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PHSC PLC (PSHC.LON) - A Business for Free

6/27/2020

15 Comments

 
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PHSC plc (PHSC) is a £1.25 Mil market cap firm trading on the AIM market of the LSE.  It has current assets  and PPE of  £1.79 Mil net of Total Liabilities. At this price you get the operating businesses for free.
PHSC is a holding company  which was founded in 1990, it owns several subsidiaries which are engaged in  the business of health & safety consulting and training.  Here's a brief bio;

"PHSC Plc operates through its subsidiaries, which provides a range of health, safety, hygiene, environmental and quality systems consultancy and training services to organizations across the United Kingdom. It operates through the following segments: Health and Safety Division, ISL, PHSCL< QLM and RSA. The company was founded by Nicola C. Coote and Stephen A. King in 1990 and is headquartered in Kent, the United Kingdom."

Here's a few numbers;

Market Cap = £1.25 Mil
Share price = 8.50p
Common = 14,677,257 (No prefs,options or warrants)
Float =  8.32 Mil
Spread = 11.11%

Div yield = 11.76%

If you've read my blog before you already know what the long-range chart is going to look like.   Absolute carnage.

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PHSC Long-range chart

Down 98.85% from the IPO price of  £6.98 in Nov 2003 to it's current price of 8.5p just above it's all-time low of 7p.   With a chart like that you could be fooled for thinking you are looking at a Congolese iron ore stock. Lets zoom in a  bit.

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PHSC 10 year chart

On the 10 year chart PHSC is down by 51%  but has been forming a bullish descending wedge. In 2019 the stock bottomed out and then a false break-out came  in late Dec/early Jan.  This rise didn't hold and the stock dropped again as the pandemic  hit and lock-downs came into force. At this point  I  started buying. 

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PHSC 5 year chart

On the 5 year chart you can see PHSC has been trapped in a narrow channel throughout 2018-2019 between intermediate support of 9p and resistance of around 12-13p. After the false break-out  support was breached as PHSC dropped and hit an all-time low of 7p before a quick correction to 8.5p.



Right, lets look at the balance sheet;

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PHSC FY2020 Interim report

The latest report,  the FY 2020 interim, shows the following;

BV = £5.289 Mil
Current Assets = £2.064 Mil
Cash = £688k
PPE=  £561k
Total Liabilities = £832k

Since then PHSC has put out a trading statement  in relation to the pandemic which includes some limited  unaudited financials for   FY2020;

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PHSC Trading update, May 2020

Netting out the deferred VAT tax payment of the £850k in cash gets us back to  £687k, around the same figure we find on the interim balance sheet.

The cash covers the lion's share of the liabilities and  at the current price PHSC is only trading at around £20k above NCAV. Add in the PPE and you are getting the operating businesses for free. I don't know about you but I'm happy to pay £1.25 Mil for  £1.79 Mil in current assets and PPE net of all liabilities.

I'm not much of a fan of goodwill and intangibles so I rarely apportion any value to them when looking at the assets. Goodwill can  vanish in an instant if an acquisition turns out to be a dud and write-downs occur, better to  buy at a discount to tangible assets.


​On to the income statement;

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PHSC FY2020 Interim report

Half year revenue was £2.2 Mil down  by  around £650k on last year's  comp of £2.9 Mil.  Half year net profit came in at £148k vs 216k for last year's comp.

The May 2020 trading update completes the year with full annual revenue coming in £4.43 Mil   and EBITDA of £280k. Time will tell what net income comes in at, could be negative if more write-downs occur.

You'll see PHSC just broke even in FY2019 and  take a look at column 5, there's an example of that goodwill impairment I mentioned earlier. PHSC wrote off an asbestos consultancy subsidiary,   Adamson’s Laboratory Services Limited. The write-off was tempered by the fact that PHSC made a gain on a
sale of the Adamson's owned property.

Here's  rev's and net profits/losses for the last several years;

2019 = £5.22 Mil / £1k
2018 = £7 Mil / -£166k
2017 =£7.16 Mil / -£691k
2016 = £7 Mil / -£414k
2015 = £7.73 Mil / £349k
2014 =  £7.59 Mil / £494k
2013 = £5.79 Mil / £382k
2012 = £4.43 Mil / £299k


As you can see, some years PHSC turns a profit, others it bleeds red. Retained earnings currently stand at £1.63 Mil so   things haven't been all bad in recent years.

Things get a bit more interesting when  we start digging into the subsidiaries;
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PHSC 2019 Annual Report

Can you spot the odd one out?

Every subsidiary has been turning a profit for the last few years apart from the security division, B2BSG, which has been running at a loss.

Let's do a thought experiment. Imagine B2BSG doesn't exist. How would FY2019 have looked?

​The trading update says B2BSG accounted for  52% of revenues so lets scrub that off.

2019 annual revenue goes from  £5.22 Mil to  £2.5 Mil but net profit jumps from £1k to £138k

Good things could also happen with the stock if management was able to turn things around at B2BSG and get it to break even. 

Judging by the numbers and the most recent trading update  I think the B2BSG will either get written off, sold or continue to become a smaller part of the group's revenues and earnings;

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PHSC Trading statement; May 2020

The thing I'm most excited about is the health & safety subsidiaries. As the lock-down continues to be lifted and businesses start to open up there's a good chance PHSC will start to get orders from firms looking to implement government guidance and avoid the risk of legal action if they haven't walked the legal line.

Revenues and earnings may be depressed for a year or two as a recession is upon us but longer term I think there's a decent chance the order book grows. 

If you look back on the chart you'll see PHSC was selling in the low 30's between late 2013-early 2015. If it can get back to £150-200k in annual net income I can see it climbing to the low 20's.  

Now to the ownership;

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https://www.phsc.plc.uk/investor-information/

The co-founders Stephen King and Nicola Coote own 43.15% of the common between them so there's a real incentive for them to make the company  succeed. The down-side is  that the heavy insider ownership limits the likelihood of shareholder activism or buyouts.

At present the parent firm is spitting out  around  £147k in dividends a year, an 8.5p share price gets you a 11.76% yield. The firm has been paying out 1p per share for a good few years now and paid an interim dividend of 0.5p  in Feb 2020.  I don't see the dividend policy changing any time soon but who knows, if the recession bites hard enough they could cut it.


Well, I'll sum up my thesis here.
​
PHSC is selling at a clip above NCAV and at this price you get the operating businesses for free. The security division is a drag on performance but maybe this changes in the coming years. There's a good chance the health & safety order  book grows and management have significant skin in the game.

From a charting point of view  a bullish descending  wedge is nearing completion, the false break-out and the new all-time low will have also   induced further selling from despondent holders.

As Ted Warren noted;

"There is no better proof that a stock will go up, than when it acts as if it can't."

Risks abound though. There's  £3.48 Mil of Goodwill on the books, who knows how much of that could end up as thin air. The security division looks decidedly moribund so revenues and earnings could decline further if the other subsidiaries don't see their order books rise.

The chart looks right to me but further false break-outs can't be ruled out.  Maybe PHSC remains trapped in a narrow channel bouncing between support and resistance for  the next few years. You can never be sure.

To me it's a bet worth taking, tangible assets selling a discount and the operating biz for free.

I'm in.


David

Disclaimer: Long PHSC
15 Comments
Can Baran
6/28/2020 06:29:33 pm

Greetings,
I enjoyed the post. A few questions:
-If this business had a moat, you would have written about it. Why doesn't it matter that it does not have a moat ?
-Do you think this is a compounder that u ll never want to sell ? If no, will you base your sell number on the technical analysis ?
-Is "buying the operating business for free" a good enough argument ? I see that except the security subsidiary the other subsidiaries make money but will they ever grow?
-What makes the management special other than the fact they own 43% of the company?
Thanks

Reply
David
6/28/2020 08:01:38 pm

Hi Can,

1) Finding companies with moats in not my thing, I just look at the long-range price chart and balance sheet and buy if it looks right to me.

2) No, I don't think PHSC is a 'compounder', I will sell when the market forces me to. I look at price action, volume, support and resistance to see what the market is saying.

3) I buy on the chart and the balance sheet, that's a good enough reason for me. I don't know what will happen with the business but I think there is a good chance the stock will be materially higher than it is now in the future. If necessary I will hold for years to capture a significant rise.

4) Nothing makes management special, as long as they aren't completely incompetent and don't engage in fraud I don't particularly care. From what I've read stocks returns are not well correlated with management competence or aptitude.


All I'm looking for is tiny firms with low floats, if the price chart and balances sheet look right I add the stock to my basket. That's it.

Thanks for taking the time to read my blog.

Reply
David
6/28/2020 08:04:06 pm

1) Finding companies with moats is not my thing, I just look at the long-range price chart and balance sheet and buy if it looks right to me.

2) No, I don't think PHSC is a 'compounder', I will sell when the market forces me to. I look at price action, volume, support and resistance to see what the market is saying.

3) I buy on the chart and the balance sheet, that's a good enough reason for me. I don't know what will happen with the business but I think there is a good chance the stock will be materially higher than it is now in the future. If necessary I will hold for years to capture a significant rise.

4) Nothing makes management special, as long as they aren't completely incompetent and don't engage in fraud I don't particularly care. From what I've read stocks returns are not well correlated with management competence or aptitude.


All I'm looking for is tiny firms with low floats, if the price chart and balances sheet look right I add the stock to my basket. That's it.

Thanks for taking the time to read my blog.

Reply
David
6/28/2020 08:07:38 pm

Hi Can,

1) Finding companies with moats is not my thing, I just look at the long-range price chart and balance sheet and buy if it looks right to me.

2) No, I don't think PHSC is a 'compounder', I will sell when the market forces me to. I look at price action, volume, support and resistance to see what the market is saying.

3) I buy on the chart and the balance sheet, that's a good enough reason for me. I don't know what will happen with the business but I think there is a good chance the stock will be materially higher than it is now in the future. If necessary I will hold for years to capture a significant rise.

4) Nothing makes management special, as long as they aren't completely incompetent and don't engage in fraud I don't particularly care. From what I've read stocks returns are not well correlated with management competence or aptitude.


All I'm looking for is tiny firms with low floats, if the price chart and balance sheet look right I add the stock to my basket. That's it.

Thanks for taking the time to read my blog.

Reply
Håkan Liljeqvist
6/28/2020 08:50:27 pm

Very interesting! Curious. How big position of your portfolio do you give a bet like this? Asking because I am thinking a lot about how I should allocate my capital.

Reply
David
6/28/2020 09:08:29 pm

Hi Håkan,

I don't have any set rules but with bets like this I'll usually put in somewhere between 2.5-5%. With the stocks I am most excited about I'll go in heavier. Often with the really illiquid stuff I can't buy as much as I want so my position sizing is never ideally how I want it. I own a large basket of stocks like this.

Thanks for taking the time to read my blog.

Reply
Alex
6/29/2020 03:37:11 pm

Love the Post!

I've also been able to find a few companies trading FAR below NCAV per share but haven't been able to form a solid qualitative case to determine a potential catalyst. Any tips on what I should look for?

What are some potential catalysts you see that could make the price rise to that 20p range? Maybe just selling off that retail susbsidiary?

Also how trustworthy do you think this business is with their reported income data? Being a novice, I'm extremely skeptical as soon as a I see the phrase "operates through its subsidiaries" lol.

Reply
mike
6/30/2020 06:52:15 pm

I think that the amount of stocks below NCAV compared to the amount of all listed stocks indicates how cheap a stock market is. This is then usually a buying opportunity.

One of the cheapest market is Hong Kong due to a mixture of disaster; political unrest, covid, weak governance and a recession.
https://www.bloomberg.com/news/articles/2020-03-17/hong-kong-stocks-below-liquidation-value-show-fear-of-recession

Reply
David
7/3/2020 06:36:08 pm

Hi Alex,

Often value is it's own catalyst, in time the market acknowledges the mispricing and corrects for it.

Other times you can look for some kind of evidence of change, it's could an old CEO or Chairman stepping down and new blood coming in, the sale of an unprofitable subsidiary, a large order or big new client, a new product. Anything that suggests some kind of positive change can move a small illiquid stock up significantly.

With regards to PHSC, maybe they sell off the security division or turn it around, maybe their Health & Safety order book grows as businesses open back up and want to make sure they are compliant with Government guidelines.The stock is cheap, illiquid and sat near it's all-time low, anything positive emerging will move it up.

PHSC uses the phrase "operates through its subsidiaries" because it;s a Holding Company,Nothing strange about that.

Reply
Alex
7/4/2020 06:09:55 pm

Thanks for the Reply!

I’m fairly new to this so I haven’t had the chance to see what works and what doesn’t over years lol ( besides lookin back at history) so I appreciate this.

I’m also afraid of value traps, I know that can be a big issue especially with cash burning companies/industries. I guess this is why we find as many of these potentially undervalued companies as we can.

Joe
7/8/2020 12:16:31 pm

Hi David

I enjoyed reading your article and it is very good. I have been invested in PHSC for a few weeks now and I too see good growth in this share over the coming months. It has taken a large COVID hit but has a good balance sheet; maybe it just needs a catalyst to get it going. I noticed it was involved in a pump and dump earlier this year but I doubt they were value 'investors'. In any event, it moves quickly either way. Which other similar shares are you invested in please?

I like Tricorn and Simigon (both risky but, I think, at good prices). Risk is unavoidable so providing the entry points are roughly right and they are not going bust/ involved in fraud then I am happy.

Reply
David
7/8/2020 06:33:22 pm

Hi Joe,

You can see some of the other companies I've invested in by looking through my blog. In terms of the UK I bought into MIRI and ENET when they were selling below net cash. Same with MNO but I sold that one a while back. I also recently bought some GTC.

Reply
haetae link
7/11/2020 09:59:31 pm

Hi David - would it be possible to link to your blog?

Reply
MARK
8/5/2020 07:59:08 pm

Hey David, TD Ameritrade doesn't have this stock available...any recommendations on brokers who offer non-US stocks?

Reply
David
8/8/2020 12:08:24 pm

Hi Mark,

I'm not sure which US brokers cover this stock. I checked Interactive Brokers and they don't cover it, maybe Fidelity or Schwab might though.

Reply



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    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Caveat Emptor!


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