Small Cap Value Report (Fri 18 Feb 2022) - PODP, CLIG, AEO, MWE

Good morning! It's Jack and Roland here with Friday's SCVR.  Many thanks to Roland for stepping in over the past couple of days, allowing Paul to take a well earned break. He's back on Monday.

Agenda

Jack's section:

Pod Point Group (LON:PODP) - recent IPO providing chargepoints and other services for electric vehicles in the UK. This is obviously a growth market, and Pod’s revenue is expanding at pace. The group has c£46m of cash on the balance sheet as it grabs market share, but losses continue. Some supply chain issues will hit margins in H1 22 too. I see the thematic opportunity, but at what point does the group become self-funding?

Aeorema Communications (LON:AEO) - extremely small micro cap, c£7.4m in size. The pandemic has prompted management to pivot to online conference events and it’s good to see that the group has not just survived Covid, but is now on course for record revenues as a result of actions taken. It could be that the addressable market has increased, and the valuation looks fairly modest, but the stock is extremely illiquid and so is probably not appropriate for a lot of investors out there. Very wide spread.

Roland's section:

City Of London Investment (LON:CLIG) (I hold) - Half-year results from this specialist asset manager. Limited net inflows and mixed market conditions mean that funds under management are broadly flat, but fee margins are stable and profit performance is quite strong. A special dividend looks likely to push the dividend yield to 9% this year. I remain happy to hold.

Mti Wireless Edge (LON:MWE) (I hold) - exchange rate movements mean that costs rose last year. 2021 profits are now expected to be lower than forecast. However, based on the evidence so far, I don’t think this really qualifies as a profit warning. The balance sheet remains strong and the outlook for 2022 is said to be positive. I remain happy to hold ahead of full-year results.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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 are analysing the company fundamentals, not trying to predict market sentiment.

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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Jack’s section

Pod Point Group (LON:PODP)

Share price: 215.2p (+1.89%)

Shares in issue: 153,952,537

Market cap: £331m

This is a recent IPO which has fallen slightly since listing, having raised some £120m and gaining the Green Economy Mark at admission​​. It’s loss-making, but is on a ‘mission to put an electric vehicle chargepoint everywhere you park’. Clearly an area that will see growing demand in the years ahead.

Podpoint formed in 2009 and has since manufactured and sold over 102,000 charging points across the UK and Norway. A network of more than 5,200 EV charging bays has also been established at locations like Tesco and Lidl, with potential to accelerate recurring revenues. Finally, the group installs home charging points for customers of major automotive brands, company workers, and property developers.

I actually had my first experience in a rented electric car recently and had a pretty rough first 20 minutes or so which consisted of me driving around Marble Arch roundabout four or five times while a passenger frantically googled for nearby chargepoints. I wonder if that’s a common experience?

Preliminary results for the year to 31 December 2021

Strong financial and strategic performance with excellent momentum

Highlights:

• Revenue +86% to £61.4m,
• Gross profit +99% to £16.3m, gross margin up from 25% to 27%,
• Adjusted EBITDA of £58k but reported EBITDA loss of £8.1m,
• Loss before tax of -£14.3m, basic and diluted EPS of -13p,
• Closing cash up from £2.9m to £96.1m.

The revenue and gross profit growth is encouraging. Home revenue grew by 98% to £40.3m, Commercial was up 64% to £18m, and Other increased by 108% to £3.2m.

Part of the difference between adjusted and reported EBITDA is £5.7m of IPO and restructuring costs. That doesn’t explain the entire gap though. I’m really curious to see what the capex requirements are for a chargepoint company in growth mode like Podpoint. I assume it is currently quite capital intensive…

It’s certainly been busy this year. The total number of units installed and able to communicate at the year end increased to 137,420 (2020: 77,498) ‘providing an excellent base to expand recurring revenue products’.

Over 66,000 charge points installed and shipped (2020 full year: 35,763) while maintaining outstanding levels of customer service with a 4.3 out of 5 rating on Trust Pilot.

Key OEM contracts won or renewed include Fiat, Jaguar Land Rover, Mercedes and Nissan. There are now over 130 active fleet business accounts with the likes of Coca-Cola, DHL and Royal Mail. Commercial recruits include CBRE, Hermes, and Serco, as well as a contract renewal with Serco.

Owned asset sites increased to 453 with 984 charging points including 73 DC rapid units.

Market share in home charging increased to 18% (2020: 16%) driven by new commercial deals with car manufacturers and operators of business car fleets.

Current trading

Strong start to 2022 with ‘significant volume’ of Home and Commercial orders. Continuing market share growth with January registrations of new Plug in Vehicles increasing to 23,840 a year, up 89% year-on-year and now representing 20% of new vehicles registered.

2021 was a ‘watershed’ year for EV adoption in the UK.

Headline gross margin guidance for the full year is unchanged with some downward pressure expected in H1 on Home percentage margin as we navigate well-publicised component shortages prior to benefitting from unit manufacture cost savings from the on-boarding and production scaling of a second manufacturing partner during 2022.

Balance sheet - £107m of goodwill and intangibles make up the bulk of fixed assets and a notable proportion of the £248.5m of total assets. Total liabilities are small though, £48.6m, so net tangible asset value is £92.8m. Good current ratio, helped by the cash raise.

This could all change depending on how much cash the group burns through as it expands.

Cash flows - net cash from operations was -£2.2m, not as bad as the net loss on the income statement, but helped by some working capital changes. £57m was spent on investing activities though, namely a £50m of short-term investments. It’s quite a busy cash flow statement, with a lot of changes happening as the company floated.

Getting a handle on cash burn going forward will be important as the closing cash balance is £46m, some way below the headline £120m raised at IPO once all the other activity is factored in. Still a decent buffer for now.

£2.6m spend on purchase of tangible assets and £4.6m spend on purchase of intangibles. That’s generally capex. Is it reasonable to assume this is a normal level of spend for such a growing company? If so, that suggests a good few years’ of cash on the balance sheet. But then again, this enterprise might end up being more capital intensive, in which case cash burn and equity dilution would become more of a concern.

Conclusion

Podpoint is helped by structural tailwinds, government initiatives, and a stack of cash post-IPO. It stands to grow revenues quite strongly over the next few years, in my opinion. As for the ultimate profitability and general economics of chargepoints, that requires further investigation.

As does the competitive landscape. This could become a landgrab and well-funded competition might lead to a scenario where all players operate at a loss for longer than expected, for example.

There’s a lot of market data in the prelims. Some of it will be noise from an investment perspective and, ultimately, the company remains loss-making. For all the talk of a growing market opportunity, I would like more detail on the actual economics of the enterprise. I still don’t feel like this is clear to me. The 27% gross margin makes me pause, but perhaps this will improve as the company expands.

The IPO prospectus is more than 200 pages long - I’m sure there’s more detail on the nitty gritty here but I might not have time to find it, unfortunately.

I’m not too surprised to see that Podpoint remains unprofitable. It’s a good growth story, which means it can pitched well to prospective investors, but if anything that makes me slightly warier. For all the EV talk, I need to be comfortable that there is a path to profitability. The large cash balance does help, at least.

I’m reminded of Gfinity (LON:GFIN) , not in terms of business model at all, but more the fact that Gfinity is a serial loss-making company involved in an attractive growth market that has to continually spend a lot of cash in order to build everything up. It all sounds attractive, but the financial reality is consistent cash burn and equity dilution.

Podpoint’s low Quality and Value Ranks are there for a reason:

That would be my concern here, hence why I want to see more detail on the actual company economics rather than how well the EV market is doing. I do suspect profitability could change quite drastically as scale builds, and Podpoint does have net cash on the balance sheet. It's high risk, high reward.

If I was asked to model the company’s prospects right now I’d really struggle. Clearly, it’s in the right place at the right time in a nascent market. Revenue growth is very strong and I do think there’s a lot of potential upside. Will Podpoint be one of the winners? I’m not sure yet.

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Aeorema Communications (LON:AEO)

Share price: 80p (+11.89%)

Shares in issue: 9,238,000

Market cap: £7.4m

This live events agency is so small you wonder why it is listed given the fees incurred. The share price has more than doubled over the past six months or so, so shareholders are doing well but there’s very little liquidity so chances are you’re strapped in for the ride.

The spread is 979bps according to Stocko, and the free float is just 30%. Major shareholders are mostly individuals.

H1 trading update

Aeorema has benefited significantly from a strong performance from its US office, which opened in September 2020. New US clients wins complement the existing multi-national blue-chip client base.

The shift since 2020 into providing virtual online conferences and events has experienced high levels of demand. The provision of consultancy services has further enhanced performance.

Aeorema now expects to report revenues of no less than £4.9m for H1 2022 (H1 2021: £1.67m), exceeding the previously reported revenue expectation of £4.5m for the period as previously announced on 14 December 2021. As a result of this record performance, profits before tax of no less than £235,000 (H1 2021: Loss before tax of £287,676) are anticipated representing the first profitable H1 in a number of years.

The prospects for the second half of 2022 remain favourable and the company is confident that it will continue this trajectory into H2 2022.

Conclusion

The company’s doing well, exceeding expectations, and I’m happy to see management actions taken in 2020 are bearing fruit now. The pandemic must have been a highly stressful period for live events companies, so it really is heartening to see Aeoroma not just survive, but use it as a catalyst to generate record results.

I don’t think the group has ever generated this amount of revenue over a six-month period. Nearly as much as total annual revenue in prior years.

Shifting to virtual online conferences might have expanded the group’s addressable market. So perhaps there’s been a fundamental change in prospects, which could justify further research.

If Aeoroma is getting on for £10m of FY22 revenues with c£1m of net cash on the balance sheet, then the £7.4m market cap does start to look cheap. Directors own a lot of the stock.

It’s too small for the majority of investors, but it’s doing well.

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Roland’s section

City Of London Investment (LON:CLIG)

Share price: 518p (pre-open)

Shares in issue: 50.7m

Market cap: £263m

Half-year results

Disclosure: Roland owns shares of CLIG

Special dividend promises 9% yield for FY21

This specialist asset manager doesn’t go in for snappy results headlines and broker coverage is limited. But City of London Investment Group is consistently one of the highest-yielding stocks on the market. It’s also delivered fairly satisfactory share price returns over time, for patient investors:

The company’s core investment strategy is focused on buying emerging market investment trusts at discounted valuations. However, efforts are underway to diversify internally. Recent expansion through a merger with US firm Karpus has also expanded CLIG’s product range into fixed income.

Today’s half-year results suggest to me that the attractions of the business remain intact, but that some challenges remain around growth.

Financial highlights: My reading of today’s results suggests the numbers show a familiar story for long-time CLIG investors. Profitability and cash generation remain strong, but growth is somewhat limited.

Today’s results cover the six months to 31 December 2021 (CLIG has a 30 June year end).

• Funds under Management (FuM) of $11.1bn (FY21: $11.4bn)
• Net fee income: £29.8m (H1 FY21: £22.6m)
• Pre-tax profit: £13.6m (H1 FY21: £8.8m)
• Interim dividend unchanged at 11p
• Special dividend of 13.5p per share

FuM: Funds under management fell by 2.6% to $11.1bn during the second half of calendar 2021. CLIG says this was due to “mixed conditions across the group’s products” but points out that FuM was still 2% ahead of the comparable figure at the end of 2020.

Net client flows for the half year were negative at -$58.7m, although the company says the trend has improved over “the past several quarters”, with a net inflow of $112.5m during the second quarter (Oct-Dec).

The current situation continues a long run of flat FuM at CLIG, as this chart from today’s half-year report illustrates:

The step up in 2021 reflects the merger with US firm Karpus Investment Management (KIM).

Happily, CLIG continues to split out FuM into funds managed by City of London (CLIM) and those managed by KIM.

CLIM: Funds under management ended the half-year largely unchanged at $7.2bn. However, the company says this reflects opposing performances from its two main strategies:

• Emerging Markets: a 23% fall in Chinese equities caused EM FuM to fall by 11% to $4.8bn
• International: Continued strong inflows despite lacklustre markets saw International FuM climb 14.2% to $2.1bn

Both strategies are said to have recorded “robust outperformance against their respective benchmarks”.

Management are hopeful that as face-to-face meetings resume, CLIM will be able to secure new client inflows. As I’ll discuss below, efforts to diversify may also attract new inflows.

KIM: Funds under management (c60% fixed income) at this US business rose by 1% to $3.9bn over the half year. Interestingly, US SPACS are identified as a $54bn addition to KIM’s investable universe. According to the company, “SPACs can offer a fixed income return profile with lower risk and potential for upside”.

I have to admit that this is outside my understanding, but I’ll be interested to see if further mention of SPACs is made in future results.

Results: CLIG’s profits and fee income jumped higher during the period. Management’s preferred measure of underlying pre-tax profit rose by 38.4% to £15.5m. However, this gain falls to 7.8% when profits are adjusted to reflect the partial contribution by Karpus in the comparative period, when the merger was completed.

At a divisional level, profits from the CLIM business rose by 11% to £8.6m during the period, while KIM’s pre-tax profit was “marginally ahead of the previous period” at £6.9m. The US business has been investing in infrastructure upgrades – hopefully performance will keep pace with CLIM in future periods.

Fee margins: Asset managers’ fee margins have come under pressure in recent years. CLIG has not escaped this. However, the company says that the group’s blended net fee margin remained steady at an average of 0.74%.

Checking back to last year, I see that this figure was 0.74% in FY21 and 0.75% in FY20. So fee margins may have varied across the group’s various strategies, but overall performance seems stable.

Dividends: CLIG says that “the outlook for global equities is far from assured in 2022”, due to inflationary risks and the potential for tighter Central Bank policies. As a result, the company has opted to leave the interim dividend unchanged at 11p per share.

However, CLIG has also declared a special dividend of 13.5p per share, consistent with its policy of returning surplus capital to shareholders.

My sums suggest a total payout of 46.5p per share is likely for the full year, giving the stock an outstanding (and covered) dividend yield of 9%.

Profitability: A key attraction of this business for me is its consistent strong profitability.

My calculations suggest a trailing 12-month operating margin of 43% after today’s results, continuing this very attractive trend.

My view: As a shareholder, today’s results don’t change my view of CLIG. This group is highly profitable but has struggled to attract client inflows in recent years. One reason for this appears to be that some of the group’s core strategies are capacity constrained.

CEO Tom Griffith admits this in today’s report, saying that “capacity limitations in the CEF [closed-end fund] universe of available securities have constrained growth”.

To escape this constraint, CLIG has tried to diversify. The strong inflows reported for its International Equity strategy suggest to me that this approach may be delivering results. The merger with Karpus is another form of diversification, of course.

As a quality dividend investment, my opinion of CLIG remains favourable, a view that’s shared by Stockopedia’s algorithms:

In my opinion, CLIG shares look reasonably valued at current levels as well:

I’m happy to continue holding the stock and wouldn’t be averse to adding to my holding at this valuation, given the group’s strong profitability and history of shareholder returns.

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Mti Wireless Edge (LON:MWE)

Share price: 59p (unch at 09.00)

Shares in issue: 88.5m

Market cap: £52m

Trading update (14/02/22)

Disclosure: Roland owns shares in Mti Wireless Edge (LON:MWE)

It’s a quiet day for news today so I’m circling back to this AIM technology stock, which issued a poorly received trading update on Monday.

“The MTI board expects to report marginally lower than anticipated net profit for the year”

MTI Wireless Edge is an Israeli firm. Its main products are radio antennae for defence clients, and water and irrigation systems for agricultural applications. The group also has a consulting business. Geographically, the company is active in markets including Russia and China, so it’s not without political risk.

If you’re new to the business, this Investor Meet Company presentation provides a good overview.

MTI’s share price has fallen by 15% this week. This suggests to me that investors saw Monday’s trading update as a profit warning. However, management says that the shortfall is due to exchange rate fluctuations, which doesn’t seem so alarming.

I think it’s worth unpicking the detail of this announcement to understand more.

Helpfully, Monday’s update steps through the details of the company’s expected financial performance for 2021, so we’re not left guessing too much. There’s also a brief but positive update on 2022 trading to date.

Introduction: MTI says that 2021 was a successful year, with sales growth and strong cash generation. However, the strength of the Israeli Shekel versus the US dollar during the year means that reported profits will be lower than expected.

Here’s a chart showing the exchange rate in question:

(Source: DailyFX)

This chart shows the ILS/USD rate since 2018. Last year does seem to have seen a sharp rise in the exchange rate.

Revenue: Broker forecasts on Stockopedia suggest that MTI’s revenue will rise by 6.1% to $43.4m in 2021. The company says that 2021 revenues are expected to be in line with market expectations of $43.2m.

Gross profit is expected to rise by 3% to $13.5m, “in line with current market expectations”.

Cash flow from operations for 2021 is expected to be “significantly ahead of current market expectations at approximately $6.5 million”. That’s an increase of 64% versus 2020. Unaudited year-end net cash is expected to be $12.5m (FY20: $9.4m).

This cash performance seems encouraging to me, but I can’t help wondering if this comparison includes some unusually large working capital movements. We’ve seen that across quite a lot of companies, due to the disruption caused by the pandemic.

Operating costs: Much of the group’s revenue is in US dollars, but MTI’s Israeli base means that many operating costs are paid in Israeli Shekel. Staffing costs are said to have risen in Israel, due to the strength of the Shekel against the dollar in 2021.

Operating profit: As a result of increased staffing costs (due to exchange rates), operating profit is expected to have risen by 9% compared to 2020 ($4.1m). This result would be “marginally below current market expectations”.

Pre-tax profit: Pre-tax profit is expected to be “below current market expectations although broadly in line with 2020 levels”. In addition to the higher operating costs mentioned above, MTI says that foreign currency fluctuations have also resulted into higher finance costs when translating cash into the group’s reporting currency of US dollars.

Net profit: After-tax profit is expected to be 6% above the 2020 figure of $3.5m. The higher costs listed above are expected to be partially offset by a lower tax rate.

Dividend: The dividend for the year is expected to be in line with current market expectations. According to Stockopedia, this suggests a payout of 2.8 US cents for 2021, giving a forecast yield of 3.5% at the current share price.

2022 outlook: It’s still early in the year, but CEO Moni Borovitz says that MTI’s orderbook and pipeline of opportunities are currently in line with internal forecasts. The ILS/USD exchange rate has also started to normalise and is said to be above the budgeted rate (in a good way).

My view: For me, there’s not enough here to justify a change of stance. Although the profit shortfall is a little disappointing, it’s not uncommon to see currency losses distort company results.

I’m encouraged by the apparent transparency shown by MTI’s management in Monday’s update. My impression is that this business has been performing well over the last few years. I think the shares probably got ahead of themselves at c.80p last year. But at current levels, I think MTI looks more reasonably valued.

I plan to continue holding my shares, ahead of the full-year results on 7 March. My view of this business remains broadly positive, although as I mentioned earlier, there are some geopolitical risks here in addition to normal investment risks.