Small Cap Value Report (Mon 30 Sep 2019) - CALL, WATR, CTG | Paul Scott

30th Sep '19 by Paul Scott

40 comments 9331 reads

Good morning, it's Paul here.

Please see the header for the results & trading updates which caught my eye, on my initial sweep of the RNS first thing.

Estimated completion time - I'm writing mainly this afternoon, so should be finished by about 8pm. Update at 17:19 - I'm exhausted, and need a break. So will finish off later this evening. Actually, I'll put any further updates from now on into tomorrow's placeholder, so that people don't have to keep checking back to see if this report is updated or not. Hence this report for today is now finished.

Cloudcall (LON:CALL)

Share price: 98.5p (down c.7% today, at 12:48)
No. shares: 26.6m existing shares + 12.0m new shares = 38.6m
Market cap: £38.0m

(at the time of writing, I hold a long position in this share)

CloudCall is a software-as-a-service ("SaaS") and unified communications business ("UCaaS"), that has developed and provides a suite of cloud-based software and communications products and services, which enables organisations to leverage data in CRM systems to enable more effective communications.

There are 2 announcements today, interim results, and yet another placing

Fundraising

This is a conditional placing & open offer, at 100p per share. This is a pleasingly small discount to the previous market price, which I am pleased about. Placings are only a problem, if existing shareholders are diluted a lot, at a big discount, which is not the case here.

What is striking is how much larger this £12m placing is, compared with previous fundraisings. The company seems to be significantly scaling up its ambitions, stating;

Funding customer led growth capital opportunities, with ambitions to achieve >£50 million in annualised run-rate revenue by 2025

To put that in context, the annualised run rate of revenues at June 2019, was £11m, so increasing that to over £50m in the next 5-6 years is a big deal, that could trigger a re-rating of the shares, possibly.

To have got away such a (relatively) large placing, in very tough markets, demonstrates that management must have told a very convincing story to institutions & high net worth investors, in the meetings that usually precede placings.

A couple of more general points;

Liquidity - for companies this small, the institutional & private investor markets are almost completely separate, which can create strange anomalies where private investors are…

Unlock with Email

Unlock with Google

Already have an account?
Login here

MrContrarian

30th Sep '19

My morning smallcap tweet: SpaceandPeople yet another warning.

Accsys Technologies (LON:AXS), Spaceandpeople (LON:SAL), Ceps (LON:CEPS)

Accsys (AXS) rev up 40% in last 5 months. Tricoya plant in Hull now won't open until H2 2020. "The delay is expected to result in overall project costs for the project being significantly higher than initially expected and we are discussing the associated funding arrangements with our project partners noting that a portion of this is likely to be paid by Accsys."
SpaceandPeople (SAL) H2 rev flat, loss down but warning buried at bottom: Guides FY pretax £0.1m, lower than mgmt expected (F/C £0.46m). Blames Brexit mostly.
CEPS (CEPS) H1 poor was previously warned.

rmillaree

Cloudcall (LON:CALL)
Is it just me or do the intangibles numbers not add up on the figures released today - ahh looks like typo as they left in the figure from last year in the sub column. Anyway capitalised spend is up.

Numbers look woeful but are on track I think however there is a known long lag before customers become profitable so it shouldn’t be a shock to holders.

fwyburd

Good morning Paul,
I'm not sure if this is worthy of your analysis time but interesting news from Intercede (LON:IGP) this morning with their non exec Jacques Tredoux increasing his control/interest to just under 30% of the shares. Does this signal a possible bid or is he just supporting the SP? Time will tell.

cheers
Francis

mojomogoz

Bidstack (LON:BIDS) - comedy interim from Bidstack.

Valued at £57m and revenue of £27k - price to sales ratio of >1000 pre open. Now going for bargain 900x.

Interim results (unintentionally) detail how the company is a fair distance from commerciality. If the tech functioned meaningfully well and integrated into a meaningful demand side platform for ads then why only print H1 2019 revenue of £27k compared to H2 2018's £317k. Sniff sniff...smells like a lot frantic re-engineering in play to make the narrative.

The Phoenix

Hi Paul any chance of a ramble on Altitude (LON:ALT) slightly higher loss, but seem to have enough net cash to keep going for a while longer yet to try and get to profit. A punter favorite but another one that has suffer last six months along with the likes of Somero Enterprises Inc (LON:SOM) and Character (LON:CCT) with small caps being out of favour and any hint of bad news hitting the price hard.

Thanks
Andy

Missed the Bidstack (LON:BIDS) value opp...back to 1000x revenues...

I like the idea of this company and in game advertising solution it provides and beyond the sarcasm would be interested in a case for why its a good buy today at £55m market cap. Why is the execution path to significant revenues and margins so compelling?

tiswas

Probably a bit small and illiquid for most around here but fantastic results from AEO, Aeorema Communications this morning.

Circa £3m market cap but over £2m net cash.

3.2p eps on 30p offer price.

1p dividend (I was expecting a special divi)

Relatively new management team, major blue chip clients, growing turnover for the first time in a few years and very positive outlook statement.

Ridiculously cheap imo but not for everyone.

jjis

Brand Architekts (LON:BAR) nee Swallowfield - reported final results today. Lays out the situation post the disposal of their manufacturing business to leave them focused on higher margin owned brands. Looks like it could be an interesting value situation if management can deliver on their plans without wasting the cash realised from the disposal. Summary is £20m Turnover business making high teens margins. New product development ("NPD") continues with 80 new products launched in the year. -- Net cash as at 31 August of GBP24m. -- Net Assets as at 31 August of GBP38m. Market cap. £35m

andrea34

Please can you cover the interims from Water Intelligence (LON:WATR) Paul? Everything seems to be going well, with a positive outlook - revenue +34%, profit before tax +20%, though statutory eps only +8% presumably due to the last placing.

Aislabie

With today’s placing announcement Cloudcall (LON:CALL) continues to keep its placing amount comfortably ahead of its gross sales!
I know that Paul is among those who see this glass as half full, but it continues to ensure that jam is still “tomorrow”. When (and if) it does arrive any holders who have not been regularly paying for more stock will have had their jam massively diluted

RichardK

Second Water Intelligence (LON:WATR) .H1 EPS $0.079 slightly ahead of Stocko FY forecast of $.15. SP has been very weak of late but up 6% this a.m. I hold, and it is a sector which I believe has good medium and long term prospects as water demand grows around the world.

Richard

TamzinPiworld

From last Thursday, Sumo (LON:SUMO) analyst presentation with CEO/Founder and CFO.

A good overview of the business, the strategy, the market and the outlook.

c.50 mins

davidjhill

Cloudcall (LON:CALL) not sure I follow. The placing wasn't done at a discount so no dilution.

The question is more whether the cash will be invested wisely to accelerate and increase growth. The key metric will be the IRR on the cash being raised.

What I don't like in this announcement is that EBITDA b/e now moves out 2 years so we've moved from cusp of operating profit to a growth model targeting £50m of run rate revenues by 2025. Therefore losses will continue for a further 2 years as operating expenses go up 40%.

However, given growth profile in users and US slant it wouldn't surprise me to see an American competitor take them out, and if they do at considerably higher price.

Cloudcall (LON:CALL)
ref the placing at £12 mill i have to presume this puts to one side any funding worries the company may have , as long as they hit their projections this should leave them with £5mil + i would guess spare on top of what they need to get to breakeven. I am guessing they will use this extra £5 mil though to invest for the long term or get to larger sales quicker so it might still end up going down the plughole in the medium term (for the right reasons)

At a market cap of £28 mill i think they have got this away at a decent price all things considered (the poor current numbers) - albeit for current holders the future upside returns are slowly being reduced as the share count continues to rise.

I guess the doubters (me slightly in this camp as far as being good investment return at present) won't be adding and the believers won't be selling.I do think in theory they are showing enough growth to get where they need to be if they can hit £15 mill sales minimum 2020 and presumably £20 mill sales ish year after that. At that stage the high profit margin should eventually show up in good cashflow once "customer acquisition costs" are distorting the figures less and they are down to the 100% repeat revenue cashflow (as they like to say net renewals rate over 100% woop).

Gromley

Cloudcall (LON:CALL) not sure I follow. The placing wasn't done at a discount so no dilution.

From an asset perspective I guess that is true - in fact with Cloudcall trading at a P/B of > 6x then in fact the asset share of existing investors is improved.

However the placing does increase the ultimate size of the potential market opportunity and future earnings. So if earnings once they reach the promised land will be the same, but there are more shares in issue - it still looks like dilution to me.

Oh and as you mention it will now take 2 years longer to reach the promised land.

No position currently and I haven't looked in any great detail recently, just picking up on the general point re dilution.

hey Mojo

first disclosure - i have held Bidstack (LON:BIDS) from 5.5p and sold sufficient at 30p to cover my outlay so I am in for free.

This company is a potential unicorn in the making and probably has all the risks that go with it. A fair value is nigh on impossible to estimate at this stage.

However, in-game advertising is a hard thing to get right but Bidstack (LON:BIDS) have that technology. I believe there is only one other credible competitor trying to do the same thing and they are behind.
Bidstack (LON:BIDS) has the exclusive licence to provide in-game adverts for Football Manager by Sports Interactive and a collaboration with EPIC games (Fortnight engine) as well as Codemasters. It also now has agreements in place with some of the top 10 global DSPs. Thus Bidstack (LON:BIDS) now have both the inventory and access to the advertisers on a programmatic level.

The market is enormous. It has been hard to crack previously because the advertising needs to be seamless in game. eg the Billboards on FM are as you would see in a normal stadium but the brands are genuine and need to change/track etc.

The management and advisory board are a who's who. If you were wanting to back management likely to succeed go and check out their profiles.There are some of the most senior, well connected people in the industry onboard.

The 2nd half of this year is where the revenues start to ramp up according to the CEO. Operational progress has been super impressive so I'm inclined to believe them but am keen to see revenues start to materialise and ramp aggressively to add another leg of credibiility.

hi Gromely - like you say it is a dilution if future earnings only stay the same as projected with no placing. That's bad dilution because the IRR on the placing is zero.

Cloudcall (LON:CALL) aren't saying that. They are saying that the size of the opportunity is now much bigger and they need to ramp up operational costs in order to support that growth but the pot of future earnings will be greater than if they bumble along without it. What we don't see, of course is just how much IRR is in the internal model !

Thus we can't really calculate, which is irritating. I have a small long position and I am reasonably happy to keep it but growing sceptical about the way in which they invest funds. I want to know at what point does operational gearing kick in as it seems to be a moving target.

I don't share rmillaree's opinion that the numbers were poor today. 30% revenue growth is good and would indeed get them to £50m+ by 2025 on a compound basis, which is what they are saying, but that's only good if margins ratchet up.

Tortoise investor

Deloitte have today published a good presentation on the current economic growth outlook which is worth a read:

https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/finance/Deloitte-uk-global-economy-in-charts-q2-2019.pdf

In short, most charts aren't looking good but interestingly UK retail sales figures are looking pretty decent and not far off 10-year highs for year-on-year growth.

Paul Scott

Hi fwyburd,

I'm not sure if this is worthy of your analysis time but interesting news from Intercede (LON:IGP) this morning with their non exec Jacques Tredoux increasing his control/interest to just under 30% of the shares. Does this signal a possible bid or is he just supporting the SP? Time will tell.

I spotted that too, but was wondering whether or not I should include it in today's SCVR, as it's not a trading update or results.

Seeing as you mentioned it, I'll comment! My view is that it's always interesting when a major shareholder increases to a whisker under 30%. As you say, this can be a precursor to a full takeover bid at a later date. The point being that going over 30% triggers a requirement to launch a takeover bid, as you know, so stopping buying a whisker below that is obviously a signal that the major shareholder is bullish, and wants to buy more, but has been forced to stop buying by the takeover rule.

I've done a search for Azalia Trust (the vehicle which holds some of the 29.7%) and it doesn't seem to have any other >3% holdings in listed companies. It seems to be a family trust, so it's not clear whether the trust has the funds to buy the whole of Intercede or not? Because of that I have to file this in the don't know tray. But it's certainly a positive sign that the biggest shareholder has just increased to 29.7%.

We should have a trading update any day soon. That implies that trading must be in line with expectations, as if it's considerably above, then I don't suppose Mr Tredoux would have been allowed to buy any more stock, just before a trading update.

I really like the turnaround potential for this share, and hold Intercede shares personally.

I had a very good meeting with CEO & CFO a few months ago, who I found refreshingly open. They came across as people who know what they're doing. The relatively new CEO has already stripped out a load of cost, and brought it to positive cashflows, so I'm hoping no dilution will be needed. He was upbeat about the potential, without being rampy, which I liked.

The key reason I bought Intercede shares is because of the amazing quality & size of its clients, including multiple departments in the US Govt, major banks, aerospace companies, etc. It's astonishing for an AIM company valued at only £15m. The CEO agreed on this point, and said it was the quality of IGP's client base which made him want to join the company. Previous management seemed to enjoy developing tech, but were not focused on actually selling it! The new CEO has changed all that, so with the expected time lag, I hope we could see progress.

There again, the company has disappointed in the past, hence why investors don't yet seem ready to bid up the share price to reflect the future potential. From £15m, we could see a multi-bagger, if sales start to grow strongly. Or we might not, time will tell, as you correctly point out :-)

Regards, Paul.

I don't share rmillaree's opinion that the numbers were poor today. 30% revenue growth is good

It depends what numbers you are looking at :) - the fact is all of the sales growth and more was eaten up as additional expenses - if you adjust for the increase in capitalised costs compare to the same time last year (add 140k to expenses). all the extra income has gone out the door in expenses and a bit more - so in that sense the numbers looked poor to me taken as read.

Also they had estimates of £2.65 net loss for year and hit £1.56 mill loss in H2 - so H2 does have to be materially better to hit targets - so there is an element of second half weighting risk in these numbers - again to be expected with the fast growth in sales expected h2. In some respects this will make the numbers look good at the year end when they hit h2 expectations and do 11.7 mill that will be 37% sales growth h2 lfl which is an increase over the 30% growth rate shown in h1.

I know the reason for the "poor numbers from my perspective" makes sense due to the quite significant payback period before the upfront onboarding costs are recouped and then the operating gearing kicks in - in that sense the numbers were never going to be pretty reading today so i don't think whether the numbers look good or bad matters too much as long as they are still on track compared to previous expectations which seems to be the case- not all the numbers in here are bad (30% revenue growth is decent) there is certainly enough in here for everyone to be happy with what they read.

Small Cap Value Report (Mon 30 Sep 2019) - CALL, WATR, CTG

Cloudcall (LON:CALL)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

40 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...