Member Info for londoner7

Hi luxs,

I was impressed by your knowledge of Valley Group operations, so I looked at your earlier posts.

Clearly, you are in the trade, and I thought to ask for any publications you’d recommend for an investor in the sector.

But first, I had a look and came across ‘The Stockists’. Much of it is advertising but I saw a couple of sections of interest to me, a piece on wholesaling and business news.

A takeaway is that there are many different sectors operating within the distribution chain, which I’d define as between the manufactured flooring product to installation. The two listed companies I’m aware of, are Likewise and Headlam, who act between the manufacturers and retail venues or independent fitters, with each operating on gross margins of c. 30%.

The listed companies account for 50-60% of the UK market with private companies accounting for the balance, including Kellars, Floorwise, Carpet Line Direct and independent trader cooperatives like the Independent Flooring Group.

The numbers from the business news section are interesting but confusing to me. Oct trading is described as 16% down on last month, Sept, but only 0.9% down on last Oct. This is revenue based rather than volume.

The ONS has floorcovering inflation 7.7% YTD. HMRC has carpet imports into UK down 6.2% YTD. I know I’m not exactly comparing ‘apples with apples’, but that suggests a volume reduction of c. 14%.

There seems to be a mismatch between trading down only 0.9% Oct (YoY revenues) and the HMRC imports down 6.2% YTD. Perhaps the Oct month is an outlier.

luxs, I’d be interested in your critique of my summarization.

Also, looking at your recent comments on Likewise, these jumped out at me. “I would like to use them more but again and again can’t help to pull my hair out”; “improvements needed in basics stock levels, adequate p.o.s. (?)”; “sampling is poor”.

Given competition in business why do you persist with Likewise? Is it an account benefit, their regional dominance, specific product offering, or something else?

I would appreciate any reply. Thanks, in anticipation.

*For the record, I’ve been in and out of Headlam as an investor several times over the years. I’ve been monitoring Likewise since they came to the AIM market, but my current concerns are around their balance sheet, as indicated in my earlier posts. On the HBR board I have commented on Likewise several months (years?) back – favourably as I recall.

Interesting.

I don't know who you consider to be the Valley boss. I was referring to the Valley vendors (sellers) Stephen Mitchell and Kate Mitchell.

This is from the acquisition RNS:

"Post a one-month transition period following Acquisition Completion, none of the Valley Wholesale Carpets Vendors are expected to continue their involvement with or engagement in the Valley Wholesale Carpets Group's business."

Madtom,

I didn’t mean to imply the payment itself is a surprise, or not priced in. Rather my query is on the implications of the payment to the balance sheet.

Cash at the interims was £4.5m – tight given the expected payment due. When I saw the appointment of WH Ireland as joint broker I anticipated some commercial activity to bolster the balance sheet ahead of the payment. Perhaps it’s happened, e.g., a further loan, which didn’t warrant an RNS.

The Valley vendors are not involved in the current business, but own 5m shares, so further discussions on deferment are another possibility.

I was surprised that today’s update didn’t add any clarity on the matter, then again, it could be that Likewise expect to close the year with free cash flow, and all will be sorted.

Those are my thoughts and I wondered on yours as a regular poster here.

Until we get clarity, I think this deferred consideration is the ‘elephant in the room’.

Madtom, what are your thoughts on the deferred consideration due next month?

Sekforde, across my North Sea holdings FCF/EV is my preferred valuation metric, so I was interested in your post.

While I think there is common agreement that the $50m payment to Suncor is an element of FCF. I think including the BP profit share is a stretch too far.

The BP contingent consideration is a balance sheet liability to be repaid over many years. In H1 the $38m payment to BP reduces the contingent consideration, but there are other moving parts. The unwinding discount is a near constant and in the half-year added $28m to the CC. The change in fair value knocked $42m off the CC, a greater sum than the BP profit share, but this component is less predictable and can move in both directions.

However, the BP contingent consideration is just one of many moving parts in the balance sheet. In spite of a reduction in the BP consideration and a reduction in net debt in the half-year, net equity still fell by $20m.

The market valuation will comprise many components of the business but a fall in net equity isn’t a positive for valuation. For these reasons I don’t think it’s legitimate to add the BP profit share payment back into FCF.

On your closing net debt number of $515m for 2023 I see various justifications in your posts, but I think your main argument is extrapolation, i.e., the reduction in net debt in the two months to Oct 30th in spite of a $60m EPL payment. That was an excellent outcome, but I’ve learnt not to extrapolate such results over long periods. I don’t know the profile of CapEx payments through H2, but I do know that Golden Eagle offloads add significant noise to monthly cash flows. At current GE production levels, I estimate an offload accruing to Enquest every 140 days, worth c.$50m for each offload. If an offload occurred between end of August and end of Oct there will not be another before end of year. Another thought occurs – has EnQuest seen a rebate on Kraken FSPO lease payments following the issues last summer?

I estimate the revenue loss to Enquest of the Kraken issues at c.44m (1,500 bo*365*$80).

Adjusting my spreadsheet from last March for the Kraken loss, price of oil and recent updated guidance on OpEx and EPL I have year end net debt at $575. However, I thought the update was more positive than I expected, so and wouldn’t be surprised with a c. $550m outcome, making my 2023 FCF number:

Reduction in net debt (717-550) = +$167m.

Suncor payment +$50m

Rebate of 2022 EPL payment -$33m.

For 2023 FCF = $184m.

Based on these numbers my current FCF / EV metric is (184/(318+550) = 21.2%

*As I post this, I see Stevo12’s response to Sekforde. Deferment of payments is possible to improve FCF but suppliers, at least listed ones, will want to close out due invoices. Most years there are CapEx over runs into the following year – across the sector. But as Stevo12 says, this will show up in the accounts. Our FCF estimates are based on guided OpEx and CapEx numbers.

There some strange numbers being posted here. I suggest you refer back to the RNS rather than poster or broker (UBS) comment.

"In addition to the £10.2 billion of global net PRT premiums written year to date, we have also written £1.2 billion of individual annuities, taking total annuity net premiums written year to date to £11.4 billion.[3]

Indicatively, this creates new business CSM of c£910m, adding to the Group's total CSM balance. This was £12.4bn at HY23 and had grown at 7% over the year. The additional CSM created so far in H2 demonstrates our ability to continue to grow the CSM balance."

L&G posted some excellent slides explaining the impact of IFRS 17 and the operation/contribution of CSM to future profits. L&G are looking towards 6-7% CAGR in UK PRT operating profit over five years. I'm an investor here because I'm confident that L&G's number crunchers anticipate the Boots deal meeting those goals, and the posted CSM number (for YTD deals) beats 7% CSM growth this year - and with 20 deals done last year still time for a few more in 2023.

I'm in with a 9% + dividend yield on 5% p.a. growth to 2024.

LGRI and Retail isn't the whole business but it is the backbone. If CAGR is close to 7% and assuming UK inflation comes back towards 3% that's good real return growth in shareholder returns from a 9% starting point.

Yes there are investment risks but for a 10% stake within my portfolio I'll take that risk against the flat rate 7% L&G would offer me for an annuity.

Lordloadsoflolly, I need to be careful in my terminology.

MMs provide liquidity in the sense that they offer bid and ask prices with a maximum volume of shares. I see a market size of 1,000 shares on this page, but I don't think MMs are tied to this, rather I think its an indicative guide for investors.

The spread represents the best ask and best bid offered by a the participating MMs. To clarify this point, looking at Friday's closing quotes, 472p - 475p, an individual MM may be offering a bid of 472p but an ask of 477p. Another might have a bid of 470p and an ask of 475p. The spread based on the offers from those two MMs is 472p - 475p. Clearly, adding a 3rd MM or a say, a 10th, offers more competition in the market and would likely reduce the spread. The MM whose 472p offer is accepted is at risk of being unable to exit the trade in a fast moving market, though given a wide spread the risk is low.

If you're a quote and trade investor in modest volumes then that's the market your in.

But there is also an order book where investors can place limit orders. In the case of H&T's Friday closing price these orders will be outside the 472p-475p spread or at a volume that is unacceptable to MMs. The order will remain on the book until the market moves in it's favour or the order times out. If you want to trade well above the typical market volume then this is where you can trade with a limit on the price you buy or sell. Incidentally, the spread can narrow dramatically when both sides of the book meet.

That's the market background though with many nuances, such as manipulating the order book with 'ghost' orders which may be used to influence the market but are subsequently pulled. But these are short term influences and of little consequence to investors taking a patient approach to building or selling a stake in a company. (I built up my current stake in H&T between May and Sept with 7 orders)

In my post I was careful to use the phrase 'a relatively illiquid market'. Given the background to the market I describe above, and the low daily volume of trades that are made in H&T shares, an individual or several trades combined, in one direction, and of a size many times an MM's quoted volume while mopping up the order book, which at times may be small, can easily result in a significant move in the share price.

Then there are algorithmic trades that for an oil company may be linked internet comment on the price of Brent, or perhaps for H&T the price of gold. I don't know what if any algorithmic trading occurs in H&T shares. Whether manual or auto trading, I don't think the movement in H&T's share price on Friday was unconnected to Gold hitting a (British Pounds) high.

Lordloadsoflolly, you say, "sales of new jewellery are becoming more significant".

True, but this is only a factor within H&T's retail segment which accounted for just 17% of 2022 gross profit by sector. They address this adjustment to inventory with the following comment:

'Sales of pre-owned products represented 82% (H1’2022: 82%) of total sales by value. Supply of some

pre-owned jewellery categories continues to be constrained, particularly 14ct and 22ct gold jewellery.

This requires us to source higher volumes of new jewellery in substitution. We expect this dynamic to

persist for the time being and ultimately to reverse as the strong recent pawnbroking pledge book

growth reaches maturity.'

However, these are factors affecting H&T's business over the medium to long term, which will be reflected in share price over the medium to long term. In the short term the share price is impacted by short term effects, like the price of gold, which was the point of my post. In a relatively illiquid market for H&T shares it doesn't take much additional buying to raise the share price.

This is what Benjamin Graham meant when he said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

The price of gold is at all time highs (British Pounds), which is good for H&T's business.

From latest latest interims:

'The Group purchases gold, jewellery, and watches from customers. The prevailing gold price has a

direct impact on gold purchasing as it affects customer demand. The gold price has been elevated

since March 2022. The average gold price per troy ounce during the period was £1,566 (H1’2022:

£1,445) and coupled with the impact of inflation on customers disposable income, we have seen a

44% increase in purchase values year on year. Some of this volume is yet to be processed and is

currently held in inventory at cost. '

Kontiki2, Thanks for posting the link to the RS energy storage report.

I'm not invested in this space, but follow energy developments generally and look in on these chat groups for useful info and links - this one being a good example.

In it's relatively short 34 pages this report provides a concise view of the challenges of electricity storage in a wind and solar supplied market. The eye opener for me was the high level of storage required to counter weather changeability that can occur over decades - in the report this leads to stored hydrogen in salt caverns as a leading solution. Though it also bring in nuclear and gas (with CCS) to supply additional baseload.

Much for the decision makers to ponder. I'll continue to follow with interest.

I've no idea how this aligns with the investment case for ITM or CWR, but I'll continue to watch that with interest too.

Well worth a read for serious investors in the Hydrogen space.

Interims next week, Wed 23rd Aug. You'll get your answer on the dividend date.

I'd guess yesterday's price reaction was in response to the latest construction update from the ONS. I think this comment captures the situation:

Clive Docwra, managing director of property and construction consultancy McBains, commented: “After last month’s figures fuelled hopes of green shoots of recovery, today’s statistics will come as a blow to the construction sector.

“Particularly disappointing was that the fall was as a result of a decrease in new work, suggesting that confidence remains low among many big investors.

“It’s little surprise that private housing continues to struggle, and with falling house prices and low mortgage approval rates it will take some months before volume house-building shows a turnaround.”

Fair to say, the market is challenging. Higher interest rates are doing what they are supposed to do. Next month Breedon announce their interims when we'll find out how management are performing in this environment. Does Breedon still have the 'self help' abilities of the Peter Tom days?

Ooops. On reading back my post I realise it isn't entirely correct.

In my estimation, there remains two contracts each of c. 450K bbls. for May and June, with the May contract expiring shortly.

Enquest is now largely unhedged to the upside, with only c. 500K bbls (as of today) under costless collars and a ceiling of $76. These collars expire by end of June leaving only puts covering some downside.

Equinor, “According to a socioeconomic study by Wood Mackenzie and Voar Energy, if sanctioned Rosebank is estimated to create £8.1bn of direct investment, of which £6.3bn is likely to be invested in UK-based businesses.
Over the lifetime of the project, Rosebank will generate a total of £24.1 billion of gross value add (GVA), comprised of direct, indirect and induced economic impacts.”

Dumbly, “On the UK relying on imports, the main exporter of hydrocarbons to the UK is... Norway. I wonder whether they would get more economic benefit by developing Rosebank or developing more in Norway (see article yesterday, I think from Modestus) and exporting that to the UK”

The UK will derive little if any economic benefit from Norway, or any other country, developing their assets to supply our demand.

I am invested in Ithaca, who hold a 20% share in Rosebank. At a project level I’m far from certain that Rosebank will be a good investment for shareholders. Many recent NS developments have been a disaster for investors. But from a UK economic viewpoint those developments are a success.

The UK government knows this stuff. It’s basic economics, so does the Labour party, regardless of what some of their spokes-people say to the press.

Here’s a manifesto policy for the floating voter:

“While the party recognizes the adverse impact to the UK economy of ceasing North Sea oil and gas development, we believe the UK public is willing to support this policy to achieve our carbon reduction objectives. Pricing is the most effective mechanism to reduce demand, so the current freeze on fuel duty will be replaced by an annual 2xCPI increase in fuel duty, with a similar rate of duty applied to household gas consumption.

A vote for us demonstrates your commitment to UK 2050 climate targets.

Anything else is green washing!”

Thanks Therapist. That's the post I was looking for!

21 day loading cycles looks like the new norm. I'm old enough to remember when the Kraken offload cycles were 12 days.

I know many here follow energy cost comparisons.

Lazard's has just released their latest US energy costing analysis, considered the bible of the industry. I'd guess it has sufficient detail to satisfy most. It dives straight in - page 2 - with a very interesting analysis of the competing technologies.

Note, pricing is based on US costs, e.g. US Natural gas prices are much lower than available in the UK.

No politics, just facts.

https://www.lazard.com/research-insights/2023-levelized-cost-of-energyplus/

Two years ago I looked at the clean energy sector, primarily hydrogen, with a view to investing in companies like CWR and ITM or an EFT for a wider spread. I appreciated the replies to my queries from these boards but ultimately decided it wasn't an investment for me.

The suppliers of clean energy technology make compelling cases but I wanted to assess it from the customers side. As a long term investor in BHP, the largest miner in the world, I looked at what they had to say. Surprisingly, or perhaps not, they had a lot to say about the part hydrogen had to play in their mining activities and customer's activities such as steel making. Their primary argument against hydrogen was that EVs - and I'm talking huge EVs - are available today at competitive pricing while hydrogen was just a prospect for the future. The BHP documentation also showed a very wide view of future demand for hydrogen in the overall energy mix by 2050. The likes of BHP and Shell view hydrogen as a niche product with a 2% share of the energy mix, while supporters such as Berenberg had the hydrogen share at 15% by 2050.

Clearly a wide range of views but I found the BHP case most compelling. Since then I've followed the plot with interest, and while I've never had an interest in the solar or windfarm investment case, from an engineers perspective I find the arguments for the all sources of energy compelling.

To my point.

With that in mind I've started to read the latest Lazard's assessment of US energy supply costs, considered a bible of the industry. There is a section starting page 26 on hydrogen, which may interest follows of the hydrogen story.

https://www.lazard.com/research-insights/2023-levelized-cost-of-energyplus/

Tamovv,
Looking at this section from your post:
EBITDAX 2023E: 1.800 mUSD
- 120 mUSD financing costs
- 660 mUSD DD&A
Accounting profit before tax: 1.020 mUSD
Corporation tax (at 40%, without applying tax losses): -408 mUSD
EPL (35%): -449 mUSD
CFFO: 822,5 muSD (30% equals 250 mUSD, so nearly sufficient to close to gap to the 400 mUSD divident target this year)
---------------------------------------------------------------------------------------------------------
Your interest is in the Cash Flow From Operations (after tax) number. What was that number in 2022?

The presentation slide 23 has net cash from operating activities at $1.723m. This seems to me to me the metric for determining dividend payments. The slide doesn’t include tax payments but if I deduct the $184m tax charge from EBITDAX I get $1,732m, so isn’t that essentially the calculation?

The 2022 tax charge of $184m, included $131m for the EPL, leaving a $53m conventional tax charge. My understanding is a ‘net deferred tax asset’ of $392m should result in a low level of conventional tax in 2023. But I’m not an expert in oil taxation, e.g., where does $53m in 2022 come from? Next month’s Q1 numbers might help. In the meantime, I’m going to focus on the EPL charge.

I don’t see where you get EPL $449m. I have $283m. But rather than looking at the detail of my EPL calculation I think it’s worth reflecting on the $131m 2022 EPL charge as a point of reference.

2022 EPL is paid on a cash flow from Ops number of $1,723. Abex and finance costs are non-deductible, but lease principle and CapEx spending is deductible.

Given your 2023 EBITDAX $1,800m is below the 2022 number $1,916m and 2023 Capex guidance S420m is above the 2022 number $381m, and both movements reduce impact of EPL in 2023, then grossing the 2022 EPL charge will set the limit for the 2023 EPL charge.

2022, 7-month CPL charge, ((131*(12/7))/25%) = $898m equivalent FY EPL liability before 25% rate.

For 2023, 35%*$898m = $314m.

Therefore, based on guidance and current oil& gas prices the 2023 EPL charge will be <£314m.

* On the lower Q1 production I’ve revised my 2023 Q1 EBITDAX down to $475m (same as 2022 Q4)