Small Cap Value Report (Mon 5 July 2021) - FRAN, IGP, RST, TRT, PRV, TPX

5th Jul '21 by Paul Scott

40 comments 10554 reads

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

Timing - today's report is now finished (15:15)

Disclaimer -

A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!

It's helpful if you include the company name or ticker within reader comments, otherwise some readers may not be aware of what company you are commenting on.

Agenda -

Paul's Section:

Intercede (LON:IGP) (I hold) - a reassuring, rather than earth-shattering Q1 trading update. Gives us more colour on the reseller partner programme called "Connect". £600k new contract wins in Q1. Long tail (c. 10-20 years typically) of recurring revenues. Things are going well. Valuation looks about right to me, for now. Long-term upside I hope, as this is a core "coffee can" holding in my portfolio.

Restore (LON:RST) - upbeat trading update, restoring divis, and confident-sounding outlook. The valuation doesn't look stretched. Could be worth a closer look maybe?

Transense Technologies (LON:TRT) (I hold) - in line with market expectations for FY 06/2021. Not enough hard numbers to form a firm view either way. Small, speculative, but looks OK. Not burning cash, so dilution risk seems low.

Porvair (LON:PRV) - solid interim results. As usual when I report on this company, I struggle to understand why it's worth a PER of almost 25? Lacklustre outlook comments too.

Panoply Holdings (LON:TPX) - I've been sceptical about this acquisitive software group in the past. Looking at it with fresh eyes today, a lot of my concerns have now been addressed. Strong performance, and good outlook. The valuation looks expensive, but if high performance and growth are maintained, then it could be justified.

Jack's Section:

Franchise Brands (LON:FRAN) - fast-growing franchise…

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Kouremenous

5th Jul '21

Hi Paul,

I'm surprised you're not a little more bullish re Intercede (LON:IGP) update this morning but maybe my calculations are overly optimistic. Given the vast majority of their revenue is recurring, and their high operational gearing levels mean most of the 600k drops to the bottom line, I calculate a forward PBT of £2m+ for Y22 with 3 quarters of the year to go. Assuming some further sales this year then the forward PE could be as low as 20. Am I being widely optimistic?

All the best and thanks so much for all your analysis

greensiax

Here are my SCVR heat maps for today (prices as at ~9:55am).

I share these heatmaps with the intention of giving a visual indication of what is going on in the SCVR world: who’s reporting (and it's impact on the share price); and what’s moving more than 'normal'. There are no associated recommendations, implied or otherwise, just information. How, or indeed if, you choose to use that information is up to you. Please feel free to ignore them if you don't find them useful.

Please read my heat map thread for a great deal of explanation of how the heat maps are formed and how I use them to guide me with my research, and for a full key to the contents.

I very much welcome feedback so if you do have any feedback, not already covered in the heat map thread, it would be very helpful if you could post your comment in the heat map thread rather than the SCVR thread. The more specific and constructive the feed back is, the more that likely it is that I will be able to act upon it. Thank you all for the feedback so far.

Small / Micro Caps reporting today:

Big movers today in the SCVR world (moving more than a 20d EMA of the ATR against either yesterdays close, or today's open):

Warm regards, stay safe, and best of luck!

Bouden54

I think I heard they were paying around 16x earnings for the catalogues (on average, some will be more expensive) which doesn't seem excessive as they are also seeing good growth from increased streaming. I think the older catalogues should provide a very reliable income stream for many years, but not sure about newer songs. They have been increasing exposure to older catalogues though with around 60% held in 10y or older vintages. Overall worth holding I think for its non-correlated qualities and prospect for valuation gains.

Chrisp

Paul, could you comment on The Panoply's results published today? There is a PI World webinar with them today too. Thanks, Chris

Brookeda

I've held Song now for a couple of years now and have got a total return of 28% so far so I am reasonably happy with what should be a strong performer over time, with compounding.

It is an unknown to a degree but I am hopeful it'll continue to do a reasonable return over time. The only thing I would add as a concern as there's new music created every week so I am not sure they will ever stop needing to raise money to keep buying new songs. It should hopefully slow down over time but the need to raise money might never end.

Paul Scott

Hi Chris,

Yes, I'm looking at Panoply Holdings (LON:TPX) now actually! The section should be up here by about 2pm, as I'm taking a break first to rest my eyes from staring at a computer since 06:30, and have some lunch.

Regards, Paul.

simoan

Paul,

I admit I don't understand your comments on D4T4. This is a company that has just reported for FY21 the lowest net profit and operating margin since it's records on Stockopedia started (2016). And yet supposedly the change to a recurring revenue model is progressing smoothly?

It's barely, increased revenue in that time either and still relies on lumpy one-off licenses for 53% of sales. This means it always appears to be scrambling to close sales in H2 every year to meet numbers, and yet it's on a PER of 48. It makes no sense to me and I can only conclude the share price is held up by"Greater Fool Theory". Not what I'd be looking for if I had a coffee can...

I wish you luck with it!

All the best, Si

rmillaree

Intercede (LON:IGP)
Kouremenous
"I'm surprised you're not a little more bullish re Intercede (LON:IGP) update this morning but maybe my calculations are overly optimistic. Given the vast majority of their revenue is recurring, and their high operational gearing levels mean most of the 600k drops to the bottom line,"

How do you know these revenues are not already baked into current/next year company expectations?
If they are then they don't really tell us anything today that we didn't already know and expect previously.

Note the company has not updated expectations as far as i can see ref sales or profits so i am kinda presuming these signed contracts are part of what they previosuly expected to arrive at some stage or not material enough to change the picture ref expectations.

This being the case only very modestly positive news at best.

Note if expectations have now changed and they are giving nudge nudge wink wink to brokers and are telling us nothing in official release - this isnn't exactly creating a level playing field for pi's and brokers and their best buddies - unless you are a best buddy.

Thanks for the reply rmillaree. Perhaps that's what I am missing!

However in the past updates on contract wins have included statements such as;

"The contract was included within the directors' expectations for the current financial year ending 31 March 2021."

Ever hopeful I read these as in addition to expectations :-)

Intercede (LON:IGP)

The contract was included within the directors' expectations for the current financial year ending 31 March 2021."

Ok thats good to know i see you logic here - however they have gone from being clear and transparent to opaque and obtuse in that regard now

Hey ho - if it aint said i wouldnt presume it other than we are forced to presume way to much trying to work out what companies say (or aren't saying but mean) most of the time nowadays.

all good fun and games.

indyinvest

If you are one of the many Stockopedia fans who are, like me, interested in investment trusts, such as SONG, you might like the free weekly Money Makers investment trust podcast I record each week with Simon Elliott, head of investment trust research at Winterflood Securities. We cover all the major announcements of the week in an hourlong podcast and currently have 1300+ regular listeners, including many professionals..https:/money-makers.co.

peterthegreat

Just to add to Simoan's comments on D4T4, I was also a bit concerned to see that some of the company's most experienced management are retiring at similar times, although they are being replaced by experienced personnel. Also, I notice that the company's Celebrus product already included some fraud protection capability as early as 2019 but I guess they must have developed it further to justify the more recent annoucement that they are moving into this market.

Also worth checking out Round Hill Music Royalty Fund Lp (LON:RHM) which is arguably a more interesting opportunity than Hipgnosis Songs Fund (LON:SONG) as it is much more heavily tilted towards older catalogues (60s-80), and the team has more of a proven track record (they run some private music royalty funds and have generated some very good returns over past decade).

James Kerr1

Panoply Holdings Panoply Holdings (LON:TPX) - I hold.

Further to Paul's note - the biggest adjustment is a £4.26m charge for higher contingent consideration - having watched their presentation they say that this method of paying for acquisitions is not going to be used going forward - there is one that rolls up in the first half of this year and one in the second, but after that it is cash/ debt and shares, which does of course bring the prospect of some further dilution. They have headroom on a facility with HSBC, and are generating good cash, which should hopefully keep the dilution under control, and they do point out that acquisitions should be earnings accretive immediately.

I'm reluctant to buy shares on fancy multiples - I could never bring myself to buy Kainos as they always looked 'too expensive' but they kept growing and the share price kept going up, and I'd take another look and they still looked 'too expensive'. I bought this six months ago, it has already done quite nicely, and I plan to hold tight for a while.

CamRaid

Paul, I found your opening comments on D4T4 interesting.

Seems you accept the investment in new customers for them but not for Naked Wines.

Just an observation as when I was reading it it made me think of the Naked Wines model.

I hold Naked and have had D4T4 on my watchlist. I am tempted to buy in at this lower entry point.

Leebod

It was worth waiting for - really useful insights that I hadn't fully considered before. Thanks Paul!

Sniggolb

I see that the love affair with Best of the best is over and the shares have abated by one third because the owners unloaded a chunk of stock a short time before a profit warning.

Lorenz Hart (partnered with Rogers before Hammerstein). Hart sadly drank himself to death. He was a great song writer. He summed it up”

“ when love congeals, you can small the odour of performing seals, the double crossing of high heals. I wish I was in love again.”
it will take some time.

timarr

Although it's been a very peculiar year the eps has dropped from 8.13c to 4.73c - putting Hipgnosis Songs Fund (LON:SONG) on a P/E of 35. A big jump is forecast next year, but I'm not really sure why.

The proposition is good, I'm just not convinced by the timing as an investor. Shares in issue have more than doubled in two years and Merck Mercuriadis has indicated that the pace of acquisition will carry on for at least five years. Obviously the money is being spent on assets - songs - and those generate earnings. I'm just not sure how anyone can know what the value of those earnings will be in five years time.

The whole thing, including the prices paid and the valuation of the portfolios, is very opaque. I'd rather sit on the sidelines and see this develop - hopefully it'll turn into a proper alternative asset class, but the evidence so far is decidedly mixed.

timarr

mark1308

6th Jul '21

Paul , many thanks for your general market musings. It is always good to see your general views along with specific company thoughts.

Hi timarr,

I bought a few Hipgnosis Songs Fund (LON:SONG) in March 2020, mainly because I couldn't understand why it had fallen in-line with the market when its source income was clearly uncorrelated, and as we have subsequently found out, I assumed people would listen to even more music during the lockdown. I also took part in a C share placing via Primary Bid which made a small return but I have offloaded those.

I'm not sure P/E is a useful valuation metric for these strange types of investments; it's a bit like all those infrastructure funds. Although on any valuation metric it looks expensive!

I agree, and I'm a pretty weak holder of the stock I bought last year - I'm not an income investor! However, it does seem that they actively manage the songs in a way the original owner would never do i.e. they have a team actively placing songs in films, ads and encouraging new cover versions by major artists to increase the income streams. So I believe longer term there is scope for them to add value by increasing revenue and profit (which should be very high margin) through more active song management.

BTW I watched the film "Yesterday" on iPlayer last night - typical Richard Curtis script, directed by Danny Boyle, interesting premise with a few laughs but otherwise turgid! - and noticed that they had to pay $10 million for use of the Beatles songs in the film. I Imagine a biopic of Neil Young, or one of the other artists whose catalogue they own, would generate a really nice little earner!

All the best, Si

Small Cap Value Report (Mon 5 July 2021) - FRAN, IGP, RST, TRT, PRV, TPX

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Paul Scott

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