Small Cap Value Report (Fri 17 Dec 2021) - AIR, TUNE, NWOR

Good morning, it's Paul & Jack here with the last SCVR for this week. What a dreadful week it's been. Never mind, the show must go on.

Agenda -

Paul's Section:

Focusrite (LON:TUNE) - getting a bit big for us now, but it's a terrific company, so I like to continue covering its updates. Today we're told that current trading is in line with expectations, despite tough comps from LY, and supply chain disruption/costs. There's a very impressive history of repeated broker upgrades. Valuation is toppy though, so there's no room for disappointments.

National World (LON:NWOR) - from yesterday, a positive "substantially ahead of the Company's expectations" trading update for FY 12/2021. This is the new holding company, cleared of legacy issues, from the wreckage of Johnston Press. I think it looks quite interesting.

Jack's section:

Air Partner (LON:AIR) - I hold - profits for the year to end Jan 2022 to be materially ahead of expectations. It’s been a strange time for Air Partner, with exceptional FY21 profits due to lockdown-related air freighting activity. But as this subsides, the group has seen a more general pick up across its divisions. It’s strategy of diversifying its operations appears to be paying off, and the valuation remains modest.

---

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.

---

Paul’s Section

Focusrite (LON:TUNE)

1,583p (pre market open) - mkt cap £924m

Focusrite plc (AIM: TUNE), the global music and audio products company supplying hardware and software used by professional and amateur musicians and the entertainment industry…

Background - TUNE is a bit above our usual c.£700m market cap limit, but I think this is an interesting group that has done very well, so want to keep covering its updates.

It’s an owner-managed business that doesn’t seem to have put a foot wrong since listing in late 2014. There have been a series of acquisitions, funded from cashflow.

It’s often said that when management are founders, and/or own a large stake in the business, then they’re much more protective of equity, running businesses with conservative balance sheets (so they survive downturns intact), and being very reluctant to issue new shares, which benefits all shareholders in the long run.

That’s certainly the case here - despite the acquisitions, the share count has remained static, which I very much like -

.

Trading Update (AGM)

The company has an unusual 31 August year end, so today updates us on Q1: Sept-Nov 2021.

My summary of the trading update -

“Demand has remained strong” in Q1

Revenues in line with mgt exps (despite strong prior year comparatives)

Recent acquisitions going well - expecting positive effect from “numerous cross-business initiatives”

Supply constraints continuing - shortage of components

Freight & shipping costs “remain significantly higher than normal”

“Although these challenges remain unpredictable, not least because of the Omicron variant, we are currently managing them in line with our expectations. "

My opinion - Normally I’m wary of exponential-looking share price charts like TUNE’s, but in this case the track record is so impressive, it looks justified by the fundamentals -

.

.

My main worry about TUNE was scuttlebutt from musicians I know, who told me the core products are terrific, but tend to be one-off purchases, boosted by the pandemic. Hence I was worried it might demonstrate the same pattern of reduced earnings as Gear4music Holdings (LON:G4M) (I hold) for example. That's reinforced by the huge jump in earnings in 2020 - sustainable or not?

The good news for TUNE shareholders, is that the opposite seems to be the case, with earnings forecasts steadily increasing of late. So maybe the growth is structural, and driven by proliferation of content creators on the internet, rather than one-off purchases fuelled by the pandemic?

A smashing trend here (helped by acquisitions too) -

.

The difficult question is valuation. TUNE has performed amazingly well, and the valuation reflects that - see below - a forward PER of 32.2 leaves no scope for disappointment. In line with expectations might not be enough.

We’ve seen painfully this year, that growth stocks which are perceived by the market (rightly or wrongly, only time will tell) to have gone ex-growth, get absolutely clobbered - I’m thinking in particular of Boohoo (LON:BOO) (I hold) and Asos (LON:ASC) (I’ve sold these to buy more BOO recently, for full disclosure).

I have no idea if TUNE can continue the strong earnings growth or not. I’m just flagging the risk that the shares could de-rate at any point if growth stalls. No sign of that at the moment though, so all good. It’s a very unforgiving market right now though, if anything does go wrong.

Overall then, lots of positives with this share, it’s got a wonderful track record. Let’s hope that continues, which today’s update suggests it is. Top slicing big winners can sometimes be a good idea though, as Andy Brough pointed out in a recent PIWorld interview, which as always with Andy is great value!

.

.

---

National World (LON:NWOR)

30p (up strongly yesterday) - mkt cap £77m

The few companies reporting today look quite boring, so I’ll circle back to this one which we overlooked yesterday, when it bounced strongly on positive news. It’s good to see some small caps responding positively to good trading updates, which reinforces my view that the quite savage small caps sell-off in recent months has been indiscriminate, which creates some buying opportunities, selectively.

I should emphasise that I’ve only looked at this share once before, here on 9 Sept 2021, so am not particularly au fait with the company. It’s like a mini version of Reach (LON:RCH) - a declining newspaper business, but with potentially interesting digital growth. Also, RCH has a humongous pension deficit (make sure you look at the actuarial numbers, not the accounting numbers), whereas NWOR is clean, because the legacy issues were dealt with when its core businesses went bust under the Johnston Press umbrella.

This was published yesterday -

Trading Update

This sounds good -

National World plc announces a trading update for the year ending 1 January 2022.

Performance in the second half of the year has remained robust and the Board expects the full year adjusted results to be substantially ahead of the Company's expectations.

Since the acquisition of JPI Media and its subsidiaries on 2 January 2021, the modernisation of the business has proceeded at pace and we have established a media presence across the whole of the UK with numerous online launches. At the same time, we have delivered efficiencies and there has been an improvement in advertising revenue.

Guidance - FY 1/2022 revenues c.£85m

H2 revenues broadly flat against last year (LY)

Digital revenues up 20%, but no figures given. For context, digital revenues were quite small at £5.8m in H1, or 13.8% of total H1 revenues.

Print revenues - down (3)% in H2, improved trend, from (9)% decline in H1.

Forecast cash of c.£23m expected at FY 1/2022 year end (up £4m in last 6 months) - although note that the last balance sheet did have £6.0m liabilities labelled “borrowings” and “deferred consideration”, so I would deduct that from cash, to give £17m net cash - still a lot for a £77m market cap company. The last balance sheet was good overall, with no legacy issues.

There’s more detail in the RNS about strategy & operational progress, which I won’t repeat here.

Outlook -

The Group is currently implementing a new phase of restructure to create a sustainable premium content and sales business as well as maintaining performance in the near term. Management is actively engaged in developing acquisition opportunities primarily targeting businesses that will enhance its digital capabilities and broaden its content base beyond news. It is also open to adding to its heritage assets to build scale and enhance shareholder value through synergies.

Whilst the trading environment remains uncertain due to the pandemic and rising newsprint and energy prices, the Board looks forward to reporting further progress in 2022 and beyond.

My opinion - I think NWOR looks quite good, and something readers might want to take a closer look at yourselves. As always, never a recommendation, just my personal opinion after a quick review (sometimes right, sometimes wrong, as my crystal ball is in for servicing & recalibration at the moment unfortunately, after a series of malfunctions).

I wouldn't worry about the low StockRank at this stage, because it’s hampered by lack of broker forecast information, and would otherwise be higher I think.

.

.

---

Jack’s section

Air Partner (LON:AIR)

Share price: 87p (+6.1%)

Shares in issue: 63,562,601

Market cap: £55.3m

(I hold)

Founded in 1961, Air Partner is a global aviation services group providing aircraft charter and aviation safety & security solutions

It has two divisions: Air Partner Charter, comprising Group Charter, Private Jets, Freight and Specialist Services; and Air Partner Safety & Security, which comprises Baines Simmons, Redline Assured Security, and Kenyon International Emergency Services.

Air Partner has been trading well for a while now - at first, lockdowns led to bumper freight business which pushed FY21 profits up to record levels, but what is arguably more impressive is that momentum has increased in other divisions since then (although the overall level of group profitability has reduced somewhat).

Trading update

High levels of demand in air freight, particularly to do with vaccine transportation, has driven strong H2 trading. Private jets has also done well in the UK and US.

Group charter and safety & security have proven more challenging, however, as Covid restrictions restrict opportunities. Government and sports work here has remained strong, but tour operators, automotive and conferences are still not back at pre-pandemic levels.

The net result of the above is that the group expects profit before tax for the 12 months to 31 January 2022 to be materially ahead of current market expectations.

Cash (ex-JetCard deposits and £1.4m in deferred consideration for Kenyon) stood at £12.7m at the end of November 2021, up from £9.8m back in July. Encouragingly, £5m of bank debt has been repaid.

The Board continues to view the future with confidence, in spite of the challenging backdrop created by the pandemic.

Conclusion

FY22 forecasts (Air Partner's financial year ends on 31st January) are very modest at £1.2m of net profit versus a market cap of c£52m. I would question that, as the group has already reported an H1 statutory profit before tax of £3.5m (and PAT of £2.7m).

Looking at the Cenkos note, it forecasts adjusted profit before tax of £6.9m for FY22, £8m for FY23, and £8.3m for FY24. There’s not enough detail in the published model to see the bridge between adjusted and non-adjusted measures, so that remains a question mark for now. In the H1 interims, Air reported underlying PBT of £3.8m compared to the statutory result of £3.5m, so presumably the difference is modest.

It looks like the group’s broker has struggled to model the changing dynamics here, with a big drop in forecast EPS at the start of the year, followed by multiple small improvements and then today’s ‘ahead of expectations’ update.

Upgrading the FY22 EPS figure by 10% to 8.6p gives a PER of just over 10x which looks modest given the net cash.

Air Partner has a history of making acquisitions and there could be more to come. This strategy comes with risk, as it involves diversifying out into new lines of business, and there have been other issues in the past (including an accounting error back in 2018 that led to the resignation of the CFO). The latter led to a sudden share price drop.

So it’s one to monitor, and Air Partner continues to benefit from Covid dynamics - vaccine distribution now - so there is a question around what fully normalised trading looks like. But the momentum is good and it’s hard to argue with the valuation, in my view.