Small Cap Value Report (30 Jan 2017) - CVR, SPE, WTM, FLYB | Graham Neary

30th Jan '17 by Graham Neary

38 comments 19474 reads

Good afternoon,

I haven't made the final decision about which stocks to cover, so please shout in the comments if you'd like me to mention something. Thanks!

Graham

Conviviality (LON:CVR)

Share price: 260p (unch.)
No. shares: 172.5m
Market cap: £449m

Half-Year Results for 26 weeks ended 30 October 2016

I have written very cautiously about these shares before, and I'd remain very cautious here, after today's results.

The group swings into pre-tax profitability of £7.4 million (up from a loss in H1 last year).

Ne debt is 1.2% below "pro forma net debt" (that will have been a tricky calculation, following on from a series of acquisitions), and is now £138 million.

And how about this covenant situation:

Leverage is comfortably below the Adjusted EBITDA bank covenant of 2.50x at 2.19x

At 87% of the maximum, it's comfortably below? Really?

Still paying dividends:

Interim dividend up 100% to 4.2 pence (H1 FY16: interim dividend 2.1 pence), which is currently expected to represent approximately one third of the anticipated full year dividend.

That 4.2p dividend is worth £7 million in total, so it's the entire pre-tax profit figure.

It's a big statement of confidence to suggest that c. £21 million in dividends could be paid out in total this year.

Interest costs added up to £2.7 million in the period. This might not seem much against the market cap or the near-£800 million in revenues.

My opinion: I don't think there is anything comfortable about the leverage here for what remains a low-margin business.

In that context, I don't understand how the dividend policy makes sense - it needs more breathing space for its covenants, in my view.

Management are heavily incentivised to grow EBITDA (contributing to a max 100% salary bonus for the CEO) and to grow EPS on a 3-year timeframe via the LTIP.

The shareholder base has obviously signed off on these policies, so in aggregate it must be content, but it looks to me as if management are incentivised to shoot for the moon - with all the attendant risk which that involves.

For these reasons, I view the low PE ratio and the dividend yield as value traps.

This Stockopedia table helps to illustrate some weak quality statistics:

Sopheon (LON:SPE)

Share price: 380p (+13%)
No.…

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mikelevie

30th Jan '17

Hi Graham, Sopheon (LON:SPE) please - positive trading statement today.

roger ashworth

Hi Graham, yes please Sopheon.

runthejoules

And a third for Sopheon! Luckily I bought in on dip before results, want an opinion

AlanJenkins2

WTM -Waterman,please Graham.

gus 1065

Me too please for Sopheon (LON:SPE) - it's been top of the Stockrank charts for a while now. Also maybe worth a comment on Waterman (LON:WTM) who reported an in line with expectations update - a bit of a "canary in the coal mine" as a barometer for sentiment in that sector of the UK small to mid caps.

Thanks,

Gus.

Graham Neary

Thanks guys, I'll cover SPE and WTM.

smatthews1

Hi Graham.

I would be interested in your thoughts for PPH as a read through for the market regarding tourism in the UK. Although only about a 3rd of there revenue is from here.

Either way update seems generally positive considering the new hotels they are adding to the portfolio.

Thanks
Sean

Dunco

Hi Graham,

Thanks for the update on Sopheon (LON:SPE), I've held for a while and I'm very happy with the performance of this share.
Could you comment on ATTRAQT (LON:ATQT) updates? How long do freezes typically last?

Thanks, Joe

Lars

Conviviality's net-debt of £138.4m reflects seasonal working capital build-up ahead of Christmas trading so not as tight as it seems in my view. Cash generation is also very solid.

I agree on the incentives pushing for "all or nothing", though. Far from ideal.

alihaouas

any chance of having a look at flybe-some imorovement since last update

FREng

Great analysis of Conviviality (LON:CVR) . Thanks for your insights.

Edinburgh Investor

Hi Graham

Regarding your point about talking to the employees [SPE], a useful tool can be to check the companies glassdoor reviews, where people review their employer - https://www.glassdoor.co.uk/Reviews/Sopheon-Reviews-E12609.htm

As they are not a large company there isn't a huge amount, however the theme seems to be a good product, the project teams are quite pressed (possibly due to strong sales), and quite a bit of staff turnover.

kenobi

I don't know if it's been noted on this board but it looks like their might be some storm clouds on the horizon for boohoo (which I hold) http://www.bbc.co.uk/newsbeat/article/38795537/boohoocom-staff-in-trouble-for-smiling-investigation-finds

Will this blow over, or turn into a sports direct size disaster ?

K

gsbmba99

The acquisition announcement for ATTRAQT (LON:ATQT) has a timetable of events. According to this timetable, resumption of trading is due to take place on 7 March.

johnrosier

Hi Graham,

Thanks for your thoughts on Conviviality and I understand where you are coming from; it’s certainly no Bioventix!

It’s a low margin business but this story is about industry consolidation and increasing margins and returns through scale efficiencies.

You rightly question the statement Leverage is comfortably below the Adjusted EBITDA bank covenant of 2.50x at 2.19x.”

I too would like to see more headroom but think that it is a fairly stable business with thousands of customers and reasonably defensive in a downturn. Furthermore, working capital is near a high point ahead of the festive season and I would expect the situation to improve in the second half.

Further improvement should also come from the realisation of greater synergies moving forward. It is still early days since it acquired Matthew Clark, Bibendum and Peppermint.

You rightly say that it is a big statement of confidence that £21m in dividends could be paid out in total this year. I think that is exactly what it is. Management are confident about increasing margins and improving cash flow in the second half and going forward. I was encouraged by the strong trading in the first two months of the second half: “Group sales in November and December were 6.1% above the corresponding prior period⁶ with each business unit performing well. Retail like for like sales in the 6 weeks ending 1 January 2017 grew 2.1% and Conviviality Retail sales increased 6.9%. Conviviality Direct sales increased 6.2% and Conviviality Trading grew 3.1%.”

It’s difficult to argue against your view that it is a low-quality business with low margins and low returns on capital and equity as demonstrated by the Quality scores you show, because it is! (Although the overall Quality score of 70 is not so bad.) I just think there is a price for everything and in this case the story is of improving margins and returns. One is buying into a company, where management, through sound acquisitions has built a group that is likely to see higher margins and returns on capital.

I might be shooting myself in the foot here but the principal reason for Tesco’s bid for Booker is to realise huge buying synergies. Perhaps Booker will provide greater competition in beverage supply to convenience stores if the merger goes through.

It is one of my 27 holdings. My average in-price is 198p. Your post has certainly provided food for thought and has made me revisit my positive stance. In all honesty, given the 30% rise in the share price since the middle of December I was expecting the shares to fall back today; better to travel than arrive and all that. I am encouraged by today’s steadiness in a soggy market and am happy to hold on in expectation of a higher share price driven by improving margins and returns.

As you say, DYOR and just my opinion. I could be wrong, I often am!

Hi Graham Filtronic (LON:FTC) Interim results seem to have greatly disappointed the market.

tabhair

I thought the end of year numbers from ATTRAQT (LON:ATQT) themselves I thought were good, insofar as a loss-making company can be! Yes it is loses money, but the gross margins, revenue growth were impressive. They have a very good product and it clearly has traction with customers, so I am ok with losses today to grow the business in the future. The important thing with this one for me is that the product is proven, their installed base is still tiny, so there is a huge runway on this one. Since much of the additional revenue is recurring, it will drop through to the bottom line as the company matures and grows. To put it this way, I think in five years time, they could conservatively be doing £10M revenue at an EBITDA margin of about 25%. From today's share price, that is (potentially a 4 bagger).

The acquisition though has really thrown me for six though. Firstly, the dilution for ATTRAQT (LON:ATQT) shareholders is nasty. The huge volume of shares hitting the market at 35p when the current market price is 46p is going to be a huge overhang. Secondly, the company who are selling Fredhopper SDL (LON:SDL) must be pretty pleased they are making a 4x gain on a company they bought for just £5M seven years ago now.

If I was a shareholder, I can't say I would be very pleased. Who knows what you're getting with this acquisition.

Hi tabhair,

Yes, waking this morning to read the results, I was pleased with the numbers (for a loss making company), I picked up a long position in ATTRAQT (LON:ATQT), mainly due to the success of their platform with Boohoo.Com (LON:BOO). Therefore, I felt the company was in a good position to attract (pun intended) more business. Currently a loss making company, but with high margins and a good client list I was willing to take a punt - this was back in the summer.

No sooner was I done reading the RNS this morning, they froze trading and released an acquisition RNS. It seems I have a lot of time to dissect this information now. It certainly dilutes my position in the short term; however, I'm hoping with a bolstered client list, increasing revenue and high margins, it may work out in the long term.

For the moment, I'm stuck with it. But as part of a well balanced portfolio, hopefully it won't hurt me too much....

Cheers,
Joe

Small Cap Value Report (30 Jan 2017) - CVR, SPE, WTM, FLYB

Conviviality (LON:CVR)

Sopheon (LON:SPE)

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Graham Neary

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