Small Cap Value Report (Fri 5 May 2023) - TPX, APTA

Good morning from Paul!

A very quiet day for news, so I had a leisurely start, and am gradually building up steam! I'll also do a couple of backlog items to supplement today's report.

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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.

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Tpximpact Holdings (LON:TPX)

Up 10% to 45.75p (£42m) - Trading Update - Paul - RED

TPXimpact Holdings PLC (AIM: TPX), the technology-enabled services company focused on digital transformation, is pleased to provide an update on its Q4 and full year trading for the year ended 31 March 2023 and to provide guidance for the full years ending 31 March 2024 and 2025.

This update reads well, with Q4 “at the higher end of previous guidance”.

Latest guidance is: revenues £83m, adj EBITDA of c.3%, so about £2.5m, for FY 3/2023.

Is adj EBITDA a reliable profit measure though? Not really. H1 adj EBITDA was £1.2m, which became £0.4m adj PBT. Statutory PBT was a hefty loss after tax of £(3.8)m from continuing operations, once a lot of restructuring, and other costs were taken into account. Although amortisation of (acquisition-related) intangible assets is hefty, at £3.2m, and most investors/analysts are happy to remove this charge from the P&L. It's doesn't seem to capitalise development spend into intangible assets, which is good.

H2 looks to have been about the same EBITDA as H1, so no sign of improvement yet, despite the upbeat tone of today’s update.

New business wins have been good, in particular the big Govt contracts announced recently.

Guidance for revenue growth in FY 3/2024 and FY 3/2025 has been raised today.

It is targeting adj EBITDA margin of 5-6%. I'm sure that would be positive for the share price, if it can raise EBITDA margin from 3% to 5-6%, but at the moment that's just an aspiration.

There’s good visibility, with £80m revenues already committed for FY 3/2024, double the equivalent backlog a year earlier.

Debt covenants - this is by far the most important issue. As mentioned previously, TPX is financially distressed, having breached covenants on its bank borrowings. The bank gave a covenant waiver on the last day, 31 March 2023. Today we’re told discussions with the bank are ongoing, which is clearly not good news. So I’m quite surprised the shares have gone up today, with the financial position still precarious, and in limbo.

Paul’s opinion - the risk is too high until it gets the bank facilities sorted out. Banks don’t like risk, and covenants are there to flag up when a borrower is an increased risk for the bank. It’s quite normal in these situations for banks to insist on an equity fundraising, to reduce their risk down to acceptable levels. Raising equity from a position of weakness often results in deeply discounted prices in placings. Therefore retail investors buying shares before a placing, are potentially cannon fodder to get the share price up, in advance of a discounted, dilutive placing that usually we can’t take part in. Although the worst placings sometimes filter down to private investors who pass the professional classification tests. I used to feel flattered when placings filtered their way down to me, but I’ve since realised that only happens because the institutions don’t think it’s any good!

For this reason, high risk of a dilutive/discounted placing, I have to mark TPX as RED. Also trading hasn’t actually improved, with H2 performance the same as H1. All the growth is talk at this stage. I would become less bearish if profit started rising, which they’re forecasting, but forecasts can be set at any level you like.

I’m not convinced by TPX’s business model. The contracts are won by competitive tender, therefore I imagine margins would be tight. Also TPX has demonstrated that it’s not very well managed. It could recover, but I wouldn’t want to gamble on that at this stage. At least if you do want to punt on this company recovering, you're aware of the high risk.

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Aptamer (LON:APTA)

Down 46% to 13.8p (£9.5m) - Trading Update - Paul - RED

A disastrous trading update - a profit warning for FY 6/2023.

Revenues have almost dried up - it only did £1.0m revenues in H1, and is now saying only an additional £0.4m has been achieved in the 4 months since. Pipeline not converting into sales in time for FY 6/2023 year end.

It’s also run out of cash, with only £0.7m left of the previous £6.7m cash pile at June 2022. Cost savings being made, and exploring various funding options - good luck with that.

Paul’s opinion - I’ve only looked at this share once, here on 3 Jan 2023, when I warned readers away from it, pointing out that it looked to be running out of cash.

One of the worst floats I’ve ever seen, it’s been a disaster since listing as recently as Dec 2021. The culprits were SPARK Advisory Partners, and Liberum. It was mostly a VCT/EIS placing, at 117p. So it’s almost joined the -90% club. This could easily go to zero I think, so I continue to view this as a bargepole job. It’s a pity, because innovative companies need development funding, but I don’t think the stock market is the right place for that. Companies should only float once they have matured, and are profitable. The IPO market is dead now anyway, partly because brokers floated so many lousy companies, at excessive valuations, in order to gorge on the lucrative fees. That greed has very much killed the golden goose now, with IPOs likely to be few, to non-existent, in the current climate. A total re-think is needed. Actually, I’ve drawn up a list of a dozen changes that need to be made to the UK stock market to improve things, which I will publish here when I send it to the FCA for their consultation on markets.

Note the StockRank system has been warning us away from this share right from the start - a very useful function.