Small Cap Value Report (Mon 25 Nov 2019) - CER, IGP, D4T4, BRCK

25th Nov '19 by Paul Scott

34 comments 7955 reads

Good morning, it's Paul here. I hope you enjoyed the weekend. I'm possibly a little behind the curve here, but have this weekend enjoyed binge-watching The Crown - isn't it marvellous!

Also, I had to chuckle when my mobile went off at 12:30 am on Saturday morning, from a friend who happened to bump into a Stockopedia subscriber in what sounded like a busy bar or nightclub! They just wanted to say hello, and how much they like the SCVRs! So hello to DavidF and Davidj128 - who subscribed here 3 months ago - good man! They signed off by quipping that, seeing as it was me, with my reputation, they guessed I wouldn't mind them calling me past midnight to have a friendly chat. Absolutely correct!

Timings - I've got a call booked in with Cerillion (LON:CER) management just after 11 am, to discuss its results. These calls tend to take up quite a lot of time beforehand, to prepare (i.e. thinking up some intelligent-sounding questions, in order to avoid appearing clueless!), and afterwards, to digest and write about it.

I've mentioned here before that CER looks quite an interesting company. So when an adviser got in touch to see if I'd like to talk to management, I replied yes please. (it's not a share I currently hold, but is on my watchlist).

So that's likely to dominate most of my morning. After that, I'll try to cover everything else of interest in the trading updates/ results statements from small caps within my remit.

Therefore, we're probably looking at an all-day job, with completion estimated at 5pm.

Update at 17:33 - today's article is now finished.

My initial sweep of the RNS has thrown up these items which I'll tackle today;

Cerillion (LON:CER) - final results, FY 09/2019

Intercede (LON:IGP) (in which I hold a long position) - interim results, 6m to 30 Sep 2019

D4T4 - interim results, 6m to 30 Sep 2019

BRCK - interim results, 6m to 30 Sep 2019. This is a recent IPO.

Cerillion (LON:CER)

Share price: 192p (up 3% today, at 09:31)
No. shares: 29.5m
Market cap: £56.6m

Final results

Cerillion plc, the billing, charging and…

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shipoffrogs

25th Nov '19

"if you want to be cynical then all of the revenue and cash growth can be accounted for in movements in working capital".

That would be very cynical - movements in working capital shouldn't have any revenue impact.

davidjhill

To be fair to management they guide on an annual basis and have a strong track record of hitting the expectations they set. If they "missed" or had a poor track record then I could understand the market scepticism (Cloudcall spring to mind), but so far they've been consistent. Why should we judge a company on an arbitrary set of quarter or semi-annual if the business isn't set up that way! The core problem is that some companies use "weighting" disingenuously which then tars everything with the same brush. Commentators then push towards a "regular revenue" saas model as being the holy grail but woe betide you if you actually move to effect that model.

Against peer group they are cheap. You could argue the peer group is expensive of course, in which case they may be fair value. I can see them growing at a CAGR of 15% p/a for the next 3+ years so for me undervalued, but we shall see. I'm happy to hold unless the narrative changes.

fred9566

I am as confused as everyone with regard to D4t4 Solutions (LON:D4T4) - you could read these interims and go either way depending on wheter you are glass half full or empty.Would appreciate your views

grumpy5

Paul,
You might want to have a look at MTI Wireless Edge (LON:MWE) which had Q3 results this morning. They made a V interesting presentation at Mello (which I don't think you attended. But today's numbers look rather strong.

mojomogoz

True...so I corrected it...the dangers of quick thinking and writing is the blurring of points...

But the points re Cerillion (LON:CER) overall hold?...or have you got a counter? I do not know the company. I started looking earlier in the year and the financials put me off diving into the operations. Feels like a company stretching to look better than it is with a shakier revenue/growth path that is implied in the price

simoan

Yes, but I work in a business with lumpy revenues and so know how very difficult it is to estimate if/when a sales pipeline will turn into revenue. It's good that they have a track record of getting it right, but eventually they will get it wrong. What today's RNS really highlights is the operational gearing in this business. If things go wrong it will not be profitable, and particularly in light of the change of business model, the risk of that is being heightened during the transition to SaaS. None of us have to hold a share working on this basis, other companies with higher quality (i.e. more predictable) revenue streams are available...

As I said before, it's very easy to see why the rating is low.

All the best, Si

Andrew L

Cake Box (CBOX) might be interesting to look at. Interim results and CFO just bought £150,000 worth of shares. 100,000 shares at £1.50. I haven't looked at the results closely yet.

DavidJ128

Hi Paul, thanks for the shout out and being a good sport when Dave and I pestered you Saturday night / Sunday morning. Really enjoying the small cap blog as I start to find ny feet as a beginner. Keep up the good work!

Friday / Saturday morning even. It is a bit of a hazy memory ;)

smegster

Is a low rating for a company a good or a bad thing, it depends if you're a buyer or a seller.

As I'm a buyer, I'm quite happy that D4t4 Solutions (LON:D4T4) has a low rating (happy enough that I topped up a little bit this morning). I understand that people would prefer steady revenues and earnings. For me, as the share price will eventually reflect the discounted future cashflows, I don't mind if these cashflows jump up and down, so long as the general (longterm) trend is for them to grow.

Sonia Danthy

testing..

As I'm a buyer, I'm quite happy that D4t4 Solutions (LON:D4T4) has a low rating (happy enough that I topped up a little bit this morning). I understand that people would prefer steady revenues and earnings. For me, as the share price will eventually reflect the discounted future cashflows, I don't mind if these cashflows jump up and down, so long as the general (longterm) trend is for them to grow.

The trouble is the market does not view things this way. Particularly with small caps we know how short-sighted it can be. And the free cashflow generation of the company is nothing to write home about. Although it goes from positive to negative like a yo-yo, if you take a 5 year average it is on a FCF yield of approx. 4% - not what I would call cheap.

ed_miller

Re £D4T4 could it be that management see no icebergs because they are holding their telescope to their glass eye?

(Disclosure: I have a small shareholding.)

Brookeda

I have been an happy holder of £mwe over the last 2 years and have seen it appreciate very pleasantly this year. It has three separate businesses which are all growing and have a lot more room to grow in my opinion. Whilst not an expert on their technology my understanding is a lot of it is leading edge and so it wouldn't suprise me at some point to see a bid come in at a considerable premium to its current price.

Personally I hope though it doesn't and it continues to grow.

Paul Scott

Hi Andrew,

Re Cake Box Holdings (LON:CBOX) - that's certainly a conviction buy, an FD buying £150k worth of shares. Although judging by his total holding of 3.67m shares, he's an unusually wealthy small cap FD!

I'm having a quick look at the interims from CBOX today, and don't see anything very interesting - adjusted profit being down 12%

I recall that, earlier this year, I dug quite deep into this company's accounts (unfortunately it's not coming up on the search here), and came to the conclusion that a lot of the profit was probably coming from selling franchises, rather than from actual trading. Since the company doesn't disclose the split, then it's very difficult/impossible to value.

Members here were also sceptical - with some pointing out that there are lots of egg-free cake shops around, in areas where there is demand for that. Falling footfall is another issue - how credible is it that any retailer can prosper long-term, when so many High Streets are struggling with declining footfall?

For those reasons, I'm not keen on Cake Box.

Regards, paul.

Hi grumpy5,

Sorry I didn't get round to looking at £MWE

Skimming through its results today, the figures do indeed look pretty good, and with an upbeat commentary too.

I try to avoid overseas small caps, listed in the UK, as so often there's something wrong with them. Although in this case, MWE has been around for a long time, and it pays decent dividends, which are both good signs.

Could be worth a closer look maybe?

Regards, Paul.

Thanks Paul,

Good point on selling franchises. I read your previous piece and that did raise some question marks.

The IPO prospectus has the split for where the revenue in the business comes from in the year to March 2018. See P15:

https://investors.eggfreecake.co.uk/wp-content/uploads/2018/06/Cake-Box-Holdings-plc-Admission-Document.pdf

But it doesn't split it for the profit I don't think. For what it is worth the importance of selling franchises will decline over time as overall revenue increases. They aim to open 24 stores a year with a target of 250 versus 122 at the end of September 2019.

I was sceptical about their proposition but the store near me seems good. Very strong like-for-like sales growth over the last 3 and a half years.

The proposition is distinguished I think through the rapid cake personalisation and online ordering. Also the cakes are attractively priced. I have had one and it was nice.

Patisserie Valerie going bust may have helped reduce the competition. But I agree it is a niche consumer offering and so how it will do over the long term is hard to say.

I think the high street decline isn't really an issue as they are a destination store. They are also considering opening sites next to transportation hubs/stations .

One to watch anyway.

Thanks, Andrew

BTW my mistake the Finance Director bought £225,000 worth of shares - 150,000 bought at £1.50.

26th Nov '19

Thanks Andrew,
Interesting follow-on points from you.
Regards, Paul.

john652

Hi thanks Paul and everyone who commented on £D4T4

D4t4

I am non the wiser really as the arguments here reflect my internal thoughts. If they miss H2 they will be hammered but a growing business in data management with a load of cash, it’s not expensive. As there are some interested parties holding, or thinking of buying, or selling (sounds suspiciously like a market :) - here is my response from the CEO a couple of months ago.

Q&A's
What are the options to make Celebrus a PAAS service where recurring revenues become a bigger part rather than the lumpy license fees. If Celebrus is to become PAAS type platform could you please comment on the roadmap ?

We supply our software in any form that the customer requires. Many of our customers are large financial services companies who will use our software on premise for many years and as a result want to purchase perpetual licences that they will depreciate as a capital purchase over a 4 or 5 year period. As a result we are currently weighted to perpetual, however if you look in the last full year’s results page 6 you will see reference to a number of multi-year annual recognisable contracts closed in H2 last year. This will hopefully provide us with more of a balance between recurring and perpetual licence revenue in the future.

Are there any KPI’s on the number of customers you have for Celebrus & what like for like up-lift there has been over previous periods?
Read the previous reports and presentations on the investor section of our web site and you will see the uplift for Celebrus clearly shown on page 2 of (2018/19) full year presentation shows 43% growth in Celebrus revenues

You do not seem to split out recurring revenue from software maintenance. Could you please provide the % split and explain what the recurring is for?

We split out support and maintenance as can be seen on page 11 of the (2018/19) full year presentation

Could you please provide the split of revenue received from direct sales compared to partner produced revenue?

We do not provide this number but you can see from our annual report page 76 the revenues from our two largest customers (customers over 10% of revenue) which are both partners and therefore indirect sales. This gives a good indication of the split…

Are you looking to keep the chief data officer role now Matthew Tod has resigned?

As reported in the announcement we have re-allocated the function internally to our expanded team and will not be replacing the role

Could you please comment on the large director share sales recently, I would have thought purchases rather than sales given the confident outlook & relatively low financial ratios D$T$ are on?

The sales by directors were for various reasons, One is one of our non execs reducing his holding prior to his eventual retirement, another was reducing his risk of investment in one stock as the price increased, another was selling some stock for personal reasons, the rest were to pay for the options exercised. All stock went to institutions as there was sufficient demand.

Our main interest really is where are D4T4 on the journey to PAAS/SAAS and if possible given the nature of the software and its use.

We will continue to supply our software and our data platforms in any way the customer requires them in either on premise, paas or saas versions. If we restrict the customers to paas or saas we limit the use of our products considerably.

The market is driving towards “as a service” and we are experiencing a gradual shift. We will not pressure the rate of shift to our present and future customers at this time.

Jeremy Rea

Hi Paul,

I think the write you are talking about was the 14th of October. Link below.

https://www.stockopedia.com/content/small-cap-value-report-mon-14-oct-2019-cbox-sys1-rno-ygen-spa-520881/

Not sure why it is not showing up in searches, one for Ed and the team.

Small Cap Value Report (Mon 25 Nov 2019) - CER, IGP, D4T4, BRCK

Cerillion (LON:CER)

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Paul Scott

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