Small Cap Value Report (Mon 4 April 2022) - BLV, MGP, FUL, TED, THRU

Good morning, it's Paul & Jack here with the SCVR for Monday.

Agenda - 

Paul's Section:

Ted Baker (LON:TED) - takeover approaches. Sycamore has raised its cash offer (was previously 137.5p) but we're not told how much. Other third parties have expressed interest too. So a formal sales process has been launched. I'm sceptical whether any bids are likely to be high enough to persuade the big 4 shareholders (including the founder Ray Kelvin) to sell up, but everything has a price, so who knows?!

Thruvision (LON:THRU) - a serial disappointer in the past, with never-ending losses each year. However, today's trading update shows signs of decent growth, and a positive outlook. Breakeven beckons possibly for 2023? Might be worth doing some digging on this one, the products look interesting, and have attracted big name clients. Valuation looks warm though.

Jack's section:

Belvoir (LON:BLV) - a 25th year of profit growth, stretching back through cycles. Belvoir has organic growth opportunities and smaller acquisition candidates. Meanwhile, the shares trade on 13.6x forecast rolling earnings with an FY21 yield of 3.24%, which hardly seems demanding given the track record and prospects.

Medica (LON:MGP) - elective scanning is now back to pre-pandemic levels, while Nighthawk continues to trade strongly. Recent acquisitions see it enter Ireland and the US. I’m curious to see how the group fares in these markets, which are quite different to UK Healthcare. There is some potential here and the current year will benefit from softer comps, but more research is needed.

Fulham Shore (LON:FUL) - EBITDA to be well ahead of last year and ahead of market expectations. There are cost pressures, but the group’s businesses are relatively low cost and it has a greater ability to increase its own prices compared to competitors. Meanwhile, cheaper new sites fundamentally improve the economics and I think management has a good chance to continue successfully growing the company.

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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.

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Paul’s Section:

Ted Baker (LON:TED)

146p (up 14% at 14:16)

Market cap £270m

Formal Sale Process

The story so far

18 March -

Sycamore Partners Mgt issued an RNS confirming press speculation that it was “in the early stages of considering making a possible cash offer for Ted Baker”

TED responded on the same day, denying that it had received any approach, and urging shareholders to take no action.

28 March -

TED rejects a bid approach from Sycamore at 137.5p cash.

4 April (today) -

TED says Sycamore has improved its offer, but doesn’t say by how much.

Other third party bid interest has been received.

A brief trading update is provided -

The Board believes the business is well positioned to create significant value for shareholders. Ted Baker is a leading global lifestyle brand and the Company continues to make good progress with its transformation. Despite the impact of Omicron on the fourth quarter of the year to 29 January 2022, Ted Baker delivered group sales growth of 35 per cent. compared with last year, and trading margin improved strongly demonstrating the progress the Company is making in re-establishing its premium brand positioning. Ted Baker has a strong balance sheet, with a net cash position at year end, and ample liquidity headroom to continue to grow.

Formal sales process has been launched, in agreement with the Takeover Code - under note 2 of rule 2.6, a crystal clear (!) explanation is given here in the Takeover Code -

2. Formal sale process Where, prior to an offeror having announced a firm intention to make an offer, the board of the offeree company announces that it is seeking one or more potential offerors for the offeree company by means of a formal sale process, the Panel will normally grant a dispensation from the requirements of Rules 2.4(a) and (b) (but see Note 12 on Rule 8) and Rule 2.6(a), such that any potential offeror which agrees with the offeree company to participate in that process would not be required to be publicly identified under Rule 2.4(a) or (b) and would not be subject to the 28 day deadline referred to in Rule 2.6(a), for so long as it is participating in that process. The Panel should be consulted at the earliest opportunity in all cases where such a dispensation is sought.

What happens next? This is from TED’s announcement today -

The Company intends to conduct a targeted process, focused on those parties who understand and value the full potential of this unique brand. The first phase of the process is expected to be based on public information only and interested parties will be invited to submit non-binding indicative offers to Evercore and Blackdown Partners. It is currently expected that a select number of parties will be invited to participate in a second phase. Those parties will be required, at the appropriate time, to enter into a non-disclosure agreement and standstill arrangement with Ted Baker on terms satisfactory to the Board of Ted Baker and on the same terms, in all material respects, as other selected parties. Further announcements regarding timings for the formal sale process will be made when appropriate.

The Board of Ted Baker has not yet had any discussions with Sycamore as to whether it wishes to participate in the formal sale process. If Sycamore does not confirm an intention to participate in this process, it will continue to be subject to a deadline of 5.00pm on 15 April 2022 by which it must announce either a firm intention to make an offer for the Company in accordance with Rule 2.7 of the Code or to announce that it does not intend to make an offer.

The Board of Ted Baker reserves the right to alter or terminate the process at any time and in such cases will make an announcement as appropriate. The Board of Ted Baker also reserves the right to reject any approach or terminate discussions with any interested party at any time.

This announcement is being made without the consent of Sycamore. There can be no certainty that an offer will be made, nor as to the terms on which any offer will be made.

My opinion - I don’t really have a lot to add, as it would just be speculation.

As mentioned before, TED has a concentrated shareholder register, so the big 4 will decide what happens next (Toscafund, Schroders, Ray Kelvin, and Columbia Threadneedle). If an offer is attractively priced, then they may be prepared to sell up. Or, if they really believe the turnaround potential is as good as they make out in the RNSs, then I imagine they would reject takeover bids, and continue as a standalone company.

I imagine it would take a very high price to persuade the founder Ray Kelvin to sell up. Hence a successful bid seems unlikely to me, but anything could happen.

The bid interest is shining a light on value in the fashion brands sector. I've been buying Superdry (LON:SDRY) (I hold) recently, as I think it could be emerging as a credible turnaround. Similarly Joules (LON:JOUL) (I hold) looks staggeringly cheap, if it can recover from supply chain problems which caused 2 profit warnings, and if it can avoid dilution from a possible placing? So JOUL is not without risk. I think a lot of fashion retailers are oversold now, even allowing for a likely soft patch as inflation bites harder later this year. Bottom line, is that if they get the product designs & pricing right, then they'll do well, largely irrespective of the macro situation. Also a tougher macro situation weeds out the competition, leaving greater market share for the survivors.

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Thruvision (LON:THRU)

31p (up 14% at 13:52)

Market cap £45m

Trading Update

We’ve not looked at this company for several years, it used to be called Digital Barriers. The StockReport is literally a sea of red, with the only black numbers in the profitability section being revenues. It did a big equity raise in 2018, and has burned through most of that cash gradually over the last 4 years. So it’s not clear whether there is a viable business here or not, let’s have a fresh look.

Thruvision (AIM:THRU), the leading provider of "safe distance" people-screening technology to the international security market, is pleased to provide an update on trading for the financial year ended 31 March 2022.

Company’s overview -

As expected, the second half of our financial year showed a significant improvement over the first, driven by a considerable increase in our Profit Protection revenues and further orderflow for US Customs and Border Protection (CBP). Full year revenue is expected to be around £8.4 million (FY21: £6.7 million) and our cash balance has increased since the half year to £5.5 million on 31 March 2022 (30 September 2021: £4.1 million; 31 March 2021: £7.3 million).

Outlook - sounds upbeat -

Our markets have now substantially recovered from the negative effects of COVID, and we believe we are now firmly back on a growth trajectory. The pandemic has strengthened the need for contactless people security screening and this is most evident in Profit Protection where increasing traction in the US and Europe means we are very positive about the Group's prospects. With operational successes and front-line demand, we are also increasingly confident about significant growth with CBP. As a result of this positive momentum in our two main markets, we are confident of good growth in FY23 and beyond.

Valuation - there’s an update note from Progressive today. This shows a forecast adj loss before tax of £(1.7)m for FY 3/2022, improving to a smaller loss of £(0.5)m for FY 3/2023, on revenues of only £10.1m.

I’m struggling to see any justification for the £45m market cap, based on small revenues, continuing losses, and a poor historic track record.

My opinion - it might be worth looking into the company’s products, and its competitive situation. There are some big name clients mentioned in the commentary today, e.g. Tesco & Asos. It operates internationally too.

The main product seems to be a scanner, that looks through peoples’ clothing, to reveal any concealed items. This is useful at airports, and in warehouses - to detect and hence deter employee theft of small items that are easy to conceal under clothing. Short video is here.

Overall, I think the products look interesting, and big name clients are ordering more. I wonder what the business model is, i.e. are sales one-offs, or is there any recurring revenue?

This share could be worth further investigation possibly, but the valuation seems rather warm, considering it has been loss-making for many years.

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Jack's section

Belvoir (LON:BLV)

Share price: 262.66p (+3%)

Shares in issue: 37,292,113

Market cap: £98m

Final results for the year to 31 December 2021

This is a UK property franchise and financial services group with a well-earned reputation for consistently good performance. Revenue and profit were both up in FY21, meaning 25 years of unbroken profit growth.

• Revenue +37% to a record £29.6m, some 25% of which is like-for-like with the remainder from acquired businesses,
• Management service fees (MSF - key underlying return from franchisees) +18% to £10.7m,
• Profit before tax +39% to £9.3m,
• Net debt down by 65% to £1.3m despite £4.4m spent on two acquisitions,
• Total dividend per share +18% to 8.5p.

Belvoir is more than just a lettings business (although that continues to dominate), with other segments making up an enlarged proportion of gross profit: 56% lettings, 19% sales, 20% financial services, and 5% other (2020: 60%, 17%, 19%, 4%).

This group is a serial outperformer and a bit of a hidden gem for those that have not heard of it. Performance over Covid and lockdowns has been far better than some might have initially feared, and the group has grown in all its three key markets in FY21.

UK residential property sales transactions rose by 41% year-on-year and were 22% ahead of the six-year average to 2019. The financial services division achieved revenue growth of 49% to £14.4m (2020: £9.7m), 44% of which arose from the underlying business. Revenue from property was up 49% to £3.7m and revenue from lettings increased 21% to £10.7m.

A number of operational metrics back up the financial growth. Two companies acquired (Nichals Humphreys, 20 offices with a focus on student lettings in March 2021, and the mortgage advisory arm of NBS in July 2021), the mortgage advisor network up 20% to 243 advisors, number of offices up 11% to 463, managed properties up 12% to 72,900, written mortgages up 37% to 16,585, and house sales up 54% to 12,320.

An additional acquisition was completed post period end: the personal agent network, Mr and Mrs Clarke Limited, for £0.2m net cash. This opens up a ‘new home-based agency option for franchisees’.

Outlook

The majority of our mortgage business is currently being introduced from non-Group sources, i.e. national contracts serviced in partnership with MAB and independent estate agency businesses, and leads generated by our online marketing activities or from our extensive client database. A key focus for 2022 is to drive further collaboration between our property and our financial services networks, so that we can maximise the earnings potential for our franchisees and advisers from offering financial services through all Group offices.

Further bolt-on acquisitions can be expected in order to expand both franchise and financial services. Belvoir has made acquisitions of this kind every year since 2015, with one already completed for FY22.

Meanwhile, the Nicholas Humphreys acquisition provides an entry into university towns, which should help drive organic growth.

The effective rate of corporation tax for the year was 20.6% (2020: 20.3%) - this could increase due to the 2021’s Budget commitment to increase corporation tax to 25% with effect from April 2023.

Balance sheet - negative net tangible asset value, but net assets of £33.6m after taking into account £34.8m of intangibles. It’s much harder to place a value on intangibles, but the resilience and recurring nature of the group’s lettings division goes some way to justifying this. It’s a capital light business model, so it is what it is. Debt is manageable and interest is well covered by earnings.

Conclusion

The property market is a curious beast. Average transaction prices are at pretty toppy multiples of earnings, but the market is so important, and the supply/demand imbalance so steep, that it’s actually in rude health. It got a lot of help from the government during lockdowns, and now we are seeing ‘the strongest residential sales market since 2007’.

This has the benefit of driving performance in Belvoir’s estate agency and financial services businesses. There is the specter of rising interest rates to consider though.

The market returned to more traditional transaction levels towards the end of 2021 and the challenge at the start of 2022 is a lack of stock in both the lettings and sales markets. This is anticipated to ease as we move into spring, which is traditionally the most active time of the year for homeowners starting to look to move.

Meanwhile, in financial services:

The financial services sector anticipates increased remortgage activity by both home-owners and buy-to-let (BTL) landlords whose mortgages, fixed amid robust property markets in 2017 and at the start of 2020, are coming to an end of their two and five-year deals. With further stimulus stemming from predicted interest rate rises in 2022, transfers and remortgages are forecast to increase. As a result, our financial services division will benefit from having a substantial client bank to service, and this will mitigate some of the fall in the house purchase mortgage activity.

And then there’s the higher quality, annuity-type revenue derived from Belvoir’s lettings division. This, unfortunately for those suffering from a cost of living squeeze, should be able to keep pace with inflation. This focus on a franchised lettings estate gives the business model real resilience and suggests the company should be able to weather downturns.

All in all, a well-managed, profitable company (with high levels of cash conversion) that is growing in a large market. There could be bumps in the road in future but the group’s track record on profit growth is encouraging and there’s a good long term opportunity to create meaningful shareholder value.

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Medica (LON:MGP)

Share price: 160.07p

Shares in issue: 122,428,836

Market cap: £196m

Final results for the year to 31 December 2021

UK market leader by revenue in the provision of teleradiology services. It provides some FY19 comps, which removes Covid distortion.

• Revenue +33% to £61.9m,
• Gross profit +41% to £31.4m,
• Gross margin up from 47.8% to 50.7%,
• Underlying profit before tax +6.9% to £12.1m (margin down from 24.2% to 19.5%).

The rest is year-on-year: underlying EPS +126% to 7.83p, basic EPS +277% to 4.56p, final dividend +5% to 1.79p, net cash up from -£3.9m to positive £3.9m.

Underlying results are before exceptional items and one-off costs relating to the GDI acquisition, associated debt facility, share based payments, and amortisation of acquired intangibles. Here’s the note for non-underlying items:

That seems fine at first glance.

UK revenue grew by 33% to £47.1m, with Nighthawk strong and a full recovery in Elective scanning by year end. Medica Ireland contributed £9.7m in its first full year since acquisition in November 2020. This is in line with expectations. RadMD (Philadelphia) contributed £5.2m for the nine months since acquisition in March 2021, ‘broadly in line’.

Gross profit up due to mix effect, cost management, and positive impact of acquisitions.

That seems positive. Nighthawk continues to win contracts and renewals, while Elective is coming back and the group has expanded radiology reporting capacity in the UK by 5%. Medica has also restructured ‘to create additional management bandwidth’, with new group functions to support growth.

MedX was also established, a joint venture with Integral Diagnostics Pty in Australia.

Current trading

Launch of a new enterprise imaging and reporting software platform for Medica’s radiologists ‘as first major milestone of the future tech programme’. Nighthawk trading remains robust, a new service with a leading health insurer in Dublin has been launched, and a general manager has been appointed for MedX.

Conclusion

It seems like the peak risk has passed for Medica - as a teleradiologist service, business could have been hit catastrophically by Covid, depending on how hospitalisations played out.

Valuation is not the cheapest, but neither is it overly expensive. The trailing twelve month figures still bear some scars from lockdowns, and the flipside of that is that those comps should be a tailwind over the next year. We’ve already seen this in H2, with Elective activity a notable growth driver.

It all depends on the group’s growth prospects really. Clearly, Medica has international ambitions and Healthcare is a huge market, so if it can find a way to replicate its UK success in overseas markets then it could grow substantially. These markets vary greatly in their complexity and makeup though, from country to country and culture to culture. Not all have an NHS equivalent, so it’s probably not the same as somebody looking to expand branded cakes or some other consumer good for example.

Still, the group is targeting in excess of 15% annual revenue growth over the medium term in both its Ireland and US markets at an underlying net operating profit margin of 20%, so management must be confident of its ability to service multiple markets.

It’s an interesting prospect with some promising signs of a quality business, and it remains on my watchlist of stocks to look at in more detail. The shares dipped recently but have since recovered, so a bit of a missed opportunity there.

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Fulham Shore (LON:FUL)

Share price: 16.5p (+6.45%)

Shares in issue: 634,820,577

Market cap: £104.7m

Trading update

The Fulham Shore is one of the better casual dining operators out there, ably helmed by the experienced David Page and co, who have worked together on several other successful roll outs in the space before.

Following the removal of all restrictions in February 2022, customers have continued to return to the Group's restaurants in increasing numbers, reflecting the fantastic quality and value of the Franco Manca and The Real Greek propositions.

Despite periods of disruption, H2 has been strong and ten new restaurants have been opened in the year. Two franchised Franco Manca restaurants were also opened in Athens, Greece. That could be an important development: proving that the Franco Manca pizzeria chain has international potential would materially improve the valuation should management look to sell.

Input costs rose throughout the year due to increased transportation costs, raw materials and the impact of Covid-19 disruption.

However these were mitigated through small price increases and generated better results than the Board had previously anticipated at the half year.

The group’s restaurant businesses have been structured to be able to provide very affordable price points compared to more established competitors, so the ability to increase prices has been built in from the start.

This strong trading momentum and expansion drove a significant increase in revenue, comparable with the levels seen pre COVID-19. As a result, the Board expects to report that revenue, EBITDA and Adjusted Headline EBITDA for the financial year ended 27 March 2022 will be ahead of last year's figures and comfortably ahead of market expectations.

With those expectations helpfully flagged as revenue of £73.4m, EBITDA of £16.5m and Adjusted Headline EBITDA of £9.5m.

The pre-IFRS 16 net cash position as at 25 March 2022 had improved to £4.0m from net debt of £3.6m, with undrawn bank facilities of £15.9m. That’s despite opening 10 restaurants, and the company intends to continue funding new sites via internal cash generation.

Current trading and outlook

The 24th The Real Greek is soon to open up in Newcastle (with another five in legal negotiations) and there are five upcoming Franco Manca sites in places like Edinburgh, Manchester, Canterbury and Didsbury, so the group is proving the scalability of its concepts.

The group plans to open around 18 new restaurants across both brands in the financial year ending March 2023 and will review this opening programme at the half year.

The outlook for costs, be they utilities, raw ingredients or labour presents challenges for all operators within the sector. In addition, the reduced VAT rate and hospitality business rates relief both ended on 1 April 2022. Thanks to its brands' affordable, value-for-money proposition, the Group is well placed to offset these increased costs through increased menu pricing, which, when they occur, will be implemented to cover costs rather than increase margin.

Conclusion

Tricky market periods, once concluded, present enhanced opportunities for quality operators. I think that’s the situation The Fulham Shore is currently in. It’s not all sunny skies now, with higher costs an increasing issue, but hospitality has survived worse and good companies will find a way to manage those pressures.

An important point to consider here as well is that the market for new sites is far more favourable for operators than it has been for many years. That will provide a strong tailwind, and fundamentally changes the economics for those operators experienced enough to capitalise.

The group’s shares have held up well recently, but then I would argue that its prospects have improved materially over the past year or so and management will be confident of further growing the company. I think it’s proving to the market that it’s a cut above other operators in the space and, if I had to pick a sector winner over the medium to long term, this would be it.