Small Cap Value Report (Mon 24 Oct 2022) - BVXP, CER, FCRM, D4T4, AFRN

24th Oct '22 by Paul Scott

39 comments 7600 reads

Good morning from Paul & Graham! Today's report is now finished.

Weekend podcast - went up on Saturday, as usual. Here is the direct link. I thought it might be helpful to subscribers if I also type up the podcast, so there's a separate podcast summary post here on Stockopedia. Lots of bargains are cropping up, but the stability of the financial system worries me a lot. If people find a written summary of the week helpful, I'll keep doing them, even though it takes a chunk out of my weekend!

Mello - tonight at 5pm

This looks a particularly interesting (online) show, with all 3 companies presenting having cropped up on my radar :
Warpaint London (LON:W7L)
Quixant (LON:QXT)
Galliford Try Holdings (LON:GFRD)

Agenda

Paul's Section:

Cerillion (LON:CER) - another positive update from this software company. Its track record is absolutely superb. No issues with the previous accounts - balance sheet & cashflow are strong. It's a bit stingy with the divis, which is helping grow the cash pile, up to £20m now. Shares are expensive on a PER basis, but I can see why, given the outstanding performance since 2020. Thumbs up from me. I'll be interviewing the CEO next week, we're just setting that up.

Fulcrum Utility Services (LON:FCRM) (I hold) [no section below] - profit warning, shares down 26% to 4.4p. A series of problems mean it’s now guiding an adj EBITDA loss of £3m, in each of H1 and H2. It’s taking longer than expected to resolve onerous contracts. “Unprecedented cost increases”. Net cash down to £4.8m at end Sept. “In discussions with its substantial shareholders to ensure that the Group remains adequately funded” - this last sentence is the killer for me, so I’ve decided to sell my small position here, and take a c.30% loss on the chin. I don’t like holding shares that need to raise more cash - the risk of small shareholders being heavily diluted in another fundraising is too high for me. I’ll keep an eye on it though in future. It’s a turnaround situation, that is not going so well, so far. [no section below].

Aferian (LON:AFRN) down 38% on a profit warning, caused by customers de-stocking (an issue that I've been flagging in my podcasts lately). Guidance…

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Paul Scott

24th Oct '22

Smashing, thanks Bert, much appreciated! :-)

TheFloatingInvestor

SDI (LON:SDI) another acquisition today, this time of Fraser Anti-Static Techniques and the largest to date, and is expected to be immediately EPS enhancing. Frasers appears to be well run company in its own right and opens up further export possibilities for SDI as Frasers has sales offices in Germany and China.

SP looks to be rerating and can see £2.00 being feasible even with the current depressed market state (Broker TP 275).

Its not a cheap company and the spread can be a bit of a pain, but management continue to delivering solid results year on year and I remain a happy holder of this one. Both revenue and profit forecasts 23/24 look like a significant jump if met.

Paul

HPSAUCE

I know it goes the whole point of these articles but is anyone else looking at the metrics across the indexes and finding them hard to beat given the downside protection afforded by the sheer numbers of companies held within them? e.g. the FTSE 250 above. Yes, earnings are reducing next year but corporation tax is more than likely to be increasing next year* (*this may change next week & then change back the week after though :D). I think I'd be content with that income and the (distant prospect) of an attempt at the ath last year (c.39% above where it is now).

simoan

I guess the reason indices like the FTSE250 are not discussed here is because any metrics for them are meaningless and can only involve high level hand waving type analysis, instead of the low level detailed analysis this forum is best at. Who on earth would invest based on the median value of an index? Only an investor who is very wet behind the ears.

The FTSE250 in particular is a stupid index. Have you looked at the constituents? It is a market weighted index of which 40% are financials and 9% is REITs. Of the financials about 30% are Investment Trusts, so nearly 40% of the index is made up of investment companies for whom the measure of EPS (and hence P/E ratio and EPS growth) is meaningless and never used for valuations purposes.

Thats withering the say the least. :D I actually hunted about for mean ratios but couldn't seem to find them on stocko (though I do recall seeing an ability to toggle between them some years ago when a friend first showed me the platform.) I vaguely recall the median wasn't a million miles away from the mean but yes I take your point.

Relating to the constituents that's quite interesting actually & destabilises my rationale quite considerably. When your currency is floundering, your money is held in a s&s isa and you want to be slightly more risk adverse it is natural to look towards the local index. The FTSE 100 hasn't felt much pain this year so in simple terms I liked the look of the FTSE 250 for an ability to rise & provide an income over the next 5 years say.

JCPr

Billing system vendor has a weak moat? Do you know how long it typically takes to replace a telecoms billing system? Or the chances of a successful replacement? There are many problems, so very hard to put into a few paragraphs, but basically companies tend to build their business processes around their billing system, so when you go to change it the billing system has to be very configurable (they always fall far short of what are usual wildly unrealistic expectations) and easily customisable (costs a fortune - way more than any number anyone first thought of) or the business has to completely change their processes and make sure everyone adopts them (never happens). So anyone who has a product that is just a bit easier to get working and a bit more flexible than the competitors and produces a delivery that is better than more or less OK has a competitive advantage

Poundlife

£SOIL may be what you are looking for, a Wisdom Tree ETF to Short Oil

carmensfella

*MELLO LONDON PRIZE DRAW*

Purchase a ticket for tonight's MelloMonday and you will be entered into a draw to win a FREE ticket to MelloLondon! TWO lucky winners will be drawn LIVE during the MelloBASH this evening! Don’t miss out! Use code TwitMM50 for half price tickets

https://melloevents.com/mellom...

Programme for tonight...
5.00 pm Mello Bliss update
5.10 pm Presentation by Galliford Try
5.50 pm Alan Charlton & David Stredder on ‘Irrational Markets Create Bargains!’
6.10 pm Warpaint
6.50 pm Delta Application Services
7.05 pm Quixant
7.45 pm Karin Shulte
8.00 pm Mello BASH

Albm7

Superdry (LON:SDRY) (I hold) for anyone that cares their Auditor (Deloitte) has resigned - The reasons are as follows:

" The reasons for our ceasing to hold office relate to deficiencies in internal financial controls which are set out in our Independent Auditor’s Report in the Annual Report and Accounts for the 53 weeks ended 30 April 2022. In summary, the Group’s control environment requires significant improvement, particularly related to management review controls, balance sheet reconciliations and transactional processing controls (particularly in accounts payable and inventory). In addition, general IT control deficiencies relating to access and change management controls also need to be addressed."

Doesn't sound great...

If it is any help, the TTM dividend yield you displayed must be wrong. You shouldn't take these things at face value and need to know how it is calculated. A better indication would be to look at the TTM total distributions of the iShares FTSE 250 ETF (MIDD) which equates to something more like 2.9% using the latest NAV.

Cricketfan

Supreme (LON:SUP)

There is a useful note from Equity Dev which refers to the recent slowdown in the lighting division as apparently only a temporary hiatus. If that proves to be the case then that makes Supreme of interest to me once more. ED are hosting a zoom featuring the interims on 29th Nov.

In passing, I cannot help but notice the number of new hole-in-the-wall shops springing up in this part of outer West London selling all sorts of vapes (I don’t indulge!).

Mark

Thanks. It is as a median average of all yields as collated by stockopedia in the FTSE 250 I assumed it was as good as any measure out there as you can go through the list it is calculated from line by line. Whenever I've explored dividend yields for individual companies on Stockopedia it has been accurate.

Well I don't think the median value for the index as shown is accurate. I think it's just very misleading and how it is calculated totally opaque. All that matters is the TTM dividend yield of the ETF you are going to buy to gain exposure to the FTSE250. That will vary somewhat as the index changes but if you buy the iShares ETF today the TTM yield is 2.9% based on the current NAV. Given that only about 150 members are operating companies and the rest Investment Trusts, Infrastructure funds and REITs, I personally don't see the point. Best to buy the individual constituents yourself because there are some good companies in the index

Actually, scrap the above... having looked at the iShares fund it is an optimised fund and does not hold all shares in the weighting of the index. So the Vanguard fund (VMID) looks a better representation. Currently yield for the Vanguard fund is 3.48%.

Quilleron

Trackwise Designs (LON:TWD) 's large EV customer is Arrival who announced recently a move of some production to the US (they have developed micro-factories which they claim will allow them to set up shop close to where the demand is for the vehicles) . The possibly now greater opportunity lies in producing the wiring harnesses that will allow the massive array of battery cells in a large battery to be monitored and controlled. A painful holding so far but their unlimited length technology does seem so far to be unique and have taken many years to develop.

The Boon Fund

£SOIL and £SBRT almost fit the bill... Except they are both still in USD and thus incur fx conversion (iny situation) for buy and sell as well as the GBPUSD risk.

It looks like there is a gap in the market!

iwright7

Cerillion (LON:CER) is very high quality, but is expensive so they could suffer a correction. However, the Oct H2 update is very strong and showing material operational gearing. Gervais Williams said in Nov 20 podcast that CER has new contracts and significantly that its, “Customers love it”. Cerillion’s offices are located in London, India and more recently in Bulgaria, so it has cheap overseas talent. – The big question in my mind is: What exactly do their customer love and what is their Moat?

Roger Baron

Hi Paul I believe that Trackwise Designs (LON:TWD) technology is still unique. "In 2010, it developed the globally unique capability of producing multi layer, flexible printed circuit boards of any length. This process is called Improved Harness Technology™ (IHT). " As I understand it, no one else can produce length unlimited circuit boards like this. The cost saving for the airline industry if they would put this in new aircraft is huge - lighter planes means less fuel which means greener. Whether they go bump and somebody else other than current shareholders make the big bucks is yet to be seen of course.

mojomogoz

Thanks...I think my original comment showed I didn't have a good handle on Cerillion (LON:CER) rather than I was claiming it to be a wrong un!

That said...beyond your offended incredulity at my dumbness (no doubt you are a holder) you didn't really answer my question: "Out of curiosity can someone summarise why the various profitability measures on here for it have really exploded up in the last few years?"

Also, obvs I don't know how long it takes to replace a telecom billing system! Maybe it takes a long time as telecos are riddled with old, sh1tty, cobbled together tech...like the tech in the back office at financials (an area I am much more familiar with)...very hard to replace, essential, needs to be foolproof and a graveyard for service providers if they try to provide anything holistic and integrated rather than periphary and not in need of much integration...

Is Cerillion a good buy today? Why?

Stupid . adjective - having or showing a great lack of intelligence or common sense.

Yes I suppose the FTSE250 could be defined as being as stupid, same as a brick wall is thick!

25th Oct '22

Apologies for the late reply. I'm not actually a holder of £CER. I try to avoid investing in anything too close to my day job - partly avoiding having too many eggs in one basket and partly avoiding potential conflicts of interest. I occasionally miss good opportunities like £CER.

And apologies for the incredulity which was pehaps a wee bit overdone. Still, unwanted legacy billing systems do persist far longer than any beseiged medieval castle with a good moat would. The money is made by changes and customisations over the lifetime of the system rather than the original contract, so once a sale is made there really is a good moat. It normally takes several years to replace one and can typically cost the operator in the order of £100million. I know of one that has taken 20 years. I know of another that didn't issue a bill to their customers for 12 months (it was OK they were state owned). The last figure I heard was that about 60% of replacement projects fail. A very plausible figure from my own observations.

Some incumbents are just old cobbled together systems from the early days but most are just older products that have been heavily customised. There's a thing called the Christmas Tree model which means people get stuck on old versions. Imagine a company that had spent £50m customising Windows XP to suit their business. They would not want to upgrade to Windows 10 or 11. So they keep going until it just becomes too painful to stay on the old stuff. It's silly to do this when we think of Windows but it is pretty much impossible to avoid for telecoms billing systems.

So what I'm saying is that if Cerillion (LON:CER) make a sale and successfully complete the migration to their product they will be the incumbent for many years to come and will get the revenue stream from that.

There's always a product or two that gets a reputation as being easier and simpler and better than their competition so they become favoured. Cerillion seem to have hit a sweet spot.

How long that will last is another question. I'm not working with the product at the moment so don't know. But they will not fade away quickly. They are expensive and I don't feel a strong temptation to jump in now myself - but as I mentioned there are other factors there

And yes, I didn't answer your question on the figures. I'm not a holder so haven't put in the right amount of work. Hopefully someone else can answer that.

PS The main reason the replacements take so long is that the telecoms company has built it processes around the old system and with the best will in the world attempts to change the processes to match the new system meet immense resistance. so many more customisations than are expected turn out to be unavoidable. The idea of installing a billing system out-of-the-box and re-building the processes around it is a fallacy only believed by CEOs.

Small Cap Value Report (Mon 24 Oct 2022) - BVXP, CER, FCRM, D4T4, AFRN

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Paul Scott

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