Stockwatch: A share full of Turkish delight

Is it time for Tarsus shares to turn better? Another marketing services company - this one in exhibitions, conferences and publishing - reports robust trading, with "strong buyer attendances" and "strong forward bookings". It’s interesting also in terms of the wider economy, as Tarsus has quite some global reach e.g. emerging markets such as the Middle East, China, Turkey, Indonesia and Mexico. 

When an exhibitions-oriented group cites healthy trading and prospects, it counters the gloom about secular stagnation with emerging markets at risk from a rising dollar (due to dollar-denominated debts) and China’s slowdown. This is a good sign for the real economy and stocks also.

Healthy record of dividend growth, near 4% yield

The table shows Tarsus raising pay-outs since 2011, helped by a cash flow profile significantly in excess of earnings and very modest capital spending needs. This implies a shareholder-friendly business enabling a useful dividend yield near 4%, adequately covered. Such a return underpins the stock’s risk/reward profile barring a global slump - but that’s not what the trading update shows any tell-tale signs of, at all. 

Meanwhile, the five-year chart shows a classic consolidation after a 2012/13 boom, as per many cyclicals amid loose monetary policy, then a period of fretting as deflationary signs persisted. If such a group can continue posting solid updates with financials in line with expectations, it will assist chances of a break-out from 220p currently.

Balance sheet risk is chief weighing factor

Most likely this is why the market prices Tarsus to exact quite a generous yield, by way of compensation for the risks. More positively, if management can improve the balance sheet via sustained underlying performance then the risk/reward balance will weigh to the upside. The end-July interims showed net debt rising to £43.5 million versus £27.7 million net assets - supported by a whopping £129.7 million intangible assets. 

While intangibles are inevitable for an acquisitive "people business", that’s still a big number in context, and growing (up 16% like-for-like). There are also £32.2 million trade receivables relative to £18.4 million trade payables, when scrutinising investors tend to fret - often justifiably, e.g. regarding Globo  - where the balance sheet shows strong growth in intangibles and strong debtors. 

If profits are being enhanced as credit entries on the income statement then typically there is a corresponding debit entry.  So it’s unsurprising to see a balance sheet profile of high intangibles/debtors exists with a market price exacting a meaningful yield - partly as compensation for the perceived risk. 

All this is likely the crux for security of the dividend and whether Tarsus is fundamentally a long or short play: if the company continues to post solid trading updates then risk tips to the upside, although the balance sheet is quite a ball-and-chain if economies stagnate.

Net finance costs have doubled to £2.8 million versus the first-half of 2014, and this year there was a £1.8 million impairment loss. On a basic accounting view, interim operating profit of £2.2 million did not cover financing charges (versus 1.2 times cover, like-for-like) although, adjusting for amortisation and other exceptional charges, interim pre-tax profit rose from £3.0 million to £5.5 million. 

The group still has plenty to do in the second half to meet broker targets of £25-27 million pre-tax profit for earnings per share around 20p; this reducing to a consensus of £18 million and 13p in 2016. After the balance sheet date, a French business sale was completed which should have raised some £6.6 million equivalent, from which net proceeds will help strengthen the balance sheet and fund expansion.

Like-for-like bookings up 12%

The update effectively proclaims an overall backlog up 12%. In emerging markets, a group business in Turkey saw buyers up 28% for a recent advertising and digital printing show, while one for education in Indonesia and another for aviation in Morocco were "successful", similarly in Cambodia and Myanmar. 

This appears to vindicate nearly 40% of group revenue/profit deriving from emerging markets, despite their higher risk. The US constituted nearly 60% of 2014 profit, with exhibitions in discount clothing, health and printing said doing well recently. Europe represented 20% of revenue but only 6% of 2014 profit, with Labelexpo Europe 2015 recently producing "a very strong result with buyers up 12% to a record..."

Similarly, the Dubai Airshow, due in November and the group’s largest event, is said to be on track for a record. So unless this is a sanitised update citing only successes, Tarsus is useful to watch for what it implies for the global business cycle as well as risk/reward profile in its stock. 

Such a trait of firms being confident to prioritise exhibitions, and continued easy-money policies by central banks appears bullish for equities.

Directors buying stock modestly

In August, the managing director added nearly £7,000 worth to own 1,119,220 shares - i.e. belief in value and motivation to enhance it. The wife of a non-executive director also bought nearly £9,900 worth at 219p.

So Tarsus is quite a curate’s egg: conservative investors won’t like the whiff of its balance sheet, but if underlying progress is indicative of the real economy then debt can reduce to favour upside in the stock - from a reasonably supportive base on a near 4% yield. 

This is quite a substantive group capitalised at £225 million, listed in the Media sector albeit "non-index" and independent brokers Numis and Peel Hunt published "Buy" notes in August/September. Off-radar for most investors, but interesting to follow.

For more information see Tarsus' website.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.