Small Cap Value Report (Mon 24 Jun 2019) - PRV, CBOX, MYSL | Paul Scott

14th Aug '19 by Paul Scott

40 comments 10780 reads

Good morning, it's Paul here.

7-8am comments

Porvair (LON:PRV)

H1 results (6m to 31 May 2019) look strong;

Revenue up 21% to £72m

Adjusted EPS up 36% to 12.9p

Cashflow looks weak though, due to adverse working capital movements (inventories & debtors up, as you would expect from expansion, but trade creditors sharply down).

IFRS 15 has resulted in a large £8.2m provision for warranties being created.

Looks potentially interesting, so I'll take a closer look later today, in more detail.

Cake Box Holdings (LON:CBOX)

Full year results (y/e 31 Mar 2019) look a little below forecast;

Adj EPS of 7.9p versus consensus forecast of 8.1p

High profit margin, as it's a franchise business, selling cakes.

LFL sales growth in franchise stores of 6.5% looks very good - maybe this is an emerging winner in the current retail downturn? Doing a roll-out of new franchise stores, which seems to be working.

Looks potentially interesting - I'll take a closer look later today.

MySale (LON:MYSL)

Formal sale process & strategic review.

Mentions the dreaded word "stakeholders" - which is often code for the equity probably being worthless.

One of the options mentioned today is de-listing, so I imagine the share price is likely to suffer badly today, although at c.7p there's not much left anyway.

I don't see any value here. Management have completely screwed things up, and a change in Australian sales tax apparently clobbered gross profit.

Given previously unrealistic outlook comments made by management, I'm not minded to believe the RNS today, saying that drastic cost cuts will make it cash generative next year.

No further coverage today, as this looks a basket case now, with management having zero credibility in my eyes.

Afternoon comments

Now i have a bit more time, let's focus on the shares whose updates look most interesting today.

Porvair (LON:PRV)

Share price: 583p (up 3.4% today, at 15:11)
No. shares: 45.8m
Market cap: £267.0m

Half year results

Porvair plc ("Porvair" or "the Group"), the specialist filtration and environmental technology group, today announces its half yearly results for the six months ended 31 May 2019.

As mentioned above, the financial highlights…

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MrContrarian

24th Jun '19

My morning smallcap tweet: MySale fire sale as sales fail

MySale (LON:MYSL), Nektan (LON:NKTN), Spectra Systems (LON:SPSY)

MySale (MYSL) Everything must go! Or maybe not. Hoists for sale flag for all or parts to raise additional capital to support the ongoing restructuring and rationalisation. Trading still challenging. A$1.96m write off of asset that is no longer deemed recoverable, no cash effect of F/C. Costs cut from A$74m in FY18 to A$35m. May need extra short term cash.
Nektan (NKTN) target of achieving EBITDA breakeven in FY19 will not be achieved due to the slower trends experienced in Q3 continuing into Q4. Q1 Confident of Q1-20 rev grown on Q4. Which is what it said about Q4 after Q3.
Spectra Systems (SPSY) does not have enough shareholder votes to achieve a quorum at its AGM. Does not say AGM is postponed, as it has before.

JohnEustace

I don’t recall this happening before - Spectra Systems (LON:SPSY) announces that it lacks a quorum for its AGM with less than 25% of votes cast.
Is this because we all hold in nominee accounts I wonder? What happens next?

https://www.investegate.co.uk/spectra-systems--spsy-/rns/annual-general-meeting-lack-of-quorum/201906240700080971D/

Wol

Re: Spectra Systems (LON:SPSY) AGM not being quorate
I don't think it helps that
1. the RNS announcing the AGM didn't give any details and only referenced the companies websit
2. The AGM was (to be )held in Rhode Island (USA)
And, as you say, shareholders through nominee accounts don't receive the AGM details or voting information.
Even so just the directors', unit trust's and investment trusts' shareholdings add up to more than 25% so it looks as if some of those also failed to vote or attend.
I am also wondering what happens next.

matylda

Good Morning Paul!

I wonder, if you get time, could you perhaps cast your eyes over CentralNic (LON:CNIC) - Expects FY to be ahead, oversubscribed bond issue 50m Euro.

Thanks in advance.

Samscvb

Then you don't have the best memory, since it happens every year

FREng

I think you might have added what Spectra Systems (LON:SPSY) do each year, if the AGM is routinely inquorate.

jonno

interesting acquisition by 600 (LON:SIXH). It has acquired CMS an American company that specialises in laser applications for $10m. Quite sizeable in relation to the market cap. Looks worthy of further investigation perhaps.

Aislabie

As far as I can see Spectra Systems (LON:SPSY) does absolutely nothing and it seems to make no difference. Their AGM is held in Providence, Rhode Island which does not encourage actual attendance and from my chat with WH Ireland last year there appears to be a comprehensive lack of interest in changing things.
As if to encourage a lack of interest the RNS announces that AGM notices have been sent to shareholders (good luck with that, if you are, like most of us locked into nominee accounts) and you find a copy you then have to go to their website. Go to Investor Relations and then to "Reports and Presentations" (not "Regulatory News") and then you discover that, in a burst of helpfulness, you can file a proxy online.
The company requires that 25% of the votes are required for there to be a quorum, this seems quite a high bar but given that more than 20% are in Directors hands it should not require much institutional interest to generate a quorum. I have to admit that I did not go through the rigmarole of nominee voting my infinitesimal percentage but this just highlights the preposterous continuing lack of official interest in blowing up the nominee account situation. In this digital age it is ridiculously easy to copy the countries such as Australia and get individual shareholders on the Register.

jwebster

Cake Box Holdings (LON:CBOX)

Looking at the cash flow

The 3.1m cash from operating activities is actually flat on previous year, despite revenue growth.

I see a big increase in wages from 1.2m to 2m, perhaps that’s the new distribution centre. But 598k of Aim listing costs was a one off item.

So, generated 3.1m cash post tax, then spent 2m on plant/property and 1m on the dividend. So, assuming they continue to grow the top line and don’t need to keep buying facilities the cash generation of the franchise model seems quite good.

Net debt 0.9m not onerous

Retail proposition fairly strong with reasonably priced cakes, message personalisation and one hour click and collect.

Currently have 113 stores, 27 were added in the period. Plan to open another six stores per quarter. I don’t know where the top out on locations is with these stores, in the results they talk about Scotland and Wales being the next open areas, which seems a bit marginal. As a comparison, I think Patisserie Valerie topped out around 192 stores?

Possible there is some good revenue growth to come as the more recently opened stores ramp up their revenue curves. Hope they control their central costs to realise the leverage.

Further to my previous note Stockopedia may want to note that the Stockreport shows an incorrect company website for Spectra Systems (LON:SPSY) which brings up a "404" note. The correct site is www.spsy.com

Gostevie

I'd be interested in any thoughts Paul or other readers might have on the Maiden Final Results from Hipgnosis Songs Fund (LON:SONG):

https://www.investegate.co.uk/hipgnosis-songs-fund--song-/rns/maiden-final-results/201906240700121117D/

I find it an interesting company as its business - buying the rights to song catalogues - is an unusual one that might not have much correlation to the market as a whole. Its website can be found here:

https://www.hipgnosissongs.com/

Steve L

Looked at Cake Box Holdings (LON:CBOX) a while ago but I think I remember reading that their ingredients include Palm Oil so maybe worth doing further research if environment/ethics are high up on your investment checklists.

stuartb58

Paul - if I read it correctly, the reduction in trade creditors at Porvair (LON:PRV) almost exclusively caused by movement of previous advance payments from large one off contracts from trade creditors to provisions. I am no accountant, but this figure around £9M at best case could be released into profit over coming years, Guess it all depends on whether there are any issues with the installations made in the big projects. Long term and very happy holder of PRV.

Apologies if I was rude. As far as I understand, it is an excuse to simply not have an AGM? I may be wrong. Corporate governance arguably an issue with this one.

TamzinPiworld

piworld has just published Hardman & Co's presentation on Hot Topics in Tech, by Milan Radia, Hardman's tech analyst. Milan discusses the internet, IoT & AI with reference to specific companies. With, what to look for to assess the investment potential in the tech space.

We have now published all, except four, of the companies we recorded at Mello May 19. They can be found here. The additional four companies will be added, as we get approval.

sharw

Regarding Spectra Systems (LON:SPSY) you say the quorum is 25% but https://www.spsy.com/wp-conten... says 50%:

"No action may be taken on any matter to be acted upon at the meeting unless a quorumis present with respect to that matter. For each matter to be acted upon at the meeting, a quorum consists of the presence in person, or by duly executed proxy, of the holders of a majority of the outstanding shares of Common Stock entitled to vote".

AnonymousUser192020

I've held $SONG since December and they seem to be doing what they promised. Clearly they have a first mover advantage but it's hard to know if a competitor could emerge - it seems that Merck has excellent connections and is a respected individual. They seem confident they can expand their war chest and there are some very conservative institutions amongst the shareholder base. Interesting that only 15% of revenue is from UK, with 64% from USA. No attempt to hedge - obviously an investor can choose to do so if they prefer. I wonder if there's potential conflict between the Company and the Adviser?

It's a play on streaming growth and performance royalties and how much pricing power the new platforms will have - I heard that Spotify took 6 years to generate a profit so a dominant platform might have more clout to renegotiate payments perhaps?

However, it's a mistake to assume it won't be correlated with the general market I think. Sure, it should have a lower volatility but a market crash with discount rates taking off will surely hammer the NPV of the income stream? And that's before the most stretched consumers are forced to rationalise their various subscription services.

Gromley

Hi jonno,

I too noticed the 600 (LON:SIXH) acquisition.

The acquisition is for $10m ($9m cash & $1m new SIXH shares – c. 4% increase in share count) so against the current market cap of c. $30m this is quite material.

We are told that the acquired business has been growing consistently and in the last calendar year delivered $11.6m revenues for $1.2m pre tax profits. It has assets of $7m, including cash of $3.1m. So on a cash free basis a PE of probably a shade below 7 is not excessive (although I would tend to assume that the cash is actually tied up in the working capital cycle.)

The market seems to like this, with the share price up c. 6% at the time of writing (and up more than 50% in the last month.)

However. I am perhaps more “liberal” in my interpretation of balance sheets than some, but this would be my big concerned with 600 (LON:SIXH).

For a number of years they were cash-flow negative and only seemed to be able to continue by selling off the family silver. They had been making encouraging noises for some time about the growth of their order book, but this never seemed to translate into a similar level of revenue growth.

Nevertheless 2018 was a better year and they even reintroduced a small dividend (effectively expressing confidence in their future cash-flows).

Their final sale of the family silver completed in May with the “sale” of the pension scheme bringing in a net $5.2m.

They obviously now spent slightly more than that (net) on this acquisition so I would see net debt at probably c. $18m

This would be potentially okay so long at the operating business can throw off enough cash to service this, but to me all looks very parlous particularly as other than working capital they now do not have any assets to speak of. My strong fear here is that there are only a bad years trading away from insolvency – the international nature of their business surely makes that a potential risk?

My nervousness here has clearly seen me miss out on the recent 50% share price appreciation, but I am seriously failing to understand the market’s enthusiasm.

Can anyone put me right on that?

Sharw,
You’re correct. 25% voted against 50% required.
Posting on my phone from Luton Airport early on a Monday morning clearly not good for my accuracy.
Memo to self - avoid making any trades till I’m back home!

Does anyone know why A J Bell classify Hipgnosis Songs Fund (LON:SONG) as a "complex financial instrument"?

Small Cap Value Report (Mon 24 Jun 2019) - PRV, CBOX, MYSL

7-8am comments

Porvair (LON:PRV)

Cake Box Holdings (LON:CBOX)

MySale (LON:MYSL)

Afternoon comments

Porvair (LON:PRV)

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Paul Scott

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