Small Cap Value Report (Mon 19 Dec 2022) - LOOK, CAM, MPE, Matalan, TEK, LBG, THRU

Good morning from Paul & Graham!

Good, that's it for today. See you tomorrow!

Weekend podcast - went up on Saturday, summarising last week's SCVRs, where we covered 41 companies (1 short of our previous record). It's a good way of reflecting on the week's news, and results, and have a moan about anything that's got on my nerves a bit! Here's the audio, and I also typed up a transcript just for Stockopedia subscribers, which is here. No mystery shares this week, but lots of stock ideas, and also plenty to warn you away from (especially companies that are likely to need a fundraise or are struggling to renew bank facilities - avoid these like the plague!)

Missing tags - as mentioned in the podcast, we've had an issue with tags (the company tickers), which have been disappearing erratically from the SCVRs, we don't know why. This means that some reports won't come up on searches for a particular company. Thanks to the readers (e.g. Snazzytime) who flag this up to me with a reader comment - very helpful, please keep doing this if you spot that the tags have fully or partially disappeared, as then I can put them back in again manually.  Anyway, the good news is that over the weekend I went through all SCVRs since 1 July to date, and replaced any missing tags. So we're now up-to-date, and all SCVRs which mention a particular company should come up when you search for that company, or click on the "Discussion" tab on any StockReport. Just an admin matter, but I thought it would be useful to keep you informed that it's fixed. 

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Agenda

Paul's Section:

Lookers (LON:LOOK) - an abrupt departure of the Chairman is announced, but comes with reassuring comments on current trading (remains strong, in line with expectations). I ponder the cheapness of the whole sector, and discuss below whether it's still of interest. The quick version is yes, I still like the value characteristics of this sector.

Matalan - it's a private company, but I found an interesting article today in Retail Gazette, which prompted me to write a section below about the importance of, and danger posed by withdrawal of trade credit insurance (a topic we've discussed here a lot in the past). Plus of course the key importance now of balance sheet strength. We don't normally have to worry about insolvency or dilution risk at companies with strong balance sheets containing net cash. It's more important than ever right now.

LBG Media (LON:LBG) - first time for me to look at this website content/advertising company. The figures look quite good, including a very nice balance sheet with net cash. But today's trading update is actually a profit warning, with forecast profit for FY 12/2022 reduced 18%. Hence the 17% rise in share price today could be a mistake. I weigh up the bull:bear points below in more detail, and emerge neutral.

Thruvision (LON:THRU) - poor interim results from this serial disappointer, but a much more upbeat outlook section, with big orders received from US border force, sounds quite exciting. Might need to raise a bit more cash. Overall, I like this - speculative, but could be exciting, and seems on the cusp of achieving bigger things than in the past. So a (speculative) thumbs up.

Graham's Section:

Camellia (LON:CAM) (£125m) (+1%) [no section below] - this complicated collection of businesses and investments is becoming marginally less complicated as it announces the sale of its interest in a food logistics company (“ACS&T”) for £16.5m, subject to adjustments for cash and working capital. Camellia will also receive a £3.8m dividend, prior to the sale. In addition to Camellia’s core overseas agricultural operations, I count eight other investments and businesses in which Camellia has a stake, and the synergies between them are not exactly obvious. It all seems needlessly convoluted but it reflects a very long history. At least after today’s announcement, there is one less factor for shareholders to keep track of.

In separate news, the company’s head office is moving to one of Camellia’s investment properties, while Linton Park, a Grade I listed building, is seeking planning approval for change of use to residential, “to make the property more attractive on the rental or sales market”. Perhaps another simplification is on the cards? Balance sheet net assets at Camellia as of June 2022 were £423m, with few intangibles, and with scope for inaccuracies, e.g. investment properties held at cost. For someone motivated to dig into the balance sheet to search for deep value (and catalysts to unlock this value), the stock could be of interest. [no section below]

M P Evans (LON:MPE) (£439m) (+2.5%) [no section below] - this is another long-standing agricultural group. M.P. Evans is focused on Indonesian palm oil. It also has an interest in a Malaysian property development company, for historical reasons. Reporting in US dollars, net assets were $469m (£384m) as of June 2022. The price of palm oil surged in H1 of this year, leading to a bumper operating profit during the six-month period of $62m. The company says that its shares “are trading below the share price implied by the independent valuation of its assets”, and announced a £2m share buyback programme in June. This was increased to £4m in September and has today been extended to £6m. The average price paid per share so far is £8.51.

This stock strikes me as interesting, for a few reasons. Firstly, there are the increasing buybacks which, although still not huge, are a good signal and have at least hoovered up c. 1% of the share capital so far. Secondly, there is a dividend yield of over 5% (and dividends have been paid here every year for decades). Thirdly, there are the bumper profits from the boom in palm oil in H1 - food commodities are a nice place to be invested during inflationary periods! Overseas risk is the most obvious hazard, although it is mitigated to some extent by the company’s very long track record. There is also of course no guarantee that the price of palm oil will increase again, or even maintain current levels. This share does enjoy a StockRank of 92 and passes no fewer than eleven bullish stock screens.

Tekcapital (LON:TEK) (£25m) (+5%) [no section below] - this investment company has four companies in its portfolio, one of which is seeking to IPO on the AIM market next year. The company in question is Microsalt, a Florida-based producer of low-sodium salt. Tekcapital’s stake in Microsalt was valued at $7m in May 2022, according to the most recent interim results. Its low-sodium crisps have been launched in 3,000 retail stores in the United States.

I’d be very cautious about investing in this IPO, but I think it’s a noteworthy announcement as the AIM IPO market has been so quiet all year, and slowed to a crawl in recent months. There were almost no IPOs in Q3 whatsoever, and almost no money was raised. One of the signs that we’ve reached a bottom will be the reopening of the IPO market, when investors have the means and the willingness to support new listings of small companies. As for Tekcapital, perhaps it will take the opportunity to cash in some of its investment in Microsalt? It has also been reducing its stake in Belluscura (LON:BELL) to raise funds (Tekcapital’s stake in that company is currently worth c. £10m).

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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:

Lookers (LON:LOOK)

76.3p (pre market open)

Market cap £296m

Board Change

I find it’s always worth reading all announcements from companies that I’m watching, because sometimes there can be trading updates buried in them. This one is a good example of that.

The Chairman, Ian Bull, has said he’s stepping down for personal reasons on 31 Dec 2022, which seems quite sudden. An existing Director, Paul Van der Burgh, will take over on an interim basis as they search for a permanent replacement. I find that a good Chairman can make a big difference to a company, whilst many others don’t seem to do anything of any use. Hence why it can be good to meet Chairmen, and chat, ask questions, at AGMs (remember them!?), to assess how they fit in, and what the dynamic with other Directors is.

Comments about current trading -

The Group is making strong progress in the delivery of the strategic priorities. 

It will announce a post year-end trading update for the year ending 31 December 2022 in early January  

and confirms that trading for the year remains in line with expectations.

The outgoing Chairman says -

"I am sorry to be leaving at this exciting time for Lookers, with the business trading well and continuing to perform strongly."

That sounds reassuring, and reinforces that there’s probably nothing untoward about the Chairman’s departure. It could be for genuinely personal reasons, or it could be a falling out, we never really know when this type of announcement comes out.

Valuation - the whole sector has had a couple of boom years, due to supply constraints for new vehicles (supply chain problems, particularly semi-conductors). We’ve written a lot about this theme in 2022. Shortages of cars has caused the profit margins dealers can charge to rise strongly, giving them a boom in profits, on lower revenues. Therefore, it makes sense to assume future profits are likely to fall back again at some stage, although that’s taking a long time to happen.

Car dealers generally are on low forward PERs, paying decent divis. LOOK also does share buybacks (which enhances EPS & DPS), and as with others in this sector also has strong asset backing (NTAV of £224m, which backs up most of the £296m market cap), a price to tangible book ratio of 1.32 (very good - the lower, the better, for this ratio). 

Strangely, the Z-score doesn’t seem keen on the financial position, which perplexes me, as I would say LOOK is very healthy financially, with a very robust balance sheet.

The big unknown, is where future profitability is likely to settle, once new & used car supply have normalised? With LOOK, it produced c.8-13p in EPS in the 3 years pre-covid, and the business looks a similar size now. The share count has actually fallen since then, due to buybacks. So estimates of 14.7p in FY 12/2022, and 12.0p for FY 12/2023, look fairly similar to the upper end of pre-covid performance. That suggests to me that earnings could continue to do OK in future, maybe a bit below current levels, who knows?

My opinion - this whole sector remains so cheap, it’s bound to attract value investors.

I remain keen on the value metrics at competitor Vertu Motors (LON:VTU) which coincidentally today confirms the completion of a deal to make a large acquisition.

This sector is consolidating, so there’s always the nice chance of a takeover bid being received, hence an opportunity to bank a nice profit (hopefully). Although Pendragon (LON:PDG) plummeting recently when a takeover deal fell through, shows that it’s probably a good idea to sell at least some in the open market, when a bid approach is received.

Another angle on things, is that the so-called disrupters, who thought they could sell cars entirely online, look a busted flush to me. I never believed that such a business model would work, because most people want to try out a major purchase like a car. So trying to sell it like a commodity product, is daft in my opinion, and requires constant heavy marketing spending. Why mention this? Well it dangles the possibility of many online competitors disappearing, as the VC/PE funding for lavish advertising campaigns dries up. Come to think of it, I’ve not noticed any recent TV ads for the main online car challengers, whereas it used to be back-to-back ads from them.

The challengers doing bust, or retrenching, would be good news for the established car dealers, as it’s less competition for buying and selling secondhand cars, hence enables them to potentially protect & even improve margins, a nice tailwind which could offset the headwind of possibly reducing consumer demand?

Overall, there seems a lot of value in this sector, with low PERs, nice dividends, and great asset backing too in most cases. Yet share prices are still low, because investors presumably think earnings are likely to fall. An interesting sector, I think.

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Matalan

This discount clothing retailer is a private business, but a very interesting situation. It’s overloaded with debt, and the founder John Hargreaves was hit with a huge back-dated tax bill - itself a fascinating case here. I’ve just been reading it. He relocated to Monaco, in order to avoid capital gains tax on a large sale of Matalan shares made shortly afterwards. However, the court decided that his links to the UK, and time spent here, meant that he wasn’t an overseas resident in that tax year. Oops! (trying to suppress schadenfreude here).

There’s currently a battle for control of Matalan, with a number of parties submitting bids, including Hargreaves.

One of the reasons Matalan is struggling financially is because trade credit insurers have reduced/withdrawn cover. This is a really important theme right now, that I’ve mentioned many times before. In times of financial trouble, either generally, or at an individual company, trade credit insurers often withdraw cover, which can cause companies to go bust, unable to persuade suppliers to send in fresh deliveries of goods.

We need to be vigilant about this, particularly for struggling retailers, and other consumer-facing sectors which are under pressure.

Hence why strong balance sheets are vital at the moment. Ignore bank debt at your peril! But often debt owed to suppliers (trade creditors) is even larger than the bank debt, and often those trade creditors rely on insurance cover.

Retail Gazette runs this story today about Matalan, which is where I got the point about credit insurance being withdrawn, a very useful reminder -

Matalan has faced debts of over £500 million and has come under increased pressure in recent months after leading credit insurers, including Allianz Trade, gradually removed cover for suppliers to the retailer.

A good question to ask management on webinars, is whether trade credit insurers have reduced cover available to their suppliers?

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LBG Media (LON:LBG)

80p (up 18% at 10:11)

Market cap £166m

Trading Update (pre-close)

LBG Media plc, the UK-based multi-brand, multi-channel digital youth publisher, announces a pre-close trading update for the full year ending 31 December 2022 ("FY22").

This sounds good (however, it’s actually well below earlier guidance, see my further comments below) -

Following a robust performance in the second half of the year ("H2") to date, full year revenue is expected to be approximately £63m and adjusted EBITDA* approximately £16m.  

As anticipated, revenue growth has accelerated in the seasonally stronger second half and Group revenue is expected to have grown by over 20% in this period vs the prior year. There has been growth across both Direct and Indirect segments against the backdrop of a challenging economic environment.  

* Earnings before interest, tax, depreciation, and amortisation adjusted for loss on disposal of intangible assets, share based payments and exceptional items

Outlook - also sounds positive -

Given the momentum seen in H2, and cost reduction exercise completed in November 2022, management is confident about the outlook for continued growth in 2023.

If the business is doing well, I wonder why it felt the need to reduce costs?

We’ve not looked at LBG before here, but a seemingly nice update today, triggering an 18% rise in share price, compels me to take a look.

Here’s the company’s self-description -

Notes to editors

LBG Media is a multi-brand, multi-channel digital youth publisher and is a leading disrupter in the digital media and social publishing sectors. The Group produces and distributes digital content across a range of mediums including video, editorial, image, audio, and experience (virtual and augmented reality). Since its inception in 2012, the Group has curated a diverse collection of ten core specialist brands using social media platforms (primarily Facebook, Instagram, Snapchat, Twitter, YouTube and TikTok) and has built multiple websites to reach new audiences and drive engagement. Each brand is dedicated to a distinct popular interest point (e.g. sport, gaming etc.), which is designed to achieve broader engagement, increase relevance and ultimately build a loyal community of followers.

The Group operates two core routes to market: Direct revenue, which is principally generated from the provision of content marketing services to corporates, brand owners, marketing agencies and other entities such as government bodies and where the relationship with the client is held directly by LBG Media; and Indirect revenue, which is generated via a third-party, such as a social media platform or via a programmatic advertising exchange / online marketplace, which holds the relationship with the brand owner or agency.

That worries me a bit, as I’ve found companies which rely on ad revenues from the internet giants, can be very vulnerable to earnings collapsing when the algorithms are changed.

LBG stands for Lad Bible Group. I’ve heard of Lad Bible. A bit of googling reveals that it’s the UK’s 12th favourite website, and hosts a mixture of funny & silly content, but has also come in for criticism for being sexist & puerile.

It floated in Nov 2021 - possibly the worst year ever for rubbish, over-priced IPOs?

Interim results - to 6/2022, and published on 21 Sept 2022 showed -

H1 revenue £24.8m

Today it’s guiding £63m FY 12/2022 revenue, implying £38.2m H2 revenue, a very strong H2 seasonal bias it seems.

H1 adj EBITDA was only £1.6m

Guidance in Sept 2022 was for FY 12/2022 adj EBITDA of £20.1m, and the outlook comments said broadly in line expected performance. So today’s £16m adj EBITDA guidance is actually quite a significant miss against the guidance only 3 months ago. Do people buying the shares today realise this, I wonder?

H1 adj EBITDA of £1.6m turned into a £(1.9)m loss before tax. The main difference is caused by an excessive-looking £2.4m share-based charge. Plus depreciation of a modest £677k, and amortisation of only £366k.

Balance sheet as at 30 June 2022 - looks great! It contains £28.6m net cash. Receivables look too high at £14.7m, so an amber flag there. Overall, NTAV of £37.1m shows a robust, very safe balance sheet. It has clearly got firepower to make more acquisitions.

Cashflow statement - last year’s figures look weird, including Director loans, but that’s because it contains mostly the pre-IPO figures. The massive H2 weighting to profits means that I don’t yet have enough information to assess how cash generative it really is. But given that not much is being capitalised into intangibles, then I reckon it is a very cash generative business - most of the £16m EBITDA should turn into profit, and cash.

Broker update - Zeus helps us out greatly (many thanks) with an excellent note today.

It’s reduced FY 12/2022 forecast profit (adj PBT, and adj EPS) by 18%, so the shares should logically have fallen today, not risen!

£16m EBITDA turns into £13.5m PBT, which is good, that confirms my thoughts above that the profits look real. Why on earth does the company report EBITDA then? It would send a much stronger message to report adj PBT. This obsession in the City with EBITDA is ridiculous I think, as it’s such an unreliable performance measure, whereas adj PBT is far more useful & reliable. Let’s hope fashion changes soon, to ditch EBITDA as an often rubbish performance measure.

FY 12/2022 forecast adj EPS is 5.2p, so at 80p the PER is 15.4, which looks reasonable, providing earnings are sustainable.

My opinion - what a strange situation - this is actually a profit warning, but it’s dressed up to sound positive, and the shares have shot up today, when logically they should have fallen. It’s possible that people might have expected a bigger miss against existing forecasts though? Or early buyers maybe had not seen the broker update?

I’m quite impressed with the numbers. It’s not the sort of thing I’d invest in, but the figures look quite decent, so it’s not one to avoid either, unless something goes wrong. Overall I’ll declare myself neutral on LBG. What do you think?

To summarise -

Bull points

• Reasonable PER of 15.4
• Lovely balance sheet with plenty of net cash - so has scope for more acquisitions
• Looks like profit turns into cash in a full year
• Big management shareholdings

Bear points

• Are profits sustainable? Ad revenue algorithms change often, and can clobber profits in this sector.
• Does LadBible have longevity?
• Competitive pressures?
• Today is a profit warning, but share price has gone up, which could mean buyers have misinterpreted the announcement?
• Why was it floated? (in a year 2021 when many floats were opportunistic and overpriced)

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Thruvision (LON:THRU)

22p (flat today)

Market cap £33m

I last looked at this company (previous name: Digital Barriers) here in April 2022, and saw a glimmer of light in what had been a poor track record. It’s been growing revenues nicely, and appeared to be approaching breakeven, after years of losses, with interesting-sounding products - body scanners that see through peoples’ clothing to reveal concealed items - maybe some ethical issues there, would you really want a security scanner that lets security staff effectively see you naked?

Introductory view from the company on its products is here -

Today we’re given -

Interim Results

Thruvision Group plc (AIM: THRU), the specialist provider of 'safe distance' people-screening technology to the international security market, announces unaudited results for the six months ended 30 September 2022 (the first half of the Group's 2023 financial year - H1 2023).

H1 revenue only £2.8m (FY 3/2023 forecast is £12.6m)

Gross profit margin of 49% means there’s good operational gearing if they can scale up revenues.

Outlook - on track to reach adj EBITDA breakeven this year (it made a £1.6m adj EBITDA loss in H1)

The Group is entering a new phase in its development. With the strategically significant purchasing framework with CBP now in place and a material order backlog built for our second half, we expect to deliver strong growth and achieve our objective of breaking even this financial year.

Looking forward, the growing interest across our key markets together with the enthusiasm with which our latest products have been received by customers, gives us confidence that profitable revenue growth will continue beyond the current period.

Big orders received from US Customs & Border worth £8.7m - impressive & obvious potential for that to scale up, if they repeat order maybe? I like this bit a lot -

With over 100 of our highest-performance cameras being deployed by US Customs and Border Protection (CBP) over the coming months and with a multi-year purchasing framework now in place, we expect further growth with this key customer over the coming years as it starts a full rollout of our technology. This significant opportunity, together with demand from other customs agencies and our growing base of Profit Protection customers should give us a profitable revenue base from which we can now build the Group."

Cash - tight at £1.1m (30 Sept 2022), but risen to £4.3m now (15 Dec 2022) - but I’d say another placing looks likely (but not from a position of weakness, so it might be able to get a fundraise away on reasonable terms)

Balance sheet - NTAV of £7.7m isn’t too bad, but there’s too much tied up in inventories £4.8m and receivables of £3.8m. Would benefit from a small top-up placing, I think.

My opinion - lunch is ready now, so this has only been a quick skim of the interim results statement. I have to say, I like the look of THRU - it seems to be on the cusp of commercial success. So I think it’s a good candidate for much deeper research by readers. In particular, you need to understand the products properly, the competitive landscape, and find information from third parties - e.g. someone who works in the sector, and knows the product well.

Overall, I think this could be an interesting punt. If the positive newsflow on orders continues, and in more bullish stock market conditions, I could see this share going a good bit higher than £33m mkt cap currently. So a speculative thumbs up from me.