Daily Stock Market Report (Wed 18 Dec 2024) - SHOE, ZTF, SPSY, CCT, IHP, ART

Good morning!

Macro: Tonight at 7pm, we have an interest rate decision from the Fed. 90% of economists polled expect a 25 basis points cut in the Fed Funds Rate, from 4.5%-4.75% to 4.25%-4.5%.

1pm: Roland and I have finished for today! Thanks.

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Explanatory notes

A quick reminder that we don’t recommend any shares. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day. We usually avoid the smallest, and most speculative companies, although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We have a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Add your own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to, if they are using unthreaded viewing of comments.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. And/or it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

Others: PINK = takeover approach, BLACK = profit warning, GREY = possible de-listing. Links:

Daily Stock Market Report: records from 5/11/2024 (format: Google Sheet). Updated to 10/12/2024.

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Companies Reporting

Name (Mkt Cap)	RNS	Summary	Our view (Author)
Integrafin Holdings (LON:IHP) (£1.3bn)	Final Results	“Strong” performance: rev +7%, EPS +4%. Positive fundamentals, macro backdrop improving.	AMBER/GREEN (Roland)
Zotefoams (LON:ZTF) (£159m)	Update on Rezorce	Trading comfortably in line. It’s shutting down a business after failing to find a strategic partner.	GREEN (Roland)
Spectra Systems (LON:SPSY) (£122m)	$9.4m downpayment	Receives initial downpayment from a customer for manufacture of high-speed banknote sensors.	AMBER/GREEN (Roland)
Shoe Zone (LON:SHOE) (£64m)	TU	Profit warning. Cons. confidence, unseasonal weather. FY25 adj. PBT at least £5m (prev: £10m).	AMBER/RED (Graham)
Character (LON:CCT) (£49m)	Annual Results	Adj. PBT in line: £6.6m (LY: £5.2m). Buybacks continue. FY25 results to be similar to FY24.	GREEN (Graham)
Windar Photonics (LON:WPHO) (£49m)	Material New US Order	$2.5m order for delivery in H1 2025. Largest discrete order in WPHO’s history. No ref to exps.
Artisanal Spirits (LON:ART) (£27m)	TU	On track for FY24 EBITDA of £1m. FY25 EBITDA >£1.5m, with one-off hit from US investment.	AMBER (Graham)

Summaries

Shoe Zone (LON:SHOE) - down 42% to 80p (£37m) - Trading Update - Graham - AMBER/RED

It’s a disastrous profit warning with the adj. PBT forecast halving to at least £5m, with the company primarily blaming weak consumer confidence and the government’s budget policies. Store closures are now planned. I’m concerned that there are fundamental problems at play and personally I would not be tempted to bet on a turnaround even at this lower market cap (adj. PER c. 10x based on latest forecasts).

Zotefoams (LON:ZTF) - down 8% to 300p (£150m) - Update on ReZorce & TU - Roland - GREEN

Zotefoams has opted to cease development of its ReZorce packaging product having failed to find a commercial partner. I think this shows sensible discipline. The resulting fall in costs should also boost profits significantly next year, even in the absence of much sales growth. I’m positive at current levels.

Character (LON:CCT) - up 3% to 273p (£51m) - Annual Results - Graham - GREEN

This toy designer and distributor has posted another decent profit result despite what it describes as a harsh trading environment. Looking forward to FY25, it is forecasting another similar result. I’m leaving our GREEN stance unchanged as I’m a fan of the company’s strong balance sheet and its tendency to reward shareholders with dividends and buybacks.

Integrafin Holdings (LON:IHP) - down 7% to 361p (£1.2bn) - Final Results - Roland - AMBER/GREEN

This investment platform for financial advisers delivered a 10% rise in pre-tax profit last year, with net inflows of c.5% of opening assets. IntegraFin’s Transact platform has good scale and the group’s quality metrics remain high, but I have some concerns about competitive pressures. The shares are not as cheap as they were but remain of interest to me.

Artisanal Spirits (LON:ART) - Up 3% to 38.7p (£27m) - Preclose Trading Update - Graham - AMBER

I didn't expect to find this one so interesting. ART remains unprofitable but is making good progress in terms of growing its whisky clubs and is taking a £0.5m hit to EBITDA in order to fund the next stage of its development in the US. Most intriguingly, it claims that its inventories have a market value of over £100m, on the back of an independent valuation. I'm neutral on this for now but I think it could be worth investigating further.

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Short Sections

Spectra Systems (LON:SPSY)

Down 0.5% to 248p (£122m) - $9.4m downpayment on contract - Roland - AMBER/GREEN

This banknote authentication and security specialist has received a $9.4m downpayment as part of a $39.6m contract announced in July. The company says it will “accelerate our manufacturing programme with this infusion of cash”.

There’s no impact on forecasts today, but this deal did trigger upgrades to earnings estimates back in the summer:

One point worth mentioning may be that Spectra Systems currently qualifies for two of Stockopedia’s short-selling screens – i.e. the screens are flagging up potential red flags.

Having taken a look at this, my impression is that the shares are qualifying for the screens because of the sudden jump in revenue and asset growth over the last year or so, paired with lower margins. In some circumstances, this might be a cause for concern, but I don’t think it is here.

Indeed, I have previously been reassured by Spectra’s strong profitability and cash generation. I think the stock could still offer value, despite rising 50% over the last couple of years. My view remains moderately positive, at AMBER/GREEN.

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Graham's Section

Shoe Zone (LON:SHOE)

Down 42% to 80p (£37m) - Trading Update - Graham - AMBER/RED

It’s a short but very serious update for SHOE investors:

Shoe Zone announces that for the first two months of its financial year and the first half of December, it has experienced very challenging trading conditions, principally a weakening of consumer confidence and unseasonal weather, both of which have decreased revenue and profit.

The recent government budget gets the blame for a further weakening of consumer confidence, for “significant additional costs” (NICs and NLW), and the planned closure of stores that have become unviable.

As a result, the Company now expects adjusted profit before tax for the financial year ending 27 September 2025 to be not less than £5.0m, down from previous expectations of £10.0m. In addition, and in light of the above, the Company is not proposing to pay a final dividend for the financial year ended 28 September 2024.

Estimates: thanks to Zeus for putting out a new revenue estimate for FY25 of £159.4, which is a 5% cut on the prior forecast. They no longer expect that the changes to NICs/NLW can be mitigated. They see net cash ending the new financial year unchanged, just below £4m.

Graham’s view

I note that SHOE has been the source of multiple profit warnings this year, with the most recent one in July.

That profit warning was blamed on higher costs of sea freight and (again) unseasonal weather.

After so many profit warnings, I’m concerned that this company might be fundamentally broken. Is competition from cheap online retailers the problem, as Paul suggested back in July?

I view Shoe Zone as a seller of a totally commoditised consumer product. Despite this, its operating profit margin has been steady at c. 10% in the post-Covid era. That was impressive, but perhaps not sustainable in the absence of a durable competitive advantage?

On the cost front, I think this is a reminder that we must not be complacent when companies tell us that they plan to mitigate higher NICs/NLW.

Shoe Zone didn’t explicitly do this, but I’ve seen many companies say that they plan to offset these higher costs without clearly telling us how they will do it. If it was so easy for companies to cut costs and to find efficiencies, why would they not have done it already?

So perhaps we need to watch out for more NICs/NLW-related profit warnings, as the reality starts to bite in the first few months of 2025.

Coming back to SHOE, the share price has cratered by over 40% this morning so that the latest PER on FY25 expected earnings is probably around 10x.

If the company was in net debt then I’d automatically shift to AMBER/RED or RED in these circumstances. However, the company is still forecast to retain a small net cash position (excluding leases). So I feel I have a little discretion here.

On balance, I think it does make sense to put this on AMBER/RED due to the risk that profitability will be affected for the foreseeable future by competition and higher employment costs, putting the company on the back foot for the next several years and taking away any real prospects for growth. If I’m wrong about that and there are signs of a turnaround next year, I’ll be happy to upgrade it again.

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Character (LON:CCT)

Up 3% to 273p (£51m) - Annual Results - Graham - GREEN

Pleasing results for FY August 2024, which are in line with expectations:

CCT are delighted with the result given the circumstances of the year:

This performance was achieved in a harsh trading environment and against a constant flow of negative headlines and data concerning the cost of living and a lack of consumer confidence combining to produce a reduction in sales at retail.

Net cash has improved to £13m despite dividends and buybacks.

The final dividend is unchanged at 11p, meaning that the total payout is 19p.

At the forthcoming AGM, the company will seek approval to buy back up to 15% of shares. I think that buying back its own shares at this level is fine but I’d be much more excited if it was doing it at a PER of 6x instead of 10x!

Balance sheet: the company tends to keep a safe balance sheet and currently has net assets of £39m, almost fully tangible.

Inventories have risen by a few million pounds (to £20m) but the explanation that there are more goods-in-transit (due to longer shipping times) seems reasonable to me.

Outlook statement wasn’t proofread properly (we’ve all been there) but it is positive overall:

The reception that our retail customers and distributors have given to our current portfolio together with the brands and product lines that we will be introducing in our Autumn/Winter 2025 product launches has been very gratifying. However, the challenging and unpredictable conditions that persisted throughout much of the last financial year have continued into the current fiscal year. With buffeting from political and macroeconomic developments, consumer confidence remains low, and this has adversely affected footfall in the high street and click-through from online marketplaces in the lead up to the key Christmas 2024 trading period. Despite this, we are encouraged by the resilience of our market share in our domestic markets and the prospects growth in our international markets expected in Q4 of the current financial year. Accordingly, the Board expect sales and profit before tax and highlighted items for the full year ending 31 August 2025 to remain at similar levels to those reported in the year under review.

Estimates: it looks like the brokers have waited until today to publish any FY25 estimates. The company has now done the job for them in today’s outlook statement and as such we have a revenue estimate of £123m and an adj. PBT estimate of £6.65m for FY25.

Graham’s view: I’ve generally been a fan of this one, although I know that it has its critics.

It’s important to bear in mind that the company is a designer and distributor only; the brands it uses are on licence. I think this is true even for Goo Jit Zu where I believe that the brand is ultimately owned by the Australian company Moose Toys, but where CCT have collaborated to help create the toys.

Therefore, as a designer and distributor, there’s a limit to the PER that the stock should be able to achieve. Barring exceptional circumstances the stock has in general traded at moderate multiples:

On the adjustments to today’s results, the company has excluded the £1m loss it made on currency hedges. I would not exclude this loss, even though the company argues that it’s based on “unpredictable and sometimes volatile currency spot rates at the relevant balance sheet dates”.

The reason I would not exclude it is that I expect the company to have profited from actual currency exchange rate movements, if it has suffered a loss on its hedge. As those currency-related profits could not have been predicted in advance, it makes sense to me that we would balance them out by including the loss on the hedge.

The underlying currency trade is that CCT makes purchases in USD from Chinese manufacturers.

The fact that there is a very meaningful exposure to Cable (GBPUSD) is another reason to avoid overpaying for this stock - there are plenty of things that can go wrong with importing businesses.

The actual net income result for CCT in FY24 was almost £5m and I’d plan for a repeat of that in FY25 - maybe a little better, if more favourable exchange rates have been locked in? GBP was very strong against USD during Q3, but has since dropped back. 1-year chart:

I’m happy to leave our GREEN stance unchanged here as despite the lack of growth, I continue to view this as a decent small-cap that has a proven ability to generate reasonable returns for its shareholders more often than not. Quality metrics tend to be quite good:

And the StockRanks agree with my positive assessment here:

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Artisanal Spirits (LON:ART)

Up 3% to 38.7p (£27m) - Preclose Trading Update - Graham - AMBER

We’ve not covered this one before.

It is “the creator of outstanding, limited-edition whiskies and experiences around the world, and owner of The Scotch Malt Whisky Society ("SMWS"), Single Cask Nation ("SCN") & J.G. Thomson”.

Today’s trading update contains lots of useful info:

• FY24 on track for EBITDA of £1m (LY: £0.5m loss) on flat revenues.

• Members of the Whisky Society up 5% since June to 42,000.

• Net debt peaked at £27m in June, backed by whisky assets worth around £100m.

FY25 outlook: revenue expectations are in line, as is EBITDA, before including a £0.5m hit due to a one-off investment in The Scotch Malt Whisky Society in America:

We are excited by this change, whereby the in-country marketing and operations team will become ASC employees from the start of 2025, providing ASC with direct operational control as well as an optimised cost structure in the market. We are confident that this change will provide the Group with an enhanced platform from which to deliver more substantial membership and profit growth in the world's largest Ultra-Premium Whisky market.

I couldn’t possibly argue against this development.

The EBITDA forecast is therefore “at least £1.5m” (prev: £2m), before doubling in FY26.

Net debt is also forecast to reduce as they have transitioned from investing in stock “to a replenishment approach”.

CEO comment:

"Our ambition remains to create a high quality, highly profitable and cash generative, premium global business and we are making good progress on that journey with a creditable performance against a backdrop of uncertain trading conditions prevailing in certain markets…

"Our acquisition of Single Cask Nation in the USA is well aligned with our ambition to take greater advantage of the sizable and growing American Whiskey market. The additional investment in our USA operations announced today further augments the exciting opportunity for ASC to deliver profitable growth in this key market.

Estimates

Panmure Liberum are forecasting revenue growth of 10% both this year and next. They see net debt falling to £27m by the end of next year (previously: £28m). I guess there is no urgency to reduce debt if it is backed up by a strong balance sheet: Panmure agrees that ART has “a very substantial and appreciating inventory base with a current market value of over £100m”.

Graham’s view

There are reasons we’ve never looked at this before:

However, I think I could be persuaded to get excited about this one.

Unfortunately, ART's PBT estimates remain negative out to FY26 (even with £3m of EBITDA).

I love to find a stock that's out of favour but where the transition into profitability is in the foreseeable future. However, if ART is not going to be profitable until FY27 or later, there is a real opportunity cost to bet on that and then have to wait maybe three years or more for the outcome.

Checking the balance sheet, I see that the company officially has net assets of £15m, or about £12m of tangible net assets.

But spirits on the balance sheet are recorded at just £26.5m, when they are allegedly (according to experts tasked with valuing them) worth over £100m. That would give an uplift to the balance sheet of c. £75m, meaning that real balance sheet net assets could be worth around £85-90m.

I’m intrigued, and I’m tempted to go AMBER/GREEN on the basis of the deep value in the whisky portfolio. But the left side of my brain is reminding me that this company is still unprofitable, and that in the absence of profitability, balance sheet plays often take a very long time to work out (if they ever do).

So I’ll stick with AMBER for now.

Another 2021 IPO that didn’t work out, the stock is very much unloved. It floated at 112p:

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Roland's Section

Zotefoams (LON:ZTF)

Down 8% to 300p (£150m) - Update on ReZorce & TU - Roland - GREEN

Today’s update from this high-performance foam specialist confirms that the company will cease development of its potentially groundbreaking ReZorce packaging product, having failed to find a commercial partner for production. The company flagged up a December deadline for a decision back in November, so today’s news should not be a complete surprise.

"Given how the unique aspects of, and the opportunity from, ReZorce are significant, it is disappointing that we have not been able to find a partner able to commit to this truly disruptive technology capable of giving consumers a recyclable and circular packaging solution.

ReZorce is intended to be an easily recyclable replacement for TetraPak type food and drink packaging, which is very difficult to recycle.

The company says it now has a product that’s capable of being mass produced at “full industrial speed through existing machinery”. Validation that ReZorce is food sterile is still pending but is not expected to be a problem to attain.

However, Zotefoams appears to have come up against a classic problem for companies trying to introduce a new technology – it has been unable to persuade any incumbents to take a chance on the new technology.

...the Board believes that the inherently low visibility over factors such as pricing, within the overall evolution of the packaging market, when set against the capital commitments required, is the principal reason the process has been unsuccessful.

Presumably packaging producers’ reluctance reflects the stance being taken by their own customers, food and drink producers. Given the consumer backdrop at the moment, I imagine focus is on minimising any price inflation, rather than innovating.

Zotefoams says the intellectual property associated with ReZorce is well protected and will be preserved for a time when market conditions are more favourable.

The company says there will be an associated £1.2m impairment charge as its MuCell business unit is shut down, but this is minimal compared to the £10.2m of spend that’s been capitalised during the development of ReZorce. So it seems that for now, at least, the company is confident that ReZorce still has some value.

Trading update & outlook: fortunately, the remainder of the business (producing high-end foams for sports shoes and other markets) is continuing to trade well.

Both foams businesses are performing well, and our order book remains robust with good visibility into next year.

Today’s RNS confirms that 2024 adjusted profits will be in line with previous guidance from November. Stockopedia consensus figures suggest this will translate into 15% revenue growth this year, with adjusted earnings rising by 16% to 22.2p per share.

In the short term, ReZorce was loss-making and has been a drag on the company’s bottom line. This means a significant step up in profits is expected next year.

With thanks to Singers, an updated note is available today on Research Tree indicating the broker expects adjusted earnings to rise by 38% to 30.7p per share in 2025. This prices the stock on a modest 10 times forecast earnings,

One point to note may be that next year’s profit jump is based almost entirely on a reduction in costs.

According to Singers, a step up in revenue is expected in 2026.

Roland’s view

I think today’s news shows sensible discipline from CEO Ronan Cox, who inherited the ReZorce product when he took charge earlier this year. ReZorce may simply be the right product, but at the wrong time.

Zotefoams’ share price has slipped lower today. But I think the main consideration for investors is the scale of the share price de-rating since ReZorce fever peaked earlier this year:

Zotefoams shares are now back where they were in early 2022, but this is a bigger and more profitable business than it was then:

Sales growth is expected to be minimal in 2025, which could be a short-term headwind. However, growth is expected to pick up in 2026. In the meantime, I think we should see improved cash flow, reduced debt and perhaps stronger quality metrics as ReZorce costs drop out of the numbers.

On balance, I think the shares could offer attractive value at current levels, so I’m going GREEN.

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Integrafin Holdings (LON:IHP)

Down 7% to 361p (£1.2bn) - Final Results - Roland - AMBER/GREEN

Closing Funds Under Direction (FUD) grew 17% to £64.1bn (FY23:£55.0bn), supported by net inflows of £2.5bn (FY23:£2.7bn)

IntegraFin is the parent company of the Transact platform. This is an investment platform used by financial advisers to manage their clients’ assets - effectively a Hargreaves Lansdown for financial advisers.

This is a business I’ve researched before and rate quite highly, so I’m interested to see how the business is performing in an increasingly competitive market place.

Results summary y/e 30 Sept 24: IntegraFin saw group revenue rise by 7% to £144.9m last year. This supported a 10% increase in pre-tax profit to £68.9m.

Underlying earnings per share were 7% higher, at 16.2p, despite the impact of the increased 25% corporation tax rate.

It’s worth pointing out that unlike at AJ Bell and Hargreaves Lansdown, IntegraFin’s recent profits have not been boosted by interest income from client cash.

IntegraFin has a policy of passing on to clients all interest earned on client cash balances. While the group did report net interest of £10.7m last year, this was earned on corporate cash balances. Cash and equivalents totalled £244m at the end of September.

The company said it continued to invest in the Transact platform last year, “widening digitalisation” and implementing “valuable integrations”. This continuous improvement appears to have helped the company maintain its appeal to the IFA market and deliver further growth in clients, advisers and funds under direction:

Net inflows of £2.5bn equate to 4.5% of opening assets for the year, representing a useful if not spectacular rate of growth. Closing FUD of £64.1bn represented a new record for the business.

Stripping out net inflows, my sums suggest that the average market performance of FUD may have been around 12% over the year.

IntegraFin’s financials are complicated by the presence of various insurance-type products on its balance sheet. But underlying profitability and cash generation is typically strong and today’s numbers maintain this record:

• Pre-tax profit margin: 48% (FY23: 46%)

• Platform margin (as a % of avg daily FUD): 23.5 basis points (FY23: 24.3 basis points)

• Return on equity: 25% (FY23: 26.2%)

For contrast, AJ Bell reported a 39.8% operating margin for the same 12-month period, while Hargreaves Lansdown reported an operating margin of 47.9%.

A competitive market: IntegraFin has good scale in a growing market. Its platform appears to be widely respected, with many industry awards.

In addition, lower inflation and the prospect of lower interest rates is generally expected to be positive for inflows and investment demand.

However, I think the drop in platform margins last year is a useful reminder of the competitive pressures it faces.

Management are also planning further fee cuts this year, to “share the benefits of scale with our clients”. These are expected to have an annualised cost of £3m. Based on last year’s platform revenue of £140m, I estimate this could represent a further 2.1 basis point reduction in platform margins, to 21.4 basis points (i.e. 0.214%).

However, my main concern with this business is the risk that Transact’s ability to gain market share could be limited by its status as an independent, branded platform targeting untied advisers.

The UK market is dominated by white-label platforms that are leased into the big branded adviser groups, such as Abrdn and Quilter. Only upstart True Potential has chosen to develop its own platform.

This slide from today’s results presentation provides a good overview of the adviser platform market:

Source: IHP FY24 presentation

IntegraFin says it believes there are a further c. 5k advisers in the UK who are “contestable”, in addition to the c. 8k it has already signed up. In addition, IntegraFin points out that it can still gain share of wallet from advisers, who typically only gradually transition clients to a new platform.

Source: IHP FY24 presentation

Roland’s view

Today’s results have seen IntegraFin’s share price slip after a strong period of growth:

I don’t see too much to worry about in today’s numbers. In my view, today’s drop is probably a reflection of the growth and margin concerns I’ve flagged up above, perhaps coupled with some profit taking after a run that’s left the shares looking relatively fully valued:

I don’t have access to any updated broker notes today, but my impression from today’s commentary is that there’s no significant change to 2025 expectations.

According to Stockopedia’s consensus forecasts, underlying earnings could rise by 5% to 17p per share next year, supporting a dividend of 10.4p. That prices IntegraFin shares on a FY25 P/E of 21 with a dividend yield of 2.9%.

I think this is a high quality business with considerable appeal. But the shares don’t offer the value they did a year ago, in my view. At this level of pricing and growth I think it makes sense to take a cautiously positive view, while reflecting the fuller valuation - AMBER/GREEN.