Small Cap Value Report (Mon 1 Feb 2021) - FNX, 5 New Listings, BIDS, PRV, ZYT

31st Jan '21 by Paul Scott

97 comments 13705 reads

Good morning, it's Paul here with the SCVR for Monday.

Timing - I've covered quite a lot this morning, and am taking a break for lunch now. More later. Update at 18:23 - today's report is now finished.

Agenda -

Fonix Mobile (LON:FNX) - I looked at this one over the weekend, an interesting-looking recent float (Oct 2020)

Brief thoughts on vaccinations progress

5 new companies intending to, or actually listing, reviewed in brief

Bidstack (LON:BIDS) - 2020 trading update (needs a placing)

Porvair (LON:PRV) - quick review of its FY 11/2020 numbers

Zytronic (LON:ZYT) - Tender Offer, and (previous) trading update

Fonix Mobile (LON:FNX)

Share price: 136p
No. shares: 100.0m
Market cap: £136m

Several readers mentioned Fonix last week, which jogged my memory to look at it over the weekend.

Fonix listed on AIM recently, the first day of dealings was 12 Oct 2020.

I must have been rather bored around that time, because I recall spending a Sunday evening reading its Admission Document, but never got round to typing up my notes, so belatedly here they are;

Floated at 90p

Placing of 50m shares, half the total, to raise £45m for selling shareholders - i.e. no fresh money raised for the company itself. Therefore the IPO should be seen as a half-exit for existing shareholders, which I’m generally not terribly keen on in an IPO

Directors sold 36m of the 50m placing shares, being about half their personal shareholdings

Paid big divis prior to the float, £6m in FY20, and £5m in FY19, so it’s a proper business, generating real cashflows, which is what aroused my interest in the company

Rapidly rising profit before tax:

FY 06/2018: £2.8m
FY 06/2019: £4.7m
FY 06/2020: £7.3m

Recent trading (at time of IPO) in line with expectations

Dividend policy to be 75% payout ratio (of earnings, I presume?)

Balance sheet - weak at only £2.4m NAV

Cashflow unusually high in FY 06/2020 - not sure why

Development spending - only low level of capitalisation into intangibles, which is good

High trade payables

Deferred payment to a charity of £3.9m - this was explained later as being for some technical reason at the request of the charity concerned, so not a problem

Notable institutions buying, mentioned in prospectus: Slater…

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Breakout Trader

1st Feb '21

I think part of the reason is that Bids offer a dedicated suite (Ad console) where metrics can be viewed and analysed.

I can imagine it would be quite a big task for a developer as you'd be liaising with multiple customers, who may want to update their campaigns frequently and you'd have to negotiate all kinds of details regarding the placement of the ads in the game, rates etc.

Bids effectively do all the dirty work so all a developer has to do is build the inventory into their game and leave Bids to act as the middle-man.

For an advertiser the benefit is having a centralised, consistent platform to view the performance of the campaign cross different games, instead of potentially dealing with various developers who would no doubt operate in different ways.

This is my understanding anyway. Bidstack play the role of the middle-man, connecting demand with supply and taking their commission on the way.

rmillaree

Paul

The only fly in the ointment is the current negotiations to relax banking covenants. However, how many companies are hitting a brick wall on that? None that I’ve seen. Lenders are being co-operative.

I think Card Factory (LON:CARD) is perhaps the exception where they have simply been given a 30 day stay of execution.

As you say though banks have generally been supportive i would agree - which is great to hear when we compare back to the nightmare that was 2008 in that regard.

BurglarBill

Hyrdus,

Forthcoming & recent IPO's on London Stock Exchange are here: https://www.londonstockexchang...

Paul Scott

Hi Devlishcunning,

Just being pedantic, but the Zytronic RNS says offer at 145p, not 140p

Not pedantic at all, you flagged an error, thanks very much!

I've already corrected it, as I spotted my typo myself a little while ago. Profuse apologies, I hate making mistakes, the information has to be 100% correct, I just typed it wrong & didn't notice at first :-(

Sorry, Paul.

Hi Ken,

The share count figures on the StockReports are very reliable I find. A few years ago there was a bad patch with the data provider, when there were errors in the data, but these days I find the share count/market cap data very reliable.

Edit: Sorry, just seen another post below, saying there's a data error for VLG shares in issue. If you find a data error, then please do raise a "green blob" to report it. Stockopedia HQ then follow it up with the data provider and usually corrected within a day or two. Looks like this was a false alarm, and the data was correct after all.

Regards, Paul.

Hi AJC,

I decided against scrutinising Lookers (LON:LOOK) as it would take too long to analyse, given all the historic problems, accounting irregularities, etc. It rose vertically on coming back from suspension, so I decided it wasn't a good use of my time to unpick everything that's going on. Generally I steer clear of all companies that have had accounting irregularities, as they can often under-perform long-term, and I just don't trust the figures. Staffline (LON:STAF) is another example, where I won't ever buy the shares again.

Sorry about that.

Hi Hydrus,

Paul thank you for the IPO summary. It would be great if you can explain how you identify upcoming IPOs - I struggle to find a reliable source for this. Thank you

I just skim the morning RNS, and saw lots of "intention to list" announcements, hence thought it would be interesting to review all 5 today, since it was an unusually large number.

Hydrus

Thanks Bill but that website (which I do look at) does not include a number of the upcoming IPOs Paul mentioned so assume he has another source

Harry Hindsight

Tender offer.

As a newbie I was confronted with this by Venture Life and also Shanta Gold if recall. Both after reasonable press announcement's but 'bombed' thereafter. Dipped into Reddit over weekend and Wallstreetbets - between the computers, money and social networkers do not feel in an investable place. But believe the small person can dip under the radar and 'nick a few quid' - maybe. Good fun though if don't have a job!

Thanks Paul good to know

Shares in issue

Last weeks short squeeze on wallstreet episode perhaps highlights that there are potentially, maybe, guessing, far more shares traded than actually exist - with options, shorting et al. Attempting to be a trader with a few 'longs' or 'wrongs'.

Hi rmillaree,

Yes indeed, Card Factory (LON:CARD) is a good example that you gave of a company where the bank is probably leaning hard on them to do an equity fundraise, hence just a 1 month extension of the covenants. That rings alarm bells to me, and could mean an emergency fundraise at a deep discount, if institutions don't like the idea of refinancing it. So very high risk I'd say.

CARD management missed their chance to refinance last year, when lots of other companies were doing placings, was it around April-May 2020? It was obvious pre-covid even, that CARD had too much structural debt, and had been paying excessive divis, so it has no balance sheet reserves to fall back on. Management gambled that the cashflows would keep pouring in forever, which we have since found out was a mistake.

I see Saga (LON:SAGA) as very different. The bulk of its debt is the 2 ship loans. In that case, the lender is co-operative, and it stands to reason that everyone, including the lender's best interests are served by waiting until the ships can start generating revenues again. Hence it would make no sense at all for the lender to resist relaxing the covenants, in my view.

The £250m bond has no covenants (or none of any significance right now anyway).

Leaving just largely undrawn bank facilities.

The insurance division generates enough cashflow to support the c.£6m cash burn from the travel division. It's a pity that the company's comms people bungled the last update, so some people have wrongly assumed the whole group is burning £6-8m per month, which is nonsense. That figure just relates to the travel division, and insurance division pays for it, so not a problem at all.

Put it all together, and I think the position at Saga stacks up fine.

Apologies for repetition. I think it's so important to drill down into the detail. Apparently high net debt at Saga is not problematic when you dissect it down into the detail. Hence why I feel we should (fairly soon) get an update confirming that covenants have been relaxed. Maybe the lender might negotiate an increase in fees though?

AJC0504

Hi Paul

Thank you Sir for your reply.

I hope having watched in silence ,for a long time, and being in truth a bad investor, until I recently discovered/tried to implement, Stockopedia .

I am getting better.

Also then trying to get my head round buying expensive/momentum stocks (behavioural bias ), I hope that you are wrong on the issue of Lookers .

Why, the facts change and then I change my mind .

You have a better knowledge than me of account matters, but I believe now that this is the cleanest set of books that you will come across. They paid enough to the accountants to make sure. New management, new conventions,

Could you rethink your facts ?

I am still trying to buy low, hence building up a position in Saga . Re Saga I believe your analysis is 100% correct, but perhaps too optimistic re Covid timetable, and cruises.

The more I read your thoughts and history, the more I like your moral worth.

Yes it is about money, but sterling character is more important.

Thank you for your reply.

Sorry old person typing with one finger-takes ages

Best wishes

Sorry Paul

Postscript

My children like you dash off a reply in seconds

It takes me hours.

Elric Langton

I honestly cannot get my head around BIDS technology; by this, I mean how the gamer immersed in the game is going to make BIDS make any money? Or should I say, the advertisers using the platform? You may argue the same can be said for advertising at a live sports event's has the same problem. Is it just trusting human habits on subliminal messages adverts embed into our minds?

Even if I was to answer my own questions, I would not invest in a company that leads its investors up the garden pass as frequently as BIDS has.

Dojosan

Cairn Energy (LON:CNE) Took a look a month back - like case with Vodafone - Indian gov likely to lodge appeal = further time delay. Also, the settelement, at least a large portion, if I am not mistaken is already factored into current SP as per some of the investors on the LSE BB have stated.

UK_Investor_8888

One more comment to add to my demise of the high streets comment.

Where as Retailers and their Administrators can forestall and renegotiate private landlords lease charges, my understanding is that there is no flexibility on The Government's Business Rates side of the cost. If you are stuck with a loss making shop or building, and the local council can't forgive Business Rates, what are they going to do?

At the end of the day a Landlord has to rent shop space to only a limited number of retailers. He'll take a short term reduction to keep base revenue.

The autopsy of dead retail, not that there will be an autopsy (even though their should be - its a Public good), is that Business Rates may have been the one factor above wages and rent that put local high street businesses under.

And the consequences of creating unemployment because non-profitable businesses need to avoid tax liabilities... is more tax liabilities. Doh.

BIACS

2nd Feb '21

Hi Paul - you are probably right that the lenders will not pull the plug, however the bigger worry is the price they will extract for not doing so. I am seeing a lot of ratcheted rate increases, expensive restructuring or 'deferral fees' and more stringent corporate controls being put in place by lenders in similar situations in the industry at the moment. Banks will be 'supportive' as long as they are getting something out of it to sell to management - i.e. more profit in the long haul which means more expensive funding for SAGA.

The other potential issue here is the cost of getting the vessels out of warm stack (or, worse, cold stack if COVID persists) - contrary to what most would think, you cannot simply decide to start using these sorts of vessels again one morning and get onboard, press the start button and sail off. The cost of getting the vessels out of layup and back into a ready for operations state can cost a pretty penny (I haven't checked the accounts/reports to see if they have tried to quantify this and made reserves for it?). The longer a vessel is laid up, the more issues you tend to have with it afterwards too, so there are potentially higher running costs to factor in due to that (or, in the worst case of having to drydock the vessel to fix anything, also potential 'down time' in operations for that). Depreciation is also a factor to watch - if you end up losing 2 full years (the 'best' two years too when the asset was supposed to brand new and at its highest earning potential) out of an operational life of say 20 years then that's a big hit to the projected profitability of the investment.

Crewing costs are also escalating rapidly presently and will remain elevated in the short and medium term at least.

Perfectly possible that the investment case might still stack up despite these things of course - just highlighting a few issues that I haven't seen raised here yet from a maritime industry perspective and which do need to be built into any projections.

This comment has been moderated

cafcash49

Thank you old man fit and apologies for not coming back to you yesterday. Many thanks, I think I understand and will now explore. Many thanks for your help. Charles

Small Cap Value Report (Mon 1 Feb 2021) - FNX, 5 new listings, BIDS, PRV, ZYT

Fonix Mobile (LON:FNX)

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Paul Scott

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