Small Cap Value Report (Fri 25 Jan 2019) - IDEA, SND, NCC, JOUL, EMR, TMMG, HOTC, MIDW, TRB, BON | Paul Scott

24th Jan '19 by Paul Scott

59 comments 15289 reads

Good morning, it's Paul here.

Just to get you started today, I reviewed 8 companies last night, which was clearing some of the backlog from earlier this week.

Then I'll look at Friday's RNSs once I've had a lie-in, and a full english at my favourite local Turkish cafe here in north London!

Ideagen (LON:IDEA)

Share price: 150p
No. shares: 219.2m
Market cap: £328.8m

Interim results

Ideagen PLC (AIM: IDEA), a leading supplier of Integrated Risk Management (IRM) software to highly regulated industries, announces its unaudited interim results for the six months ended 31 October 2018.

These numbers were published on Tuesday this week (22 Jan 2019), and have been well-received by the market, with a good bounce in the share price from a recent low of c.119p, to 150p now.

I met the Exec Chairman both at Mello Chiswick, and also privately for a working lunch, in late Dec 2018. I wrote up my thoughts afterwards, here. I've just re-read those notes, to refresh my memory.

Interim results - key points;

Good revenue growth of 22%, to £21m
Organic revenue growth is strong, at 8% (the rest has come from acquisitions)
Recurring revenues now 67% of the total. This is expected to grow to 74% by 2020, as the group transitions more to a SaaS model
Adjusted profit before tax up 17% to to £4.8m - note the strong profit margin of nearly 23% of revenues (if you accept the adjustments)
Net debt of £1.3m - a very good position for an acquisitive group. I'll look at the balance sheet more closely below

Positive-sounding operational review (I won't repeat it here). 95% customer retention rate stands out as very pleasing.

Current trading & outlook - sounds fine;

First half performance in line with market expectations and outlook strong for second half...

Current trading is in line with market expectations and the acquisitions made in H1 are performing well.

The IRM market continues to grow and our success in winning new business together with our levels of recurring revenue and repeat business from our 4,000 strong customer base provides the Board with confidence in the outlook for this year and beyond.

What's IRM? It stands for "integrated risk management".

Balance sheet - net assets of £71.7m, is top heavy with intangibles of…

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ISAallowance

25th Jan '19

"Btw, for Cloud, read “someone else’s server” so companies with sensitive data may be sceptical about leaving it in the hands of someone else with generic levels of protection."

Where someone else is normally Microsoft, Amazon, IBM or one of the other very large players, who one would hope are putting more skill and effort into securing their huge cloud infrastructure than any individual small (or large) business using it possibly could.

jdnthomas

To address the most important point you raised Paul: I only ever wear a scarf to keep my neck warm, and none of the styles shown in that video would achieve that.

Glorenfeld

Hi Steves, the research note is available on Research Tree.

mrosbiston

I had another look at Hotel Chocolat (LON:HOTC) this morning. There is nothing screaming out fraud - but there are some amber flags on the story.

Receivables and Inventory has increased quite significantly – despite benign revenue growth. As mentioned, this sets off the Beneish M Score earnings manipulation radar.

Capex is pretty high and will now be funded entirely by operating cashflow, cash balance is very low so this represents a big risk to me, as growth is almost entirely driven by store openings.

If unable to open enough stores, growth stops, which at a PE of 30x is dangerous.

Liable to significant negative operating leverage if costs increase, unlikely to be able to increase product prices (in my view) and has exposure to cocoa price - what happens if this increases back to 2015 levels, and add in staff cost increases - its just a tough battle to improve margins.

Management seem to be trying a lot of things to acquire new customers

Actual accounts seem fairly clean - just concerns the operating model has significant risk.

Mark Tughan

Mountfield (LON:MOGP) - £7m of contract wins. Appear to be significant for a company with an EV of £4.3m and 2017 sales of £12m.

Paul noted recently that the HY results were "very encouraging" (H1 was up 56% to £8.9m). Also: "On current trends, it's probably going to look very cheap in comparison to a £5 million market cap. [SP at the time as around 2p]. While it may have individual merits, it's not for me simply because this is not a sector I want to get involved with."

I had taken a tiny slug last year, but have just bought more. Possible multi-bagger / deep value? Famous last words - speaks a holder of Revolution Bars (LON:RBG) .

Inline trading statement from RTC (LON:RTC) which has sent the share price 10% higher on the day. RTC (LON:RTC) are a Derby-based micro-cap (~7.5m) recruitment agency who are fairly cheap (~7 ttm p/e, ~7% div yield).

I have a very small holding.

sharw

Regarding NCC (LON:NCC) a small bounce this morning. The IC headline says:

"NCC's (NCC) shares took a dive after half-year numbers revealed weaker UK revenues and a significant squeeze in the cash conversion ratio from 72 per cent to 33 per cent. Management now anticipates full-year adjusted operating profits of £34m, down from house brokers Peel Hunt and Jefferies' prior estimates of £35.3m and £34.9m, respectively".

(to read on you need to subscribe)

This suggests it was the cash conversion rather than the slight profit miss that caused such a massive fall yesterday.

mammyoko

After-the-event questions have been raised in several places in respect of Patisserie Holdings (LON:CAKE) about whether it was realistic for it to be reporting sales of around £570k for each and every store (£114m across an estate of 199 stores). Somebody calculated that this would require every location to be taking nearly £200 per hour every hour across every location. I am not familiar with cafe takings but people who are said that this was a ludicrous figure (after Patisserie Holdings (LON:CAKE) had announced its problems). I think, therefore, that it is legitimate to raise the question in respect of Hotel Chocolat (LON:HOTC). They are claiming, I think, to make sales of £330 per hour for every hour that they trade across their estate of 113 locations (£116.3m sales / 113 stores = £1.03m per store / 3,120 opening hours per year = £330 per hour). I'm afraid that if the Patisserie Holdings (LON:CAKE) takings per hour per location look suspicious then those for Hotel Chocolat (LON:HOTC) look even more suspicious. Although Hotel Chocolat (LON:HOTC) is reporting PAT of £10m vs £16m for Patisserie Holdings (LON:CAKE) there are more than a few similarities in the accounts (as well as the product). A long time ago, in a different life, I knew Luke Johnson when he was running a night-club in Oxford. The hubris doesn't entirely surprise me although I will always be grateful to him as I met my wife of 27 years at his night club. I have no personal knowledge of Mr Thirlwell or Mr Harris although I note that Hotel Chocolat was originally called Choc Express. Possibly in homage to Mr Johnson's other vehicle. Just another spooky coincidence? I do note, however, that Mt Thirlwell's background prior to developing a passion for chocolate was in sales and marketing. Of course, there's absolutely nothing wrong with that but it helps to explain how they are able to sustain a business selling a non-premium product at premium prices. I think that the sales per store look highly questionable in light of what has been questioned at Patisserie Holdings (LON:CAKE). But, I reiterate, I leave it to others who have more experience of small, retail establishments to comment on whether takings of £3k per day, every day of the year across every site is credible.

andrewdb

I do not particularly like Hotel Chocolat (LON:HOTC) chocs either but looking at the business area they are in...
... would not be so downbeat.

You want to buy chocs for someone - a slightly nicer box than you can get in the supermarkets.

In Bristol, with a quick google I see guilbert's (longtime fan), hotel chocolat and one other.
So most people will go to hotel chocolat.

That the choc is 'different' is part of their USP. If it tasted the same as Cadbury / Montezuma's / or your fave mainstream brand, well, you would buy that.
This is a place where Thorntons went wrong.

So, imo there is a long term space in the market for this sort of thing and they might fill that space and might make money doing that.

Re Hotel Chocolat (LON:HOTC) Just realised that only 69% of the sales come from the physical shops which makes the daily takings across every site £2,300 and the takings per hour (every hour across every site) £230. Perhaps that is credible? I have my doubts

gregatr0n

Mountfield (LON:MOGP) definitely great value but illiquid share and risky sector. I am holding with trading update due by end of month. Expecting to see over 1.1 million profit for calendar 2018 so p/e less than 4.

0ctag0n

My own experience with Hotel chocolate wasn't great, they messed up the gift wrapping option I asked for due to a website issue. It was a present for my in-laws and they preferred the box of 'artisan' type chocs I had previously bought as a present from Waitrose at a considerably cheaper price.

gbjbaanb

Microsoft may keep their servers secure - but what goes on them is the customer's products, and they are going to be a s insecure as hosted anywhere else. If you do a search, you'll see many incidents of data breaches from Azure servers.

boothbym

Any views on FairFX? Resultslooked good but the share price is down quite a bit?

Zafariqbal

Can I have your view on Sosander, reported on 9th January .

Why is the share price moving down ? Is there a opportunity to buy or is there something fishy going on /

Your comments will be appreciated.

OldSchool05

The squeeze in cash conversion ratio for NCC (LON:NCC) is due to 2 factors as far as I can see:

1) Increased trade debtors (approx £4m) part of which the company is putting down to staff turnover within their credit control team - red flag to me.
2) Reduction in trade creditors due to "normalization of payment terms" (about £4m).

The underlying business seems to be growing quite well, especially Assurance division with top line growth of 10% for the 6 months (incl. 20% growth in US market).

Profit forecasts don't seems to have changed significantly, certainly not to warrant steep fall yesterday. I have a tendency to agree with Paul here that the company looks rather accident prone when viewed through 3 year share price. Investors appear to agree with this and are potentially reacting to another "accident" in the face of credit control problems?

Beginner

Paul reported on Sosandar (LON:SOS) on 9 Jan, as you have noted, and I cannot see any further changes Paul could comment on. Best to watch and wait, do your own research, and decide on your actions. Paul isn't paid enough to be all our brokers!

agreed it seems a little high, but with the price of their products i wouldn't be surprised to see an ave spend of £20 per customer. 100 customers per day would be achievable, certainly in London and in transport hubs.

where they might have problems is that they have a fair bit of critical mass now - i don't think London can sustain any more than its current 27 locations. So store openings are going to be in smaller locations which might struggle to hit EBITDA numbers.

other concerns are average leases of 5 years and the large increase in finished goods (for inventory) - if this is sustained then it might not be good.

on the positive side, its a slick operations, financial reports are very nice, governance seems good, remuneration is reasonable, auditor is not GT.

if there is to be a profit warning, i would certainly be wary of a drop in share price ahead of interims.

barnetpeter

My local store is busy but not that busy! The shares look as expensive to me as the chocs.

skyvan

You're right about Hotel Chocolat chocolate: nearly as awful as Thorntons. And my wife agrees with you.

Small Cap Value Report (Fri 25 Jan 2019) - IDEA, SND, NCC, JOUL, EMR, TMMG, HOTC, MIDW, TRB, BON

Ideagen (LON:IDEA)

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Paul Scott

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