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

Valuing Paragon Entertainment

Disclaimer: I have no licence to distribute financial advice, so the following piece should be viewed as being for entertainment purposes only.


For an overview of Paragon Entertainment, look here: 

http://themaskedstocktrader.blogspot.co.uk/2015/09/paragon-entertainment-analysis.html



I've written about my bullish views on Paragon Entertainment before, but in this short piece I intend to present a view of the financial potential this company has for delivering high revenues and profits within their industry.

• Updates on the MAJID AL FUTTAIM LEISURE & ENTERTAINMENT LLC deal that covers Saudi Arabia, Egypt, RAK and Dubai (1)

• Updates on the Hamleys Mosco project (2).

• Further news regarding their recently completed project with the National Museum of Kazakhstan in Astana (3).

Majid Al Futtaim Leisure & Entertainment LLC:

To kick off, Mark Pyrah, CEO of Paragon Entertainment said the following about this partner:

'We are delighted to be working with MAF to create the very best leisure and entertainment across the MENA region and this Framework Agreement allows us to provide the very best support for this impressive client.' (1).

This to me potentially implies a couple of things:

1. Mark Pyrah thinks that they may be prepared to spend lots of money.
2. He may well be a corporate suck-up.

Excluding the second point, it's slightly difficult to value a deal like this when you're given so little information about the attractions Paragon Entertainment would be providing. Nevertheless, we can try and get a glimpse of the potential by running some potential numbers across the resorts mentioned in the RNS.

In the RNS, the information we are given is the following:

"Paragon will be offering attractions design and build services around MAF's existing Magic Planet, Little Explorers, Ski Dubai, WAHOOO! Water Park, Playnation and Aquaplay projects as well as working on new concepts." (1)

Well, across the six mentioned projects that Paragon will be working on (we'll ignore the "as well as working on new concepts" for the moment), let us assume that Paragon makes £150,000 in profit - this is pretty small really, because just a ferris wheel costs between $20,000-$60,000, or £13,170-£39,506 and firms don't hire in contractors to design and build products they can order on Alibaba (4).

If we assume for a moment that this figure is true, you get a profit figure from that one overall project in the region of £900,000 or 19.7% of the current market capitalisation of the company (£4.4m as of 02/10/2015) - so even with small figures being thrown around the potential for Paragon Entertainment to capitalise heavily on their investments in these projects is clearly very large.

If in reality we upscale this slightly to a level that perhaps better befits the reality of employing specialists in the specialist entertainment construction sectors, to a profit per site of £250,000 you then leave with a profit of £1,500,000 over the timescale of the project.

Now, in reality we currently have no idea how much they're receiving for these projects and they may also not get paid for the projects all in advance (this rarely happens in any industry) and or complete them all at once, but the point really is that with a market capitalisation currently of £4.4m Paragon Entertainment doesn't have to make very much money out of these projects in order for this to translate into huge potential earnings in relation to the company's current market value and it's worth remembering that this is only for one project!

Hamleys Mosco Project/National Museum of Kazakhstan:

Quite frankly, we haven't been given enough information to put a value on these projects, so for the sake of consistency let us revert to our low figure of £150,000 profit per project. This still (added with the possible profits from deals with Majid Al Futtaim Leisure & Entertainment gives you a possible total profit figure across all of the projects of £1,750,000 or 39.7% of the total market value of the company.

Regardless of how you value these deals (I have done so very crudely) with the sheer number of projects the company is undertaking, in combination with the potential yields each contract has to offer, it's hard (in my eyes at least) not to remain bullish on Paragon Entertainment while the company remains at this value in the current market place.

As ever though, do your own research.

Enjoy,

The Masked Stock Trader

Sources:

1. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&ArticleCode=b5t3w216&ArticleHeadline=Framework_agreement_signed

2. http://paragonent.com/media-centre/corporate-news/hamleys-moscow-named-best-designed-store-of-the-year-at-2015-world-retail-awards

3. http://paragonent.com/documents/PARAGON_NEWSLETTER_SINGLE_PAGES_MAX_3.pdf

4. http://www.alibaba.com/showroom/ferris-wheel.html

Paragon Entertainment - Analysis

Disclaimer: I have no licence to give financial advice, etc...

Company Information:

• The operating group listed on the AIM in 2011.
• Paragon Entertainment Limited designs, develops and builds visitor attractions, and licenses and distributes related products and services. 
• The unaudited results for the period ending 30th June 2015, showed a return to EBITDA (earnings before interest, tax, depreciation and amortisation) profitability in conjunction with half-year revenues of £4,500,000 (3).
• Mark Pyrah, Chief Executive Officer was quoted in the same set of interim results as saying: "The past year has been a challenge though we are excited about the busy six months ahead with a number of exciting projects.” (3)
• Paragon Entertainment's most recent projects have included (3):

1. The design and build of galleries at the Olympic Museum for the IOC in Lausanne, Switzerland.
2. Design and build of the galleries at The National Museum of Kazakhstan
3. The design and build of Titanic Belfast
4. The thematic build of the Wallace and Gromit ride at Blackpool Pleasure Beach
5. Licensing and distribution installations at Gullivers, Milton Keynes and Art Mall, Ukraine.

Recent Company Developments:

• The company's overdraft has recently been extended for another year (1).

• Directors have recently settled historic tax liabilities with their own funds (2).

• Directors have recently transferred their shares into Self Invested Pension Plans (which offer inheritance and income/capital gains tax benefits) (4).

Expected Short-term Newsflow:

• Updates on the MAJID AL FUTTAIM LEISURE & ENTERTAINMENT LLC deal that covers Saudi Arabia, Egypt, RAK and Dubai (5)

• Updates on the Hamleys Mosco project (6).

• Further news regarding their recently completed project with the National Museum of Kazakhstan in Astana (7).

Fundamental Analysis:

For me, the most important aspect for determining if there is a potential trade has to start with the board of directors. In this case, it's clear that they're optimistic about the future (you don't bother hedging against paying capital gains tax unless you think an asset - their shares in the company - are going to go significantly up in value.

This idea presents itself again through the board of directors choice to pay the tax bill owed to HMRC through their own personal funds, which shows a very progressive attitude with regards to the company that's rarely found elsewhere on the AIM.

With regards to other positive aspects of the company, I like the way that its revenue sources are internally hedged by operating across the Middle East, North Africa, Eastern Europe and the UK. In the event of a global hiccup, Paragon Entertainment shouldn't be hit especially hard.

Furthermore, the company being currently valued at just £3,990,000 (as of the close on 25/09/2015), I suspect that the scale of some of these projects could be large enough to create a situation where the company sees a sudden increase in its operating profits.

This positive outlook in combination with the rumours circulating on ADVFN (8) that the company has recently signed significant deals and that the Nomad broker (Finncap - for anyone who's interested) may force the company to show its hand makes a nice set up for a trade to the long side, in my opinion.

Technical Analysis:

I'm not normally a huge fan of using technical analysis with stocks valued under £100,000,000, because you tend not to get consistent and or high daily volumes to give an accurate base for beginning any form of quantitative analysis. Plus, the naturally wider spreads you tend to find in more illiquid markets means that the net level of importance assigned to every price tick is higher than it would be in more liquid stocks - meaning that if one base move in the price of an asset equates to a high percentage of the current share price overall, then the stock will technically mis-signal more frequently than in cases where the opposite scenario is found; i.e. big single ticks in stock prices cause technical mis-signalling more than smaller price ticks of the same percentage value do.


Nevertheless, the tightening in the Bollinger Bands over the macro time scale in combination with the convergence of the major moving averages makes it look like the stock has created a volatility funnel that it is in the process of breaking out of.


Also, it's notable that there's a clear line of resistance in the 2.5-2.7p area, which if broken would signal a technical breakout that would target the next bands of resistance at 3p, 3.38p and 4p.

Conclusion:


On a balance of probabilities, it looks like the odds are stacked in your favour going long here in the short term (a few weeks). Whether the underlying scenario facing this company would continue to play out equally as positively in the same way over a longer time frame it is hard to say, but I feel that currently I would be likely to miss out on an opportunity by not entering long here (which i did yesterday - 24/09/2015).



Enjoy,

The Masked Stock Trader

Sources:

1. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&ArticleCode=kcd1u5a1&ArticleHeadline=Re_HSBC_Bank_Facility

2. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&ArticleCode=p7zsjxbz&ArticleHeadline=Re_Agreement_with_HMRC

3. http://paragonent.com/documents/Interim_Results_Six_Months_to_30_06_15.pdf

4. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&ArticleCode=liel07d5&ArticleHeadline=DirectorPDMR_Shareholding

5. http://www.lse.co.uk/share-regulatory-news.asp?shareprice=PEL&ArticleCode=b5t3w216&ArticleHeadline=Framework_agreement_signed

6. http://paragonent.com/media-centre/corporate-news/hamleys-moscow-named-best-designed-store-of-the-year-at-2015-world-retail-awards

7. http://paragonent.com/documents/PARAGON_NEWSLETTER_SINGLE_PAGES_MAX_3.pdf

8. http://uk.advfn.com/stock-market/london/paragon-ent-PEL/share-chat