Small Cap Value Report (Mon 11 June 2018) - XLM, SOM, RDL, TRD, IGR, Quindell | Graham Neary

11th Jun '18 by Graham Neary

55 comments 19587 reads

Good morning!

Before I get into today's report, I'd just like say how thankful I am for the early comments. Besides alerting me to the stories which you find most interesting, they also help me to spot things I might otherwise have missed. So long may this continue!

Today, the following stories have grabbed my attention so far:

XLMedia (LON:XLM) - trading update
Somero Enterprises Inc (LON:SOM) - AGM statement
Triad (LON:TRD) - final results
Ranger Direct Lending Fund (LON:RDL) - management review process update
IG Design (LON:IGR) - final results

XLMedia (LON:XLM)

Share price: 118p (-31%)
No. of shares: 220 million
Market cap: £260 million

Trading Update

Performance has stalled at this Israeli performance marketing group, registered in Jersey.

General thoughts

Can we trust these Israeli (and Greek, Cypriot, etc.) small-caps, listed on AIM? It's difficult to generalise, but my basic point of view is that I always want to feel like the shares I buy have a sturdy relationship between the shareholders, directors and the company itself.

This is related to something I was taught about property investing. From a legal point of view, you can't buy land. You can only buy title to land, i.e. the right to do certain things with a specific piece of land.

It's the same with companies. We don't buy companies, we buy securities (bonds, shares, etc) which give us rights to do certain things (collect coupon payments, collect dividends, vote for Directors, etc). If there is something wrong with the securities themselves, then there is something fundamentally wrong with our investment.

Usually, we don't have to worry too much about the legal integrity of company shares. But sometimes, it matters a great deal.

I currently own shares in just one company not registered in the UK: DP Eurasia NV (LON:DPEU). This is active in Turkey and Russia, and is registered in the Netherlands. I accept that this is a risky stock, and so my position is very small. However, I do take some comfort in the Netherlands registration, since the Netherlands is on…

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FREng

11th Jun '18

Annoncement today that Argo Blockchain PLC is to float on the LSE’s main market, raising £20m via a placing. They offer "cryptocurrency mining as a service" through arbitrage on commercial daacentres.

In the cryptocurrency goldrush, they seem to be shovel makers. Worth a look.

Triad (LON:TRD) are heavily dependent on a few central government contracts (especially MoJ). They seem good at winning and delivering, but maybe the risk is what holds the price down. I'm long.

Trident

I think to some degree these K3 Business Technology (LON:KBT) contract announcements are to give hope to shareholders that despite the previous profit warning, the lights are still on and they are getting new business.

Maybe the business will stabilise at some core turnover level, but for their focus on AX products was their central weakness. Don't hold me to it but I believe there has been a history of increasing write-off of development costs, and these adjust profit. Maintaining and developing a product set is an expensive business, and you have to be winning consistent, and decent size business to justify the investment. I believe some other steady eddie parts of the business have filled in the AX hole in the bucket until recent times. Then if they are sold on a subscription basis (rental model), and this generally pays off in three or so years time, when the annual base of sales has built up, assuming there is a decent market for the product. So there can be a revenue/cash shortfall in the meantime.

These are the uncertainties for K3 in my view.

Luthrin

Re Triad (LON:TRD) :

It's worth looking back at the 12 Jun 2017 SCVR when Triad released its previous full year results (also on a Monday morning with Graham writing the report). In the very first comment FREng highlighted the company, saying: "I see TRD as a profitable company with a solid balance sheet, trading on a low P/E, with the increased profits flowing cleanly into increased cash." Graham himself gave the company a generally positive write-up.

The share price at the time of Graham's 2017 post was 77p, up 4% on the day. So here we are a year later with the share price some 7% lower despite another profitable year, a doubling of the final dividend, and £3.75m of cash now sitting on the balance sheet instead of £2.25m (against a market cap of £11m).

Triad (LON:TRD) is the sort of contrarian value play that Ben Hobson recently wrote about. Many investors won't touch it because of its miniscule market cap, particularly after Paul Scott's Mello Derby talk where he gave his reasons why he now avoids such highly illiquid 'lobster' stocks (a view shared by Graham and Ed Croft I believe). I couldn't resist taking an initial position in September when the price had dropped to the low 60s, but surprisingly the share price continued to fall after the interim results. This was despite a solid half-year report with the Chairman dropping a strong hint (if one cared to read the RNS carefully) that the company's year end cash position would be very healthy.

In general I won't average down on a position, but I make an exception for these nano-caps because the share price can drop 20% or more between reporting statements on exceptionally low volume, suggesting that there is no real selling pressure from insiders, just nervous or bored PIs bailing out. I was buying Triad in the low 50s in March, and whilst I appreciate that there is considerable risk attached to such a strategy, I think this can be lessened by investing in a basket of similar value opportunities.

I sold a third of my holding soon after the open this morning at an average price of 73.2p and my sales didn't move the price (there's usually good liquidity on results day). As for the remainder, I'll just continue to hold as the company still looks very good value at the present price. I don't harbour any illusions however - it won't surprise me in the least if the share price drifts lower over the coming months, just as it did last year.

Vsihv

Hi Graham,

I am not sure your financial expertise extends to exchanges, but Aquis are due to start trading this week.
Time allowing (which might not be possible given the existing list), would value your thoughts.

Have listed my tuppence below - I think it could be an interesting company for a small position to tuck away for a few years.

Many thanks in advance.
V

Aquis (an early stage pan European exchange), which is taking advantage of new regulations and changing the pricing basis from its competitors.
http://www.aquis.eu/investors

11m shares issued at 269 pence - £73m market cap post placing anticipated.
Warsaw exchange are selling (7m shares) 20% roughly and also another 4m shares being issued.
Mgt have the CVs and will hold 9% post placing (and a few biggies have gotten involved - Miton / Hale / Shroeder / Old Mutual)

Paying a reasonable price for future growth, if you believe:
Their pricing model and transparency will take market share (possible - certainly more than they have at moment)
Will translate to higher margins (certainly very scalable - they have doubled revenues without increasing cost anywhere near that amount)
Technology and Data - less hopeful here.

As with all exchanges, masses of operating leverage, but currently loss making (no projections from what I can see available documents).
Expensive relative to LSE / NEX (on P:S, P:B), but then it would be.
Market share doubled as did revenues in past year (in fact chart looks quite similar to IEX group (of Flashboys fame, which I would say is nearest competitor) market share on Wikipedia).

Subscription based pricing as opposed to transaction based - why do others not follow this model I wonder - can certainly see the value and also the benefit of the exchange not being beholden to trading volumes / market conditions?
Technology services business - not sure they will make much traction against what BATS / LSE / Nasdaq are already providing (who are more entrenched and in an arms race, think deep pockets is helpful!)
Market data - assuming I already get from LSE others, I am not sure what additional info these guys would add.

Johnny2509

Was hoping for Air Partner (LON:AIR) to release their accounts today.

Still, it’s only lunch time, so who knows.

Can they become unsuspended if they issue during day? Seriously considered opening a position day before they got suspended expecting a positive surprise, but couldn't get order in and price moved against!
Might still regret not getting order in - no news is good news or so they say

Tortoise investor

I'm a fan and holder of Palace Capital (LON:PCA) on the basis it has a good dividend and trades at a discount to NAV. The management is very selective about its purchases and it has executed well to date which is the other key attraction here; it has a history of buying property at a discount and selling at a decent profit. On a 13.5% discount to NAV per share which increased post-fundraising, and dividend is 5.3%. Obviously a key thing to watch is rental income what with all the CVAs and dividends are only covered 1.1x at the moment.

Wimbledonsprinter

Gus

I was at the presentation given by IG Design (LON:IGR) this morning. While the increase in past due receivables was not specifically mentioned (note 26b in the annual - good spot Abtan), Fineman (CEO) did specifically mention that the recent troubles at House of Fraser and Poundland were not an issue for IG Design, and stressed their track record of picking “winners” on the high street and of avoiding retailers with problems. Overall, he gave a confident presentation on the outlook for the group.

(I have no position.)

Housemartin2

I could not agree more with Graham's point about Investment in China by Somero Enterprises Inc (LON:SOM). I had thought my view was an outlier. I wince when RNS's enthuse about investment in China in general. As Graham says, there are plenty of other opportunities in places where the rule of law is better and the chance of your ideas being copied is less.
(Obviously in the UK post Brexit we will have to get used to trading larger volumes with more risky places, so I had better get over myself !)

Bezhe

Latest on Quindell (£QPP?) Many readers will have mixed feelings about the fact that KPMG have been fined £4.5 million (discounted to £3.15 million) and the audit partner has been fined £120,000 (discounted to £84,000) arising from their admission of misconduct in relation to the audit of the financial statements of Quindell for the period ended December 31 2013 (according to the FRC). Their misconduct included "failure to exercise sufficient professional scepticism".

I'm sure readers will recall that Paul exercised lots of professional scepticism - free of charge.

But will the Big 4 worry about this at all? I doubt it somehow.

Audit fees for the year in question (2013) were £395,000. Fortunately for KPMG, they managed to charge fees of £1,370,000 in 2014, presumably due to the mess in 2013. Heads we win, tails you lose.

mammyoko

Re Ranger Direct Lending Fund (LON:RDL) is there a risk that the acrimony surrounding the wind-up could lead to the Directors cutting the dividend?

jdnthomas

re Ranger Direct Lending Fund (LON:RDL). I don't follow your maths Graham. The hard to value holding Princeton apparently represents $29m out of a total NAV of $212m. NAV per share is 938p. So excluding Princeton the NAV per share should be 938p x 183/212 = 809p not the 846p you mention. Is one of my figures wrong? Otherwise upside depends on Princeton not being worthless.

TamzinPiworld

IG Design (LON:IGR) here's the video on their FY18 results RNS from today, giving more detail on what they're up to.

http://www.piworld.co.uk/2018/06/11/ig-design-group-igr-full-year-results-2018/

Paul Fineman, CEO.
Introduction – 00:18
Regional performance – 1:30

Giles Willits, CFO.
Financial highlights – 2:50
Efficiencies – 3:36

Paul Fineman, CEO.
Strong performance in retail – 4:39
Investor outlook – 6:19

I was impressed by a presentation I attended this morning. They are super sharp at spotting the opportunities, investing in machinery for optimum efficiency. ROCE 20% is impressive. Target double digit EPS growth. Have really diversified in terms of seasonality and product over the last 4 years. Simply great management.

Graham Neary

Hi, thanks for the comment. You had me worried there for a second!! But I think I have figured it out.

The 938p NAV amount is for end-March and uses a $1.40 GBPUSD exchange rate.

Today, GBPUSD is $1.34, so dollar-denominated assets are worth more in GBP terms.

I think you and I both agree that NAV is (most recently recorded to be) $183 million, excluding the value of Princeton.

So just divide that number by FX 1.34 and by 16.1 million shares.

Thanks

Graham

john2

Here's the research from Berenberg quoted in today's FT Alphaville blog -

'XLMedia (XLM) has released a trading statement this morning which indicates that its 2018 results will now be marginally lower than those in 2017A. This is largely the result of a number of regulatory oneoffs. While in the long run these favour XLM, they have created a negative short-term impact. Reflecting these, we reduce our estimates by c12%. With the business model still solid, the company accelerating its efforts in the US and the company in evaluation stages for a number of deals, we would view a pullback in the shares as an entry point for longer-term investors. XLM shares trade on c12.9x cash-adjusted P/E (16.5x normalised) with a c6% FCF yield. We remain buyers but move our one-year price target to 225p.

A number of changes in the past six months have
created some short-term pressures for XLM. 1) New consumer protection rights have forced operators to adapt their guidelines on how terms and conditions (T&Cs) are advertised to customers. This has created one-off delays to some affiliate advertising practices. 2) Interim changes to XLM’s payment model (ie a switch by some operators to revenue share from cost per acquisition) create lower short-term revenues but greater opportunity in the long run. 3) XLM has selectively pruned some low-margin media revenue streams in an effort to refocus on higher-margin pushing work. The company is comfortable with a return to growth in 2019E.

Thanks Graham that makes sense - although it does also make the point that there is $/£ exposure here which is proving quite volatile!

re: IG Design (LON:IGR)

Thanks for sharing that, Tamzin. I have also linked it from the report.

Best,

Graham

mammyoko, there is a vote next week for new directors. The vehicle is being wound up so the money will (should) be sent back to shareholders, no matter what. G

Hi Bezhe, many thanks for the comment. An interesting post-script to the QPP affair. G

Small Cap Value Report (Mon 11 June 2018) - XLM, SOM, RDL, TRD, IGR, Quindell

XLMedia (LON:XLM)

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