AIM listed International marketing services group Cello (LSE:CLL) was a not so hot share tip from me back in August 2010 at 38p. Those who followed me have trousered a few decent dividends but at 40.5p today, investors are not exactly celebrating a ten bagger. Reading today’s results for the six months to 30th June 2012 I am struggling to see what I was so excited about in the first place.
Revenues grew by just 2.8% to £63.3 million, underlying pre-tax profits grew by 2.2% to £3 million and earnings per share actually fell from 3.06p to 2.69p. The one bright point is that the dividend was increased by 5.5% to 0.88p and the stock now offers a decent 5% yield but I do not think that the dividend can be viewed as 100% safe. This is a company with borrowings of £13.7 million (up from £11.2 million) – that is debt of 16.6p per share.
The health operations (market research, medical communications and strategy consulting) performed well with the margin up from 20.7% to 25%. But the consumer side (market research and consulting) saw margins plunge from 7.8% to 0.4%. Cello says this operation has now been “stabilised and a planned recovery” is underway. You can plan all you want but the environment is “challenging” and I am not convinced that this sort of operation has any real pricing power.
In terms of cashflow at an operating level the bleed was £858,000. The company then p0onied up another £1 million in tax payments and capex of c£858,000. That worries me when the debt looks a little high. The other thing that strikes me about the balance sheet is that while the net asset value is £67.878 million that is more than 100% made up of goodwill and intangibles of £75.7 million. Tangible net asset backing is non existent.
The company says that it will hit full year forecasts. So that means earnings of 6.45p ( down from 6.71p) with 6.85p forecast for 2013. You may well say that on a 2012 price earnings ratio of 6.3 the rating is undemanding. But then again this is a company which between 2011 and 2013 will have grown its earnings at just 1% a year. This is not really a growth play. My sense is that the macro-economic risks for earnings are on the downside and not the upside.
I would far rather that the company paid down its debt than bluster with an increased dividend when earnings this year will actually fall. I am sure that Cello is a good enough company. It is just that I cannot see much in the way of upside while there are clear downside risks. The profits for those who followed my original tip on a website that I do not mention any more are not great. Call me a chicken but I’d cut and run and take them anyway.