Small Cap Value Report (Wed 8 Sep 2021) - SOM, AUG, MEAL, WINK, ALT, ACSO, TRX

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

Today's report is now finished.

Agenda -

Paul's Section:

Somero Enterprises Inc (LON:SOM) (I hold) - sparkling interim results, and Finncap raises full year forecast by 21% (and still seems conservative to me). Terrific business, generating loads of cash, and still looks cheap. That assumes a continuing positive macro backdrop of course, as this is a cyclical business.

My notes from recent webinars from Parsley Box (LON:MEAL) and Altitude (LON:ALT) - which I thought might be useful for anyone who is time poor, and can't watch the recordings themselves. Key points only, and my personal interpretation, so not intended to be a comprehensive regurgitation of the webinars.

Accesso Technology (LON:ACSO) - trading update. A strong recovery in revenues back to pre-pandemic levels, guidance raised. EBITDA also "significantly ahead" of market expectations. Guides that costs will rise. I remain sceptical about this company, but I'm not a tech investor, where different rules apply.

Jack's Section:

Augean (LON:AUG) - Solid results from Augean, whose business is highly regulated and discourages competitors. There is an ongoing tax dispute which has previously put investors off but the direction of travel here is positive. Two bids for the company has been received but the share price remains above these levels, so there is some hope of further offers.

M Winkworth (LON:WINK) - franchised estate agency active in the London property market. Business has been booming ahead of the halting of stamp duty but the company is well positioned longer-term and is sensibly managed. It's very small though - prohibitively so for those hoping to buy in scale - but useful readacross for the market.

Tissue Regenix (LON:TRX) - has a history of equity dilution but new management brings a greater focus on product commercialisation and cost reduction. There is a backlog of elective surgeries and the group has expanded capacity just in time to meet potentially strong demand in the year ahead. Cash burn remains a concern though, making this a high risk investment.

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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.

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Paul's Section

Somero Enterprises Inc (LON:SOM) (I hold)

512p (at 09:25) - mkt cap £288m

Interim Results

This US-based company (listed on AIM for 15 years), sells & supports laser-guided concrete laying machines, a niche where it is the market leader.

Interim Results for the six months ended June 30, 2021

Record H1 results due to strong US market, raising 2021 guidance

Revenues in H1 are strong at $64.4m, which is obviously up on H1 LY (covid impacted) of $35.3m. H2 LY was $53.3m, so the recovery has continued nicely into this year.

Good macro drivers in Somero’s main US market. The demand for warehousing looks like a long-term trend to me, what with eCommerce growing, rather than a flash in the pan -

H1 2021 trading in the US was highlighted by accelerated activity from customers working to catch up on projects previously slowed by COVID-19 restrictions and by healthy demand for new warehousing

Profitability has gone through the roof, with H1 PBT of $23.5m (H1 LY: $7.5m) against a weak pandemic hit comparative.

H2 LY was $16.3m, so there’s been another big uplift against the recovery period in H2 last year. Impressive, because Somero originally guided quite cautiously for 2021, saying it would be a year of consolidation & increased overheads to lay the foundations for future growth. Whereas it seems to actually be turning out to be a much stronger year than originally anticipated.

EPS is $0.32 in H1, converting to sterling at £1 = $1.376 gives 23.3p EPS in H1 - remember this is just a half year.

Seasonality - looking back at the Stocko sequential half year table here (very useful!) shows that pre-pandemic there was a usual H2 weighting to profits. If that happens again this year, then maybe we could be looking at up to c.50p EPS for FY 12/2021?

Broker upgrade - many thanks to Finncap for keeping us informed. It raises EPS forecast by a hefty 21% to $0.55 or 40.0p. That looks very conservative to me, it’s way below my figure above. So I’m inclined to expect further upgrades as 2021 progresses.

Finncap also raises its price target to 700p, which again doesn’t look particularly high to me. If Somero does achieve 40-50p EPS.

Sure, Somero is cyclical - so are lots of companies. It depends where we are in the economic cycle. If you think we’re in an unsustainable boom fuelled by QE and zero interest rates, then you might think we’re near the top of the cycle. Other people think a growth cycle has only just begun. So who knows?!

Balance sheet - looks fine, no issues.

Cashflow statement - I was wondering why cash hasn’t increased that much. It’s not because of working capital normalising (little overall impact), it’s because $17.37m was paid out in divis in H1. This business is a cash machine when trading well. So expect more generous divis.

My opinion - I’ll go through the commentary in more detail when time permits, but want to get this quick view up promptly, covering the main points.

This company is performing superbly, and the shares look cheap still, if you think the current level of business (let alone any further growth) is sustainable - which I do.

Note below that the StockRank has been jammed on maximum for over 18 months!

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Webinars

Many thanks to InvestorMeetCompany, PIWorld, Mello, Equity Development, and others who are providing very useful company results webinars. All listed companies should be doing these routinely now, as all shareholders deserve to see the same presentations that the institutions see, and be able to ask questions. A level playing field for all should be the norm.

I enjoy webinars, as you can't beat hearing management talk about their companies in their own words. It deepens my understanding of companies (useful when we have to cover over 500 companies here, which is crazy really), and it gives a flavour for what management are like. I'm just looking for passionate, hard-working, hands-on entrepreneurs, from any background, not smooth-talking suits!

After yesterday’s deluge of results, I was too tired to visit the Malta At War Museum, so instead sat in the sun, listening to some webinars. Here are my comments, if you’re interested, which as usual are just key points that I jotted down, it’s not meant to cover everything -

Parsley Box (LON:MEAL)

Company has only existed for 4 years

23k reviews on TrustPilot (I must have a look at those)

H1 2021 was up against tough prior year comparatives (start of the pandemic)

Most revenues come from repeat customers, and are higher margin & larger order value than new business

Growth in active (at least 2 orders in 15 months) users from 100k to 178k at end H1 2021

CFO (John Swan) is retiring soon. New CFO (Holly) joining soon. All seems amicable

Product innovation explained, including new chilled range - positive early signs - appeal to a slightly younger (over 60s!) customer (but surely there’s little differentiation from supermarket ready meals?)

Capital-light business (production is out-sourced)

Main expense is marketing - £4.85m in H1

Contribution margin of £4.17m, but that’s stated before £2.9m general & administration spending. Then there’s the marketing spending on top

New orders are 35% gross profit (due to discounts), repeat orders 55% - quite good

Cohorts slide does show the cohorts declining over time, still not clear what LTV is, this was rather glossed over - I suspect many customers don’t re-order, but a lucrative few become regulars, that’s from reading between the lines not from anything specific the company said

Labour & raw materials cost inflation is evident - will pass on to customers with price rises

Double property costs, due to need for social distancing. Will save £480k p.a. from September, when surplus property is vacated. This struck me as very high, so I rewound the video to make sure I had noted it down correctly, and unless they mis-spoke this is what was said - so quite a big reduction in overheads coming through

Customer acquisition cost has been high, due to TV ads, will return to normal now - long-term benefit from brand recognition, which is up strongly

Customer churn is low, but CEO was quite vague about this, so dodged the question a bit in my view

Closest competitors are Oakhouse, Wiltshire Farm Foods

Headcount currently 120 people. Likely to rise by 10-15 this year

Call centre employs a lot of staff - looking to partially automate outbound calls

My opinion - I’ve nothing to add to yesterday’s report. I think it’s an interesting niche business, with some potential. Although the valuation still looks steep to me, now that growth has sharply reduced after the pandemic one-off boost last year.

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Altitude (LON:ALT)

Another webinar (recorded) on IMC from yesterday.

Nicole Stella - American-sounding CEO, joined in 2017, has 17 years sector (promotional goods) experience. Talks well, a good presenter.

Peter Hellett - is a NED, standing in for outgoing CFO. Says departure of CFO is “all perfectly amicable”, he wanted to pursue some other passion apparently. Seems a credible NED, sounds a bit like Pete Waterman (slight Brummie accent!). His background is in turnarounds, tech companies mainly. Straight-talking, seems credible to me, not rampy - pointed out some negatives, very open.

Profit rose for FY 03/2021, went through the figures (see RNS)

Custom-built tech platform

6-12% transactional fees (peak at 18%)

“Opportunistic sales of PPE equipment” in pandemic of £1.9m, so revenue growth is not the main activity. PPE sold at only 17% gross margin, added £300k to gross profit, but has opened their eyes to opportunities to sell non-competing products direct, not just being an intermediary.

£400k benefit from US Govt grant in pandemic

Clean P&L for the first time - no acqns/disposals, or material exceptionals, so investors can see the steady state of the current business

Presentation of revenues will change under IFRS 15, I didn’t fully grasp this point

ACS & (something else) have great growth potential - ACS numbers will be much bigger this year (sounds interesting, but it wasn’t explained very well)

Big growth potential from selling direct (as above)

USA is returning to normalcy

Showed an interesting graph, that in previous crashes (e.g. 2008), promotional goods declined massively, but then enjoyed a multi-year, gradual recovery - expecting the same this time

Supply challenges - more inventory is needed earlier

Covid - not over yet, e.g. factories in China & Vietnam are cropping up still, but we’ve navigated through the worst

Outlook for FY 03/2022 - returning to pre-pandemic levels of activity

Optimistic as markets recover

Emphasised still in “cash conservation” mode - which makes me wonder if another placing may occur? (speculating there)

Q&A - receivables high - yes, quarterly invoicing is the norm, and delays happen when suppliers reconcile their numbers. Industry standard.

My opinion - it all seems a bit vague to me. I’ve never fully understood what the business actually does. Maybe they need to change the presentations, to give more basic examples of real world transactions?

It’s not clear to me if this is a good business with potential, or not.

Overall - might be worth a small punt, but at this stage that would be largely speculative. So not one for me, but I’ll follow with interest.

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Accesso Technology (LON:ACSO)

895p (up 8% at 10:17) - mkt cap £369m

I hadn’t spotted how strongly this share has performed in the last year - market sentiment certainly seems very positive - I suppose it’s an obvious re-opening trade (theme park ticketing & queuing systems). My problem with Accesso, is that I’m not convinced it’s a good business at all, whether theme parks are open or shut! Nobody wanted to buy it (as far as we know) when it did a lengthy formal sales process a while back, and the company’s financial history is fairly poor - no meaningful or sustained cash generation for example (after taking into account the large payroll costs that were capitalised onto the balance sheet as development spending).

Let’s have a look with fresh eyes at today’s update.

Trading Update

accesso Technology Group plc (AIM: ACSO), the premier technology solutions provider to leisure, entertainment and cultural markets, gives the following trading update ahead of its interim results which will be released on 14 September 2021.

The current financial year is FY 12/2021.

This sounds positive - a return to pre-pandemic revenue levels -

Through July, August and the Labor Day holiday period, accesso has built on excellent first half performance and continued to capture high demand for its technology solutions. As a result, trading during this period was very strong.

The Group's ongoing momentum now leads the Board to revise upwards its expectations for full year 2021 revenues to not less than $117m. This represents full recovery to 2019 trading levels.

$117m is £85m.

What about profitability? We’re not told, instead they tell us about “cash EBITDA”, which of course is not profits (or cashflow) -

This rapid growth in revenue alongside a slower return to normal operating expenses will result in Cash EBITDA being significantly ahead of current market expectations for both the half and the full year.

However, in the strange world of tech shares, conventional valuation metrics disappeared ages ago.

Costs are rising - together with the comment above about costs increasing more slowly, then this implies that short term profitability might be short-lived? Do tech investors care about profitability though? Arguably not. In the current environment people seem to pay up for growth, and you can see why when we look at the many massive success stories in the tech area (mainly in the USA), where in many cases ignoring profitability in the short term has produced gigantic investment returns -

The Group is currently deploying additional resources across technology implementation, product development and customer support to calibrate for the new demand. As previously signaled, these investments will have a limited impact on Cash EBITDA in 2021; their full annualised effect will be felt in the 2022 financial year.

My opinion - doesn’t really matter, because I’m not a tech investor, and valuations in this sector mystify me.

With planned cost increases, it’s not clear to me that the business is likely to make any sustainable profits just yet, so for me that renders it impossible to value.

Maybe it will grow into a larger, and profitable business. Maybe it won’t. That’s the crux isn’t it.

We just review the numbers here, with a value/GARP approach, so I can’t form a view on Accesso, because there’s not enough to go on. There’s not much point in me reviewing tech shares, as it’s not my investing focus, and other people are more in tune with the sector, so can do it better. All I would say is that when bull markets end, tech valuations come back down to earth with a crash, and conventional valuation metrics do matter again (based on my experiences of the whole boom/bust cycle from 1998-2003).

The valuation is all about what investors think the future holds, and that’s for each individual investor to guess for yourselves. Nobody can predict the future with certainty, and there’s not much in the way of historical profitability to benchmark Accesso shares against.

Also, there’s been very little revenue growth in recent years (pre-pandemic), so it seems odd to me that ACSO has such a premium valuation. Is it really a growth company? Doesn’t look like it to me (see graphs below). Maybe growth is likely to improve in future? The share price is already anticipating that anyway.

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Jack’s section

Augean (LON:AUG)

Share price: 335p (unchanged)

Shares in issue: 104,971,924

Market cap: £351.66m

Augean is a waste management solutions provider that disposes of hazardous waste for the oil & gas and nuclear & radioactive sectors. It’s a complex and legislation-driven market which acts both as a barrier to entry and a potential business risk to the company insofar as government intervention is always a possibility.

Back in May 2021 Morgan Stanley Infrastructure came forward as a bidder for the company at around 280p, followed by Eleia Ltd putting in a cash offer of 325p, which values Augean at c£341.2m.

This morning, Augean’s shares stand at 335p so there is a slight premium to the offer. Will there be more twists now that this company is ‘in play’? That’s what a share price above the most recent offer implies, although it can’t be relied on.

Interim results

Financial highlights:

• Adjusted revenue before Landfill Tax -8% to £37.9m,
• Adjusted PBT +19% to £10.1m,
• Adjusted EBITDA +7% to £14.2m,
• Adjusted basic EPS +16% to 7.79p,
• Net cash of £6.1m excluding lease liabilities,
• Return on capital up from 44.9% to 46.2%.

The key market of Energy from Waste (EfW) treatment continues to trade well, with new contracted plants coming online. The application for an onsite EfW r-code solution at Port Clarence has been successful, which should increase the asset’s recovery capacity.

Treatment and disposal sales in total were also up 20% to £30.9m with strong growth across all waste streams. This was impacted by the pandemic so might recover further going forward.

North sea services (NSS) is in line with management expectations - but those expectations are for relatively subdued trading and revenue is down 55% to £7m. Total group revenue fell 8.5% to £37.9m.

HMRC - as noted above, the regulated nature of Augean’s markets are both an opportunity and a threat. While new entrants might be put off from entering this complex and highly regulated world, the flipside is that Augean is handling a long-standing tax dispute with HMRC.

To summarise:

• 10 December 2019, Augean paid £40.4m to HMRC to clear all outstanding Landfill Tax assessments. In 2020 HMRC subsequently repaid £1.4m relating to one aspect of the Landfill Tax dispute
• On 25 May 2021 HMRC issued a Landfill Tax assessment for £1.5m relating to time periods that had previously remained unassessed in relation to the Landfill Tax assessments. This was already factored in by management and had no impact on the income statement.
• On 23 June 2021, the decision of the preliminary hearing of the First Tier Tax tribunal heard in September 2020 was received, finding in favour of Augean.
• HMRC have subsequently applied to the Tribunal for a determination to extend or move the appeal period of the initial decision.

This kind of risk makes Augean uninvestable for some investors, understandably as it is a hard to quantify risk that falls to a degree outside of the company’s control. What can be said is that the direction of travel regarding this situation is positive. Perhaps it is the developments here that have sparked the bids, with some players now considering the tax situation suitably de-risked?

Balance sheet - looks healthy with consolidated net assets of £69m and net tangible assets of £49.2m. The current ratio looks to be around just 1x however, with £11m of cash set aside £28.4m of current liabilities. Perhaps you could argue that a larger cash pile is warranted.

Outlook - Augean is focusing on more growth in its core EfW and construction soils markets, although NSS will remain subdued for the rest of the year.

Conclusion

Full year estimates are for about 17p of normalised earnings per share in FY21, rising to 20.1p in FY22 as NSS business picks back up.

That would value the company on a PER of 19.7 falling to 16.7, which looks about right (but possibly even still cheap if the tax situation is fully resolved and the company sees good growth). It’s a strong business when it is not having to dispute tax cases, with barriers to entry and a portfolio of well located assets generating good returns on capital.

This tax has been paid but Augean is claiming it back and HMRC is looking to extend the appeal period for the initial decision. Compared to normal business operations that investors are used to, this looks like an extremely long-winded process. Overall though, the risk here has diminished.

Beyond that, there is no guarantee that a bid will go through - although this looks to me like the most likely course of action. In fact, the market thinks it is more likely that a higher counter-offer will materialise than for discussions to fall apart. Should Augean remain a publicly listed stock however, then it continues to be an interesting proposition in my view.

The shares are more expensive than they have been in the past, but there has also been good news regarding its tax situation and the fact remains that the group operates in generally attractive markets with scope for long term growth (in nuclear decommissioning, for example).

M Winkworth (LON:WINK)

Share price: 202p (+6.32%)

Shares in issue: 12,733,238

Market cap: £25.7m

(I hold)

We’ve spent a good deal of time discussing the franchised estate agency business model in the past but suffice to say it is a robust one, with high levels of cash generation, profitability, and returns on capital.

These companies have sailed through the Covid lockdowns much better than many expected and are currently going from strength to strength. All in all, these businesses look like solid long-term investment candidates. Stockopedia tends to agree.

They are exposed to the property market though of course, and so there are issues such as the withdrawal of stamp duty and future interest rate rises to take into account. It’s possible for the market to turn at some point, but it’s a very important market too, so the government does step in to support it.

While house prices and rental rates can fall, the latter in particular is sticky revenue that should ensure these businesses act as going concerns in the worst of times (assuming they do not take on overly onerous debt burdens, which has so far not been the case - they tend to be financially prudent).

Of the three listed plays often discussed, Winkworth is the smallest by market cap and is the most exposed to the London property market, so these are additional characteristics to consider.

In fact, the WINK spread reads as some 1,053bps and it looks like you’ll struggle to buy more than £2,000 in one go on the open market at quoted prices so I won’t spend too long on it. There could be some useful readacross for the rest of the market though.

Interim results

Financial highlights:

• Network revenues +92% to £36.4m,
• Of this, sales revenue is up 195% to £24.6m and lettings is up 11% to £11.8m,
• Winkworth revenues +107% to £5.25m,
• Profit before taxation +330% to £1.98m,
• Cash up from £3.27m to £4.57m,
• Dividends of 8.3p declared (+169%).

Network sales revenue is up from 45% of total to 68%, so clearly this has been the star performer over the past six months. Management calls this part of the market ‘extraordinarily active’.

This upturn in sales started at the end of 2020 and carried through into 2021. It’s interesting to note that the uptick began, presumably, during the winter lockdown. A number of factors are at play here:

• pandemic-induced buyers searching for space and bringing forward moves to the country,
• record low interest rates, and
• government support, in particular after the release from lockdown.

Housing market transactions have been depressed since 2015, leading to the dominance of rental and management turnover over the last five years. Since the autumn of 2020, however, there has been a significant catch up in completed sales.

Peak activity for Winkworth was focused on the country markets. Outside of the internationally reliant central London market, the capital also performed very strongly though.

There was a divide in performance between houses and flats: the former more popular and the latter static, but there are now signs of recovery in rental which is expected to continue into H2.

Three new franchised offices opened.

Dominic Agace, Chief Executive Officer of the Company, commented:

While the first half of this year was marked by an exceptional level of sales activity, it also vindicated our strategic expansion in recent years into the country, enabling us to service clients not only in the buoyant London market, but also Londoners and country dwellers seeking more space or a change in environment. Our rental business remained strong, albeit on this occasion it was outshone by sales, and we are again encouraged by the number of applications from talented operators looking to work within our successful and well-balanced franchise model.

Conclusion

It’s a bumper set of results, not sustainable growth rates as it also reflects a flurry of activity ahead of changes in stamp duty, but investors will be more than happy nonetheless.

The company itself says:

The ending of the stamp duty holiday, the re-opening of foreign travel in August, and transactions due to complete in July having been brought forward to June will, inevitably, mean that some of the fervour will come out of the sales market.

The ending of stamp duty relief is being both phased and extended so the cliff edge situation some might have feared looks to have been avoided and sales applicants continue to track well ahead of 2019 levels.

Winkworth has made some recent moves away from the franchise model. I’d be wary of too sharp a shift but if it’s done in a controlled manner by the management team when it spots sites it can add value in, then it makes sense. Other franchise-heavy operators also split their business this way, selectively acquiring franchise units where appropriate.

More recently the group is ‘seeing a growing number of highly qualified, dynamic new franchisees joining us to take advantage of the opportunities presented by a revived market’.

It’s a great company and business model - probably too small for some and family-owned so it doesn’t really ‘behave’ like other stocks - but that might make it all the more appealing to the right kind of long-term investor.

The real elephant in the room, as ever, is interest rates. Underlying demand is supported by mortgage rates as low as 1%... But debating ultra low IRs could be turned into an entire book and many smart observers have got it wrong so far.

Tissue Regenix (LON:TRX)

Share price: 68p (-2.88%)

Shares in issue: 7,033,077,499

Market cap: £47.8m

(I hold - high risk)

This is a stock I hold but it’s not my typical investment - much more speculative, and with a dubious history regarding shareholder value creation under previous management. Attractive potential upside, with a greater urgency on product commercialisation and a strengthened management team, but persistent cash burn nonetheless.

As such, I took a small, high risk position with money I can afford to lose in the worst case scenario. I only stress that so as to give due consideration to the risks here, mindful that this is a widely-read blog.

Frankly, I’m not sure the level of risk to shareholders is being communicated in these updates. That’s not to dismiss the investment case, but it does make me uneasy. Shares in issue have ballooned from 743m in 2015 to over 7 billion today so the key risk is that the company reverts to type and further dilutes shareholders.

The group makes acellular tissue scaffolds for use in surgeries - it’s a potentially lucrative and highly regulated market with barriers to entry. TRX’s products are patented and well-regarded. Current applications for dCell address critical clinical needs such as sports medicine, heart valve replacement and wound care, while CellRight is used in spine, trauma, general orthopaedic, foot & ankle, dental, and sports medicine surgical procedures.

That bit’s good - patented products in highly regulated markets - but TRX must grow revenue for its shareholders. Covid disruption was unfortunate as elective surgeries have been put on hold. There are signs of improvement now - these surgeries will still be needed once hospitals are past dealing with Covid and so TRX is expanding its facilities just in time to capitalise on the backlog.

For now the key question is can TRX make it through this lean period without having to dilute shareholders further over the next 12 months?

Half year report

Financial highlights:

• Revenue +12% to £6.8m (+21% at constant currency),
• Gross profit of £3.1m, gross margin steady at 46%,
• EBITDA loss down from £2.1m to £1.1m,
• Cash position down from £13.7m to £6.6m.

The key thing to look at here is the cash burn. Both government backed loans (part of the COVID-19 relief programme) have been forgiven, while a restructuring of US commercial operations provided savings of c.$350k in the first half.

TRX has a habit of realising significant cost savings, like pulling rabbits out of the hat, which is good from a cash conservation perspective but begs the question as to why these operational costs were there in the first place if they’re not needed now. A more positive spin is that this shows the more commercial focus of the savvier new management team, which is carving out a far leaner enterprise.

This quote stands out for me though:

Operating loss for H1 2021 reduced to £1.6m (H1 2020: £2.5m) and the group also has a strong cash position of £6.6m (H1 2020: £13.7m).

I would dispute that - this is the key risk for the group and it can’t be stressed enough in my view. Management might as well be upfront about it. There’s no shame in investing in products that can improve surgeries and quality of life but it’s often high risk so why don’t we just call a spade a spade?

Assuming that sales don’t grow and similar levels of cash burn are reported going forward, cash on hand would last for another year or so. That’s not a strong cash position, it’s a risky position, and that’s been known for some time.

Obviously investors are hoping for a significant pick up in sales, which is what management is guiding towards, but even so it will be a close-run thing. Also, included in the cash burn over the last 12 months is £2.1m spent on the completion of TRX’s Phase 1 capacity expansion, which is expected to meet production demands over the short and medium term.

So assuming no growth in revenue and similar levels of cash outflows is, hopefully, a pessimistic interpretation with scope for management to beat. Looking the other way, a pick up in revenue and reduction in growth capex following Phase 1 completion could quite quickly drive cashflow breakeven.

I note Hardman anticipated free cashflow and operating cash flow to both be close to zero in 2021. That was back in June. I struggle to reconcile that with today’s interims though, so will be interested to see if a new note is forthcoming.

Balance sheet - net tangible assets of £15.2m is fine, but, as above, with cash down from £13.7m to £6.6m, cash burn is the key point of focus.

Trading - signs of recovery in the Orthopaedic and Dental division, revenues up 26% (37% constant currency) to £4.3m, driven by the US market. US product shipments increased by 44% in H1 2021 year-on-year. BioRinse sales +26% to £4.3m (37% constant currency), again with improving conditions in the US. Germany, by comparison, remains more subdued due to lockdowns and a slower vaccine rollout, with sales flat at £1m. dCell sales were down 12% (4% constant currency) to £1.5m. Some positive signs in there but this needs to continue.

Two additional products were added to the Biosurgery portfolio, DermaPure Mesh and VNEW®. The DermaPure Mesh is a meshed dermal graft and VNEW® is a pre-shaped dermis graft. New product development and commercialization is encouraging.

Conclusion

I don’t mean to be too negative here, I just think management should be framing these results with a focus on cash burn and how the company hopes to manage its finances depending on various scenarios over the next year or so. Much more detail could be provided in this regard.

There’s an Investor Meet Company presentation at 4:30pm today: https://www.investormeetcompan... - I’ll be tuning in if there’s time to see if more detail is provided around prospects and upcoming cash costs as we are entering a critical period.

In fairness, my view here is due to the group’s track record of equity dilution under old management. The new team has gone a long way in cutting costs. Administrative expenses have fallen from £5.4m to £4.4m after cost restructurings at the end of 2019 and in January 2021.

Note: Interim Admin expenses

And there are good things here, namely:

• Sales up in US with improving outlook,
• UK vaccine rollout boding well for H2,
• Successful expansion of facilities and capacity,
• Ongoing product development and focus on commercialisation,
• Senior hires and greater depth of management,
• Patented products in a highly regulated market with strong barriers to entry.

Covid was a bad bit of luck for a company like TRX, obscuring underlying progress and temporarily halting revenue growth at a time when the company is loss-making and investing for expansion. Historically, growth has been hampered by capacity issues which have now been addressed. The upcoming 12 months could be strong for TRX - but they also need to be.

The focus now must be on driving revenue, broadening the product portfolio, and increasing market penetration. There’s a decent chance of this happening - Europe continues to be disrupted, although the UK should show better figures in H2 and the US is already recovering strongly, with US product shipments up by 44% - but even then it might be a close run thing with the existing cash pile.

The group says it expects ‘a significant increase in elective surgeries globally during H2 2021 and beyond’. It’s well positioned to capitalise on any such recovery following its capacity expansion, but it does need to happen otherwise another fundraise is on the cards.

I continue to hold, but it is high risk. Comparing it to M Winkworth above, for example, is like comparing night and day.

Again, that’s not to dismiss the investment case but just to draw attention to the risk profile here. Anecdotally, I feel as though this has become a bit of a trader’s stock (certainly more so over the time I’ve held) so I’m braced for volatility over that timeframe as well.