Small Cap Value Report (Fri 7 May 2021) - NUM, KITW

Good morning! It's Paul here with Friday's SCVR.

Timing - today's report is now finished, there's hardly any relevant news, and a lunch opportunity has just arisen, so I'll down tools for the week. Have a smashing weekend!

My recent article on Boohoo (LON:BOO) (I hold) results wasn't quite finished, so this is just to flag up that I spent some time yesterday afternoon typing up the rest of my notes from the company's webinar. So here's the link for the completed report.

It's quiet for news today, but I won't short change you! I might look at a new float instead.

Agenda -

Numis (LON:NUM) - stunningly good interim results. Cyclical business of course, but everything seems to be booming at the moment.

Kitwave Group - a new listing on AIM, in the pipeline. I've started to look at it, and see enough positives to make me want to dig a bit deeper.

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Numis (LON:NUM)

418p (up 7% at 08:33) - mkt cap £450m

Numis is a leading independent investment banking group offering a full range of research, execution, corporate broking and advisory services to companies in the UK and their investors. Numis is listed on AIM, and employs approximately 290 staff in London and New York.

I last looked at this listed broker here in July 2020, when it issued a positive trading update, with upbeat outlook comments. Last year, there were bumper fees from many fundraisings, whereas this year M&A and IPOs are surging. Even Wh Ireland (LON:WHI) managed to report a profit recently, so market conditions must be outstanding.

Half Year Results

For the six months to 31 March 2021.

Take a look at these figures, which are stunningly good, albeit against soft H1 comparatives. H2 last year was much stronger -

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Share repurchases of £11.5m done, which should enhance EPS. Or some people see share buybacks as a way to disguise dilution from share options, if you’re more cynical.

Picking a few interesting points of wider interest, from the commentary (these are all copy/pasted, with nothing added by me) -

• As markets exhibited signs of a sustained recovery, volatility subsided, and corporate confidence returned, the environment for capital markets activity improved significantly
• IPO volumes over the past 6 months have been at their strongest level for many years
• volumes were materially ahead of the comparative period which was adversely impacted by the start of the pandemic and the pause in deal flow ahead of the UK general election
• UK M&A volumes have started to recover driven by both domestic and international buyers identifying attractive investment opportunities and being able to secure the necessary financing
• Proposed Dublin office offers strategic opportunity to leverage Capital Markets capabilities in Europe…Whilst Brexit has had minimal impact on the performance of the business, an EU office would both restore certain EU institutional client relationships and provide us with the opportunity to expand our Capital Markets offering throughout Europe with the benefit of passporting.
• In addition, the Brexit deal agreed in December 2020 improved investor sentiment toward the UK. Consequently, the UK has outperformed a number of other markets over the past 6 months and flows into UK equity funds have improved over the period

Outlook -

The Investment Banking pipeline continues to benefit from a high volume of IPO mandates and the near term outlook for further Growth Capital Solutions and M&A revenues is also encouraging. We therefore expect the broad profile of Investment Banking revenues featured throughout the first half to be sustained in the second half of the year.

Whilst our pipeline is becoming more diversified by sector as market confidence builds across a wider range of industries, execution of the IPO pipeline in particular will be dependent upon the current positive market environment persisting.

Balance sheet - very strong. There are some large numbers in working capital, but the net current assets position of £164.4m is very healthy. This includes £97.6m cash.

The only long-term creditors are £38.7m lease liabilities which doesn’t seem excessive to me. Although there might be a question mark over whether big glitzy London offices are necessary these days? For this type of business, I think they are necessary, and we'll probably be back to near-normal later this year. In the worst case scenario, businesses like this have everything in place to return to work from home if it proves necessary again. So I'd say they've got all outcomes covered.

My opinion - we’re seeing boom times for financial markets, and personally I can’t see any reason why that would end any time soon. Assuming Numis achieves a similar result in H2, then that could be c.50p EPS, so a PER of just over 8. That looks cheap, but remember it could be at, or near, peak earnings. Inevitably the future is going to contain some fallow patches too.

I rarely invest in brokers, but have to say Numis would probably be top of my wishlist, even after a strong run up in share price lately. This strong level of performance justifies it.

What a pity that Numis keeps its research hidden from private investors. They should consider at least letting us read the small caps stuff, where we create the market liquidity & set the share price. The more informed private investors are, with good quality research, then the more likely we are to buy the shares, which would benefit Numis and its clients. That message doesn't seem to be getting through to them, which creates opportunities for their competitors, who do see the benefit in engaging with private investors.

Note the high StockRank below. Also, I see NUM has been a solid dividend payer, with a decent yield over the years.

A thumbs up from me, this looks an excellent share.

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Kitwave Group (KITW)

Placing & Proposed Admission to AIM

This proposed new listing has caught my eye, because the list of institutional investors is like a who’s who of the great & the good in the small caps world. They’ve done their due diligence, and obviously like it, because they’re buying shares in KITW, which is a good starting point for us to see if we like it too.

Key points are -

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Despite the selling shareholders, management will retain a healthy 22.3% of the company, so it gets a tick in the crucial “skin in the game” box.

I think it’s private equity backed, so will probably have a lot of debt, hence the new money raised is really to pay off the existing financial backer. That’s not necessarily a bad thing - PE funds tend to like to exit things after a few years, to recycle money for new deals.

What does Kitware do? It’s a wholesale distribution business, experienced in M&A by the looks of it, so that could be of interest in making further acquisitions. I like the idea of backing a management team who know what they’re doing, experienced in M&A -

"To date, we have executed a highly successful buy-and-build strategy, having acquired and integrated 10 wholesale distributors into the Group since 2011, and we are confident that trading on AIM will enable us to continue to support this strategy. Furthermore, the Directors believe that Admission will enhance the profile of the Group and its brands, improve Kitwave's position with key suppliers, strengthen the Group's balance sheet, and provide the Group with greater ability to incentivise and retain key employees going forward…

Kitwave Group plc is an independent, delivered wholesale business with approximately 1,100 employees and a network of 26 depots able to support delivery throughout the UK, specialising in selling impulse products (such as confectionery, soft drinks, snacks, ice cream), frozen and chilled foods, alcohol, groceries and tobacco to approximately 38,000, mainly independent, customers. Currently, the Group sells a broad portfolio of approximately 33,000 Ambient, Frozen & Chilled and Foodservice product Stock Keeping Units (SKUs).

The diverse customer base includes independent convenience retailers, leisure outlets, vending machine operators, foodservice providers and other wholesalers, as well as leading national retailers.

The Group was founded in 1987, following the acquisition of a single-site confectionery wholesale business based in North Shields, Tyne and Wear, United Kingdom.

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That gets another tick from me - an established business, with sensible activities, not blue sky nonsense.

Very brief financials - hmmmm, it’s low margin, to be expected from a distribution business I suppose -

revenue and Adjusted EBITDA growing to £592.0 million and £27.6 million respectively in FP20 (an 18-month period). In the 12 months to 30 April 2020, the Group's revenue and Adjusted EBITDA was £399.0 million and £17.5 million respectively.

So systems & financial controls will be of vital importance. I’m still scarred by Conviviality going bust (taking £30k of my money down with it) a few years ago, because they made a hash of acquisitions, and failed to have proper financial controls in place to invoice clients correctly & collect in the customer cash. That’s the big danger with high volume, low margin businesses. Also customers going bust can be a problem in difficult economic times - one customer going bust, wipes out the profits from many others.

Schedule One Announcement

This is required under AIM Rule 2, giving information in a prescribed format about the company, in advance of it listing on AIM.

This is where I found the list of institutions which are buying into the IPO, I’ve highlighted the ones that I particularly rate as shrewd -

My opinion - too early to say, as I’ve not read the Admission Document yet, as I can’t find it. If anyone does find it online, perhaps you would be kind enough to post a link, then I’ll have a rummage over the weekend (maybe).

After Deliveroo flopping so badly, I don't think we can assume that IPOs will automatically go to big premiums. I tend to look at IPOs in terms of, is this a great business that meets my investing criteria & has the potential to grow a low, and do I rate management (subjective of course). Plus, is it attractively priced?
Of recent IPOs, the two that stand out to me as coming close to meeting my criteria, were Virgin Wines Uk (LON:VINO) (covered in yesterday's SCVR) and Parsley Box (LON:MEAL) . In both cases I'm not intending to buy any time soon, and want to see how things progress once lockdowns have fully ended. It's good to see companies build up a track record of say 2 years as a listed company, before taking the plunge, in my opinion, because often things seem to go wrong in the first 1-2 years.

If anyone spots any decent IPOs, do leave a comment here, as I don't have a system to look at them properly, it's largely random if I spot something.