DQE fishiness

Interesting thread on PPP (Paulypilot’s Pub) about DQE (DQ Entertainment). This one’s a real stomach-churner of an AIM company. What do they do? Fortunately, it is really simple to describe:

DQ Entertainment is India’s largest animation company with a global client list that includes Disney, Universal Studios, BBC, Nickelodeon, Cartoon Network. It has moved into co-production and the acquisition and development of intellectual property, which includes recently acquiring the rights to Jungle Book, Peter Pan, Lassie and Charlie Chaplin amongst others.

Don’t you wish all companies could be so simply described? Anyway, that’s where the luck ends. It was inevitable that, as soon as you see a word like India, you’d be hosed from the outset. And hosed you are, my friends, as the company has dropped 19% so far today, and a massive 35% over the last 3 business days. "Significant if true", to quote Ben Graham. There’s no RNS out the last while, nor anything coming up on Google. I can’t imagine that the drop is causeless, though.

The OP (original poster) to PPP garnered a lot of reccies, and it looks like it may have been one of his core holdings. He says:

I’m simply not interested in submitting a boom or bust entry.

It looks like a few experienced investors are similarly positive on the shares. I think that they are far better investors than me. Mark Keston supports the bull case, for instance:

I cannot see any warnings or suggestion that they will miss target but earnings would be slightly down on last year. Can this be a year end institutional tidy up/forced seller decimating the price ? A forward p/e at two with no obvious financial distress at the company seems like bargain territory.

Directorspeak is positive:

"We remain confident that our business strategies are sound; backed by robust order book and the operational milestones achieved this far will pave the way forward achieving growth for the company. Our technological and creative base backed by systematic expansion of necessary capacities in 3D stereoscopic productions for television and feature films will put DQE ahead of its peers as our IP’s gain further traction worldwide."

Unfortunately, that’s not how it’s turning out so far. YTD, the shares are down 11%, whilst the Footsie is up.

I think it is always worth analysing disasters, simply because I want to avoid them. If only I can avoid the disasters!

There’s a few things that stick out about DQE immediately:

  1. AIM – a risky place
  2. India/China/Russia – asking for trouble. Even Paulson caught a cold on them
  3. PER 4.6, PBV 0.36 – a little suspicious. This is the problem with value investing. Is there something that the market knows that I don’t? Not a deal-breaker, but why is a company that’s ostensibly going great guns on such low multiples?
  4. Z-score 1.21. That’s weak for a non-financial.
  5. Revenues going from 12.2m in 2008 to 27.8m in 2011. Growth is good, of course. Unless there’s something iffy going on.
  6. Number of shares in in 2008: 12m. In 2011: 36m. OK, now we’re beginning to see what’s going on here.
  7. ROE 5.55% Oh-oh, something definitely going on here.

In terms of the revenue growth, shares in issue, and declining ROE, we’re seeing a fairly typical pattern here. And not the good kind, either!

My verdict: Avoid. Too risky. Let’s see in 6 months how close to being accurate I am. DQE has one analyst. He/she rates it as a "strong buy". Nice bit of analysis there. Not! Presumably it is the house broker, who’d put a "strong buy" on used manure, just as long as it was a client.

Don’t get Lynched.

37p

=-=-=-=-=
Powered by Blogilo

Advertisements

About mcturra2000

Computer programmer living in Scotland.
This entry was posted in Uncategorized. Bookmark the permalink.

2 Responses to DQE fishiness

  1. Wexboy says:

    Yeah, I keep a regular eye on DQE and EROS – I like their stories, but there’s always been a bit of a stink off them… Can’t quite put my finger on it, when I get that whiff there’s really no need to waste time digging! Actually, there is a more obvious reason for discomfort I did notice – ignore EBITDA & other management gobbledygook, after film investment these companies are both consistently cash-flow negative, and they both have significant amounts of debt – a dangerous situation…

  2. mcturra2000 says:

    Another point which was picked up on Motley Fool, and I really should have picked up on, too, is “look at the cashflows”. For DQE, net cash flow has been consistently below net profits, with the exception of the finals released on 11-Aug-2011.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s