Westminster Group - Securing a Sales Pipeline

http://www.wg-plc.com


Since 2012, Westminster Group (LSE:WSG) is an example of a company that every investor would be pleased to have in their portfolio. The shares entered 2012 at less than 10p. They now stand around 75p - that is an increase of over 700%. The company is a security specialist that operates across the globe, providing managed security services and distributing security products such as blast proof film, x-ray machines. With a transition made towards focusing upon the services as they draw higher profit margins, the company has clearly been able to convince investors of the prospectivity of the business plan. Westminster's share price peaked around 95p a couple of weeks ago and currently stands at 76.75p meaning that with 46.575m shares currently in issue, it is capitalised at ~£35.20m. The company has recently turned its attention to completing an East African airport management contract - the result of that will play a large part in outlining Westminster's future.


The technical position of the shares remains bullish, but that is only the case above 75p. The reason for that is it would indicate there was not a more serious change in sentiment compared to what is currently being seen. The pullback that has taken the shares down by approximately 18% (from the peak) is not too dissimilar to those seen in early 2012, May 2012 and September 2013. Admittedly the fall has been faster, but so was the rise so that is not unexpected. The 50-day moving average currently lies just beneath the share price and that should provide support - indeed the share price kicked back off of it earlier today. Any end of day close below 75p risks a fall back to 70p and a halt of the bullish trend as the series of higher highs and higher lows would have been broken.

Intra-day share price movements
Given that the indicators have significantly retraced over the past week or so, I would expect that an upwards bounce to circa 80p is the more likely short-term scenario (compared to continued downside). If 80p is re-broken and bullish sentiment remains, then I would expect that a period of consolidation would ensue. It may have a short term downward tendency that would represent investors taking profits. Any material move upwards back towards 90p and higher is likely to require some substantial contract news from the company. Overall, I'd be inclined to say that the majority of the rise has passed and that any move higher would be constricted to roughly 10% (excluding fundamentally driven movements). However, this is a bull market and there are numerous examples of company's extending their gains by more than what was initially considered feasible (take @UK (LSE:ATUK) as an example). In the short-term a bounce is likely.

As noted earlier, Westminster Group is has two main operations; distributing security products and providing  security consultancy/security training services. The target market are governments, NGO's and blue chip businesses. Some of the target locations include the Middle East and Africa (due to their emerging markets and consequently they tend to be less security mature). In 2012, 76% of total group revenues were derived from the two regions. On the other hand, the company is partly focused on established economies, although the opportunities that these regions prevent are more limited in terms of scale. The UK and Europe amounted for 22% of 2012's revenues.

Following a company restructuring earlier in the year, the operations themselves are undertaken by two divisions. These divisions encompass a range of subsidiary companies.
Technology - Involved in providing clients with fire safety products and security solutions. The range of products is vast and as an example, it spans blast proof doors, CCTV circuits and Fire detection
Managed Services - This division's revenues are long-term and recurring compared to Technology's which tend to be less predictable. The MS division provides the training and consultancy services. These services have scale in that they can be scaled up for projects such as ports, railways and airports. A growing part of this division is 'Westminster Aviation Security Services (WASS)". During H1 2013, revenues from this subdivision rose by 214% and in September Westminster acquired GXS Aviation in order to reinforce the growth

Due to the wide array of subsidiary companies and security services covered, the company therefore prides itself on being able to offer clients a complete security solution, rather than making them need to search and procure multiple companies. The result of multiple years of brand strengthening and presence building is that Westminster has started to generate more contract leads, and in turn translate these into secure contract wins. That has been seen during 2013 to date with the following notable contract wins:
- January 2013: $3m vehicle screening solution in the Middle East
- February 2013: $250k contract extension to the January deal
- September 2013: $470k Airport security contract in East Africa

Given the size of the contracts, they are not enough to change the company's outlook. However, what is substantial enough is a contract that Westminster is currently in the process of finalising a heads of terms agreement for an airport contract in East Africa (there is no certainty it will be finalised). The possible contract is for an airport in East Africa. The contract would run for 15 years with a total value of $300m. That amounts to an average of up to $20m/year, a large amount that would be profit. That is huge, and that is what investors are banking on Westminster securing. The deal has been in negotiations for many months although the outcome is anyones guess. There is no certainty of Westminster securing the deal though and that means that the company is highly risky.

If the company fails to win the contract then a significant share price retreat is guaranteed (in the short-term). On the contrary, if they do manage to secure it, then their annual revenues would be doubled. The one point that will count against Westminster is that it doesn't have a large amount of experience of operating at such a large scale. Therefore, they don't have a similar case study that they can present. That said, if you invest in Westminster, you have to bank on CEO Peter Fowler having provided a compelling and attractive pitch. The real point is that if they do secure the contract, that would be a massive endorsement of the company. I'd therefore expect the share price to rise substantially. As I said, it would give them a reference for other large contracts and give them that initial critical mass.

Below are the relevant points from the H1 2013 results:
- Continuing Revenues of £4.68m vs £4.77m in 2012
- Aviation revenues rose by 214% to £1.44m from £458k
- Gross margin rose to 39.6% from 28.2% due to increase in managed services. This was due to a reduction in the Cost of Sales
- Operating EBITDA of £180k up from £40k
- Cash balance of £0.81m, total borrowings of £2.6m
- Pre-tax loss rose to £742k
- Substantial increase in project pipeline although the majority of the revenues are locked into a few contracts that are highly competitive (at FY end 2012, this stood at £783m)

I think that underlines Westminster's position. The business transition has been completed, but it is too early to comment on how successfully it has been implemented. During H1, losses rose, but that is to be expected considering Westminster is starting to grow. However, the cash outflows during the period are concerning. There have been numerous equity issues since January and the company has signed an Equity Financing Facility (EFF), which is not a favourable method of financing - however, on this occasion it suits the business model. Following multiple debt-equity conversions, Westminster now has a debt position of £0.83m.

When you actually look at the number of shares in issue, Westminster entered the year with 32,608,904 yet it now has 46,575,803. That represents an increase of 13,966,899 within 12 months which is dilution of almost 43%. That remains a serious concern. Going forward, a mixture of debt and equity will be used for working capital purposes, and they will be required if the East African airport contract is won. For Westminster, the caveat of the stronger balance sheet has been a raft of new shares in issue. That, combined with a rapidly increasing share price has meant that the market cap has risen considerably.

CEO Peter Fowler commented: "The successful realignment of the Group against these high growth opportunities has provided stronger focus to the business and we are growing our reputation as a provider of high quality security solutions. We have disposed of the non-core and lossmaking UK businesses and resolved legacy issues such as the Synergy loan note. This focus has led to record levels of interest, particularly in our Managed Services division, which is aligned with aviation security. This global market is expected go grow from $19bn per annum now to $45bn per annum by 2018 and this validates our decision to grow the Managed Services division. As ever when dealing with such projects the timing of such contract signings can inevitably be difficult to predict however I am confident that this division is poised to help us deliver very significant shareholder value."

On any conventional measure, Westminster is vastly overvalued. The company is valued at £35m, yet has a low cash balance and is not making a profit. There are many companies out there that are valued at around the same level, but are profitable and have a fair amount of cash. Equally though, there are a few companies who are valued at tens of millions and who are not currently making a profit. Westminster is one of those companies. The reason why they are able to sustain their valuations is because of the market expectation. The market is banking on significant contract success in East Africa and beyond - as it stands, that has not been forthcoming. Therefore you end up buying into expectation. That is the reason why Westminster has been resilient even despite some pretty weak financials (for the market cap). The question investors have to ask themselves is whether the reward justifies the risk.

To conclude, I deem Westminster to be a high-risk, potentially high-reward proposition. The financial position has improved in recent months, but remains unconvincing, although the operational direction shift is important. If the East African contract is won, I would look at Westminster a lot more favourably as there is no doubt it would be transformational. As I alluded to, that would fully endorse Westminster's services, and give them a case study to use as a future reference. If they don't win the East African contract it proves that aspect remains a psychological hurdle. Scaling up a business and convincing possible clients to trust the brand is a huge obstacle, but once overcome it can lead to long-term prospectivity.

Given that the share price has risen rapidly, the risk is raised and that reason, combined with the high market cap means that a No Rating tag is most appropriate for the time being. Admittedly, with the bull market in full flow and many smaller companies picking up, Westminster could continue to rally, especially since the technical position remains bullish above 75p. Regardless, at £35m there is too much lying on one decision in my opinion. Bullish investors would argue that there are many more possible contracts in the pipeline, but I would want to see endorsement from a large client beforehand especially given the stretched valuation on current financials. For that reason I assign Westminster a No Rating tag.

8 comments:

  1. A fair balanced appraisal. Shame there are no broker notes commissioned.

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  2. Hi. I Came across your link on advfn. Good site imo although as a holder i am very bullish on wsg :,). Keep it up

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  3. Excellent, Been WSG 2 years, great to see this write up.Well done

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  4. ok summary but too much just looking at east africa where we are in talks with 10 million pax many in advanced stages and $300 million sounds low ball seeing as Lungi $150-300 mill and east africa being vastly bigger i would imaging $500-600 mill also no touching on Pipelines in Nigeria , i believe this piece is well thought out , also if it bounces off 75 it will fre rate 80p in day one i have played this share for years and if 80 is re taken it will swiftly move back to 90 as you are right on expectation but people want in as a spike to 1.5-1.7 area is very likely if/when .4 pax signed .

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  5. Another fair and good review Elite. Westminster is may largest holding by some margin so i have benefited from the rise. The east african airport contract does seem to have taken an age to materialise, however WSG are the only company in the running as far as we are aware so patience is certainly key.

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  6. also how can you possibly state $300 mill over 15 years as fact not as imo ? the real figure could be double that based on simple maths .

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    1. Up to $300m is the value the company gave!

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  7. Personally think this is overvalued. People are paying a massive premium for 'expectation'.

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