Small Cap Value Report (5 June 2017) - AVCT, SOM, DP Eurasia, DSG
Good morning!
Avacta (LON:AVCT)
- Share price: 96.5p (unch.)
- No. of shares: 68.4 million
- Market Cap: £66 million
ShareSoc Growth Company Seminar
I'm glad to help to publicise a ShareSoc event. There is a very long Avacta comment thread here which is relevant to anyone watching or holding this share.
It's on Wednesday 14th June in the City. Registration from 5pm.
Somero Enterprises Inc (LON:SOM)
- Share price: 292.5p (-7%)
- No. of shares: 56.2 million
- Market cap: £164 million
A detailed announcement from this US-based manufacturer of screeding equipment (tools which help to ensure that new concrete floors are perfectly flat, e.g. using lasers).
Trading so far this year is in line with market expectations:
The Company remains encouraged by the positive trading environment across our footprint, the growth opportunities visible in North America, Europe, Middle East, Latin America and our Rest of World territories, and the prospects for improvement in China for the remainder of 2017. This constructive, positive environment, combined with continued solid margin performance, cost management, and healthy operating cash flow generation means the Company's trading to date is in-line with market expectations for the full year ending 31 December 2017.
There is no explicit mention of an "H2 weighting", but it sounds to me like there is an implication of same, as in the description above of an "improvement in China". Also from this earlier sentence in the statement:
In North America, while H1 trading in 2017 has been flat compared to the prior year due in part to poor weather across the US that has delayed numerous project starts and ongoing political uncertainty, we remain encouraged by healthy market fundamentals in the US that are reflected by the high-level of activity and extended project backlogs our customers continue to report.
The US is the core market for Somero and I think this very mixed set of circumstances may have spooked a few investors out of the stock today.
Some Stockopedia commenters have been discussing it on this thread, with a few existing holders top-slicing their position on this announcement.
I can see why they might do that: prior growth expectations are now potentially under threat. Somero's target has been to achieve $90 million in sales by 2018, which at prevailing margins and effective tax rates would result in PBT of $23 million and net income of $15.5 million.
The current market cap is c. $212 milllion in USD terms or $192 million excluding the year-end cash balance, about 35% of which is being paid out in August in the form of a special dividend (13.3 cents per share).
So if the targets were hit, the 2018 valuation doesn't look too bad. If the targets are missed, and results stay flat, then investors will have to satisfy themselves with net income in the region of $14 million.
The worry of course is that we see another cyclical downturn as occurred from 2009-2011.
On balance, I have a pretty favourable view of Somero. The company's competitive position in the US/Europe looks pretty strong, with only one smaller competitor I could find in the US, and with patents covering its newer generation of machines.
Trading into China looks more difficult given the difficulty of enforcing foreign patents (and Somero's penetration into China remains tiny - see here for the range of screeding equipment by Chinese manufacturers available on Alibaba).
So I wouldn't place any firm value on Chinese growth possibilities, but I could see this remaining a good US/Europe/Mid East/Lat Am story.
A pretty reasonable holding, in my book.
DP Eurasia (New flotation)
Some readers share my interest in new flotations (though I don't invest in them, I like to see what's happening in the IPO market). So in that spirit I'll say a few words on DP Eurasia.
It has less in common with Domino's Pizza (LON:DOM), and more in common with DP Poland (LON:DPP), as the holder of the exclusive master franchise for Domino's in a particular geographic area. Whereas DP Poland has a single country, DP Eurasia has Turkey, Russia, Azerbaijan and Georgia.
DP Poland has been a serial loss-maker for many years (though hopefully not forever), and I cannot see any reference in this RNS to DP Eurasia's profitability beyond "adjusted EBITDA". So perhaps it is also loss-making on a statutory basis.
Like DP Poland, DP Eurasia has a mix of corporate-owned (37%) and franchised (63%) stores.
System sales (i.e. sales including those by franchisees) reached TRY 650 million in 2016, or about £140 million. It claims to be the largest pizza delivery company in Turkey with 51% of the market, and to be the fifth largest master franchisee with Domino's. It has 567 stores in total, and plans to open 70-90 per year. That's a lot bigger than DP Poland.
I'll look forward to more details about this. It's a far from proven investment thesis but perhaps these will turn out to be good, profitable enterprises some day. Obviously the macro-political risk should also be factored in, when venturing into riskier locations.
Admission is scheduled for 3 July 2017.
Dillistone (LON:DSG)
- Share price: 71p (-16%)
- No. of shares: 19.7 million
- Market cap: £14 million
Trading and new product update
It's my first time looking at this small software company, focused on the recruitment sector.
It produced revenues of £10 million last year. Adjusted profit was almost flat at £1.4 million, but including one-off items it fell to £0.5 million. That's after capitalising £1 million of spending on intangibles.
Today's RNS is a profit warning, although you have to read down to the 11th paragraph before this is confirmed:
The Board currently expects that the second half of the year will deliver better results than the first half in terms of general trading. However, the slow start to the year and the higher cost base mean that the results for the full year are expected to be significantly below market expectations. In view of the proposed fund raising, the Board expects to reduce its dividend until the benefits of its investment in the New Product flow through to the Group's balance sheet.A fund raising? There is talk in the statement of a "New Product" that "addresses a market need which, in the view of the Board, is global in nature and has the potential to be very significant for the Group".
It's very secretive about this product, but says that "fundraising for completion and launch of the product is now being explored". It is anticipated to be "highly cash generative" from 2019.
CEO comment:
"We've seen improvement in the order book since the beginning of the year and are confident that this will improve further in H2.
"We are delighted by the early response to our New Product and excited by its potential. The New Product is essentially a start up being developed within the auspices of an established business. We believe that it has the potential to transform the nature of our business and to deliver significant shareholder value."
This is all very strange to me. Should listed companies be raising money and diluting shareholders for confidential projects which they can't tell anyone about?
This is effectively a mystery box with a secret prize inside, and shareholders can only find out what's inside it after they've bought the box!
It doesn't sound terribly investable to me. Though it has historically been decently profitable for its size, and paid dividends when it could afford to.
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32 comments
No spell checker on stocokpedia im afraid.. im Dyslexic like branson sorry..
Thanks for this, I just listened to the whole 52 mins out and about while
Boy rode his bike and the CEO actually quoted my potential concerns which was very interesting
So they basically sell the machines, and they are not a pure machines outfit (as anybodt can copy a machine)if that makes sense.
They kind of use scare tactics that concrete sets in 1hr and if you dont lay it correctly the world will
End. I dont know the costs of their machines v chinese machines. But yes, buy a chinese machine and your not trained then the floor sets and you need to redo.. The quote of £400,000 for a somero machine in the presentation was talked about
If you can get one for £80,000 in china and mess it up you can still afford to relay??
China lays 53% of the whole world concrete amount, the US 2 %, that was talked about , so china is a massive market to crack but good luck building the SOM business model there of customer comes first and the excellent support they have else where
Fully speaking chinese training centes/helpdesks, support thats huge/huge costs
An interesting topic came up about support and queries and how that was charged and if its shown in the accounts...You can log a call (free support if you buy the machine) and a trained somero person will come to the site. Not sure about flights and hotels etc??
Somero prides itself sending their experts in to go over your business and for financials with a fine toothcombe (if you buy the machine), so you get trained at there state of the art factory in the far south in florida. Great if your in north west or further a field
They say they dont plan to charge for support as
Its all priced in and customers like this
They support the business by a helpdesk that has 65 language translations that you are phoned back within 10 mins(concrete sets in 1hr)
It seems the only gripe at the moment is the number of quality sales people they have on board in foreign counties , it takes a lot to train up a new guy and that meams having a current guy offline while the new guy is trained which costs money
Also persuading those counties to use US type specs in the building plans
I would like to see more training camps across USA and not just in Florida. These small concrete contractors need to send their employees all the way to
Florida. There was talk of no debt now on the company, I would push out 3-4 strategic locations across the US. Relying on one base location for training is potentially risky.
All in all, I still have a large amount in SOM and will hold for the moment as I like it, its rough round the edges but has potential
The website needs to be updated with a better investor relations department /contact and remove old content which makes it looks
Unproffesional
Hi Redrichmond
I agree that China is a conundrum,if they unlock it ..and they've spent a few years trying...it'll transform the business, if not the RoW is still growing fast , incidentally I've found the company v good at dealing with Q's , in fact I'd say their one on one IR is amongst the best I've come across but agree the website could use an upgrade.
Finally...and it's a low blow but here goes.. professional only has the one f ..sorry couldn't resist
PS I hold SOM ..rather a lot as it happens
One thing I have noticed,
1)There is no Shareholder/Investor relations contact on their site, theres only a contact form with information about machines. Where how do you get in contact with the management. I need to find out about the hundreds of copies of their machines on alibaba in china and what they are doing about it
2)Data on the investor pages is 2 years out of date ,talking about 2015 and the future for 2016
https://www.somero.com/investors/investors/
Hi Redrichmond
I'm sure you have already seen the Somero Enterprises Inc (LON:SOM) video on Piworld, but in case not this is the link
http://www.piworld.co.uk/2017/06/14/somero-som-invester-presentation-june-2017/
If I recall correctly the CEO/CFO were asked about copy cat risks. I think the response they offered was that they were not overly concerned about this risk. They believe that Somero Enterprises Inc (LON:SOM) maintains its competitive advantage by offering a high quality support and education service which glues their customers to Somero Enterprises Inc (LON:SOM) as well as the machines they sell. Indeed they told an anecdote to offer illustration about this challenge.
BTW thanks for your earlier post of the abc report. Very useful.
Regards
Howard
Interesting reading from the CBI in the USA. its a kind of metric used to measure work in the pipeline.Released a week a go
http://www.abc.org/NewsMedia/ConstructionEconomics/ConstructionBacklogIndicator/tabid/272/entryid/8733/abc-s-construction-backlog-indicator-rebounds-in-2017.aspx
"“This was a terrific report,” said ABC Chief Economist Anirban Basu. “For the first time in the series’ history, every category—firm size, industry and region—registered quarterly growth in CBI. Among the big winners were firms in the western United States and those with annual revenues between $30 million and $50 million per annum.
“However, some contractors have expressed concerns regarding construction conditions in 2019 or 2020,” said Basu. “These concerns are rooted in a number of factors, including the already lengthy duration of the economic recovery, evidence of saturation in certain commercial real estate markets, weak momentum in numerous public spending categories and tightening monetary conditions. However, first quarter 2017 CBI strongly suggests that rumors of the business cycle’s demise are exaggerated, at least thus far.
“Because of these and other emerging concerns, ABC’s CBI measure is arguably more important than usual,” said Basu. “Backlog is a leading indicator, and meaningful declines in CBI could potentially confirm fears that the current construction spending expansion cycle is winding to a close.”
Thanks Redrichmond,
A useful input / comment. I had looked at that survey and written about it when commenting on Somero prior to the AGM trading update. http://www.stockopedia.com/content/somero-trading-update-on-monday-i-think-some-thoughts-191049/ Hopefully we are now through the flat
Period and certainly we do need an H2 pick up given 1) market forecasts and 2) management expectations. So certainly worth keeping an eye on this series.
Thanks
It looks like the market in general is pulling back prior to the results of the General Election.
A sea of red on my portfolio at the moment. I suspect relatively illiquid stocks with wide spreads are dropping even faste, creating a bigger feeling of a falling market.
Hi,
Re my BMUS fantasy fund (which is pretty similar to my real life main holdings), I just decided to play it safe, and move 36% into cash, ahead of the election uncertainty.
Also, I've got cold feet about roll out shares, after the profit warnings from Revolution Bars & Comptoir, clearly having read-across for other retail & hospitality operators, facing similar big upward cost pressures.
The third factor is that BMUS has done ridiculously well, being up about 200% in 2 years (with no gearing), so it just felt a good time to take some money off the table, and not be greedy.
Prices & valuations generally look quite stretched to me, so I'm not convinced Risk:Reward is very good at the moment.
In my real world portfolio I've also started opening some short positions on mid to large cap retailers. I reckon broker forecasts may not be factoring in enough cost inflation. The issue seems to be that Living Wage is not only pushing up wages for lower paid staff, but is also pushing up wages for everyone else - because other staff demand that the differentials are maintained between them and lower paid people.
Plus, the operational gearing could kick in on the downside, as retail & hospitality businesses also potentially face faltering demand too.
I'm feeling much more cautious about things now, and don't want to see my stellar gains melt away if the market turns down. Hence moving partially into cash seems a prudent thing to do at the moment.
Obviously none of this is advice, it's just responding to questions from readers above, about why I've slashed the positions in BMUS.
Regards, Paul.
Re: Dillistone (LON:DSG) I remember watching one of those investor interview videos with the CEO a couple of years ago. He was asked ''what is your unique selling point, why should they [investors] give their money to you and not the competition?' the CEO led with 'We are yielding in the region of 5%...'' Not exactly an inspiring sales pitch about the positives of the business. Now that dividend is on hold.
www.proactiveinvestors.co.uk/c...
I agree with Graham, almost impossible to value until we know what the new product is, how much they are going to raise, at what price and how they are going to use the cash. I would also like to see the CEO enthusiastic about the growth of the business, the value they provide to customers and the quality of their products and people. That definitely seems to be lacking in the past if the interview comments are representative.
Re: Dillistone (LON:DSG) I remember watching one of those investor interview videos with the CEO a couple of years ago. He was asked ''what is your unique selling point, why should they [investors] give their money to you and not the competition?' the CEO led with 'We are yielding in the region of 5%...'' Not exactly an inspiring sales pitch about the positives of the business. Now that dividend is on hold.
www.proactiveinvestors.co.uk/companies/stocktube/4227/dillistone-to-deliver-further-growth-with-investments-says-ceo-4227.html
I agree with Graham, almost impossible to value until we know what the new product is, how much they are going to raise, at what price and how they are going to use the cash. I would also like to see the CEO enthusiastic about the growth of the business, the value they provide to customers and the quality of their products and people. That definitely seems to be lacking in the past if the interview comments are representative.
grout123 - http://www.stockopedia.com/fantasy-funds/beam-me-up-scotty-4990/
Hi Paul
Laughton mentions the 'Beam Me Up Scotty portfolio'...
What is this secret portfolio? Im intrigued....;-)
I bought Dillistone last year on the back of statements with 2016's final results and AGM. Management were putting out numbers such as 70% (and even 100%) order growth!!! Fortunately I sold out shortly afterwards when I realised that a lot of this 'order growth' was simply migration of existing clients to a newer version of software. The positive statements simply looked more like 'spin' than substance.
This latest update which includes a disastrous passing of the dividend and a profits warning is full of more spin. Graham put it very well when he says management are talking up their exciting new 'black box' product without giving any guidance as to what the potential of the product might be. The optimists are clearly hoping it is a game changer. I am more inclined to look at today's facts. A steady little dividend payer suddenly isn't any more and the cost of developing this new product is going to wipe out most of the company's profits for a year or two despite capitalising a lot of that expenditure.
I think SOM still looks to be a very strong business, with a strong balance sheet. What they make is the future of retail globally - I am not being put off by this.
What does Paul know that we don't (well a lot in my case) but he obviously sees dark clouds ahead selling out of 7 big holdings in his Beam Me Up Scotty portfolio in the past 2 days (and he still has a couple of hours left today).
Paul - is this your big bet on the election result??
Seconded - would like to understand Paul's rationale especially on £PURP! I top-sliced Purplebricks (LON:PURP) today but only to bank some profits while it is very pricey. Have been tempted to bank £G4M but I remain undecided.
I've been campaigning in a marginal in West Midlands where a lot of soft Labour voters now say they will vote Conservative. My view is Tories will probably still have a majority but not greatly improved. I don't think that will especially damage equities.
Hi Graham,
Maybe more up Paul's street, but worth commenting on the Comptoir (LON:COM) profit warning in light of Tasty (LON:TAST) previous warning and Restaurant (LON:RTN) 's fall from grace.
A lot of tough headwinds in the sector (rent, rates, wage inflation, food inflation etc) and supply has temporarily outstripped demand in casual dining imho. Brave time to buy into one of these businesses.
Hi Graham -
On the subject of IPOs, I am a keen follower and made reasonable gains last year.
However I have a long-standing complaint. First, that companies only publish the admission document on the day of first dealing thus giving us little time to study it. There have been rare exceptions
Second, that copies of the admission document are made available days in advance to the 'chosen few' brokers and institutional investors.
Level playing field? That would be too much to ask.
Agree, would add that you probably won't get your shares in time to trade on day 1 either. The quality of IPO's recently seems a bit poor, call me cynical but are our friends in the City trying to part us from recent profits resulting from the recent bull market where gains have been almost across the board. Reminds me of the days of "tell Sid" where privatisations made profits which people were encouraged to reinvest in lots of dodgy flotations leading to the 1999-2000 bubble. Lets be careful out there, why did I suddenly think of the Aussie fisherman who had a close encounter with a shark. As a friend said he's been mugged more times by men in suits than in hoodies.
For me SOM is a sell now. Your coverage Graham is fantastic. Especially the link to the screeding equipment in china,.,, China wont grow as they have their own equipment and patents mean nothing there... The only thing you can hope with SOM for is a Chinese or other firm want to get into the US and they buy out SOM.... I wish I knew about your skills before... how was this link to the screeding in china missed ??? SOM was being hailed...
"Trading into China looks more difficult given the difficulty of enforcing foreign patents (and Somero's penetration into China remains tiny - see here for the range of screeding equipment by Chinese manufacturers available on Alibaba)."
I do wish anyone holding Avacta well but its been a jam tomorrow situ for as long as I can remember. Ive attended two previous presentations by the company and both were full of the future of Affirmers etc but no real progress. Sorry to be downbeat but my gut says leave alone.
The performance of Somero won me the Preston Gold Cup as the most successful investor in our Investment Club in 2016. I have backed it again in 2017 to retain the cup!
Dillistone (LON:DSG) AGM statement contains a profit warning. Mike Love of Scisys is the chairman here, which leads me to believe that DSG's "new product" is real, as Mike is no fool.
Paul has commented before that the company looks atttractive (but illiquid).
Mike Love is no dozer, and runs a very tight ship. A buying opportunity will emerge here, but the Dillistone (LON:DSG) statement mentions a fundraising and gives no details. We need to wait until the conditions of this emerge. I held but sold out this morning first thing for a small loss. I will be back when things steady.
Covered DSG there too, forgive my lack of faith!
Graham
Thanks. That's very helpful. My only positive is Mike Love as Chairman ...
Somero (SOM) would be worth a comment - 10p special div announced and all looks solid, yet sp down - good entry point?
Covered it, cheers.
Graham
Anyone have any idea why focusrite's share price has collapsed more than 10% today? No news or RNS..
Hi Danyou
I hold also (indeed sold some Purplebricks (LON:PURP) on Friday and topped up Focusrite (LON:TUNE) so drop is annoying) but my guess on the fall is that the float is small (I think I am right here) at 34% and so maybe somebody put through a large sale at the open? Perhaps somebody with more knowledge than me (and Level 2 data?) will be able to confirm.
I always ignore moves like this (indeed I have used falls like this at the open to top up modesly twice in the past month once in Fevertree Drinks (LON:FEVR) and once in Treatt (LON:TET) though wont be here for lack of funds!). I see Focusrite (LON:TUNE) as a great business where all the numbers look right and (though a relatively new holding for me) I am in for the long (10 years) term.
Look forward to hearing from any body who know differently!!:-)
Regards
Michael
Hi Michael,
I watched and sold my Focusright shares today, it opened down about 2 percent, pulled back to about 1.5 I could not sell all my holding at that point, so went for sale of half then about a half hour later it was down 8 percent, so I was out of the rest, that was around 9.30 when I came back around 11 in it had pulled back a bit. The volume today was over 150k when normally it is around 50k or under, so I suspect there was something sitting there at open as you say, although I cannot see the trade on LSE. The share has now dropped below its 20 day ema but not 50 so feeling a little nervous about buying back in. Regards Ilsa
Ps similar behaviour by Altitude, and Gear for Music. and Paul Scott has sold his holding for Focusright in his fantasy fund.
Hi Pineapplefriiter
Thanks for the reply. Sounds like you have a different trading strategy and time horizon to me? Paul certainly has an amazing record and is better than I will ever be but he is a full time PI where as I, even if you include general reading, has very little time each week to dedicate to my investing and for this reason I prefer to make purchase and hold once I am as certain as I can be that a share will perform well over 5 to 10 years.
I certainly would not sell on a 2% (or 7%) fall that occurred for no reason. As of writing noon on 8th June most of that fall has already been recovered.
Happy Investing
There are chinese patent numbers
https://www.somero.com/about-us/patents/
My concern is whats the point
Of spending huge amounts on registering if they are not enforced. Anyone contacted somero on this and whats there thought?
They could always get into bed with BURford Capital (another of my holdings)to borrow the money for litigation funding ,of course BUR would get a cut. Everything is copied in china. I even saw an exact copy of a mini car under a different brand, real looked weird