Small Cap Value Report (Tuesday 11 May 2021) - ULS, ANG, MGP, AIR

Morning all, Jack here with the placeholder for today's report. Leave a comment below if anything catches your eye, and let us know why it's of interest.

I've been talking with colleagues about that old adage: 'Sell in May and go away, and come back on St. Ledger's Day'. I'm often skeptical of this kind of thing but studies show a 'remarkably robust' result, with returns on average 4% higher during the November-April period than during the May-October. The revised study above includes data from some 114 stock markets and takes into account almost 63,000 monthly returns 'start[ing] with the UK stock market in 1694 and end[ing] with Jordan which starts in 2006.' Sounds comprehensive but who knows what kind of regime changes and all the rest of it we might find in that data set. It's past 7am so I'm not about to check...

And then, of course, the past 12 months have hardly been typical. This will have a direct impact on the next 12 months in my opinion, almost a yin and yang effect with a slowdown and subsequent bounce (assuming we maintain the current course).

Uls Technology (LON:ULS) - ahead of expectations update from this conveyancing-focused software company with £24m of cash to invest.

Angling Direct (LON:ANG) - gross margin improvement and a swing to profitability for this online and physical store fishing retailer looking to expand across Europe.

Medica (LON:MGP) - Elective revenue heavily disrupted but month-on-month improvements, a post-Covid backlog, and a solid growth opportunity ahead.

Air Partner (LON:AIR) - record year of trading and the momentum continues into the new year.

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ULS (LON:ULS)

Share price: 96p (pre-open)

Share count: 64,871,276

Market cap: £62.28m

Our coverage on ULS has been light so far so thanks to Simon for flagging it.

Uls Technology (LON:ULS) was admitted to AIM in July 2014. It’s actually figured quite well in terms of Ranks across that timeframe, although the share price has been volatile.

The group’s business was founded in 2003 and provides online services for consumers and intermediaries in the property, legal and financial services industries.

The central service is eConveyancer, a fully automated online comparison platform which enables customers to obtain residential conveyancing quotations from our solicitor partners, then instruct their selected solicitor.

The group says that 2% of all UK conveyancing (the legal transfer of property) goes through eConveyancer, either through its own brand or as a white label solution.

Other services include:

• estateagent4me – find an estate agent to value and/or sell a property.
• Property Searches – one stop shop for conveyancing firms and solicitors for all searches.
• Energy Performance Certificates – select an assessor to obtain a residential or commercial property energy performance certificate.
• ID Checks – online electronic identity checks, including those required to comply with anti-money laundering regulations.

Top line growth has stalled in recent years. This flatlining revenue coincides with the share price crash in the chart above. Beyond today’s look at current trading, going back to the FY18 and FY19 accounts is warranted, in order to get a deeper understanding of what went wrong here.

But the longer term trend is encouraging.

And a lack of meaningful dilution means most of this growth is flowing through to diluted earnings per share. The compound annual growth rates (CAGRs) are good here too, mid-20s for profits, earnings per share, and free cash flow.

Meanwhile, the group actually stacks up quite well in terms of valuation compared to the rest of its Software industry group.

So there are quite a few positives here at first glance.

Trading update

The Board expects financial results for the Period will exceed management's expectations.

Highlights:

• H2 revenue +68% on H1, from £6.3m to £10.6m,
• FY revenue -18.4% to £16.9m,
• Disposal of Conveyancing Alliance Limited ("CAL") in November 2020 for £27.3m, taking cash balance to c£24m with no debt,
• Due to poor H1 (Covid-disrupted) and ‘significant investment’ in DigitalMove, ULS expects a pre-tax loss of c.£0.8m (2020: underlying pre-tax profit of £2.4m).

We’re getting a few ‘ahead of expectations’ updates these days and ULS can add its name to the list.

The group’s H2 was strong as the housing market materially improved and there was a significant recovery in volumes from its broker channel. This channel was up 21% in terms of active users at the end of FY20, although the recovery in the group’s lender channel has been slower.

ULS has undergone a strategic reorganisation with Jesper With-Fogstrup joining as CEO in January 2021 and a number of other new senior hires. Alongside this is the decision to accelerate the digital customer experience of DigitalMove, on which the company is spending ‘significantly’ more opex.

As for current trading and outlook, the flagship eConveyancer product had a particularly strong second half last year and current trading is buoyant. ULS sees further potential here and is ‘securing new routes to market’.

Conclusion

Directors have been buying and there are some solid institutional names on the share register.

It looks like ULS might have actually played quite an important role through the lockdowns: over 40,000 instructions went through DigitalMove in FY20, facilitating the legal process of buying and selling homes.

And the trajectory is encouraging too, with a strong sequential improvement in key performance metrics in the second half. Conveyancing completions in H2 were 18,667 compared to 15,100 in H1.

ULS notes that there has been a shift in market dynamics. Home movers are driving the main market more than the first-time buyer at the moment.

That makes sense. Lockdown has made people re-evaluate where they live and work and has helped stimulate the housing market. Importantly for ULS, it is also helping to accelerate digital adoption. This puts it in a potentially promising spot.

Following the CAL sale, ULS has significant cash funds. It intends to ‘rapidly build solutions for the housing market and legal conveyancing community, improving the home moving experience, unlocking efficiencies and revenue earning opportunities across the process.’

This looks potentially quite promising and is worth further investigation in my opinion. The property market has proven far more robust than many considered possible in early 2020 and the trajectory looks positive from here.

ULS, with its potential for digital disruption, could be poised to benefit. The valuation is undemanding for a tech stock given the £24m net cash position resulting from its disposal of CAL.

Angling Direct (LON:ANG)

Share price: 85.08p (+0.09%)

Share count: 77,267,304

Market cap: £65.7m

We always talk about ecommerce here and Angling Direct (LON:ANG) is as good a play as any, forging ahead in the niche market of fishing. The fact that it gets discussed less than the likes of Gear4music Holdings (LON:G4M) might even be to its advantage.

One interesting point here is that Angling considers itself much more than a simple retailer of goods. It is an important pillar of the fishing community with ‘passionate colleagues, store-based qualified coaches, social media reach and ADTV YouTube channel’.

It’s summed up neatly by a quote referenced by the group’s chairman:

There are two distinct visits to tackle shops, the visit to buy tackle and the visit which may be described as Platonic when, being for some reason unable to fish, we look for an excuse to go in, and waste the tackle dealer's time - Arthur Ransome

And the chairman adds:

Our customers love being in our stores, on our website and social media outlets socialising, learning and receiving top-quality fishing advice and assistance. We equally relish both the visits to buy and the platonic, to use Arthur Ransome's words.

There’s something potentially quite valuable there.

But, like the G4M of old, Angling Direct has so far struggled to translate strong revenue growth (5Y CAGR: 36.7%) into sustained profits.

This kind of operating model isn’t easy. You need extremely efficient distribution, logistics, and inventory management solutions. But once you’ve built them and established a strong market position, the scalable economics can be extremely attractive.

At some point, Angling Direct could well reach that inflection point.

And maybe Covid has been good for fishing? Surely if there’s one outdoor activity suited to social distancing, it’s this… It has certainly accelerated the trend towards online sales, and even attracted new anglers to the sport for the first real increase in licence for several years.

Full year update

Highlights:

• Revenue +27.1% to £67.6m (online sales +39.9% to £35.3m, of which 12.4% was international),
• Retail store sales +15.5% to £32.3m despite lockdowns,
• Gross profit +39.5% to £23.1m; 300bps improvement in gross margin to 34.2%,
• Operating cash flow +825% to £6.9m,
• Profit before tax +279% to £2.6m,
• Basic earnings per share of 3.33p,
• Net cash of £15m.

The gross margin improvement is particularly promising, especially since this has resulted in the swing to positive PBT. Angling says this 300bps GM improvement is due to a ‘more disciplined approach to pricing and inventory management’.

This is what’s needed in order to ensure that all of Angling’s hard work in terms of operations can translate into profit for shareholders. If the group has figured that out then it could grow strongly in the years ahead.

The group has spent time and money this year improving its customer journey functionality across UK and international websites (.uk, .de, .fr, .nl) and has ‘reconfigured’ its distribution centre.

Four new stores have been opened in high density fishing catchments (Warrington, Bristol, Northampton, and Leicester), bringing the total estate size to 38 sites at the end of the period. There have been two additional openings since, in Redditch (February) and Sittingbourne (April).

And another promising sign: Angling’s own higher margin Advanta range is making an increasing contribution and is now up to 4.8% of total sales (FY20: 2.8%). This range was only launched in 2016, so it’s good to see it gaining traction.

Key hires have also been made across the ‘critical areas’ of Web development, Technology, Buying, Finance and Operations.

Current trading and outlook:

• Strong Q1 FY22 sales, up 54% on the prior year, reflecting closure periods in both years. Online sales up 42%, store sales up 75%,
• Focused internationally on five key growth territories; Germany, France, Netherlands, Belgium and Austria
• well-placed to deliver profitable growth in revenues, albeit at a lower rate than the prior year as trading conditions and sales mix begin to normalise
• Financial guidance reinstated, on track to meet current year market expectations

Conclusion

These look like great results to me and the real question is whether or not Angling Direct is on the cusp of profitably scaling its online and international operations.

It’s in a niche sector, with a strong market position, and it looks to have created a resilient business model with its hybrid online/retail operations.

I am reminded of G4M here both in terms of the group’s previous profitability struggles and its consequent ‘laser-focus on pricing and inventory management’.

The group has a chance of fulfilling its ambition ‘of becoming Europe's first choice omni-channel fishing tackle destination for all anglers’. And what’s more, Angling appears to be motivated by something larger than just making money for shareholders.

One thing to note is the consistent director selling - this can be done for a number of reasons. Directors need liquidity too, and they sometimes just want to enjoy a share of the wealth they have helped to create.

But if they know there’s a good opportunity here, they wouldn’t want to be selling down too much would they?

That aside, Angling is clearly passionate about fishing and it has strengthened its balance sheet, inventory management, and pricing discipline. It could be building something quite valuable.

Medica (LON:MGP)

Share price: 159.16p (-2.06%)

Shares in issue: 122,390,760

Market cap: £194.8m

If you’ve run any screens recently on longer term quality metrics, you might have encountered Medica (LON:MGP) . Its profitability metrics are reassuringly double-digit.

This is a leading provider of teleradiology services - as such though, demand for its services has fallen amid the general preoccupation with Covid.

The one-year share price has been volatile as a result but it has rebounded back to previous levels and the StockRank is also on an improving trend.

The Company currently offers two primary services to hospital radiology departments:

• NightHawk - urgent reporting service
• Elective - includes routine cross-sectional reporting on MRI and CT scans, and routine plain film reporting on x-ray images.

The former has proven more resilient than the latter, which has been heavily disrupted over the past year.

Through its US subsidiary, RadMD, Medica also provides pharmaceutical and biotech clients and contract research organisations (CROs) with high quality, complex imaging services for international clinical trials.

Full year results

Highlights:

• Revenue -20.9% to £36.8m,
• Gross profit -21.6% to £17.5m; gross margin -40bps to 47.4%,
• Underlying operating profit -55.7% to £5m,
• Underlying earnings per share -57.3% to 3.47p.

NightHawk revenue grew 4% to £23m, making a quick recovery from the impact of Covid.

Elective revenue fell 49% to £12m as the NHS re-prioritised away from elective procedures.

GDI contributed £1.3m of revenue following its acquisition on 3 November 2020. This acquisition has pushed Medica from net cash of £4.6m in FY19 to net debt of £3.9m at 31 December 2020.

GDI is a leading teleradiology and managed services provider based in the Republic of Ireland that also manages 50% of Ireland's screening and surveillance programme for diabetic retinopathy.

There have been a couple of post-period deals too: RadMD (Completed the earnings-accretive acquisition of RadMD, an imaging Contract Research Organisation (iCRO) business based in the US, enabling entry into the USD 1 billion global market) and Integral Diagnostics.

Conclusion

With its revenues from elective surgeries and the like, Medica was always going to see its results hit by Covid.

Elective surgeries will return, and what’s more, there will be a backlog of activity. Medica is already seeing month-on-month improvements here. While it continues to be a drag on results for now, this could transform into a tailwind later on in the year (but there’s also the risk that things could take longer than expected to fully recover).

Nighthawk has been resilient but the group does note the issue of pricing pressure on gross margin here.

The group undertook an equity placing and subscription which together raised £16.1m in March 2021. Institutions and company management took part. Medica also completed a refinancing of its debt in early May 2021 on favourable terms. So the group has shored up its finances.

Beyond that, it is still spending money on growth initiatives both organic and acquisitive.

There’s a clear focus for the year ahead: i) ensuring that the UK business is well prepared to support recovery in Elective activity, ii) accelerating growth and market share gains in NightHawk and iii) internationalise its new areas of business.

Ultimately, although these results might not thrill the market, neither do they dent the medium term investment case in my opinion.

Air Partner (LON:AIR)

Share price: 85.97p (+10.22%)

Shares in issue: 63,562,601

Market cap: £54.6m

It’s quite the comeback for Air Partner (LON:AIR) - even today’s drab market can’t hold the shares back and they are now up more than 10% at the time of writing.

The company has guided towards good trading so well done to anyone who did buy in recently.

The group released a (very) brief update back in January:

At the time of the half year results, published on 30 September 2020, the Board reported that it expected modest profits in the second half of the year. However, despite global travel restrictions, the Group has performed better than expected and ahead of market expectations.

Today we have the full year results.

Full year results

Record year, driven by exceptional levels of trading in the Charter division; Current year Q1 performance ahead of management's expectations

There have been some intriguing updates today - notably ULS and Angling Direct - but this one just about shades them.

Highlights:

• Revenue +6.7% to £71.2m,
• Gross profit +31.3% to £44.9m,
• Underlying profit before tax (PBT) +176.2% to £11.6m,
• Statutory PBT +833.3% to £8.4m,
• Underlying continuing basic EPS +121.9% to 14.2p,
• Total dividend +33.3% to 2.4p.

The shares have rerated over the past few weeks (and today) but 14.2p of underlying EPS puts the shares on a PE ratio of just 6x. Whether or not this level of trade is sustainable is another question, and trading has been volatile in the past.

Still, it’s a single digit historic PE ratio and a Value Rank of 87 (this could increase in the coming days), so if you think Air Partner’s momentum will continue, there’s probably still time to consider it.

Air Partner’s Charter and Safety & Security capabilities have allowed it to provide highly tailored solutions over lockdowns. Following its placing, it has also paid down debt from the Redline acquisition (see new business wins here) and is investing in organic growth opportunities.

Group Charter has fared particularly well due to evacuation activity and sports and government business. I would assume this activity will subside to some degree.

Freight has been strong thanks to PPE flying and automotive supply chain disruption. Again, what happens after this fades?

US Private Jets performed well ‘as HNWIs (high net worth individuals) travelled for leisure’. Meanwhile UK and Europe Private Jets had a more difficult time due to ongoing travel restrictions.

The number of new JetCards sold is up 9.4%.

It has not all been good across all divisions, but it’s safe to say the good far outweighs the bad here.

And the momentum continues. Air Partner notes a ‘strong start to the current year with Q1 performance ahead of management's expectations’ and with trading levels for Q2 also expected to be ahead of management's original forecast, subject to government restrictions being lifted.

Conclusion

This has been a record year for Air Partner, which has seen it partner up with governments and global corporations to play a vital role in evacuations, repatriations and the provision of PPE in the face of the global pandemic. Hats off to the team.

The good news continues, with the new year again ahead of expectations. Organic investments in the US should drive growth in an important market, and Redline is winning new business.

Freight activities continue to support the fight against COVID-19, delivering test kits and vaccine raw materials, the US Charter business continues to trade strongly, JetCard sales and deposits are up in the UK and US, and there are signs of recovery in the Safety & Security division.

So on the whole, this looks really good. The trick will be in figuring out how much is a passing Covid boost and what true, sustainable, underlying growth might look like.

Trading has been choppy in the past, and brokers are forecasting a very different FY22e. But then again, management commentary on current trading paves the way for future upgrades.