Small Cap Value Report (Fri 13 May 2022) - TTG, FCRM, FIH

Good morning! Paul & Jack here.

Agenda - 

Paul's Section:

TT electronics (LON:TTG) - an in line update for FY 12/2022, after good trading in the first 4 months. Order intake looks particularly strong, and inflation is being managed well. There is an H2 weighting expected for one division. Looks excellent value, with a decent divi yield, so a thumbs up from me.

Fulcrum Utility Services (LON:FCRM) - a tale of woes today, due to problems in the energy supply market. However, a big fundraising at 12p in Dec 2021 means the business is cash-rich, and has other assets. 7p share price now could be an opportunity, but special situations investors who can put in the time to properly understand risk:reward of this business model. Shrewdies, Harwood Capital, are involved, which means there's probably an opportunity here.

Jack's section:

FIH (LON:FIH) - curious mix of businesses tracing its origins back to 1851. A recovery is on the cards, and potentially some operational gearing. The group has property, too. But the stock is illiquid and there has been minimal share price appreciation for a long time, so you have to weigh up whether or not it’s worth investing time into.

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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:

TT electronics (LON:TTG)

176p (last night’s close)

Market cap £311m

Trading Update (AGM)

TT Electronics plc ("TT", "the Group"), a global provider of engineered electronics for performance critical applications, publishes the following trading update on the Group's performance for the four months to the end of April 2022 (the 'period'), ahead of the AGM taking place later today.

Continued strong order intake, with full year outlook unchanged

Key points -

Group revenue was 6 per cent higher than the previous year on a constant currency basis and 5 per cent higher on an organic1 basis.

Order intake continues to run well ahead of revenue with book to bill for the four months running at 151 per cent.

Acquisition (Ferranti) going well.

Cost inflation -

Our well-established self-help initiatives and our decisive action on pricing continue to effectively offset current cost inflation.

H2 weighting for power & connectivity division - so interims might disappoint possibly?

Net debt expected to increase at half year, then normalise for year end. This is due to stocking up, and supply chain shortages.

Outlook -

Whilst macroeconomic conditions remain uncertain, the year has started well, with continued growth in our end markets, and good execution against the well-documented challenges.  
Accordingly, management's outlook for the year as a whole is unchanged.

Valuation - with confirmation today that performance is in line with expectations, then we should be able to rely on the forecasts which produce a forward PER of only 9.4

Also note the decent dividend yield -

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My opinion - the key point for me, is that demand is clearly strong. A book to bill ratio of 151% in the year to date looks very good. It’s a pity they don’t give the size of the order book in this announcement, but clearly it would have risen. Although I wonder if customers might be stocking up, to ensure their own production continues smoothly?

Supply chain disruption, especially in electronics, is well known, and sooner or later will get resolved. That’s why the share price has been so weak, and could provide a buying opportunity, maybe?

In conclusion, I think TTG looks attractively priced right now, for investors who are happy to hold for the long term. In the short term, obviously macro uncertainties are a big current issue - which is why share prices are much cheaper.

Although bears might point out that the share price has gone nowhere in the last 20 years, so the only benefit of owning this share is the divis, arguably. So maybe it’s cheap for this reason?

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Fulcrum Utility Services (LON:FCRM)

7.0p (down 23% at 08:50)

Market cap £28m

We rarely cover this share here, because we came to the conclusion several years ago that it wasn’t a good business. Performance seemed to collapse well before the pandemic, and the best part of the business was sold off.

There’s nothing else of interest reporting today, so let’s see what’s going on with FCRM.

Trading Update

Fulcrum Utility Services Limited, a leading independent provider of essential utility services including multi-utility connections, electric vehicle charging infrastructure, renewable energy infrastructure and smart metering solutions, provides a trading update today for its financial year ended 31 March 2022.

Key points & my comments -

Revenue £57.4m for FY 3/2022

Adj EBITDA of £0.5m (it did £1.0m in H1, so H2 is £0.5mloss-making)

Order book has softened

Problem contract has been terminated

Chaos in energy sector is causing problems

Interim CEO appointed in Jan 2022 is a turnaround specialist

New CFO from Feb 2022

Acquisition opportunities being looked at

Refinanced in Dec 2021, at 12p per share with £20m placing + £1.2m open offer, so cash position is now strong

2 major shareholders include Harwood, a shrewd, well-known activist investor

My opinion - this looks quite an interesting special situation, which would need a lot more research to properly understand. What I like is that the balance sheet is now strong (post placing at 12p), but we can now buy in the market at just 7p. That could be an opportunity.

Worth taking a closer look, for experienced special situation investors.

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Jack's section

FIH (LON:FIH)

Share price: 248p (-4.8%)

Shares in issue: 12,519,900

Market cap: £31m

Full year trading update to 31 March 2022

These results were published on Tuesday.

Market liquidity seems to be abysmal at the moment and FIH, with its £31m market cap, is no exception. It looks like you can currently buy about £700 worth reliably at market prices, with a spread of 1,600bps, which almost makes it not worth bothering about.

But that situation could improve for investors at some point, in which case it wouldn’t hurt to have covered the company once or twice. At first glance though, it’s hard to get too excited by the historical performance.

This is an international specialist services group with businesses in the Falkland Islands and UK. There are three businesses:

• The Falkland Islands Company (FIC) provides essential services to the people of the Falklands and was established by Royal Charter in 1852. Activities include retailing, property, automotive, insurance, tourism shipping and fishing agency services.
• The Portsmouth Harbour Ferry Company (PHFC) operates a passenger ferry service across Portsmouth Harbour.
• MOMART provides market leading specialist international arts logistics and storage services.

Trading activity is back to pre-pandemic levels and the board now expects to report an underlying pre-tax profit that will significantly exceed market expectations.

The cash balance at 31 March 2022 was c£9.5m. Bank loans were £14.2m (£14.6m at 30 September 2021) and included a £12.7m long-term mortgage on a freehold property at Leyton purchased in December 2018 for £19.6m.

Stuart Munro, CEO of FIH, comments:

We believe the outlook for the Group remains positive. Further opportunities to work with the Falkland Islands Government and the UK Ministry of Defence are being explored by FIC and a return of tourists in the austral spring would further boost trading. In parallel, costs are being carefully managed in Momart and PHFC in line with their ongoing trading recovery.

Conclusion

The last time we covered this ‘eccentric mix of businesses’ was in 2013 (!) so it’s about time we updated our views. There’s little in the way of equity dilution over the years, and a good chunk of debt is property mortgage, so the company looks secure.

Property can be attractive in terms of hidden value and downside protection, but the company has precious little to show by way of share price appreciation over time.

Dividends have also been choppy.

It might be worth a look for investors scouring the market for neglected and hidden value, but the shares look like they are so illiquid that it’s hard to see this stock appealing to a lot of people. Small free float too, at c39%. The business is interesting though, in the sense that it probably has a fascinating history, dating back as it does to 1851.