Small Cap Value Report (Mon 26 Oct 2020) - HSS, AUG, ECK, INL, DRV, UCG, AFN

Good morning, it's Paul here with the SCVR for Monday.

Today's report is now finished.

Agenda - these are the small cap company updates that I've selected to write about today;

Hss Hire (LON:HSS) - discounted fundraising

Augean (LON:AUG) - small tax refund re HMRC dispute

Eckoh (LON:ECK) - Trading update

Inland Homes (LON:INL) - Trading update

Driver (LON:DRV) - Trading update

United Carpets (LON:UCG) - Trading update

Advfn (LON:AFN) - Final results

Re Yourgene Health (LON:YGEN) - I've read through its update today, but I don't have anything to add to it.

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Hss Hire (LON:HSS)

Share price: 22p (up 5%, at 09:44)
No. shares: 170.2m
Market cap: £37.4m

Proposed Capital Raise of up to £54m

Ever since this tool hire company floated in Feb 2015, I’ve been flagging that its balance sheet was dangerously over-geared. That, combined with disappointing trading & restructuring, has largely destroyed shareholder value. This is one situation where I don’t have much sympathy with shareholders, because the terribly weak balance sheet was obvious from day one. You just had to look.

This seems to be a preliminary announcement today, giving the outline of the refinancing. Key points;

• Firm placing & open offer to raise c.£54m
• Priced at just 10p (a whopping 55% discount)
• Dilution is heavy, with c.540m new shares to be issued, dwarfing the 170m currently in issue. This means the share count will rise more than 4-fold
• Possible covenant breach & serious consequences by end 2020 has driven need for fundraising
• Details of the open offer not given, or I might have missed them? £35.5m total, but it’s not stated how many new shares existing holders can apply for
• 3 largest shareholders are supportive - Toscafund (26.9%) often stands by its mistakes, or even takes them private
• Free float of only 13.8% has led the company to explore other listing venues - not stated, but I wonder if this might mean a move to AIM possibly?
• Revenues (presumably the monthly run rate?) now hack up to 90% of last year’s
• Increase in online penetration
• Intending to permanently close 134 branches

My opinion - this deal should avert financial distress, even insolvency, at end 2020. It shows the value of having a concentrated institutional shareholder base, in that they are defending their existing investments by putting in fresh client funds.

The problem is that this deal is not big enough. It doesn’t fix the balance sheet, it just makes it a bit less disastrous. Last reported NAV was £67.1m, deduct £159.6m of worthless intangibles, and NTAV was negative £(92.5)m. This deal might add say £50m extra NAV (after costs), thus NTAV will still be negative by c. £(42.5)m - still poor. The company will still be dependent on very large borrowings. Therefore I don’t imagine it’s likely to be paying divis for the foreseeable future. This probably won't be the last equity raise, as the balance sheet remains very weak.

Overall this share is a classic case of why a dangerously over-geared balance sheet is something best avoided.

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Augean (LON:AUG)

Many thanks to Berksbee for flagging this announcement;

Augean, one of the UK's leading specialist waste management businesses, announces that it has been notified by HMRC that it will be repaying £1.6m of Landfill Tax to the Group. The amount relates to a single biomass customer and is part of the £40.4m of disputed Landfill Tax assessments which the Group paid in full in December 2019...

Augean will also be seeking interest & costs.

Another disputed £16m was heard at a Tribunal in Sept 2020, and the decision is awaited.

Augean complains that the relatively small £1.6m case has taken 3 years to resolve.

My opinion - we've had interesting discussions here about Augean before. It looks very interesting, and profit growth in recent years does look stellar, if the HMRC dispute is ignored. The valuation on a PER basis looks modest, if forecasts are achieved. I don't understand how this sector works, and am not keen on heavily regulated sectors, so don't feel I can offer a meaningful view on it. But the numbers certainly do look interesting, especially if larger HMRC disputes are resolved in the company's favour. So I'll keep a watching brief on it.

Incidentally, I recently reviewed a much larger, but much more problematic waste group called Renewi (LON:RWI) in early Oct 2020 here.

I'll add charts & pictures later, once I switch from my chromebook onto my larger PC.

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Eckoh (LON:ECK)

Share price: 64.5p (down 4% at 10:48)
No. shares: 253.8m
Market cap: £163.7m

Half Year Trading Update

Here are my notes from the FY 03/2020 results, published in June 2020. I was impressed, and thought the share looked potentially interesting, albeit rather expensive on a PER basis.

Today we have an H1 update, 6m to 30 Sept 2020.

Eckoh delivered a robust performance in the period and in line with Board expectations, generating comparable levels of profit to the prior year, reflecting the resilience of its business model.

High levels of recurring revenue, a solid order book, enterprise clients and a strong balance sheet, combined with prudent cost control, have enabled Eckoh to manage the impact of the global pandemic effectively….

We already knew that Eckoh should be resilient to covid, since it has recurring revenues, but I wonder if profits being flat against last year is good enough, when a share is on a high PER like this? Maybe not.

New business was “challenging” in Q1, with tender processes put on hold by customers. Q2 is seeing signs of momentum building.

More details are given about contract wins, including a 6-year renewal for Capita, re London Congestion Charge, and;

There are a number of other sizeable renewals expected to close in the second half of our financial year.

Liquidity looks fine;

net cash of £12.9m at 30 September 2020 (30 September 2019: £10.9m).

My opinion - no strong view either way. Maybe the shares are priced about right? I.e. expensive on a PER basis, but the market seems to be factoring in future growth, after a pause in H1 due to covid.

I have a nagging doubt about the longevity of companies taking payments over the phone. Surely, in the long run, this type of transaction would tend to migrate to apps, rendering Eckoh’s activities ultimately obsolete? What do readers think on that point?

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Inland Homes (LON:INL)

Share price: 52.9p (up 2%, at 11:54)
No. shares: 226.5m
Market cap: £119.8m

Trading Update

Inland Homes ("Inland Homes" or "the Group"), the leading brownfield developer, housebuilder and partnership housing company with a focus on the South and South East of England, today issues a trading update for the year ended 30 September 2020 ahead of its Preliminary Results which will be announced in January 2021.

There’s a lot of detail in this announcement, but very little which I can actually use to form a view on the company. Nothing is said about profitability, for example, apart from this;

The Group was trading in line with market expectations to mid-March 2020, but its results have inevitably been impacted by the global COVID-19 pandemic.

Net debt is down a bit, but still rather high;

During the year, we achieved a reduction of Net Debt to £138.3m (30 September 2019: £152.3m)

My opinion - Inland has generated very little shareholder return in the last 6 years - the share price is back to where it was in 2014, and only modest divis have been paid over that period. Compare that with say Persimmon (LON:PSN) a larger and much more successful housebuilder, which has paid out gigantic divis over the same period.

Therefore, the discount to NAV at Inland is probably justified. They seem to be very busy, with lots of projects underway, of various types, but shareholder returns never seem to reflect all that work.

It would be interesting to tot up how much management have taken out of the company, in various forms of remuneration, and compare that with the dividends paid to shareholders over the years. I was unimpressed with management, when I attended an AGM a few years ago. The CEO behaved like a petulant child, when challenged about poor shareholder returns, and management bonuses. It was a very strange meeting. Things like that tend to permanently put me off investing in a company.

It’s a difficult share to value. You would need to do a sum of the parts calculation I think, to assess each development, what profit might be made from each, over what timescales, etc. Then there are JVs, property management deals, and other moving parts.

I’d be more inclined to look at the larger, simpler, and lower geared national housebuilders, if I wanted exposure to this sector.

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Driver (LON:DRV)

Share price: 51p (up 15% at 12:30)
No. shares: 52.2m
Market cap: £26.6m

Trading Update

For background, here is my report on Driver’s interim results (6m to 31 Mar 2020), which produced good profitability, although cautious about the outlook due to covid uncertainty & limited visibility. Liquidity and balance sheet looked fine, although very high receivables stood out on the balance sheet.

Driver Group plc (AIM: DRV), the leading global professional services consultancy to the construction and engineering industries, providing multi-disciplinary consultancy services including expert witness, claims and dispute resolution services, today announces the following operational update on its activities.

This update today, for the full year FY 09/2020, sounds pretty good in the circumstances;

Activity levels overall have been broadly consistent with those achieved in the first half, with a strong performance in the UK and Europe offset by a weaker result in the Middle East and Asia Pacific regions. As a result, the Board expects in the absence of unforeseen circumstances to report underlying* PBT for the financial year of approximately £2.5m.

Cash conversion has been strong, which might address my previous worries about the high level of receivables on the balance sheet;

Cash conversion has been particularly strong in recent months resulting in a healthy net cash balance on 30 September 2020 of £8.2m.

That’s a good improvement on the £5.5m net cash reported at 30 June 2020, so it looks as if some of the receivables must have turned into cash.

Outlook - a strategic review & restructuring seem to have worked well;

I am confident that the reduced cost base and renewed focus on our core business of higher margin expert witness and dispute resolution in both APAC and the Middle East will deliver improved operating performance.

My opinion - I can see why the share price has risen strongly today, it looks justified, with a reassuring update.

The share price looks good value, given the resilient performance this year, strong cash position, and encouraging noises about improved future performance.

There was a flurry of takeover activity for consultancy businesses a while back, although Driver might be too small to attract bidding interest? But you never know.

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United Carpets (LON:UCG)

Share price: 4.25p (up 31%, at 13:55)
No. shares: 81.4m
Market cap: £3.5m

Trading Update

United Carpets Group plc (AIM: UCG) the third largest chain of specialist retail carpet and floor covering stores in the UK, is pleased to announce the following trading update.

This relates to FY 03/2021 so far.

This share is too small for me to mention for itself (mkt cap only £3.5m, well below my usual cut-off point of £10m). However, I think it’s interesting for read-across to other home improvement shares, as this update reinforces that people are spending money on improving their homes, an enduring trend so far this year. It makes obvious sense, that with holidays largely cancelled, and people perhaps not so keen to visit shops or go out for meals, and other experiences, and being stuck at home a lot of the time, then it makes sense to make home a bit nicer to live in.

Since our 56 stores reopened on 22 May 2020 trading has been robust with good demand from consumers increasing like for like sales by 23.8% for the 19 weeks to 1 October 2020. This has meant the Group has recovered much of the ground lost during lockdown, when stores were closed for just over 8 weeks and virtually no revenue was generated.

That’s clearly very good.

Liquidity - looks fine. It had £5.4m in cash at 30 Sept 2020, but £2.0m of that came from a Govt-backed loan, and £1.1m short term boost from tax deferrals. That still leaves £2.3m of cash, if those items are adjusted out, which looks fine.

Outlook - various factors are mentioned which might present headwinds;

• Raw materials shortages, leading to higher input prices
• Demand could be harmed by further Govt restrictions on movement
• No deal Brexit risk could increase costs for goods imported from EU (also forex volatility)
• Recession risk in 2021
• Capacity constraints with not enough carpet fitters

The last point reminds me of the inept Govt adverts telling people in the arts (e.g. an unemployed ballerina) to re-train. My brother is a composer/saxophonist, and he was recently advised by a Govt website to re-train as a bomb disposal technician. I must call him, and suggest that carpet fitting might be a lower-risk career alternative!

My opinion - UCG looks quite good, but it’s really too small to be stock market listed.

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Advfn (LON:AFN)

Share price: 16.9p (up 9%)
No. shares: 25.7m
Market cap: £4.3m

Final Results

ADVFN, the global stocks and shares website, announces its audited results for the year ended 30 June 2020.

It’s difficult to shake off the impression that this company is a lifestyle company, which is operated entirely for the benefit of its Directors and staff. Shareholders are not even an afterthought, they might as well not exist!

Key points;

• Revenue down to £7.1m (LY: £8.7m)
• Costs cut, e.g. staff down from 68 to 38 and lease on London office not renewed
• R&D spending of £277k to keep website “up-to-date and fresh”! Strange, as it looks the same to me as it did 20 years ago
• Loss of £349k
• Weak balance sheet, but has enough cash to keep going. NTAV is negative

My opinion - the company has been resolutely averse to making sustainable profits, or paying divis, for the last 20 years. Therefore the only hope for shareholders is that someone might want to buy it, for the user base (the vast majority of whom seem to be multiple handles for certifiable lunatics). Anyone who has looked at the bulletin boards on advfn will know what I mean.

Still, it's always good fun to see what Clem has been up to. He's been trying to jump on the crypto currency bandwagon, without any apparent success. I wonder what they'll try next? A cure for covid maybe? Selling timeshares on Mars?

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That's me done for today, see you tomorrow!

Regards, Paul.