Small Cap Value Report (Mon 2 July 2018) - TRAK, PLA, ZOO, KMK, AVAP, PLUS

2nd Jul '18 by Graham Neary

34 comments 13589 reads

Good morning! Today we have announcements from:

Trakm8 Holdings (LON:TRAK) - final results
Plastics Capital (LON:PLA) - final results
Zoo Digital (LON:ZOO) - final results
Kromek (LON:KMK) - final results
Avation (LON:AVAP) - interim statement
Plus500 (LON:PLUS) - trading update
Quartix Holdings (LON:QTX) - trading statement
Filtronic (LON:FTC) - trading update

It's a lot of news - let's see how I get along covering it.

4.30pm: I made it as far as Plus500. The Quartix statement was in line with expectations while Filtronic was "broadly in line", i.e. a slight miss. So it's not worth reporting on them today.

Trakm8 Holdings (LON:TRAK)

Share price: 94p (-10.5%)
No. of shares: 35.9 million
Market cap: £34 million

Final Results

This company has previously proven to be controversial, due to the rather high rating it enjoyed, compared to its limited cash generation.

Most of the optimism has by now been squeezed out of the share price.

Back in late 2015, it was trading almost at 400p:

Recently, I used the Stocko comparison tool to show a side-by-side comparison of Trakm8 with Quartix, another telematics stock. Quartix has consistently been the more impressive of the two, from a quantitative point of view.

Another resource worth mentioning is today's article by "blondeamon", who owns shares in Trakm8 and is bullish on the stock.

I've read both positive and negative reactions to today's results already.

Let's have a look at what they actually say.

Financial highlights:

5b39eaafa784dTRAK_20180702_highlights.PN

So it's a healthy upward move in many of the headline numbers.

Net debt has reduced by £0.5 million to £3.3 million, while cash generated from operations is up very significantly to £4.7 million.

Certain overhead expenses have been reduced while R&D spending is maintained and sales and marketing spend is increased. Manufacturing and distribution facilities are being expanded.

Outlook

First sentence of the outlook statement:

Due to customer inventory build-up in Q4-FY2018…

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raigersfield

2nd Jul '18

Plus500 announced this morning that analysis of its client base shows a large proportion of its revenues come from clients able to be categorised professional.
Hopefully that will help Graham retract his previously bearish stance on this issue and cease referring to this growth company as a bucket shop.

Brookeda

Super update again Carcosa.
I have been for a long time long and continue to be so with Aviation.
Probably won't be enough for me to retire but I agree on the long term upside followed by it being a potential acquisition some time in the future

Graham Neary

Hello mate, thanks for the valuable input on Avation (LON:AVAP).

I too can only see forecasts around that level, from a single broker, who last updated their forecast in May.

LeoInvestorUK

Mammyoko,

The precise FCA requirements for an elective professional client are that at least two of the following criteria are satisfied:
(a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(b) the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
(c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;
(source: https://www.handbook.fca.org.uk/handbook/COBS/3/5.html)

Now (a) Is very vague. IG were defining a large transaction as £20k for equities and £50k for others, but it was never clear what they meant by that and I can't find that advice now. Do all equity derivatives count as equities and "other" means things like FX/Cryptos? Does buying options on £20k (or £50k) of underlying count? Selling options? Buying/selling with a guaranteed stop loss? Buying/selling with a hedge or covering option in place? Why wouldn't twice the frequency at half the size count?

(b) is the only one even close to qualitative and objective. But the figure could depend on your relative ISA / SIPP holdings (the same amount of money in an SIPP cost you less to put there than the same amount in an ISA, yet presumably they count for the same), how much you have given to and manage on behalf of your spouse and children (any amounts presumably doesn't count), and most obviously, how much debt you have (as presumably loans would not be subtracted from even cash in a broker account, ISA or SIPP).

(c) again, open to interpretation.

In my opinion somebody who only just meets the criteria (b) (or worse, relies on (c)), who is making 40x £20k/£50k trades a year may well be over trading and/or being reckless, but they are also probably particularly profitable for the spreadbetting company. Personally I think that a better indication of a "professional client" would be somebody with a track record demonstrating they are trading in proportion to their wealth, but there we are.

As an aside, I currently don't think we need worry too much about the impact of this on share prices as people are forced to liquidate - small/illiquid shares are already margined around 25% with IG and so the new 20% limit does not affect them. Heavily shorted mid-caps might be impacted somewhat.

Hi, I am impressed/surprised by the 75% number (from 12% of clients). If that turns out to be true, then hats off to Plus500.

That makes no difference as to whether or not it is a bucket shop - a place where bets are made, but the underlying asset is in many cases never bought or sold, either by the customer or his counterparty.

Thank you, mammyoko!

Apologies, I don't have time for Mercia Technologies (LON:MERC) today. Thanks for mentioning it, anyway.

Hiya, Filtronic (LON:FTC) was just a very short update, "broadly in line" = slight miss, I haven't got anything else to say on that for now. Cheers! G

Ian field

The majority of PLUS revenues are not from client losses. 89% are dealing spreads and the rest is from overnight charges.

Gromley

The fact that it was so short though was quite intriguing I thought.

Last years trading statement contained a similar short paragraph on FY performance, as this year it helpfully quoted expected numbers for key metrics.

But whereas this years update ends there, last years update went on to give a short outlook view for each of Filtronic Wireless and Filtronic Broadband - both were moderately positive.

So why I wonder was there nothing this year?

I'm more inclined to be negative about such an omission (although they have played a fairly straight bat in the past about how concentrated, lumpy and hard to predict their business can be).

I suppose on the other hand they could be restricted by NDA from saying something about a big 5G project (5G is the potential upside catalyst here), but you would think they could at least say something bland than go for total silence.

It's a bit of a puzzle to me - I'll continue to watch from the side lines for now.

dgold

Ian, it would be helpful if you could let us know the source of that information.

The Phoenix

Hi Graham,

One hell of a marathon effort from out of interest how long does it take you to dissect a company to get say an 80% feeling if its worth a further look or discarding ?

Thanks again for your efforts

Andy

VegPatch

Hi Martyn
I took a look at LON:MERC as I met them at Mello. I think the start up space is interesting (and obviously very high risk) and what interested me is that they have a good network from which to source investments. Unlike say IP Group i hoped that Mercia would NOT be sourcing the majority of start up ideas from universities. Thats almost the last place i want to get start up investments as 1) Universities tend to breed research boffins who are out to solve theoretical problems rather than innovators looking to solve real world problems and make money and 2) university people rely on funding so there is always a reluctance to "kill" start ups if the investors controlling the purse strings are also from universities. Mercia does have university tie ups but many of their start up investments come from real world entrepreneurs.

I was a bit underwhelmed by the results today. NAV has only risen from 40.4p to 40.7p. This is despite third party funds rising to £400m. The fees earned from these funds are used to pay the running costs of the business and allow the balance sheet investments to feed into the Group NAV.
Part of the problems is that there is too much cash on the Group balance sheet (aka "cash drag"). I applaud the Group for being disciplined with shareholders money but at the same time the Group needs to invest in the starts ups of the future,

At a 30% discount to NAV I can see the business looking on the cheaper side but I would want to see a set of results where the NAV starts to rise strongly and the drivers of the growth are broad based, as happened with Draper Esprit, as a sign that the investments are maturing nicely.

One to watch for me rather than go in feet first.

DJCP

I'd heard of this ESMA regulation, but hadn't looked into it until reading here today reminded me. I'm not an 'expert' investor, but don't like being restricted or told what to do with MY money.

Off-topic - whilst looking into ESMA with AJ Bell, I learned that whereas I'd needed a W8-BEN form (with previous broker) to trade USA stocks, this is not needed within their SIPP - something learned !

I do not pass any of the 3 FCA requirements (as per leoleo73 post #18), but AJ Bell do have an online test. I completed this, answering what I expected them to require, as opposed to 'true' answers, and am now allowed to trade these professional-only investments IF I want :o)
It appears that companies are just covering their backs, in case of future claims.

p.s. As mentioned a while ago (and by others since), doing a great job Graham, but do feel you're stretching yourself thinly when I see the list of companies you're aiming to cover. As I've seen on SCVR in the past - covering fewer companies indepth, with one-line summaries for the rest may be a compromise - Your post #22 being an example.

atali1

https://www.plus500.com/Docs/Plus500UK/Prospectus.pdf
"In 2017, approximately 89 per cent. of the Group’s revenue was generated from
the dealing spread charged on its trades, approximately 11 per cent. was generated from overnight
charges and there were no net revenues from mark-to-market profit and loss."

Other useful points:
PLUS have 4282 professional clients as of 20th June.
IGG last reported around 3800 in late May.

I find the huge valuation different between PLUS and their peers a bit of a mystery. Still a long way to go for PLUS to be on a similar valuation rating. Client base is essentially the same between all CFD providers. The more people you get in the higher the chance of acquiring another high value client. And PLUS are streets ahead of their peers when it comes to bringing users in.
Not to mention PLUS having optimised the CFD model so their costs are on a different scale to the others while their platform is arguably the best.

Thanks for the feedback DJCP

Hi Andy.... no probs! It takes a while, I can study a company from scratch and have an initial view within an hour. It takes about eight further hours on that stock to make an initial buy decision.

Metatron

3rd Jul '18

Part of the growth story of Plus 500 is supposed to lie with trading Cytprocurrencies like Bitcoin but that should apply to its rivals who as others note trade on much lower valuations.

bgw1970

Read the Prospectus. Last year spread revenues were 109% of revenues. They internalise almost all risk, so one customer nets off against another. They were set up in 2008 to do this, because it's so much more cost effective to do so, and to offer, now, about 1200 instruments, than to hedge in the market as IG mostly does, while offering almost 10x the number of instruments.

12%=75% is an EEA number, rather than being for the whole company.

16th Nov '18

Trakm8 Holdings (LON:TRAK)

When this article was written (2-July-18 with the share price at 94p) Graham wrote :

We are used to seeing forecast H2-weightings result in profit warnings, and the Trakm8 share price today appears to have priced in a profit warning for later in the year.

Roll on to today 16-Nov-18, the profits warning duly arrived, but with the shareprice down 62% on the day to 22,5p (down 75% from the July price) I think we can safely say that the profit warning was not previously priced in.

Something I have learnt over time is that it is a dangerous game to suppose that the bad news is "all in then price" (I don't mean to suggest that was what Graham meant in this case). Often times the news may be worse than presumed (as was the case here) or that having digested the expected bad news the market will proceed to price in further bad news.

I am losing count of the number of "H2 weighting" predictions that have failed to transpire.

Small Cap Value Report (Mon 2 July 2018) - TRAK, PLA, ZOO, KMK, AVAP, PLUS

Trakm8 Holdings (LON:TRAK)

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Graham Neary

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