Small Cap Value Report (Mon 22 March) - CMCL, CNKS, CAMB

Morning everyone. Ben here - just putting up the placeholder for the first of this week's SCVRs.

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Kicking off, here's a write-up by Keelan Cooper here at Stockopedia of the Caledonia Mining and Cenkos Securities results, which were published today...

Caledonia Mining (LON:CMCL)

Share price: 1169.5p (+3.5%)

Shares in issue: 12,000,000

Market cap: £140 million

Zimbabwean focused gold producer and explorer, Caledonia mining, released a strong set of FY 2020 financial results this morning.

Results for the Year ended December 31, 2020

• Gross revenues reached $100 million.
• Gross profit of $46.6 million and EBITDA of $43.4 million equating to margins of 47% and 43% respectively.
• Normalised all-in sustaining costs increased to $946 per ounce ($820 in 2019), but still remain low compared to peers.
• Adjusted earnings per share of 204 cents.
• Net cash from operating activities of $30.9 million.
• Net cash and cash equivalents of $19.1 million (2019: $8.9 million), although this was in part due to a $13 million equity issue in the third quarter of 2020.
• Total dividend paid of 33.5 cents per share.

Some key operational milestones were reached during the year. The company’s only producing asset, the Blanket Mine, produced a record 57,899 ounces of gold and at higher gold recovery rates. Integral to Calendonia’s future growth at the Blanket Mine has been the development of the Central Shaft, which is expected to commission shortly in Q1 2021. The project has taken 5 years to complete, at a total cost of $67 million, and will now contribute to meaningful production growth in the near future.

Furthermore, Caledonia has secured option agreements for two exploration projects in Zimbabwe on favourable terms. Glen Hume and Connemara North are located in the Gweru mining district and the company now holds the right to explore each property for 15 & 18 months respectively.

Source: Caledonia Mining FY results 2020 presentation

Steve Curtis, CEO of Caledonia, commented the following on Caledonia’s Full Year results: "Caledonia's immediate strategic focus is to complete the Central Shaft project, which is expected to increase production, reduce operating costs and increase the flexibility to undertake further exploration and development, thereby safeguarding and enhancing Blanket's long-term future. We will also conduct exploration activities at Glen Hume and Connemara North while evaluating further investment opportunities in the gold and precious metals sector in Zimbabwe and in other jurisdictions, with our long-term vision of becoming a mid-tier, multi-asset gold producer."

Fundamentals

From a fundamentals perspective, Caledonia offers some compelling valuation and quality characteristics. At current prices, if we factor in the Earnings Per Share on a rolling 1y basis, the P/E ratio stands at just 4.3.

The company’s current production plans at its Blanket Mine, which is on track to deliver between 61,000 - 67,000 ounces of gold in 2021 and 80,000 ounces annually from 2022, will also see earnings grow quite substantially. Given the forecasted earnings growth, the forward PEG of the company is an astonishingly low 0.1. This means that Caledonia actually qualifies for one of my personal favourite growth screens, the Jim Slater ZULU Principle Screen.

As one of the lowest cost gold producers listed on the London market, Caledonia is also able to benefit from industry leading returns. The company is in the top quartile of its industry for Returns on Capital Employed, Returns on Equity and Operating Margins.

Its ROCE has averaged over 20% over the past 5 years and Operating Margins have averaged just under 50% over the last year. The all round financial health of the company is also moving in the right direction, as highlighted by a Piotroski F-Score of 7/9.

Conclusion

As the Blanket Mine continues to ramp up operations, revenues and profits should continue their historical upward trend. The recent capital raise and healthy net cash position of the company means that it should be able to fund current operations and exploration projects from its internal cash flows. This greatly reduces the risk of any further meaningful dilution, which is common with smaller sized metals & mining companies.

Source: Caledonia Mining FY results 2020 presentation

The principal risk here remains the company’s reliance on its Zimbabwean assets. A typically volatile region, Zimbabwe has suffered from food shortages, public unrest and hyperinflation in recent decades. There has been some recent stability in the country, but there is always notable risk attached with investing in less established and more volatile mining jurisdictions. However, whilst the company’s Zimbabwean focus may deter investors, Caledonia looks well placed to continue to deliver in this relatively underexplored gold frontier.

Gold and gold stocks are also out of favour at the moment. Gold prices remain well below their highs in August 2020 and short-term profitability could take a hit if these prices persist. Inflation is starting to pick up around the world though, which should provide gold with a boost later in the year, but it’s impossible to predict in these unprecedented times!

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Cenkos Securities (LON:CNKS)

Share price: 68.55p (+3.1%)

Shares in issue: 57m

Market cap: £39 million

Cenkos securities is one of the leading independent institutional securities companies in the UK. The company specialises in the provision of corporate finance, corporate broking, research and execution securities services to small and mid-cap companies. Cenkos also engages in sales, trading and corporate broking activities on behalf of major Investment Funds such as Aberdeen Standard, Baillie Gifford and BlackRock.

Cenkos, which has raised more than £21 billion for its clients since 2005, published its annual results for 2020 this morning.

Annual Results for the year ended 31 December 2020

• Revenues increased to £31.9m (£25.9m in 2019).
• Underlying profits jumped to £4m (£1.4m in 2019).
• Profit before tax £2.3m (£0.1m in 2019).
• Profit after tax £1.8m (£0m in 2019).
• Large increase in cash position to £32.7m (£18.3m in 2019).
• Net assets of £25.6m (£24.7m in 2019).
• Basic EPS of 3.7p (0.1p in 2019).
• Full year dividend 3.5p (3p in 2019).

Overall, Cenkos had a much stronger year in 2020, with all key metrics across the businesses reflecting the improved trading performance. The Corporate Finance division, which provides specialist technical advice on all forms of corporate transactions such as IPOs, fund raisings, M&A and restructurings, performed exceptionally well as did its Execution Services division.

Nomad, Broking and Research activities remained subdued over the year, falling from 2019 levels, but there are reasons to be optimistic. As UK small cap equities have outperformed their larger index peers, Cenkos has seen more opportunities in its core target market.

Smaller sized companies have sought to raise money to fund additional growth as a result of the current market conditions and Cenkos has greatly benefited from this surge in activity. It also looks as though this level of activity has continued into 2021, with the company reporting that there is a healthy business pipeline for the upcoming year.

Julian Morse, who will shortly become CEO of Cenkos, commented the following on the group’s results: "This has been a strong year of growth for Cenkos, with revenue up by 23% and underlying profit by 188%, as the impact of changes made to our operations came through and companies looked to the equity markets for ready access to capital. During 2020, we raised £900m for our clients, completing 29 raisings including 4 IPOs. The momentum has carried through into 2021 with a healthy pipeline ahead."

Fundamentals

Cenkos is currently categorised as a contrarian stock, given its high Quality and Value Rankings of 94 and 90 respectively. The share price and earnings momentum has been poor in recent years with revenues and profits having steadily declined since their peak in 2014. The 10 year chart below highlights the extent of the share price decline, descending from a peak of around 250p in 2014 to 68.55p today.

Herein is where the opportunity may lie. The valuation, when the current cash position is taken into consideration, is remarkably cheap. Cenkos currently has a positive cash balance of £32.7m. However, due to its financial Pillar 1 requirements, the more accurate net cash position is around £14.5 million.

If you take the current market capitalisation of £39 million and subtract the net cash position of £14.5 million, you get an Enterprise Value of £24.5 million. If we divide this by the underlying profit (in place of the EBITDA) for 2020 of £4m, we get an EV/EBITDA of 6.125. The company also looks to offer good value if you take into account free cash flow and sales generation, as can be seen below.

Furthermore, Cenkos maintains a generous dividend policy. Since floating on the AIM market in 2006, the company has handed out £115.1 million of cash to its shareholders, which equates to about 178.3p per share. The current dividend yield stands at just over 5%, which should be reflected on the StockReport page once the full year 2020 financials are updated.

Operating margins remain quite low, but they are improving. The historical operating margins enjoyed by the company also suggests there is scope for this to improve much further in the coming years, if the company continues to turnaround its fortunes. Cenkos seems to be on the right track in this regard, as is exemplified by the near perfect Piotroski F-Score of 8/9.

Conclusion

There are plenty of reasons to be confident that Cenkos might be able to execute a solid turnaround plan in the current market environment. Merger & acquisition activity is starting to pick up and we are seeing a general rise in interest in financial markets. Companies are taking advantage of these conditions to float on stock markets or raise funds through other means in order to fuel their future growth requirements.

This has been the case in the UK market where the number of IPO listings, especially on the AIM market, bounced back strongly from 2019. 2021 has started in much of the same manner, with a number of high profile listings scheduled for the UK market this year. The shift in interest towards UK listed small caps has created a much stronger backdrop for Cenkos.

Cenkos aims to continue its focus on the careful implementation of its turnaround strategy, which seeks to deliver sustainable growth and create shareholder value over the next 3 years. The company remains undervalued compared to peers in its industry, but it must start to show that it can grow at similar rates if the share price is going to rebound towards its 2014 heights.

Director Purchases

Non-executive Chairman, Lisa Gordon, purchased 100,000 ordinary shares of 1p each in the Company ("Ordinary Shares") at 73.0 pence per Ordinary Share. Following this transaction, Lisa Gordon is interested in a total of 100,000 Ordinary Shares, representing 0.18% of the Company's issued ordinary share capital.

Non-executive Director, Andrew Boorman, purchased a total of 20,000 ordinary shares of 1p each in the Company. These shares were purchased in two equal tranches of 10,000 Ordinary Shares at 71.9 pence and 73.0 pence per Ordinary Share, respectively. Following these transactions, Andy Boorman is interested in a total of 108,152 Ordinary Shares, representing 0.19% of the Company's issued ordinary share capital.

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Ben's section:

Cambria Automobiles (LON: CAMB)

Statement regarding a possible offer

Share price: 74p (+12.12%)

Shares in issue: 100,000,000

Market cap: £66 million

Interesting to see that it looks like the management team at auto retailer Cambria Automobiles want to take the company private. Chief executive Mark Lavery (who holds 40% of the shares in Cambria) is leading a team including James Mullins (FD, 2.49% stake) and Tim Duckers (motor division MD). They’re looking at a buy-out valued at 80p per share in cash.

Under the rules of the Takeover Code they’ve got until 19 April 2021 to formally announce their intention to make an offer for the company, or not.

Shares in Cambria are up 12% to 74p today, so it feels like the market is hedging its bets a little bit here as to whether Lavery’s team will pull this off.

Cambria started out in 2006 as a buy-and-build car dealership group and it’s now got 40 or so franchises. Paul has been a fan of some of these auto dealers because a number of them have solid asset backing in the form of freehold properties - and certainly they’ve been a part of Cambria’s acquisitions over the years. But the bigger picture right now, of course is that Covid has been a huge disruption to the motor sales industry. Plus there’s ongoing turmoil caused by greater interest in electric vehicles and growing scepticism of diesel vehicles.

For what it’s worth - I actually bought a car last October (between lockdowns) from a dealership that’s part of Cambria’s rival, Vertu Motors (yes, it was a diesel!). That was during a 0% finance ‘event’ and apparently even that kind of incentive wasn’t bringing punters through the doors. It had apparently been ‘a bit disappointing’.

Back to Cambria, the challenges of selling cars over the past 12 months have been significant. In a pre-close update in early March, the company said it was mired in uncertainty. This is what it had to say about its performance in the five months to 31 January 2021:

“In the period, the new car market was down 14.4% with the private segment down 13.3% and the diesel content down 37.3%. The Group's new vehicle unit sales for the period were down 14.4%, with sales of new retail cars to private guests down 15.3%.”

So in an industry that’s very cyclical anyway, is this a case of it being darkest before dawn? Do Lavery and his team consider that the worst of the Covid crisis is behind them and now might be an opportune moment to take the business on themselves? Presumably so. The Stockopedia StockRanks point to this being a stock that has been trading cheaply - with the ValueRank currently at 98.

More generally, you’d have to say that any situation where the CEO has a 40% stake in the company could easily (perhaps even inevitably) lead to a buy-out move like this. Given the uncertainty facing this industry, investors might be happy to take the rather modest premium.