This should result in a reduction in bureaucracy and recognise quality partnerships where cooperation delivers improved care.
Partnership working has never been so important for the success of care delivery businesses – an area where all of Totally plc’s businesses shine.
Totally plc is already working in areas that have used the new systems as defined within the White Paper and welcomes the ongoing changes which mean services can quickly be mobilised to deliver targeted local services