Small Cap Value Report (Thurs 17 Mar 2022) - MPAC, FIPP

Good morning! It's Jack and Paul here with the SCVR for Thursday.

Agenda -

Jack's section:

Mpac (LON:MPAC) - strong FY results with a positive order book performance boding well for future. The group is targeting both organic and acquisitive growth, it is executing well against its strategy, and there is plenty of room to grow market share. Worth a look.

Frontier Ip (LON:FIPP) - Frontier invests in spin outs with intellectual property, which it then helps to commercialise. Its prospects are tied to the quality of the investments it makes, but it’s a potentially interesting way to gain exposure to early-stage companies. Trading at around NAV, so scope for multiple expansion if the portfolio businesses develop.

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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.

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Jack's section

Mpac (LON:MPAC)

Share price: 509p (+8.99%)

Shares in issue: 19,894,138

Market cap: £101.3m

Full year results for the year to 31 December 2021

Mpac is a high-speed packaging and automation solutions provider. Previously more of a turnaround situation, the company is now firmly back on track with good operating momentum and further growth on the agenda.

Strong performance in FY21 with results exceeding market expectations and FY22 has started on track

• Order intake up from £83.9m to £117.9m, and closing order book up from £55.5m to £78.4m,
• Revenue +13% to £94.3m,
• Underlying operating margin up from 7.8% to 9.3%,
• Underlying earnings per share up from 31.4p to 39.7p,
• Statutory profit before tax up from £2.9m to £8.2m,
• Cash down from £15.5m to £14.5m.

A good performance in the Americas and a recovering outlook in EMEA have driven the strong order book performance. In the US, Mpac Switchback is trading ahead of expectations (acquired in 2020, and a significant contributor to growth in 2021) and a new HQ and showcase facility was opened in Q3.

The Switchback acquisition really does look to be bearing fruit. It fits with Mpac’s defensive healthcare and food & beverage markets, its trading ahead of expectations, and is playing an important role in accelerating the expansion into the Americas market. The Lambert acquisition has not performed as well and has failed to meet performance criteria, so Mpac is releasing £2.4m of deferred consideration onto the income statement.

The group’s global ERP systems are now live at UK and Canada sites, making for a more integrated enterprise as part of the ‘One Mpac’ strategy.

Revenue by region: Americas £63.3m (2020: £46.7m), EMEA £26.7m (2020: £31.3m) and Asia £4.3m (2020: £5.7m).

Revenue by sector: food & beverage £45.3m (2020: £34.8m), healthcare £45.3m (2020: £44.5m), pharmaceutical £3.7m (2020: £3.9m).

New products and business - Mpac Cube is a suite of digital products that enhances customers’ connectivity, productivity and sustainability. The contract secured with FREYR Battery is the other big development here (previously flagged).

As announced in July 2021, the Group signed a contract with FREYR Battery ("FREYR"), a developer of clean, next-generation battery cell production capacity, for the supply of casting and unit cell assembly equipment to the battery cell production line at FREYR's Customer Qualification Plant in Norway. The equipment to be supplied by Mpac will support FREYR in achieving its ambitious growth plans for a more sustainable future, with Mpac providing equipment, services and know-how to industrialise the battery cell production. This development line is due to be completed in Q4 2022.

Strategy:

The Group remains focused on executing its long-term strategy, including developing Original Equipment ("OE") order intake growth, and improving margins through our Service business and increased operational efficiencies. Delivery of these strategic initiatives contributed to an improved financial performance and underlying profit before tax for the year exceeding market expectations.

OE order intake of £96.0m was 54% above the prior year (54% on a like-for-like basis). OE revenues of £74.1m (2020: £64.1m) were 16% above the prior year (4% on a like-for-like basis).

And additional organic and inorganic growth targeted:

Our search for further complementary acquisition targets continues; however, management focus remains on delivering organic growth and extending our commercial reach to new customers with new products and services, supported by a comprehensive, market-led development roadmap. We remain a relatively small player in a multi-billion revenue market with growth prospects.

Conclusion

The results look good, and the strong (and more diverse) order book performance bodes well for the future. The strategy really looks like it’s working here, with cash for acquisitions, ongoing integration, new product and business development, and a focus on original equipment orders.

The stock has rerated, but arguably so have the group’s prospects.

A market cap of c£93m suggests plenty of scope for further growth given that Mpac is aligned with some structural trends and large, defensive markets. Early moves into clean energy with the FREYR battery contract are intriguing, and hint at further avenues for organic growth going forward.

There is a pension scheme to account for. Contributions were £2.2m in the year, so a decent proportion of the £8.3m operating profit. But if the group can continue to grow its operations, then this should become less of a concern given that there are no active members.

Another encouraging point is how well the group has navigated Covid and supply chain disruption. That suggests to me a credible management team, as does the execution of the group’s stated strategy so far. All in all, this looks good to me at the current levels (note that the metrics below need to update to reflect share price moves today).

Edit - I see Equity Development has brought out a note on the group's results, with a fair value target of 660p.  

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Frontier Ip (LON:FIPP)

Share price: 87.6p (+10.89%)

Shares in issue: 55,005,546

Market cap: £48.2m

Half year results to 31 December 2021

Frontier IP finds strong intellectual property and accelerates its development through a range of commercialisation services. It often does this by involving relevant industry partners at an early stage of development to ensure that commercial applications are developed around the IP.

It has built a portfolio of equity stakes and licence income in spin-out companies, with names including:

• Alusid (Frontier IP stake 35.6%) - innovative formulations and processes for premium-quality tiles, tabletops and other surfaces that make use of industrial waste materials which would otherwise be sent to landfill.
• CamGraPhIC (Frontier IP stake 20.8%) - is developing graphene-based photonics for high-speed data and telecommunications, which could be a key enabler for 5G technologies and beyond.
• Exscientia (Frontier IP stake 1.3%) - artificial intelligence for drug discovery, collaborating with pharmaceutical firms including Bristol Myers Squibb, Bayer, Apeiron and Rallybio.
• Pulsiv (Frontier IP stake 18.3) - developing a unique power conversion technology which significantly improves the efficiency with which electricity is converted from AC to DC and vice versa.
• The Vaccine Group (Frontier IP stake 17%) - developing novel herpes virus-based vaccines to protect against infectious diseases that can have significant social and economic impact.
• Cambridge Raman Imaging (Frontier IP stake 25.8%) - developing graphene-based ultrafast lasers and artificial intelligence to generate digital images of patient tissue, removing the need for chemical staining.
• Celerum (Frontier IP stake 33.8%) - developing novel artificial intelligence based on nature inspired computing to optimise the operational efficiency of logistics and supply chains.

These sound like fascinating opportunities, but hard to value without a lot more research into them. At the group level results are improving so perhaps it is worth investing more time into looking at the portfolio businesses.

• Group profit before tax up 239% to £10.3m,
• Unrealised profit on revaluation of investments rose by 197% to £11.9m,
• Fair value of portfolio rose by 37% to £43.9m,
• Basic earnings per share increased by 162% to 14.54p,
• Net assets per share increased to 84.7p from 56.8p.

The highlight in the period was Exscientia's listing on the Nasdaq Global Select Market at a valuation of some $2.9bn in October 2021. This was the first of Frontier’s portfolio companies to float.

After the period end, the group sold 25% of its shareholding in the company, raising a total of c£6.1m for an aggregate realised gain of £2.79m. Frontier will use this cash to provide further support for the portfolio and for general working capital. It retains 1,173,600 shares in Exscientia, which look like they’re valued at $14.60, so around $17m total.

In terms of other developments:

• The Vaccine Group announced a major technical milestone in the development of its next-generation Covid-19 vaccine,
• CamGraPhIC raised £1.6m through an equity fundraising to accelerate development of its graphene-based photonics technology for high-speed telecommunications,
• Pulsiv appointed a new CFO,
• Celerum launched its first commercial product and signed its first customer (post-period end),

Conclusion

The group’s businesses look like they are making progress but a lot of them are earlier stage and beyond my circle of competence, so the truth is it would take me a good while to build an informed opinion about the wider group’s prospects.

The key figure without deeper research is the net asset value, which is up year-on-year from 56.8p to 84.7p, meaning the shares trade at around NAV. That strikes me as potentially good value assuming the portfolio businesses have strong growth prospects.

I would assume there is scope for that multiple to expand on further good news as the portfolio also has a number of other companies at the point of acceleration in commercial development.

I think it’s an interesting way for investors to consider exposure to early-stage companies built on intellectual property with commercial applications, but it all depends on the group’s ability to invest in the right opportunities of course.