Daily Stock Market Report (Thur 8 May 2025) - VANL, MTC, POLX, ZOO, EMR, NXT, MONY, LORD, FLTR, KMK, FRP, MTRO

Good morning! Mark and I continue to fill out the Agenda.

The Agenda is now complete at last - 39 companies!

2pm: wrapping it up there, cheers!

Companies Reporting

Graham's Section

Next (LON:NXT)

Up 1% to £123.87 (£15.2bn) - Graham - AMBER/GREEN

(At the time of publication, Graham has a long position in NXT.)

This update is ahead of expectations, but there are some good reasons for the share price rise to be limited.

Firstly, Next has a tendency to under-promise and over-deliver. The market is used to this by now.

Secondly, and more specifically, Next themselves say that some of the additional sales in Q1 are likely to have been pulled forward from Q2, thanks to the warm weather that saw people buy summer clothing earlier than expected.

Therefore, Next are not changing sales forecasts for Q2 or the rest of the year.

Key facts:

• 13 weeks to the end of April: full price sales +11.4% vs last year.

• This is £55m ahead of forecast (which was to be up +6.5%)

• PBT forecast for the year is increased by £14m to £1,080 which is solely due to the outperformance in Q1. No change to the rest of the year.

I note that online sales are +8.9% but retail sales are holding their own, +5.2%.

Finance interest income hasn’t moved much, only +1%.

Outlook

As per usual we have perfect clarity in terms of guidance. There’s no need to chase forecasts from other sources:

At the new EPS guidance and the current share price, the shares are trading at 17.7x earnings - not cheap by any means.

The P/E ratio has been drifting higher in recent years:

For the rest of the year, full-price sales growth is expected to moderate due to a) strong comparatives from last year, and b) the effects of National Insurance increases on the wider economy. Next has been notably bearish on the economic effects of higher national insurance contributions.

Share buybacks: Next’s disciplined approach to share buybacks - an approach I fully support - prevents them buying back shares at the current level. They demand at least an 8% return (pre-tax earnings yield) on buybacks and this prevents them from buying back shares above a share price of £116. As the company notes, this affects the EPS forecast, as more shares in issue at the end of the year will mean lower EPS.

Keeping dividend hunters happy, any surplus cash that was earmarked for buybacks, but wasn’t used for buybacks due to a high share price, will be returned via a special dividend instead.

Graham’s view

I’m a happy shareholder here, and have been holding these multi-bagging shares for many years (with thanks to Paul, who tipped me off about the company’s virtues). The question is whether the shares are too expensive now - should I reduce my stance back from GREEN?

This stock is categorised by Stockopedia as a “High Flyer” - high quality and high momentum, but low value - which is considered to be a winning investment style.

I went GREEN on this in March at £108, which was still within the range where the company was able to buy its own shares.

The shares are up another 14% since then, despite everything that has happened in financial markets since then.

Perhaps this isn’t greedy enough, but I think it has moved up quite enough in a short period of time.

Therefore, I’m going to stay positive on it, but less ebulliently so. I wouldn’t rush to buy shares at the current level, but I’m glad to continue holding them for now. AMBER/GREEN is fair.

Mark's Section

Zoo Digital (LON:ZOO)

Down 8% to 9.3p – Trading Update – Mark – BLACK (RED)

Here’s the highlights:

· Subject to audit, FY25 revenue is expected to be up 22% to $49.4* million and adjusted EBITDA of at least $0.1 million (FY24: loss of $13.6 million)

· Net cash as at 31 March 2025 of $2.6 million

· Business is proactively restructuring its costs to focus on being profitable and cash-generative from a lower revenue base, reflecting the challenging trading conditions

· $6.8 million of annualised fixed cost savings made since the start of FY25 with a further $1.7 million savings being implemented in FY26

Although 22% is a decent recovery, this is a miss versus expectations:

Here is the real lowlight:

As a result of the current challenging market environment the Board believes that revenues for FY26 will be below previous expectations.

Research provider progressive reveal what this means in practice, cutting FY26 revenue by 23% to $42.5m, EBITDA from $7m to $4.5m, and EPS goes from 1.1c to -1.4c. This is despite the company saying that FY26 includes large, non-repeating orders:

The Company expects its customers to continue to license a greater proportion of content and as a result, the Board anticipates that FY26 revenues are likely to include several larger, non-repeating projects. This leads to greater challenges in forecasting of revenues and resourcing due to the uncertainty and timing of ZOO's customers concluding arrangements with licensors and licensees.

Could FY27 be even worse? The company seems committed to further cost-cutting to make ends meet. However, as I have commented in the past, they were slow to grasp the nettle initially and burnt through a cash pile they had originally raised from the market to make an acquisition. They are now looking pretty tight on cash:

Cash at 31 March 2025 was ahead of expectations at $2.6 million* due to a strong focus on cash management and working capital, including active management of trade creditors. The Group's invoice discounting facilities of $3 million and £2 million were unutilised at 31 March 2025. The Board expects to partially draw on these facilities during FY26. Cash management continues to be a key focus for the business.

Also today, we get the announcement of a new CFO, Rob Purcell. He was previously CFO at NSC Group, described as “a privately owned London-based multinational IT services provider with over 1,500 employees operating across more than 100 countries, generating annual revenues exceeding £120 million.” So he is a relatively big hitter to join a tiny AIM company. However, is this change too little, too late?

Mark’s view

That the market has not sold off more severely today tells me that no one believed the previous forecasts anyway. This further warning, whether expected or not, simply reinforces our RED view here.

Empresaria (LON:EMR)

Up 60% since yesterday to 40p – Possible Offer – Mark – AMBER/RED/PINK

This was an announcement that didn’t make yesterday’s DSMR, and it’s another takeover offer...sort of:

The Possible Offer, which is subject to confirmation of funding and completion of due diligence, is payable as follows:

· 10 pence per ordinary share of 5 pence each in the share capital of Empresaria (the "Ordinary Shares"), paid in cash at completion of any offer ("Completion"); and

· 50 pence nominal per Ordinary Share, to be settled in unsecured loan notes redeemable for cash on the third anniversary of Completion. Such loan notes would attract an annual interest rate of 2.6%.

On paper, it is a decent premium versus the undisturbed price of 25p. However, it seems the possible acquirer doesn’t really have the money, and wants to pay the bulk of the price in three years' time. If I was a holder, I’d be very interested in how those loan notes were secured and what happens if they are defaulted on.

The acquirer is given as:

an entity to be incorporated and controlled by a consortium of individuals comprising Peter Gregory, Nigel Marsh and Ashok Vithlani, [who is a] director and shareholder in Interactive Manpower Solutions Pvt Ltd. (a subsidiary of the Company), the Group's Offshore Services business based in India.

It seems the outsourcing part of the group is the real gem and what the consortium is most interested in:

This assessment aligns with the Company's previous statements regarding valuation within the Offshore Services operation. Recent sector-specific M&A activity, such as Teleperformance's acquisition of PSG Global in late 2022, suggests that this division alone could have a significantly greater value than currently attributed to the entire Group.

The board have the view that the break-up value of the group exceeds this offer, and it seems the larger shareholders want to try to force some action here:

Notwithstanding the views of the Board, the Company's two largest shareholders are aware of the Possible Offer and have encouraged the Board to explore options to realise value. The Board has, accordingly, decided to announce details of the Possible Offer to facilitate this.

To my mind, the problem is that the Empresaria balance sheet looks terrible for a recruiter. Most companies in this sector have significant receivables balances and, in order to manage working capital swings, have net cash. Not so here, where they have both off-balance-sheet receivables financing and bank debt. Whereas a company such as Gattaca (which I hold) trades at a discount to TBV, Empresaria has negative tangible net assets. If current market conditions persist for some time, Empresaria could be in trouble.

If the outsourcing business really is valuable, then I can see why larger shareholders want to force some near-term resolution. However, if there was a ready stream of buyers for this allegedly valuable outsourcing arm, why hasn’t the board sold this off and used the cash to rebuild the balance sheet before now?

This offer, if made firm, will leave minor shareholders with the distinctly unattractive option of holding unsecured loan notes issued by an unlisted entity. The loan notes effectively give the acquirer an option on the recruitment markets recovering in 3 years' time, or walking away having only lost the 10p/share in cash. I’d want around 30% CAGR return to run the risk of unlisted loan notes, with interest proposed at just 2.6%, the NPV of the loan notes would be 38% of the face value or 19.1p/share. Adding the 10p cash gets a 29.1p NPV/share for the offer vs a share price now trading at 40p. And this is only a possible offer.

Mark’s view

The possible offer here is structured in a way that is distinctly unattractive to the individual investor. Indeed, it may be at an effective discount to the current share price, depending on an investor's risk-weighting of the loan notes. If this doesn’t become a firm offer, the balance sheet risk remains high in a challenging recruitment market. I see no reason to change my previous AMBER/RED view.

Lords Trading (LON:LORD)

Up 5% to 29p – Final Results – Mark – AMBER

We haven’t looked at this specialist plumbing distributor on the DSMR recently. On the surface, these results look like a miss versus forecasts:

However, their broker, Cavendish, says these are in line with their forecasts, so there must be a stale forecast in the consensus here. Always a risk when the trend looks like this:

Anyway, the results themselves don’t look particularly great, even on an adjusted basis:

And it's much worse on an unadjusted basis. There is a huge table of adjustments, but as Paul already pointed out last time this was covered, most of these are real ongoing costs. It is really fair to exclude only the intangible parts.

It is also worth noting that EBITDA is a poor measure here, with significant lease liability payments excluded. In such cases, it is usually best to look at the cash flow statement. Net debt has increased by £3.9m, meaning free cash flow was just £1.7m after adding back the money spent on acquisitions and dividend payments.

Net debt excluding lease liabilities is an not inconsiderable £32.4m. they have undertaken a sale and leaseback post period end:

The Group completed the sale and leaseback of four of the Group's freehold properties for a cash consideration of £13.1 million. The four sites within the Merchanting division at Tamworth, Dewsbury, Luton and Ilkeston will be leased back for fifteen-years on market terms. The net proceeds from the sale have been applied towards reducing Group borrowings.

This is one example where IFRS16 is actually quite useful. While this reduces bank debt, it doesn’t change the group's financial position. It is worth noting that this means there is pretty much no tangible PP&E left on the balance sheet, and existing leases are onerous to some extent, with ROU liabilities exceeding assets by £7.3m.

Outlook:

Although the past looks a bit dim, the company are expecting a brighter future:

Strong like-for-like revenue performance during Q1 FY25

· P&H Q1 FY25 revenue 22% above a weak Q1 FY24 and benefiting from a pull forward of boiler volumes ahead of industry-wide price increases on 1 April 2025

· Merchanting Q1 FY25 revenues 11% ahead of Q1 FY24

Cavendish are forecasting an adjusted EPS of 2.9p for FY25. This makes the P/E around 10, which is relatively modest. However, once you add in the debt, onerous leases, provisions, and make more sensible adjustments to reflect the underlying economics, this doesn’t look particularly good value.

Mark’s view