Belgravium update

Tom Russo looks for something he calls “the capacity to suffer” in the companies he invests in. This is the willingness of a company to suffer poor initial returns on an investment in order to gain a big competitive advantage at a later time. For example a company that invested heavily in China since the 1980’s might today be a well established brand in a huge, booming economy.

I think this capacity to suffer applies to individual investors as well, but in a different way. After reading this excellent topic on the Corner of Berkshire and Fairfax forums, I thought about why I mostly invest in small caps and why most investors seem to dislike them. A lot of arguments I hear against small caps don’t have anything to do with the fundamentals of the companies. These are things like the illiquidity of the stock, a lack of information (companies that have gone dark or that provide very limited updates during the year) and the fact that there is no catalyst in an investment. I think an investor can gain an edge by accepting these negatives. From what I have seen so far, I believe that the market especially discounts illiquidity. Almost all investors want to be able to quickly jump in and out of a stock. By simply being willing to suffer the illiquidity of a stock you can often buy in cheap.

Belgravium final results for 2012

Perhaps the capacity to suffer also applies to investors in Belgravium (click here for my initial post on Belgravium). The company reported the final results for 2012 and as expected revenues and after tax profits were down sharply from 2011 coming in at £8.67m and £336k respectively.

The share price declined significantly and is currently below 3.0 GBX, bringing the market cap slightly below £3m. I was a little surprised by the market reaction, since the company had already updated investors and told them customers were delaying orders and that Belgravium’s full year results would suffer. The decline might be caused by the fact that the company also said it does not expect that their markets will be much better in 2013:

“2012 was a challenging year and we do not expect our markets to change significantly in 2013. However, the Group has a strong balance sheet and has initiatives in place which should at least ensure improved profitability in the current year.”

There are also some positive signs though:

  • Belgravium expects improved profitability in 2013
  • Belgravium continues to generate free cash flow: £593k in 2012
  • The balance sheet is very strong: Belgravium has £1.6m in cash and no debt

Balance sheet

One thing I did not mention in my initial post on Belgravium is the significant amount of deferred income on the liability side of the balance sheet. This liability is created by the sale of advance maintenance and software contracts:

“Income from the sale of advance maintenance and software contracts is shown as deferred income in the balance sheet and released to revenue over the length of the contract in line with the substance of the relevant agreement.”

Short-term deferred income is included in “Trade and other payables”. You can only see this by looking at the notes of the annual reports. At December 31 2011 the amount for deferred income was £1.44m on total payables of £3.3m. We will have to wait for the annual report for 2012 to find out how much deferred income was included in the total amount of payables of £2.64m on December 31 2012. There is also non-current deferred income of £970k relating to long-term contracts. MSN Money lists this as “deferred income tax” which is wrong.

It seems clear though that from the total liabilities of £3.71m on December 31 2012, around £2m consists of deferred income. I understand the company needs to account for this as a liability, but thinking about this from an economic perspective it seems to me that Belgravium has a stronger balance sheet than you would think at first glance.


Belgravium mentioned in the report that their financial situation is very different from 2010:

“This year’s downturn in Belgravium’s performance is very different from 2010 when we had a demanding bank debt. Our cash generative policies have allowed that debt to be repaid in full and left a healthy surplus for future corporate development. Whilst we aim to increase sales organically, now that we have the resources, it is right that we also seek further growth by acquisition.

We are examining two areas:

Increased territorial coverage. We have long felt that our products and services could be sold into more countries, particularly in Europe. So far, sales have been restrained by the perceived need to have local representation, installation and maintenance arrangements. Certainly where we have such facilities, as in France, good business has resulted. We are therefore pursuing the development of relationships where we can extend territorial coverage.

New market sector. Belgravium will continue to be focused on digital data capture but there are other markets to which this can apply outside of logistics and where our hardware and software expertise would provide immediate benefits. In 2013, we shall attempt to find such a company and to use some of our cash reserves to build a growth relationship.”

(Emphasis mine)

I am not a big fan of acquisitions when a company is trading at such a depressed price. This is why I sent an e-mail to the IR address listed on the Belgravium site. I just asked them to also consider repurchases. It seems that management is fairly confident that Belgravium can stay profitable: they expect “improved profitability” in 2013, they have paid a small dividend in 2012 (for the first time since 2008), have announced a 0.1 pence dividend for June 2013 and they are looking at acquisitions. These are not things that management tends to do when it is expecting losses. Cash conservation is key in those times.

Since management believes the company will stay profitable, in my view repurchasing shares at these depressed prices is a very good use of the excess cash. Belgravium’s Board should consider this possibility and weigh it against the uncertain returns from acquisitions. In my first post I said I thought acquisitions were a “big mistake” at current prices. I have changed my mind somewhat, because the latest report made me realize that Belgravium is probably losing some business, because it has not been able to provide local support throughout Europe. This is something their customers seem to value very highly, so it makes sense to invest in this. It would help increase revenues and the company probably already has a good idea in which countries it is most likely to achieve success. But perhaps the company can do both an acquisition and a share repurchase.

I hope Belgravium will repurchase some shares, but it is difficult because the stock is illiquid. Perhaps the company can buy shares from a large shareholder looking for an exit. Another possibility is a tender offer. One problem there is that the costs of the tender process itself might be significant. I saw an AIM-listed small cap that incurred about £100k in costs in their tender offer. For a company of Belgravium’s size this is a big number. Perhaps for a nano-cap like Belgravium these costs can be reduced.


I still like Belgravium and at the current price I like it even better than in my initial post. This is why I bought some more shares recently. Belgravium will stay a small position for me and I don’t want to give the impression that I think it is a wonderful company I would like to own forever (a Buffett-type investment). I just like the fact that sentiment is very negative and that the share price has collapsed. If the company can stay profitable and keep generating cash, I believe the investment should work out well when business improves a little.

Disclosure: long Belgravium

Posted in European Stocks and tagged .

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