Westminster Group - Operational Turbulence


With the Alternative Investment Market (AIM) trading towards the lows of its multi-year range, it is not surprising to see companies on lofty valuations turning lower in the event of slower than anticipated delivery of progress. Westminster Group is an excellent example of that, with the share price down over two-thirds from the peak made at the same point last year. However, there have been external factors also at play that have exacerbated the fall and meant that the share price has been particularly volatile over the past few months. The market capitalisation has also re-adjusted lower to circa £15.40m from £35m at the time of the previous review last November.

This article is a follow-on from the below post. For full context and information, read this article first:


As per the chart, the technical picture has been relatively easy to read with the breakdown through 70p a major sell signal that prompted an acceleration in price declines through to 45p and lower. The likelihood of a downward break was increased as the share price repeatedly 'bumped' against the 70p floor, and fundamentals did not support the high market capitalisation without a substantial news announcement.

From that point the share price has been extremely volatile (as a result of news statements), but broke through 50p after initial support, and then broke through 40p with relative ease. The chart as a whole paints a grim picture, but there is a key price band to watch for; this spans 20p and 25p and is likely to provide some level of support akin to that at around 50p. Without a major negative news announcement, I'd suggest that the support band would halt a further price decline and could help to form a base. The support at that level is mainly round-number. Given the market caps that correspond to each of those support lines, it's probably unlikely that 20p (or near it) would be reached in the near-term.

In terms of technicals, there is not an awful lot of additional detail to comment upon. Westminster did manage to raise £300,000 in a placing at 77p in March, but I would refrain from reading too much into that given the size of the placing and given that it was a business partner who took up the shares. CEO peter Fowler holds 12.4% of the shares in issue.


Rather than re-cover the operations of the company in full detail, this is a brief excerpt of how the company describes itself:

"Westminster's principal activity is the design, supply and ongoing support of advanced technology security solutions, encompassing a wide range of surveillance, detection, tracking and interception technologies and the provision of long term managed services contracts such as the management and running of complete security services and solutions in airports, ports and other such facilities together with the provision of manned services, consultancy and training services. The majority of its customer base, by value, comprises governments and government agencies, non-governmental organisations (NGO's) and blue chip commercial organisations."

Westminster now has representation in over 50 countries, across its two divisions; Technology and Managed Services. The client base is blue-chip with big name clients such as Barclays, Exxon Mobil, US Air Force and the United Nations

Before looking into the progress made since the last review in November 2013, below are two questions asked to CEO Peter Fowler.

Q. Who are WSGs main competitors on the managed services side?

There are actually very few competitor companies around the world who have our international presence, experience and reputation to provide managed services type projects such as complete long term airport security solutions. There are companies who provide either manpower or various forms of technology but few who provide the complete turnkey solution and even fewer who offer a Build-Operate-Transfer (BOT) model.

There are of course a few global companies such as G4S and a handful of smaller companies who do however we believe we are much more agile than large scale global players and our reputation, strong brand and a network of agents provide us with a market advantage over most of our competition.

We have provided equipment and services to many airports around the world and have an excellent BOT reference site with our West African airport contract, won in 2012 which we took from being one of the worst performing airport security operations to one of, if not the best in Africa within 18 months and our achievements and professionalism have been recognised by organisations such as ICAO and British Airways.

Q. In 2013, WSG was loss-making and the balance sheet does not show a position of great strength - albeit the £1.25m placing recently does alleviate that slightly. Are the managed services projects cash intensive?

Firstly it is important to understand we have been in the build-up phase of our business model and our focus has been on developing our international presence, delivering solutions which enhance our reputation and developing a strong pipeline of major opportunities, the costs of which have been written off as expensed. 

However to answer your question we understand and prepare for what is required on each contract. Managed services contracts will typically involve capital outlay at the start, the amount being a function of the individual site and this is obviously a factor in our pricing assumptions. We expect to get the contract EBITDA positive in the early stages (again, timing will be a function of the individual site).  Our West African airport contract achieved EBITDA payback in approximately 2 years. Underlying cash dynamics are helped by a good gross margin, operating leverage and effective credit sanction.

Moving on from that, it's important to look at the key developments made since the initial review, and to identify how material they are to the medium-term future of Westminster. In the initial review, when the share price was 76.75p and the market cap was £35.2m, I commented that "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." "The reason why [Westminster has been] able to sustain its valuation is because of market expectation [of major contract wins]." Unfortunately, those expectations have not translated through to reality over the past year, despite some positive noises from the company. I also commented how a No Rating tag was most suitable and that it would be good practice to wait for a large contract to roll-in as a proof-of-concept and a proof-of-capability.

That has partly materialised through Westminster signing a 25 year managed services MOU in August, carrying a touted 'up to $300m' in revenue potential. The MOU would see Westminster working alongside CWind in an equal partnership to provide Ferry Transfer services to a government in Africa. The formal arrangement is expected to be closed in late 2014 with operations beginning in early 2015, potentially providing long-term recurring revenues under the brand "Sovereign Ferries". However, although this is a proof-of-capability project, I'd wait for a larger project to be confirmed before looking further at Westminster.

The $300m is projected over a 25 year period, albeit there is further incremental revenue potential. Bear in mind that the $300m figure is a projected figure (hence there are no contractual payments guaranteeing that sum). The revenues will be paid on a similar basis to what Westminster currently receives at its West African Airport (i.e. a charge per passenger so passenger numbers are directly related to revenues).

On a perfectly straight line basis, Westminster would receive revenues of $150m over the life of the project, or $6m per year. However, it will likely be back-loaded given how it is tied to passenger numbers, so the revenues over the first few years will likely be low compared to that average revenue per year figure. That probably explains the lack of a substantial market reaction, given the share price quickly retreated.

Alongside that long-term contract, Westminster has signed numerous other contracts since last November, including a $2.6m vehicle screening solution contract in Asia, and a 10-year £1.9m franchising agreement in Mexico. However, this has failed to come to fruition with the contract now delayed in 2015. Quite frankly, these 'lumpy' revenues are not of particular interest, and it's the managed services contracts that are where recurring revenues exist, and as such would carry higher earnings quality. Although progress on the long-awaited East African Airport contract has failed to materialise so far, several other contracts (including for consultancy, and a pipeline project) have been signed for unspecified financial amounts. That's not particularly useful for investors, but on occasions is down to the data-sensitive sector of operation.

But, there has been one big problem that Westminster has faced, and this has exacerbated the share price decline. Ebola.

As previously noted, Westminster provides managed security services at a West African airport and is paid on a per passenger basis. Initially in July the company noted that there had been no material impact on flights with passenger numbers up 7.4% year-on-year (YOY). That was followed up in August by a £1.25m placing at 40p a share, as a "precautionary measure to mitigate any potential disruption to the company's cash flows" in the "unlikely event" that the Ebola situation would worsen. As has become clear, the situation has worsened, but I reckon that a cash raise would have been needed anyway. It is the Ebola situation that has contributed to the drop from 50p to 30p, and that is understandable given the strongly bearish perception that Ebola carries.

That risk aversion ended up being rightly justified with passenger volumes quickly dropping to just + 1.6% YOY and airline Gambia Bird suspending flights 'until further notice' after the UK Government withdrew permissions at late notice. Since that time Ebola has hit the 10,000 mark, but remains very difficult for a private investor to gauge. Therefore, the bearish sentiment will likely linger until a risk-adjusted market cap is hit, or until the company releases material positive news elsewhere.


Unfortunately the financial position of Westminster remains uncomfortable, and that underlines my previous point that the £1.25m raising was unlikely to be just related to the Ebola situation; rather it catalysed it. In hindsight it was a shrewd move given how much more difficult it would be to raise cash at the current point in time without unveiling positive news beforehand.

The actual track record of Westminster does leave much to be desired with revenues between 2009 and 2013 both volatile and actually down. Pre-tax profits have also been on the decline as a whole and have been within the -£1.00m and -£2.00m range over the past few years. That situation is unlikely to abate in the near term with the vehicle screening contract delayed, and the suspended flights in West Africa decreasing managed service revenues.

Expectedly, the interim results in September were also uninspiring:

-   Strong gross margin at 58.4%, but dragged higher by a lack of contracts within the technology division
-   Convertible loan debt reduced to £0.575m
-   Revenues of £2.24m vs. £4.68m with managed services revenues at £1.50m vs. £1.55m. The decrease was down to exchange rate fluctuations, as they were up $0.2m in constant exchange rates
-   £940,000 loss before tax after administrative costs of £2.29m
- Current assets = 1.09x current liabilities is OK. Add in 90% of the placing proceeds as net, and factoring in the 4 month equivalent of a projected £1.3m H2 loss, and net current assets are likely around £1.62m. That would give adjusted current assets = 1.31x current liabilities, which is again OK, except that the cash balance is low
- Total tangible assets = ~1.89x total liabilities

In fact, at the date of the interims (30th September), the company noted that it had a cash balance of £1m (although we obviously cannot extrapolate the level of liabilities at the time). That will not be enough to fund the sort of expansion that Westminster is seeking, with the Ferry start-up and Ebola situation helping inward cash flows. Therefore the company is aiming to cut admin costs by 15% during H2.

There are a couple of bright spots regarding the cash balance although they are by no means long-term solutions. The company is expecting a settlement of a legal dispute with CTAC Ltd to conclude imminently and potentially return cash, after CTAC was acquired for £1.8m in April 2010. The other bright spot is less certain, and relates to the vehicle screening contract, but as mentioned that has been pushed back into 2015 now. In all likelihood, the company probably does have the flexibility to issue convertible loans or issue more equity, but the scale of any dilution are key factors. If the company can release a string of positive news flow, any placing or convertible debt issuance may well be easier to conduct.

The problem for investors is that so much of the investment case for Westminster remains predicated on delivering major contract wins. The West African airport contract and Ferry service are now two to point to, but more are required before being able to back the long-term recurring revenue plan. Bureaucratic processes and the size of the contracts are keeping the lead times from pipeline opportunity to contract signing particularly long, and that has now been realised by the market, and will probably temper enthusiasm. That said, if the company does deliver on its promises of signing up further large-scale managed services contracts, then the high margin will enable operational gearing to kick in and filter through to the bottom line.

CEO Peter Fowler said, "We recently announced the signing of a memorandum of understanding for the Ferry Project in Africa, which is progressing through licencing, and which would represent another very attractive potential long term managed services project. We have also made significant progress with other managed services projects including the East African project which remains very much alive and also a major opportunity in the Americas which has made significant advances through the governmental procurement process.

"Our pipeline is growing and opportunities continue to progress and, whilst dealing with governmental processes can be time consuming and frustrating at times, I am confident that the opportunities these potential contacts offer, being long term with excellent financial dynamics, will deliver value for our shareholders."

Financial position remains a hurdle

From my point of view, the financial position of the company, combined with the latent Ebola deterrent, remain sufficiently strong to detract from taking a position in Westminster at the current point in time. Sentiment is firmly bearish, and the technical situation remains uncertain with the lack of a share price base visible. I would make the point though that the market cap is approaching levels at which speculative investors could support the share price against the sizeable 'prospect pipeline' that the company has built, given that they noted several high-profile opportunities in the recent results (e.g. 3.8m passengers per annum worth of contracts at "advanced stages"). I would therefore say that the downside in the near-term is possibly limited to around the 25p mark, barring any further negative announcements.

The cash position does remain weak though, especially when looking at what Westminster are seeking to achieve, so a resolution on that front is ideally required. That's highly important since I would imagine that various high-profile contracts will require the tendering company to be in a sound financial position; Westminster is not in a sound financial position at present. The upside kicks in if the company can sign several more long-term, recurring revenue, managed services contracts, and benefit from both revenue stacking and operational gearing. Unfortunately, that upside remains unclear as it did last November and it still seems sensible to see if further major contracts are signed. There are background reasons to be optimistic, but they are overshadowed by events at the core managed services operation. For that reason I have kept the No Rating tag on Westminster at 30.00p.


  1. Very fair el1te. I think 28p will be support and fingers crossed for us depressed holders than Peter can show us why we invested. Fair article in nov too.


  2. Good review! Subscribed

  3. Ebola has really damaged the company and too many investors are now not taking the risk or dumping it. Fowler has not done enough to convert the near 1 billion sterling pipeline im afraid but may be he can in 2015.

  4. Excellent. It is a shame that there is not more discussion within these comments as this is very good detail for private investors who are shunned by brokers and for companies like wsg where there is no broker reviews this is invaluable


  5. Will you review again after the rns on 19/11 ?

    1. I will await funding news beforehand, as that seems a near certainty within the next 6 months or so