Small Cap Value Report (Mon 10 Jan 2022) - COG, ELTA, MEX, QTX, BOOM, MRK, NGHT

10th Jan '22 by Paul Scott

40 comments 10449 reads

Good morning, it's Paul & Jack here, raring to go, with what should be a busier week for trading updates. Today's report is now finished.

Agenda -

Paul's section:

Cambridge Cognition Holdings (LON:COG) (I hold) - contract win, and positive outlook comments from CEO. This remains one of my favourite small growth companies.

Electra Private Equity (LON:ELTA) (I hold) - final stage of the breakup of this investment trust. ELTA now becomes "Unbound", the holding company for Hotter Shoes (comfy shoes for the over 55s, mainly women). Looks cheap, but I reserve judgement until we get clean accounts for the standalone company in due course.

Quartix Technologies (LON:QTX) - a really comprehensive TU for FY 12/2021, giving very clear profit guidance. This share looks expensive, but the international growth now being achieved looks impressive.

Audioboom (LON:BOOM) - we didn't spot the series of "significantly ahead" updates in the autumn, sorry about that, as this share has done really well. Another impressive update out today. There's a lot to like here, apart from the high valuation. Nice to see a serial disappointer turn the corner into being a viable, fast-growing company.

Marks Electrical (LON:MRK) - impressive figures in this update to end Dec (Q3). However, I question how sustainable its sector-leading profit margin is?

Nightcap (LON:NGHT) - very strong like-for-like (LFL) sales growth in July-Dec, but how much of that has been driven by refurbishments? We're not told. Also the cash figure reported is gross, not net. There's a big difference, and the company's balance sheet is not strong, as it claims. Too expensive for me, and I don't like selective reporting of positives.

Jack's section:

Tortilla Mexican Grill (LON:MEX) - strong end-of-year update from Tortilla which ensures full year results should be materially ahead of expectations. Profitability is helped by Covid-related government initiatives and profits over the next year or two are forecast to fall, so there’s still a question over the underlying profitability of the enterprise. But as an operator, Tortilla looks good and is ready to roll out.

Does anyone read this I wonder? It's still useful to include, to help new subscribers, and as an occasional reminder to existing subscribers who expect us to be clairvoyant.

Explanatory notes -

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rmillaree

10th Jan '22

Electra Private Equity (LON:ELTA)

Good point ref PBT Bouden - practicably speaking i like to have the full chapter and verse of both as only loking at the detail of the differences can we start to get a picture as to whether decent EBITDA may be overpimping things or whether it may be the opposite (less likely) . Certainly looks like expected PBT ye sep 2022 is negative so that puts a different picture on things - i suspect though there will be a lot of one offs this year that may mean the expected loss doesnt really reflect the true ongoing earnings potential. here Time for some further digging perhaps. seems quite positive they think non shoes can get to over 50% of profits hopefully thats some reasonably organic non organic growth coming along (like vegan steak bakes).

davidjhill

I think the confusing messages have come about because the capital markets day is done by the CEO of Hotter who just talks about that business but actually the Electra Private Equity (LON:ELTA) group is made up of more than just Hotter, despite the fact that all of those assets will trade under the Unbound group.

Whilst PBT is obviously usually a better measure I think in this instance EBITDA is a more useful interim view until the Unbound business is trading without the one offs associated with all the demergers etc.

The Hotter PBT vs EBITDA should actually be quite close together over the next 12 months as they don't capitalise much and I would expect interest to moderate around the £400k p/a mark. So I see PBT (before any growth) normalising at around the £4m - £4.5m p/a level which, against a market cap of £25m is around 6*. On an EV/EBITDA its 5* so not much in it from my calcs.

The £15m insurance claim could make quite a difference but I prefer to discount that to zero until there is certainty.

Paul Scott

Well done Epsilon!

JCPr

I've the same restriction on AJBell. ELTA is not due to de-list until the 31st Jan so I'm surprised they've stopped trading so early.

yiannos1

The insurance claim is not for £15m.

The insurance claim is UP to £15m.

It can be from £1 to £15m.

Thanks

Zipmanpeter

Rmillaree, Re Electra Private Equity (LON:ELTA) /Hotter. On what is your comment "Certainly looks like expected PBT ye sep 2022 is negative...." based.

The slide below is from the last investor presentation I know about. Today we had Nov-Dec revenue growth confirmed as +9% at 65% %GM. If we assume H2 is the same as H1 that is >£3Mn underlying EBIT which I see as consistent with their definition of EBITDA being >£5Mn. I can't therefore see why this year will be negative.

Will a conversion listing really cost more £3Mn for a £25Mn cap business that is already quoted or am I missing something?

I hold as I really like the re-structuring done in last few years and the go forward strategy. The old have all the money and the "young-old", 55-70 have discovered online shopping big time the various lock-downs.

Martin5760

Great analysis of Nightcap (LON:NGHT) this morning Paul

Hi Zipmanpeter

Remember the listing is Unbound Group. That consists of Hotter shoes and other assets, not just Hotter.

I expect Unbound may well report losses because it demerged £HOST and has been busy unwinding itself. That has costs in advisor and listing fees as well as a more swollen BoD than is needed.

However, once all those one offs come out this year we should be left with a business that has £6m of cash, a £15m+ covid insurance claim and Hotter Shoes. The latter will have £10-11m of debt and should be making £5.7-6m EBITDA. I reckon at a PBT level that should start to unwind at around £4m p/a and if they continue along growth trajectory considerably more in my view.

For me the opportunity is twofold. Firstly I don't think the market has really got its head around what Unbound is and is confused on forward profitability and secondly there is selling pressure from institutions that could hold Electra Private Equity (LON:ELTA) but not Unbound. As all this unwinds over 12-18m months I think the value should become clear, at which point I am hoping the price will be considerably higher.

Mark Tughan

Re: Nightcap (LON:NGHT) - worth noting that the founder lock-in's expire on Wednesday. There could well be an overhang. This was originally a pehicle in part to rescue the London Coctail Club, which was for sale and had not attracted any interest - I believe the advisers selling it were seeking (and suing for) their fees after the deal with Nightcap (LON:NGHT) .

Personally I think the juys is (or should be) still out on whether this is going to be a shareholder friendly and rewarding journey for non-inside investors.

gmtrader

Cheers Paul for your write up on £MRK.

In the latest video interview the CFO says costs from suppliers had not gone up in the 3rd quarter but they were starting to see the costs from suppliers rise now. This I'd imagine would be passed onto the customers.

Regarding EBITDA being 9%, in the IPO document EBITDA for fy21 was actually 13.8%. The drop was due to greater expenses of wages and advertising taken on from going Public. They do not expect to see that level of % again but do expect to maintain 8-9% level.

The reason behind having a lot better EBITDA % than others like Ao World (LON:AO.) is mainly to do with their distribution. They rely on 1 distribution centre, in central England as apposed to 17 that Ao World (LON:AO.) have. That's a huge saving for the company. Less wages but also they do NO over night trunking of goods from one centre to another.

Whether they can keep this high as they grow, who knows but they have so far and are confident they can in the future.

I think they are a pretty good punt for a small investment but they are a little bit illiquid so I wouldn't invest too much.

Zipmaster

Hello Zipmaster thanks for highlighting the fact my comments ref losses being expected were nonsensical , i made the silly mistake of just lifting the number from Stockopepia - i see that the total revenue figure is £1 million for the same 2022 period so its clear everything contained in stockopdia ref 2022 is simply faulty data that should be ignored - i should really have expected that to be the case when i looked at the numbers - so please everyone disregard my comments about the expectations being for losses for the year ref profits.

Deegee Eff

Electra Private Equity (LON:ELTA) I agree that the fundamentals look very good, but I think we are a long way from the shareholder register getting into equilibrium eg MandG seem to be selling and other significant shareholders do not look like AIM type investors.

fanmail

Just a couple of notes to your BOOM comment for which many thanks. The vast majority of their revenues arise in the US, over 90%, and the CEO is based there naturally enough. Podcasting is a global business and BOOM is best viewed through this prism.

BOOM has been outperforming the market as measured by podcast advertising revenues in the last five years and now has 4% of the US market for podcast advertising. That market has grown from $0.3bn in 2017 to an expected £2.0bn in 2023. I don't think it is surprising that the odds of BOOM remaining independent are low in the light of a very active M&A market and the likes of Amazon, Netflix and Spotify keen to dominate. How that is factored into a valuation of the shares I shall leave to you and your followers.

I am long.

planetx

Christopher Mills buying into Rockwood Realisations again today , a chunky £385k worth of shares added taking him to over 5%.

Boy that lad gets about a bit doesnt he.

banterex

Anybody have an idea why Volex took a hit today?

JohnDoe2378

Hi banterex,

Volex (LON:VLX) has taken a battering past two months!!

Clearly some investors are spooked about something, not sure what though.

When others are fearful...

Breakout Trader

I sold out, reluctantly, a month or two ago, as it seemed any company selling 'goods' were heading south. I can imagine their next set of results won't be great due to inflation, supply chain issues and so on. OEMs are building lower volume than they'd like at the moment.

Could there be an imminent bid for Fulcrum Utility to take it private , or break it up ?

Bayford Co and Mills seem to have positioned themselves into very strong positions to carve up as they see fit .

Jonathon Turner/Bayford now up to 26.7% and Mills/Harwood Capital at 28.8%

Given Bayford had previously attempted to take private something seems to be in the offing . add to this the three directors finally buying shares in the recent placing .

Fulcrum is in a good sector for sure and some conspiracy theorists might argue there has been a concerted effort to batter the share price down , then do a large fund raising to get yet more shares on the cheap and then a little nudge at the end to takes it private at a very good price ?

As Hannibal said in the A team / Bayford says to Mills ??

"I love it when a plan comes together "

Boon

Strategically, I think we will see a credible bid from a strategic buyer (in the advertising space) soon enough for Audioboom (LON:BOOM) . The reason? Many of the large advertising networks have been caught a flat-footed by the boom in podcast ad inventory space, and the demand from advertisers (hence why BOOM revenues increasing so rapidly).

Many online ad networks would have seen huge revenue growth themselves in 2020, 2021 (especially with the CPC/CPM inflation in 2021). But looking forwards, they're probably nervous what can keep driving their revenue growth, to support their high PE multiples. So I wouldn't be surprised if one of those companies made a bid for Audioboom, to keep their revenues "growing".

(Also many ad networks would have been hugely cashflow generative in the last two years, so have a cash pile, and also richly valued stock, to use for acquisition).

Small Cap Value Report (Mon 10 Jan 2022) - COG, ELTA, MEX, QTX, BOOM, MRK, NGHT

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Paul Scott

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