Small Cap Value Report (Fri 9 Dec 2022) - CTA, LOAD, TET, D4T4, K3C, LGRS, RBN, AFRN, PDG, BKG, PRV, PROC

Good morning just from Paul, with it being a Friday.

It’s got to be a fairly quick report today, as I have to travel into London for an investor Christmas party at a posh club, so will be spending most of the day eating, sampling lovely wines, talking about shares, and being generally affable. So I prepared some sections last night, to get today's report off to a flying start.

Agenda

These are all quick comments, with no sections below, to save time & cover lots of ground - 

CT Automotive (LON:CTA) [quick comment] - dropped 16% to 102p in late trades yesterday, after a profit warning was issued at about 4pm. Supply chain problems (including semi-conductor shortages, and China lockdowns), and operational problems, plus a delayed order, mean FY 12/2022 revenues will be lower than expected at c.$120m, and higher costs, resulting in a thumping great adj loss before tax of $11m. Cost-cutting is being implemented. Net debt at 11/2022 was $11.6m, about half of available facilities. My view - I’m not familiar with the company, but it looks problematic to me, so I’ll be avoiding this.

Crestchic (LON:LOAD) - Sky News says that larger rival Aggreko (now privately owned after a bid from TDR last year) has agreed a 400p per share takeover offer with Crestchic. This is only a 12% premium to last night’s closing price, and looks far from generous, given how well Crestchic is performing. If the story is true, I think shareholders will be up in arms about having the upside snatched away from them. I would be inclined to reject the deal when it comes to a vote. If they want it, they should pay a proper bid premium! Stockopedia shows at 356p price yesterday, the forward PER was only 12.5, so a lousy 12% bid premium seems disappointing. EDIT: here's the announcement this morning, it's 401p cash, recommended by LOAD's Directors (why???). Big shareholders (including Harwood) holding 38.5% have agreed it.

Treatt (LON:TET) - a backlog item, I’ve had a quick look at FY 9/2022 results, published on 29 Nov. Adj EPS was down 27% to 19.8p, not very good really, and at 644p the PER looks toppy at 33x. This share is really all about the growth potential from its new factory, with much greater production capacity, and more efficiency. Balance sheet is strong, although inventories look much too high. Forecasts from Edison don’t look exciting enough to justify investing here, so shareholders must be hoping it beats forecasts. That needs to happen, as on existing forecasts, it looks overvalued to me. Could be worth keeping on the watch list, and diving in, if it starts issuing out-perform trading updates in future.

D4t4 Solutions (LON:D4T4) - interim results to 9/2022 were published on 30 Nov - not very good, with a adj loss before tax of £(1.3)m, down from breakeven in H1 LY. However, D4T4 has historically had soft interims, then produced good finals, and the outlook comments suggest a similar pattern this year, in line with expectations for £4.2m adj PBT. Balance sheet is great, with £26m cash pile. Looks an interesting company, but tricky to value at the moment.

K3 Capital (LON:K3C) - another one that’s had a bid approach, at 350p, but again it’s only a modest premium of 17%, and a forward PER of about 15 - hardly an exciting outcome. At this rate, the companies that are performing well are being taken private, and we’ll just be left with the dross!

Loungers (LON:LGRS) - interim results, for a strange 24 week period (why?). Figures look disappointing, with PBT of only £2.8m on revenues of £122m. Last year’s H1 was much stronger, at £12.8m PBT, but that benefitted from reduced rate VAT, and business rates relief. Balance sheet is quite modest, with NTAV of only about £25m, so no asset-backing to speak of. Upbeat-sounding outlook comments. I covered LGRS here in October, concluding that whilst it’s a well managed business, the shares look too expensive, in what is a horrible sector where it’s now difficult to make any money at all, due to cost pressures and subdued demand.

Robinson (LON:RBN) - here’s an interesting one. Another company which has successfully hived off its pension scheme liabilities (a “buy-in”), to L&G, announced yesterday. The same thing was recently done by TT electronics (LON:TTG) . This is clearly a positive development, as it means the uncertainty & funding costs of pension schemes have now gone. Although RBN says its scheme was already in surplus, and enjoying a contributions holiday. I wonder how many other companies could also shed their pension schemes? Could be interesting.

Aferian (LON:AFRN) - puts out an in line trading update for FY 11/2022. Revenues $91m (down 2%), and profit guidance is $7.8-8.8m. ARR up 15% to $17.5m. Bear in mind that AFRN recently issued a profit warning which I covered here on 24 Oct, so today’s in line, is achieving forecasts that are half what they were a year ago. Looking at valuation, the fwd PER is now about 13, which looks OK.

Pendragon (LON:PDG) - announces that potential bidder Hedin Mobility has stated it does not now intend proceeding with a bid, mooted at 29p, "due to challenging market conditions and the uncertain economic outlook".  PDG confirms that trading for FY 12/2022 is OK - "The economic backdrop remains challenging, however the Board continues to expect to deliver group underlying profit before tax in line with expectations for the current financial year."

Berkeley group (LON:BKG) - mid cap housebuilder. H1 results “robust”, profit flat vs H1 LY. Guidance unchanged for FY 4/2023 at £600m PBT. Guidance for the next 2 years’ profit is lowered from £1.25bn to £1.05bn. “Good order book visibility”. Strong balance sheet, with £343m net cash. Remember that large housebuilders are effectively being hit with a new 4% surcharge on corporation tax, called RPDT, plus cladding remediation costs, and a “building safety levy”. So we’ve seen peak earnings in the sector, and forecasts are now falling - already reflected in lower share prices. BKG has done big buybacks, so share count has fallen a lot in recent years.

Porvair (LON:PRV) - this looks a good update for FY 11/2022. Revenue up 18% on LY, 5% of which is forex help. Adj EPS expected to be ahead of market forecasts, also helped by forex. Net cash £18.1m. Order book “healthy”, and lead times returning to normal. Looks good, and for the first time in years, the valuation actually looks quite reasonable. Could be a buying opportunity maybe?

PROCOOK (LON:PROC) - profit warning. Weaker sales in recent weeks mean reduced revenues for FY 3/2023 of £60-65m, and only breakeven profitability. Costs higher. “Beginning to see the benefits” of lower priced new stock intake, and cheaper shipping costs. So margins expected to improve in new financial year. Identified £3m in overheads cost savings. Last balance sheet looked reasonably OK, so I’d say it should survive, and has previously been highly profitable. Could make a turnaround at some point, but for now probably best avoided I reckon.

Associated British Foods (LON:ABF) - owns cheap clothes retailer Primark, which it today says is seeing "encouraging" current trading. Full year outlook unchanged. Experiencing "further significant input cost inflation", but less volatility. This might refer more to its food division? Primark comments confirm that retailers at the value end are doing fine.

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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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