Paragon Entertainment - Post AGM Analysis

Disclaimer: I don't have a licence to distribute financial advice.

The eleventh of December 2015 saw the release of four regulatory news announcements for Paragon Entertainment, these included two director buys, an AGM statement and a company update [1]. 

Points taken from the AGM:

While I wasn't able to attend the AGM, I have been luck enough to be in contact with a couple of gentlemen who were, who both corroborated each other and stated a few key facts:

• The 2016 order book is at its highest in the companies 30 year history. The value of orders confirmed as well in excess of the £11m revenue forecast however the BOD have deliberately underplayed it so as to not disappoint and maybe 2016 will be able to exceed market expectations.
• One of the attendees (The Mad Stork - the esteemed investor on Twitter) reported back that funding was a non-issue. The board confirmed 100% that no dilution would be required for 2016.
• Another point made was that the 7am RNS was originally twice as long, but that it was supposedly shortened by the company's broker.

Updated Financial Overview:

For 2015, every £1m over £8.5m revenue (this covers admin costs) creates £200k profit for the bottom line[2].

Working in conjunction with the board of directors' conservative views, with a low revenue forecast of £11 million for 2016, we can expect their bottom line profit to be approximately £0.5 million, meaning that the company is currently trading on a forward P/E of 6.9. 

When we think that the FTSE 100 (excluding financials) runs on a PE ratio of 18.32 and that the wider AIM market runs on PE ratios much higher than this, there remains a large amount of potential upside for Paragon Entertainment even using the self-professed low end revenue figures.

Using the more realistic figures mentioned of ~£14 million in revenue, the company would see a bottom line profit of ~ £1.1 million or 31.7% of the company's current market capitalisation (a forward PE of 3.15.

Middle Eastern Developments:

The current evidence in the public markets suggests that a large proportion of their future revenue is to come from their contracts in the Middle East:

"we signed a representative deal with a company out there [Middle East] to try and find work for us and push work for us and certain for 2015-2016 they've found over £10m worth of work for us." [3]

The Middle Eastern contracts are especially important, as this is a sector that is expected to see muli-billion dollar revenues by 2017 [4], in the UAE alone.

Lamda Developments:

With further deals with Lamda accounting for four development projects over the next two years [5], there are substantial revenue sources lined up for the future too, showing that Paragon Entertainment is perhaps more in line with longer term investors rather than day-traders [6]. 

Hamleys Developments:

In addition, with the Paragon Entertainment being the "World Design and Build Attraction and Thematic Partner for Hamleys Group" there is a clear sense in the operating market that the company is delivering a very high standard of work - as illustrated by its award for "Best Retail Store 2015" for Hamleys Moscow.

Furthermore, with new work for two stores in progress and a further in discussion for 2016, Hamleys' intended twenty new stores over the next five years could provide some serious revenue to Paragon Entertainment [7].

Contextually, we have to remember that Paragon Entertainment are one of the odd ones out on AIM: they're in the odd case where they actually make money on decent revenues, don't need to raise funds and therefore perhaps don't pander to the needs of short term traders.

If this was a company run by David Lenigas, Paragon would have a market capitalisation well into the tens of millions, but would have also had several placings this year! 

Summary:

1. No dilution to come.

2. Order book at its fullest in history.

3. Award winning. 

4. Paragon Entertainment are active in a worldwide growing industry.

5. Recent director purchases.

Enjoy,

The Masked Stock Trader

Sources:

1. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&share=paragon_ent

2. https://twitter.com/power_thompson/status/653825095916462084

3. http://uk.advfn.com/podcast - ADVFN Podcast number 365, approximately 7-9 minutes in.

4. http://gulftimes.ae/dubais-theme-park-industry-to-attract-revenues-of-to-us5bn-by-2020-iec/

5. http://paragonent.com/documents/PEL_AGM_2015_final_presentation.pdf

6. http://www.paragon-creative.co.uk/news/paragon-signs-loi-with-lamda-development-for-athens-project

7. http://paragonent.com/documents/PEL_AGM_2015_final_presentation.pdf

Developing Trading Strategies

Disclaimer: As per usual, I don't have a licence to distribute financial advice, so this should not be viewed as content intended to advise individuals/institutions on a financial level.

The lack of a clear trading strategy is one of a few key features that separates out the successful traders from the unsuccessful traders. 

Traders/investors without clear strategies have a tendency to commit the following "crimes":

1. Buy high and sell low
2. Over sizing their trades
3. Not managing their risk

While points 1 and 2 on that list are important, the most important point for developing any profitable trading strategy is point 3 - professionals say that what separates out institutional investors from retail investors is invariable the managing of risk rather than the investments they make.

Building a strategy:

While the idea of "building a trading strategy" tends to conjure the image of a technical trader or quant, the reality of the situation is that anyone who takes the time to write down even some trading rules that they then have by their computer will outperform traders who don't.

Even if these rules are as crude as "Place a stop" or "split your order", as long as they're not fundamentally stupid rules they will help your performance.



In addition to this, the markets that you trade will also be an important factor in building a strategy. Traders of larger capped equities, ETFs, commodities and currencies will all benefit from strategies that link their position entrance to market movements - limit orders placed in the market ready to be executed.

This has a couple of added benefits to traditional market orders:

1. There is a tendency amongst traders to jump the gun and enter too early with market orders before their trade pattern/reason has been confirmed as valid by the market.
2. This acts as a further risk management tool, as the market only takes you into trades that are validated by your signal.

It's worth noting that in the trading of smaller capped equities this style of trading will only likely cause risk management issues, as the heightened volatility caused by wider spreads and lower order book weighing on each side of the book means that your chances of being entered into the market on a mis-signal are raised.

Signal Generation:

After you have developed your risk management system, the next step will be to develop your signal generator.


Signal generation can be highly complicated or it could be as simple as a moving average crossover, or a P/E ratio.

I am a fan of the backtesting of strategies to prove that they have some form of historical bias towards making you money, so if you are a good programmer or know someone who is, test out your strategy first! 

The Yahoo Finance API should be available for gathering daily closing data and ranges so this could be a good place to start if you want to technically test a strategy. For guys in the US, Quantopian is a pretty handy tool too for testing strategies.







As and when I think of more to add here, I will update this page.


Cheers,

The Masked Stock Trader