Small Cap Value Report (Mon 20 Sep 2021) - FIF, CHRT, ZOO, CTG, WIL

Good morning, it's Paul & Roland here with Monday's SCVR. Today's report is now finished.

We like to keep you on your toes, by switching the writers without warning! Welcome back Roland - thanks for your fantastic contributions.

Paul's preamble -

I've relocated from Malta to Madeira (via Heathrow) this weekend, for the next fortnight, and am thinking about what other islands beginning with M that I could try next? Madagascar springs to mind! Anyway, I've got my laptop with me, decent wifi (more reliable than in my London home anyway), and of course a box of Yorkshire Teabags, so can happily work anywhere!

Incidentally, Heathrow T5 seemed to be very busy when I got there at some ungodly hour on Saturday morning. By about 08:00, I'd say it looked (subjectively) similarly busy to pre-pandemic. So the re-opening, re-start of travel trade, looks back on. I mentioned this to the BA stewardess, en route to Madeira. I asked her, is it time to buy shares in travel companies? Yes, she replied, every flight is full, and the staff are so happy to be busy again. As a friend mentioned though, caution is needed because the capacity might be lower, so this needs some expert comment, I'm just mentioning this as half-baked scuttlebutt.

Also the recent data that out of 50k deaths with (not necessarily entirely from) covid this year, only 59 people had been double-vaccinated, and had no underlying health issues, is of absolutely seismic importance. Think about it. That's 0.1%. Many people are happy with those odds, to get on with life, instead of hiding away maybe forever. I know I am, and have taken far worse odds quite routinely as part of normal life - e.g. pulling out of a blind junction without knowing whether a speeding artic is around the corner or not, etc.

Risk is all around us, all the time. Investing is all about trying to assess the risks, and the upside, risk:reward. I think at the moment, with speculative share prices generally very high and a lot of macro risk out there (inflation, Fed tapering, supply chain, shortages of everything, etc), then risk:reward looks potentially dicey for some shares. This market looks complacent. Not so much with UK value shares, but in the US in particular it seems euphoric & poised for a correction.

Blockchain seems an obvious, and excessive speculative frenzy. All this money-printing and zero interest rates looks like it's set off a dangerous speculative mania, that could continue for some time. But history tells us what the outcome will certainly be - a crash. The only question is the timing.

---

Agenda -

Paul's section:

Zoo Digital (LON:ZOO) - an in line trading update for H1. I remain sceptical.

Christie (LON:CTG) - improved (profitable again) in H1. Overall though, I can't generate any excitement over the future prospects of this company. The pension deficit still dominates its balance sheet unfortunately.

Wilmington (LON:WIL) - solid results for FY 06/2021. Dividends reinstated. The PER is 16.5, which is probably about right. Seems a good sector to be involved with. Weak balance sheet doesn't seem to be causing any problems. I quite like this one.

Roland's section:

Finsbury Food (LON:FIF) : A strong set of numbers from this food producer, which has been a convincing turnaround. Last year’s pandemic food shopping tailwinds could make for tougher comparatives this year though, especially given the current supply chain difficulties

Cohort (LON:CHRT): A cautious update from this small-cap defence group suggests to me that performance could fall slightly below expectations this year. However, I can see long-term potential here.

---

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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.

---

Paul’s Section:

Zoo Digital (LON:ZOO)

125p (up slightly today) - market cap £103m

AGM Statement & Trading Update

ZOO Digital Group plc (AIM: ZOO), the provider of cloud-based localisation and digital distribution services for the global entertainment industry…

Both Jack and I have reviewed this company previously, and are sceptical. That’s because ZOO has a long history of not really making any sustainable profits/cashflow, despite rising revenues and permanently bullish commentary from the company. The >£100m market cap baffles me.

What’s the latest? The tone is bullish, but the conclusion is it’s trading in line with expectations, so price neutral -

"A strong pipeline of work and excellent customer relationships gives us great confidence in meeting full year market expectations, and I look forward to updating shareholders on our further positive progress in due course."

Summarising the other points -

• “Strong momentum”
• Further territories to be entered (so more costs presumably?)
• H1 revenues “slightly ahead” of expectations
• Significant increase in EBITDA vs H1 LY
• “Much improved visibility”
• New production of TV/films resuming
• Taking on more staff (so more costs again)
• Loan notes are converting - investors need to check the dilution, because our previous notes here indicate the conversion price is well below the market share price - maybe conversion could lead to profit-taking?

My opinion - unchanged. Zoo’s track record has been poor. So shareholders need to be sure that things are going to markedly improve, otherwise the £103m market cap doesn’t make sense to me.

.

.

---

Christie (LON:CTG)

118p (up 8% at 13:41) - mkt cap £31m

Christie Group plc ('Christie Group' or the 'Group'), the leading provider of Professional & Financial Services (PFS) and Stock & Inventory Systems & Services (SISS) to the hospitality, leisure, healthcare, medical, childcare & education and retail sectors, is pleased to announce its interim results for the six months ended 30 June 2021.

These figures look good, showing a progression from heavy losses in H1 2020, a small loss before tax in H2 2020, into a profit before tax of £1.2m in H1 2021.

H1 revenues are strikingly higher, at +52%

Management describe performance as “rampant” in H1!

Dividend reinstated, but only 1p

Pension deficit is reduced, but still dominates the balance sheet, and makes NTAV negative.

Q3 trading well.

Strong & profitable H2 expected, to exceed expectations.

It claims to have net cash of over £8m, but this seems to ignore borrowings of c.£5m, so I make net cash £3m, not £8m

Benefited from £2.1m Govt grants in H1 2021, which is more than the entire profit for the period.

My opinion - it’s now a modestly profitable business, saddled with a big pension deficit. The removal of Govt support creates a headwind. If it’s only modestly profitable when conditions are “rampant”, then I don’t hold out much hope for the future.

It looks an OK business, but cashflows seem to be primarily needed to service the pension scheme.

It doesn’t interest me for these reasons.

.

.

---

Wilmington (LON:WIL)

224p (unchanged) - market cap £196m

Financial Results - year ended 30 June 2021

Wilmington plc, (LSE: WIL 'Wilmington', 'the Group') the provider of data, information, education and training in the global Governance, Risk and Compliance markets, today announces its full year results for the year ended 30 June 2021.

These numbers look quite good.

Revenues flat at £113m, despite covid restrictions.

Adj PBT up an impressive 27% at £15.0m

Adj basic EPS also up 27% to 13.6p - which looks a beat against the 13.3p consensus shown on the StockReport - the PER is 16.5

Cost cutting & efficiencies, as the business successfully moved online in some areas.

All the adjusted profit is wiped out by non-cash impairments of £14.8m, so investors need to be clear that you accept the adjusted numbers.

Dividends reinstated at 6.0p total for the year, a yield of 2.7%

Net debt reduced to £17.2m, which is fine, it’s relatively modest compared with adj profits.

Strong demand

Current year has started well, in line with expectations.

Balance sheet is weak, with negative NTAV of £(43.3)m - I’m not unduly concerned with this, because WIL looks like a business that operates normally with favourable working capital.

My opinion - we all know that ESG, and compliance, are lucrative areas for advisers & training companies like WIL. It’s trading well, makes a strong profit margin, and is decently cash generative.

Overall, I quite like it. Worth a look possibly.

.

.

---

Finsbury Food (LON:FIF)

Share price: 95p (pre-open)

Shares in issue: 130m

Market cap: £124m

Preliminary results

Baked goods firm Finsbury Food (LON:FIF) produces bread and cake products for supermarkets and foodservice channels. The company has delivered a decent turnaround over the last two years, despite the hit to foodservice demand caused by the pandemic. Profitability now seems to have returned to historic highs, although the business does face the predictable short-term headwinds.

Note: Finsbury Food will be giving a presentation for private investors on the Investor Meet Company platform at 3.30pm tomorrow (21/9). I find these presentations to be an excellent way to find out more about the character/style of a company’s management. Well worth a look if you’re interested in this stock - presentations are usually available for later playback as well.

Financial Highlights

Although Finsbury’s sales to restaurants and cafes suffered last year, with sales down 14.9%. However, these represent a minority of the group’s output.

The main part of its business is supplying supermarkets and other retailers. Demand was strong last year due to lockdown and Finsbury’s retail sales rose by 5.8%.

Here are the main financial highlights:

• Revenue up 2.3% to £313.3m
• Adjusted operating profit margin 5.1% (FY20: 4.9%)
• Adjusted pre-tax profit up 10.2% to £15.1m
• Adjusted earnings per share up 15.2% to 9.1p
• Net debt (excl leases) down 50% to £13.1m
• Dividends resumed at 2.4p per share for the full year

According to Stockopedia data, these numbers are slightly ahead of consensus. We can see that last year’s performance represents a return to a level of profitability last seen in the 2018/19 financial year:

Profits vs adjusted profits: I should point out that Finsbury Food’s profits are quite heavily adjusted. The company presents separate reconciliations between adjusted and statutory versions of EBITDA, operating profit and pre-tax profit.

Unusually, statutory profits for the year are higher than the adjusted figures:

• Adjusted pre-tax profit: £15.1m
• Statutory pre-tax profit: £17.0m

I don’t think there’s much to be gained by ploughing through all of the adjustments here. In my view they are all fairly reasonable. I’m happy to accept that the adjusted profits are representative of the underlying performance of the business.

Cash flow: Cash generation seems good. I calculate that free cash flow last year was £15.3m, providing a 112% cash conversion rate from net profits of £13.6m - a good performance.

Balance sheet: Finsbury’s balance sheet looks okay to me, although perhaps not outstandingly strong. Net debt excluding lease liabilities is comfortable at £13.1m.

Unusually, Finsbury appears to have included IFRS 16 lease liabilities under “interest-bearing loans and borrowings” on the balance sheet, rather than listing lease liabilities separately, as most companies do. The numbers are split out in a footnote instead.

The only other comment I’d make on the balance sheet is that the current ratio measure of liquidity (current assets/current liabilities) is quite low, at 1.1. It’s common to see this with consumer businesses that get paid quickly by customers, and enjoy generous payment terms with trade suppliers.

Finsbury is a B2B business, so I expected more evenly matched payment terms. However, the numbers suggest that Finsbury gets paid by its customers more quickly than it has to pay its own suppliers.

My sums suggest Finsbury’s invoices are paid in an average of 53 days.

In contrast, it seems that the company takes an average of 108 days to pay its own suppliers.

Like supermarkets, Finsbury appears to enjoy a significant amount of free credit from its own suppliers. This can be used to fund working capital. This isn’t a problem unless the company is forced to accelerate its payment schedule for any reason - 108 days does seem quite slow to me. I estimate that reducing this to 90 days would require a cash outflow of over £10m.

Outlook: Chief executive John Duffy is bullish about the future growth prospects of the group. But he also warns that “persistent challenges” are likely “around inflation, skilled labour and driver shortages”.

Looking ahead, the company is targeting growth in its overseas division, where sales rose by 13% last year.

Markets such as vegan, gluten-free and artisan bread are singled out as growth opportunities.

As far as I can see, the company hasn’t provided any explicit financial guidance for the 2021/22 year in today’s results. I’ve not been able to find a new broker note either, this morning.

Consensus forecasts on Stockopedia prior to today showed earnings rising by a further 12% this year. This would put Finsbury stock on a forecast P/E of 9.5, with a useful 2.6% dividend yield.

My view: Finsbury’s results look fairly solid to me and show decent cash generation and an improved performance despite last year’s headwinds. Overall, I think this is a decent, well-run business.

However, cost pressures and labour shortages this year seem likely to put some pressure on margins, unless supermarkets choose to absorb cost inflation or pass it onto customers. Both of these seem unlikely, in my view - I’d guess the big retailers are likely to insist that suppliers share some of the pain, too.

Finsbury shares look cheap on less than 10 times forecast earnings, but this is a low-margin business that’s always likely (in my view) to face margin pressures. It’s not a stock I’d want to hold at a premium valuation, but if I held the shares I would continue to do so after today’s results.

---

Cohort (LON:CHRT)

Share price: 554p (-4% at 09:24)

Shares in issue: 41m

Market cap: £237m

AGM Statement & First Quarter Update

This small-cap defence group is composed of a portfolio of businesses which enjoy considerable autonomy but benefit from the support of the parent company in areas such as finance, strategic support and shared information and best practices.

I’ve been interested in this stock for a while, but haven’t yet persuaded myself to hit the buy button. One concern is that the EID subsidiary in Portugal appears to be underperforming, suppressing growth elsewhere. The market has become cautious too.

Cohort shares have gone nowhere for the last two years:

Checking back in the archives, I covered Cohort in May when the company issued “a subtle profit warning” due to order delays at EID.

Let’s see whether today’s update sheds any fresh light on this situation.

Order book: Since 1 May, Cohort has secured £85m of new orders. These have lifted the order book from £242m at the last year end (30 April) to just under £300m on 16 September. Revenue cover against forecasts for the current year is now 82%, which seems reasonable to me at this stage.

New orders are reported for most of the group’s businesses today, but not the troubled EID division. There’s no mention of this business at all in today’s trading update.

Balance sheet: Cohort has always maintained a strong balance sheet and this remains true. The group had net funds of £3.3m at 31 August (30 April: £2.5m). Available liquidity stands at £43m, providing plenty of dry powder for current commitments and potential acquisitions. I have no concerns here.

Continued delays: The company says that progress since the start of the year has been good across most of the group. But delays to “certain aspects of our work that were highlighted at the time of the Group’s preliminary results” have persisted.

Management say that underlying causes include extended negotiations with customers, travel restrictions and supply chain challenges. However, these are challenges faced equally by most businesses.

My guess is that these comments relate to the delays with certain EID projects that were mentioned in the full-year results. I’d have preferred a more explicit statement about trading headwinds, but there we are.

Outlook: The board remains “optimistic that the Group will return to a higher rate of growth in 2023/24”, based on long-term orders and a “strong pipeline of opportunities”.

My view: I’m a little disappointed that we haven’t seen a more explicit update to guidance today. But it sounds to me like Cohort’s management expects a pretty flat set of results this year.

I’m not surprised to see that the shares are down this morning. For now, my working assumption is that trading will be in line with or slightly below current consensus expectations. On that basis, I’d say the current valuation of the stock is probably up with events:

However, I do still have a broadly favourable impression of this business. If the shares continue to fall, I could be tempted to buy.