I’ve kept an eye on Watchstone Group (LSE: WTG) ever since its troubled days as Quindell, when a forced restatement of its accounts and the opening of an investigation by the Serious Fraud Office caused panic.
On Thursday, Watchstone released its first-half results, and it’s no surprise that the losses are continuing. Revenues dipped to £19.7m from £22.9m, resulting in a bigger EBITDA loss of £2.1m (from £1.7m), and a jump in the pre-tax loss to £3.5m from just £0.01m a year previously.
The firm’s healthcare business was said to be growing, with revenues up by a modest 2.6%, though foreign exchange translated that into a 1.3% sterling fall. The other part of the business, Ingenie, “continues to face very difficult market conditions,” with revenue dropping to £4.8m from £7.7m.
Loads of money
What I find most interesting about Watchstone is its cash position. The firm had cash and term deposits of £58.4m at 30 June, plus an additional £50.2m in escrow pending the outcome of legal action by Slater & Gordon related to the sale of the old Quindell’s Professional Services Division.
That total, of £108.6m, dwarfs the company’s current market capitalisation of £46m, which makes for a very unusual company valuation — one which certainly makes it more than a bit tricky to value the underlying businesses.
Are investors holding the shares in the hope of owning around £2.40 in cash for every £1 invested, in the event that the legal action by Slater & Gordon fails? Given that the action alleges “breach of warranty and/or fraudulent misrepresentation for a total amount of up to £637m plus interest in damages” (which Watchstone “denies … in the strongest terms“), that’s perhaps a risky strategy.
Continuing growth
A first-half trading update from Harvey Nash Group (LSE: HVN) gave its shares a modest morning boost, on top of a doubling over the past two years.
The technology recruitment and outsourcing specialist has been growing its earnings steadily, and last year’s EPS rise of 29% helped support a progressive dividend policy too. The January 2018 yield came in at 4.9%, and while the subsequent share price gains have dropped the forecast 2019 yield to 3.4%, that would be thrice covered and looks very solid to me.
The first half of the year brought in £527m in revenue, up from £422m, “largely due to increases in contract recruitment, managed services and IT outsourcing as a result of both organic growth and acquisitions” with permanent recruitment essentially flat.
In line
That translated to a rise in gross profit from £46.5m to £51.7m, with the company telling us that “trading remains in line with the Board’s expectations for the full year.” But what does this all mean?
For me it means a good long-term income and growth prospect, with the shares on an attractive valuation. In addition to that tasty and growing dividend, we’re looking at forward P/E multiples of only around 9.5.
I imagine some investors are wary about the lack of sparkle in permanent recruitment, and the currently sluggish economy will surely weigh heavily on that — especially with the possible Brexit effect still pretty much an unknown. But I’m seeing an attractive prospect here.
