Small Cap Value Report (Fri 4 March 2022) - TENG, AXS, DPEU

Good morning, it's Jack & Paul here with the SCVR for Friday.

Jack's section:

Ten Lifestyle (LON:TENG) - FY adjusted EBITDA to be below expectations due to reduced member requests following Omicron disruption. This is in the context of previous downgrades. This group has yet to make a profit and is not self-funding, and I don't feel as though that is reflected in the valuation. Not for me.

Accsys Technologies (LON:AXS) - an interesting company, which is spending quite a lot of money building substantial production capacity for its wood products. It looks like the demand is there, but the company has frequently raised new equity in order to finance capital investment. If it is nearing the end of a capex-heavy phase, then it could soon become sustainably profitable, and revenue growth looks set to continue. I’d like to learn more, but I’m not tempted to prioritise it at the current levels.

Dp Eurasia Nv (LON:DPEU) - short comment to acknowledge concerns over Russian business following a steep fall in the share price.

---

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.

---

Jack's section

Ten Lifestyle (LON:TENG)

Share price: 106.5p (pre-open)

Shares in issue: 83,741,801

Market cap: £89.2m

Trading update and notice for half-year results to 28 February

This is a ‘global concierge platform’, that helps wealthy and mass affluent individuals and their families to organise leisure activities. It typically partners with blue chip corporate clients.

Net revenue for FY22 (excluding direct cost of sales relating to certain member transactions managed by the group) remains in line with the board's expectations, but Omicron disruption from December onwards has resulted in reduced member requests.

The Board now expects the Adjusted EBITDA outturn for FY22 to be below expectations but with growth still expected on the prior year (FY21: £4.4m).

This sounds unfortunate as, after a strong recovery in Autumn, additional staff were hired only for Covid to once again impact momentum. Ten does note an increase in activity from February in EMEA, which was hit by Omicron back in November, so recovery in other markets could follow.

The board expects the new contract wins secured during H1 to increase revenue and profitability in line with its expectations for FY23, which remain unchanged. We continue to enjoy a healthy pipeline of new business and high conversion rates... The effects of the conflict between Russia and Ukraine on the business is currently expected to be limited as only c. 1-2% of the Group's annual Net Revenue relates to Russia and the directly affected region.

Net cash was c.£4.7m at end of February 2022 (FY21: £6.7m).

Half year results will be announced on Wednesday 11 May 2022. If you want to attend you can email investorrelations@tengroup.com.

Conclusion

It feels slightly odd to be writing about a ‘global concierge platform for the wealthy and mass affluent’ given recent events but there we are. The geopolitical situation might end up playing more of a role if it affects confidence beyond Russia and the Ukraine.

Ten has managed to grow revenues in the past, but it remains loss-making and cash burning. Equity dilution has been moderate so far, with shares in issue rising from 78m in FY16 to 84m today, but you can see the group does keep returning to its shareholder base for funds.

There is a small net cash balance but ultimately Ten is not self-funding after many years of operations, and it doesn’t look close to paying a maiden dividend.

For those reasons, I would say the risks are higher here and to the downside in the short term. The valuation doesn’t look particularly appealing.

It’s interesting to see the ‘Strong Buy’ recommendation combined with multiple multi-year downgrades - I’m not sure I follow that logic. I’ll leave Ten there for now, as the stock doesn’t appeal to me given the historic profit performance and current market conditions.

---

Accsys Technologies (LON:AXS)

Share price: 142.37p (-1.3%)

Shares in issue: 192,761,322

Market cap: £274.4m

Trading update for the 10 months ended 31 January 2022

Accsys creates high performance, sustainable wood building products. It basically takes soft wood, which is fast to grow, and puts this through a modification process to turn it into more usable hard wood.

Its two products are called Accoya® wood and Tricoya® wood.

Accoya® solid wood is sustainable, durable, and stable with exceptional performance, finish and sustainability... Primary applications for Accoya® wood include windows, doors, cladding and decking, where the combination of performance and sustainability benefits compete favorably against hardwoods, plastics, metals and concrete.

And:

Tricoya® acetylated wood elements are produced for use in the fabrication of panel products such as medium density fibreboard (MDF). Panel products made with Tricoya® wood elements are truly durable and stable enough for use outdoors and in wet environments, unlocking new possibilities for design and construction.

In terms of performance over the ten month period, wood revenue rose 12% to €79.9m and group revenue was €92.3m.

10 months Accoya® sales volumes of c46,817m3 were down around 2% due to temporary production downtime at the Arnhem plant primarily. This results from the installation of the new fourth reactor and isolated maintenance work (which have impacted February as well).

Due to the production downtime and resulting lost sales volume that cannot be recovered as the plant runs at full capacity, FY 2022 EBITDA is expected to be around the lower end of the range of market consensus expectations.

Demand for the product remains strong however, and production is now back at full capacity, with ongoing average sales price increases offsetting higher raw materials costs (primarily net acetyls).

The Accoya® USA plant joint venture is progressing and Accys has made its final investment here. Key contracts have concluded, including $80m of senior debt, and construction will soon commence.

The plant extension in Arnhem (The Netherlands) is nearly finished, scheduled for April 2022, and will increase the annual production capacity of the plant by 33% to 80,000m3 of Accoya®.

Meanwhile, the Tricoya® UK plant in Hull progresses in line with expectations and on track for July 2022.

Conclusion

Again, a company more often loss-making than not, although the revenue CAGR is more attractive here at 13.6% over five years. It’s quite capital intensive, which is unsurprising given the various investments relayed in the update above. But I’m more interested than I thought I might be, having taken a quick look.

Perhaps capex will moderate once the existing projects are completed?

There’s a much higher level of equity dilution here though, up from 91m in FY16 to 193m today. The group is forecast to make profits in both of the next two years but I’d want to know more about future capex spend and revenue growth before investing, as I’d rather avoid another fundraise and invest in a self-funding business.

It sounds, on balance, as though that might improve, in which case it’s worth considering whether or not an inflection point is approaching in terms of profitability.

I think it’s an interesting company. Last time Paul took a look (here), Accys was targeting a fivefold increase in production by 2025. Tricky to judge for now without spending more time on it. How much more does Accys need to spend before it is profitable? That’s the key point for me.

The Z Score is just about in ‘distress’ territory.

The revenue growth does suggest demand for the product but a fair amount is priced in presently. It looks like Accys is building a company of potentially substantial scale though. The share price is factoring in growth but there is something worth investigating here if it turns out that a lot of the capex investment has now been made, in which case earnings could grow quite quickly.

The impression I get is that the company can’t create its products fast enough for customers, which is a sign of promise. I'm wary of the dilution, however, and FY EBITDA at the lower end of expectations is hardly shooting the lights out (although it sounds like the group operates otherwise at full capacity). I'd want to build a much clearer view of the group's prospects before committing one way or the other.

---

Dp Eurasia Nv (LON:DPEU)

Share price: 45.6p (-1.72%)

Shares in issue: 145,372,414

Market cap: £66.3m

Russia/Ukraine update

Worth a quick comment to highlight the volatility in the market right now - as if anyone needed a reminder - as the DP Eurasia share price has fallen off a cliff.

Most of the group’s business is in Turkey but it also holds Master Franchises in Azerbaijan, Georgia, and Russia.

At this stage, due to the pace of the evolving geopolitical crisis, it is still too early to quantify any possible ramifications for the Group's Russian business or on its full year 2022 results. A further update will be provided at the time of the Company's 2021 Preliminary Results, when the Group may have greater visibility on the impact on its Russian operations.

DP Eurasia continues to perform ahead of pre-Covid levels and remains focused on factors that can successfully mitigate the negative headwinds, including pricing to offset inflationary pressures in its core markets.

Conclusion

Jubilant has rapidly been building up a substantial holding and last I looked, DPEU was reassuring investors that it would not get delisted and was proposing additional takeover protection measures. So you could argue it was too risky even before this conflict. It’s not on my radar.

The update though, however brief, is worth covering just to touch on some of the exceptional stock market moves we are seeing.

I’ve certainly seen a few people on Twitter who, for example, have made massive one-off investments in speculative companies only to see c90% share price drops in the current market. It does happen so risk management is always essential - whether that’s a cash buffer, asset diversification, a buy and hold portfolio of high quality companies, or whatever else.

Market conditions can change quickly and there are good, high quality, resilient businesses out there worth sticking with. In the meantime I hope everyone is doing ok and managing their risks, liquidity needs, etc. appropriately. Now’s the time to have a plan.