Managed Support Services – Turnaround Complete

The name Worthington Nicholls will send a shudder through the spine of some small cap investors. Floated in June 2006 at 50p a share, the shares quadrupled after the family-run firm undertook a string of acquisitions. But a lack of accounting controls resulted in heavy losses, the departure of several directors and an investigation by the Serious Fraud Office.

A year ago a new management team was installed, led by Simon Beart, and the name of the company was subsequently changed to Managed Support Services. An impressive turnaround has taken place over the last twelve months. The business is now profitable, generating cash and looking to expand.

Managed Support Services has four business units supplying, installing and maintaining heating, ventilation, air conditioning and catering equipment. It also offers interiors and shop fitting services. It’s all unglamorous stuff, but then that’s often no bad thing when it comes to investing.

Beart’s track record highlights his skills as a turnaround specialist. He co-founded packaging firm Britton Group in 1992. This was floated and then acquired for £250m in 1998. After that he took the reins at software outfit XKO Group and refocused the company following the downturn in the IT sector. After a name change to Revenue Assurance Services, this company was sold for £110m in 2007.

So can he complete a hat-trick with Managed Support Services? Its market value is less than £10m and, given the sale prices achieved at his two previous companies, Beart clearly has ambitions to grow the business.

Although the company’s progress over the last year has been excellent, investors have yet to show much interest. Indeed the share price is roughly half what it was when Beart took charge. Back then the company was losing £1m a month and heavy job cuts had to be made. Although the headline losses eventually came to nearly £50m, much of this was the write off of goodwill, so the restructuring was completed without having to spend too much of the company’s cash resources.  

The focus now is on shorter contracts and proper accounting controls have helped to jettison low-margin jobs. Gross margins were 12% in the year to September 2007 but improved to 17% for the six months to March 2008. They increased again to 27% for the six months to September 2008 when the company made a profit of £1.1m on sales of £16.3m.

Cash generation looks good under the new regime too, especially considering the company is paying its creditors early to get discounts. The cash balance increased by £850,000 over the last six months to £7.9m. This increase included £1.3m from the sale of an investment property while £1.2m and £0.95m was paid for deferred consideration and restructuring costs respectively. This means the underlying cash generated by the business over the last six months was £1.7m, comfortably ahead of profits.

A tax refund of over £0.5m has been received since the end of September and more cash should be generated by the business in the second half of this financial year, although management reckons the period from October to March will typically only account for about a third of annual profits going forward.

Beart has managed to renegotiate the earn-out clauses from previous acquisitions but further deferred consideration of £1m is still due, with £0.25m scheduled for early 2009 and the remainder over the following three years.

At 10p per share, the market cap of the company is a miserly £9m. This should be more or less covered by the company’s cash balance come March 2009 while the underlying business, generating pre-tax profits of perhaps £1.5m, is thrown in for free.

It goes without saying that current trading is tough so this profit figure can’t be taken for granted. The company’s clients are typically in the hotel, retail and property development industries, all three of which are suffering badly at the moment.

The cash pile could be put to use as well. The High Court has approved a capital reconstruction which will allow dividends to be paid. However, the company is more likely to be treading the acquisition trail although in a much more conservative fashion than it did before.

Beart wants to both increase and broaden the range of services offered by Managed Support Services. Clearly the general nature of the company’s new name was no accident. However, he thinks that current prices are little on the steep side so patience will be exercised until the right deals come along.

It’s good to see a new management team back themselves, so it’s worth examining how many shares the directors hold. Beart picked up 0.5m shares at around 8.5p in April and also has 4m warrants that can be exercised at 7.5p over the next 10 years.

The company’s chairman is Rodney Mann. He managed breweries for 30 years at Grand Metropolitan and also worked with Beart at XKO Group. He bought 10,000 shares at 12.5p in July.

The finance director is Piers Wilson. He has 40,000 shares bought at 12.5p and 2.8m warrants exercisable at 10p over the next ten years. Wilson previously worked at ED&F Man and Cable & Wireless and took over from William Good this summer. Good worked with Beart at XKO but left Managed Support Services once his task of restoring the financial controls for the business was completed.  

The rest of the management team has 1.7m warrants on similar terms to Beart’s while Euan McAlpine, a non-executive appointed in September 2008, has 100,000 shares.

Most investors would ideally want to see more in the way of shares held by management and less in the way of warrants. However, the warrants dished out so far represent less than 10% of shares in issue. This doesn’t seem excessive.

This is clearly a share to watch. Although there are undoubtedly risks with any acquisition-led strategy, given the management team’s track record and the low entry point, the upside for the shares could be significant.