Small Cap Value Report (2 Oct 2015) - UNG, TET, VLX

2nd Oct '15 by Paul Scott

5 comments 15007 reads

Good morning!

Very quiet for results and trading updates again today, so another short report.

Universe (LON:UNG)

Share price: 9.5p (up 1.3% today)
No. shares: 220.3m
Market cap: £20.9m

Major contract win - I don't normally comment on contract win announcements, unless they look material to the business. Universe has won a contract to supply an EPoS system to the entire estate of 650 off-licence and convenience stores run (or franchised) by Conviviality Retail (LON:CVR) .

Revenue is expected to be £4.3m spread over 3 years, which isn't huge in the context of Universe already having forecast turnover of about £21.6m this year. However, I'm impressed that Universe has managed to win such a fairly big client, in a competitive tender, suggesting that its software is good. This deal should also act as a reference for further sales to other new customers.

The StockRank here is very good, at 96, also the trend of performance over the last few years seems to be encouraging, so Universe might be worth a fresh look. The shares look priced about right for now (forecast PER of 12.1), but if there's good growth in the pipeline then perhaps earnings forecasts might rise in future?

The only caveat is that these shares have always historically been very cheap, so could easily revert to being on a PER of 6-8 again, if the future numbers disappoint. Also there are no divis, and the spread can be wide. So it's probably not for me.

Treatt (LON:TET)

Share price: 165p (up 2% today)
No. shares: 51.7m
Market cap: £85.3m

Trading update - a reassuring update, with the key bit saying;

The Board is pleased to confirm that the Group has performed well in the second half of the financial year and expects to report revenue and profit before tax for the year ended 30 September 2015 in line with its expectations.

Debt and forex are mentioned positively;

The cash performance of the Group has been encouraging, with net debt ending the year at its lowest level since 2006. The Board is also pleased to report that the FX strategy in place has prevented movements in FX rates during the year having a material impact on results for the year.

Valuation - Stockopedia shows broker consensus…

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Leven

2nd Oct '15

I think Universe (LON:UNG) have historically been cheap because of the concentration risk of clients - 3 customers accounted for 59% of turnover in 2014. As they win new clients this risk should diminish - exciting potential for earnings growth and PE expansion. Disclosure - I'm long the shares.

Splode

True, but their three biggest customers (Asda, Morrisons and ExxonMobil) are large and Universe is well entrenched - they have served two of them for >10 years. The nature of their business is that they get thoroughly integrated into their customers' operations so contracts are 'sticky' and they can 'invade' other areas of large customers businesses. The downside is that it can be difficult to break into new customers - so the news with Conviviality Retail today is very good.

I'm long and hope to be for a while.

JDW72

The previous p/e would have reflected the weakness in the balance sheet which has been improved by paying down the debt and also the concentration of business with just three clients (was 85%).

The balance sheet is much better now, the reliance on key clients much improved. That's why the P/E ratio is improving.

Additionally, the products are much better and they are able to offer a level of integration that their competitors can't.

I think good growth will come from them exploiting further uk opportunities (pharmacies, butchers(!), etc.) but the paradigm shift will come when they bite the bullet and trial in the USA. I suspect at that point (if not before) US firms might start taking an interest in UNG as a firm.

Daniel Neale

I am hopeful about the USA opportunities. I'm sure the management are looking across the pond... I was half expecting something to be announced regarding US today but shall have to wait and see.

The CEO is heading across to a couple of "Convenience Store Conferences" (the mind boggles) but I'm not sure there are firm plans yet with regards the USA.

The model relies on a "field force" of engineers who can get to clients and resolve issues quickly and with the USA being such a vast country that is a harder thing to make work. They'll need to find a densely populated local area to trial in and / or hook up with an American company who have a field force already in place.

Small Cap Value Report (2 Oct 2015) - UNG, TET, VLX

Universe (LON:UNG)

Treatt (LON:TET)

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Paul Scott

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