Small Cap Value Report (Mon 15 Nov 2021) - CARD, BILN, NGHT, TLY

15th Nov '21 by Paul Scott

30 comments 9517 reads

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

Agenda -

Paul's Section:

Card Factory (LON:CARD) - a meaningful Director buy (of £107k) reinforces my view that things seem to be improving for this greetings card retailer, following a sound recent trading update. Although bank debt remains a concern, due to the risk of an equity raise being required.

Billington Holdings (LON:BILN) - profit warning for FY 12/2021, due to contract delays, and supply chain issues. WH Ireland halves profit forecast for 2021. On the upside, outlook for 2022 is good, and balance sheet is strong. Overall though, I see little attraction to this share.

Nightcap (LON:NGHT) - awful results for FY 06/2021, mainly due to massive £3.8m share option charge (how can that be justified at this early stage?), and IPO costs. Balance sheet looks quite weak - the big cash pile seems to be offset by bank borrowings + stretched creditors. Overall, I think this looks significantly over-valued, having a premium for newness and roll-out potential.

Totally (LON:TLY) - low margin healthcare outsourcing company, has produced decent interim results. This share looks quite interesting, with over £5m annualised EBITDA, a number which survives my close inspection! The cash on the balance sheet has come from favourable payment terms with the NHS, so shouldn't be seen as surplus cash. Overall, I quite like this share, looks an interesting business that's now performing well.

Jack's Section:

to follow

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,…

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JESSE LIVERMORE

15th Nov '21

Bouden54

The problems at Cmc Markets (LON:CMCX) are largely company specific rather than the result of 'a quiet couple of months trading activity'.

This can be seen by comparing how analysts forecasts have evolved this Summer - Ig Group (LON:IGG) have a very different profile to Cmc Markets (LON:CMCX) .

Cmc Markets (LON:CMCX)

Ig Group (LON:IGG)

Since mid 2019, Cmc Markets (LON:CMCX) have been taking on client risk rather than fully hedging it as Ig Group (LON:IGG) do. The result this Summer was that Net Operating Income guidance fell 20% in the 6 weeks to the start of September. Basically £VMCX failed to correctly identify which risks to hedge.

Going forwards therefore, the Quarterly results of Cmc Markets (LON:CMCX) will largely be a function of hedging/not hedging, & hence will be lumpier than those of Ig Group (LON:IGG) .

Benson

Kainos (LON:KNOS) down 10% currently after an excellent report even though profits were only up 3% Hopefully a sign of more sanity is returning to the market

BnB

I agree that the price needed to deflate a little. Indeed, I sold half my stake a while back for £20 in anticipation of a correction. However, analyst estimates for Kainos (LON:KNOS) over the next couple of years look seriously conservative. Is turnover really going to stay flat in 2023? Track record and the ever-growing demand for IT services suggest otherwise.

I don't think we know for sure that the downturn in Cmc Markets (LON:CMCX) earnings was due to hedging related issues as opposed just to quieter trading - unless I missed this I don't recall the trading updates going into that level of detail. In any case, the broader point is that revenues will be uneven from month to month (whatever the reason) and you just need to look through this to a certain extent. Obviously both IG and PLUS reported decent trading recently so that is an anomaly, but these are very different businesses with different clients so I don't think this is necessarily the start of a trend.

Samsgrandad

Cloudcoco (LON:CLCO)

News of a £3M 3yr contract for this company which is what was salvaged from the wreckage of PINN Pinnacle Technology which bought a lot of companies with paper but forgot to lock in the sellers who cashed in and ran. Last reviewed by Paul about 2016 when he said they appeared to be going bust. Many new shares later and still clinging on. I was going to print out the stock report but I ran out of red ink. I worked in IT support from 1970's onwards and one thing that customers need to know is that when there is trouble their support company will be there for them. Why a company would risk a contract with a supplier with such shaky finances I don't know, maybe connected in some way. Being cynical I suspect another fundraising, they often follow publishing of good news to dress up the company for a party. Still a big risk of going private too. Their financial adviser MXCP did that.

Surrey Steve

Hi Paul

Did you have any joy with the enquires into Hostmore (LON:MORE) & Electra Private Equity (LON:ELTA) (I Hold both)? I am particularly keen to understand the relative net cash/debt positions & where the Sentinel sale proceeds reside.

Best wishes Steve

MightyPedro

I'm more optimistic on £BILN. The demand side has been transformed by the huge demand for warehouse space for online sales and data centres. 1.5bn sq ft needed globally just to keep pace with predicted online retail penetration. If we really build all the giga factories which we need for EV then the UK will struggle to supply all the fabricated steel required. See Somero Enterprises Inc (LON:SOM) for how this can play out. Margins have been messed up by COVID and soaring steel prices but if they can get back to the 6% or so they made in 17, 18, and 19 then 40p of earnings is a realistic possibility perhaps in 2023. Add that to the EV only being around GBP20mn (assuming those delayed contracts convert to cash in the new year) then you have a very cheap business. TNAV 230p last seen. Great management team who have been flagging this risk of delay all year hence the muted price reaction.

You're certainly right about the balance sheet (pension fund surplus as well) and it being small and illiquid.

timarr

I don't think we know for sure that the downturn in Cmc Markets (LON:CMCX) earnings was due to hedging related issues as opposed just to quieter trading

That's true, but the change in hedging policy will inevitably make things lumpier. But really CMC is just another example of a stock that got ahead of itself as investors interpreted excess earnings driven by lockdown as a permanent state of affairs. Despite that the business looks in rude good health.

But really, the underlying point here is that the stake held by Peter Cruddas means there are no agency problems with management. The business is managed for the long term, and decisions are made on that basis. Investors who are looking to make a quick turn need to be aware of this because they may not get the results they expect in the short-term.

Stonethecrows

I was wondering whether Paul or Jack could have a look at Totally (LON:TLY) totally results today ?

Boon

My read of the Billington Holdings (LON:BILN) profit warning is that not only is the revenue slipping into next year, but the profitability of those slipped revenues will be lower due to the slippage.

Maybe hence why broker forecast of EPS is lower this FY, and unchanged next FY?

Roger Baron

Mti Wireless Edge (LON:MWE) Increase in profitability up 11% seems quite good to me, esp' when "...By far the majority of industry's investment in 5G is still to come and so the opportunity remains significant for us and we continue to be well placed with the antenna division being a key supplier to the major mobile network radio manufacturers."

One of my largest holdings having been in since 26p and 22p. I'm not particularly comfortable about military aspects but on the other hand - "One fifth of the world's population live under conditions of water scarcity and the issue is getting worse. Governments globally are responding and solutions like Mottech's, which typically save 35% of the volume of water previously used, are gaining traction across all of our target markets."

Chris Giles

Hi Paul - just wondering if you can share your view on what has happened at LON:ELTA the share price seems to have come off sharply following demerger - I was expecting it to go the other way as value gets realised?

Lochinver

Thanks for the write up on Totally (LON:TLY) Paul. It looks very interesting.

I must find out much more about what they actually do, given the true level of profitability you uncovered.
Plus I love businesses who get paid by customers quicker than they have to pay suppliers. It means their growth is self financing rather than the other way round, as it is for the majority of businesses who will see increases to their working capital as they get busier.

I agree they are at risk of, and dependant upon, one principle business for this payment benefit, but hopefully the NHS being a public body is not going to be changing its policies any time soon.

ACounsell

Having worked through the numbers following Paul's analysis of the Electra Private Equity (LON:ELTA) situation (DYOR as the SCVR emphasises) I also would have expected the demerger to unlock value rather than destroy it! It is difficult to understand how a business valued c. £5.50 a share can suddenly be valued at c. £4.40 a share (based on Paul's spreadsheet model at today's prices) - a 20% fall - with no fundamental change in the underlying businesses and no negative news flow. It would seem that the whole demerger process and the role of the advisors has been, and continues to be, the major problem. It is hard to continue to hold the two businesses when they are being sold off so badly but I guess we have to wait and see and hope that they recover to a more reasonable valuation.

RE: Electra Private Equity (LON:ELTA)

It would seem that the whole demerger process and the role of the advisors has been, and continues to be, the major problem

And maybe, also, there were a lot of private shareholders on board who had unreasonable expectations of how quickly the value could be unlocked and who jumped overboard when they discovered they couldn't stag the stock for the expected profit after demerger?

It'll probably take some time for the shareholder register to sort itself out but if the underlying value thesis is correct then this will sort itself out eventually. Classic voting machine versus weighing machine type stuff.

Wilbraham

rambutan on advfn made this comment in relation to Hostmore (LON:MORE) to the effect that there's up to 25% of shareholding possibly to be ditched over time ''I think that a lot of the shares need to change hands.
Crown Sigma is a UCITS fund of PE funds, so will have to sell.
Witan IT, another fund of funds, albeit with a bit more flexibility, will also be a seller.
Likewise the M&G stake.
So plenty of work for the brokers to be getting on with. imho''

Norfolk'n'Good

Many thanks for the excellent write up on Totally (LON:TLY) (I hold) Paul.

The customer concentration risk is both a strength and a weakness, as you have alluded to. There is good visibility of revenue/earnings through contracts awarded, but Co is very much dependent upon the NHS.

The Board is made up of ex NHS employees and their knowledge of the internal workings of the NHS both from a practical, working point of view, as well as a winning new business and contracts point of view, must be a significant barrier to entry.

Of course, in the current climate the NHS will need all the help it can get, especially in reducing waiting lists, especially from a known, reliable and trusted partner such as Totally. (There has been a recent shift away from competitive tendering with contracts now awarded to known and trusted 'Preferred Partners' of which Totally (LON:TLY) is a well proven one).

Also in this regard, the relatively new area of insourcing i.e the supply and sourcing of skilled staff for out of hours use of NHS facilities, is expected to be a significant growth area for the business.

I hadn't quite figured out the cash pile vs market cap conundrum which you have shone a light on and so an average daily cash balance is certainly worth finding out tomorrow, if possible.

Westway001

I’m not a holder here so apologies for my lack of knowledge of the fundamentals, but might it not be a case of the “buy on the rumour, sell on the news” ie buyers rode the wave on the way up to the float and then cashed in? If so, if the value is truly there then the price will drift back up.

"It is hard to continue to hold the two businesses when they are being sold off so badly."

Eh?

If everything in the grocery store was on sale at 20% off, you wouldn't turn around and say 'I don't trust this, I'm going to come back when the prices are much higher'. People would think you are insane. So why is it ok when it comes to our money?

B.Ritholz

gmtrader

7th Dec '21

Totally (LON:TLY) Interview of CEO with VOX.

Small Cap Value Report (Mon 15 Nov 2021) - CARD, BILN, NGHT, TLY

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Paul Scott

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