Maxima General Discussion

Maxima released its prelims today: http://fool.uk-wire.com/cgi-bin/articles/200908040700068044W.html

• Results in line with revised market expectations

• Revenues up 21% to £56.6m (2008: £46.7m)

• Recurring revenues remain strong at 56% (2008: 52%)

• Adjusted* profit before tax £7.1m (2008: £8.9m)

• Loss before tax £9.6m (2008: profit £5.2m) includes the impact of exceptional items and goodwill impairment 

• Adjusted* earnings per share 21.2p (2008: 26.3p); basic loss per share 36.8p (2008: earnings 15.1p).

• Proposed final dividend of 2.5p (2008: 3.6p); total dividend of 4.5p (2008: 5.6p) - in line with policy to pay out a proportion of operating profit to shareholders as dividends

• Net debt at 31 May 2009 of £15.5m (2008: £8.6m) following £8.5m net cash outflow on acquisition of DXI in June 2008

As I have a holding in Maxima, should I continue to hold or dump 'em? My thoughts on the results, FWIW:

• The bottom-line loss is quite bad - but does include quite a few apparently genuine one-off charges:

- Goodwill impairment (£8.4m) - a non-cash charge but there is still substantial goodwill on the books (£41m), so there must be some risk of further impairment.

- Onerous lease provisions (£2.7m): if this includes all outstanding rentals on vacated premises, then it could be a bit of a "sandbag", flattering profits in future periods.

- Redundancy & restructuring costs (£0.9m): this doesn't appear to be a final/definitive figure because:

Detailed plans of the restructuring were not released below senior management level until after the year end, so we anticipate further restructuring costs not exceeding this year's figure. 

• If one accepts the "exceptionals" as one-offs, underlying EPS of 21.2p looks quite attractive relative to the SP of 80-90p
• Total dividends of 4.5p give an attractive yield... and look sustainable
• Operating cashflow of £5.2m is consistent with adjusted earnings and appears sufficient to support an annual interest charge of £1.1m, loan repayments of around £1m annually & a dividend payout of £1.4m for the year.
• Net debt of £15.5m appears manageable & good details have been given:

The Group had committed borrowing facilities of £18.75m at 31 May 2009, comprising a £4.5m term loan facility, repayable in nine installments until 31 May 2013, a £13.25m revolving credit facility repayable by 31 May 2013 and a £1.0m overdraft facility. £17.75m was drawn under these facilities at the year end. Cash balances at the year end were £2.4m, which together with the overdraft facility allows £3.4m of headroom.

I remain somewhat nervous about the UK economy & outlook, so am not inclined to top up. However, in the event that a genuine recovery takes hold, I feel that Maxima's strong leadership (Kelvin Harrison is known to me personally) & market positioning should lead the company to benefit well, in the face of a diminished competition.

In the light of all the above, I am happy to continue holding. The shares are up slightly this morning.

Regards,

Mark

I see that Edison have issued a note updating their figures for Maxima: http://www.edisoninvestmentresearch.co.uk/?ACT=18&ID=2129

I have included a table showing the trend of their forecasts in the thread header. It is encouraging that the results slightly beat Edison's March forecast (Maxima y/e is 31st May) and that the 09/10 revenue forecast is increased. On the downside, I see that 09/10 EPS and dividend forecasts have been reduced further (suggesting margin/cost pressures).

I hope that these figures mark the bottom of the earnings downtrend - we shall see.

I also observe that Maxima's ratios appear attractive compared to their peer group.

For completeness, just a cross-link to my writeup of a presentation that Kelvin Harrison gave recently to investors: http://boards.fool.co.uk/Message.asp?mid=11717537

Edison released an update to their forecasts on 15th December. I will update the header. Still reducing their outlook estimates....

Hi Mark

Just to say I'm on board with these again. Nothing more to say until 2nd Feb.

DoY

Spent considerable time compiling post. Pressed "click here" for help on using sentiment and post promptly disappeared. Retiring to TMF!

Sorry about that - the sentiment thing is too confusing for newcomers, we know, and we are planning to eliminate it (or rather make it optional) in the set of changes that are coming next week.

OK - copied from TMF

http://www.investegate.co.uk/Article.aspx?id=201002020700094979G

MXM is currently up 12.2% on today’s interim results, on top of a 7.3% rise yesterday (which makes me angry in spite of being a holder).

Marben100 wrote up a recent Mello presentation:

http://boards.fool.co.uk/Message.asp?mid=11717537

Last April Kelvin Harrison appointed Graham Kingsmill and David Memory as CEO and FD respectively, moving over to Chairman himself. Kingsmill and Memory earlier held similar positions at Netstore plc, then an AIM listed company providing IT application management, hosting and security services. Kingsmill had previously been UK & Ireland managing director for SAP.

On 31st May 2009 (MXM’s year-end), head count was 450. During the following 6 months this was reduced by 44. At the same time, 47 new people were brought in, which means around 90 souls were required to leave. This sounds like a recipe for disruption unless managed with exceptional skill.

There has obviously been a partial but significant reorientation of the business. This is described by Kingsmill in the report in terms that meant very little to me. I need to take a more leisurely look at the text but at present am left feeling unsure whether he is an outstanding CEO a just a good spin doctor. The results, though well down on last year, suggest the former. At least, they do when looked at in relation to forecasts for the current full year, bearing in mind the tendency for H2 to exceed H1 in normal circumstances.

According to Mark, Harrison will continue to handle acquisitions, of which there have been many up until the end of H1-(08/09). The credit crunch has put a stop to that, although not permanently, I am sure.

I think Graham Kingsmill was present at the Mello evening. Any reactions from attendees?

http://www.david-wilmshurst.co.uk/mxm/mxm_data.htm

DoY

Hi DoY,

Sorry for the tardy response... been occupied with other matters.

Firstly, on the housekeeping front, I have updated the forecasts in the thread header to reflect Edison's latest note of 3rd Feb (note to editors: dunno why it doesn't appear in the MXM news feed?). Though Edison have maintained their 09/10 revenue forecast and lowered their 10/11 one, I observe that they have increased their EPS forecasts. It is not entirely clear to me why, but I presume that Edison have had detailed discussions with management. ;0)

Concerning the business reorientation, I asked Graham Kinsgsmill about this at Maxima's AGM last year, which I attended. My understanding/recollection is that he wished to move Maxima's focus from "commodity" services - i.e. general IT support - to higher-value specialist services, that build on Maxima's specialist expertise (e.g. Citrix, Microsoft Dynamics). If successful, that sounds like a sensible and margin enhancing move (perhaps that explains the improved EPS forecasts?).

DK didn't attend the Mello function, but my impression of him from the AGM was that he was strong-minded (acting independently of Kelvin) and sales focussed. His skills seem like a good complement to Kelvin's, which I believe are more strategy and business-process oriented. The next couple of years results (subject to general market conditions) will show whether DK can deliver!

As business-turnaround is one of Kelvin's skills, I am pretty confident that he will keep a beady eye on major organisational changes and ensure that they are carried out in a manner that minimises disruption to core functions/morale.

It is good to see an apparent stabilisation in the outlook, after the shock of losing the QAD business franchise. However, Maxima is heavily UK focussed and I am not optimistic about the outlook here for the next 2-3 years. Whilst I think Maxima's Board is shrewd enough to ensure that the business weathers the storm well and emerges in a strong competitive position, I am not inclined to add to my holding until I have more confidence in the general UK business climate. Neither am I considering reducing at this level as, to some extent, that risk is "in the price".

Best regards,

Mark

Some notes from last week's AGM...

Market Conditions

• Impact of the loss of the QAD relationship on like-for-like revenues: -5% year-on-year.
• Client confidence is mixed, some reporting good market conditions (eg a flooring specilaist), others weaker.
• Not much direct exposure to the public sector but construction industry clients may be affected by cutbacks.

Cloud Computing

• Maxima feels it has a competitive advantage in offering "cloud computing" solutions because of its skills base/mix, with network hardware & software solutions being a core skill. Competitors with a more software focussed skill set may struggle more.
• CAPEX to provide cloud computing infrastructure is incremental, with hardware being "plug and play" to upgrade capacity. Maxima rent data-centre space, as necessary. Where up-front CAPEX is needed, this will be funded from straightforward cashflow/debt, not lease finance.
• The reality, however, is that cloud computing still in its infancy and there is a lot of hype.

Staff, Service & Costs

• There are now 20-25 staff at Cheltenham. The lease runs until 2018. There have been some enquires from prospective tenants but safest to assume the premises aren't relet (as reflected in accounting provisions). Maxima have vacated a significant part, ready for reletting.
• The current year analyst assumption is for a further £0.75m charge for redundancy & reorganisation costs, as organisation change is not yet complete.
• Clients have expressed satisfaction with the provision of out-of-hours support from Hyderabad (and with the cost savings it brings).
• Part-time & flexible working are both appreciated by UK-based staff and allow Maxima to match staff costs to demand.
• Much of the accounting function (some 12-15 staff) remain based in Glasgow, which keeps costs down
• Customer visits to the new "competency centres" are running ahead of plan. They offer an informal environment for clients to view and discuss applicable technologies & services. The AGM was held in part of the Thames Valley competency centre, which was very close to the M4/J12. Customers find this convenient & those based in central London tend to welcome some quieter time outside the capital.

Financial & Corporate

• The bank covenant specifies a maximum net debt:EBITA of 2.7x, reducing to 2.5x in one year
• Kelvin is taking more of a back seat now, happy to leave the day-to-day operations in the hands of Graham & David
• Kelvin, personally, would not want to participate in an MBO & would have to be bought out in the event that management wish to proceed down this avenue. IMO this affords some protection to other shareholders against a "Touchstone style" outcome. ;0)

Cheers,

Mark

http://www.investegate.co.uk/Article.aspx?id=201209170700113599M

The final results are likely to indeed be final as there is a recommended takeover by Redstone included. Redstone have also issued a placing at 1p (above the share price at the time) which some of the directors have taken part in. If Redstone is going to settle at 1p or more then the Maxima shares are the cheaper way in at present (23.5 to buy with a 1 for 28 offer on the table). Cost savings from the Redstone document are expected to be significant and would make the acquisition clearly earnings enhancing