Small Cap Value Report (3 Mar 2017) - HVN, TRAK, G4M

3rd Mar '17 by Graham Neary

31 comments 17822 reads

Good morning,

Paul is going to be busy for most of today, so I'll man the fort here.

At the moment I provisionally intend to cover:

Harvey Nash (LON:HVN)
Trakm8 Holdings (LON:TRAK)
£G4M

Regards

Graham

Harvey Nash (LON:HVN)

Share price: 61.4p (-1%)
No. shares: 73.5m
Market cap: £45m

Pre-Close Trading Update

This lowly-rated recruiter seems to be doing ok, mostly because of currency movements:

Those constant-currency movements are less than inspiring, however, and are more important to me than the actual numbers. They tell a more accurate story about the performance of each segment that was under the control of the company.

However, today's statement from the company doesn't take any responsibility for the weakness seen, blaming the UK result on Brexit uncertainty and blaming the Rest of World result on "challenging market conditions" in Hong Kong.

Perhaps it's unrealistic to expect better explanations than this, but I much prefer when companies tell us that they made some mistakes or that they were beaten by superior competition, and that's why the results aren't very good.

Anyway, even with this lacklustre trading update, Harvey Nash shares are screaming value at the current level. I'm not surprised to see that the StockRank Value Rank is 99. The trailing PE ratio is 6.8x and that ignores the value of the healthy cash balance.

So if it can sail through the next year or two in a reasonable way, it's priced for a fantastic shareholder return, even if we assume the business is less than high-grade.

Trakm8 Holdings (LON:TRAK)

Share price: 75p (-4.5%)
No. shares: 32.5m
Market cap: £45m

Proposed Capital Raising

Completion of Capital Raising

The stream of bad news here has finally taken its toll on shareholders with a discounted placing. £2.1 million is raised through the issuance of 3.2 million at the discounted price of 65p per share.

The bookbuild was made available only to institutional investors, investing alongside management and directors who have put in £800k.

The statement acknowledges that the issuance price is at a 17% discount to yesterday's closing price. Needless to say, this is another instance of the disparity in opportunity faced by difference classes of investors.

For what…

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tony akram

3rd Mar '17

Does anyone know if I wanted to take up the option of buying TRAK at 65p how do I do this ?

Is it a case of just contacting my broker ie HL ?

I am not a current shareholder dont know if that makes a difference.

Gary Leach

Thanks Graham. An interesting slug of volume (6.5m) just gone through at HVN. I'm hoping it might have cleared a suspected long-standing overhang. SP has reacted positively.

whitmad

As a contractor myself, I believe the likely effect of IR35 on agencies is overstated. The biggest impact will likely be on those government departments who suddenly find they have to pay a premium to attract contractors, to compensate for their overheads in being taxed under IR35, otherwise they will simply fail to recruit and projects will fall behind. There may be a transitional blip while they come to realise this. Previous attempts to pressure contractors into permanent employment, either by government with the original IR35 rules, or by industries acting in concert to reduce contractor rates have failed, I doubt this will be any different.

I should add that I believe recruiters to be largely oversold and good value at the moment. I hold HVN, GATC, and EMR

Laughton

Tony,

You can't. Open only to institutions who oversubscribed - as Graham says above.

Rusty2

No you can't as above "The bookbuild was made available only to institutional investors, investing alongside management and directors who have put in £800k."

MiserableJacktPotato

With IR35 - maybe I've missed something here. But from what I understand HMRC is effectively saying is that "you are an employee of this organisation, therefore you need to PAYE and contribute NI".
But surely, if I am an employee, the organisation now has to provide me a workplace pension?

Ramridge

Hi Graham - I know you have started reviewing £G4M. Perhaps I could ask you to review the following data (provided by G4M) which I have extracted from a Edison Research note published today.

What this says to me is that growth is slowing across the board, in particular LFL European growth in period Jan-Feb was down to 64.1% against a full year 124.5%. H1 to H2 also shows a slowdown in growth in each market.

Earlier this week I posted that I had liquidated my holding with the view to potentially buying back depending on today's update. http://www.stockopedia.com/content/small-cap-value-report-mon-27-feb-2017-qtx-tni-dia-mcls-vlx-173168/?comment=21#21

As I write the SP is down 3% so I could buy back at a small profit. However having given it further thought I am not going to that but bank the 164% profit I have notched up to date and move on. A PE above 50 doesn't sit well with slowing sales growth rates.

Would be interested in your views

Regards, Ram

Thanks Guys

IGotPoesJacket - You would think so, but rules regarding employment rights are completely distinct from rules regarding tax status. They like to have their cake and eat it.

jeddi

My understanding that the takeover price of 32red is 1.96, and the dividend is 4p bringing the total to 200p,

IR35

IGotPoesJacket

Its all about raising tax revenue from an easy target. The IR35 legislation was introduced over 15 years ago and has undergone a few amendments all aimed at raising more tax by treating freelancers as employees without the benefits of employment. Recruiters are trying to get the latest amendments delayed/removed. If they fail then some of the consultancies that supply government organisations will likely benfit ( e.g TRIAD). The public sector may struggle to get contractors to work for them if there is alternative work available in the private sector which so far isn't affected by the rule changes.

Graham Neary

Hi ram, great table and thanks for sharing. I really am no G4M expert but I would be thinking about the business model and where it will be in 3-5 years - is there anything to stop it from scaling up and on balance is it likely to execute? Are the latest growth rates too slow for what you would want it to achieve, and do you lack conviction that growth can go any faster than this? How big is the growth runway?

Sorry I don't have the answers but those are the questions I'd be asking.

Certainly, I wouldn't rule out investing on the basis of the growth figures presented in that table.

Best wishes

Graham

Hi Graham - these are excellent and pertinent questions. Maybe I was too tunnel focused and need to broaden the area of analysis before coming to a conclusion.
Many thanks for your thoughts, Ram

bestace

On £G4M, the headline growth figures shown in the RNS are comparing 12 month periods and look pretty healthy, but this hides the fact that (as ramridge alludes to) the growth rate over the last 12 months has been trending down in both the UK and Europe.

Edison are estimating revenue growth of 41% for FY18 (which is down on FY17 and in line with Jan/Feb YOY growth) and 24% for FY19. They were pretty conservative with their estimates last year which left room for upgrades through the year, so a recurrence of that happening this year is very possible.

If the German distribution hub stimulates sales in the same way the Sweden hub seems to have done, then there should be a decent boost to growth rates. The German addressable market is £1.2bn according to figures published in their last annual report, whereas Sweden's is only £107m. The German hub is also intended to service the Netherlands, which is the 5th largest market at £202m.

Purely on a momentum basis I reckon this still has plenty left in the tank and the sell off this morning has barely registered if you look at the long term rising price channel. Based on Edison's figures the PEG is around 1.4, which doesn't seem overly expensive in the current markets.

Nick Ray

As I write the SP is down 3% so I could buy back at a small profit. However having given it further thought I am not going to that but bank the 164% profit I have notched up to date and move on.

I think the textbook answer is to rebalance by selling the +64% so that you are not overweight in £G4M compared with other stocks in your portfolio.

Paul Scott

Hi Graham,

Thanks for another excellent report!
It's odd being a reader, instead of a writer!
I find your views very thoughtful, and stimulating.

For what it's worth, my views are;

IND (results yesterday) - quite encouraging - H2 was better than H1

G4M - fantastic organic growth - I think the high rating is fully justified. This is my biggest position.

RBG - we will have to wait & see if the spike up in price holds. There have been 3 institutional sellers, looking at the "Holding in Company" RNSs. Lovely business though. Cheap.

Best wishes & thanks again for holding the fort :-D

PP.

darekn

9th Mar '17

8% drop in G4M SP today. Really kicking myself for missing this when it was first flagged here, but am very tempted to buy in at 580...

10th Mar '17

Now down over 12%, low today was 490p.

vik2001

someone must be selling g4m in big chunks ....

Ajay_Gajree

I'm buying G4M more! Looks a big buying opportunity. Looks to be because Old Mutual have sold a chunk which has flooded the marker for now.

Small Cap Value Report (3 Mar 2017) - HVN, TRAK, G4M

Harvey Nash (LON:HVN)

Trakm8 Holdings (LON:TRAK)

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Graham Neary

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