Small Cap Value Report (Mon 3 April 2023) - NUM, PEEL, TRCS, D4T4, WHI, SCE, CINE

3rd Apr '23 by Graham Neary

53 comments 7084 reads

Good morning from Roland and Graham!

Today's report is now finished (10am).

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Roland's Section

Tracsis (LON:TRCS)

Share price: 895p (pre-open)
Market cap: £267m

Interim results

“Unchanged expectations for the full year”

This company provides software and related services for the rail industry in the UK and North America. Tracsis is an AIM success story that’s four-bagged over the last 10 years and 20-bagged since its 2007 listing.

It’s not such a small business anymore, though, so I’m interested to see if the growth rates and profitability seen in the past can be maintained.

Today’s half-year results cover the six months to 31 January and appear to show solid growth in both revenue and profit:

Revenue: 34% to £39.2m
Adjusted EBITDA: +21% to £7.5m
Statutory pre-tax profit: +76% to £2.3m
Interim dividend: +11% to 1p per share
Net cash: £17.0m (July 2022: £17.2m)

It’s probably worth pointing out that last year’s pre-tax profit was depressed by various acquisition-related costs, so the increase in EBITDA is probably more representative of the underlying growth rate here.

Operating update: Tracsis has two main operating divisions. Both appear to be performing quite well:

Rail operations and planning (revenue +43% to £7.6m): this provides software solutions to help with staffing and operational planning.…

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Bouden54

3rd Apr '23

Central Asia Metals (LON:CAML) I wouldn't really call it a miss - underlying earnings were all in line. There was a non-cash markdown of one of their mines, mainly just reflecting current commodity prices, which explains the fall in statutory profits.

davidjhill

Agreed Jim

We have 85% of expected revenue for the coming year covered (60-65% is ARR and 20-25% is the two contracts delayed into Q1). That leaves 15% or about £4.5m of additional contracts to find during the entire year. Given the 27% growth in order book I'd be surprised if they don't achieve well in excess of that but let's assume it is just as expected.

so circa 12p EPS (adjustments are actually quite small. share based payments which I agree are an expense should be low few hundred k) and with net cash forecast to get above £21m this just looks like a baby and bathwater knee jerk reaction.

I don't understand investors fixation on a few days either side of a Y/E to determine a companies valuation. In reality if those 2 contracts had been executed the trading update would be bang in line and everyone would be fine. In reality the real growth of the long term business is unaffected and the product is increasing traction across many verticals. I'm slightly irritated by short term reaction but happy to hold / buy more over the next couple of years when I think it will be 2 or 3 * the current share price.

cheeky_minnows

It seemed to me that a change in net profits from $87.5m to $19m was significant and the Sasa impairement of $55m didnt seem very well explained. It looked to me that zinc prices were higher in 2022 than 2021 (although more volatile), lead seems to be a similar story. Ok, I understand the inflationary costs, but surely this applies across the business, unless the Sasa mine has big wage inflation.. The production volumes dont seem to explain this large markdown, maybe it is based on future reserves. Would love to understand it better if you know !!

Snazzytime

hi davidjhill

D4t4 Solutions (LON:D4T4)

Wouldn't it be more appropriate to ask Roland (not Graham) how he arrived at his estimate of 22x PE rather than to just dismiss it? He may well have some good reasons why it differs from yours.

Your estimate of 12x PE may well prove more accurate in time but it is, after all, still only an estimate.

Views and forecasts expressed on this forum can never be so black and white.

Snazzy

jdnthomas

To be fair to Roland (not to be confused with Graham) he was referring to the p/e based on FY 23 earnings i.e for the year ended 31 March 2023. According to Stockopedia the forecast earnings for that period are about 8.5p so at a price of 182p that is indeed about 22 - and perhaps more if earnings need to be revised downwards

Not sure it is right to adjust out cash as I suspect this mostly represents customer cash received in advance. A nice position to be in, but not really free cash.

I suspect projections for 2024 may also be revised downwards - are there new broker notes out today, or is the projected figure of 12p from before today's profit warning?

More generally there seems to be a trend of software companies missing revenue targets generally citing longer sales cycles. NCC and Shearwater are other recent examples. Perhaps in the current macro-economic climate we need to distinguish between software which directly drives the bottom line for customers, and that which is just nice to have if you can afford it.

illiswilgig

D4t4 Solutions (LON:D4T4) (I hold) Trading Update and profit warning. Interesting discussions. Thanks David and Roland for the rapid evaluations.

At first glance it looks like a simple case of contract signings slipping across the year end. Never pleasant though, and under the current conditions I sense that the market is not of a mind to 'take hostages'.

By coincidence I'd just re-listened to the Zeus interview with management (thank you David for the link) and made a note to consider buying more on the next update. Which gave me a dilemma this morning.

Do I tend towards the management explanation of a slippage in contract signings (not that surprising under currrent conditions)?

Or do I err on the side of caution and assume that it's likely worse than management think (also not that surprising under current conditions)?

Not an easy decision. But there is a bit more information in the trading statement that's worth considering I think.

Revenue for the year just ended (FY23) has fallen by a whopping 24% - oddly for this kind of warning - adj earnings appear to have fallen much less - I estimate likely 10-15% depending upon your view of likely tax charge on adj earnings.

Normally you'd expect operational leverage to cause such a fall in revenue to result in higher percentage falls in earnings. The bulk of the delayed contracts is 'low margin 3rd party hardware' - listening to the presentation this is typically 10% margin, wheras the Celebrus propriety software licences billed as Annual Recurring Revenue are typically 70%+ margin. The build up in high margin ARR - just over 74% of FY23 revenue - and just over 50% of FY24 - is making the business much more resilient to movements in hardware contracts, which is a good thing in my book.

Despite the fall in revenue cash generation looks to be good with £17.7m net cash, about 25% of the MCap today, up 6.3m yoy and that's despite paying a 12.5p special dividend in the year. Intriguing. How many growing software businesses are throwing off that much cash?

Management have tried to sweeten the pill with the news that the prospective business pipeline has increased 27% in value with a 4x increase in quotations submitted to new and existing customers. Well they would say that wouldn't they - but the figures are significant and do bear considering.

The problem I've always had with buying more D4T4 is that its tended to be on a high rating. Yes it's still highly rated on todays reduced FY23 earnings, about 23x at the current 175p. Which makes no allowance for cash and assumes that the business has been lost rather than delayed.

If you tend towards management's explanation then after todays fall in SP it looks a lot cheaper on current year forecasts. An unusually low price for the business at just over 15x current year (FY24) earnings - without adjusting for the increasing cash pile, allowing for any one-off contribution in the current year from the delayed business or any futher increase through the improving business pipeline.

I can't know what the future will bring. I do think that the cash generation and high level of ARR gives a good basis for reducing downside risk at the current shareprice - whilst the potential upside has increased thanks to the shareprice and improving pipeline of prospects.

Accordingly I've had another scrabble around down the back of the sofa and spend what little I could find on some more shares in D4t4 Solutions (LON:D4T4) this morning at 173p. I plan to follow up with further buys in the coming weeks to significantly increase my holding.

cheers

Mark

Hi Mark - I am similarly minded. One of the delayed contracts was low margin, the other a high margin ARR. Once this concludes it will also push ARR up above the £16m

I noted in the podcast that the ARR contracts are multiple year non cancellable contracts. They just invoice annually for the licence rather than spread it monthly or as a lump sum.

It is for this reason I lean towards being pretty comfortable with forecasts for the coming year - ie a big percentage is high quality non cancellable ARR with half of the rest made up from the 2 delayed contracts plus an increase of 27% in the weighted pipeline.

This arbitrary Y/E deadline for a profit warning or in-line statement based on a few days delay in contract signing is a bit bizarre. Businesses don't run themselves that way but as investors if it is one side of the line everything is fine, if its a few days later its a problem! with D4t4 Solutions (LON:D4T4) I think a bit longer term. Do I want a business capable of growing ARR 15% for the next few years, throwing off cash, with a net cash balance sheet making up 1.3rd of its market cap and paying dividends? Looks better value to me than many other companies more richly rated.

No - it is not advance cash : it is net cash

£6.5 of revenue has just moved from year just finished into next year. combine with the £16m ARR and you can see why earnings haven't been adjusted. more likely to beat forecasts rather than miss them imo. But thats courteousy of the 2 contracts moving into Q1

Btw - this is nothing like Shearwater or NCC. Two contracts didn't quite get signed in time and moved a few days. Otherwise the trading update was actually in line.

Berksbee

One point to note about GKP (LON:GKP) (I hold) is the last note on the recent update - the Local Kurdish Govt get the revenues and then pay GKP. These payments are often late. It's an additional risk but when the money does eventually come into GKP they often announce a special dividend.

I'm not dismissing it. I know where Roland gets the number from - it is stocko based. My point is that looking at it from that arbitrary headline number isn't correct. Roland or Graham won't have time to dig further or try and understand the intricacy when they are trying to hammer out a bunch of analysis on a series of stocks so it's not a criticism.

Samsgrandad

Roland explains the subject of amortising and the profit and loss, and its irelevance to cash generation far better than I could in his Tracsis above analysis but I'm happy with the company's paying down debt, cash reserves and future growth of eps from acquisitions. The CAML talk on Investor Meet Company was very good and covered that subject well.

Silver Moon

Being underwater in D4t4 Solutions (LON:D4T4) I bought more shares at 174p as I see that doubling down is the most feasible route to getting out of this hole. It's reassuring to read illiswilgig's view supporting Dave and Rolands evalutions and look forward D4T4 getting off this rocky road.

OPEC must be playing the market, hasn't oil production already been cut? I hold Gulf Keystone Petroleum (LON:GKP and the Iraq government shut the Kurdistan pipeline last week causing a steep fall in the share price while the price of oil rises. To me this means the pain of a cut is going unshared, for the moment at any rate.

Hi Samsgrandad, thanks for the pointer - I watched the Investor Meet Company Presentation, question answered at 45:32 - so reducing the Sasa asset value on the balance sheet, but insignificant vs the overall life returns from the site. They also do not expect any further impairments, either at Sasa or Kounrad.

gmtrader

Yes it was cut back in November by 2m barrels

What is interesting is gold normally drops if the likely hood of interest rates go up but this time it’s the opposite because we have seen what the rising interest rates has done to banks. Everything seems to be topsy turvy atm.

wolfspirit

◄WANdisco (WAND)► CEO and CFO resign - WTF, they have been paid until now? I guess with a Garden Leave payment as well?
If they pop up in the directors register on another company - it will look like a short opportunity.

Lucky dip

https://twitter.com/rudawengli...

The situation is being resolved according to the Iraq oil ministry.

Dojosan

Price of rhodium has fallen off

ridavies

4th Apr '23

David, re D4t4 Solutions (LON:D4T4) thank you for your insightful comments. I always take your comments seriously and they are a must read for me. This is now Tuesday, and although thy were punished yesterday, they have recovered today. Clearly you are a man of influence!

In the light of your comments, I will add them back to my watch list again. I always had a soft spot for them, but they hurt me when they made the major change of strategy.

Thanks again.

Small Cap Value Report (Mon 3 April 2023) - NUM, PEEL, TRCS, D4T4, WHI, SCE, CINE

Roland's Section

Tracsis (LON:TRCS)

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Graham Neary

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