Cash flows can tell investors a lot about the health of a business by giving visibility into how a company is doing. As the saying goes, cash is fact, profit is opinion. Strong cash reserves offer a degree of reassurance that the company can distribute and increase dividends, reduce debt, get through downturns and reinvest in its operations. Companies with a high level of free cash flow — essentially the money left after necessary expenses — will typically therefore command a premium rating.
Good underlying cash inflows can still end up showing as negative free cash flow if they’re masked by heavy expenditure, but this doesn’t necessarily indicate a poor investment. Many businesses with high capex requirements — for example telecoms operators investing in infrastructure — or making investments to support growth will be in this position, but these cash outflows should boost future returns.
Similarly, high cash balances should be assessed in terms of how companies deploy them. Airline and holiday operator Jet2, which shored up its cash assets during the pandemic and is now benefiting from pent-up demand for travel, has more than £2bn of net cash sitting on the balance sheet, of which a small portion is being returned to shareholders via a £300mn buyback. Inevitably, it will face significant future expenditure on new aircraft, and after the turbulence and crises of recent years, having these reserves bolsters the company’s resilience.
In contrast, Elixirr, the ambitious challenger consultancy business, also boasts strong cash generation, but faces no such capex demands on its cash — it’s primarily a people business. It’s been using cash effectively on acquisitions, including last year’s addition of US-based strategy firm Hypothesis, which counts five Magnificent Seven companies among its client base, and looks to be in a good position to continue investing in talent and M&A.
BUY: Elixirr International (ELIX)
The “challenger” boutique consultancy is thriving, writes Valeria Martinez.
Last year was record-breaking for Elixirr International. The Aim-traded consultancy posted all-time-high revenues and now plans a move to the main market, a step that could broaden its investor pool and open the door to FTSE 250 inclusion.
While global consulting giants such as Accenture and Capgemini grapple with slower client spending, project delays and tighter fees, the so-called “challenger” consultant is thriving. Elixirr grew organic revenues by 13 per cent, with M&A helping push total revenues to more than £111mn.
New clients added £11.4mn to the company’s top-line growth, with £9.7mn coming from existing ones. The strategy is to squeeze more from its partner base, with revenue per partner up 6 per cent. The number of clients spending more than £1mn rose to 27, and the firm has also been busy poaching new partners.
A key deal was the acquisition of Los Angeles-based insights firm Hypothesis, which means more than half of sales now come from the US market. A new £45mn debt facility will support more acquisitions, with dealmaking expected to become a bigger part of the growth story.
Margins dipped slightly following the Hypothesis deal, but profitability still improved strongly. Adjusted Ebitda rose 23 per cent to £31.2mn, while free cash flow jumped by 74 per cent to £28.1mn, helping fund a 20 per cent dividend increase.
Elixirr’s shares are up 17 per cent over the past year, but they still trade on a forward price/earnings ratio of just 13.8 times, a discount to their five-year average. The group made no reference to US tariffs in its outlook, but with record revenues already booked in the first quarter, momentum looks strong. Joint house broker Cavendish is optimistic that upgrades could be coming.
SELL: Mobico (MCG)
Investors will welcome a leadership reset at the National Express owner, writes Valeria Martinez.
Mobico’s chief executive Ignacio Garat and the board of the National Express owner have parted ways. Chair designate and former chief executive Phil White succeeded him on an interim basis from May 1.
In a move first floated in October 2023, the group recently agreed to sell its US yellow school bus arm for an enterprise value of up to $608mn (£453mn). Peel Hunt analyst Alexander Paterson called it a “shockingly bad” deal.
But the company’s 2024 results also showed the need for an urgent reset. The company reported a statutory post-tax loss of £794mn for 2024, driven by a writedown on the value of the school bus business, tax asset write-offs and a higher provision for lossmaking rail contracts in Germany.
Adjusted operating profits rose 11.3 per cent to £188mn, landing at the bottom end of guidance, with a 5.5 per cent margin. Structural issues in Germany’s rail industry and stubborn weakness in the UK weighed on the results, although Spanish subsidiary ALSA was still the bright spot with record revenues.
Mobico has faced a grinding recovery after the pandemic, with driver shortages, cost inflation and underperforming contracts forcing a major restructuring. As a result, adjusted net debt has ballooned to more than £1.2bn, with a year-end covenant gearing ratio of 2.8 times Ebitda.
The school bus sale should reduce covenant net debt by $365mn to $385mn, and the group says further (undisclosed) deleveraging options are on the table, along with cost savings. The deal does clear some uncertainty, but it’s far from a win and leaves questions over whether Mobico’s financial health can really turn a corner.
HOLD: Warpaint London (W7L)
The branded cosmetics seller looks to outperform the market, writes Julian Hofmann.
Selling cosmetics is no easy business, with a host of big-name competition and a dependence on consumer spending making for a sometimes volatile market. However, it is one that Warpaint London seems to have negotiated with some skill after delivering a strong finish to its full year and raising its dividend by more than a fifth.
Organic margin expansion seems to have been the secret behind the results, with the company’s acquisition of Brand Architekts falling too late for the reporting period. An across-the-board rise in sales and profits, combined with stable costs, meant that gross margins increased to 41.2 per cent (2023: 39.9 per cent).
Management said Europe, where there is room for growth, is still a prime market. In these results, European sales increased by 22 per cent to £54.7mn as the company’s products — which include the W7 and Technics make-up brands — were rolled out across more locations. One of the more significant deals was with Italian retailer Tigota, which launched Warpaint products across 200 outlets in Italy. The UK market, led by the likes of Superdrug, was also key to the results, and sales here were up by 8 per cent to £35mn.
Warpaint’s exposure to the US has been a source of concern since President Trump’s announcements on tariffs. At £8.7mn, however, the company’s US exposure is limited — although revenue growth is high at 19 per cent. Management believes it can continue to grow sales in the country despite the new tariff regime.
Warpaint’s shares have fallen back a bit this year, partly on trade worries, and this values them at a consensus forward price/earnings ratio of 14.5. That is slowly looking like better value, but we remain cautious.
