Small Cap Value Report (Mon 2 March 2020) - Virus, BKS, MWE, JSG, AIR, CSSG, DISH

Good morning!

Despite the continued spread of the coronavirus over the weekend (13 new cases in England, and hundreds of new cases in Italy), the FTSE Index is currently trading near 6700, having gained 150 points versus this time last Friday.

I was checking IG's "Weekend FTSE" yesterday afternoon. It briefly dropped below 6500, prompting me to drip a few more funds into my account there, just in case we had another spike lower.

Dripping more funds into the account was also in line with IG's advice to customers. Unusually, it wrote a message to customers on Friday, asking them to "prepare for high volatility" and advising that there was a "risk of gaps" over the weekend.

But for now at least, bulls on the index (such as myself) are enjoying some respite.

I wonder if it has anything to do with the sharp drop in new cases of the coronavirus in its Chinese epicentre, Hubei.

Or it could just be old-fashioned opportunism. I bumped into an experienced private investor yesterday evening, who said that he had spent the entire Sunday afternoon trawling through the index for bargains, because of the "great value" on offer at the moment. Time will tell if he is right. For my sake, I hope that he is!

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Companies which issued noteworthy announcements this morning:

• Beeks Financial Cloud (LON:BKS)
• MTI Wireless Edge (LON:MWE)
• Johnson Service (LON:JSG)
• Air Partner (LON:AIR)
• Croma Security Solutions (LON:CSSG)
• BigDish (LON:DISH)

Timings: Finished at 13:30pm.

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New article - I've written a special article for Stockopedia, outlining my reaction to recent news flow at Tesla ($TSLA). Here's the link.

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Beeks Financial Cloud (LON:BKS)

• Share price: 101.24p (+1.7%)
• No. of shares: 51 million
• Market cap: £51.5 million

Interim Results

This is the cloud computing company which runs data centres near financial exchanges, to give institutional clients the fastest possible execution of their orders. 

Key points here:

• H1 revenues +23% to £4.3 million
• annualised monthly recurring revenue +37% to £10.2 million
• unchanged gross profit margin 49%
• adjusted EBITDA +30% (excluding the impact of IFRS 16)
• new data centres in New York, Singapore, Paris and London.
• New customers are joining on much larger contracts than before. This is important, because the number of institutional customers has increased by just 6% over the past year.

Outlook - trading is "within the range of market expectations".

CEO review - very upbeat. Beeks is signing big, multi-year deals with "Tier 1" institutions, and branching out from forex into fixed income, crypto and "Open Banking" services (so-called "Open Banking" reforms require the sharing of financial data).

Beeks is also helping clients with their wider cloud requirements, providing a service which includes setting them up with other cloud vendors.

There is additionally a retail product at Beeks, but it's not the focus of management in terms of growth. Its percentage share of company revenues is falling.

Competitive advantage - it's good of Beeks to provide a paragraph on this, helping simpletons like me understand why we should trust the sustainability of the business model:

We have an established customer base and a strong competitive advantage through the breadth of our connectivity to trading venues, the sophistication of our self-service web portal, and the breadth of our services. We now have a foot-hold in all asset classes of note, meaning we can enter into contract discussions with any financial institution within the trading ecosystem. We believe we are now one of only very few businesses with this breadth globally in delivering these services via the cloud. 

Headcount increases from 33 to 40. Investors should always be on the lookout for companies which are able to control their staff count, and Beeks seems to score favourably in this regard. Using annualised H1 revenues, the amount of revenue generated per staff member is c, £215,000.

Brexit - no adverse effect is expected.

H1 Profitability is impacted by £100k of share-based payments (vs. £30k in H1 last year), and some other small costs which are classified by Beeks as non-underlying.

As a result, growth in statutory PBT is a little muted at 14%. "Underlying" PBT, in contrast, grew at 46%.

Since I don't treat share-based payments as non-underlying, I wouldn't trust the 46% growth rate given. The truth is somewhere in the middle.

Net assets are nearly £6 million and net cash was £0.7 million. That sounds fine, but do bear in mind that Beeks has expressed an interest in further "strategic and bolt-on acquisition opportunities".

Forecasts - in an update issued by Progressive, EBITDA forecasts are reduced by 9% (for both this year and next year). Progressive says "We believe our latest forecasts are more consistent with the new market consensus and therefore with management's outlook commentary".

Adjusted EBITDA is expected to grow by 24% next year (FY June 2021) to £4.6 million.

My view

I still find it hard to judge whether or not Beeks has a truly long-term competitive advantage. As usual, it helps for a company like this if you are a customer or a competitor, so you can judge its offering against the alternatives.

The numbers do say that Beeks offers clients something fresh which they can't easily get elsewhere.

For example, the return on the asset base is strong (Stocko calculates ROCE as 18.6%, and ROE as 20.3%).

I note that capex significantly increased to £1.2 million in H1, matching the entire amount spent in the previous financial year. It might be a challenge to earn as much on this spending as the company earned from its prior investments. I wouldn't be surprised to see ROCE/ROE come under a little pressure.

The reduction in analyst earnings estimates also hints at some difficulties or higher costs which hadn't been anticipated.

And I share Stocko's caution on valuation. If the latest earnings estimates are hit, reported earnings per share in FY June 2021 will still be less than 3p. Paying 100p for this today strikes me as being perhaps too optimistic.

Therefore, while I still have a mostly positive impression of Beeks as a company, I remain cautious on the shares.

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MTI Wireless Edge (LON:MWE)

• Share price: 33.1p (+7%)
• No. of shares: 88 million
• Market cap: £29 million

Final Results for 2019

MTI Wireless Edge Ltd (AIM: MWE), the technology group focused on comprehensive communication and radio frequency solutions across multiple sectors, today announces its audited results for the year ended 31 December 2019.

We don't cover this very often. Its an Israeli antenna company with interests in water management (irrigation/distribution) and professional services related to the core antenna business. Operations are now global.

The share price has performed well since I looked at last year's results.

This year (FY December 2019), sales growth is again 13%. EPS growth is again stronger than this, dropping in at 21%.

The max share of revenue by a single customer was less than 7%. Customer concentration is therefore moderate.

Buyback programme - there is a strange buyback programme, designed "to assist with trading liquidity". The normal objective of a buyback programme is to reduce the capital of a company, or sometimes to fund employee benefit schemes.

Apparently, MTI buys shares in the market, to increase the volume of shares traded, and then later sells these same shares in blocks to institutions, "subject to demand and price".

Sounds odd to me. Could this be open to exploitation? MTI seems to be acting as broker for its own shares, buying and selling them with different parts of its shareholder base.

Outlook - 5G, climate change and defence spending are all seen as macro trends offering growth opportunities. No specific info is given for the outlook, but MTI is proud of its 50-year track record and considers itself well-positioned for the future.

Trade receivables tick up to $9.8 million.  It's still taking clients a long time to pay.

I do think this is a very significant improvement against previous receivables figures. By my calculations, it took clients around 90 days to pay MTI in 2019, versus 130 days in 2018. So I am less alarmed about this aspect of MTI's financials than I was before.

My view

MTI is slowly growing on me. If you have the risk tolerance for small-caps headquartered far away, it might be worth another look.

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Johnson Service (LON:JSG)

• Share price: 199.4p (+9%)
• No. of shares: 370 million
• Market cap: £737 million

Preliminary Results

This is a bit too big for us. However, Paul covered its recent trading update here so I'm happy to provide a follow-up with the actual results.

Like many other share prices, JSG has been all over the place over the last week. It fell from 223p in mid-February to 183p on Friday, and is up today.

It provides workwear and table linen/napkins on a rental basis. A decline in the hotel and restaurant trade (e.g. linked to the Coronavirus impact on tourism) would have a knock-on effect at JSG.

Results for FY December 2019 are good (revenue +9.2%, operating profit +16.7%). Let's skip ahead and see what JSG has to say about the virus:

Whilst we have not as yet seen any impact on trading from the Covid-19 virus, we will continue to monitor the situation over the coming weeks. 

I didn't expect that! Along with Brexit, the Coronavirus fear has not yet harmed JSG in the slightest.

Outlook - in line with expectations. A new site in Leeds will hit margins, as it will take time to build up its throughput. That's fine.

Net debt is c. £90 million (excluding the impact of IFRS 16). Borrowings are in the form of an overdraft and an RCF.

My view - JSG's recent track record is fabulous. It deserves recognition for an excellent 5-6 years. Probably valued about right at current levels.

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Air Partner (LON:AIR)

• Share price: 72.2p (+2%)
• No. of shares: 53.5 million
• Market cap: £39 million

Air Partner delivers integrated solution for FCO

I took a quick look at AIR's January profit warning, thinking that it didn't sound too serious. The share price at the time was 77.6p.

Today, Air Partner says that it worked with the FCO to evacuate and repatriate UK and Irish nationals from the Diamond Princess cruise ship.

This is the ship that sat off the coast of Japan for a few weeks, after a large percentage of its passengers caught Covid-19.

I think seven of those passengers have now tragically died (six as of February 28th. plus an Australian man on Sunday).

Air Partner delivered on a "complex, challenging and time sensitive" project to get UK and Irish nationals back. The flight was from Tokyo to Boscombe Down, using a specially configured Boeing 747.

A recently acquired Air Partner subsidiary, Redline, assisted with security clearances and security.

I'm not sure how material this project is for AIR shareholders but at the very least, it's an encouraging tidbit. Perhaps there will be more opportunities for AIR to help out with this sort of evacuation.

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Croma Security Solutions (LON:CSSG)

• Share price: 87.03p (-5%)
• No. of shares: 15 million
• Market cap: £13 million

Half-year report

This is a security company with "a military ethos", i.e. a strong preference for ex-military recruitment.

It has transitioned from a core offer in locksmithing to having a greater focus on guarding/protection services. 

These results show a loss of momentum in 2019, as revenues and EBITDA declined slightly.

The outlook statement describes a "healthy pipeline of acquisition opportunities" and says Croma is "well placed for a satisfactory year". It remains ambitious for the long-term to become "The British security brand".

My view

It's hard to get overly excited about this share but it is profitable and pays a dividend - which is more than can be said for most AIM micro-caps.

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BigDish (LON:DISH)

• Share price: 2.9p (+2%)
• No. of shares: 349 million
• Market cap: £10 million

February Operational Update

It's a bullish update from this yield management platform for restaurant.

166 new restaurants were added in February, bringing the total number of live restaurants to 562. And more have agreed to join.

Restaurant groups are showing interest, and this accelerates the pace of signups. By far the biggest group to join was Wildwood (51 sites).

DISH says that the virus increased demand from restaurants to join the platform.

I guess this must be bearish for restaurants, if they joined DISH out of desperation to give customer discounts and get bums on seats:

As news coverage of the coronavirus intensified the Company saw an increase in demand for its services from restaurants. This resulted in a record week where 58 restaurants were added. 

My view - Impressive growth from this early-stage company. As noted in February, it looks like it might need to raise more funds to achieve its goals.

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That will do it for today. Paul returns tomorrow.

Cheers!

Graham