Daily Stock Market Report (Fri 31 Jan 2025) - VNET, TRB, AVON, TUNE, SMIN, BBOX

Good morning! We have a section from Mark on Vianet to kick us off today

1.05pm: I've run out of time, have a fantastic weekend everyone. And thanks for all the constructive feedback in the comments in the last few days - plenty to ruminate on!

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Companies Reporting

Name (Mkt Cap)	RNS	Summary	Our view (Author)
Smiths (LON:SMIN) (£6.4bn)	Strategic Update	Focusing on John Crane/Flex-Tek. Other businesses to be divested or demerged. £500m buyback.	AMBER/GREEN (Graham) I like it when companies simplify. Also there is great shareholder orientation on display with the company using its strong balance sheet to enrich shareholders as much as possible.
Tritax Big Box REIT (LON:BBOX) (£3.5bn)	TU	Contracted rent increases by £22.7m. LTV falls to 29%. Enters 2025 with confidence.	AMBER/GREEN (Graham) A pleasant increase in annual contracted rents, coming from both rent reviews and new developments. I don't see anything to dislike and the shares trade at a 20% discount to book value.
James Halstead (LON:JHD) (£736m)	TU	H1 sales are slightly below last year. PBT comparable. Full year PBT expectations are in line.
Avon Technologies (LON:AVON) (£441m)	AGM Statement	In line.	AMBER/RED (Graham) Nothing too objectionable here but shares are already pricing in a good deal of success over the new few years. Has the potential to grow into its market cap.
Alliance Pharma (LON:APH) (£331m)	TU	“The Board continues to anticipate that underlying Group profit in FY 2024 will be in line with FY 2023.”	PINK (Takeover planned at 62.5p).
Focusrite (LON:TUNE) (£123m)	AGM TU	Content Creation division: channel de-stocking in H1, expected H2 weighting. Audio Reproduction: headwinds in a softening market.	AMBER (Graham) Statement fails to indicate the full-year outlook vs. expectations. Superficially offers value. Profit warning risk.
Tribal (LON:TRB) (£84m)	TU	FY24 revenue ahead, adj. EBITDA substantially ahead of exps. Continued ARR growth for FY25.	AMBER/GREEN (Graham) We've been AMBER/GREEN on this before. Looks interesting on valuation against ARR. Overall growth will be held back in short-term but could improve again from 2026.
Maintel Holdings (LON:MAI) (£40m)	TU	Rev £97.9m (below exp?), EBITDA £10.5m “broadly in line”. Outlook: revenue warning for 2025.
Ground Rents Income Fund (LON:GRIO) (£30m)	Response to possible offer	37.5p “materially undervalues” the company. PUSU deadline is 5th Feb, extension not granted.
Oncimmune Holdings (LON:ONC) (£14m)	TU	Revenue warning for FY August 2025. £4m expected. Seeks finance to extend cash runway.

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Vianet (LON:VNET)

Down 11% yesterday to 90p - Trading Update - Mark - AMBER/RED

Weakness in the hospitality sector is affecting profits here, as they say:

The Board now expects revenue for FY25 to be approximately £15.7million (FY24 £15.2m) and EBITA to be approximately £3.6million (FY24 £3.5m).

This makes quite a big difference to EPS, with Cavendish now forecasting 2.8p for FY25, some 55% lower than previously. They also take the axe to 2026 estimates, cutting those down by 47% to 3.5p. So, this appears to be more than a one-off issue.

Even after yesterday's 11% fall, this now trades on 26x 2026 Earnings, which seems far too high. Prior to this update, the algorithms weren’t too critical of the company:

But this is mainly due to the unrealistic forecasts and that the company managed to get itself categorised in the Software and IT Services industry by describing itself as:

[an] international provider of actionable data, business insights, and payment solutions through an integrated ecosystem of connected hardware devices, software platforms and smart insights portals

The reality appears to be that they provide PoS for vending machines, plus their core business of beer flow monitoring. Pub chains pay for the latter to make sure their tied estate doesn’t sell other beers. While they may have data backends, customers probably don’t buy the products for the data but for the core functionality.

Management don’t seem to be concerned with paying 26x earnings for the shares, with Chairman and CEO, James Dickson buying £22k worth of shares on Thursday morning. However, he does have the value of his £4.6m worth of shares to protect. Only being encumbered with about £300k of shares, CFO Mark Foster has been far more circumspect and only managed to find £4.5k to invest this morning, or 1.6% of his FY24 total pay packet.

Mark’s view

In November, Graham said, “Vianet strikes me as being quite expensive and probably overvalued, but that’s all.” It looks even more so today, and would need to trade at about a third of the current price to make it an interesting proposition for me to look into further. AMBER/RED

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Graham's Section

Tribal (LON:TRB)

Up 13% to 44.25p (£95m) - Trading Update - Graham - AMBER/GREEN

Tribal (AIM: TRB), a leading provider of software and services to the international education market, is pleased to provide an update on trading for the year ended 31 December 2024…

Some very nice news this morning:

• Revenue ahead of market expectations (£85.6m)

• Adj. EBITDA substantially ahead of market expectations (£14.4m)

• Net debt of £3.2m is “well ahead” of expectations (£9.4m)

The £6m difference between actual net debt and expected net debt stands out to me - a very big difference for a company with a market cap of less than £100m. I wonder if there are some one-off items involved, such as receivables having been paid faster than anticipated?

ARR in the Core business is up 9% to £54.8m, “more than offsetting the anticipated ongoing decline in non-core business ARR”.

Outlook: FY24’s performance provides “a strengthened foundation as the business enters FY25”:

Whilst new customer generation was slower in FY24 than in prior years, the Group has a growing pipeline across the business, an effective cloud strategy, and continued ARR growth projected for FY25.

Estimates

Thanks to Singers for publishing revised forecasts this morning.

2024 revenue is now anticipated at £90m, with adj. EBITDA at £16m.

For 2025, the loss of non-core revenue is going to drag on revenue growth and so the revenue forecast for 2025 is flat at £90m again. Adj. EBITDA is expected to fall back to £14.5m. Singers suggest that growth will pick up again in 2026 as non-core revenue shrinks away to zero, and that the shares are attractive on a 2-3 year view.

Graham’s view

I think our existing AMBER/GREEN stance makes a lot of sense here.

Tribal claims that its “Student Information Systems” is the number one provider of this type of service to universities in Australia, New Zealand and the UK, and I can imagine why this might help to make it an attractive takeover target (a US company offered 74p per share last year, but shareholders rejected it).

Financially, an ARR of £54.8m for software should normally, I think, be valued at a much higher multiple than Tribal’s <£100m market cap suggests.

The balance sheet has been weak here in the past but the net debt figure announced today seems very low. That said, I do expect that TRB's balance sheet as of Dec 2024 will once again have a deeply negative net tangible asset value. But perhaps that is not a huge problem in this case.

Overall, I think this looks interesting. I don’t have more conviction in it because I don’t know enough about their other software products and services, but I do agree with the broker that this looks potentially quite attractive.

In general, I always think it’s worth taking a second look when parts of a business are shrinking and parts of it are growing, as in the case of TRB and its “Core” vs “non-core” activities.

If the part that is shrinking is sold off, or is simply allowed to shrink until it no longer has much influence on the results for the group as a whole, you get a nice situation where the financial performance of the overall group can predictably improve. Investors who watch out for this can, I think, spot the opportunity early and predict the improvement earlier than others. Maybe this could be one of those cases?

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Avon Technologies (LON:AVON)

Up 2% to £15.08 (£456m) - AGM Statement - Graham - AMBER/RED

We have a brief AGM statement from AVON.

Q1 trading is in line and the outlook for the full year is “consistent with guidance given” at the FY24 results in November.

Megan looked at this in November and was AMBER/RED on valuation grounds.

Checking the forecasts published by Zeus in December, I see that adj. PBT is anticipated to rise significantly from £27m (FY Sep 2025 forecast) to £37.9m (FY Sep 2027 forecast).

Zeus, not known for their bearishness, said that the valuation at the time (share price £14.40) was looking “full”.

With both Megan and Zeus warning me that this stock is expensive, I’m going to leave our AMBER/RED stance unchanged.

That said, if the company hits future targets (and today’s update brings us that little bit closer), then AVON has the potential to grow into this market cap. Perhaps detailed research could give an investor conviction in the company’s plans.

But based on a brief review, I think AMBER/RED here is fair enough.

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Focusrite (LON:TUNE)

Down 6% to 197p (£117m) - AGM Statement and Trading Update - Graham - AMBER

Focusrite plc (AIM: TUNE), the global music and audio products group supplying hardware and software used by professional and amateur musicians and the entertainment industry, will today hold its Annual General Meeting…

This is a really frustrating update as the company skirts around the key question.

I’m not surprised that investors have responded by selling the shares.

It starts by saying:

Overall the Group's trading for the first six months of the current period is expected to be in line with the Board's expectations.

That’s fair enough, but investors really care about the performance for an entire orbit of the sun, not performance over half an orbit.

Surely the company will tell us if the outlook for the year is still in line with expectations?

They continue:

Within the Content Creation division… the Group's trading has seen underlying end-user registrations remain strong… Owing to planned ongoing channel de-stocking in the first six months of the period, performance for the first 12 months is anticipated to be weighted towards the second half when the current de-stocking trend in the US is expected to ease.

TUNE have talked about de-stocking before, so this is an ongoing issue, but hopefully they are right that it will ease in H2!

Now, will they tell us that the full-year outlook is in line with expectations?

No, first they need to tell us about the other division:

Our Audio Reproduction division is experiencing headwinds in a softening market following a post Covid boost, as indicated at the FY24 results. Our order pipeline remains strong, enhanced by a much broader product portfolio than in prior years.

That sounds moderately negative, but the company did say in its full year results that “all industry data points to the market normalising over the coming year”.

So I guess the normalisation is happening as expected? And the full-year outlook is in line, then?

We’ll never know:

Both our divisions remain focused on managing costs, maximising gross margins, and investing selectively to support future growth."

Graham’s view

This update is a missed opportunity to say that the company is on track to meet market expectations for the full year, which are revenue of £161m and net profit of c. £10m.

Superficially this stock does offer some value at current levels but I’m worried that it may have another profit warning in it, and I think it could communicate more effectively with us. So I am leaving our neutral stance unchanged.

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Smiths (LON:SMIN)

Up 11.5% to £20.80 (£7.1bn) - Strategic Update - Graham - AMBER/GREEN

Thanks to Jeff for requesting this.

SMIN was “only” worth £6.4bn last night. The market loves this announcement.

We have never discussed this stock before as it is too large and not the type of stock that private investors tend to take much interest in. But given the importance of today’s news, it justifies a mention.

The group will be greatly simplified but before we get into that, here is an overview of its divisions I’ve gleaned from last year’s full-year results.

John Crane, a global leader in mission-critical technologies for the energy and process industries and an innovator in rotating equipment: revenue £1.1bn, headline operating profit £263m.

Flex-Tek, a global provider of engineered components that heat and move liquids and gases for the construction, industrial and aerospace markets: revenue £786m, headline operating profit £161m.

Smiths Detection, a global leader in threat detection and screening technologies for aviation, ports and borders, urban security and defence: revenue £859m, headline operating profit £102m.

Smiths Interconnect, a leading provider of high reliability connectivity products and solutions serving segments of aerospace and defence, medical, semiconductor test and industrial markets: revenue £354m, headline operating profit £49m.

Today’s announcement

SMIN will focus on John Crane and Flex-Tek, describing what they do as “high performance industrial technologies for efficient flow and heat management”.

Smiths Interconnect will be sold, targeting a deal by the end of 2025.

Smiths Detection will be demerged or sold, after the sale of Sminths Interconnect.

Buybacks: the £150m share buyback is increased to £500m.

Checking the final results statement again, I see that the group had a leverage multiple of only 0.3x, i.e. it was hardly leveraged at all. The net debt figure was £213m (vs. adjusted operating profit of £526m). So I would presume that the company can afford to do this buyback.

Furthermore, “a large portion of all disposal proceeds” will be returned to shareholders, in addition to this £500m buyback. But perhaps the disposal proceeds might also be returned in the form of dividends?

The CEO, who was appointed last year, has this to say:

…the Board has spent considerable time evaluating the options to maximise shareholder value and address the persistent discount to the significant value embedded within the Group.

"We start from a position of strength and as we execute this strategy, we will become a more focused business with significant potential for future growth and value creation. Focusing on our world-class John Crane and Flex-Tek businesses and carefully managing the separation of Smiths Interconnect and Smiths Detection, we will deliver significant value for all stakeholders.

Graham’s view

This is a major change for a company that is the better part of 200 years old (174 years, to be precise).

In principle, I’m all for companies simplifying their structures. I don’t think anybody believes in the idea of the “conglomerate” any more, either from a business or an investment perspective. Investors certainly prefer to understand what they are buying and be able to value it using one method, rather than trying to value it on a sum of parts basis.

It does appear that John Crane and Flex-Tek have more in common with each other than they do with the other two divisions. It’s hard to imagine that there are valuable synergies between Smiths Detection and the others, for example.

Therefore, I applaud this decision, and I applaud the shareholder orientation that (in my view, perhaps controversially?) is demonstrated by the scale of the potential buybacks we could see here.

I’m AMBER/GREEN on this. The Stocks really like it, too:

Let’s hope that buyers accept the invitation to bid for the Detection/Interconnect businesses. The valuations they might attract are the great unknowns here.

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Tritax Big Box REIT (LON:BBOX)

Up 1% to 144.5p (£3.6bn) - FY24 Trading Update - Graham - AMBER/GREEN

Thanks to boringchess for requesting this.

In general I don’t cover REITs and investment trusts, although I would like to - it’s just a matter of time constraints.

If you’re interested, I recommend that you check out the regular thread posted by Charles Mitchell. The latest one is here.

Tritax is “one of the biggest providers of critical chain supply infrastructure” - it has a very large estate of distribution warehouses.

According to its last set of interim results, contracted annual rents were £303m, an increase of £8m for H1.

Today’s full-year update says that there has now been a total increase of £22.7m in contracted rents for the year.

This is broken down as follows:

• £11.6m from active management - rent reviews and other initiatives.

• £11.1m from development lettings - pre-lettings and pre-sales of new developments.

Data centres: Tritax are working on their first data centre development and now have a data centre pipeline.

Disposals: over £300m worth of disposals, mostly from their “non-strategic” portfolio (this portfolio is worth less than 5% of total assets).

Sales from their logistics portfolio occurred at a small (3.3%) premium to book value.

Balance sheet: moderate leverage with a 29% LTV and a modest cost of debt (3.1%).

CEO comment:

"We are delivering and enhancing performance across all aspects of our business as we make excellent progress implementing our strategy. In line with guidance, we saw an uptick in activity in H2 2024, most notably securing one of the UK's largest pre-lets of the year of nearly 1 million sq ft to a global leader in ecommerce…

"We enter 2025 with growing confidence, driven by improving occupational market conditions, our expanded range of growth drivers - which now include highly accretive data centre developments - and enabled by ongoing investment in our high-calibre team, dedicated to achieving continued success for Tritax Big Box."

Graham’s view

Checking the interim results, I see official net assets per share of 177p (effectively 100% tangible).

Under the accounting conventions used in the real estate industry, net tangible asset per share is about the same, 179p.

The shares trade at a 20% discount to this.

Overall, I don’t see anything to dislike here. Modest leverage, some disposals taking place at a small premium to book value, the shares trading at a useful discount, and an opportunity in data centres.

REITs can’t be expected to beat the market, except in cases where they are taking quite a lot of financial risk. But the returns from a solid REIT can be a reassuring part of a portfolio which is otherwise taking more adventurous bets. BBOX looks like it might be able to offer that sort of solid return. Maybe if you have a strong view on the outlook for distribution warehouses, you might take a stronger view.

I’m moderately positive on this.