Small Cap Value Report (Thu 8 Oct 2020) - IGP, NRR, VARE, MOTR, MYSL

Good morning, it's Jack here with the SCVR for Thursday. Running a bit behind today! Some good, positive, informative comments - do keep them coming.

First port of call looks to be Intercede, with a positive market reaction...

---

Intercede (LON:IGP)

Share price: 78.9p (+12.71%)

Shares in issue: 50,482,281

Market cap: £35.3m

Intercede (LON:IGP) is a cybersecurity company specialising in digital identity protection. It looks to have a high quality client base for such a small market cap, even after this morning’s +12% rise.

Paul has picked it up frequently in the past so if you’d like some more colour on it just head over to IGP’s Discussions page.

The group has been delivering trusted solutions to high profile customers for over 20 years, with ‘millions of identities deployed to governments, most of the largest aerospace and defence corporations, and major financial services and healthcare organizations, as well as leading telecommunications, cloud services and information technology firms’.

It sounds impressive, but a quick look at the StockReport shows a lot of red in the run up to these results. So understanding just what led to those losses, and what has changed to create these profits, is important.

Clearly there’s a turnaround happening here but it does look as though this is one turnaround where profitability has begun to visibly improve.

Either way, today’s action shows the company’s stock is on the up. The direction of travel is more promising than a Momentum Rank of 60 might suggest, with shares up 159% over the past year.

Trading Update for the six months to 30 September 2020

The group reports revenue +9% ‘in line with expectations’ - not that you’d know that from the strong share price reaction, up from £4.4m to £4.8m.

Cash generation, though, has shot up quite encouragingly. Perhaps this is what’s pleased the market.

Canny cost control has resulted in cash balances nearly doubling, from £4.8m as at 31 March to £8.1m as at 30 September. So in just six months, IGP has racked up around 10% of its total market cap in cash.

And that’s it! You certainly can’t accuse management of being overly wordy here.

There is a second RNS today to declare IGP has joined the Faster Identity Online (FIDO) Alliance. This is an industry association that sets a universal standard for authentication. FIDO authentication enables end users to authenticate via fingerprint, facial recognition, voice and security key and is backed by the likes of Google, Amazon, and Apple.

According to IGP, enterprises looking to use FIDO may still need assistance maintaining strict control over exactly who is accessing multiple systems and resources.

Intercede plans to address this with the new version of its MyID product. Allen Storey, Chief Product Officer at IGP says:

Our next version of MyID will provide fully compliant FIDO authentication services, combined with the issuance, policy and lifecycle management capabilities of the MyID platform. Functionality that will provide IT teams the software they need to issue, replace, and revoke FIDO credentials for employees and suppliers.

Conclusion

More work needs to be done on the implications of this FIDO announcement but it seems as though IGP has the history and expertise to capitalise.

The group has a dedicated web page up for it on its site, here, so it looks like it is really backing this initiative. As it’s aimed at enterprises, IGP could be looking at some potentially big and lucrative accounts.

In the meantime, its shares look quite expensive on a relative basis, with a TTM PE ratio of 35.9 actually rising to above 40x for FY21 if broker forecasts are to be trusted.

That’s quit a big ‘if’ though. Intercede is so small that I doubt any brokers are spending much time on this one, as they make money covering bigger companies that institutional fund managers actually stand a chance of investing in.

This does leave an opportunity for smaller retail investors. The chronic dearth of coverage coupled with earnings momentum, good funding, and a big market opportunity means it really is possible to find compounding opportunities at the sharp end of the market. The risks are higher, and the liquidity lower, of course, so it’s a trade off and not suitable for all.

Liquidity is clearly an issue here - you can buy about 1,500 shares easily for a total investment of just over £1,000.

That aside, a turnaround is taking place and IGP has probably just widened its total addressable market with the FIDO news. That opportunity is tricky to quantify based on these RNS statements alone.

I’d probably want to read the management commentary in annual reports over the past few years to get more of a sense of the strategy that is leading to increased profitability and look more closely at the management team itself as they are the ones executing. If you build a position here, it might be tricky to extricate yourself so you’d need some conviction.

I had a hunch that a concentrated customer base might be a concern, but can’t see anything in the most recent annual report. Meanwhile, the company scores well for Financial Health:

On the whole this looks like an interesting proposition, but the shares are already pricing in growth. The question is whether the market is correctly valuing the scale of IGP’s opportunity. I’ll continue to watch with interest to see if news flow continues to be positive.

Newriver Reit (LON:NRR)

Share price: 56p (+1.8%)

Shares in issue: 306,278,160

Market cap: £167.8m

This is an interesting one - Newriver Reit (LON:NRR) is a REIT focused on community-focused retail and leisure assets. The leisure and retail space is obviously ground zero for lockdown.

A very smart, very experienced leisure team has just floated Various Eateries (LON:VARE) - I find the £60m market cap valuation (for ten sites!) to be slightly bonkers given current depressed valuations among its peer group. Well done to the bookrunners...

But the team does make an interesting thematic pitch that, for experienced sector specialists, this is a once in a lifetime ‘reset’ of the market that could bake in long term high returns for those that time their investments well.

I watched a video presentation by the team, led by Hugh Osmond, on Investor Meets - great management team and interesting pitch. Just can’t get round the valuation.

Anyway, that’s a long-winded way of saying some smart people are banking on a return to normal life on a 1-2 year view and are placing their bets accordingly. There’s life in the old dog yet.

Against that backdrop, NRR seems to have rustled up some resilient results.

Trading Update

The group is managing liquidity, making disposals, and collecting on rents.

Rents

Q3 rent collection is already 72% ahead of where it was at the same stage in the second quarter, at 66%, reflecting ‘an overall recovery in retail sales and the significant progress that has been made in reaching payment agreements with the Company's occupiers.’

NRR gives a summary here:

It’s resilient so far, but we do have that tricky winter coming up. How much longer can operators hold their breath?

These kinds of situations unfortunately usually affect the smaller, independent operators who love what they do but live by the skin of their teeth at the best of times. Even today, the rumour mill is going with whispers of new measures hitting pubs in the north of England. It’s a very fluid situation.

Disposals

Against this backdrop, NRR is ahead of schedule with its £80m-£100m asset disposal programme. Completed disposals total £50.9m at a 3% discount to March 2020 valuations.

This suggests some players in the market continue to look through these lockdowns to a more ‘normal’ market and are valuing accordingly. The property market is less efficient than the stock market though, with much lumpier transactions, which might make things seem less volatile than they really are.

I also wonder if NRR has changed which assets it is selling. It could be that it is hiding some big valuation hits by instead selling higher quality assets. Slightly cynical, perhaps. It’s entirely possible these resilient transaction values are a reflection of a high quality leisure and retail estate.

Conclusion

These disposals mean NRR begins its second half with £140m of cash reserves, which is 71% higher than the position as at 31 March 2020. It has total available liquidity of £235m.

There have been some pretty hefty losses here in 2019 and 2020 - asset writedowns, presumably, as cash flow has been robust in that time.

Both the retail and pub businesses have remained cash positive throughout lockdown and beyond. The group’s Financial Health scores are middling, and it has quite a lot of debt - but this will be backed up by its property estate.

A quick look at the balance sheet shows Long Term Investments of £1.2bn against total debt of £714m which looks like a pretty solid loan-to-value ratio of around 60% (assuming no drastic writedowns).

The growth and value box is striking - it’s a sea of green, with shares trading at just 0.27x tangible book value.

It is ranked as a Value Trap though, which is a fair assessment. Perhaps on a longer term view, if you are of the same view as the Various Eateries bunch, you can argue there is contrarian value here.

The short term is incredibly uncertain though, with widespread and ongoing renegotiating of rents possibly justifying further property writedowns. Anybody investing in this part of the market should be prepared for further volatility in the short term, but with a possible rerating on the cards in the longer term.

Motorpoint (LON:MOTR)

Share price: 288p (-7.1%)

Shares in issue: 90,189,885

Market cap: £279.6m

Half year results from this vehicle retailer.

Motorpoint (LON:MOTR) ‘s sites reopened in early June and since then ‘demand levels have exceeded management's expectations with strong year on year sales growth’.

MOTR’s ten sites in England reopened on 1 June and its three Welsh and Scottish sites reopened during July. The closures resulted in combined losses of £3.4m in April and May but by June the company had returned to profitability.

In fact, profit before tax for the period will still be ahead of last year despite lockdown.

Online sales grew too, to c.36% of sales in the three months to 30 September 2020 following accelerated investment. With the addition of a new ‘home delivery’ arm as well, it seems like management has been fairly proactive in the period.

Again, this seems like a quite decent performance under the circumstances but the market is not enthused. Perhaps this is just a reflection of how far the share price has recovered since May (up by more than 50% from c190p to 288p).

The group says in its ‘Outlook’ section:

The increase of Covid-19 cases in recent weeks and resultant Government restrictions will subdue demand in the short term as consumer confidence is negatively impacted, as we have seen in certain of our sites affected by local lockdown restrictions.

So perhaps that is tempering enthusiasm somewhat.

Conclusion

There’s not much more detail here, so tricky to say at the moment. MOTR will publish its Interim Results for the half year ended 30 September 2020 on 26 November 2020 so we’ll get more information then.

I don’t see anything in this update that is surprisingly bad though. In fact MOTR seems to have navigated lockdown fairly well given the circumstances.

Financial Health looks solid, although the group’s Quick Ratio is very low, so it doesn’t operate with much cash in reserve.

Free cash flow is patchy too, with some years seeing a lot of capex and, while returns on capital are very encouraging at 34%, operating margins hovering around the 2% mark are a concern.

MOTR looks like a well run operator but you could argue that the group is fully priced given the uncertain trading environment, low margins, and lumpy cash generation.

That said, I see shares have actually been coming down in recent years, so it seems like MOTR is earning enough to pay both a dividend and buy back shares.

The update highlights some good points, with the return to profitability, but the share price has recovered well and there are possible clouds on the horizon as seen in the cautious outlook.

There’s probably better risk:reward opportunities out there right now, in my view.

Stockopedia likes it though - obviously a high QM stock, but it also qualifies for the Value Momentum screen.

MySale (LON:MSL)

Share price: 9p (-5.88%)

Shares in issue: 844,708,673

Market cap: £71.8m

They do say a picture tells a thousand words…

Mysale (LON:MYSL) has had a torrid time of it trying to establish the profitability of its business model. Hundreds of millions of AUD in annual revenue has not been enough so far:

But the shares are up c6% today and the group’s StockRank has just scrabbled out of the ‘25 and under’ club on the back of strong recent share price momentum.

If it can close that gap between the top and bottom line by cutting the right costs, it could possibly swing into a sizable profit quite quickly - but I’ll believe it when I see it.

Founded in 2007, MySale is an online clothes retailer with retail websites in Australia, New Zealand and South-East Asia. It gives customers access to brands and products at discounted prices, and gives brand owners a way to offload troublesome stock.

It’s been an absolute money pit for shareholders over the past few years however, soaking up cash while revenue has fallen. You can see the group has recently gone from net cash to net debt, so this £5.1m placing shouldn’t come as too much of a surprise.

What is potentially interesting is just who is providing the funds: Catch.com.au founders Gabby Leibovich and Hezi Leibovich and former-CEO Nati Harpaz.

Between them they grew Catch (now owned by Wesfarmer’s) into one of Australia's most successful online retailers.

Carl Jackson, CEO of MySale, commented:

We are delighted to welcome Gabby, Hezi and Nati as substantial shareholders in our business…

As a business, we are well positioned to take advantage of the accelerated shift to online and, as the quality and number of partners working with us continues to grow, we stand to capitalise further from this long term structural change.

We have experienced a strong start to the year as we enter the peak trading season. During the past year we have restructured our cost base taking out significant unnecessary costs, improved the margins and are now moving to scale the business.

Conclusion

There could be something here - MYSL is an online retailer - just a tremendously unprofitable one right now.

Its finances look precarious even after this placing and it has still yet to prove its business model so I’m firmly on the sidelines. It could at some point come good but it will likely be a bumpy ride and I’d rather park my money elsewhere.

You might miss out on the upside but neither are you going to lose money by not getting involved. The company still has plenty to prove in my view.

There is some potential in the model - Philip Green is a shareholder and must see the value in what MYSL is attempting. But I remember being shown Koovs a few years back (remember them?). The pitch was basically ‘India. Online. Retail. Give us money.’

Needless to say it went bust, but not before taking a load of shareholders down with it. Perhaps MYSL can do better by its investors but I’m waiting for the company to make a profit before I consider it.