Small Cap Value Report (Mon 28 Nov 2022) - IHC, SDRY, CER, INHC, POLN

28th Nov '22 by Paul Scott

36 comments 7934 reads

Good morning from Paul & Graham!

Agenda

Paul's Section:

Superdry (LON:SDRY) - I ponder the S.Times article about its bank facilities, and the response from SDRY this morning. I'm worried about this, it is starting to look like a financially distressed situation, so I'm inclined to give it a wide berth until the necessary borrowing facilities have been secured. More detail below. EDIT: I'd forgotten about the long-running warnings in SDRY's Annual Reports, about its apparently chaotic accounting functions, and the auditors resignation. Maybe this has had a bearing on the apparent unwillingness of its banks to renew facilities? I covered the issues in detail here in Oct 2022.

Cerillion (LON:CER) - excellent results, as expected. I rummage through the figures, and see nothing of concern, just strong organic growth, lovely profits & cashflows. Shares aren't cheap, but this looks an exceptionally good company. Thumbs up from me.

Graham's Section:

Inspiration Healthcare (LON:IHC) (£41m) - this medical technology company has issued a severe profit warning. The current year’s profit forecast is reduced by 85%, and next year’s profit forecast is reduced by 45% (per the latest broker note). The timing of orders is blamed, and this in turn is blamed on economic uncertainty and on lockdowns in China. These are diplomatic ways of saying that demand for the company’s products is weaker than anticipated, but we have seen many other companies referring to recent difficulties in China. While I’m not in a position to say this with any certainty, I’m inclined to think that these shares are getting into value territory at a P/S ratio below 1x.

Induction Healthcare (LON:INHC) (£30m) - I take an initial look at another small healthcare company. This is a software business providing a range of products used by patients and healthcare professionals. It competes with the likes of Microsoft Teams but attempts to differentiate itself with a healthcare-focused product. While it lacks a financial track record worth mentioning, it does report £13.5m of ARR as of April 2022, which is interesting to me given the modest market cap. It’s not clear when this company might generate a profit but at least it is aiming for results that are close to breakeven (on an adjusted basis) in the short-term. Anchored by a good net cash position of £7m - £10m, I think it could be…

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Boon

28th Nov '22

A revenue upgrade today at Yu (LON:YU.) and pretty stunning results. This will go down as one of my biggest misses this year. I'd gone in with a decent sized holding (c4% of my Boon Fund) back in May, Aug this year at c200p.

I sold out in Sep at 175p as I fretted that government intervention in the business energy market, would put the brakes on customer acquisition. True enough, the government introduced a price cap, meaning that it makes no sense for customers to switch suppliers.

But what I hadn't realised was that Yu would go on to make outsized bumper profits from its existing customer base. Indeed, today's update doesn't mention a thing about new customer acquisition, which I am guessing has been muted.

I'll definitely be reflecting on this; as it was a mistake in my analysis. I've lost out on a near 100% SP increase (395p intraday today) in just half a year! One of the few doublers on the market in 2022. Singlehandedly, if I had held on to my Yu shares, my entire fund would be up 2% more this year. Definitely a costly decision.

However, if energy prices start to plummet back to "normal"... with only a 2%+ EBITDA margin... on the other hand, plummeting prices will stimulate the switching market, as businesses look to re-contract to fixed rates at cheaper rates than variable. Food for thought.

JohnDoe2378

Definitely a short for me!

Graham Neary

Good luck, sheeza! It's fun to expand the list of stocks we cover here from time to time :)

Michael C

I'm glad I'm not a REIT manager crossing my fingers that Superdry (LON:SDRY) pay the Christmas quarter day rent.

Tommy H

As an opinion of one on Induction Healthcare (LON:INHC)

My wife was severely underwhelmed with "Attend Anywhere" as a product for NHS "remote face-to-face" calls, no where near as good as Zoom or Teams using the free versions for home life.

Attend Anywhere did not even have basic functionality like "blur your background" so those working from home, you got to see the kitchen behind them, or kids watching TV, which did not impress staff trying to keep some sense of home life or privacy.

The support to the NHS Trust, or is that training of the Trust IT Support Staff was not amazing either so issues logged were just left in a blackhole of no response.

She has since changed service and using a different product so a lot happier.

Tommy

I do not hold

Wimbledonsprinter

I saw Neil Campbell of Inspiration Healthcare (LON:IHC) present at Mello this month. Given the company manufactures neonatal ventilators and incubators, competing against the likes of Draeger, I can only wish the company every success.

Unfortunately, from an investment point of view, I came away unexcited from the thinly attended presentation. Looking at the Stockopedia numbers, the ROCE has been declining since 2018. The recent investment in the Croydon facilities is an important decision. I was surprised that Campbell said that IHC has no publicly disclosed ROCE targets.

Zipmanpeter

Re Eenergy (LON:EAAS) - I think the basic idea is attractive (cheaper/greener energy without capital upfront) and appealing esp to sectors like education where they focus. I also think their claims to be at 'inflection' have some merit since the integrated eEnergy brand is going to be much simpler to sell; scale is improving and wider demand for energy services is growing as energy prices go up.

However, there are challenges - given such a strong idea, why are sales not accelerating more rapidly - especially on the physical product side, I suspect getting enough people to do the install work must be a permanent struggle. On the energy markets side, there are a lot of much bigger players making more liquid markets - Shell are sniffing round this market!

Finally, at time of small cap buying strikes, you only have to look how the share count has grown and how close they are to needing more cash to see the business is precarious. Another discounted to a low share price capital raise has to be a high risk here

I've 'liked them' all the way down from 24p to todays <5p/share. I still do but have yet to buy any.

yiannos1

A company (EEnergy group plc) that borrows on these kind of rates simply because no one will lend them on normal rates is going to be worthless at the end of the day.

Someone has a very strong conviction in LPA (LON:LPA) - a Peter Gyllenhammar, who has now amassed a 24% stake, from less than 3% last June 2021. His latest increase in holdings come after a Trading Update last week.

Over the years, I have seen Peter's name crop up in other companies I have tracked, mainly small cap. Some successful, some not so. Here's a snapshot of recent companies he's had to declare an interest in.

Anyone have information on who he is, or his track record? Google throws up few results!

(I hold LPA in the Boon Fund)

Simon Cannell

He’ s a Swedish investor who has had quite a long track record of investing in 'undervalued' small caps in the UK.

There is a chapter on him in Guy Thomas’s book ‘Free Capital’ which goes into his investment history https://www.amazon.co.uk/Free-Capital-private-investors-millions-dp-0857198823/dp/0857198823/

although I read that book about 10 years old I think so not sure how useful it is for more recent activity…

KevinS1

I admit to not having undertaken any analysis yet on Brickability (LON:BRCK) or any of the other brick manufacturers, but I am slightly wary of this sector at the moment.

Whilst they are doing fine currently, surely if we end up with a housing downturn next year then the house builders will require less raw materials and their sales could drop thereby hitting all of their other metrics.

I appreciate this still remains an "if" but 2 or 3 of the housebuilders have warned of reducing sales, more cancellations etc and with mortgage rates hitting 5-6% and no sign yet of coming down I don't see the urgency to get into these companies yet. Whilst I am not trying to "time" the market I am still wary of another downturn before things improves, hence I will keep a close eye on things but keep my powder dry at the moment.

A great time to research which of the house builders and/or brick manufacturers might make the best investment later.

Hi Boon - when did you put this into your fund - was just trying to see your rationale.

Paul Scott

I remember the name Peter Gyllenhammar for two reasons.

Firstly, because it's one of those names that somehow invokes drama, passion, multiple syllables, and a slight threat, because it sounds like hammer. That's before I've even googled it.

Secondly, because about 20 years ago, when I was doing shareholder action groups below net cash in the 2000-2002 bear market, he used to pop up with notifiable shareholdings in companies that were trading well below NTAV. Some of them worked, some of them didn't, so I concluded he didn't have any particular insights. He just liked buying NTAV at a big discount, sometimes at dying companies.

I'm sure he has much more money than me, so probably an interesting one to follow! :-D

Hi Neil,

Price to sales - why is this a good valuation measure? I question it.

CER makes fabulous profits & cashflow on each £ of sales. That's what matters, surely?

Whereas e.g. AO struggles to make any profit on all its sales.

I would chuck out Price to Sales as a bad measure, it's for bull markets only.

Regards, Paul.

Bloody hell, that is harsh! ;-)

Must admit, I did mystery shop SuperDry, hoping that its products would disguise my middle-aged beer gut. But actually, their products seemed to accentuate it, and charge about 4-5 times as much as Primark do (who welcome beer bodies with X to 6x X sizes).

On a more positive note, I've seen loads of younger people carrying/wearing SuperDry gear recently, so none of us lot have got any clue!

Bottom line for me with SDRY is this -

Awful stuff in Annual Reports about lack of control in accounts dept. Resignation of auditors. Latest thing, banks want out - so story fed to S.Times that about to conclude new deal.

Reckless founder/CEO.

It might be fine, but I'd steer well clear. Why take the risk?

Paul.

29th Nov '22

In Oct. And I am planning to do a combined Oct and Nov writeup, in the next week!

I invested as it is in a defensive space (public transport, long term investment cycles), huge backlog (disappointed earlier this year), decent balance sheet, and what I think is a hidden asset - their pension scheme. Which they have stated they want to sell. So there is the will to realise this asset soon.

Cons - niche. No visibility on revenues, dependent on train manufacturers. Lack of good or ambitious management to drive growth.

Interesting! So at least he's been in the game for a loooong time, almost three decades? If he hasn't lost his shirt by now... Presumably he has some investing acumen. Or just very deep pockets!

I remember reading about him in "Free Capital" as Simon says above.

Unfortunately I am away so haven't got access to my copy or I would have re-read the chapter.

To have appeared in here would likely mean he is a highly successful investor, but probably worth checking yourself. Like Paul, I do recollect him buying into numerous UK companies in the past, but cannot recall much else.

I will do some further research.

epo001

There is nothing sadder than a fashion stock which has gone out of fashion, we, the Stockopedia cohort have not the faintest clue how or why fashion stocks will succeed and should just stay well away.

WarrantStar

I would only use price to sales for a company that has yet to make any profits.

Small Cap Value Report (Mon 28 Nov 2022) - IHC, SDRY, CER, INHC, POLN

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Paul Scott

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