Small Cap Value Report (Mon 10 Oct 2022) - RFX, BOWL, LINV, QTX, MADE, JOUL, BKS

Good morning from Paul & Graham!

Podcast - the summary for last week went up on Saturday, on podcast platforms, and here on my website. Last week's "mystery shares" (i.e. for Stockopedia readers only), which are my best ideas from the week, are;

Victorian Plumbing (LON:VIC) - see Thursday's report

Castings (LON:CGS) - see Friday's report, and

Wincanton (LON:WIN) - see Friday's report.

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CEO Interviews - I enjoy doing audio interviews, and am planning on doing more. This week I've got 2 planned, both on Thursday, both are shares I hold personally this time (they're usually not), being -

Beeks Financial Cloud (LON:BKS) (reporting today)

XP Factory (LON:XPF)

So if readers here have any clever questions that you want to suggest, I'd be happy to hear them in the comments below. I would stress that my interviews are fairly high level, so trying to understand the businesses generally, not usually drilling down into minute detail. So I can't promise that I'll be able to ask your specific question (that's more suitable for the excellent webinar formats run by PIWorld, or IMC, and others), but it would be good to hear what topics you think are most interesting for me to ask about.

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Agenda

Paul's Section:

Hollywood Bowl (LON:BOWL) - another positive trading update, ahead of expectations for FY 9/2022. Although I can't crunch the numbers accurately, because there's not enough information provided, and no broker notes available to me. The balance sheet is strong, with lots of net cash driving a self-funding roll-out of new sites. The dividend yield is now 5% and growing. So the fundamentals look great. Will the boom continue though? That's the big unknown, and the key to determining if the shares are cheap, as they seem, or just enjoying a boom that might fizzle out eventually?

Beeks Financial Cloud (LON:BKS) (I hold) - Results FY 6/2022. Just to let you know, I'm currently working on this section, it should be up between 1-2 pm. Update: see tomorrow's report, as this section missed today's cut-off.

Made.Com (LON:MADE) [no section below] - a quick update from last week. As previously reported, this heavily loss-making online furniture company is up for sale, in a last ditch attempt to avoid running out of cash & insolvency (it has previously said that it couldn't raise sufficient equity). The latest update says it has "begun discussions with a number of interested parties regarding the sale of the group". Timescale - non-binding indicative proposals are invited by mid-October, so this week & next week really. The Directors will review the proposals, and then start a second phase of discussions with a "select number of parties". Current plans require a cash injection of £45-70m over the next 18 months.

My view - MADE looks highly risky for existing equity. MADE failed to become viable during the pandemic, in perfect conditions - when everyone was shopping online, and its physical competitors' stores were closed. Trading has since collapsed, with huge losses this year, and cash rapidly dwindling. Shipping costs & supply chain costs became excessive, and should ease gradually in future, but will MADE still be around by then to benefit? Just because there are several parties interested, and going through the numbers, doesn't mean the equity is worth anything. Why would a buyer bail out existing shareholders, who have already declined to refinance the business? It's possible that somebody might see value here - there are press reports (maybe placed stories to talk up the price?) of private equity buyers sniffing around. Anyone holding this share is taking a massive risk of a 100% loss, in my opinion. Why take that risk, just on hope that a white knight might ride to the rescue, for a company that is close to insolvency? I'd say the probability is maybe c.90%+ that equity ends up worth nothing, and the business is bought out of administration for very little, leaving nothing for shareholders. I could be wrong, it's just educated guesswork at this stage, but I'm flagging extremely high risk, and that this share remains uninvestable. Anything could happen though, only insiders know what's going on. [no section below]

Joules (LON:JOUL) [no section below] - in a similar vein, but nowhere near as severe as MADE, JOUL is also on a tightrope needing to refinance. I need to set aside my incredulity at how previous JOUL management have managed to wreck a previously excellent business (whereas MADE was never a decent, profitable business). An update today says -

• Making good progress with turnaround plan
• Possible equity raise (as previously reported)
• Considering other options, including a CVA (not yet determined if necessary)

My view - it's still too risky for me, so I'm watching from the sidelines (as mentioned here before). CVAs don't necessarily involve wiping out existing shareholders, but I would expect a CVA to be done alongside an equity fundraise, and renegotiated (probably lower) bank facilities, it's often a package like that, which preserves some value in the existing shares. But it depends on how supportive existing shareholders are - especially the founder, who banked £12m in April 2021, part-selling at 232p. He remains the biggest shareholder at 21.7%.   Will private investors be looked after in this process? Only insiders know, and there are a very wide range of possible outcomes here, ranging from OK, to a 0p wipe-out. So at this stage, this is impossible to value, and has to be seen as very high risk. For gamblers & optimists only at this stage, I'm afraid. Once again, I apologise for my previous misplaced bullishness on this share, I had no idea trading would deteriorate so badly, and the company would be run into the ground by incompetent management. [no section below]

Graham's Section:

Ramsdens Holdings (LON:RFX) (£62.5m) - an excellent pre-close trading update from this provider of pawnbroking, forex and other related financial services. Two of the four segments are above their pre-Covid levels. The forex segment is not quite there yet, but it is close. Pawnbroking is above pre-Covid levels and the momentum here looks excellent. The cost of living crisis may possibly hurt the demand for holiday money at some point, but conversely increases the demand for short-term credit. With many payday lenders having left the market and not been replaced, I can see the pawnbrokers having a very strong few years ahead of them.

Lendinvest (LON:LINV) (£104m) - this is an asset manager and an investor in the property space. Originally focused only on bridging loans, it now offers both development finance and buy-to-let products, and has an online platform for borrowers and lenders. This morning, the company has issued a nasty profit warning as it expects fewer growth opportunities in the buy-to-let category; it has needed to reprice products to shield itself and its investors from vulnerable property prices. The broker’s PBT forecast for the current year takes a huge cut. I’m nervous about this company’s prospects and would need a chunky discount to book value to get me interested here.

Quartix Technologies (LON:QTX) (£164m) (+3%) [no section below] - this telematics company provides a trading update in line with expectations for Q3. Annualised recurring revenue hits £26.9m, up by over 10% year-on-year. The subscription base is up 17% year-on-year. The company highlights growth in new subscriptions of 24%; I view this figure as the “second derivative” of growth and as being less important than the 17% growth in total subscriptions. The company expects more of the same in Q4. CEO Richard Lilwall is happy with the strong progress made in France: growth is led by Continental Europe, while the mature UK market continues to put in a solid performance. Growth in the US is slower. My view here is unchanged from July. I like the company but I’m not sure how to justify the valuation at 6x ARR and have concerns about price erosion for telematics technology. The forecast PE multiple is 30x. [no section below]

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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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Paul’s Section:

Hollywood Bowl (LON:BOWL)

205p (pre market open)

Market cap £352m

Trading Update

Hollywood Bowl Group, the UK's largest ten-pin bowling operator, today announces a trading update for the financial year ended 30 September 2022 (FY22).

Excellent operational and financial performance - investing in UK growth and international expansion   

The Group has continued its excellent momentum following a record first half with another period of strong trading and further growth.

The boom in ten pin bowling continues. We reported here on 21 Sept 2022 impressive interim results from smaller competitor Ten Entertainment (LON:TEG) with forecasts also raised. TEG seemed to think that a step-change upwards in revenue & profit has happened, calling it a “new baseline”, but I don’t see how they can be so sure that it’s not just extended pent-up demand? Although we should recognise that the customer offer has improved, with better & refurbished sites, and additional games (not just bowling).

Some key numbers for FY 9/2022 -

Revenue £184.9m (well ahead of forecast £170m showing on the StockReport).

Like-for-like (LFL) revenue growth of 28.3% compared with pre-pandemic FY 9/2019 - this is a key number for all retail/hospitality businesses, and it needs to be strongly positive, to absorb 3-years worth of additional costs, which this is.

EBITDA (pre-IFRS 16, so a meaningful number) guided at £38.2m (up over 40% on pre-pandemic FY 9/2019) -

The Group expects to report EBITDA4 growth (pre IFRS-16) in excess of 40 per cent compared to FY19 (£38.2m), ahead of market expectations

Continuing to expand, with 2 new sites in the UK imminent, plus another 10 planned over the next 3 years.

Canadian acquisition is trading in line with expectations, and rapid expansion into new sites planned.

Net cash of £56m, plus undrawn £25m RCF - so tons of liquidity here, and little to no dilution/insolvency risk, in my view.

Balance sheet - when last reported as at 31 March 2022, looks fine to me. Although note there is a deficit on the lease entries, suggesting it has some under-performing sites. That would be a good question to ask management about, if they do a webinar - how many loss-making sites are there, how much do they lose, and what plans are there to exit or renegotiate on those leases?

For more detail, I reviewed BOWL’s interim results here in May 2022. Note that there was a £3m boost in H1 from temporarily reduced VAT.

Seasonality - checking the half year results table on Stockopedia here, there’s a strong H1 bias to profitability pre-pandemic, 2017-2019. H1 results this year seem to show EBITDA of £31.0m on the same basis as the FY 9/2022 guidance of £38.2m. So it seems that there’s a more pronounced H1 bias to profits this year.

Costs - “well insulated” from inflation. Electricity is hedged until end FY 9/2024. Solar panels being installed (we’re seeing this from quite a few companies now, pleasingly, and payback periods are now much shorter). Interestingly, food & drink is low, at <10% of overall costs, menus simplified, and labour costs are <20% of revenue at centre level. This sounds as if the position is pretty solid, nothing to be alarmed about re costs.

Dividends - a final divi of at least 7.5p is mentioned today. A 3p interim divis has already been paid, so 10.5p+ for the full year, a healthy (and growing) yield of about 5% - well worth having, in these inflationary times. Note also that in the past, BOWL has paid special divis, usually a similar size to the final divi. Plus it’s self-funding its own growth, and has accumulated a nice cash pile. So this is clearly a decently cash generative business.

Valuation - I can’t make sense of the profit numbers, because there are no broker forecasts available to me. So although BOWL says it’s ahead of expectations at EBITDA, I can’t see how that figure reconciles to the broker consensus net profit figure of £34.3m shown on the StockReport, there seems an anomaly between those numbers.

Therefore I think all we can do is assume that EPS might come in a bit ahead of the 21.9p broker consensus shown on the StockReport. If it’s say 23p, then the PER would be 8.9, which seems very good value.

My opinion - bowling companies are trading their socks off right now. If that level of demand continues, then the shares are really cheap.

But will demand, and hence profits, remain at elevated levels? Or are we seeing a continuing boost from pent-up demand? Who knows?

That’s it really, the investment case depends entirely on what you think is likely to happen in future. I don’t have any particularly strong view either way because this is an unknown factor, and nobody knows how the future will pan out.

As a value operator, it could be that BOWL is an affordable form of entertainment, which might do well in tight consumer spending times. This stood out for me -

The Group remained the lowest cost option of the major ten-pin bowling operators with a family of four able to bowl for under £22.

Hence on balance, I'm leaning towards seeing this share as attractive value. In more normal macro, and stock market conditions, this share would undoubtedly be considerably higher, based on these numbers.

Note that the share price isn't a lot higher than when it floated in 2016. Yet the business is considerably bigger & more profitable now.

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Graham’s Section:

Ramsdens Holdings (LON:RFX)

Share price: 197.5p (pre-market)

Market cap: £62.5m

This is “a diversified financial services provider and retailer” - it’s easy to think of it as a pawnbroker, but in reality it is diversified over a range of other products.

Forex has historically been a very important segment for it, and the good news this morning is that gross profit in this segment has “almost” recovered to pre-Covid levels. Gross profit for FY September 2022 comes in at £12.6m (the equivalent result for FY March 2020 was £13.1m).

The other segments sound like they are doing well, too:

• Jewellery retail revenue £26.2m (+40% vs. last year), much higher than pre-Covid levels.
• Pawnbroking loan book £8.6m (+41% vs. last year), above the pre-Covid loan book.
• Precious metal buying revenue £16m (+50% vs. last year).

So the growth vs. last year is stunning, and there is some growth vs. the last pre-Covid year, in two of the segments.

CEO comment:

"We are pleased with the Group's very strong performance during the year, which again reflects the resilience of our business model and the strength of our value-for-money reputation amongst customers.

We are particularly pleased with the strong rebound in our foreign currency segment, which has been a key driver behind our profit performance… we are in a good position to continue our positive momentum into the new financial year."

My view

It’s difficult to form an opinion on this in isolation to H & T (LON:HAT) (where I have no position currently but still have a positive view on the company).

This trading update is superb and, like H&T, it appears that Ramsdens is currently firing on all cylinders.

As I’ve already noted, this company is heavily weighted to forex. Maybe, if the cost-of-living crisis hits tourism, there could be less demand for holiday money? That’s one of the few vulnerabilities I can think of, and it does potentially affect the most profitable segment at the company..

That aside, I can think of little that is standing in the way of continued growth here.

The pawnbroking segment - which I view as the anchor for the jewellery retail and precious metals buying segments - is strong again, and this is attributed to:

customer spending habits returning following the easing of restrictions related to covid-19 and fewer alternative options for small sum short term credit.

That last bit caught my eye. As noted in The Guardian recently, payday lenders have been allowed to go bust (e.g. Wonga) but few new payday lenders have been allowed to operate. This creates a bigger market for unregulated, illegal lenders and also for regulated businesses such as pawnbrokers.

As a reminder, one of the best features of the pawnbroking loan is that if the customer walks away from it, they suffer few repercussions. They will not return home some day to find the bailiff knocking at their door. Even their credit score is unaffected. They lose the item but that is all. Regulators tend to worry about the rate and the amount of interest rate being charged but not about the format of the loan itself.

This share gets the thumbs up from me. Despite the growth momentum, it does not appear overly expensive, and ROCE/ROE should hopefully return to their previously high levels.

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Lendinvest (LON:LINV)

Share price: 75p (-23%)

Market cap: £104m

This is another 2021 IPO. Down 60% so far:

While the bear market we are going through is undoubtedly difficult, I also think we need to reflect on the glut of overpriced IPOs in 2021. I think we can safely conclude that there must have been a period of irrational exuberance, which allowed so many overpriced small-cap listings to hit the market around the same time.

Here’s a five-year chart of the AIM All-Share Index. We can hardly blame bankers and corporate issuers for selling stock to the public last year:

Let’s take a look at Lendinvest, which has not been covered in the SCVR before.

It describes itself as “a leading technology driven asset manager for UK property finance”.

On its website, you can apply to borrow for a range of purposes, all of which can be categorised as either bridging or development. The “bridging” category includes buy-to-let products.

It is also possible for individuals and institutions to use the website to invest in loans made by Lendinvest. Lendinvest uses its own balance sheet to invest, and is a manager of third-party assets.

Today’s update offers some optimism despite the challenges posed by rising interest rates. But there’s a profit warning later in the RNS.

"Looking ahead, we are acutely aware of the disruption in the UK mortgage market, which is affecting confidence and for the moment, applications for new mortgages have slowed across the market. Recent market dislocation has demonstrated the flexibility and speed to market capability of our platform. This provides us with a competitive edge, flexibility, and proven risk management capabilities, which in addition to the size of our addressable markets and our strong financial position, gives us confidence in our long-term prospects."

The growth figures for H1 - the period from March to September - look good, but of course markets are forward-looking and it’s the next six months which matter most. Deployed capital has reached £2.4 billion (up from £1.8 billion a year ago).

The company also reports “committed and deployed capital”, which apparently includes funds that the company could invest, but has not yet found a home for. There is a big discrepancy between this figure (£3.4 billion) and the amount that has actually been invested. It looks like this discrepancy was increased by recent agreements with Lloyds and JP Morgan.

More agreements on the way?

Investor appetite remains strong and we expect to complete a number of additional transactions in the second half of the current financial year.

Outlook

The profit warning is revealed down here.

Here's my summary of this section:

1. The company has repriced products and “tightened our credit appetite” to protect returns given the likelihood of falling property prices.
2. H1 growth was in line with expectations, but growth in Buy-to-Let in H2 is likely to be below expectations. The company has reduced its opex in anticipation of this.
3. FY March 2023 PBT is probably going to be around the same level as last year.

I’ve found a note from finnCap, wherein they have today cut their PBT forecast for the current year by 31%, to just £14.2m.

The top-line revenue growth forecasts for this year and next year are cut by between 7% and 9%.

There appears to be very significant operational gearing; this is why the opex cuts are so important, to prevent the company from swinging even lower towards breakeven.

My view

I’ve dug out the March 2022 balance sheet. Lendinvest has net assets of £97.5 million, or about £90m after deducting intangibles.

Balance sheet leverage was as follows: the company was carrying loans and advances with an accounting value of £1.2 billion, and had outstanding borrowings of the same amount.

This leverage was reduced by a large securitisation in May. It has also raised new funds by issuing bonds. The company has been “selectively moving assets off the balance sheet”.

As there are quite a lot of moving parts, I’m unable to form a strong view on Lendinvest today. But I suspect that it should be trading at a discount to book value, given that higher rates are likely to pose a severe test for its remaining loan book. I’d also really like to see the new balance sheet for September 2022, after the dust has settled from all of the various events in H1.

We’ve also got the IPO problem: yes, the shares are down by more than 60%, so they are cheaper than they were before. But if I was to put my trading hat on, I would say that the share price momentum here is extremely negative, the company is issuing profit warnings, has a horrible economic outlook, a highly leveraged balance sheet with questionable values, and has still not found a floor after an overpriced IPO. It’s not clear to me that we have a solid underlying business to invest in here. But perhaps it will come good in time.