Small Cap Value Report (Mon 18 Sep 2017) - IPX, FIF, SPO, VLTY

18th Sep '17 by Graham Neary

32 comments 15190 reads

Good morning!

Impax Asset Management (LON:IPX)

Share price: 107.5p (pre-open)
No. of shares: 128 million
Market cap: £137 million

This environmental asset manager announces it's buying a US (New Hampshire)-based asset manager ("Pax World"), operating in the same field of sustainable investing.

The two companies already have a partnership together, running a $511 million environmental fund, so they should know each other well.

Impax's run-rate Revenue and EBITDA are given as £36 million and £11 million, respectively (July 2017) based on managing £7.2 billion of AUM.

This deal will create an entity with combined AuM of over £10 billion, using August figures. It's a >40% increase in AUM in one shot! And it will now be a trans-Atlantic operation with a much wider range of research capabilities, and wider product ranges.

The deal is valued at $52.5 million plus up to $37.5 million in contingent payments out to 2021. It's mostly being paid in cash, with a $26 million bank facility being involved.

My opinion

Looks very exciting! Asset managers thrive on scale: the costs of infrastructure weigh them down initially, but then they are scalable to infinity.

Reaching over £10 billion in AuM puts this in a new size category and gives a fresh reason to invest. The overall risk has certainly increased with the addition of a large debt facility, but successfully integrating this company should set Impax up nicely for many years ahead.

Finsbury Food (LON:FIF)

Share price: 101.25p (+2%)
No. of shares: 130.4 million
Market cap: £132 million

Preliminary Results

Paul has been rather underwhelmed about this bakery for a while. It's not hard to see why, as like-for-like sales and earnings growth have been underwhelming for a while. Profit forecasts have been gradually sinking too:

Today's final results confirm adjusted EPS of 9.6p, putting this share firmly in "cheap" territory (though not necessarily value!)

Full-year like-for-like sales are flat at £314 million, adjusted operating profit is up 4% to £17 million, and PBT comes in at £13 million, vs £11.8 million last year. The CEO describes it as "solid delivery against expectations".

Given the conditions in the sector, it seems like a reasonable set of results.…

Unlock with Email

Unlock with Google

Already have an account?
Login here

yamaha865

18th Sep '17

On Sportech, I sold out a few days ago after seeing comments made by the judge's that they were likely to allow HMRC's appeal. I cant remember where I read this so not helpful I appreciate! so DYOR on that one.

Also bear in mind, if awarded compound interest this is likely to be subject to a circa 45% tax rate

https://www.out-law.com/en/articles/2017/july/tribunal-dismisses-appeal-against-restitution-interest-tax-charge/

andrea34

FDEV and TSTL continue to be hit today.... :-/

Mark Simpson

Not within the remit of Graham & Paul due to being a resource stock but worth a mention Goldplat (LON:GDP) reported prelims today:

https://www.investegate.co.uk/goldplat-plc--gdp-/gnw/preliminary-results/20170918070005H4597/

Goldplat (LON:GDP) are more at the pick's & shovels end of mining with their primary business being recovery of gold from mining by-products (fine carbon, mill liners, grease etc.) and the main South African recovery business has been operating since 1979.

A foray into explo was badly timed by previous management but has been rationalised under the current management and 1 primary mine, Kilimapesa in Kenya, remains in the portfolio. A major focus of management over the past year has been to return this mine to profitable operation. All other licenses have been relinquished (this is the non-cash write down in today's results) or JV'ed out to remove the capital drain of exploration activity.

And it is this development that makes this an interesting investment situation. The results released today showed fully diluted EPS of 0.73p but these include a £1.1m loss from the Kilimapesa mine. Since this reached profitability towards the end of the last fiscal year then going forward if the recovery operations continue to perform as expected we will be looking at a minimum of 1.3p fully diluted EPS for FY18.

This compares favourably to the current 6.5p to buy and there are several reasons to believe that 1.3p may prove conservative:
- 1.3p EPS assumes break even at Kilimapesa, profitability would increase this further.
- There are opportunities to increase the output of their Ghana recovery operations through importing material from South America and a contract to clean up artisanal tailings that are currently polluting land areas in Ghana.
- There is an opportunity to reprocess their own tailings dump in South Africa - this would be highly profitable because the material is already owned.
- Average gold price in FY17 was $1258 current price is $1315 - although less exposed to gold price than a traditional miner this will act as a tailwind.

Being an Africa focused operation there are risks with Goldplat:
- BEE legislation in SA - although the impact on GDP is likely to be limited to c4% of SA subsidiary.
- Government taxation & licensing policies changing.
- Financial health of customers/suppliers.

The share price reaction today has been relatively muted. Given the challenges of the past mining strategy the market may be adopting a wait-and-see approach to believing future profitability. However if things continue to go well the company will generate significant profit and cash flow compared to their current market cap and holders will be well rewarded for taking this risk. (Discl. For this reason I am a holder of the equity.)

Tortoise investor

The results, and not just the executive chairman's musings, were also interesting from City of London Investment (LON:CLIG). Basic earnings per share are now 36.9p putting this on a P/E of around 11 - historically it has traded more around a p/e of 13 (from memory). The company is cash rich and nicely sets out on its website how it will maintain its 25p dividend: http://www.citlon.co.uk/shareholders/announcements.php

In some years the dividend has not been covered but this has not been a problem because it has so much cash in reserves.

Obviously this is partly a play on emerging markets and a weak pound, but it's a good option for diversifying a portfolio with a high yielding share.

stockopediausername

Hi there,

would you consider covering MGP? Unaudited half year results today.

ricky65

I remember being skeptical about the acquisition as NetDimensions wasn't profitable in its last two years IIRC.

Paul Scott

Hi MrContrarian,

Thanks for posting quick fire snippets of results/TUs, in comment no. 6 above - that's really helpful, and highly complementary to Graham & my posts. So more of this please! :-)
The more companies we collectively cover, the better. It's a team sport!

Regards, Paul.

fred9566

yes I agree but thye appear to have taken the financial hits in H1 following a number of initiatives following the acquisition of Net Dimension- following these initiatives thye are forecasting "margins improving substantially in H2".They have strong operating cash flows and their trading and outlook statement is very positive : "confidence in the outlook fro the rest of the year and of achieving further significant growth in 2018"
I think we are just at the beginning

davidjhill

hadn't seen this before so thanks for highlighting it. I bought a few.

The only things I was a little unsure about was two things

1) cashflow significantly lagged profit : I can forgive this given that profits in the 6 months went up so rapidly that even on payment terms of 60-90 days there would inevitably be a large increase in debtors and thus deferred revenue collection. I will be watching this over the next couple of reports though to make sure it comes back in line.

2) how much a clients marketing spend is likely to be cyclical or impacted by regulation changes and whether there is a mass concentration of any one client in those numbers. Haven't found any answers to this so something else I will be keen to find out.

Ramridge

Hi davidhill Veltyco (LON:VLTY) I am actually in the middle of digging deeper into this company's business.
Just a few warning bells.
1. They are based in the Isle of Man so presumably lightly regulated
2. they operate in the same space as XLM and TAP i.e online marketing for the gaming industry. But worth noting that they are also into binary options. A danger signal.
3. From their commentary, I suspect that most of their recent growth has come from the binary option segment. That leaves me a little cold.

I took an entry position this morning. Will review this once I have completed my analysis.
So, superb growth and profits but at what risk?

Beginner

Just to say 'thank you' to you, Mr C. I am a long-time follower on Twitter, but have not been able to offer my thanks properly before. Your musings are the first thing I look for each morning.

GrahamF

Hi Ramridge. If by TAP you are referring to Taptica I'm not sure this is really what they are are doing. As I understand it they are involved in mobile Ad-tech generally rather than being aligned to the gaming industry.

Goldplat (LON:GDP) house broker note now on company website:

http://www.goldplat.com/media/BAhbBlsHOgZmIlEyMDE3LzA5LzE4LzE3XzE4XzI2Xzk1MV9GdWxsX1llYXJfUmVzdWx0c19WU0FfRmxhc2hub3RlX0ZZXzIwMTdfMTguMDkuMTcucGRm

Always have to be careful with the rose tinted views of house brokers but the 39% 12-month target price upgrade to 17p shows the potential if the company continues to deliver operationally.

Hi Graham - I think you are right. I had to go to the admission document to understand Veltyco's business model.
Veltyco is a marketing and promotion company to the gaming industry and not a gambling operator. They strike exclusive deals with online gambling companies to market & promote their websites and then receive revenue share of the punters they attract.
These exclusive arrangements cover Betsafe (casino, poker, etc), LottoPalace, and binary options via Option888.com. They are adding more exclusive partners.
I have not found any document which shows segmented revenues. But the RNS narrative and business tv interviews suggest their binary options arm is currently providing the huge growth.

This definitely qualifies in my book as a high risk/ high reward share.

Graham Neary

Hey ram, covered it.

Thanks

Rusty2

I agree I don't think Taptica International (LON:TAP) are into that, that's gambling something that I avoid. I'm not sure about XLMedia (LON:XLM).

Many thanks Graham. I think you have landed in the same place as I have. High risk/ high reward.

VegPatch

Impax presented at the ShareSoc evening last week and I topped up my position. I think this business has a differentiated product as it is sold as a clean, environmental fund with good returns via distributors like BNP Paribas in Europe. In the US the funds are more sold along straight performance lines ie against the benchmark. But overall I feel that as an ex fund manger, there are too many me too products out there. You need something different to stand out. So the environmental angle plus good long term returns, ticks my box.

I think the deal today is sensible. Impax has known Pax for over 10 years as they have sub advised on an environmental fund. The selling shareholders, the Shadek family who own over 80% of the equity, bought Pax Worldwide in 1996, but have played a passive role ie they just bought the business, they havent run it and they havent introduced loads of clients which has grown AUM. Therefore I am less worried about what will happen when they get the $$$ in the mail. The Shadeks are rolling some of their position into Impax shares. Management of Pax Worldwide, ie not the shadeks, are incentivised by a lock in until 2020. These dont always work as I found out when a number of older colleagues retired after one merger. However it least it can provide an opportunity for younger members to take over.

Ian Simm, CEO of Impax strikes me as a sensible manager who realises the need to diversify his product streams by geography (ie increase his US funds) and by type (the Pax funds arent strictly environmental funds, but they are pretty close). My only concern is taking on debt as a fund manager when markets are near record highs and Impax doesnt much non-equity products of scale in the P&L to cushion any falls in the equity markets.

I am holding on to my position as the asset gathering stories tend to feed on themselves, growing AUM and performance at the same time. Impax seems to have hit a distribution sweetspot. I can also see a larger competitor with a more vanilla equity offering looking enviously at Impax's niche environmental funds and wanting a piece of the action by buying Impax. There is the small issue of BNP Paribas 25% shareholding, is this a poison pill? or could a buyer strike a long term distribution deal with BNP Paribas? I dont know. However that would just be icing on the cake. As I tweeted last week after the ShareSoc event, https://twitter.com/VegPatchSh...on an EV/AUM basis it looks cheap given the growth.

daveinthelakes

Thanks for the reply.

I am convinced BNP have their stake purely to stop others getting control of the company which I believe may be the only one that invests solely in the field of sustainability.

I bought in a couple of days before they released the annual results in November 16 and top sliced 20% of my holding in June being wary of the double whammy that asset managers can be hit by in a market fall and so my cost base is about 38p. I just wonder if at today's close next years growth is to a large extent already in the price?

Nice buy, well done.
To a certain extent yes, but analyst numbers are still behind the curve ASSUMING AUM growth continues. I put assuming in capitals because clearly thats a massive risk. However Equity Developments numbers were only £36m of rev next year before the acquisition. As I said on twitter I felt that the August AUM (on their website) justified this number, implying no new net inflows and assuming a stable market from here. Big risk also that markets may fall. So dont disagree with booking a partial profit.

Small Cap Value Report (Mon 18 Sep 2017) - IPX, FIF, SPO, VLTY

Impax Asset Management (LON:IPX)

Finsbury Food (LON:FIF)

Unlock the rest of this article with a 14 day trial

About the Author

Graham Neary

32 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...