Small Cap Value Report (Weds 22 Sep 2021) - TEG, TIME, ALFA, BMS, SAGA, SDI

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

Agenda -

Paul:

Saga (LON:SAGA) (I hold) - interim results are as expected. The group is operating around breakeven, with healthy profits and cashflows from the insurance division funding the heavy losses from the mothballed travel division. The company has ample liquidity. In time, as travel recovers, I think this share could substantially re-rate, the valuation doesn’t make sense at all to me, hence I see a big opportunity with this share, for investors who are prepared to be patient - recovery could take a year or two, and is dependent on what happens with covid.

Sdi (LON:SDI) - a good update, which says trading is at least in line with market expectations. A smashing company, but I do have concerns over the valuation, and the potential impact of reduced earnings next year.

Jack's section:

Time Finance (LON:TIME) - met with Time Finance management yesterday to discuss its results. Notes of the conversation are below.

Alfa Financial Software Holdings (LON:ALFA) - positive trading and full year revenue expectations are nudged up by 4%. The outlook sounds favourable so it wouldn't be a surprise to hear more good news from Alfa, but the shares look expensive.

Roland's section:

Ten Entertainment (LON:TEG) - A strong reopening performance from this bowling alley operator. I think the shares are probably up with events but could continue to perform if the group resumes its previous growth trajectory.

Braemar Shipping Services (LON:BMS) (I hold) - A confident trading update has sent shares in this shipping business higher today. I think there’s still value here, with the potential for an ongoing re-rating.

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

Saga (LON:SAGA) (I hold)

339p (down 3%, at 09:17) - market cap £477m

Interim Results

Saga plc ("Saga" or "the Group"), the UK's specialist in products and services for people over 50, announces its interim results for the six months ended 31 July 2021.

Continued strategic progress positions Saga to emerge stronger from the pandemic

Successful resumption of Cruise; robust Insurance performance

Here’s the slide deck of presentation slides.

Revenues £156.4m, down from £192.4m in H1 LY, and way down on 2019/20 H1 of £395.9m - obviously this is due to the travel division being mothballed due to the pandemic, so these results are largely irrelevant.

Insurance division continued to perform well, making a profit of £69.0m in H1, slightly below the £70.0m in H1 LY.

Travel division loss making at £(51.2)m - so as expected, the profits from insurance more than covered the losses from the mothballed travel division (including 2 new owned cruise ships)

Central costs of £11.1m, and finance costs of £7.1m, results in an underlying position close to breakeven at £(2.8)m loss - that’s really not bad at all, and demonstrates what I like about SAGA’s business model - that profitable insurance operations can carry the travel division during shutdowns. That’s very different to other travel companies, which are typically burning cash & having to fundraise still in some cases (e.g. Easyjet (LON:EZJ) recently). The hybrid model of SAGA seems much better, because the business can tread water without needing to tap shareholders for cash again.

Liquidity is very strong (see below) - £175.3m in cash, plus £100m undrawn RCF

H1 trading in line with expectations

Adjusted net debt (excl. Cruise ship loans) of £226.8m (down from £410.7m a year earlier) - I don’t see debt as a problem at all, although would prefer to see it eliminated in time.

Positive cashflow.

Travel division monthly cash burn was £5.9m, a bit lower than guidance, and is funded by the positive cashflow from the insurance division, so it really isn’t a problem even when travel is mothballed.

3-year fixed price insurance policies now make up 45% of the total, giving good visibility.

Customer loyalty is good

FCA market study as expected. I think this could have a negative impact on profitability, but don’t know by how much. It could be a factor holding back investor sentiment maybe?

Insurance division has benefited from reduced claims during the pandemic.

Most importantly, cruise bookings for next year are ahead of pre-pandemic levels, with pricing also ahead of expectations.

Still some uncertainty over covid, and ships operating at reduced capacity currently. So don’t expect profit to rebound fully for the time being.

Outlook - the all-important outlook comments, are arguably more important than the numbers in a year that is still being heavily disrupted by covid.

"We have successfully recommenced our Travel operations, including the launch of our newest ship, Spirit of Adventure. I am delighted with the positive feedback received so far and encouraged by the strong pipeline of future bookings.

In Insurance, customer retention remains strong, and the attraction of our offer is borne out by the increased uptake of our new three-year fixed-price product. From a financial perspective, we further strengthened our position through a series of financing transactions, including the recent completion of our bond issue…

Both our cruise ships are now sailing with fewer restrictions and are achieving satisfactory levels of occupancy. Guests are giving us exceptionally positive feedback. We have begun a phased resumption of our tour operations. However, COVID-19 is still affecting them and we expect to take far fewer customers on holiday than we would normally in the second half of our financial year.

We are encouraged by the fact that confidence is returning in overseas travel for next year and that the Government is continuing to relax the COVID-19 rules relating to travel and have therefore now increased our marketing activity.

Cruise bookings - I’m thinking in terms of seeing this year, FY 01/2022 as a write-off, and looking forward to FY 01/2023 being maybe a partial recovery year, with FY 01/2024 being hopefully the year that SAGA is really firing on all cylinders. Although makets do look ahead, and anticipate improved performance, so the shares could re-rate earlier than that, possibly.

Similarly, Cruise bookings for 2021/22 are lower than the same point two years ago by 17% and 29% for revenue and passenger days respectively due to the decision to suspend operations for Spirit of Discovery until 27 June 2021 and for Spirit of Adventure until 26 July 2021. However, demand is very strong for 2022/23 departures and ahead of the same point two years ago, with revenue and passenger days ahead by 58% and 39% respectively.

It’s very easy to forecast the numbers once the business is fully re-opened in the travel division. Then we should have a very strongly profitable business, making perhaps £150-200m p.a. profit in future, maybe? (once travel is fully re-opened). That’s the investment case in a nutshell.

Net debt - here is a simple table showing the net debt position. Most of the debt relates to the 2 owned cruise ships, so I tend to offset the assets against the cruise loans.

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Aside from the cruise ship loans, the only other debt is £400m in corporate bonds. There are several years left to run, they’ve covenant-lite, and are a secure way to fund the business, which I very much like.

Note also the company is swimming in cash, with a whacking great £175.3m cash pile - tons of liquidity in other words. I think some investors still think of SAGA as being financially distressed. I’ve been saying for some time, that’s completely wrong. The figures today show clearly that the company has ample liquidity, and is not at all financially distressed. At some point that reality should dawn on investors, and result in a re-rating perhaps?

Valuation - I’m happy to be patient, this share could take a year or two to re-rate, providing nothing goes wrong. I see the current market cap as completely wrong, out of kilter with a business that has the potential to recover to making £150-200m p.a. pre-tax, take off 25% tax, that’s £112-150m earnings, divided by 140.1m shares in issue = 80-107p per share. At the current share price of 339p, that’s a PER of between 3.2 - 4.2 - clearly a ludicrous undervaluation.

What about debt? I ignore the cruise loans, as that’s just like HP on a car - they own the assets, which offsets the debt. That leaves only a relatively small £225m of other debt, which should be repaid from cashflows over the next few years.

I think, once recovery from travel has happened, this share could sensibly be valued on a PER of 12 (hardly demanding!) and that suggests a price target of 960-1284p - fabulous upside on the current 339p, if my estimates turn out to be correct, which they may not of course, anything could happen, we don’t have a 100% reliable crystal ball. It’s always educated guesswork with any share, trying to look into the future.

Balance sheet - is large and complicated! NAV is £687.4m, less intangibles of £718.6m + £58.0m, gives NTAV negative of £(89.2)m - this is quite weak, so I would like to see the company retain cash, and build up its NTAV into a positive position in due course, which is the company’s stated policy - it wants to reduce debt, and become more conservatively financed.

The position is not getting any worse anyway, despite the ravages of the pandemic, so I can tolerate the not ideal balance sheet for now.

My opinion - this is my second largest personal investment, so there’s always a risk I could have unintentional bias (that’s why we disclose when we hold a share). It’s a long-term investment for me, which I continue to believe could have substantial upside, as explained above in my valuation workings.

I’m pleased with today’s interim numbers, which don’t seem to contain anything untoward, although I do need to spend more time going through everything in detail - this is just an initial review.

I have no idea what the share price will do, and don’t really care. For me it’s the long-term, potentially big re-rating which interests me. In the meantime we just have to endure sometimes extreme volatility in this share - I’ve no idea why it’s so volatile, again it doesn’t matter to me, other than being irritating. Volatile share prices never blow me off course, and I don’t use stop losses on individual shares - a personal choice, other people are happier with stop losses, whatever floats your boat.

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Sdi (LON:SDI)

198.6p (down c.3% at 12:15) - mkt cap £197m

AGM Trading Update

SDI Group plc, the AIM quoted Group focused on the design and manufacture of scientific and technology products for use in digital imaging and sensing control applications, is pleased to announce an update on trading for the current year.

The Group has made a good start to the new financial year, modestly above our initial forecasts, and the Board remains confident that results for the full year will be delivered at least in line with market expectations1.

1Analysts from our Broker finnCap Limited and from Progressive Equity Research regularly provide research on the Company, and the Group considers the average of their forecasts to represent market expectations for FY2021/2022 being Sales of £42.05m and Adjusted2 Profit Before Tax of £8.85m

Excellent footnote, that’s very helpful - please can all companies do this.

It’s useful to include forecast EPS in footnotes too.

The above forecast looks consistent with Stockopedia’s consensus EPS figure of 6.65p for FY 04/2022. That’s a current year PER of 29.9 - pricey, but I think the premium is probably justified, given the company’s excellent track record.

It’s not mentioned today, but the company has previously advised that the current year performance is being boosted by some one-off orders. That’s why guidance for next year is for EPS falling, to 5.05p, which would raise the PER to 39, which I think is too high.

My opinion - SDI looks a quality company, with management who’ve established an excellent track record of making good, value adding acquisitions. That’s the investment case in a nutshell, backing management to continue growing the business with more good acquisitions.

Personally, it doesn’t appeal to me at this stage, I’d rather wait to see if it slips on reduced profits next year. I’m not keen on the current price, which asks buyers to assume that next year’s forecasts will be considerably beaten. That may happen, but why pay up-front for something that is inherently uncertain? Hence my quibble is purely on valuation, but I acknowledge it’s a decent company, and well managed.

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Jack's section

Time Finance (LON:TIME)

Share price: 24.25p (unch.)

Shares in issue: 92,512,704

Market cap: £22.4m

I’ve been away from the SCVR so far this week on other business but there’s been time to fit in a couple of calls with company management. Some investors prefer to look at numbers alone and ignore this side of things but I personally view chats with management as time well spent.

Yesterday it was Time Finance CEO and CFO Ed Rimmer and James Roberts. Not a company I’ve spent a lot of time on in the past but the notes below should provide some useful context going forward.

Notes

Ed Rimmer (CEO) joined OPM in 2017 but left in April last year, only to rejoin in March 2021. Prior to that 20 years at Bibby (largest independent non-bank invoice discounting provider). James Roberts (CFO) has been with Time since 2017 and PWC before that; financial services expertise.

• AIM-listed business providing UK small companies with access to multi-product range of alternative funding solutions (not a bank)
• Supports UK SMEs, primarily lends off its own balance sheet but flexibility to broke on deals, particularly in corporate vehicles.
• Wider range of products than competitors
  • Four main product types: asset finance, invoice finance, loans vehicle, finance (brokered on so no residual values here, mainly small fleets of corporate vehicles)
  • Tier 2 funder, not a bank, no retail deposits, towards the bottom of tier 2 in terms of size; slightly higher-rate deals with commensurately higher risk; much more hands-on management of those deals
• Origination comes from 3rd party intermediaries - accountants, insolvency practitioners.
• Competition is from banks and challenger banks
• 20,000c SMEs let to
• £100m of new business last year
• £57m of equity on BS (market cap of just £22.4m)
• £3m of PBTE in FY21, so shares currently trading on less than 10x that.

Market

• Competes with a wide range. Mainstream banks, modern challengers, alternative finance platforms (fintechs), some peers similar to Time, and small private companies
  • Banks have the range of products but not personal approach
  • Smaller operators are personal but limited range
  • OPM quite uniquely positioned given its smaller size but wider range - flexibility, speed, personal approach, range of products are key characteristics that allow it to compete in a competitive market

Finance

FY20 numbers were hit by first 3mths of Covid, FY21 hit by the rest so both impacted.

Roughly £30m turnover, £7.5m-£8m of profit ‘in the good old days’

Big dip in FY20 pandemic

FY21 has been steadying the ship

Solid achievement in the numbers

Revenue has continued to fall as more Covid exposure this year compared to FY20

Margins have improved and marginally better PBTE of £3.1m

EPS up to 1.98p

NTAV £28.4m up 7%; a lot of goodwill and intangibles in BS

Cash and equivalents up to £11,3m from £1.4m

Unearned income (loans with 2-3 more years to run) should drop through over next few years

Lends money out at a certain rate but needs to get it through at a certain rate from wholesale. Currently c4%

Write-offs up 0.3% on the year before but forbearance has fallen from £24.3m to £0.8m

Improving quality going fwd and provision of £5m is prudent

Revenue fall driven by vehicle brokerage; dealerships were effectively mothballed. 20% of revenue but 50% of the reduction in FY21; should come roaring back

Oil Tanker - size of book. March 2020 lending book fell and that revenue over the next few years is smaller. Need to grow this order book back up. Like a leading indicator. Year to May 22 is forecast to show the recovery here.

Focus was on getting balance sheet healthy. NTAV up, cash up, arrears down 9.3%.

Existing book in a much healthier place; arrears spiked in 2020 and fell this year. Lower than pre-pandemic

Diversification of book is a strength; spread across sectors; if there's one specific dip it is diversified. Eg. hospitality over Covid. Resilient

Lending is about £100m

Top 10 sectors less than 25% of book; good risk mitigation

Support from funding partners - they put 10-20% into every deal so partners have to put in the majority. Key funding lines important

NatWest facility up recently. £162.6m of facilities; only used £66.7m of it so best part of £100m to fund future growth

Fair bit of cash to hit growth aspirations (c£11m), supportive funding partners

Next 2-4years

Reviewed medium-term strategy to capitalise on growth opps; rebrand of 1PM after multiple acquisitions over 5Y; Time rebrand allows for repositioning.

• Become nationally recognised SME funder (invested in marketing capability)
• More than double gross lending book to £250m at end of 4Y; profitability back up to pre-Covid and beyond
• Achieve profits organically in excess of 2019 pre-Covid levels
• Significantly strengthen balance sheet as focuses on own book lending; double NTAV to c£55m

Via six core strategic strands

• Focus on core products: asset, loan, and invoice finance
  • Business to consumer lending acquisitions are now classed as non-core - one in mortgage broking and one in second-hand car market
    • Approved as lender of Recovery Loan Scheme, which govt provides 80% of lending
    • Restructured asset finance senior mgmt team and new leader
    • Repositioning soft asset business; was small ticket, inefficient. .Now min ticket size of £5k, new deals up and level of queries more manageable
  • Multi-product solutions and asset based lender offering; integrated offering, atm quite fragmented and not integrated product
    • New director of commercial loans and ABL
    • Relaunched cross sell initiative to existing clients
  • Repositioning of brand and investment in marketing; head of marketing v experienced, worked with Ed at Bibby
    • Seen a big increase in PR efforts over the last few weeks, stories being put out there, helping businesses recover, new digital marketing exec
  • Invest in further sales talent to originate more
    • New CEO, new head of sales for invoice finance in the south, already good impact
    • 4 new broker managers and BDMs in asset finance
  • Bring further liquidity into the business (lower priority but important long term) - for every deal it puts out has to finance 10-20% with its own BS; so this is essential for growth
    • New NatWest invoice finance expansion
  • Organic growth but targeted acquisitions that fit with core products
• Summary

Resilient over Covid, liquidity has actually improved

New strategy, new mgmt

Multi-product offering

Strong base for opportunities once market restarts

Hopefully sustained recovery between now and Christmas, could be longer than that though, but would give a bit more confidence

Questions

• Are fears of pent up insolvencies etc. overstated?

Businesses propped up by funding over last few months; some will have a plan and be sustainable but some won't

Doesn't believe there will be a tidal wave of insolvencies, will be gradual as government will manage

They need businesses to recover so they can get taxes and recoup loans

Small business lending tends to profit from banks taking a more calculated view, if things get bad, OPM would benefit. Would be stress on client base but better placed to manage as hands on. Would do well in boom and bust, not as well when mundane

• How have you strengthened the balance sheet so much with no dilution?

Didn't ask for forbearance from funders, took it on the chin, didn't ask it from others

Looked at cost controls, headcount reduced slightly, very conservative in expenditure

Main thing was derisk the book; Time was a CBILS lender not a bounceback lender, this brought cash in; a lot more redemptions coming in than new business going out

TIME got the loan from NatWest

Conclusion

Good opportunity to talk with the management of this small company. The rating is modest but the share price chart tells a story and more work is needed to know whether management actions are really going to arrest this long, slow decline.

It sounds as though ‘turning around the oil tanker’ metaphor is paving the way perhaps for another couple of quarters of declining or flatlining revenue but the work is happening to make FY22 a year of recovery.

It’s worth watching based on the valuation and growth prospects, but I’m waiting to see more definitive signs of progress in future trading updates.

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Alfa Financial Software Holdings (LON:ALFA)

Share price: 179.85p (+14.19%)

Shares in issue: 300,000,000

Market cap: £539.6m

Alfa’s in a similar area to Time although it is about 20x the size by market cap, and it has more of a focus on delivering software systems and consultancy services to asset finance companies themselves. Unlike Time, Alfa’s shares are up by more than 10% this morning so it will be interesting to compare the commentary of the two.

Its technology platform Alfa Systems is used by some of the world's largest asset finance companies. Part of its value is in being able to consolidate multiple customer systems onto a single platform, as well as being an end-to-end solution for its customers.

There was a big drop in the share price here a while ago. Shareholders got hurt in an overvalued IPO back in 2017. That must have been some valuation, as even today Alfa looks pricey on various valuation metrics.

The shares are tightly held. Alfa’s major shareholder is CHP with 66%. This is actually the maker of Alfa Systems and directors include the executive chairman and CEO of Alfa.

Interim results

Financial highlights:

• Revenue +8% to £41.1m despite currency headwinds,
• Operating profit +9% year-on-year,
• Subscription revenues +46%,
• Revenue from top 5 customers down from 64% in H1 19 to 55% in H1 20 and now 43% in H1 21,
• Two new customer wins in recent weeks and five in the year so far,
• £50m of cash on the balance sheet, no debt,
• Special dividend of 10p (£30m) declared, taking total dividends over 12m to 26p (£77m) - compared to a share price of 176p, that’s nearly a 15% yield for those 12 months,
• Total contract value (TCV) +30% to £125m.

Alfa has seen good progress across all parts of the business.

Subscription is the fastest growing element of revenues, which is good to see as they are stickier. This includes cloud hosting services and bundled licence, maintenance and hosting contracts. Alfa anticipates that the majority of new customers will take a hosted service and will increasingly take bundled licence, hosting and maintenance contracts. Overall subscription revenues increased 46% to £11.4m.

Services - revenue increased by 4% to £23.3m.

Software - improvements have been made for services to wholesale customers, as well as in the areas of credit decisioning, business rule creation and regulatory support for European markets. There’s also a new user interface (UI), so plenty of work going on here. Software revenues were down 19% to £6.4m.

Alfa IQ - the group continues to demonstrate the potential of Alfa iQ and the improvements it can make to customers' return on capital. Three white papers have been produced ‘challenging traditional thinking in the industry’.

Market - the underlying asset finance market did see a dip in activity following widespread Covid-19 lockdowns but has broadly been recovering during H2 2020 and continued to do so through H1 2021. Alfa now says market conditions are favourable.

As a software provider, Alfa has actually benefited as remote working has forced lenders to adopt, accelerating moves towards a digital strategy.

Pipeline - good conversion of its late stage pipeline and the early stage looks promising, as the pandemic has made companies consider the risks they take in running legacy software platforms. Many companies continue to operate on old on-premise equipment and there is a ‘clear opportunity’ for them to adopt more resilient and reliable cloud-based systems with greater functionality.

Outlook - Total revenues in 2020 were £78.9m, with underlying revenues of £73.3m once £5.6m of one-off licence income is removed. Alfa now increases its revenue expectations for 2021 by around 4%, and the special dividend payment is notable.

Net cash increased by £13m to £50m, an encouraging result. Earnings per share of 2.93p, up from 2.62p.

Conclusion

There are a few points to like here. The increase in subscription revenue, the scalable tech platform and stronger order book, and the improving market conditions for its customers. Customer concentration risk is being managed, and Alfa is generating cash which strengthens the balance sheet while also investing in its products.

The obvious sticking point is valuation, although given the group is nudging up revenue expectations, perhaps we could see the relative valuation multiples come down a bit. I imagine broker upgrades are in the works,

I wouldn’t be surprised to see further good news here but the current valuation is factoring in a lot of growth already, so I can’t say I’m tempted at these levels.

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Roland's section

Ten Entertainment (LON:TEG)

Share price: 255p (pre-open)

Shares in issue: 68.4m

Market cap: £174m

Half-year results

Ten Entertainment operates 46 bowling alleys and family entertainment centres around the UK. Today’s half-year results are the first real chance we’ve had to see how this business is performing as life returns to normal.

The company’s opening statement is positive (my bold):

“Exceptional summer performance; full year trading now anticipated to be ahead of previous management expectations”

TEG shares have doubled since the vaccine rally kicked off in November. The stock is now trading broadly in line with pre-pandemic levels. Is this justified? Let’s take a look at the numbers.

Financial highlights: Ten Entertainment’s financial year ends on 27 December, so today’s half-year results cover the period until 27 June. This means that these numbers only include six weeks of trading (from 17 May) under Covid-19 restrictions.

Fortunately, TEG’s management has been pragmatic about reporting on this situation and have included some useful (and meaningful) comparisons.

H1 summary: Total sales per week appear to be consistent with the first half of 2020, pre-Covid. On a like-for-like basis, sales are comfortably ahead of both H1 2019 and H1 2020.

Profitability seems to have worsened compared to the first half of last year, but I don’t see this as a big concern. TEG faced additional costs from reopening, including training, cleaning and restocking. Capacity was also restricted at first.

Current trading: The company says that footfall growth has driven “the most successful summer trading period in the Group’s history”. Demand has been boosted by staycations and the company has seen spending return to 2019 levels.

For the 17 weeks to 12 September, TEG’s like-for-like sales were 36% ahead of the same period in 2019, while spend per head was also slightly ahead of 2019, at £14.80.

Here’s a useful snapshot showing KPIs for this year’s trading, versus historic levels:

It seems clear to me that customers have embraced the opportunity to go bowling again. Online bookings are up as expected and other metrics are consistent with 2019 levels. These numbers look very reassuring for shareholders, in my view.

Balance sheet & cash flow: The group’s financial situation looks comfortable enough to me. Net bank debt is modest at £10.9m and available liquidity is said to be £28m.

Management say that the business generated £1.6m of free cash flow in H1 and should continue to generate cash in H2. Given that H1 only included six weeks of trading, my sums suggest that cash generation is slightly ahead of 2019 FCF on a pro rata basis.

Although TEG did do a placing in March 2020, the company only raised £5m with 5% dilution to shareholders. So investors who have simply held the stock through the pandemic have not suffered much at all.

Outlook: The outlook for the remainder of the year is positive and TEG is planning to return to growth, with four new centres planned for 2022.

Demand growth is expected to moderate to “high single digit in 2021” as the staycation trend eases.

Profits for the full year are expected to be ahead of previous forecasts, but no figures are provided. This morning’s share price gain of 5% suggests to me that the upgrade could be relatively modest.

The company is targeting double-digit sales growth in 2022 compared to 2019. This does not seem unrealistic to me, but previous forecasts already implied 8% sales growth in 2022, so again, the increase could be relatively modest.

My view: Stockopedia classifies Ten Entertainment as a Momentum Trap with a relatively low StockRank of 31. In the short term, I’d agree that the shares are up with events. But this business was highly profitable and growing steadily before the pandemic. I don’t see any obvious reason why this can’t continue.

Prior to today, consensus forecasts put the stock on around 15 times 2022 earnings, falling to a P/E of 14 in 2023. I don’t expect these ratios to change all that much after today’s results.

Although I can see some downside risk as pent-up demand eases, I think this business should continue to perform well. I’d view this as a stock to continue holding, buying on any dips.

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Braemar Shipping Services (LON:BMS) (I hold)

Share price: 264p (+14% at 08:48)

Shares in issue: 32.0m

Market cap: £84.5m

Trading update

Braemar Shipping Services is a turnaround that finally seems to be coming good after some difficult years.

Readers of my SIF column will know that I hold Braemar in the SIF portfolio and personally, so I’m keen to understand what has triggered today’s 14% rise.

“Continuing to build momentum: trading well ahead of last year, interim dividend planned”

Shipping is a fairly hot sector at the moment. Rates for dry bulk and container shipping are extremely high and we’ve even seen a shipping IPO recently - £TMI.

Braemar is profiting from these tailwinds and has already upgraded guidance once this year:

Today’s update is strong, but the company is only guiding for results to be “modestly ahead” of these upgraded expectations for the six months to 31 August. I think what may be happening today is that the stock is returning to growth after a period of consolidation:

Braemar shares certainly still look potentially cheap, given the confident outlook:

Drilling down into the commentary, all three of the group’s main operating divisions appear to be performing well, albeit largely as expected.

Shipbroking: Braemar has been investing in this business, which historically has generated about 70% of revenue.

Strong demand for dry bulk and container capacity is offsetting weaker demand for oil tankers. The forward order book for this business has risen from $43m to $56m during the half year, suggesting decent visibility for the remainder of the year.

Revenue and profits for the full year from shipbroking are expected to “exceed the previous year and meet current expectations”.

Financial: The Braemar Naves business is said to be benefiting from “resurgent interest in the shipping industry”. This division has closed “several restructuring opportunities and one significant leasing transaction in the container market” during the half year.

Although revenue from such corporate finance work is lumpy, with limited visibility, management says that “current activity levels point to a strong year as a whole”.

Logistics: Braemar is in the process of folding its Cory Brothers freight forwarding business into a larger joint venture with Dutch firm Vertom Agencies. This will create a European port agency business.

Cory Brothers is said to be trading ahead of last year and in line with expectations.

Outlook: Braemar’s half-year results are expected to be well ahead of the same period last year and modestly ahead of current expectations. The board expects to declare an interim dividend this year (the first since 2019) and is confident about future growth prospects.

No further guidance is provided.

My view: I’ve included the divisional review above to show that today’s trading update is not a major upgrade to expectations.

This view is supported by Braemar’s house broker FinnCap, which has left its forecast unchanged today (a new note is available on Research Tree). FinnCap highlights “risk to the upside”, but its analysts do not appear to see enough evidence to justify upgrading their forecasts at this time.

FinnCap is forecasting earnings of 24.1p per share for FY22, which puts Braemar on a forward P/E of 11 after today’s share price gains. Dividend forecasts in Stockopedia suggest a yield of around 2.2%.

I think we’re seeing Braemar shares re-rate as the market gains confidence in the company’s ability to deliver a consistent performance.

It’s worth noting that larger rival Clarkson (LON:CKN) currently trades on 27 times forecast earnings. Braemar has consistently underperformed Clarkson over the years.

Clarkson is starting to look a little expensive to me. But if Braemar can deliver a more consistent performance through the cycle than in the past, then I think the smaller company’s shares could still deliver big gains from here.

Overall, I continue to feel that Braemar could offer real value at current levels.