Small Cap Value Report (Weds 18 Aug 2021) - ANG, TCN

Morning all, it's just Paul here today, with the SCVR for Wednesday, on an exceptionally quiet day for news.

Today's report is now finished.

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), and make your own investment decisions. 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.

Agenda -

Paul's Section:

Angling Direct (LON:ANG) - decent revenue growth in H1 of +19.5%, although online sales in the EU have plunged due to supply difficulties re Brexit. Guides to >£4.0m EBITDA for this financial year ending 31 Jan 2022. Tons of cash in the bank, so expansion self-funding. Looks quite good to me, worthy of deeper research I think.

Tricorn (LON:TCN) - announcement today indicates that business likely to be put into administration & sold to the highest bidder. Hence a 100% wipeout for shareholders is likely.

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Angling Direct (LON:ANG)

72p (pre market open) - mkt cap £56m

Half Year Trading Update

ANG produced a record profit, in its results for FY 01/2021. Jack reviewed the numbers here.

No doubt fishing will have been stimulated by lockdowns, and receipt of Govt support measures, so it will be interesting to see if stronger performance is sustainable in more normal conditions in future?

Today’s update -

Angling Direct plc (AIM: ANG), the leading omni-channel specialist fishing tackle and equipment retailer, provides an update on trading for the six months ended 31 July 2021 (H1 2022).

The table (below) for H1 revenue growth raises a few questions. Online growth shot up 47.6% in H1 LY, as I would expect from the impact of lockdown 1 closing the stores & pushing business online (which was already a key focus pre-pandemic). That has slowed right down to only +3.2% in H1 this year, up against that tough comparative. However, in the line below that, it shows that UK online sales grew +15.8% to make up all but £1.2m of the total. That suggests rest of word online sales dropped heavily, from £3.1m to £1.2m - probably due to Brexit difficulties supplying small orders into the EU?

Retail store sales did well, +40.1%, but this is not like-for-like (“LFL”), so presumably has benefited from new store openings.

Net cash is strikingly high for a company worth £56m, at £19.6m (as at 31 July 2021)

Company commentary - all stores were closed for Feb, Mar, and through to 12 April 2021, due to lockdown 3.

Total sales growth in H1 of +19.5% was concentrated in Q1, against the softest comparatives.

European sales - as I suspected from the figures above, there has been significant disruption from Brexit -

German, French and Dutch native language websites sales in Europe (which comprise less than 5% of Group revenue) were down by 34.2%, impacted by post-Brexit restrictions on bait sales and significant customs border disruption, impacting lead times and customer confidence. The latter has started to improve in recent months, and it remains a strategic priority for the Group to establish a more efficient trading model in Europe.

Judging from what other companies have said, the only solution at the moment seems to be using a distribution network within the EU, rather than trying to supply lots of small orders from the UK, and running into customs administration problems & delays. That also means having to set up a customer returns operation in the EU. Asos (LON:ASC) (I hold) has apparently done this, via a facility in Poland, operated by Clipper Logistics (LON:CLG) . This does seem to be an area where smaller online retailers are having difficulties. Some are either raising prices, or just withdrawing from EU sales altogether.

It works the other way of course - in the UK market there’s now less competition from EU eCommerce vendors, who are having trouble supplying the UK (I’ve heard that Gear4music Holdings (LON:G4M) (I hold) main European competitor is having problems supplying the UK market, so G4M is gaining market share in the UK as a result).

Stores - 1 new site opened, and one relocated. Total is now 39 UK stores. Stores operated a call and collect service during enforced closure, in addition to web sales.

Strategy - continuing to develop gross margin, and improve logistics. “Good progress” with expansion plans, especially in Europe (no specifics provided).

Outlook - useful to have specific EBITDA guidance. The key numbers is pre-IFRS 16 of course, with the post IFRS 16 EBITDA figures generally being meaningless (as they omit some property rental costs).

The Company is only three weeks into the H2 period and the Board remains alert to evolving trading patterns as we emerge from the pandemic. Given the successful trading performance over the first half and notwithstanding the imposition of any further restrictions, the Board is confident that FY 2022 EBITDA will be not less than FY2021 of £4.0m (pre-IFRS 16) and £5.7m (post-IFRS 16), even taking into account the considerably reduced government support.

The Company's strong balance sheet means it is well positioned to further invest in its strategy to become Europe's first choice omni-channel fishing tackle destination.

My opinion - this looks quite good. It looks as if the company might have reached sustainable profits, and also has plenty of cash in the bank to fund expansion.

Seems reasonably priced. Looks worthy of deeper research.

Note how the StockRank has steadily improved. Ecommerce businesses seem out of favour at present, so this could be a decent time to look at the sector maybe? Although ANG is a hybrid, with physical stores as well as online.

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EDIT: an updated note has come through from Singers, via Research Tree, many thanks for that.

Earnings forecast has been raised by 8% today, with an indication there could be further upgrades.

Forecasts are a reminder that £4.0m EBITDA translates into a considerably lower profit before tax (PBT) of £2.7m, which is only 2.8p adj EPS - with the same EPS forecast for next year (FY 01/2023). That's not madly exciting, so bulls will have to hope actual results come in well above current forecasts.

At 72p per share, the forecast PER is currently 25.7 - not exactly a bargain. Although that doesn't adjust for the big cash pile, which would lower the PER considerably if stripped out, which I think is a reasonable thing to do, now the company is trading profitably.

If it beats forecasts, and expands meaningfully using its big cash pile, and cracks the problems in trading with the EU, then this could look a lot better in the not-too-distant future. So I still like it, even though the forecasts are not madly exciting.

End of edit.

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Tricorn (LON:TCN)

Shares suspended - mkt cap £2.2m

Not a share we've been covering here recently, because it's well below our usual £10m cut-off, and has been in financial distress, looking for a buyer.

Bad news for shareholders today I'm afraid - your shares are probably worth nothing -

It is expected that, in the event such transaction(s) conclude, these would be likely to be conducted out of administration, in order to safeguard the continuity of the operation and employment, and consequently the consideration receivable by the Company is unlikely to result in any value for equity shareholders.

Suspension of trading on AIM
At the request of the Company, trading on AIM in the Company's ordinary shares have been suspended from 7.45 a.m. today, pending clarification of its financial position.

Due to all the taxpayer support measures for companies during the pandemic, insolvencies have been incredibly rare. So this is a reminder that, if nobody is prepared to refinance a struggling company, then administration (which almost always wipes out existing shareholders) is the only alternative. Company law dictates that companies cannot continue trading whilst insolvent, otherwise Directors become personally liable for the company's debts. Also remember that shareholders rank behind creditors. So when the money runs out, creditors take priority over shareholders.

Tricorn did warn shareholders that it needed more funding on 21 July 2021 -

The Group is currently operating within its existing financing facilities but increasing pressure on margins and cashflow means that additional resources will be required in the short to medium term (see also Going Concern note 2)

The key part of the going concern note said this on the same date -

As disclosed in the statutory accounts for the period ended 30 September 2020, the Group requires substantial investment within the next 12 months in order to return the Group to cash generative activity levels. The Directors have considered the going concern basis and in line with that disclosed in the statutory accounts for the period ended 30 September 2020, as at the date of approval of these interim financial statements the requirement for further funding over and above the existing facilities and the requirement for ongoing support from the Group's their bankers not to recall facilities repayable on demand present material uncertainties which cast significant doubt over the Group's ability to continue as a going concern.

So to be fair, the risks were spelt out very clearly.

I hope none of our subscribers got caught on Tricorn.

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