Small Cap Value Report (Mon 29 Jan 2018) - STHR, UTW, CVR, FISH, SPE, CLLN, ANP, YU., ITM

Monday, Jan 29 2018 by
91

Good morning! 

Thank you for suggestions, which I will prioritise for coverage.

There are a lot of updates today, so I may need to be selective.

Regards,

Graham



SThree (LON:STHR)

  • Share price: 368p (-1%)
  • No. of shares: 132 million
  • Market cap: £485 million

Final Results for the Year ended 30 November 2018

Mentioning this international STEM recruiter only briefly, for two reasons.

1) It doesn't get requested very much, and 2) its market cap is now pushing the limits of what we tend to cover here, after a strong share price performance over the past year.

I covered SThree a few times last year, and my overall stance on it hasn't changed. I think it's a very well-run international business with attractive geographical diversification and an excellent track record of profitable performance.

Today's results show further progress in the strategy to limit Permanent hiring activities, while expanding the more reliable Contract-based activities.

It's more and more international, as 81% of gross profits are now derived from outside the UK.

Some people might be reluctant to invest in this sector due to low margins and its hyper-competitive nature, and I can understand that position. But for an investor who does want to get involved in recruitment, I think this should be one of the first stocks they look at.

The algorithms are impressed too, giving it a StockRank of 97.

5a6ef7b080537STHR_20180129.PNG



Utilitywise (LON:UTW)

  • Share price: 41p (suspended)
  • No. of shares: 78.5 million
  • Market cap: £32 million

Temporary suspension of share trading

I haven't studied this utilities consultant in any detail before, as my modus operandi is to find things that I might like to buy shares in, and there were more than enough red flags to keep me away from this.

On Jan 17th, Paul highlighted (actually he put it in bold) the risk of the company failing to get its July 2017 accounts published in time to avoid suspension. It was an important warning for anyone holding these shares, as that is indeed what has happened.

Prior to suspension, Utilitywise was trading on an official PE ratio of 5x, but it was no bargain. The algorithms on this website had correctly, I think, identified it as a Value Trap.

The big accounting problem…

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Disclaimer:  

All my own views. I am not regulated by the FSA. No advice.

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SThree plc is an international staffing company, which provides specialist recruitment services in the science, technology, engineering and mathematics (STEM) industries. The Company provides permanent and contract staff to sectors, including information and communication technology (ICT), banking and finance, life sciences, engineering and energy. The Company's segments include the United Kingdom & Ireland (UK&I), Continental Europe, the USA, and Asia Pacific & Middle East (APAC & ME). The Company's recruitment brands include Computer Futures, Progressive Recruitment, Huxley and Real Staffing. The Company's other brands include Global Enterprise Partners, Hyden, JP Gray, Madison Black, Newington International and Orgtel. The Company delivers contract, permanent, projects, retained and executive search recruitment solutions. Its support and mobility services offer contracting, relocation and relevant visa support. It provides resources to support its brands with contractor services. more »

LSE Price
350p
Change
-0.9%
Mkt Cap (£m)
459.3
P/E (fwd)
12.5
Yield (fwd)
4.0

Utilitywise plc is a United Kingdom-based business energy and water consultancy. The principal activity of the Company is of an intermediary for energy supplies to the commercial market. Its operating segments include Enterprise and Corporate. The Enterprise segment is engaged in energy procurement by negotiating rates with energy suppliers for small and medium-sized business customers throughout the United Kingdom, the Republic of Ireland and certain European markets. The Corporate segment is engaged in energy procurement of larger industrial and commercial customers, often providing an account care service and offering a range of utility management products and services designed to help customers manage their energy consumption. It provides energy management services, including procurement, energy reduction and audit, carbon offsetting, smart metering, water brokerage, design, manufacture and supply of timers, controllers and building management systems, and the Internet of Things. more »

LSE Price
41p
Change
 
Mkt Cap (£m)
32.2
P/E (fwd)
6.3
Yield (fwd)
3.4

Conviviality Plc is a wholesaler and distributor of alcohol and impulse products serving consumers through its franchised retail outlets or through hospitality and food service. The Company's activities consist of the wholesale and retail distribution of beers, wines, spirits, tobacco, grocery and confectionery within the United Kingdom to both the on-trade and off-trade market. Its segments include Conviviality Retail, Matthew Clark and Peppermint Events. Its Conviviality Retail is a franchised off-license and convenience chain with over 370 Franchisees and over 700 retail stores trading primarily under the fascias of Bargain Booze, Bargain Booze Select Convenience and Wine Rack. Its Conviviality Direct is an independent wholesaler to the on-trade, serving over 23,000 outlets from national hotel chains to independent food-led pubs and restaurants trading through two businesses, Matthew Clark and Bibendum. Its Conviviality Trading is a full service brand and wine agency. more »

LSE Price
290.5p
Change
-0.2%
Mkt Cap (£m)
533.3
P/E (fwd)
11.3
Yield (fwd)
4.9



  Is SThree fundamentally strong or weak? Find out More »


50 Comments on this Article show/hide all

Graham N 29th Jan 31 of 50

In reply to FREng, post #5

re: Defenx (LON:DFX)

Hi FREng, the market cap on that is a bit too low for me, apologies! G

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FREng 29th Jan 32 of 50

In reply to Graham N, post #31

Indeed! Yet Defenx (LON:DFX) was well into SCVR territory six months ago. If the business survives it may yet be there again ...

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Laughton 29th Jan 33 of 50
3

In reply to whitmad, post #24

Thanks for the link re ITM Power (LON:ITM) but that document seems to be over 10 years old. Hasn't the science moved on a lot since then? The "book" makes a big play of saying that fuelling a car with hydrogen is no cheaper than diesel and therefore should be discounted. But surely, it's not just the cost that is going to drive the change. It's all about the environment and reducing reliance on fossil fuels.

Maybe I've got it wrong, but a good deal of ITM's pitch seems to be about using solar to power the hydrogen production.

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Camtab 29th Jan 34 of 50
1

In reply to Laughton, post #19

I don't think you are being stupid at all. Although I am thinking I might be a bit stupid for investing in a stock because I believe in what it does. I cannot tell you much about the deal with Shell, but I do know they make some money by supplying the fuel. They have signed various contracts with various companies one example is Toyota. You can find details under the news tab.They have also signed deals with some bus companies. This is one aspect which as you point out doesn't provide much income now but as demand grows (which I hope it will)...... They have also a business incorporating hydrogen systems into companies as an alternative fuel option which has seen an increase in demand. Then there is a scheme they have tested and seems to work well with a German municipality called Thuga where they seem to be able store renewable energy in the gas system via hydrogen. I am no expert but this is my interpretation. DYOR, it is still in the punt section of my portfolio.

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Graham N 29th Jan 35 of 50
1

In reply to mikelevie, post #10

Hi Mike, I've covered Yu (LON:YU.)

Thanks for the suggestion. G

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Graham N 29th Jan 36 of 50
1

In reply to gus 1065, post #1

Hi gus, I covered Sopheon (LON:SPE). Interesting company. Cheers. G

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Graham N 29th Jan 37 of 50
2

In reply to Camtab, post #4

Hi Camtab, nice suggestion. I've covered ITM Power (LON:ITM) before. Once again, it appears to be on the verge of significant revenues. As you suggest, it is still a bit "blue-sky" for me. Happy to listen to any arguments for or against it. Thanks. G

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Camtab 29th Jan 38 of 50

In reply to Graham N, post #37

To be honest Graham I requested it purely as a left fielder. It is a subject I find interesting and I believe we should do everything we can to help future generations so it fits nicely into the happy clappy part of my portfolio. Backed by a lot of blue sky and hope. Paul would be proud it is only a small part of my portfolio.
I do get a bit fed up though of people poo pooing things with little knowledge. The link attached above is so out of date.....

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Laughton 29th Jan 39 of 50
3

In reply to Camtab, post #38

Re ITM Power (LON:ITM) again - well, I'm with you Camtab. Although I don't own any of these shares I just have a feeling that I should (a) because I like driving but feel we should reduce reliance on fossil fuels and (b) because I feel that this could end up a better bet than pure electric vehicles if for no other reason than the time needed for refueling/recharging.

Here's a more recent link with a more positive outlook - http://www.autoexpress.co.uk/car-news/electric-cars/93180/hydrogen-fuel-cell-do-hydrogen-cars-have-a-future

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Laughton 29th Jan 40 of 50
2

In reply to Laughton, post #39

And another - for those interested - http://www.nextgreencar.com/fuelcellcars/

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gus 1065 29th Jan 41 of 50
2

In reply to Laughton, post #39

I wonder if ITM Power (LON:ITM) will be the beneficiary of some of the larger corporates, especially in the traditional fossil fuel sector, seeking to enhance their green credentials by associating with the company either as a customer or in some form of JV? A few crumbs from the rich man's table of the likes of Royal Dutch Shell (LON:RDSA) or BP (LON:BP.) would go a long way to filling up ITM Power (LON:ITM) 's order book even if on a stand alone basis they are uneconomic at the moment.

Gus.

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Modform 29th Jan 42 of 50
1

Those who are interested in ITM POWER, may want to have a look at BLDP, a Canadian company in fuel cell technology. It has quite a few buses being tested in london. It has won so many contracts with China for buses and trams, also with European countries. Their fuel cell technology uses much less precious metals than normal fuel cell, making them much cheaper to produce.

They have a subsidiary called PROTONEX which produces wearable items for USA army, the device scavenges power from different sources to keep the most critical ones active.

The company actually makes a small profit.

I had held in the past but sold last year as I felt the sp had gone ahead of itself. The sp has been drifting down. There was a short seller attack on Friday but the company issued a statement today and the sp is up 30%.

No advice is intended, please dyor

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Tommykeenanz 29th Jan 43 of 50

Fulcrum utilities FCRM a review of this decent company would be hugely appreciated

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Samsgrandad 29th Jan 44 of 50

In reply to Laughton, post #39

ITM Power (LON:ITM)
Much more to producing hydrogen than at first meets the eye, however, science moves on.
The recent RNS announcing a joint venture with Shell describes a 10 MW industrial implementation of proton exchange membrane electrolysis.

“Shell and ITM Power will build the world's largest hydrogen electrolysis plant at Rhineland refinery, Germany. With a peak capacity of 10 megawatts the hydrogen will be used for the processing and upgrading of products at the refinery's Wesseling site as well as testing the technology and exploring application in other sectors.”

This is to supplement hydrogen produced from steam and which is used in the conversion of heavy oils into lighter refined fuels. I would assume that waste heat from the refining is used to partly power the hydrolysis. The electricity coming from over supply in the grid.

This pilot project falls short of producing vast quantities of hydrogen necessary for replacing fossil fuels in cars although it's interesting that it is a way of stabilising the supply and demand on the electricity grid, (one of the shortcomings of renewable power) and in doing so creates hydrogen using electricity which would not otherwise be used or stored.

https://en.wikipedia.org/wiki/Polymer_electrolyte_membrane_electrolysis

It may not replace all petrol and diesel use but every contribution to fossil fuel consumption will be worthwhile.

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janebolacha 29th Jan 45 of 50

In reply to Samsgrandad, post 44:

Slightly off topic.

" it's interesting that it is a way of stabilising the supply and demand on the electricity grid, (one of the shortcomings of renewable power)"

This pilot investment by Elon Musk in Australia is very interesting in that respect. It looks like it could be one way of overcoming the aleatory availability of many sources of renewable energy. It may also turn out to be a great investment!

http://www.iflscience.com/technology/looks-like-teslas-giant-battery-in-australia-made-some-serious-cash-this-month/

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bestace 29th Jan 46 of 50
2

In reply to Paul Scott, post #25

We don't yet know how much of that will actually translate into revenues for Altitude.

We do have some indications; their investor presentation after the last interims (slide 13) indicated a 20% cut due to Altitude of the supplier's revenue, i.e. a $500 order placed via a distributor's website on the Altitude platform, on a gross profit margin of 60% means $300 due to the supplier, so Altitude's 20% cut would be $60.

Based on the distributor revenue figures quoted in today's RNS that implies $1.3m annual revenue to Altitude from the 7 partners already signed up and $5.3m from the 57 partners currently being onboarded, so that's $6.6m of annual revenues to Altitude.

For context, broker forecasts (per Stockopedia) are for £12m revenues for FY18, which would include revenue from the legacy promotions business, so their forecasts for revenue arising from the new platform are presumably much lower than that (say around £8m based on £4m of legacy revenues, I haven't seen the actual broker note).

In other words they may have already met their 2018 revenue forecasts just based on the partner sign ups announced today, and ignoring the 88 partners in the pipeline.

That's probably unlikely in reality given there are some sweeping assumptions in those numbers - not least of which is the assumption that 100% of those partners' revenues will be flowing through the Altitude platform (most unlikely I would have thought), and that the 60% gross margin for the partner applies across the board (sounds rather high to me given the nature of the product).

Of course you won't see any of that growth in the historic accounts for FY16 or even for FY17 which won't be released for a few more months yet, however the potential upside here is huge relative to forecasts, they just need to get some traction with partner and supplier signups, and in that context I actually found today's update quite encouraging even though I agree there is still a distinct whiff of jam tomorrow. Bear in mind it's not loss making thanks to the legacy business which just about pays the bills, so it's not as blue sky as some stocks out there.

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Ramridge 30th Jan 47 of 50
2

Re. Altitude (LON:ALT)
[bestace: I have only just seen your note on this subject. Generally I agree with your view. However I cannot reconcile your $6.6m revenues.  I suspect it is based on the target assumption of 210 orders p.a. per distributor rather than the base scenario of 100 orders p.a.]

Altitude is an interesting stock with a high risk profile but also a high reward potential. In my view the potential high reward tips the balance in taking the risk and going long.

The following argument is based on information provided by the company in their 2017 interims presentation (you can download it from their website).
The company shows two scenarios, a base case and a target. Working purely with the base case and the US market only, ALT’s revenues over the medium term are projected to be approx. £43m p.a. So a build-up could be, in the first year £10m ramping up to £43m in year 3.
Considering ALT’s last audited revenues were £4.3m, that’s worth sitting up and take note.
This base scenario assumes capturing 2% – 3% US market share in the medium term.

Here is the second interesting reason. The company is actually building a platform business in the true sense of the expression. A platform business model creates a technology platform with network effects and provides facilities for all parties to transact directly. The platform owner, ALT, does not own the means of production, instead it creates the means of connection, and in the process takes transaction fees based on the completed transactions (viz. ebay, uber, eat, etc)
So as a platform business, we are likely see revenues substantially falling into the bottom line profit and cash flows.
However the risks are not trivial.
- Management have been bullish and optimistic for a number of years. To date they have built the platform but no real revenues from this source to prove the complete business model.
- Take-up by the US is showing promise as yesterday’s RNS shows. But there is still a long way to go before they hit minimum traction.
I have taken a long position but if the company doesn’t show real progress in line with their base case scenario in the near future, then I would likely sell.
Please DYOR

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bestace 30th Jan 48 of 50
1

In reply to Ramridge, post #47

Generally I agree with your view. However I cannot reconcile your $6.6m revenues.

I was trying to combine the figures disclosed in yesterday's RNS with the figures provided in the interims presentation. It's very possible my understanding is deficient so happy to be corrected, DYOR etc. These were my workings:

7 signed up partners doing $11.2m revenue + 57 partners in the process of coming on board doing $44m revenue = $55.2m of partner revenues, which on a gross profit margin of 40% (not 60% as I said in my last post) means $33.1m of supplier revenue (i.e. 60% x $55.2m), which in turn means $6.6m of revenues to Altitude (LON:ALT) (based on a 20% cut of the $33.1m of suppliers' revenue).

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Ramridge 30th Jan 49 of 50
1

In reply to bestace, post #48

re. Altitude (LON:ALT) Thanks, bestace.
Following the presentation data for the base model, for every $100 that a distributed sells, ALT's transacton fee = $100 *60%(gross margin) * 20% (ALT's fee) = $12. Effective 12% of a distributor's revenues.
Taking $55.2m as the total annualised revenues, that gives $6.6m fees for ALT. Which agrees with your computation. Of course this is over a calendar year, and not current financial year.

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anfitrion 30th Jan 50 of 50
1

In reply to Paul Scott, post #21

I don't agree with you view on Conviviality (LON:CVR) as busy fools. This is obviosuly in vogue as Carillion in on anybody's mind, but the drinks business is far off from construction, as Conviviality basically just applies a mark-up to all their drinks they sell.

Over the last few months, they took on more growth than they could chew and ended up having to hire temporary employees and trucks to deliver on them. So those addition £70m on sales yoy and basically same PBT means they took on those sales at no profit? Hardly. If you dig into drinks wholesale you will realise that rebates from suppliers (the Diageos and Beam / Suntory of the world)
make up 1/3 of earnings, and these come at the end of the year (H2 for Conviviality). With c.8% growth they will be juicy, and this is probably why they are still confident in making their FY numbers while many market participants are scratching their heads around it.

Bad debts could indeed be an issue if the UK goes into a recession, but not an issue at the moment. The receivables are mostly linked to the the large national accounts (Stonegate, Wadworth, JD Wetherspoon...) which represent 60% of Conviviality's sales and are obviously the ones that get to pay with very flexible terms not available to the small accounts. At the moment these guys are posting pretty solid single digit like for like growth so it will be fine. Not that this can't change if the UK goes into a recession, of course. And this is why I agree with you in that the company should ease up on dividend payments until the balance sheet is more solid.

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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