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

5th May '23 by Paul Scott

60 comments 6400 reads

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.

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.

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…

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Wol

5th May '23

Just a guess.. A change of advisor is sometimes a prelude to a placing. I guess the market is expecting a discounted placing and has reacted by pre-empting some of the discount.

Another Warren Buffett quote "Do they think assets grow on trees"

Northender

I agree with Patrick and Ken . Hopefully, the disposal by abrdn European Logistics Income (LON:ASLI) today at a small premium to NAV at 31/12/22 helps to reassure that the NAV of Tritax EuroBox (LON:EBOX) won't fall too far.

So ChatGPT is wrong. And here is the source of the confusion. There are several levels of a p&l account. Direct costs (labour costs, raw materials) are taken off to get to gross profit. After that admin expenses and the rest take us down to the next level. ChatGPT is clearly talking about the costs taken off to reach EBITDA. labour and raw materials have already been taken out at a higher level (before gross profit). And, yes, I know I am talking about ChatGPT as if it were a person. Humour me please.

More importantly, Buffett and Munger are right. EBITDA and most "adjusted" versions of earnings are "b******t".

Howard Adams

Snazzytime, bensummers & Brilliant Leader

Some of my recent experiences with ChatGPT and Google's Bard.

I treat ChatGPT responses with great caution, especially where any numbers/stats are concerned.

It has not really been trained on any substantial or substantive numbers/stats models as far as I understand it. I think 'Wolfram Alpha' (Computational intelligence engine) plugins are available and might be available in the paid ChatGPT option (or other specialist AI platforms).

In addition, I always repeat any question prompts I put through ChatGPT by repeating them through Google Bard (it is free).

Google Bard also presents fallacious responses. Sometimes the same as ChatGPT or it creates its own 'illusions' (as the AI crowd call them).

That stated, by thinking quite carefully about what information I am actually seeking and then refining my question prompts in a sensible cascading/narrowing of scope manner I have obtained some really useful insightful responses.

I am continuing to use it quite frequently and have found it pretty useful for gaining rapid information about the contextual situation of a market sector, industry, comparisons of stock X vs Y vs Z. For digging into market penetration by different companies.

For example I got an extensive set of responses when I interrogated ChatGPT and Bard about the structure and main players within the US healthcare sector, but specifically companies focused on 'Healthcare, equipment & supplies'.

This session took me about 60 minutes and gave me a wealth of useful information as I did not know anything about that sub-sector before hand.

After assessing seven options identified through the session, I am now concentrating on two contenders, Boston Scientific (NYQ:BSX) and Stryker (NYQ:SYK) to see if I ought to consider an opening position. Two others offer possibilities Medtronic (NYQ:MDT) or Abbott Laboratories (NYQ:ABT) for further research.

I have held two of these in the past, but I could not have got to the clarity of possibilities so fast and with so much 'rich' contextual background information without ChatGPT and Bard.

Regards

Howard

rogerh

Hi Ken, Thanks for your input re investment trusts as always. I do hold Tritax EuroBox (LON:EBOX) since it was at a premium but have wondered whether the huge discount is not only due to interest rate increases. I think a lot of their holdings are related to logistics for the e-commerce sector. Presumably there is the same trend in Europe as here i.e. a move away from e-commerce to physical shopping. I think Amazon has closed 3 centres in the UK already. Whilst this has not caused me to sell any shares, it has put me off buying more.

lemming1

I have shares in Aquis Exchange (LON:AQX)

Mark Carter

"The IPO market is dead now anyway, partly because brokers floated so many lousy companies"

Preach. It's all too easy to pick complete junk on AIM. I did a quick check. The AIM index rose13% over the last decade, whilst the Footsie rose 25%, and the FT250 by 35%. Dividends excluded. AIM provides little in the way of dividends, so the returns of the FT100 and 250 are going to be even higher. Whilst no index shot the lights out, I have long observed that the mid-caps do better over the long term.

AIM is pretty ropey, as you can see from the overall returns. Call me old-fashioned, but my idea is that the long-term returns from the AIM should be higher to compensate for higher risks. As the long-term performance indicates, it appears to be mostly dross.

Having said that, all that dross is undoubtedly masking a lot of good companies in there that must be shooting the lights out relative to the big board. AIM is not something I generally investigate, though.

I wonder if one solution is for the LSE to merge with another stock exchange, say on the continent or the US. There are some really good companies in Europe that are worth investing in.

davidjhill

Not really

EBITDA can be a useful measure for investors as long as it is used properly and therein lies the problem. Often companies use it to obfuscate.

Sometimes a company will have a decent pile of cash and earns interest on that cash. Is that a useful measure of future profitability of the business? Only if the cash pile is generally maintained across the cycle and interest rates are stable.

Or imagine a company that bought a lot of stuff historically that is now being depreciated at quite a lot p/a. The PBT number includes all that depreciation but actually that is historic, sunk cost. What matters to existing shareholders is what the business is earning going forward. By leaving the depreciation in the true earnings of the combined entities is masked and investors may under appreciate the business.

Anyway - this is offset by companies who also quote ebitda when they have a large amount of debt, thus a large amount of interest. Servicing the debt is imperative so the interest cost is an ongoing expense and should be taken account of by shareholders when valuing the business. It may also be used by companies who keep capitalising more and more costs, or effectively mortgaging the future. Again in this instance it is an inappropriate measure.

So - a saying like "bullshit earnings" is really just a soundbite that ignores good reasons for an ebitda measure. Like most measures of profitability the key is to look at them all and understand where the differences come from and then apply your judgement as to what should or shouldn't be included. Not dissimilar to looking at debt now that lease costs are included in accounts as net debt when they really aren't.

"The thing is, if we all know this then why did the Fed put rates up...by 25bps? Im not in the Fed are stupid camp... so why did they do something that doesn't make sense...?"

If putting up interest by 25bps causes the system to collapse, then it's a very fragile system and unfit for purpose.

I'm increasingly of the view that modern banking models can never be made to work. Sure, they work great when interest rates move downwards, and really badly when rates increase. As rates increase, the long-term debt goes into loss. If people take their money out, those losses crystallise.

What you have is a system, then, which rewards bankers/shareholders when things go well, but requires bailouts when things go against you. It's my contention that it doesn't really matter how competently and honestly you manage a bank, it's just a system that's inherently floored.

IIRC it was Nassim Taleb who suggested that banks should be owned and run by central banks and be part of the civil service. He's probably right.

yiannos1

No it’s not a useful measure for any serious investor and this is the reason it is used far more by small cap companies that are trying to hide the true picture of their financial performance.

But I have to agree with you that it shouldn’t be compared as bullshit earnings.

Should just be renamed as bullshit earnings.

wolfspirit

Got to wonder if the directors of the market will consider the future of the market?

With the IPOs Cash Grabs by insiders and the Delisting "manoeuvre" to allow 75% shareholders to grab the remaining 25% for almost free, we just need the Conservative Crew to follow through on the rumors of removing the IHT benefit of AIM - and it will all be over for Junior!

Bouden54

I'm not sure this is all management charges though - would need to check but some of this likely to be building costs. Running a REIT is also a lot more hands on than running say a typical equity fund, so higher charges probably justified.

Trident

I think there are enough accurate explanations of EBITDA below to correct the above assumptions. Of course, Munger and Warren have appropriate cynicism as to its use because like all things it can be abused, or be wielded to frame a particular view of Adjusted earnings.

For example operating costs should not normally feature in adjusted earning, but some IT companies who develop software may attribute some annual salary costs for software development as capital expenditure, and amortise it. This is not uncommon but if they are annually recurring costs, it seems to me wrong in principle.

So you have be aware of how consistently they do this, and how much.

Private Equity are OK with EBITDA as this helps them compare with cash generation, though frankly cash generation should be evident from the Cashflow statement, but perhaps in some cases it is not?

RDHOWARTH

Well I agree mostly.. I think the severity of the increases has caused problems. Yes, that's the Banks fault for sure....but I didn't mean to suggest it was the result of a 25bp rise. IMO this is pretty irrelevant. I meant to suggest that given the distress, it didn't help and actually the mkt is crying out for cuts. Paul put it better saying they have just moved too quickly. Not many businesses survive under such strain to be fair.

ken mitchell

Thanks Roger

I rarely buy an Investment Trust trading at a premium because if it or the sector goes out of favour (as has just happened with Commercial Property Trusts) then the falling share price is made much worse still by the premium going to big discounts.

The opposite applies if buying when Trusts are on big discounts. I.e the rising share price getting an extra boost from the discount narrowing or even going to a premium.

Re your questions about Tritax EuroBox (LON:EBOX) I think your concerns might be overplayed. There have been some big falls in Commercial Property Trust NAVs, but the falls have been much bigger for the UK Trusts than the European ones. Also some REITS are now reporting increases in NAV and also property disposals higher than Dec 2022 NAV. E.g Aew UK Reit (LON:AEWU) . Why not use the link in my post this morning to check out your EBOX concerns. Clicking on the blue Trust heading brings up a wealth of info including (obviously) Results statements and also research like Quoted Data.

A current exception to my don’t buy at a premium rule might well be Henderson Far East Income (LON:HFEL) . It’s one of the Investment Trust dividend heroes with increased dividend for 16 years running. But overall performance has been dire as can be seen using this link giving 1,5 and 10 year performance. HFEL has badly underperformed the others in the sector. Now at rock bottom that near 10% dividend should underpin further share price falls and the Managers are well aware of the dire performance, so worst case now might be bumping along the bottom but 10% dividend to compensate while waiting for improved performance.

https://www.theaic.co.uk/aic/f...

FREng

Paul

I'd welcome your views on Cambridge Cognition Holdings (LON:COG) when you have a moment.

Richard Goodwin

It includes salaries except where the firm is capitalising them as part of the process of building an asset eg software companies capitalising the costs of developing software which then then capitalise and amortise in the same way that a manufacturer would gradually depreciate a piece of equipment

eg software companies capitalising the costs of developing software which they then amortise in the same way that a manufacturer would gradually depreciate a piece of equipment

Which isn't quoted on Aquis Exchange rofl

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

Tpximpact Holdings (LON:TPX)

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Paul Scott

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