Small Cap Value Report (Mon 20 Feb 2023) - TEK, DARK, LIT

20th Feb '23 by Paul Scott

26 comments 8292 reads

Good morning from Paul & Graham!

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.

Graham’s Reporting:

Tekcapital (LON:TEK)

Share price: 17p (-16%)

Market cap: £26m

We’ve only covered this investment company twice previously in the SCVR. Roland gave an overview of the company in 2021, and I gave it a quick comment in December 2022.

As noted by Roland, one of the main points of worry here is the dilution of existing shareholders:

nQ-8aCs6chzByKEqM5RCNwLoOc86sPbeAV_rQPsLGN7wJvft_MGxp6z_QTa4l6HuLF6C6tYbJc0EyKUYPKEd5QvrsPtNTd5pB_ILtDkaNPnxOjzGzRTJdJ6ZL6qORiaSOrlNUQlIosSkGU5Z6CClpwM

It appears that this dilution has held back share price gains::

y38nxpP3MIN8N4PTWbOue_oJJiupEiVvZDhODrifcDjbcpi2iyFFop_dbY4Wi3VHC9mp1osAzFiI0MeM58OkPmh_uM9nZgU_Y_vwLOxnkIKhyX09SnDZO0fgd-fJvYE3xXTT_6N6viTSDoic9OXkjKU

Today we learn that the company is selling 14 million new shares at 16p each (gross proceeds £2.25m). The latest share count is 151 million, so this is 9% dilution.

For dilution in the region of 10%, I want to see the proceeds having a material positive impact on the value of the company.

The company provides the following explanation:

The net proceeds of the Placing will primarily be used to accelerate the growth of the Company's portfolio companies…
Funds raised will be used as follows:
- £0.6m to build commercial inventory of MicroSalt Limited
- £1m to purchase autonomous shuttles for Guident's Remote Control Monitoring Centre clients and for fabrication and testing of their regenerative shock absorbers for prospective clients
- the remainder of the funds raised will primarily be for…

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Albertos

20th Feb '23

Bit of a shocker from Trifast (LON:TRI) this morning.

Now forecasting adj PBT of £9m - last Arden note I can find (Nov22) shows £14.2m.

This was on my watch list and I was a bit bemused by the strength of the SP over the past couple of months. Reading the TU they are blaming destocking in Asia and continuing high debt levels - really looks like they took their eye off the ball for a while.

Phil

Berksbee

Some excellent results for LON:TSTL in their half year report, which for some reason I haven't seen on the RNS. Look quite good IMO. Back to decent growth, US finally starting to deliver and Profit recovering. Details below:

Revenue up 16% to £17.5m (2021: £15.1m restated to include products discontinued in 2021)
o Underlying revenue up 21% (excluding previous year distortions)
• Overseas sales up 12% to £11.2m (2021: £10m); UK sales up 24% to £6.3m (2021: £5.1m)
• Gross margin up to 81% (2021: 80%)
• Reported EBITDA up 16-fold to £3.9m (2021: £0.2m)
o Adjusted* EBITDA up 28% to £4.6m (2021: £3.6m)
• Reported profit before tax of £2.4m (2021: loss £1.2m)
o Adjusted* profit before tax up 41% to £3.1m (2021: £2.2m)
• Reported EPS 3.19p (2021: -2.08p)
o Adjusted* EPS 4.65p (2021: 4.97p)
• Tax charge £0.9m (2021: tax credit £0.2m)
• Interim dividend maintained at 2.62p per share (2021: 2.62p) - Only surprising part
• No debt and cash of £8.4m (2021: £8.8m) after paying dividends of £3.3m (2021: £1.9m) including a special dividend of £1.4m in August 2022
*I Hold

JASVFS

Good morning Paul and Graham, as Edward John Canham has just noted the TU from Trifast was a bit of a shocker. We're long term holders/sufferers, my penchant again for British metal bashers. If you get time would either of you please comment, we are unlikely to sell as it seems much too late for that but are they a patient top up at this level?

Rusty2

Trifast (LON:TRI) A warning to others about high debt levels, now interest rates are higher this could affect many companies.

Monty Carlo

This profit warning is a shock to some major shareholders as well I suspect - Mark Slater upped his holding from 11% to 12% in early Feb.....

The Boon Fund

Now getting to squeaky bum time with the debt:equity ratio at Trifast (LON:TRI)

I don't track this share at all, so don't know the details. But if I were invested, I'd spend some time now looking at the debt covenants, interest rates, and expiry dates of facilities, to make a judgement whether the debt is likely to dominate the company value going forwards, rather than the equity.

Snazzytime

Interesting to see that the blank placeholder page has 42 likes!

Lordsdrive

Is some of the increase in profits starting to adhere to shareholders or does it still all get stripped out by the directors' incentive scheme? Last time I looked (which was a couple of years ago) the directors were taking the bulk of the upside in the company.

SundayTrader

I believe the debt levels mirror inventory - these have been rising for some time. Presumably action can be taken here if the bank is worried - the update refers to action to reduce inventory. More worrying, imho, is the lack of progress at the bottom line since 2018. I get the feeling the company has been "buying" business at the expense of margin. Again this is adressable under the new CEO, when he arrives, but this will take time. My personal view is that there is a recovery case here, but it is too early to jump in. I have held this share in the past, but got out about three years ago.

Roger Baron

I'm comfortable with the risk of holding Tekcapital (LON:TEK) but I would be happier if, as a shareholder, they gave me the opportunity to partake in all these discounted share placements.

kendal

Still little interest in Tristel which posted strong results today.

Charles Mitchell

Agree Roger Baron. I am getting fed up with this drip drip dilution-they could easily let PI's get involved. I continue to hold because of some interesting holdings. I am going to email them and state my views. Charles

Bouden54

Good update on Litigation Capital Management (LON:LIT) I thought and surprised the muted reaction. The sector is of interest to me as I suspect after years of delays we could start to see some big case wins come through, while valuations look very cheap. The other attraction is that earnings should be uncorrelated to the wider economy.

Worth noting that LIT value all its cases at cost so the book value is probably hugely understating the real value. This is in contrast to peers which generally mark their cases at fair value.

cheeky_minnows

I looked into Darktrace (LON:DARK) in 2021 and was put off by what I read of Mike Lynch and the whole Autonomy debacle with HP. I decided to lose my money with Shearwater (LON:SWG) instead.. what a parcel of rogues..

And in any case.. all this time looking after striking train drivers can't be good for the business

Harry Hindsight

Was going to say 'it didn't wash' but up 4.7%. Still if can't make hay during a pandemic?

ridavies

That makes sense and I hoped it would be the answer, Martin VT. Thank you. Does the same process apply to all 3 shares I mentioned?

Tommy H

I appreciate that there is not a huge input around resources stocks

Wentworth Resources (LON:WEN) there has been a statement out today that the recommended 32.5p offer will not be increased.

The vote is 23 February and open market price is currently 28p, so ~16% profit if it goes through, though looking at the last trades it was more around 29p but still a large drop in the last couple of days as looks like those who bought hoping for a higher price are now exiting, and possible some cutting loss worrying that it will not go through.

Say a risk of a drop to say 25p which was the pre-announcement price so ~11% loss if it falls over, but still always a good dividend!

I do not currently hold, having sold (before the bid was made obviously as this is me we are talking about here, common be truthful I can take it!) but wondering whether to look tomorrow for a small position?

Heads or Tails?

Tommy

raggedtp

While I'm not advising, Tommy, I think buying right now is a bet. Look at https://www.lse.co.uk/SharePri... Quite a few PIs have already committed their votes to No.

They think it's worth 40p, m,ainly because of the stated NAV

I am a former holder of a reasonable amount, and I sold down at an average of 31p. 32P had been my target, by the way, and I was making a fair profit at this price. Why did I sell?

1. M&P, as operator, is one of the few business buyers possible. Who is going to come in, after Wentworth Resources (LON:WEN) failed to get one of the few logical acquisitions through last summer? Another investment company is the best bet, but rare as hen's teeth in junior miners and energy companies right now.

2. Look at the headcount of Wentworth Resources (LON:WEN) ; 16. And that probably includes Katherine Roe. Recent Directors have been managers, not entrepreneurs, and if the deal falls through, other shareholders who wanted out will call for heads to roll. A small, effectively investment, company, with a discredited Board?

3. While the StockRank is rightly good, future earnings risk went up on Jan 25th. http://newsfile.refinitiv.com/... Getting paid in Tanzanian shillings now because of a lack of $ is not comforting.

I will be looking on over the next few days, and there is a price at which I would buy back in, but it's not 28p right now...

Dragon

I think with the RNS's that have been issued, the board believes the votes are going against a 75% vote in favour of the bid. An institution has already declared they will vote against the bid with about 11% of the shares. It's cutting it close if there is another bidder and the original bidder has stated that's all you're getting.

Tomorrow could be quite exciting both ways.

I hold and voted against the bid. I'm getting an 8.8% divi at the moment.

Small Cap Value Report (Mon 20 Feb 2023) - TEK, DARK, LIT

Graham’s Reporting:

Tekcapital (LON:TEK)

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Paul Scott

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