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Good morning! It's Jack & Roland here with the SCVR for Thursday.
Agenda -
Jack's section:
Sosandar (LON:SOS) - a quick catch up of results earlier in the week. Trading ahead of expectations and navigating current supply chain pressures well. There's a lot of growth priced into the valuation, but there's a big prize at the end of the road as the company approaches a profitability inflection point.
Belvoir (LON:BLV) - trading ahead of expectations, although the property sales market is expected to normalise next year. Long term growth prospects remain intact and the group pays a useful dividend, backed up by resilient lettings income. A good buy and hold candidate with a proven, steady, and relatively low risk growth strategy.
Bigblu Broadband (LON:BBB) - a period of change here, with the disposal of UK and EU operations followed by the sale of most of its stake in Quickline. Cash returned to shareholders and used to pay down debt. Australasia doing well, Nordic restructuring coming to an end. I’d like to see signs of profitability beyond the adjusted EBITDA level.
Roland's section:
Oxford Metrics (LON:OMG) - a strong set of figures showing a return to 2019 performance at this software business, whose results were hit by lockdowns last year. I like the technology and can see plenty of scope for growth. But I’m concerned by a lack of consistency and long-running losses in the Yotta division.
Uls Technology (LON:ULS) - this conveyancing technology firm appears to be making progress and has plenty of cash to support its growth rollout. However, the business remains loss-making. Success will depend on the quality of the group’s offering and the competitive landscape. Still quite speculative at this stage, in my view, although potentially quite reasonably priced.
Explanatory notes -
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Jack's section
Sosandar (LON:SOS)
Share price: 33.5p (pre-open)
Shares in issue: 221,108,332
Market cap: £77m
A quick word on the Sosandar update earlier this week. This is a widely followed ecommerce stock that looks to have turned a corner over the past year or so. It probably listed a little too early and has since had to raise cash a couple of times from shareholders, but now it appears to be reaching that all-important inflection point.
What’s more, recent trading has been so strong that it’s possible current consensus forecasts are undercooked.
You’re now being asked to pay up for these growth prospects though. Sosandar’s market cap is currently more than £70m on forecast FY22 revenue of £24.4m (which will most likely be beaten), rising to £38.5m in FY23.
If it’s the real deal, then the prize at the end of the road could be a multi-billion pound market cap. Easy to say that, of course, and much harder to execute, but the team’s doing well at the minute.
Looking ahead, whilst we are cognisant of ongoing supply chain challenges, we continue to mitigate the impact and our long-term growth strategy remains unchanged. The Company is trading ahead of market expectations for the full year and we look forward to a successful second half and beyond.
Highlights:
- Revenue +184% to £12.2m,
- Gross profit +207% to £6.9m, gross margin up from 52.3% to 56.5%
- Net cash of £7.4m following a fundraise and significant investment in inventory ‘in order to meet growing demand from all customers including third parties’.
KPIs are improving: active customers up 41% to 191k, conversion rate up from 2.58% to 3.91%, average order frequency up 19% to 2.21x per annum, and average order values maintained at £86. Cost per acquisition is currently half that of pre-pandemic levels, which is encouraging.
The strong trading at third parties is probably the most notable development here. These are top tier names - Marks And Spencer (LON:MKS) , Next (LON:NXT) , and John Lewis. Sosandar’s products are selling well in all of them.
As intended, the funds raised through the equity placing in May 2021 have enabled us to further increase our ability to meet the proven and growing demand from our third-party partners. We began to accelerate the increase in inventory levels during September with autumn revenue stepping up substantially. We intend to continue with this strategy over the second half of the financial year.
The positive trajectory continues: revenue for 1 October to 29 November rose by 120% year-on-year, reflecting consecutive record months. EBITDA positive in both October and November, ‘demonstrating the group's trajectory towards annual profitability’.
Conclusion
Management has its eyes on the prize here:
We believe Sosandar is well on the road to becoming a substantial business and a sustained success.
There’s a lot of growth priced into the current valuation, so it’s all about where you think the company is headed. The growth rates are eye-catching but they have to be at these levels. In order to push the shares higher in the short term, I would speculate that Sosandar has to not only beat consensus forecasts, but also a couple of ‘whisper numbers’ likely doing the rounds that are factoring in further upgrades.
That matters less if you believe in the long term prospects, and I know a lot of private investors do, some of whom have been following this company and talking to management for years now.
Hopefully we are now beyond the days of equity dilution as growth accelerates and the group reaches EBITDA profitability. Shares can rerate further at such inflection points.
It looks like the StockRanks have recently reached a step change in their appraisal of the business.
Belvoir (LON:BLV)
Share price: 239p (pre-open)
Shares in issue: 37,292,113
Market cap: £89.1m
This is one of the UK’s largest franchised property groups, with six brands and a network of 439 offices. Belvoir focuses on residential lettings, property sales, and property-related financial services. The latter is a differentiator as the group has stolen a march on competition in this lucrative area and its Brook division is the largest appointed representative of the Mortgage Advice Bureau (holdings) (LON:MAB1) .
It’s a high quality business, with double digit ROCE and profit margins, good cash flows, and double digit five-year growth CAGRs.
Fortunes are tied to the property market to a degree, but residential lettings provide a more stable income base, and debt levels are manageable, so it’s resilient despite cyclical exposure.
The shares have been inching downwards recently, perhaps on fears that we are at something of a market peak. But these companies were not given much of a chance at the onset of lockdowns and they have since prospered, so I would not be too quick to dismiss the prospects.
Belvoir currently qualifies for the Neglected Firms screen, which is a surprise given its strong track record of profitable growth and dividends.
Trading update for the year to 31 December 2021
The Board is delighted to report that trading in the ten months to the end of October 2021 was ahead of management's expectations, with both of the Group's divisions, property and financial services, achieving year-on-year growth.
The property division achieved gross profit growth of 29% and accounts for 77% of group gross profit. Income from lettings was 21% up year-on-year resulting from ‘unprecedented demand for rental properties with rents increasing in all areas of the UK’, as well as the acquisition of Nicholas Humphreys (a student lettings network).
Meanwhile, income from sales was up 65%, mainly a result of the strongest market for property transactions seen since 2007.
The financial services division (18% of group gross profit) continued its strong growth with gross profit up by 39%.
Belvoir's network of mortgage advisers increased by 21% from 202 at the start of the year to 245 by the end of October, driven by both organic recruitment and the acquisition of Nottingham Mortgage Services, the mortgage arm of The Nottingham Building Society.
The Group remained focused on meeting the demand for house purchase mortgages for much of 2021, and now, given signs that interest rates might rise, are benefitting from a busy period for remortgages. The ability of our advisers to switch between different product sales and our substantial client base provide a very resilient and agile business model for our financial services division.
The group's operating activities continue to be highly cash generative underpinned by Belvoir's significant recurring lettings income stream. Net debt is down to £2.7m (31 December 2020: £3.7m) despite having deployed £4.0m of cash in March to acquire the Nicholas Humphreys network and £0.6m in July to acquire Nottingham Mortgage Services.
Outlook:
Current substantial pipelines of house sales and written mortgages support our end of year forecasts. Consequently, the Board expects that the performance for the full year, in terms of profit before tax, will be ahead of management's expectations for 2021 and substantially ahead of 2020.
Conclusion
A good long term hold candidate with solid growth and income prospects. There’s always the risk of a market crash, but these companies habitually maintain strong balance sheets and have resilient cash flows, so any serious decline in share price can be treated as an averaging down opportunity depending on your time horizon.
The past year has been an exceptionally strong sales market, due in part to the extension of the stamp duty holiday. This came to an end in September and so the market will likely normalise in 2022. Belvoir itself has ‘seen a predictable slowing in the number of new instructions’. But the fact remains this is a good company outperforming expectations, on a forecast PER of 14.7x (10.4x trailing twelve month free cash flow) and paying out a forecast dividend yield of 3.6%.
Forecast earnings per share are set to reduce slightly year-on-year.
Still, the valuation remains attractive in my view once you consider the group’s relatively low risk, established strategy and its potential to continue to grow Lettings and Financial Services-based income.
Bigblu Broadband (LON:BBB)
Share price: 72.5p (+4.77%)
Shares in issue: 58,326,120
Market cap: £42.3m
Speaking of inflection points, one is forecast for Bigblu, albeit profit growth beyond FY21 looks fairly muted.
This is a provider of alternative super-fast and ultra-fast broadband services. It looks like a frustrating hold so far for investors, though, who have had to fund revenue growth in these loss-making years.
The two StockRank upgrades so far in 2021 have been driven by improving Quality and Momentum scores.
On 10th June 2021 it disposed of Quickline (QCL) for £48.6m, a return of up to 5.8x the cost of the group’s investment over a three-year period, with capital returned to shareholders. This is a positive, which differentiates it from other serial loss-makers that often show a chronic desire to consume, not return, capital.
A fundamental responsibility of the Company is to deliver shareholder value, and, in this regard, the Board were delighted to return c.£25.9 million in cash to shareholders, equivalent to 45 pence per share, in October 2021. In addition, the Company was also able to use the cash received following the Disposal to repay its debt facilities in their entirety and secured a new RCF, with our lead banking partner Santander.
The focus now is on the group’s two international businesses: SkyMesh, an Australian satellite broadband provider that targets customers in rural areas outside of the fibre footprint; and its Nordic satellite and FWA broadband business that has been restructured. Bigblu retains a small stake in Quickline as well.
During the period, BBB delivered growth across all four of the Board's key metrics: customer base, revenue, EBITDA and free cash flow. As a result, the Directors remain confident in the future growth prospects of the business, and the Board will continue its focus on ensuring it can maximise the inherent value within the Company and deliver further shareholder returns.
- Customer base at end November was c60k (FY20 57.2k), with strong organic growth in customer numbers in Australia offset by ongoing pressure on customer numbers in the Nordics,
- Revenues increased by c 15% to c.£27m,
- Adjusted EBITDA improved by c10% to c.£4.5m,
- Net cash at 30 November 2021 of c.£5.0m
The group notes good growth ‘with significant opportunity to further accelerate customer numbers, revenue, EBITDA, and free cash flow’.
SkyMesh has become the clear market leader in Australia and has been named Best Satellite NBN Provider for three years in a row to 2021. The group has more than 50% of the market share of net new satellites.
Having assessed the opportunity in this region, we continue to believe that, whilst the organic growth remains highly impressive, this growth could be accelerated by certain partnerships or acquisitions in the wider Australasia region. As announced earlier in the year, SkyMesh has signed an agreement with Kacific to provide services into New Zealand and will sign its first customers before the end of 2021.
Bigblu has acquired the customers and assets of Clear Networks in Australia. The purchase price was AUS$ 2.4m (£1.3m) with an additional possible $0.5m earn out. Pro forma customers, revenue and adjusted EBITDA for Clear for the period to July 2021 were c2.2k, AUS$3.2m and AUS$0.5m respectively, so 0.75x sales and 4.8x EBITDA (excluding the earn out).
Bigblu Norge's infrastructure upgrade program has been completed and includes the demounting of the most unprofitable masts.
Bigblu has been focused on improving the identified infrastructure (approximately 55 towers) to now offers speeds of up to 100 Mbps. As part of this process the company demounted approximately 100 loss making sites and ended the period on c.9k customers.
The Nordic business has also recently entered into a distribution agreement with Telenor to provide next generation superfast broadband via wireless 5G and has successfully delivered its first customers in Norway on this service.
Conclusion
The Quickline disposal could be a good catalyst, providing an opportunity to both return £25.9m of cash to shareholders and pay down £8.4m of debt just as the group approaches consistent profitability. That said, free cash flow is so far not keeping pace, with ongoing high levels of capital expenditure.
That could mean the company is building something really substantial (if growth capex), or it could mean that its operations are just very costly to run (if maintenance capex). This is particularly relevant since Bigblu appears fond of reporting adjusted EBITDA. If maintenance capex is substantial then I’m not so sure we should be skipping past depreciation and amortisation.
This one requires more work into the actual business model and economics. I don’t have a view at present, but it sounds like the company has been through some serious changes over the past 18 months or so, selling its UK and Europe satellite operations first and then disposing of most of its stake in Quickline.
Skymesh looks like it has built up a good position in Australia, but the Scandinavian operations are being restructured. The former sounds like the more promising opportunity. Such scattered geographic markets is slightly puzzling, although operations have been simplified after the sale of its UK and EU operations.
I remain neutral for now as more time is needed to get to grips with the changing investment case, and the company has struggled to generate profits beyond its favoured ‘adjusted EBITDA’ measure, so I’m still unsure on the economics here.
Roland’s section
Oxford Metrics (LON:OMG)
Share price: 126p (pre-open)
Shares in issue: 127.0m
Market cap: £154m
“Positive outlook with both divisions experiencing a strong start in the new financial year”
Oxford Metrics has two divisions, Yotta and Vicon.
Vicon uses camera-based systems to capture human motion and integrate with the digital world. Customers include all 10 of the world’s largest gaming companies, movie studios and the healthcare sector.
Yotta provides infrastructure management systems - for example OMG software is said to manage around half the UK’s street lights.
Today’s results appear to be slightly ahead of consensus forecasts. They show improved profitability and substantial top-line growth compared to 2020, albeit adjusted profit is still lower than in 2019. Management commentary is bullish on the outlook for the year ahead, suggesting a return to growth in key markets.
This stock has been a multibagger over the last five years.
But on 43x 2022 forecast earnings, OMG shares are already priced for growth. That’s reflected in Stockopedia’s High Flyer designation, too. My goal here is to see if today’s results can justify expectations for further gains.
Financial highlights: Revenue from the entertainment sector was hit by lockdown last year but has recovered strongly. Today’s results cover the year to 30 September 2021. For a more meaningful comparison, I’ve compared these with 2019 results:
- Revenue: £35.6m (unchanged vs FY19)
- Annual recurring revenue: £7.4m (+20% vs FY19)
- Adjusted pre-tax profit: £4.8m (-12% vs FY19)
- Adjusted earnings per share: 3.59p (-9% vs FY19)
- Operating cashflow: £14.5m (+88% vs FY19)
- Net cash: £23m (+67% vs FY19)
I’m encouraged by the increase in recurring revenue, which I think has been driven by an increase in the use of Yotta software to help manage remote working environments.
This aside, trading levels seem to have returned broadly to levels seen in FY19. We now need to see a return to genuine growth.
Cashflow statement: I’m pleased to see that cash generation has remained strong. Although this was aided by some favourable working capital movements, I don’t see anything to be concerned about here. This is clearly a cash-generative business, something that’s apparent from the StockReport:
The increased dividend looks affordable to me.
Balance sheet: OMG’s net cash position equates to more than five years’ capex, based on last year’s cash outflows of £4.2m. The company’s cash reserves comfortably cover all of its near-term liabilities, so I don’t see anything to be concerned about here.
Profitability - a story of two halves? What interests me more is understanding the profitability of this business. I’ve some concerns here, as I’ll explain.
Starting at the top level, the quality metrics shown on the StockReport are acceptable but do not seem that exciting to me, for a growing software business:
One potential concern is that operating margins seems to have trended lower since 2015:
Today’s results show a group operating margin of 9.3% and return on capital employed (ROCE) of 9.1% - both are slightly ahead of the TTM figures. That’s consistent with improving trading in H2 FY21.
If I strip out goodwill and intangible assets (from acquisitions), then I get a return on capital employed of 14.1%. That’s an approximation of the ROCE that would have been generated if the company’s assets had all been developed in-house. It’s better, but still not that exciting for a tech business, in my view.
However, drilling down into the results reveals a big difference in scale and profitability between Vicon and Yotta. I think this may go some way to explain the group’s lacklustre profitability.
Vicon generated a pre-tax profit margin of 12.7% last year, or 24.6% on an adjusted basis. This division also accounted for around 75% of revenue.
Yotta has reported a pre-tax loss every year since at least 2018 (the earliest I checked). Even using the more favourable adjusted pre-tax profit figure, Yotta only generated a margin of 9.9% last year. Yotta’s revenue has also only grown by 10% since FY18.
My view: I agree with management’s view that the group’s technology is likely to have an ever-increasing range of applications. One example is the rapid growth in tele-healthcare during the pandemic. Another is the increasing prevalence of augmented reality applications.
The company says that while it lacks the scale to compete in all relevant markets, its strategy will be to place an increased focus on core markets, while broadening its reach by licensing its intellectual property to other organisations.
That makes sense to me and could drive steady growth in recurring revenues.
However, I’m concerned about the Yotta business. Revenue has only grown by 10% in four years and the division has been unprofitable throughout this period.
This performance is placing a drag on group profitability. I wonder if the Vicon business would be more valuable and faster-growing as a standalone operation.
I’d want to do more research to understand the pathway to profitability for Yotta if I was a shareholder.
My other concern is valuation. Broker forecasts suggest margins will improve over the next couple of years, driving double-digit earnings growth. Even so, I’d suggest this outlook is already baked into OMG’s valuation:
While I think this is an interesting business with significant potential, I feel the shares are probably up with events at the moment. For now, I intend to maintain a watching brief.
Uls Technology (LON:ULS)
Share price: 70.8p (-2.4% at 09:05)
Shares in issue: 64.9m
Market cap: £46m
This conveyancing software company is a new one for me. It has three main divisions. The main business is eConveyancer. This is a conveyancing comparison service that allows customers to get conveyancing quotations from ULS’s partner solicitors.
Alongside this, ULS runs DigitalMove, which is a digital platform for managing the conveyancing process. The group also has Legal Eye, a risk and compliance advice business.
The sale of the Conveyancing Alliance Limited (CAL) business for £26.4m last year has left ULS with plenty of cash, but no profits. The challenge for CEO Jesper With-Fogstrup, who joined at the start of 2021, is to return the group to growth and profitability by pursuing a digital strategy.
How is he doing? Today’s results suggest a mixed picture, in my view:
- Revenue: +48% to £10.2m
- Gross margin: 40% (H1 2020: 38.8%)
- Underlying pre-tax loss: £(1.5m) H1 2020: £(0.64m)
- Cash balance of £23.1m as of 30 September. No debt.
Cash flow: Cash burn during the first half of the year was just under £1m. At this rate, ULS should be able to operate for the foreseeable future without running out of cash. That’s good, as it means the company should be able to invest in growth without constantly having to dilute shareholders to stay in business.
e-Conveyancer: The sale of CAL has led ULS to refocus its efforts on e-Conveyancer, which is now the group’s main business. This service is typically used by mortgage brokers and lenders to find conveyancing deals for borrowers, although there’s also a B2C offering.
e-Conveyancer has seen a 10% increase in the number of active introducers using the platform over the last 12 months, resulting in 28,866 conveyancing instructions.
Since its launch in 2003, ULS says this service has helped 835k consumers buy, sell or refinance their home.
To put these numbers in context, ONS stats show that there were 674,263 property sales in England alone during the year to 31 March 2021. So e-Conveyancer still has a small share of the market, with plenty of room for growth.
Management is now focused on broadening the reach of this service, through both B2B and B2C channels.
DigitalMove: This is a newer service that provides a digital platform to track the conveyancing process. ULS says 90% of e-Conveyancer cases are now on DigitalMove, so the focus has turned to attracting a broader range of users. This is expected to improve margins.
One big hope is a pilot offer for estate agents. I can see this could be a growth opportunity, although I’d want to do some research into existing competition before extrapolating too far. I can imagine that Rightmove, among others, might be targeting this territory.
So far, ULS says that DigitalMove has handled 60,000 instructions, achieving significant time savings for customers.
Outlook: Mr With-Fogstrup’s outlook commentary includes a lot of bullish remarks about the UK housing market, but very little concrete guidance on the outlook for the business.
Although I agree that the macro environment has been and remains supportive, this won’t necessarily translate into growth for ULS.
My view: As a potential investor, I’d want to do more research to understand the quality of ULS’s technology and the competitive landscape.
For now, the group’s financial position looks bulletproof to me, giving management a clear runway to invest and deliver growth.
In terms of valuation, we don’t have much to go on here. Assuming a similar revenue growth rate during the second half of this year, then we could see full-year revenue of c.£25m. With £23m of cash on the balance sheet, the current market cap of £46m doesn’t seem too excessive by current market standards.
Only one broker forecast is shown on Stockopedia, suggesting revenue of £28m and adjusted earnings of 4.95p for FY22. However, this seems quite optimistic to me. I have a feeling that it’s an outdated forecast from before the CAL sale.
I’ve not been able to find an updated note for ULS on Research Tree (house broker is Numis).
On balance, I think there could be an interesting story at ULS. But I’d want to do more research before taking any position.
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