Small Cap Value Report (Mon 21 Mar 2022) - STEM, SPSY, BBB

21st Mar '22 by Jack Brumby

50 comments 8416 reads

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

Agenda -

Jack's section:

Sthree (LON:STEM) - strong Q1 trading and ongoing investment in headcount. Conditions are positive and that might not last forever, but there’s nothing in today’s update to seriously dent sentiment. In the meantime, STEM has a differentiated strategy, a good balance sheet, and opportunities to drive further growth.

Spectra Systems (LON:SPSY) - strong full year results and multiple growth opportunities going forward. Given the group’s increasing earnings per share and dividend payments over the years, I think the share price probably deserves to be higher. The shares are illiquid and neglected, so perhaps a more engaged investor relations function would help.

Bigblu Broadband (LON:BBB) - an interesting micro cap situation, but one with very poor share price liquidity and an ongoing lack of sustainable cash generation. The company has changed significantly over the past couple of years, so it could be that it’s now a different proposition but, given the lack of liquidity and poor track record over the past five years, I’d need to spend more time on it to really get comfortable with the outlook.

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.

Jack’s section

Sthree (LON:STEM)

Share price: 412.5p (pre-open)

Shares in issue: 133,632,112

Market cap: £551.2m

Q1 trading update for the three months to 28 February 2022

SThree is a global pure-play…

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planetx

21st Mar '22

Unbound feeling generous with its senior team award nil cost options to them .

Typical private equity mentality means this moves from watch list to avoid list .

Just plain wrong in my opinion to issue nil cost options, private equity mentality at its worst spilling over into Aim territory .

Rhymes with tankers .

Why can’t they just be happy with their big fat salaries and if they want to own part of the company write the cheque out like the rest of us have to .

Remember where the Unbound and Hostmore teams came from , private equity and they will be self serving to the end . Avoid these companies even if they seem great value . You

Bouden54

Remember that Hotter Shoes and TGI where the 2 companies Electra were struggling for years to shift from their otherwise excellent portfolio when it was wound up - feels a bit like the leftover dross and would personally avoid both.

FREng

John Authers' daily email today comments that the VIX volatility index is back below its pre-invasion level. Maybe that makes it a good protective buy if you think the risk to markets could get much worse yet.

Does anyone here trade VIX? If you do, what tickers do you favour?

And on the back of the what 8 million ? Fees that they agreed to pay in the split up .

The more I think about it, it’s one total royal piss take and what is worse is they just carry on .

How about simply building a company to be proud of with longevity , for the benefit of its shareholders .

The form is very clear to see now , if the market swings up for sure they will do well as anyone can surf a riding ride, but for 100% sure in a tough economy and market you need to be better than these self fulfilling robbing clowns are showing themselves to be .

Aislabie

Thank you Si for your thoughts on Spectra and thanks to Paul for his review.

One other really odd thing about Spectra is that they never hold an AGM because there are never enough votes for a quorum. Even though AGMs have been enfeebled over the years this looks like something which should draw some reprimand and maybe a quiet word from their Nomad. Of course holding it in Providence, Rhode Island helps to keep it exclusive even if they get the votes for a quorum!

Trident

I think if you look back at previous Spectra Systems (LON:SPSY) presentations on PI World, you will see the CEO address some of the issues.

I am struggling to remember the technical cause of lack of liquidity, but the CEO suggested there was some forthcoming possible news on that front (this was a while back).

I was impressed by the CEO's presentation at the time, but didn't pull the trigger for some reason. Possibly my concerns about liquidity, which I have tried to make a feature of my buying criteria, amongst others, put it in the Watchlist category.

FYI they are registered in Delaware in the USA and are not obligated to follow the Takeover Code if that's of concern to anyone.

Ben1

I just read the John Authers email. Interesting, but of course it is very America focused. If America is shrugging off the invasion, how much of that is just because Ukraine is a long away from America (most americans probably couldn't tell you where it was on a map), and has probably dropped off their news feeds. Most of our media attention is on refugees (which aren't going to be affecting America), not on the war itself, where there are no major advances or retreats for them to talk about.

If it did provoke world war 3, the Americans would probably be fashionably late to it anyway!

Good point. I think this was an issue the CEO said was under review in one of their PI World presentations, but possibly said before Covid fully hit?

I suppose if you have a Delaware registered company, and an AIM listed stock it will always be a bit of a peculiarity. I can understand not wanting to be unduly burdened by certain factors (tax and governance codes, and tight regulation), and just put performance front and centre. But it does make it rely heavily on the good faith actions of the board, and institutions and private investors may be more than usually wary?

The CEO seemed from the presentation to be a reasonable sort, and the Company has been a relatively good performer in terms of revenues and profit. I may revisit their old presentation. They must be due for a further presentation?

rmillaree

Unbound (LON:UBG)

I have had a look at the hurdles that need to be hit and at least they are fairly challenging on face value - if we say company will be doing EPS of 18p and has p/e of ten that will be shareprice of 180p. Thats worth a bonus of 550k IMHO to main bods - if they hit those targets on fair and reasonable lfl basis and shareprice has gone up over fourfold in the meantime from where we are now!! So no dummy spitting from me here unless i am mising something.

Annual Compound Total Shareholder Return percentage ('TSR') over
the three years to the year ending January 2025 (weighting 50%): Vesting will
start from a threshold at 40% pa, with maximum vesting at 70% pa

Earnings Per Share in the Year to January 2025 (weighting 50%):
Vesting will start from a threshold of 18.60 pence per share, with maximum
vesting at 22.74 pence per share

Caper4

I sold the share because of the lack of liquidity. In today’s market conditions you need to be able to get out fast !!!

john2

There was what I thought a very impressive presentation from the Spectra CEO at an online Mello a few months ago.

What is grossly offensive is the fact they are nil cost . At the very worst the strike price should be current share price .

The sense of entitlement is just plain wrong .

First sign of credible "founder mentality" is actual skin in the game this is the acid test of a management team with credibility and commitment to the cause of the company and to represent shareholders .

These clowns are having none of that, they risk nothing of their cash but everything of shareholders who also pay their wages .

Nil cost options is simple shareholder theft, these guys would be better off wearing Dick Turpin masks and at least being up front about their willingness to lay it on the line.

I say this as someone who built a business and every single day I was motivated by representing my shareholders as well as myself to the best of my ability.

I find it a total wind up, and on the back of the self serving float and its luxurious "fee fest" there is "form" which means this is not a credible management team to be trusted to represent a shareholder.

Honestly blows my mind .

davidjhill

I don't have a problem with nil cost when the targets are sufficiently challenging, which in this case they are.

Effectively you can think of it as a bonus. Get the share price up to 150-200p and you get £500k . I for one will be very happy at a 200p share price over 2-3 years from here. The directors aren't founders so they do need a sufficient incentive in place and this isn't excessive or unreasonable imo.

I do have major problems with BoDs that issue nil cost without a big hurdle rate. Then I agree it is just a transfer of value from shareholders to Directors. In this case it isn't though.

mojomogoz

Beeks Financial Cloud (LON:BKS)

I don't know very well. Looking at it briefly today I'm struck by how cash consumptive growth seems to be, a rather sketchy balance sheet, significant capitalised development cost supporting adjusted profit claims but a highflying valuation nevertheless. Plus there was a cash covenant breach back in December...

Why are investors in a good position at current price to capitalise on any growth they achieve? What exposure does it have reduced trading volume in its markets? Is a capital raise inevitable?

I disagree Camtab. You need to look through one years worth of numbers where investment is heavy because they've found a sweet spot that is underserved in the cloud market.

I reckon ARR should exceed £25m within 12 months from current run rate of £17.7m. They can do 40%+ ebitda margins on that and thus generate £10m of ebitda profit. Depreciation is relatively low as they don't capitalise a lot so that should translate to PBT of circa £7.5m against a market cap of £81m or roughly10* PBT. For this type of business a take out would be more like 25-30*

I'm not saying it will definitely get there but if you just focus on todays numbers and not 12-24 months forward you're missing where the real value of this business lies.

Chris Brown

As someone who sold Pendragon (LON:PDG) on 8 March at c.20p, it is more than a little annoying to see it rocket to 26p today on this news of a takeover bid from its 25% shareholder, Hedin Group. This bid was 'submitted several weeks ago' and apparently summarily dismissed by the Board, who saw no reason to disclose it to mugs like me. I guess they didn't consider it material!

Think we need to agree to disagree !

The solution is to issue them at the current share price not nil cost .

Nil cost is a freebie at the expense of shareholders and if shareholders consider that "I'm winning as well if they deliver" that is their short sighted choice but I just dont buy into that way of thinking myself .

There are lines in life and business and this is over the line, applying the logic that "if they deliver that then who should I worry" misses the point totally .

Morally bankrupt for me, and on the back of the 8 million fee fest this is now a group of people that are showing signs that the company is there to serve them , and not the other way round .

Form is there now - avoid like the plague ,.

As a final Ps to this .

I wonder how much cash the senior gang at both Hotter and TGI. Fridays amanaged to extract to enrich themselves out of the “uncoupling” (if any but I suspect they had their fingers in the honeypot again )

If they did that would make it a triple whammy !!

Seems pretty obvious to me that a company like this doubling sales in a 2 year period is going to be splashing the cash at this stage of its growth spurt. Not sure if there are any decent broker notes available that map the future cashflow expectations - that is where I would want to be looking.

Not sure it would be the end of the world if they raised say 8 mill - dilution of 10% ish. So even if they do need to raise funds is that the end of the world?

They state they have already upgraded forecasts for this year 3 times so to me that’s a positive sign that at least they are driving sales forward and presumably their business must be sticky?

Must admit though I haven’t looked at the numbers In too much detail so your concerns are certainly very sensible questions to be asking to be sure.

Zipmanpeter

22nd Mar '22

Re £UBG nil cost share awards for BOD if they achieve targets. It's worth going back to the objectives: to incentivise/retain the BOD for their 'special skills' and align them with shareholders (or more accurately prevent them manipulating the share price to their advantage

On this basis, the award of of options make sense for shareholders if you agree that the BOD should be paid as much as their salary plus what they earn as a bonus. (We can argue why the BOD should not be working flat out for their base salary, I don't recall bonuses making me work harder, but that is another discussion!).

Target related share options delay cash out for the business and are not paid in cash, both helpful for a growing business. I agree nil cost feels wrong

What would be even better would be to pay say 10% of their base salary as shares at the market price until they have at least 1x base salary - that's continuous, real alignment!

Small Cap Value Report (Mon 21 Mar 2022) - STEM, SPSY, BBB

Jack’s section

Sthree (LON:STEM)

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Jack Brumby

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