Small Cap Value Report (Tue 22 Feb 2022) - BKS, SLP, SPR, SYS1, BLTG, ANG

Good morning, it's Paul & Jack here with you for Tuesday's SCVR.

Agenda - 

Paul’s Section:

Ukraine - the situation in Ukraine is very much dominating the headlines at the moment. A recent article from John Authers provided a table showing that this type of crisis usually creates a short term spike down in markets, which tends to be quite quickly recovered. Personally I can’t see any reason for a protracted bear market over this current crisis, because the West has already indicated we’re not prepared to fight over the Ukraine, and Russia doesn’t care about sanctions (which incidentally don’t work, but primarily fulfill the need to be seen to be doing something).

However much disgust & anger there is towards Putin, the bottom line is that very little is likely to actually happen in response to his actions. Therefore the stock market could quickly forget about problems in the Ukraine - just like it did when Russia annexed Crimea a few years ago. Anyway, we’ll see. Inflation & interest rates seem bigger issues for the market, in my opinion, right now.

(EDIT: please note I am only discussing the impact on stock markets here, not starting a wider debate about Russia/Putin/Ukraine)

Beeks Financial Cloud (LON:BKS) (I hold) - announces its third large contract win this month. Increased revenues are being recycled into higher costs, to drive more growth. Looks a very exciting growth share to me, and a top pick for 2022 and beyond, in my view. Tricky to value at this stage, but organic growth this strong is extremely rare. Bearish market conditions mean the very positive newsflow has been ignored - this looks a clear buying opportunity to me. 

System1 (LON:SYS1) - a profit warning coming quite soon after an in line update on 9 Feb 2022 (accompanied by a curious downgrade in broker forecast). The cash pile is almost a third of the market cap. Possibly interesting as a punt?

Angling Direct (LON:ANG) - a year end (FY 1/2022) trading update, which reassures on several fronts - in line with expectations, and with a reassuringly large cash pile. The main drawback is broker forecast for earnings to drop in FY 1/2023, so I think it would need ahead of expectations updates to drive share price growth. Maybe there could be better bargains elsewhere, given bearish market conditions for small caps?

Jack's section:

Sylvania Platinum (LON:SLP) - I hold - meeting with management covering H1 performance, growth projects, basket prices, and future capital expenditure. Notes below.

Springfield Properties (LON:SPR) - is confident of meeting FY expectations, with good visibility heading into H2. This is Scotland’s leading housebuilder, which gives it a strong market position but also some nuances to consider compared to other housebuilders. Margins are lower than some peers, and the balance sheet is not stacked with cash as with some others, but operationally the group is doing well and the family ownership is a potential plus.

Blancco Technology (LON:BLTG) - revenue up 13% and adjusted operating profit up 36%, but there’s a slowdown in Mobile revenue. Meanwhile, operating margins are expected to reduce due to wage and travel costs. The valuation remains high even after a slight derating recently.

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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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Paul's Section

Beeks Financial Cloud (LON:BKS) (I hold)

159p (pre market open) - mkt cap £90m

$2m Contract Win

This is the third RNS in Feb 2022 alone, concerning significant contract wins -

22 Feb 2022: $2.0m proximity cloud contract win
8 Feb 2022: £2.5m contract extension
2 Feb 2022: $2.2m contract win, and trading update (revenues FY 6/2022 ahead of expectations)
27 Sept 2021: FY 6/2022 revenues ahead of expectations
10 Aug 2021: Proximity cloud product launched.

I think that newsflow demonstrates that something very significant is going on at Beeks, and accordingly I’m growing increasingly positive on the shares - which in normal market conditions would be soaring. Hence I think there’s a buying opportunity here - note (below) how the share price has not moved that much overall since proximity cloud was launched in Aug 2021, despite it clearly being a resounding success and causing significant upgrades to forecast revenues -

The value of this contract means that the Board anticipates revenue for the full year to be slightly ahead of the recently upwardly revised expectations, with the additional profits to be further invested into the offering in order to support the strong pipeline of opportunities ahead.

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My opinion - the organic growth being achieved at BKS is accelerating, with 3 big contract wins announced this month alone. Bearish market conditions in small caps means that this acceleration in organic growth has been ignored by the market.

I think there’s a very interesting buying opportunity here - the fundamentals are improving considerably, but the price hasn’t moved - which is ideal for buyers of this share.

Additional revenues are being recycled into further growth spending, which might put off some investors. Personally I see it the opposite way - when you have an exceptional service that is winning big contract wins (recurring revenues), then focus on driving that growth as hard as you can. This could be a much bigger business in a few years’ time, generating big profits, if this rapid growth continues.

Hence I see BKS as probably the most interesting growth share in the UK small caps market right now.

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System1 (LON:SYS1)

225p (down c.40% at 09:25) - mkt cap £28m

To begin with, I should add that the quoted spread for this share is very wide, so the real price is usually somewhere within that spread - which you can find out by putting a dummy trade into any online dealing platform. Also, the price moves a lot, on a few small trades, so again the market price is not necessarily reflecting reality.

Given the lack of liquidity, I’ll keep this section brief.

This share had been unusual, in holding up well during the current bear market in small caps, but that’s unravelled in one fell swoop today.

Trading Update

System1 Group, the marketing decision-making platform, issues the following update on trading for the year ending 31 March 2022.

“Satisfactory performance” in the 9 months to end Dec 2021.

Q4 revenues have fallen short by £1m

…due to a sudden and unanticipated reduction in the forecast for bespoke consultancy project sales in the US.

Full year profit now expected to be £1m short of expectations (not stated what expectations were/are).

“Rapid action” (unspecified) being taken to address this problem.

Claims to be “well into its transition from a marketing agency to a decision-making platform.”

Cash looks healthy, with £9m net cash at end Jan 2022.

Broker update - many thanks to Canaccord, which has today reduced forecast PBT from £1.8m to £0.8m for FY 3/2022. Painful, but not a disaster, at least it’s still profitable, and has a big cash pile relative to the market cap.

My opinion - as mentioned last time we looked at this company here on 9 Feb 2022, it’s a tricky company to value, and we didn’t see value in it at 375p per share. Particularly as the broker slipped through a forecast downgrade, despite an in line update, which does now look a tad awkward.

If you accept that it doesn’t have great visibility, and performance is erratic, then the much reduced £28m market cap after today’s plunge makes the share more attractive to me as a value investor. Particularly as the net cash pile is £9m, almost a third of the market cap.

The big problem is that I don’t know whether its data analytics business is likely to be a success or not, because it’s too early to tell.

Overall though, it could be worth a small punt, for the risk-tolerant, given the protection provided by the cash pile, and management having plenty of skin in the game.

A key thing to research, is what the data analytics service actually does, and who it is competing against? That’s ultimately what is likely to drive the long-term share price.

I’m a little worried about possible restructuring costs, as it seems to be talking about the traditional market research as being legacy business, which implies running it down possibly (which could have costs from letting staff go, closing offices, etc).

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Angling Direct (LON:ANG)

56p (down c.1%, at 10:51) - mkt cap £43m

Full Year Trading Update

Angling Direct plc (AIM: ANG), the leading omni-channel specialist fishing tackle and equipment retailer, provides the following update in relation to trading for the financial year ended 31 January 2022 ("FY22"), ahead of announcing its Final Results on 11 May 2022.

Performance is in line with expectations, with a helpful footnote provided -

... the Board expects to report pre IFRS-16 EBITDA of no less than £5.0m for FY22, in line with market expectations*, representing a significant improvement with growth of over 25% on the prior year.

*Angling Direct believes that current market expectations (i) for the year ended 31 January 2022 are revenue of £72.5 million and pre-IFRS 16 EBITDA of £5.0 million; and (ii) for the year ending 31 January 2023 are revenue of £82.0 million and pre-IFRS 16 EBITDA of £4.3 million.

Supply chain -

Management has continued to invest in stock to both de-risk supply chain uncertainties and ensure robust stock levels ahead of the 2022 fishing season, as well as to satisfy its impending European fulfilment capability…

Cash -

The strong trading performance and associated cash conversion has mitigated these working capital investments and this has led to a 10.7% improvement in the cash position as at 31 January 2022 to £16.6m (31 January 2021: £15.0m).

Brexit - has impacted online sales into Europe (down 39%, vs UK up 3%), but this is being fixed with the imminent opening of a European distribution centre. This reminds me of similar commentary from Gear4music Holdings (LON:G4M) (I hold). So as a general theme, there’s no doubt that Brexit has impeded sales & delivery for online retailers.

The solution is having distribution facilities (owned, or outsourced) within the EU, so this looks like a fixable problem for companies large enough to justify a European distribution facility.

Cyber incident - this reassures, so it looks like we can stop worrying about this episode-

As previously disclosed, whilst the cyber incident that occurred in November 2021 forced the cessation of online operations for seven days, the Company's stores remained trading throughout. The Company has since provided all of the required information to the Information Commissioner's Office and they have closed their investigation with no action taken. The Company continues to pursue residual claims with its insurers in relation to the disruption caused by the cyber-attack and will provide further updates as appropriate.

Broker update - many thanks to Singers, for providing an update note today.

The £5.0m EBITDA guidance translates into £3.5m Profit Before Tax (PBT).

Coincidentally, that is 3.5p EPS, so a PER of 16.0 - however bear in mind that there’s also a material cash pile, so the cash-adjusted PER would be lower than 16.

Forecast for FY 1/2023 is a reduction in EPS to 2.6p - presumably due to business rates relief ending? That raises the PER to 21.5, so it’s difficult to see much upside on the share price unless performance can exceed expectations for FY 1/2023.

My opinion - this looks OK, nothing particularly exciting. At least I haven't found anything wrong with it.

I do like the cash pile, which is almost 40% of the market cap. If you adjust the valuation for that, it looks a lot more interesting.

In normal markets, I could be tempted to have a little punt on ANG. However, right now there are probably better value opportunities elsewhere.

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Jack's section

Sylvania Platinum (LON:SLP)

(I hold)

Meeting with management

Following on from yesterday’s trading update, I had the opportunity to catch up with Sylvania CEO Jaco Prinsloo, specifically regarding the group’s growth prospects going forward.

Summary

Prices are down but operationally the group has done well and the team has a good handle on the two main issues: Lesedi disruption and water shortages, and lower PGM feed grades and run of mine. The result was lower PGM production but confident of an increase in H2, which would result in FY production of 66-68oz for the year.

Samancor - good visibility on the host mine, more about the grades. Ferrochrome has increased which means all production must be up. They have to look at producing more from their own operations, and SLP feels it has quite good line of sight here, hence the H2 guidance.

Strong dependence on basket price re financials. Has been a c30% pullback compared to last CY (when prices spiked)

Still solid cash generation, enabled windfall divi - 2.25p vs. 3.5p

Growth

Has been split out into a couple of areas.

1. Existing opportunities are R&D and process optimisation. This is how the group has increased its ounce profile considerably since 2013/14 with initiatives such as Project Echo.

The two milling flotation projects (MF2) in Lesedi and Tweefontein will come online in March and later in the calendar year respectively. These will start contributing to higher levels of production, potentially up to another 10k ounces in time.

3rd party material dump feed could lead to better resources, and there are short term opportunities here. A decision must be made on whether to displace lower grade existing material with higher grade from new 3Ps. Between 10-20k ounces could be added this way over the next 18mths, with SLP acting as the mine’s PGM partner.

The infrastructure would look similar to existing facilities, very familiar, so lower execution risk. SLP would contribute capital to build those facilities (tailings etc) to partner with host mines and share in revenue.

Sylvania does the most volume in terms of PGMs, then there is Jubilee Metals (LON:JLP) which is more diversified (with copper dumps in Zambia), and Glencore has decided to do it in house. Also Tharisa (LON:THS) , although its operations are slightly different.

Some other chrome miners also want to bring retreatment in house, but this takes time to set up and there is an opportunity cost. Others would rather partner with SLP so they can more immediately profit from PGM prices rather than spend 2-3yrs optimising sites and losing out on some of the ‘super cycle’.

Interestingly, the current mine arrangements result in SLP keeping all the PGM product but miners get chrome back for free; more recently they want to share in both metals.

2. Exploration projects - how to extract value here in the longer term.

Volspruit & Northern Limb projects are open-cast mining that SLP owns mining rights on. Optimisation studies etc. yet to conclude. SLP is focused on more optimisation work in order to better define the projects and reduce the exploration risk.

There are high overhead costs in smelting and refining - they would much rather optimise and mine less at a higher grade.

Volspruit - should be able to make a formal decision in the next 6-9m. Geological results on both in 6mths. Drilling density and other factors mean Northern Limb could be later than Volspruit.

Potential to build PGM oz significantly here, but needs to decide if SLP wants to go it alone. Same kind of tech but would be larger. Depends on the balance of risk and capital required.

Longer term - life of operations has at points been a question mark for shareholders. Management understands this, as they don’t publish resources so it’s hard to gauge. There is plenty going on though. 3P projects will bring reserve statements in excess of ten years and we should be getting updates on both in the next year.

Basket price - talk of a ‘super cycle’ from mgmt raises the question of commodity prices, although SLP has gone on record before as preferring to leave forecasts to others. Mgmt did make several points here though, and more can be found in the presentation slides (pg. 28).

• Fundamentals indicate Rhodium and Palladium remain in deficit and this is forecast to continue for the next 3-5yrs
• The recent pullback in basket price has been caused by computer chip shortages leading to lower new car production. Anglo Platinum smelter failures also led it to release significant stock piles into the market
• Vehicle sales are beginning to pick up and Anglo stock piles have been largely depleted
• The general view is robust demand in the medium term
• Platinum is currently in surplus but forecast to be in deficit over the next 5Y due to increasing demand from the hydrogen economy (platinum is used as a hydrogen catalyst, and it can also be used as a substitute for palladium)

Capex

SLP holds a reasonable amount of cash to cover working capital; around $10m for WC it keeps for this, then existing project capital is another $20m, then keep about $20-30m for upcoming projects - so around $50-60m total is committed, with the remainder spare for new opportunities.

Exploration projects - will diversify away from rhodium but higher platinum. Some earlier published resource statements also show significant nickel and copper components.

Projects are technically achievable, but partnering with existing mines might improve the economics. They would want to maintain a stable dividend structure going fwd. Use debt? Bring in partner? Spin out as separate vehicle? All questions to be answered as the projects progress.

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Springfield Properties (LON:SPR)

Share price: 148.5p

Shares in issue: 118,296,888

Market cap: £175.7m

Interim results for the six months to 30 November 2021

Highlights:

• Revenue down from £94.4m to £87.3m,
• Gross margin down from 19.6% to 18.5%,
• Operating profit down from £9.3m to £6.7m,
• Profit before tax down from £8.6m to £6.2m,
• Basic earnings per share down from 7.07p to 4.93p,
• Interim dividend per share up from 1.3p to 1.5p.

Tough comps due to H1 21 additional sales from completions rolled over due to Covid.

Private housing revenue is down considerably, from £71.9m to £47.3m. 197 private homes were completed, down from 299, and more in line with seasonal phasing of completions across the financial year. The order book is at record levels heading into H2 and eight new private developments commenced completions post period.

Affordable housing revenue was up from £18.3m to £31.7m. 204 affordable homes completed (H1 2021: 126) as a result of the group’s ‘substantial’ contracted order book here. Springfield is on track to deliver a record year in affordable housing and revenue is expected to be up c35%.

Contract housing revenue rose from £3.8m to £7.5m. This is where Springfield provides development services to third party private organisations. 58 homes were delivered, up from 18.

The group says it has managed cost and supply chain pressures, maintaining gross margins after accounting for the impact of regional and housing mix in private and affordable housing.

Planning approval was received for 240 homes during the period and the proportion of land bank with planning permission was 51.6% (31 May 2021: 52.4%). Post period, it submitted planning application for a new, large development of up to 1,000 homes in Edinburgh commuter belt.

The total land bank stands at 15,308 plots, up from 15,281 on 31 May 2021, with Gross Development Value ("GDV") of £3.1bn (31 May 2021: £3.1bn).

Springfield also acquired Tulloch Homes after period end. This is an Inverness-based housebuilder focused on building high-quality private housing in the Scottish Highlands with a GDV of £375.4m. The move should ‘accelerate growth, enhance earnings and strengthen the Company's foothold in an area of high demand’.

Conclusion

This looks like a fairly robust performance after accounting for the exceptional comps, with high demand across the business and a total order book at record levels. Customer satisfaction remains high, and the group has managed cost pressures.

Springfield is confident on its H2 prospects and meeting FY expectations due to ‘homes completed, reserved and missived, and our highest ever revenue in affordable housing, giving us significant visibility over our revenue forecasts’. Meanwhile, the acquisition of Tulloch Homes provides further scope for growth and enhances its foothold in the Highlands.

This is Scotland’s leading housebuilder, and demand here continues to outstrip supply. House price inflation in Scotland was 11.4% in the year to November 2021, and the increase in house prices is largely offsetting the industry-wide increases in material costs. I suppose Scottish independence could be a risk to consider.

It looks solid to me, although housebuilders are obviously cyclical, so that’s just an issue that won’t go away. The current multiples seem to suggest markets remain skeptical but I think it could potentially be good value, with the caveat that there are some areas to investigate.

Its focus on the Scottish market is both an opportunity and a risk. The housing market is cyclical. Springfield margins seem to lag some of its peers, who also have higher cash buffers.

That said, there are positive signs too. The free float is only 53% or so but this is due to the fact that the founding Adams family retains a significant holding, which is a positive to me, and helps to differentiate it from some of the other housebuilders.

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Blancco Technology (LON:BLTG)

Share price: 232.46p (-0.45%)

Shares in issue: 75,672,915

Market cap: £175.9m

Interim results for the six months to 31 December 2021

Blancco Technology is a global provider of mobile lifecycle solutions and secure data erasure solutions.

Highlights:

• Revenue +13% to £19.7m,
• Gross profit +18% to £19.1m,
• Adjusted EBITDA +21% to £6.4m,
• Adjusted operating profit +36% to £4m, reported OP up from £0.7m to £1.9m,
• Profit before tax up from £0.5m to £1.8m,
• Cash from operations -8% to £4.6m,
• Net cash up from £8.2m to £10.2m.

IT Asset Disposition (ITAD) revenue was up 33% to £6.9m as businesses returned to offices. Enterprise revenue increased 11% to £7.1m, and Mobile revenue was down slightly from £5.8m to £5.7m.

In terms of regions, North America grew by 19% to £5.8m, APAC revenue was in line with last year at £6.2m, and EMEA was up 22% to £7.7m.

Gross margin of 97% is very good, driven higher by less third-party licenses. The valuation remains quite high though, so investors might look more to the slowdown in mobile revenue. This has been driven by a ‘widely publicised supply shortages of new handsets resulting in transitory impact on second-hand market’. Blancco adds that it has increased market share in the period here and that the long term growth trends remain strong.

However, operating margins are also expected to reduce due to wage inflation and more normal levels of travel expenditure. Adjusted operating margin was 20% in the first half.

Conclusion

Even after a bit of a derating here, the shares look quite expensive. These don’t strike me as the kind of market conditions that support high valuations.

The company is steadily growing revenue but profits have yet to come through. That is forecast to change in this financial year though, and operating cash flow has been well ahead of EPS over the past couple of years.

So it looks like the company is self-funding at least, although the cash flow figures are low relative to the c£175m market cap. And the company quotes an adjusted cash from operations figure, which I don’t see the point of. Actual net CFO was £4.4m, with £2.2m then spent on purchase of intangible assets.

A degree of operational gearing could change the profit profile in short order, but there’s a lot of earnings growth priced in. I think this is the kind of highly valued growth share that has something to lose in a risk-off market.