Small Cap Value Report (Fri 9 April 2021) - SRT, LGRS, NCYT

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

Timing - with it being a quiet Friday, I'll take my time, and hope to finish by 1pm. Today's report is now finished.

StockSlam recording

These are quick fire shares investor evenings (online at present). If you missed it, here is the recording for the most recent one. They're good fun I think. Here is the video, let's see if I can embed it below...

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Boohoo (LON:BOO)

(I hold)

Jack and I agree that BOO is cluttering up the comments in the SCVRs, and it's not a small cap any more, so we want to move it onto a separate thread. Here is the new BOO thread - where I comment on today's news re its warehousing update, pointing to strong growth. NB - please leave your comments about BOO on the new thread, not in the SCVRs any more. Many thanks.

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Srt Marine Systems (LON:SRT)

31.75p (up 2% at 08:29) - mkt cap £53m

Trading Update

SRT Marine Systems PLC (SRT), a global provider of maritime surveillance, monitoring and management systems, today announces a trading update for the year ended 31 March 2021.

The Company expects to report revenues of approximately £8.2 million* and loss before tax of £5.8 million* with gross cash as at 31 March 2021 of £5.3 million*.

The asterisk says “subject to audit”.

Clearly another grim year. This is a stark statement -

… because of Covid lockdown related implementation delays, no invoice milestones were completed and thus no revenues recognised during the year.

That relates to new projects. Existing projects & sales of hardware generated the £8.2m revenues.

Funding - a CBILS loan of £2.5m was due for repayment in April 2021, but has been extended to quarterly repayments from July 2021 to April 2023, giving some breathing space on cashflow. Note the £5.3m quoted above is gross cash, so we would need to deduct the £2.5m CBILS loan from that, plus any other loans.

The interim results as at 30 Sept 2020 show the £2.5m bank loan, but also “Other loan” of £5.99m. This is a £10m secured loan note programme provided by LGB Corporate Finance. This is expensive debt, costing 8-10% p.a. interest cost. A covenant was breached on this loan, subsequently a waiver was provided by the lender.

Overall then the funding position is clearly precarious, and another equity fundraising is needed, in my opinion. Unless it can actually land some of the enormous pipeline of new orders that rarely actually materialise.

Jam tomorrow - as always with this company. The share price is supported by dangling the prospect of large contracts in front of us -

As of this statement, based upon customer guidance, we expect three of the Asian opportunities and one of the Middle East opportunities, with an aggregate value of approximately £71 million to commence during the first half, a further one in Asia worth approximately £14 million at the beginning of the second half, with the other two Middle East contracts , with an aggregate value of approximately £40 million, to commence later in the second half. The implementation and therefore revenue profile of each project differs, ranging from 9 months to 24 months to complete and therefore the revenues associated from these projects will be spread over a 24 calendar month period against delivered milestones…

We now have seven new system contracts worth a total of £125 million which are pending commencement as the respective countries relax restrictions and contracting processes catchup and normalise. Five worth £85 million are of primary short-term focus for us given customer guidance regarding their contracting processing status. These systems are vitally important to our customers and we maintain very close liaison with them whilst we both wait for the relevant government contracting agencies to normalise operations.

Diary date - 29 July 2021, for FY 03/2021 results.

Apology from management - this is a nice touch -

… to our shareholders who I know, like me, expected and hoped for a great financial result this year, but will today be disappointed. I am very sorry for this disappointment and would like to personally thank you for your support and patience which I expect to be rewarded in the coming year as our system customers are able to proceed as planned with the implementation of these essential systems."

My opinion - you can’t help but like, and believe, Simon Tucker, the immensely affable CEO of SRT. However, the reality is that this business has almost no visibility over sales even in normal times. Add covid lockdowns into the mix, and performance is almost random.

I’ve followed this company since it listed in 2005. Performance over that time has been highly erratic. It’s probably not the company’s fault, it’s the result of relying on Governments around the world moving at glacial speed to implement projects that are clearly not essential - if they were essential, they would be implemented with more vigour by customers.

The investment case here is always the same - look at the gigantic pipeline, if only a few of those contracts come off then profits will soar. The pipeline seems to get bigger & bigger, yet in 15 years we’ve never had a sustained breakthrough in revenues or profits - instead just seeing one-off bumper years occasionally.

To me that just doesn’t seem a very good investment case. I don’t want to invest in things where the result is essentially down to guesswork, and luck.

Plus it clearly needs another fundraising, and all that debt will need to be paid off at some stage. So perhaps a funding requirement of £10-20m, to add onto the £53m market cap, doesn’t exactly leap out at me as a bargain.

We’re in a bull market, where punters are happy to chase after jam tomorrow stocks. If that happens to coincide with some belated good news on contract implementations, then there could be upside here, who knows?

I’ve got absolutely no idea what is likely to happen, nor what the share price is likely to do.

The shareholder base looks very fragmented, with hardly any institutions over 3%, and management also only having small shareholdings.

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Good luck to holders, but there’s too much guesswork here to interest me. I’d have a punt on it, if the market cap was say sub-£20m, with plenty of cash in the bank. But at £53m market cap, with net debt, and clearly needing another equity fundraising, then it’s not of interest.

I think today’s RNS is misleading, by quoting gross cash, and not net debt.

Looking back at the AIM admission document from 16 years ago, it floated with 69m shares in issue, at 35p. The share price today is slightly below that, and there are now 164m shares in issue, which actually isn’t too bad considering the company has never achieved a sustained breakthrough into profitability. Plenty of AIM shares are far more profligate in new share issuance.

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Loungers (LON:LGRS)

(I hold)

262p (down 1.5%, at 10:43) - mkt cap £268m

There are hardly any trades printed so far today, so the price movement is irrelevant really.

This was a badly floated share - the broker just placed blocks of shares with institutions (thus earning big fees for doing the least amount of work), resulting in a concentrated shareholder register (see pie chart below), and hence terrible after-market liquidity.

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Bank facility extension and re-opening update

Loungers, the operator of 168 neighbourhood café / bar / restaurants across England and Wales under the Lounge and Cosy Club brands…

Bank facility extended - to Oct 2022, total £25.0m Revolving Credit Facility (RCF).

Covenants waived/amended - enabling full resumption of new site roll-out programme.

Re-opening - 47 sites opening on Monday (12 April) for takeaway and outside trading. All sites (apart from Wales) should be open by 17 May.

New sites - 4 new sites opening by 26 May, taking total to 172.

We are approaching re-opening with enthusiasm and optimism, encouraged by how strongly the business traded last Summer and Autumn… We remain confident that Loungers is well-placed to emerge strongly as the country comes out of lockdown…

"We expect to trade well once the estate is fully re-opened, particularly with our strong coastal presence as we look forward to a summer of staycationing.

Judging from evidence about bookings for bars & restaurants that I've seen, I think we’re about to enter a bonanza for this sector in the coming months, but time will tell.

Roll-out - LGRS was a fast-expanding & successful roll-out prior to covid. This should be an excellent time to be opening new sites, as there are such attractive deals available from landlords -

We anticipate - and are ready to return to - a run-rate of 25 new site openings per year during the course of the year ending April 2022, assuming no further Covid interruptions. The pipeline of new sites is exceptionally strong and we continue to see a large number of attractive opportunities in the locations which we are targeting…

"The most recent lockdown has given us a real opportunity to build a fantastic pipeline of new sites in what is undoubtedly a tenant-friendly environment. We will approach the coming months cautiously but are very keen to get back to opening 25 sites a year at the earliest opportunity with such excellent properties being presented to us, and we are grateful to Santander and Bank of Ireland for their continued support."

My opinion - my sector expert who I consult from time to time has always said that LGRS is the pick of the bunch, in terms of operational excellence.

I bought a small amount for my SIPP about a year ago, but the lack of market liquidity in the share has put me off buying any more.

I’d say it’s almost a certainty that trading should be strong once the sites re-open.

The risk is obviously that covid rears its ugly head again in the autumn/winter, or worse still if a mutated form emerges that gets round the vaccines. Every investor has their own ideas on what the most likely outcome is, and that drives our decision-making. Nobody knows for certain.

Maybe the share price has already factored in the upside from re-opening? Hence I’m not convinced that risk:reward is particularly attractive to buy any more at this stage.

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** BREAKING NEWS **

Novacyt Sa (LON:NCYT)

470p (down 32% at 12:53) - mkt cap £331m

Trading Update (profit warning)

Bad luck to holders here, of this covid testing bonanza company.

I’ve got the live price chart on my other screen, and it’s in freefall at the moment, hasn’t bounced at all, and in the time it’s taken me to write this, it’s dropped further to 455p.

What’s gone wrong? - a contract extension being negotiated with the UK Department of Health and Social Care (DHSC) has not been agreed. Worse, it is now in dispute -

Regrettably, the parties are now in dispute regarding the contract, which may have a material impact on Q4 2020 revenues. However, the Company has taken legal advice and believes it has strong grounds to assert its contractual rights.

Current trading - the DHSC contract was half of Q1 sales, so this issue looks very serious -

Novacyt delivered revenue for Q1 2021 of €83.0 million (£72.6 million). Approximately 50% of Q1 revenue was driven by sales to the DHSC, predominately PROmate™. The remaining c.50% of Q1 revenue was driven by continued growth of international sales and expansion of the Company's private sector testing operations…

Given the ever-changing nature of the COVID-19 pandemic and diagnostic testing demands, the Company continues to have limited visibility over future sales.

Profit warning for 2021 -

Whilst the Directors are confident new contract wins will continue as Novacyt expands international sales and into private sector testing, they believe revenue and profit for 2021 may be lower than current market expectations due to the absence of the DHSC contract extension.

Novacyt expects PROmate™ to continue to be rolled out in hospitals, private sector settings and international markets for the foreseeable future, although the Company believes that Q1 PROmate™ sales may be sufficient to support the NHS current roll out plans for the remainder of 2021.

Positive noises are made about new products in development.

My opinion - neutral. It’s a boom time company, which hit the jackpot with a covid testing product that has produced spectacular, but short term profits.

Today’s update sounds a serious one, given that the biggest customer has not extended its order, and is now in dispute with the company.

It’s anybody’s guess how this works out.

It’s a pity the update doesn’t tell us what the current cash position is. With the market cap now down to c.£330m, there could be an angle on this re cash & profits even at a reduced rate?

There are probably lots of spread bet punters in this share, who will have been stopped out by now, and could be scrambling to buy back in? Which may not necessarily be a good thing, given that the fundamentals have seriously deteriorated by the sounds of it.

There’s such a great concentration of risk here - a product dependent on a pandemic, lots of competing products being developed all the time, the pandemic itself is likely to have relatively short shelf life (we hope), and now the loss of the biggest customer by the looks of it.

How on earth do you put all that together to value the share? I’ve got no idea! It will be interesting to read subscriber views in the commments below, which is why I'm mentioning it, as I know there is considerable interest in this share in our community.

This is one for traders I think. Or it could be an interesting special situation if you’re able to accurately work out the cash position, and buy at a favourable price. It could be strongly profitable even after losing the biggest customer, who knows? Good luck whatever you decide.

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