Small Cap Value Report (Fri 21 June 2019) - IQE, RDL, PRP, FFX, GOAL, TSLA

Friday, Jun 21 2019 by
49

Good morning!

Today there are updates relating to:

Also, a few words on £RDL (in which I have a long position).


IQE (LON:IQE)

  • Share price: 43.9p (-39%)
  • No. of shares: 791 million
  • Market cap: £347 million

Trading update

Wow, commiserations to holders at this one.

We are going to have a sales miss for FY 2019. Revenue will be in the wide range of £140 - £160 million, failing to hit consensus of £175 million.

Comment:

This is a larger impact than the previously guided risk related specifically to Huawei, due to the far-reaching impacts on other companies and supply chains that are now becoming evident.

Shareholders are right to be disappointed that management failed to predict the "far-reaching impacts" of Huawei's problems.

There has been a reduction in forecasts from a number of chip customers - I wonder if Huawei is the only major phone manufacturer whose demand has receded, or if there are more? IQE refers to a "weak smartphone market" which has impacted H1.

Divisional Analysis

  • Photonics - now forecast to have less than 30% revenue growth, versus >50% previous guidance. Lots of work being done to bring in new customers.
  • Wireless - now forecast to decline by 20%-25%, versus previous guidance of a 15% decline. There are "significant global supply chain shifts".
  • Infra-red - still doing well. Guidance unchanged for 15% growth.

For context, the main contributors to adjusted operating profit last year were Wireless (£12 million) and Photonics (£11.5 million). Infra-red contributed £3.4 million.

Profit Guidance/Outlook

This is where things start to look really bleak.

Adjusted Operating Profit Margin - "significantly below" previous guidance of over 10%.

I've spoken many times about the capital-intensive nature of this business. It is now forced "to avoid non-critical capital expenditure".

There will be "active management of all cash flows" to ensure the company doesn't break through the limits of its lending facility.

Outlook - "cautiously optimistic" (this phrase doesn't help much). Seems happy with the bigger picture outlook:

...we expect that the significant market drivers such as 5G, connected devices…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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RDL Realisation PLC, formerly Ranger Direct Lending Fund Plc, is a United Kingdom-based company focused on realization strategy and a managed wind-down. The Company’s investment objective is to seek to effect a managed wind-down with a view to realize all of its investment. It seeks to sell its investments either to co-investors in the relevant investment or to third parties. more »

LSE Price
479p
Change
1.6%
Mkt Cap (£m)
76.0
P/E (fwd)
n/a
Yield (fwd)
n/a

RDL Realisation
Price
121.5p
Change
 
Mkt Cap (£m)
n/a

IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

LSE Price
63.7p
Change
23.4%
Mkt Cap (£m)
408.3
P/E (fwd)
27.4
Yield (fwd)
n/a



  Is LON:RDL fundamentally strong or weak? Find out More »


37 Comments on this Article show/hide all

hawkipa 21st Jun 18 of 37
2

Hi Graham,

Really high quality analysis today. Thanks.

I'm intrigued with the RDL Realisation (LON:RDL) position and very much like the way you worked through your thesis, which makes sense to me. If I play devils advocate for a moment these are some questions that it has prompted for me.

1, Would it not make more sense to use bigger haircuts to figure out your margin of safety?
2, What price on the time of the money potentially locked up? If it becomes unlisted and possible legal action occurs, does this not present a credible risk that your investment could take a long time to be crystallised and whilst the return might be good for a one year play, what if it is five or possibly even seven years?

It's only fair to say I am not particularly familiar with the situation, so my questions might prove to be idiotic, but those two points gave me enough reason to initially think it would go straight to 'too difficult' for me. However, I'm intrigued to know your thinking on those two points and whether I should get over myself and read more on the story.  

Regards
Paul

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mojomogoz 21st Jun 19 of 37
1

In reply to post #485691

Hello again timarr

We'll have to disagree on how to weight and attribute things. Time will judge.

I regularly touch dirty things...this may make me stronger or could be a perversion. Time and account balance will judge

Ciao!

PS if I thought Taptica International (LON:TAP) were filthy dirty dirty I wouldn't play...but I think they are a bit mucky.  Any entrepreneur and entrepreneurial business has dirt on them. With the old CEO I've gone into it at length before and wont here (time!). Defacto he's a (civil) fraud. Personally, I think the PE company that bought his old business were stupid and sued to save face plus the payment industry was even more wild west than ad tech and the paypal issue was probably a weekly event for them and others and seen to be normal circumstances rather than something to report to PE company. Its grey and there's probably a bit of naughty...but I've been in position of pitching myself to PE and VC in the past and they don't want to hear the full truth...they want to be sold (particularly most VCs)

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davidjhill 21st Jun 20 of 37
4

In reply to post #485566

Mojo : re Taptica International (LON:TAP) at least they appear to have moved back towards the price before the Uber nonsense. I think the new share buy back is likely to have a more material upward impact on the share price than last time for several reasons

1) The original ousted founders have disposed of their stock and thus there is no overhang.
2) The funds used for that purchase also significantly reduced the amount that could be bought in the market at the time and thus limited impact
3) The stale bulls that were frustrated sitting there prior to the last buy back were selling into strength and should have now exited
4) The RythmOne shareholders who wanted to exit have had an opportunity to do so

Given the materially accretive nature of this buy back at extreme PE levels the EPS uplift should help smooth any short term trading gremlins.

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mojomogoz 21st Jun 21 of 37

In reply to post #485711

davidjhill - agreed - but waiting for the (perceived) reality to arrive ;)

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prem14 21st Jun 22 of 37
4

Hi Graham
About IQE (LON:IQE) , while I tend to agree with your views on its current state I disagree that it has made "poor historic returns for shareholders". Even Ed's portfolio in 2017 made a good return. I myself including many others have made decent profits out of it. Sometimes, you just need to judge when to get out of investments.
Cheers.

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rmillaree 21st Jun 23 of 37
6

IQE (LON:IQE)
prem14
I disagree that it has made "poor historic returns for shareholders". Even Ed's portfolio in 2017 made a good return. I myself including many others have made decent profits out of it. Sometimes, you just need to judge when to get out of investments.

I think the poor historic return is pretty much a fact  looking at a reasonable timeframe of say 2 years- shareprice now is at the lowest level it has been for over 2 years (i think) .

To add insult to injury the company took £95 million from bods issuing new shares at 140p

So i don't see how you can call this anything but a poor return.

Note if we could all know when to sell shares for any company  the whole investing game would be simple to make a fortune -  take the could have sold for profit argument to its extreme and Say Patisserie Valerie wasn't a bad investment as on could have sold out the day before the stock was suspended - there are very few shares where one couldn't get in and out sometime at a  profit.

IMHO

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FREng 21st Jun 24 of 37
3

In reply to post #485741

rmillaree

I sold IQE (LON:IQE) in November 2017(162p, having bought at 83 and 112) influenced by SCVR comments from Graham and Ramridge that IQE was fully valued. It rose a bit after that but then declined.

I find selling much harder than buying and rarely get the timing near optimal, but the analyses in SCVR from experienced investors have significantly improved my results.

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Graham Neary 21st Jun 25 of 37
6

In reply to post #485726

IQE (LON:IQE)

Hi prem, by returns I am referring to profits, free cash flow and dividends. I don't usually praise companies or management teams just for having their share price go up :)

G

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purpleski 21st Jun 26 of 37

In reply to post #485621

Hi Timarr

About Taptica International (LON:TAP) why do you say:

“they're using legitimate interest and contractual necessity as the basis for collecting and sharing data when they should be establishing consent...”

That is why is “...legitimate interest and contractual necessity...” sufficient reason in their case?

I hold Taptica International (LON:TAP).

Thx

Michael

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Gromley 21st Jun 27 of 37
5

An interesting afternoon RNS from GAME Digital (LON:GMD) - recommending acceptance of the 30p / share bid from Sports Direct (Mike Ashley).

The phrase that somewhat amused me was :

In coming to this recommendation, the Board has considered the growing size of Sports Direct's shareholding in the Group and the reliance GAME has on Sports Direct for supporting its future growth prospects (especially the future rollout of BELONG and GAME venues under the collaboration agreement)

Which I would cheekily translate as : "Mike has so much power here now that you'd better take the price he is obliged to offer, otherwise he'll find a way to have you shares for nothing."


Anyway that is now the end of that particular saga, long term shareholders may well feel short-changed , but to be honest it could have been a long and uncertain path to getting better returns.



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fwyburd 21st Jun 28 of 37
2

In reply to post #485776

Hi Gromley,
I like your cheeky translation but I don't like their weasly words about Cannacord, telling them it's fair value. I hate people hiding behind others rather than taking responsibility for their own opinions. Speaks volumes about the current management who I expect will get fired PDQ.

But is it the end of the saga?
I can't work out who owns what proportion of the shares at the moment but it's been suggested that Odey and Bennbridge have been buying since the announcement. Could they hold out for a better deal and block this? We shall see
Have a great weekend
cheers
Francis
PS: well done Graham for another great week of insight and analysis

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timarr 21st Jun 29 of 37
2

In reply to post #485766

Hi Michael

I'm not sure what your question is, but I can explain what I mean.

The main basis for collecting, processing and distributing data under GDPR is personal consent in which the person - let's call them Tim - is asked for consent for their data to be collected. However, it's not enough simply to get Tim to click on a box, you have to simply and clearly explain why you're collecting the data and get him to consent to each different use.

There are a number of other bases for collecting personal data that don't require consent, and these can be used in defined circumstances. However, the ICO report (https://ico.org.uk/media/about...) makes it clear that in most case the data being collected is not simple personal data but enhanced - so-called special category personal data - because it's used to categorise consumers. And the only basis for this being collected under GDPR is explicit consent.

This means - by definition - that any ad tech company collecting Tim's data must ask for consent. And the ICO finds that most (perhaps all) aren't doing so. However, even where they're collecting simple personal data these companies are generally using cookies which require ... explicit consent. So pretty much all data used by ad tech companies requires explicit consent.

What most ad tech companies appear to be doing is relying on the "legitimate interests" basis for gathering data which essential collapses to "we need to collect this for our business model" and as the ICO points out that fails the legitimate interests test in multiple ways. Worse than that, the ICO finds the core activities of the ad tech industry - collecting and sharing personal data - fail to meet GDPR in multiple ways.

The other way the industry is seeking to meet GDPR is by using contractual controls where they use contracts to specify what the users of the data they collect can do. However, the ICO finds that this is not being properly managed - you can't just have a contract, you actually have to monitor what the third-party is doing to make sure that they're complying to it.

My point about Taptica International (LON:TAP) was that their users' T&Cs include both legitimate interests and contractual control terms - which the ICO are now saying aren't permissible as the basis for the ad tech industry failing to seek consent. But as the industry relies on collecting data and sending it to hundreds of third-parties for no-one knows what purpose then they have a problem seeking consent.

Taptica International (LON:TAP) have in the past discussed their use of anonymised cookies which may help get around this. I could never really understand how that would work with their business model and I'm not even sure it protects you from GDPR. But maybe.

I'm not sure if that answers your question, but if you reword I'll have another stab (at the risk of sending all readers to sleep).

timarr

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Graham Neary 21st Jun 30 of 37
2

In reply to post #485701

Hi Paul,

Thanks for the feedback as always.

Re: your questions,

1. My bear case scenario involves a 100% write-down of Princeton and 100% of Interational SME, and 50% of Vehicle platform.

Vehicle has already been written down by $9 million.

The value ascribed to it after the writedown at March 2019 was $31 million, or $40 million before the writedown.

It is possible that the writedown was unsufficient. However, I calculate that it's roughly enough to bring the recorded amount down to the underlying value of collateral (the company said LTV was 1.29x in March, excluding the writedown, and 40/1.29 = 31. The picture is complicated by the fact that these numbers include the value of a $4.5 million loan which does not seem to have been collateralised).

Writing Vehicle down by another $14 - $15 million would mean that the $4.5 million loan defaulted (although it is supposed to have been repaid already, and the company didn't notify the market that it had defaulted in yesterday's update) and/or that there were there massive defaults in the collateralised portfolio, with the recovered amounts approaching 50% of the estimated value of collateral. That's a plausible "worst-case" scenario by my standards.

I don't see any reason to write down SME/CRE or Real Estate Loans, and the other platforms are very small.

2. As far as platforms in run-off are concerned, management are "working to ensure that the overwhelming majority of this category will be repaid by late 2019". Princeton could take a while but the others should be a lot faster. Management are incentivised by a bonus scheme based on the IRR for shareholders.

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Graham Neary 21st Jun 31 of 37
1

In reply to post #485781

Many thanks Francis -- I'd like to point out that Paul did Monday and Tuesday though. A shared effort! Have a great weekend. G

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mcfly46 23rd Jun 0 of 37
1

In reply to post #485801

It can't only be me that thinks looking forward to a company struggling is a bad look? You've gone from a curious interest to a strong agenda to see the worst in anything Tesla does. Just seems a bit OTT to me.

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shipoffrogs 23rd Jun 33 of 37
1

In reply to post #485956

I second that. Elon Musk has his faults but he has made remarkable progress in three different businesses simultaneously - one as a competitor to NASA!!

He is a "man in the arena".

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jonesj 23rd Jun 34 of 37
2

Elon Musk's rockets are very impressive. It wasn't that long ago that US rockets struggled to take off without falling over. Now they can land on their end.

However, Tesla are operating in the high capex & low margin car business. They lack scale. They make no money. Competitors in their segment have started to launch within the last 12 months. There have been many lies and broken promises about the product. Yet at times, the valuation has resembled that of some fancy tech stock. For a car maker.

This is the only company I have ever shorted.

[Jeff Bezos also has rockets that land on their end & another business which is way better than Tesla]

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mcfly46 24th Jun 0 of 37

In reply to post #485966

no doubt theyre not perfect, and at this point it could go either way but i'll offer some counter points to your points in the interest of discussion.

They lack scale- hard to argue that they're not scaling rapidly, the factory in shanghai should at least double production. https://www.hypercharts.co/tsl..    

They make no money, comes back to your point about high capex, some people will forgive because of rate of growth and others won't.

Competitors launching cars - it is widely stated no other manufacturer has matched the 2012 model s, but this is again an opinion thing and if you like Tesla as a brand.  We still haven't seen the much awaited 'Tesla killer'.

Lies is quite strong, I genuinely believe Musk believes they will achieve the great things he predicts and when they will achieve them.  Though he is undoubtedly an optimist and dreamer and they regularly fall short of his plans.

I think they are more than a car stock and their tech is way ahead of other car manufacturers though is easy to argue with all the money and power they should be able to catch up.  IF they will is something we have to make our bets, and take our chances on! 

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Graham Neary 24th Jun 36 of 37
1

In reply to post #485961

Man in the Arena? Yes, but...

-- "Funding Secured".

-- "I am optimistic about being profitable in Q1 and all quarters going forward."

-- "The houses you see around you are all solar houses. I don't know if you know that. Did you notice?"

-- "I think the most profound thing is that if you buy a Tesla today, I believe you are buying an appreciating asset – not a depreciating asset.”

-- "Tesla advanced Summon ready in ~6 weeks!" (Nov 2018)

-- "From our standpoint, if you fast forward a year, maybe a year and three months, but next year for sure, we'll have over a million robotaxis on the road."

.... I could go on and on and on. It's a very long list of misleading statements and false promises. Bears and short-sellers are the antidote to this problem!

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jonesj 25th Jun 37 of 37

In reply to post #486171

I can argue that Tesla are not scaling rapidly any more. US quarter on quarter sales have been flat and the Model 3 seems to be cannibalizing sales of the larger and usually more profitable models. Growth will be constrained by better quality competitors. By quality, I mean fewer defects and defects that get fixed quickly by proficient dealer networks). The road tests on competitors are mostly favourable.

The China plant has the potential to help growth. However, this depends on demand being sufficient and Tesla lasting long enough to get it to full scale. Regarding demand, there are numerous other electric cars on the roads in China. Also, Chinese consumer sentiment towards American branded products might be influenced by politics.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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