Small Cap Value Report (Fri 26 Aug 2022) - MCRO, HDT, ALU, TRCS

26th Aug '22 by Paul Scott

18 comments 6945 reads

Good morning! It's just Paul here today, as it's Friday (usually quieter). I'll sign off for today, and the week, so today's report is now finished.

Have a lovely weekend, and if you fancy it, do tune in for my next podcast summary of the week, on QualitySmallCaps - it should be up by Sat lunchtime.

Agenda -

Everything is written by Paul today, with it being Friday.

Main sections:

Alumasc (LON:ALU) - announces a disposal of its loss-making Levolux subsidiary, which gets its £2m loss off the books and into discontinued operations for FY 6/2022, which is handy! I have a ponder about cyclical businesses, and conclude that we don't know what happens next at this stage.

Tracsis (LON:TRCS) - I circle back to its positive year-end trading update issued this Weds. It's not cheap, but I think Tracsis looks on a roll, with positive forward-looking commentary. Thumbs up from me, although it's not cheap, but the premium rating looks justified.

Short sections (no further detail):

Micro Focus International (LON:MCRO) [no section below] - not a small cap but… a recommended cash takeover bid has been announced for Micro Focus, at 532p per share. The bidder is a large Canadian software group called OpenText. What is so noteworthy about this, is the bid premium - a whopping 98% above last night’s closing price for MCRO shares! This is the second big premium bid from Canada recently, following on from RPS (LON:RPS) which received a bid at a premium of 76% from Canada’s WSP - a larger consulting group.

I looked at MCRO here in June, concluding that it’s clearly financially distressed, with one of the worst balance sheets I’ve ever seen, including a $3.65bn net debt pile, that it was struggling to reduce. Although as noted in that report, software companies can often attract surprisingly high takeover bids, as we saw with EMIS, and smaller Proactis & Tungsten. Here’s another one, where a bidder obviously sees considerable value in the business, and seems happy to take on its gargantuan debt.

Software does seem to be an active sector right now, and it seems the worse the finances, the better chance of a takeover bid! On that basis, maybe WANdisco (LON:WAND) is the next one to be bid for?!

Holders Technology (LON:HDT)…

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planetx

26th Aug '22

Bonhill , Used to have some good shareholders like Gresham but seem to have lost that support looks a bit of a dead duck ?

MrContrarian

My morning smallcap tweet: Please sir, can I have some more?

Oxford Cannabinoid Technologies Holdings (LON:OCTP) Micro Focus International (LON:MCRO) Bonhill (LON:BONH) Nanosynth (LON:NNN) Westminster (LON:WSG)

◄Oxford Cannabinoid Technologies (OCTP)► will delay Phase I clinical trials of OCT130401 to save cash. Cites continuing market uncertainty. Stretches funds to Q4 2023. FD resigns. She is thanked. [SP=0.9 Cap=9m]

◄Micro Focus (MCRO)►not a smallcap but shows how cheap UK companies can seem to buyers.Rec offer of 532p, a 98% premium [SP=267.8 Cap=1063m]

◄Bonhill (BONH)► sells Business Solutions subsidiary for £723k. Had rev of £2.4m and EBITDA £0.4m. Co will make £0.6m PA cost saving "from streamlining central support headcount, reduced office space and lower IT costs". So the EBITDA was illusory. [SP=5 Cap=6m]

◄nanosynth (NNN)► £2.9m death spiral with Lanstead. It's well disguised as a convoluted 'Subscription and Sharing Agreement'. [SP=0.46 Cap=10m]

◄Westminster (WSG)► wins £100k Mass Entry Screening solution for an 'iconic building'. I think that's probably detecting possible weapons without scanning on by one. [SP=1.22 Cap=4m]

Quilleron

You should be able to edit your post at least up to 15 minutes after you posted - please correct the typos, get the link working and remove the frivolous and distracting graphic.

Samscvb

"Software does seem to be an active sector right now"

MAYBE be some juice left in AVEVA (LON:AVV), strategic bidder that owns 60% already: Investegate |Schneider Elec. SE Announcements | Schneider Elec. SE: Response to press speculation

fwyburd

Re: Steve Holdsworth

I posted yesterday about his recent death. If anyone here is on Twitter, there will be a virtual 'homage' to Steve tomorrow (Saturday) where you post a picture of a pint of beer (as he did every Saturday) at 10am with the hashtag #pintofhope. There's also a nice piece from ShareSoc here https://www.sharesoc.org/blog/...

cheers

Francis

TheRaven

Safestyle UK (LON:SFE) Safestyle - any views on today's news of a delayed presentation?

Bristolian

Carrying on Paul's theme of software company takeovers. Darktrace (LON:DARK) has a market cap is £3.5b but on 15/8/22 it announced that it is in the early stages of discussions with Thoma Bravo, L.P. ("Thoma Bravo") regarding a possible cash offer for the entire issued and to be issued share capital of the Company. Given the news regarding premium offered for Micro Focus International (LON:MCRO) there may be good crossover news regarding the bid for Darktrace (LON:DARK) despite the early stage and lack of bid yet.

chris2021

Bank loan and credit facility both expire Oct 23. Currently rate is LIBOR plus 7% (slightly less for undrawn element of credit facility). 2021 borrowing interest cost was £0.6m, so appears relatively modest with regard to profits. Question is the impact, if any, of the cost of living crisis on sales of replacment doors and windows. Increase in future borrowing rate and decline in sales would be a double whammy hit to profitability.

Stockade

There seem to be no new comments in the last four hours?

Surely not.

Trident

Thanks Paul for the commentary on Tracsis (LON:TRCS) (I hold)

Very much positioned as consultancy/software business, though I suppose the events side of things has a more basic element of providing marhsalls for traffic organisation/co-ordination. However, even there they can layer detailed local traffic flow analysis, which must aide getting local Govt permissions etc. Clearly that side of the business suffered during the pandemic lockdowns, but is bouncing back quite strongly now, helped by the warm weather, no doubt.

The shares have always been fairly illiquid, and this has a part to play in supporting the price. The founding CEO and Finance Director, now moved on, seem to have held onto their original option holding. They set the initial conservative tone on structuring acquisitions, with low dilution, which sensible follow on management have continued. As a cash generative business (particularly from the Railway divisions) they have been able to cross-invest for some diversification.

I guess they see the future as an integrated traffic and people movement analytics business to assist in Town/City and infrastructure planning, as well as offering safety/productivity monitoring software for mass transportation systems.

I suspect there aren't too many joined up businesses in this area, but they remain still relatively small. I could imagine one of the larger consultancies seeing value in this area at some point, but with few other operators, it is probably still below the radar for many.

They do provide a small dividend, which is probably not likely to excite many, but as Paul has said they have been, so far, a relatively safe haven for investors in buffeting times.

Tommy H

you can for up to 59 minutes normally is an edit button bottom right on your post

ps - typos are down to dyslexia so thanks for your feedback, much appreciated .

MIK

Hi Paul,

Hope you're keeping well! I'm a relatively new subscriber (approx. two years) and have just started to use the comment function ;) Not related to news today but I wondered if you know whether Saga (LON:SAGA) (I hold) have any tax losses to bring forward i.e. to put against future profits?

Thanks for all the great write ups and podcasts. It's been a very difficult year in the markets up to now but really appreciate your writing and recording style and of course the content which I find informative and light hearted and make for very easy reading/listening.

Thanks again and best wishes,

Michael

Paul Scott

Hello Michael! (Daddahm), welcome to the comments section!

I'm a generalist, not a tax expert. Bearing that in mind, with Saga (LON:SAGA) (I hold) it has historically been highly profitable, over many years, so I very much doubt there would be any historic tax losses brought forward, other than what might have happened in the pandemic.

As you asked so nicely, and it's out of office hours, I've checked the FY 1/2022 Annual Report here. and note 10 covers corporation tax.

There's this reconciliation from the loss before tax in both years FY 1/2022, and FY 1/2021, which seems to have resulted in a positive tax charge in both years, despite losses before tax, with the main culprits being tax disallowed write-off of goodwill, and something I've never seen before re the cruise business "entering tonnage tax regime". Hence there was an overall positive tax charge, despite losses before tax.

I've had a quick look at the balance sheet, and can't see any tax losses brought forward. But it's a large, and quite complicated balance sheet.

So the honest answer is, I'm not sure, but think there probably aren't any significant tax losses. But you would need to check that out more carefully for yourself.

Regards, Paul.

Westway001

What a focused, thoughtful and balanced response! This epitomises what we all appreciate about your analysis, Paul, thank you every time.

27th Aug '22

Oh how kind thanks Westway, one tries ones best ;-)

30th Aug '22

Many thanks for your reply Paul which I've just seen! I'm not sure how/if the comments can be followed. I've just noticed the chain icon so maybe that's how ;)

I remembered you were a shareholder (and note you still are) so thought it might be an issue that had been covered previously. Really appreciate you taking time to look into this further and respond. I'd had a look through quite a lot of info & data but hadn't found any tax losses being brought forward either (whether from prior to the pandemic or during). As you mention though it is a large and quite complicated balance sheet!

Thanks again and all the best,

FeatheredCapital

Tracsis is not expensive. The group's R&D costs go straight through the income statement unlike nearly all their software peers who capitalise the majority of these costs. This makes a huge difference to the profit line of a growing business.

This coupled with the recurring nature of a significant portion of their revenues, the large amount of net cash on the balance sheet and multiple organic short and long term opportunities on the horizon make it a must hold AIM stock.

I hold.

Small Cap Value Report (Fri 26 Aug 2022) - MCRO, HDT, ALU, TRCS

Agenda -

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Paul Scott

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