Small Cap Value Report (Wed 18 Sep 2019) - JDG, CNKS, KETL

Hi folks,

Thank you for the useful suggestions and all the comments, as always.

Today I have covered:

• Judges Scientific (LON:JDG)
• Cenkos Securities (LON:CNKS)
• Strix (LON:KETL)

---

Judges Scientific (LON:JDG)

• Share price: 3679p (+7%)
• No. of shares: 6.2 million
• Market cap: £228 million

Interim Results

These are fine results and the outlook for the full year is ahead of expectations.

Financial Review

The company does what all companies should do, and states what the expectations were: adjusted PBT of £14.8 million to £15.1 million.

To find the new forecast, you have to look up a broker note. I have done this, and the new forecast is for FY 2019 adjusted PBT of £16.5 million.

What's really impressive to me about these results is that they are organic. In the company's words:

In the absence of any material acquisition since 1 January 2018, this statement shows no distinction between total and organic performance.

Revenue is up 9%, adjusted PBT is up 27%, and the performance looks even better on a statutory basis, i.e. without making any adjustments.

This is because the company's amortisation charge dropped significantly compared to the prior year (perhaps due to the lack of M&A activity?)

On a cash flow basis, the performance is great: £7.3 million of (after-tax) cash from operating activities, with only £300k spent on capex. Such a low capex number doesn't look sustainable, but it's still a fantastic cash flow performance for the six-month period.

The company acknowledges that it has enjoyed a benefit from exchange rates. Perhaps it could show revenue at constant FX in future, to help us see the underlying result?

Order intake

As many readers will know, Judges is an acquirer of scientific businesses, in a similar vein to Scientific Digital Imaging (LON:SDI).

It has a brilliant track record of buying small businesses at cheap multiples, using some debt, and then paying off the debt with internally generated cash flow, thereby building huge value for shareholders.

The order book is an important measure used by the company in shareholder communications. At the end of H1, it stood at 13.2 weeks of sales, which the company describes as "healthy" but which is down compared to 15 weeks a year ago.

Judges says that this is actually a product of its own success: it has reduced lead times for customers, which has result in sales being accelerated and brought forward. That makes sense actually: if you could satisfy your customer orders immediately, there is no need to carry any order book at all!

I note that UK order intake was weak (down 22%), although this was fully offset by gains in other regions.

Q2 orders showed a "small contraction". Judges says that orders have now recovered to a satisfactory level.

My view

I'm very annoyed at myself that I didn't pick this up during the December 2018 sell-off, as the share price is up by around 50% since then! A missed opportunity for me, but well done to those of you holding this one.

Looking ahead, I think prospects remain good.

There is a small question mark over whether the company will be able to continue applying the model at a larger scale. Buying small, founder-led scientific businesses at cheap multiples works when you have a very small fund. Will it still work now that Judge's resources are growing?

I take the view that when a company proves it can manage a small pot of money extremely well, it is usually a good idea to let it run its profits, i.e. to keep using its profit streams to grow.

Judges pays a modest dividend, which many investors are in favour of, but it has a strong bias towards reinvesting its earnings. This is a big reason why it has turned into a multi-bagger!

Will it multi-bag again? I don't know, but I might buy a token shareholding in this, when I have some spare funds. If for no other reason, it will help me to stay alert to future buying opportunities!

Note that the StockRank is 89, as Stocko can see the virtues of this share. It qualifies for Growth and Quality stock screens.

---

Cenkos Securities (LON:CNKS)

• Share price: 51.95p (+17%)
• No. of shares: 55 million
• Market cap: £29 million

Interim Results

The day has finally arrived when Cenkos produces a loss! Although at £200k for the six-month period, it's not the end of the world.

This is an AIM broker which many of you are familiar with. Its big paydays are associated with IPOs and other corporate activity, and it also generates revenue from everyday brokerage and research services.

H1 revenues are just £10.6 million. At its peak in 2014, Cenkos generated full-year revenues of £88 million! This is a perfect example of a feast-to-famine industry.

It confirms again today that there are "very difficult market conditions". On the bright side, H2 has "started well", including an IPO (which must be Brickability (LON:BRCK) ).

Outlook

The pipeline for the remainder of the year and for 2020 is encouraging. We continue to evolve our business to adapt to market changes and remain at the forefront in providing capital and solutions for growth companies.

Balance sheet is usually a fortress. Net assets are stable at £26 million. If we ignore receivables and payables (which are of a similar size), the company's equity is mostly in the form of cash and financial assets.

Interim dividend is unchanged at 2p.

Admin expenses: staff costs halved to £6.5 million, compared to the prior year.

I keep banging this drum about Cenkos, because it remains true: it has a great track record of aligning bonuses with profitability. A shame that it didn't trim the bonuses just a little bit more, to maintain its track record of permanent profitability, but it almost managed it.

My view: probably undervalued. If there was some consolidation in the sector, with interest from a larger bank, I can't imagine why Cenkos would sell itself at only around net asset value.

One possible explanation for the very cheap valuation of this company (despite the lack of deal flow) is the close association with Neil Woodford, whose fund management company is in some difficulty at the moment.

Personally, I won't be investing in these shares again, because it doesn't pass my quality filters, and I'm being strict on quality (it's a people business, lumpy revenue, very cyclical).

As part of a "deep value" strategy, however, I think Cenkos could make a lot of sense around current levels. When the AIM/small-cap IPO market recovers, which it will at some point, perhaps this broker's revenues can start to impress again?

---

Strix (LON:KETL)

• Share price: 169p (+3%)
• No. of shares: 190 million
• Market cap: £321 million

Interim Results

Stable performance from this owner of IP relating to kettle safety controls.

There is a small (2.5%) increase in revenue, feeding through to a small increase in operating profit.

Leverage has reduced somewhat (net debt £33.4 million) and this means that PBT (i.e. after deducting the reduced interest charges) can increase at the faster pace of 4.6%.

The outlook for the full year is in line with expectations.

The expectations (from Equity Development) are for EBIT this year of £31 million, and diluted EPS of 14.4p.

What I like about this company:

• one of the few small-caps with large global market share of its niche
• simple product - kettle safety controls
• its achievements are based on the successful defense of its intellectual property
• great track record of profitability and ROCE
• growth opportunities via acquisition and a new manufacturing facility in China is coming (to be ready by August 2021)

I'm not quite comfortable enough to buy it for my personal portfolio, but this is certainly one of the more interesting and successful small-caps to float in recent years.

---

I've run out of time and will have to leave it there - apologies for not getting around to cover your requests today.

Have a good evening,

Cheers 

Graham