Small Cap Value Report (Mon 13 Dec 2021) - K3C, PURP, STEM, TSTL, COST, TUNG

13th Dec '21 by Paul Scott

27 comments 9830 reads

Good morning, it's Paul & Jack with Monday's SCVR.

Mello - tonight at 17:00 - a Christmas special, with the highlight being David interviewing Sir Martin Sorrell! More details here.

Agenda -

Paul's section:

Purplebricks (LON:PURP) - yet another problem has surfaced this weekend, with an administrative failure opening up more legal claims against PURP. Do the cash pile & well-known brand offset the problems? I don't know, so it's impossible for me to value the shares.

Tristel (LON:TSTL) - in line with expectations trading update at today's AGM. However, expectations have been lowered considerably. It's a nice little company, but as before, I have to challenge the valuation as seemingly excessive.

Jack's section:

K3 Capital (LON:K3C) - strong end to the year, with revenues up 70% and adjusted EBITDA up 61% as the company continues its transformation into a more diversified multi-disciplinary professional services group. Shares have more than doubled since Covid lows, but enough going on here to suggest it’s still worth looking at.

Sthree (LON:STEM) - results look good to me, in line after upgrades a couple of months ago and with the contractor order book up 43% year-on-year. The shares have rerated quite strongly though and, while SThree looks like one of the better recruiters, I’m holding off for now in case valuations are peaking. Next time, I’d like to buy before the rerate. CEO is stepping down for personal reasons, not much detail given.

Costain (LON:COST) - update on trading to confirm year-end net cash of c£100m. That makes the company extremely cheap by most metrics, but the recent track record has been poor and the group is still working its way through a dispute with National Grid. Very low margin business and seems accident-prone.

Tungsten (LON:TUNG) - mixed results harshly judged today, with shares down around 20%. The company is pushing back investment in order to preserve cash so that it can settle a £1.5m employee claim against the company. It’s got some big customers but has been heavily loss-making in the past, and today’s news is a further hit to sentiment.

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…

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mojomogoz

13th Dec '21

Eve Sleep (LON:EVE) is lowly valued...but is it obvious its cheap? The cash is needed for development and results from prior equity financing. Online mattress retailing seems quite "niche" (ie odd) and perhaps something people who are not going to sleep on the mattress do!? Ancillary sleep products can be sold online obviously...but why would Eve Sleep be the go to place (non sleep mattress buying) people get their CBD oils etc.

Eve looks like a little brand company looking for a bigger home/distribution and that its only good grounds for competition is price (despite saying they differentiate from other mattress in a box companies by ancillary sleep wellness products). Marketing spend looks like it needs to remain high to keep on pushing sales.

An oddity is that the CFO is paid considerably more (approx 2x) than the CEO according to 2020 accounts (this may change as CEO was the CMO previously).

Revenue and profit expectations for 2022 in Stockopedia look like they are data errors...obviously a tripling of revenue for next year would have a meaningful profit impact!

The above are questions rather than statements. I don't know Eve well. A path to profits could be great for share price...but any commercial setbacks or poor trading and it could be toast (...could covid be a one off boost and now it has tougher time). Give me the counter arguments.

BnB

re Sthree (LON:STEM) - This business is nowhere near as cyclical as the market thinks. There is a structural shortage of STEM skills in virtually every advanced economy of the world. Only in the most extreme of circumstances (9/11 terror aftermath, pandemic spring) does a brief shortage of demand intervene, before the structural issues bring it back. After today’s understandable drop on CEO departure for “personal reasons”*, this is 20% off highs and looking good value. The hiring momentum that follows major technology investments of the scale that we have seen in 2020 typically lasts for 5-10 years.

* I get the impression that M Dorman was split between family in New York and business in Europe. Must have been exhausting. But this is just a guess.

Camtab

In my opinion if you take the rewards of authority you also take the downside and that is full and open disclosure. I really don't accept personal reasons for leaving as it has just become a get out. More transparency please.

andywillz94

Gattaca (LON:GATC) - (I do not hold, yet)

Down a further 6% this morning, to 127p on no news. forecasts are bullish at FY 7/2022: 13.6p and FY 7/2023 forecast: 20.7p which is PER of 9.3 and 6.1. a potential bargain if you think these are achieable.

Rusty2

Eve Sleep (LON:EVE) looks high risk, according to Stockopedia is virtually bankrupt. Quite a few rivals in this space. There were plans to merge with Simba in 2019 but that fell through.

I see this was a Woodford backed stock.

Why is it under Technology - Software and IT sector?

johnsmith68

Great to see more noble philanthropy from a director responding to "existing market demand" and selflessly forsaking their own shareholdings to satisfy the institutional clamour. Today is the turn of Andrew Wass at Gear4music Holdings (LON:G4M) trousering a cool £34m by reducing his holding from 30% to around 22% of the company.

My sarcasm aside, he's obviously entitled to take some of the fruits of his success and it is reassuring that he will retain a significant stake in the business. Nonetheless, having sat idly by whilst the founders of Best Of The Best (LON:BOTB) made a similar move, only for the profit warnings and tanking share price to follow close behind, I'm a little bit spooked at the timing here and wonder quite how bright the outlook can be for him to liquidate such a massive pile of cash at this time.

My finger is hovering over the sell button...

gringo

£G4M For a company which has unveiled a profit warning, what looks like quite large earnings downgrades for 2022 /2023, and now an 8% director sale I'm surprised the shareprice is holding up so well. PER of 37 and 25 for 2022/23 seems well up with events. You could easily argue overpriced compared to many cheap looking shares right now. The selling director must agree.

Was on my watchlist, think I'll give it a miss.

Gattaca (LON:GATC) maybe down because of Sthree (LON:STEM) fall? But Robert Walters (LON:RWA) are not down, so who knows in this market, what is going on apart from a lot of small caps are falling back. Gattaca (LON:GATC) is only £42m mcap, did not realise how small it is. Their last update in November, was not very inspiring compared with rivals.

davidjhill

well he didn't trouser £34m. He sold more like £10m worth but still retains a very substantial stake. Owning 22% of the business after the sale isn't small change.

More interestingly is that the placing was done at the share price. No discount. In fact the last few days the price has gone up a bit so clearly when the soundings were going on institutions were happy to pay more than the then existing share price.

tic_tac_toe

I sold on this, happy to take a profit and sit on sidelines for now

JohnDoe2378

Certainly no sign of any Santa Rally as yet!

Yes, apologies for my miscalculation - he sold around £12m not £34m. A tidy sum but not quite as extreme as I reported earlier.

Simmo1a

nope, I’m in the red, again! Lol

TamzinPiworld

Sthree (LON:STEM) FY21 TU presentation to analysts and investors this morning. Helpfully they've left in the Q&A. STEM are trading in line with previously upgraded expectations. A great shame that the CEO, Mark Dorman is leaving. Video and podcast.

On Thursday we published the PIWORD Andy Brough interview which is worth a watch if you missed it. A very candid insight to Andy's thoughts at the moment. It's received a lot of good feedback (thank you!), he is a top class speaker and fund manager.

Small Cap Value Report (Mon 13 Dec 2021) - K3C, PURP, STEM, TSTL, COST, TUNG

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Paul Scott

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