Small Cap Value Report (Weds 4 August 2021) - MMH, NSH, SEEN, SEE

Good morning, it's Paul & Jack here with the SCVR for Wednesday.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Agenda -

Paul's section:

Seeen (LON:SEEN) - speculative, loss-making social media tech platform. Water Intelligence (LON:WATR) and its chairman Patrick De Souza are major shareholders. Not for me.

Seeing Machines (LON:SEE) - it's been a long road to successfully commercialising the technology here but progress has been made and the share price has duly rerated. Revenues are forecast to increase, but losses are also set to continue, making this tricky to value.

Jack's section:

Marshall Motor Holdings (LON:MMH) - car dealer momentum continues and Marshall FY PBT guidance is up from 'not less than £22.1m' to 'not less than £40m'. Impressive given the share price, and the strong trading continues, but the group does flag high levels of uncertainty and an expected realignment of used vehicle values.

Norish (LON:NSH) - micro cap temperature controlled logistics provider investing in a small Dairy division. There are some signs of margin improvement and growth opportunities here, but the stock is illiquid and that might automatically rule it out for a lot of investors.

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Paul’s Section

Seeen (LON:SEEN)

43.5p (unchanged today, at 10:07) - mkt cap £22m

This one’s very small and illiquid, and I’ve already decided that I wouldn’t touch it (heavily loss-making, low gross margin, cash burning), but will type up a brief note just so we have something in the system to refer back to if it crops up again.

Results for FY 12/2020 show a big jump in revenues to $10.1m up 136% (note US dollar reporting). However the gross profit is only $1.1m, a margin of just under 11% - hopeless!

Then we have massive overheads, totalling $5.0m. This includes $618k in share based payments. Why?! How is it OK to reward Directors for producing such lamentable numbers? That seems crazy to me. I do wonder sometimes who really benefits from the existence of many listed companies, especially the blue sky ones like this. Still, the share price has doubled in the last year, so shareholders are probably quite satisfied about that.

Profit after tax came out at $(3.6)m. I use PAT for tech companies that receive tax credits, as that’s a bona fide source of income (for R&D tax credits, etc).

The balance sheet looks OK for now, with a $5.3m cash pile, but what stands out is that cash fell by $4.4m in FY 12/2020, so if 2021 burns cash at the same rate, then the cupboard will be almost empty by the end of this year (not long now), so expect a placing in 2021 or 2022, and it’s anyone’s guess what terms that will be on. Could be highly dilutive, if investors are not keen to fund the losses. I’ve learned the hard way how destructive to my wealth it can be, holding poorly performing companies that need to raise cash. It’s just a complete unknown, how much outside shareholders are going to be diluted. Why take that risk?

Risks - the list of risk factors published within the FY 12/2020 accounts also repel me as much as the numbers. Revenue is derived from Youtube advertisements, so is at risk from any adverse changes in the terms dictated by Youtube. Therefore this business effectively has no control over its revenues, and they’re from a single source by the looks of it. Awful, and very risky. Having demolished the investment case, let’s look at today’s update.

H1 trading update - quite a fancy description of the business -

SEEEN plc (AIM: SEEEN), the global media and technology platform that offers proprietary AI products and solutions to harvest video moments efficiently for brands, creators and publishers and thus enable discovery, sharing, ecommerce and improve digital marketing yield, announces a trading update for the six months ended 30 June 2021, as well as a change to its Board coincident with the launch of its 2H Go-To-Market strategy.

H1 revenues up 39% to $5.1m (that looks about the same run-rate as last full year)

Losses - seem reasonable, but it depends on how much they’re capitalising onto the balance sheet (last year it capitalised $1,977k into intangible assets, probably internal development spending I would guess), which I think is side-stepped in this figure reported below -

Improved adjusted loss before tax* of $0.9m (1H 20: $1.1m) with Group shifting from product development (funded by EIS/VCT money) to sales and marketing

* Cash of $3.9 million at end of the period to execute on growth plan
* Adjusted for amortisation of intangible assets and share based payments.

Cash burn - not as bad as last year. It has dwindled from $5.3m at 12/2020, to $3.9m at 06/2021, cash burn of $1.4m in H1. At that rate, the placing may not be needed until late 2022.

My opinion - it’s too early stage, and impossible to value, to be investable on the numbers alone. However, if people have investigated the products, and think they’re good, then that could be an investment angle.

Looking at the shareholder list, shrewdies Marlborough (now part of Canaccord) have 8.9%. There also seems to be a relationship with Water Intelligence (LON:WATR) which bizarrely holds 7.7% of SEEN. I recognised Patrick De Souza’s name on the shareholder list at 10.9%, he’s Chairman of WATR, so clearly they like SEEN.

For me, it’s not something I would want to speculate on, without doing detailed research on its products, and that’s not an area of expertise for me, so will move on.

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Seeing Machines (LON:SEE)

9.63p (up c.3% at 11:42) - mkt cap £373m

SEE has specialised technology which uses cameras & software to track & interpret the eyeball movements of vehicle drivers, raising alerts when driver attention is slipping, to avoid crashes.

Jack looked at the FY 06/2020 results here, and was distinctly unimpressed by yet another year of jam tomorrow promises, losses & cash burn. SEE has made these things its speciality in an astonishing 16 years as a listed company, with repeated false dawns & dilution. The share count has gone up from 870m to 3,876m just in the last 6 years. Here’s the long-term chart -

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As you can see, there’s been a strong surge of investor interest in the company in the last year, just as there has been for many companies, especially speculative things which tend to do very well in bull markets. Perhaps lots of new investors coming into the market has helped, as they look at things with fresh eyes, whereas old hands like me have heard the same story for 16 years now, and it’s got very stale indeed.

However, here at the SCVR we like to park our preconceptions to one side, and give everything a fair hearing. My best investments in the past have often been turnarounds that were written off by most investors, and subsequently multibag. Spotting the turnaround early can be really lucrative sometimes, so I’m always on the lookout for situations which have become fundamentally better (Cambridge Cognition Holdings (LON:COG) and Intercede (LON:IGP) have both been big winners for me in recent years, and I still hold both). Both of those are turnarounds under effective new management, after years of under-performance under old management. If you get in early, before other investors have noticed, or believe the turnaround, then making 2-3 times your money is quite possible, sometimes much more.

Trading update -

Seeing Machines Limited (AIM: SEE, "Seeing Machines" or the "Company"), the advanced computer vision technology company that designs AI-powered operator monitoring systems to improve transport safety, provides a trading update for the year ended 30 June 2021 ("FY2021").

Main points in the announcement -

• In line with expectations (no guidance figures provided)
• Start of automotive royalty revenues “long-anticipated” I should say so!
• Over 100k vehicles now on the road with SEE’s system installed
• Royalties expected to increase sharply in next 2-3 years, as vehicle production ramps up
• Significant growth in aftermarket - now profitable
• Signed contracts for air traffic control, and aircraft simulators - limited competition
• Revenues A$47.3m (up 18% on LY, up 30% in constant currency), equals £25.2m
• [Note: £1 = A$1.88 - the Aussie dollar has weakened against sterling this year]
• Cash A$47.7m, ahead of expectations
• Automotive RFQs (what are RFQs?*) revenue potential A$900m
• Established as central to the automotive sector

*Google tells me that RFQ means “request for quote”. I wish companies would put in the full term, then in brackets the abbreviation, if they’re going to use abbreviations further on. Readers may not necessarily know industry jargon.

My opinion - looking at this with fresh eyes, it sounds as if SEE has finally turned a corner, and appears to be on the cusp of finally commercialising its technology. Hence I can see why the shares have re-rated, there appears to be substance behind this.

The big question is how to value it? Readers would need to do detailed research, starting off with the basics - how much are the systems sold for per unit, what volumes are realistic? How much will overheads be? Bearing in mind that many companies spend a lot more, once the revenues are rolling in.

Many thanks to Cenkos for making an update note available to us on Research Tree. This shows rising revenues, but continued losses both FY 06/2022, and FY 06/2023, so holders must be assuming that these forecasts are beatable.

Overall, it’s great to see this share finally come good (I’ve held it several times in the distant past), but for me it’s impossible to value. I’m not keen on investments that require so much guesswork.

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Jack’s section

Marshall Motor Holdings (LON:MMH)

Share price: 225p (+5.14%)

Shares in issue: 78,232,237

Market cap: £176m

(I hold)

It’s been flagged for a while now that car dealers are enjoying strong trading conditions. Today’s update from Marshall Motor Holdings (LON:MMH) further confirms that trend, although the group continues to note ‘high levels of uncertainty’ as we emerge from lockdowns.

The share price is now at an all time high and comfortably ahead of pre-Covid levels.

Nevertheless the company is flagged as a top StockRank stock (99, with a Q Rank of 74, V Rank of 99, and M Rank of 92) and the valuation remains modest even on FY21 EPS forecasts that might well be beaten.

Trading update

This is a short update so I’ll just quote it directly.

On 25 June 2021, the Group announced that it expected to deliver underlying profit before tax for the full year well ahead of the Group's historic record result. This performance has been underpinned by a market which has benefited from positive tailwinds since April, including unprecedented used vehicle value appreciation and favourable demand-to-supply conditions for both new and used vehicles.

Those tailwinds continued in July and the Group now has initial visibility on the outlook for August and September.

That June update was unscheduled and communicated ‘significant upgrades to both first half and full year expectations for 2021’, with an ‘exceptionally strong first half performance in both profit and cash generation’.

Consensus earnings per share forecasts were upgraded by c20% on the news.

Marshall continues today:

There remains a high level of uncertainty over the second half of 2021 and into 2022 given well documented vehicle supply issues, an expected realignment of used vehicle values (the timing of which is uncertain) and the continuing impact of the COVID-19 pandemic. Given these uncertainties, there remains a range of possible outcomes for the year, however, the Board now expects that continuing underlying profit before tax for 2021 will be not less than £40.0m. This figure is after the commitment to repay all CJRS and non-essential retail sector grants received for this financial year.

Interim results will be released on the 10th of August.

Conclusion

We’ll be getting more detailed commentary from management next week but this is a very positive announcement that suggests FY profit before tax of not less than £40m will be at least double the level it has been at any point in the past decade.

But the company is communicating a higher than usual level of uncertainty as well, with ongoing supply issues and ‘an expected realignment of used vehicle values’. This suggests that £40m of full year PBT might not be sustainable.

While brokers have upped their estimates for FY21, FY22 upgrades have been more tempered so it appears as though the analysts covering MMH are prudently expecting some of these profits to be given back. Unsurprising given that a lot of the outperformance is coming from the used car segment - which is where MMH anticipates a degree of realignment at some point.

The all-important September trading month is just around the corner. If conditions turn before then due to, for example, ongoing shortages, then sentiment could turn. But the scale of the profit uplift is notable: in May, the group said that it was targeting underlying profit before tax of not less than 2019’s result of £22.1m. Now the board is guiding to in excess of £40m.

If you apply the FY19 tax rate of 20.8%, then profit after tax would be at least £31.7m and FY21 earnings per share would be 40.5p, making for a FY21 forecast PE ratio of just 5.3x. These will be bumper results though and forecasts for FY22 remain a much more modest 22.7p.

Still, even with rising levels of uncertainty likely to impact H2 2021, MMH is taking advantage of the current conditions and has great momentum. It’s a well run car dealer emerging from the past year in good shape, meaning it is well placed to capitalise on sector consolidation opportunities over the medium term. This, along with a couple of other dealers, will emerge as sector winners in my view.

The usual car dealer warnings apply though: it’s a low margin business, low multiples are to be expected, and conditions can turn.

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Norish (LON:NSH)

Share price: 160p (+3.23%)

Shares in issue: 30,070,378

Market cap: £48.1m

This looks like a neglected micro cap. Logistics in general is a buoyant part of the market right now and Norish is a third party multi-temperature warehousing and logistics business providing services to importers, manufacturers, wholesalers, retailers and distributors. So perhaps it is worth taking a closer look here.

The shares are illiquid, as you would expect given the size. Stockopedia indicates you can reliably buy in only c£1.5k chunks, while the spread is some 645bps. That probably rules it out for a lot of investors.

The company was founded in 1975 as a joint venture between Irish and Norwegian investors, and has been listed since 1986. It is incorporated in Ireland and operates in the UK from 6 sites, providing in excess of 50,000 temperature controlled racked pallet spaces.

Over the past couple of decades the share price performance has been unspectacular, save for that dramatic rerating that began in June 2020.

Meanwhile, revenue growth over the past decade looks to be a tale of two halves.

What’s interesting is that net income has been improving even as revenue falls from that 2017 peak. This suggests the company is engaged in margin-enhancing initiatives.

And then we have Norish’s acquisitions and new businesses. They are not obvious logistics-related enterprises:

• 2012 - acquired Town View Foods Limited, a protein commodity trading business based in Newry, Northern Ireland.
• 2016 - established Cantwellscourt Farm Limited, a large dairy farm based in Kilkenny, Ireland.
• 2018 - established Grass to Milk Company Limited, developing an A2-protein milk supply and combining with novel dairy processing IP, to develop an early-life stage milk-based beverage targeting high-value export markets.

Interim results

Highlights:

• Sales +19% to £18.9m,
• Operating profit +61% to £1.51m,
• Pre-tax profit +73% to £1.35m,
• Fully diluted earnings per share +74% to 3.58p,
• Net debt up from £8.7m to £9.5m; interest cover of 9.9x.

The group breaks down results across three divisions.

Cold Store revenue +12% to £7.9m, operating profit +28% to £1.8m, and operating margin up from 19.4% to 22.1%.

Sourcing revenue +25% to £10.5m, operating profit +20% to £121,000, and operating margin steady at 1.2%.

Dairy revenue +27% to £508,000, operating profit up to £32,000 from a loss of £143,000, operating margin of 6.3%.

It’s this smaller Dairy division that could make this a potentially interesting opportunity, although it’s still early days in the commercialising of A2 protein, grass-fed, dairy products. The group has just completed the development of its supply chain and systems here for future growth.

Norish is collaborating with Bright Dairy & Food Co Ltd and New Zealand Focus Group to develop a new ultra-premium, A2-protein, grass-fed, Pure Milk UHT product for China, which will go on sale in the second half of the year. A commercial team is now in place on the ground in China and the group is expanding into high growth retail channels such as Social Commerce, E-Commerce and High-End Retail.

Group cash generated from operations amounted to £1.3m. Investment of £1.9m was made in assets, comprising £0.7m in Grass to Milk and £1.2m in equipment at the cold store division.

Conclusion

There might be something worth investigating here, but no doubt the size of the company and the lack of liquidity in the shares will put many off. It’s hard to buy in meaningful quantities, and getting out could prove equally difficult. That means you would have to invest with conviction.

There are signs of margin improvement here. First half operating margin was 8%.

And there’s £23.7m of net plant, property, and equipment on the balance sheet which could be further investigated for signs of value.

The group looks to be quite capex hungry. It’s tricky to distinguish between growth and maintenance capex but I can imagine the core operations need a fair amount of the latter. That appears to have been the case this first half, with a £1.2m investment in Cold Store.

I’m interested to see how the dairy division develops - Grass to Milk Company will deliver its first sale in the second half of the year and management speaks positively about the near term outlook.

Ultimately though the lack of liquidity here puts me off, especially now that the shares are out of obvious value territory given the recent rerating.