Small Cap Value Report (Mon 25 March 2019) - AEO, SAL, SPSY, MGP, BRY, LDSG

In reply to post #461468

Would like to second request for a look at iEnergizer (LON:IBPO). Interesting track record, apparent value.

In reply to post #461473

Hi frederiktug - a slight beat for Medica (LON:MGP) ? I have stocko forecast consensus eps normalised as 7.49?

Also Medica (LON:MGP) please Graham, the numbers look good and reading this they seem to be recruiting radiologists abroad to support nhs before rolling out the service in those countries where they have radiologists, so a ready made resource pool. That works then good growth possible. This also looks a good company for someone to come and buy, profitable, no debt, growing, structural growth as medical services world over need to become more efficient & unique IP, damn it I’m going to top up !

In reply to post #461488

Looks like Microgen (LON:MCGN) are not really seeing any material growth (despite previous acquisitions) in the business proposed for the demerger, so that  as an AIM demerger doesn't feel that exciting for the market (I am sure advisors are excited by the potential fees), but it could unshackle the Aptitude business to enable it have a sharper growth orientated profile.

Still a pretty cash generative business.

Re Spaceandpeople (LON:SAL) and Aeorema Communications (LON:AEO), the only way that I can see these and other similar very small market cap companies surviving is to amalgamate them into one larger company sharing cost of listing, administration and logistics etc. The problem with this of course is that while it is investor friendly, many board members will lose their livelyhoods so very unlikely to happen.

Hi Graham,

Would be great if you can find the time to cover Medica (LON:MGP) - I hold - no changes anticipated.

I am surprised, would have expected more of a negative reaction to the share price, and perhaps I am missing something, but I did not read the results as positively.

Revenue increase double digit, which would indicate a slowdown from earlier 15% (which I would expect stated as mid to high teens).
Revenue / unit is coming down - some of the margin impact of this is offset by growth in higher cost service
Margin guidance is negative and was not mentioned in the trading update - which is why I was expecting a drop in the price.
EBITDA is meaningless given CAPEX
Cash flow generation and returns are great, but given the margin and revenue changes I note above, the quality scores will come down.

@ John652
Personally, I see this very much as a UK story for the time being.
If they have a product that can be rolled out to multiple jurisdictions and indeed source cheaper radioligists internationally, who are not working unsociable hours, that would certainly leave a pretty big revenue runway for limited capital investment and could facilitate margin expansion.

This is not a high growth business, which is what it came to market as, but has the potential to be a nice compounder if held for the long term.
I am concerned about pricing pressure / competition, and I think the valuation relative to high quality compounders confirms such doubts.

I had a look at iEnergizer (LON:IBPO) mentioned above but, despite the stockrank of 98, the problem is poor liquidity as shown by those horizontal sections on the graph.

The present quote is 120-150 !

The reason is the amount with major holders:
EICR (Cyprus) Limited 157,196,152                      82.68%
AXA Investment Managers U.K 10,350,000          5.44%
Capital Research Global Investors 7,650,500       4.02%
NFU Mutual Investment Services Ltd 6,821,304  3.59%

I'll pass on this one.

Spectra Systems (LON:SPSY)

Thank you for your analysis Graham.

Personally I would like to see banknotes remain as a pillar of the financial system & I pay by cash wherever practical.
However the reality is contactless payments are taking over at a rapid pace. Development of contactless transactions & trends such as the dreadful "Card Only" tills are obvious within the UK.
In Emerging Markets, such as Thailand, this trend is a few years behind, but the machines for contactless payment are widespread and I'm starting to see people pay with cards or their phones. The banks are investing in various financial technologies and closing branches, just like here.

Banks like to get rid of cash to reduce costs.   Governments like to get rid of it to improve traceability of transactions.  

People seem to like the convenience of cashless, even if there are negative consequences eventually.  For example, once cash is dead, imposing negative interest rates is a possibility.

So the banknote component of their business is something that I would value as a declining business. The forward PE of 18.5 is something I would expect to see on a growth business, or a durable franchise with a moat.

The application of their technologies to prevent counterfeit goods is possible more interesting, but I cannot find sufficient information to evaluate this.

I mentioned DDDD last week and the rather strange director buying (they already hold a large amount of stock).

The share price has gone up every day since (I bought on the director buying RNS).

I always think that director buying in a "quiet" stock should be considered carefully. This post on a BB by a poster is worth a read I think!

"Directors have insider knowledge at all times.

From the skeletons in the cupboard, to the progress in the lab, to the prospects far into the future, directors have a picture no one else can expect to see. And when they start buying, look out for random purchase patterns – where the directors are buying lumps of shares in an attempt to make a material profit in the near term from a substantive rise in the company’s share price.

Simply put, the stock purchases should look contrived; that is, it should look like they’re scrapping together cash on the basis they just can’t resist it. This is the narrative you are looking for – old fashion avarice".

Non-Standard Finance (LON:NSF) and Provident Financial (LON:PFG) continue to trade blows in respect of much smaller NSF's proposed nil premium reverse takeover of PFG. NSF response to the latest PFG circular today is detailed and hardhitting. Since this is a nil premium, hostile takeover and basically says NSF will sack the current PFG board and implement a big strategy shake up to restore PFG's fortune you can expect some pretty tough messaging!

But they are certainly going for the PFG CEO, Malcolm le May personally and even shelling some recent Board appointments to be who are ex Wonga and Cattles.

https://www.nonstandardfinance.com/~/media/files/n/non-standard-finance-v3/documents/disclaimer-documents/publication-of-providents-financial-board-circular-25-march-2019.pdf

All very entertaining. But more importantly to mind, NSF's arguments are strong (and yes, its opportunistic!).
Just hope they land it without too much cost incurred for advisers.

I also think NSF will benefit from recent notice of an FCA review into guarantor lending since it has had less recourse to guarantors than Amigo, less impairment and can point to its focus on direct contact through its physical branch network if required. (In contrast, Amigo is down 30% in last month - it has 88% market share but had a spotty record in dealing with its customers when private ie before last year's IPO (at 275p, now 169p !!) Another smart sell down by a founder at an IPO).

A very happy and optimistic long term holder of NSF despite recent share price weakness.

In reply to post #461408

I'd say rather the opposite - he's battening down the hatches, seeing what happens in the future, not expecting anything to happen other than stick their heads down and wait.

I have not looked at Medica (LON:MGP) before. My concern would be political risk - NHS outsourcing.

In reply to post #461563

RE: Spectra Systems (LON:SPSY)

Although banknotes are unlikely to disappear entirely what we've seen in Sweden and China is likely to repeated globally. It's not just contactless payments - although they are a factor - but mainly mobile payments (and I don't just mean things like ApplePay, that are just payment cards in a less easy to use form factor).

In Sweden the volume of notes in circulation dropped by 40% between 2012 and 2017. You can pretty much avoid using cash anywhere in Scandinavia now, and there are an increasing number of outlets that don't accept cash. There's a big debate going on about whether to regulate to force shops and banks to accept banknotes. Meanwhile in China over 90% of citizens in cities are using mobile payment methods: 30 year olds carry, on average, 25% of the cash that 60 years olds do.

The trend is clear, banknotes are in decline. However, one effect of introducing more secure cashless payment methods is that crime is likely to switch to easier targets - so counterfeiting cash is a boom industry. Hence the need for better security methods to make it harder to fake notes.

So, a declining industry but likely to be quite lucrative while it still exists. Personally I'd rather invest in growth sectors, but I don't think the reduction in banknote volume automatically feeds through to the bottom line here.  Overall, though, I think this is in the too hard to analyse bracket.

timarr

In reply to post #461603

Absolutely.
Whilst their report says no customer accounts for more than 10% of revenue, since they operate in the UK I would guess over 90% is ultimately NHS care.
Which does leave political risk.
The obvious direction this could take is having computer software assess the evidence and make the diagnosis. In some areas of medicine, this is proven to be more reliable than doctors.

In reply to post #461618

Assuming this is Medica (LON:MGP) :

No customer accounts for more than 10% - I expect this is because their customer is an individual NHS Trust, not the NHS at large - but the point you make is valid.

NHS outsourcing, I would suggest is a positive - lot cheaper paying for one X-Ray to be read remotely if your in house radiologist is sick than to hire a locum radiologist.
Pressure on NHS budgets (and therefore willingness and ability to pay) given they are your only customer (indirect as it maybe), on the other hand ...
This is perhaps manifesting itself in Revenue / body part, unless they offer some sort of volume discount to customers.

In reply to post #461618

Re: Medica
You are right jonesj, DeepMinds Technologies, which is a UK company owned by Alphabet, is working on software to automate a range of different types of scans used in medicine and has obtained promising initial results.

Re Medica a medium term risk might well be AI. Research indicates AI software is very accurate:

https://www.radiologybusiness.com/topics/artificial-intelligence/ai-breast-masses-found-ultrasound-radiologists

EDIT: this seems to be addressed in other comments but I’ve left the link for info.

In reply to post #461628

The NHS could possibly clone the idea internally (a national pool of remote radiologists serving local trusts) without the 50% gross margin...

MGP I understand they have difficulty in obtaining enough skilled staff; also software is now available to initially scan the MRI results & then flag queries to a human,This could become another Robot story.. there are however a great number of MRI machines now and due to expense try to use them 24 hrs /day, that produces a lot of scans but i know a surgeon who can check hundreds a day. The success will ultimately be based on what they can charge.

There's a great write-up of Medica (LON:MGP) posted by a fellow Stockopedia contributor here https://www.stockopedia.com/content/medica-group-time-to-take-a-second-look-450998/ for anyone interested