Small Cap Value Report (Monday 24 April 2023) - De-listings, MGP, MIND, LOK, CKT, SPSY, CARD, CNIC

24th Apr '23 by Paul Scott

101 comments 12061 reads

Good morning from Paul (I'm back at work now) and Graham.

Mello Monday is tonight, starting at 17:00. There are 3 interesting companies reporting, that we've reported on here recently. Also a session on ChatGPT, and finally a panel discussion on the disastrous delisting of iEnergizer (LON:IBPO) so all very topical & interesting I think.

Delistings

Again this topic rears its ugly head. We often flag this here in the SCVRs as a sudden and brutal way that shareholder value can be destroyed, at least for small shareholders like us. I expect the tiniest companies, that have effectively failed in their business models, to delist, and frankly good riddance - I'd happily see several hundred micro caps disappear, and we largely ignore most of the obviously rubbish ones here at the SCVRs anyway. However, last week shocked everyone with a much larger company, iEnergizer (LON:IBPO) (over £500m market cap before the announcement, a lot less now), and highly profitable & dividend paying, suddenly announcing it was intending to delist, and it's a done deal given the CEO controls it with an 83% shareholding.

I was discussing IBPO with some investor friends over the weekend, and for me the conclusion is to reinforce my policy of not investing in any company where one individual has such extreme shareholder dominance (83% held by Anil Aggarwal). Or at least I would never invest in any AIM-listed company where such a ridiculous share ownership structure exists, because AIM has inadequate controls over the behaviour of a dominant shareholders. AIM allows companies to float with a clearly inadquate free float, and also allows the dominant shareholder to de-list any time they like, if they're above 75%, or can get there with the agreement of others. Surely we need a new rule to require at least 50% free float before companies are allowed to list on AIM? And maybe we should copy other international markets, where a dominant shareholder is restricted from voting in a delisting? Companies need to be forced to commit to a listing, even if it ceases to be convenient for a controlling shareholder.

However, this idea conflicts with my preference (following a lot of very successful investors) for family-run and controlled companies, which are often very good performers long-term. It was pointed out to me that both VP (LON:VP.) and Goodwin (LON:GDWN)…

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simoan

24th Apr '23

However, I (regrettably?) sold out on Friday after finally receiving a long-awaited response from the broker about why the 2022 interest income had decreased ($40k in 2021 vs $17k in 2022) even though cash balances had increased ($16,775k in 2021 vs $17,496k in 2022).

Hi abtan,

I don’t really understand why there should be a causal relationship between the year end cash balance (and lets remember it’s the cash balance held on that day only), and the amount of interest earned over a 12 month period? You’d need to know much more about the profile of the cash balance over the year to draw any meaningful conclusion in that regard. The one thing we know about the business is that incoming cash is inherently lumpy given the nature of the contracts it signs.

All the best, Si

timarr

RE: Spectra Systems (LON:SPSY)

While that's undoubtedly true the lack of interest suggests that almost no cash was on account earning during the year, in which case the year end cash balance management is pretty extraordinary. I can't think of any particular reason why Spectra's clients would be paying them en-masse at the company's year end either.

I imagine there's some realistic explanation, but given the opacity of the business I preferred not to wait around to find out.

Of course, that’s fine, and the right thing to do if you’re concerned, but if you’re implying there’s a good chance of a fraud taking place and that the cash may not really exist as shown in the accounts (a la Patisserie Valerie) then it would be dead easy to fix the interest earned in the accounts too. Even with my poor accounting skills I could manage that to cover my tracks :) Anyway, it looks like something spooked the horses today!

Anyway, it looks like something spooked the horses today!

Probably the CFO departing without so much as a thanks for their efforts?

FWIW I also noted De La Rue (LON:DLAR) moaning about the decreasing demand for banknotes due to central banks having overordered during CV-19 times. It's unclear how Spectra's earnings are linked to banknote production but in the projects I worked on (now over a decade ago) prices of security features were set on the volumes used. Normally those are fairly predictable, but maybe not right now?

Lot of moving parts, and although I'd be staggered if there's fraud involved here, given the client base, it's always been tricky analysing the business, and this is just another layer of complexity. There's plenty of value lying around in markets at the moment, no need to tax my increasingly febrile wits on something I clearly don't understand.

timarr

Maybe she was just crap at her job. It happens. Looking at her Linked-In she’s not stayed in any job for very long since she left Covidien in 2015 following the takeover by Medtronic. They certainly didn’t want to retain her services. Tbh I find the gushing send off RNSes when someone has jumped before they were pushed really fake.

Richard Goodwin

There were lots "More than 80 Chinese enterprises have joined Aim since 2005 " 2015 extract from FT

Monty9

Thank you Paul, encouraging. Disappointment reduces in the inverse ratio to the price!

wolfspirit

Oxford Instruments (LON:OXIG) is rising nicely (i hold) - but what is more important is that Spectris (LON:SXS) has risen even more. Spectris abandoned a bid in march last year at £31 due to Ukraine conflict uncertainty. Conflict is still on - but is the uncertainty the same?

Spectris' paper is worth about 40% more now. £27->38

abtan

Spectra Systems (LON:SPSY)

Hi Si

Interestingly it was Patisserie Valerie that came to mind when I saw the low interest income in the Spectra accounts.

Having said that, when I made my decision to sell I didn't actually assign a high probability to fraud. But after today's events - the CFO abruptly leaving - that % has ticked up a little.

It's a strangely timed coincidence given that the broker finally responded to me (after 3 attempts over the last month) on Friday.

---

I think Timarr has responded with the rest of my thoughts, especially the assertion that interest income should not be that low, even if the annual cash balances were highest at the end of December.

The reported cash balances at FY21 Year End, FY22 Interims and FY22 Year End were $16.8m, $18.0m and $17.5m respectively.

A 2% interest on an average $17m cash balance = $340k
For comparative purposes (and apologies for stating the obvious) a 2% interest on an average $5m cash balance = $100k

And yet the interest income in 2022 was only $17k.
And the FED rate at the end of 2022 was already 4.25% - 4.50%

Something just doesn't look right.

I was hoping that the broker would come back to me with a plausible explanation for this, for example, that the majority of the cash is restricted with zero interest income, or that restricted balances were much higher in 2022 vs 2021, etc....

But their response wasn't really convincing, with a mention of there being a lag, which doesn't make sense when I'm asking about a period of 24 months, and that the forecast direction of interest income is upwards, which I can't really see from looking at the accounts.

Everything could of course be fine, but for now I'm happy to wait on the side lines.

Tommy H

No problem

https://www.dividenddata.co.uk...

Cheers

Tommy

The last news announcement by Gulf Keystone Petroleum (LON:GKP) was 31 March saying shutdown would be about two weeks, nothing since, have checked both the company website and Stocko? Sorry late night question so will post again tomorrow am as well, just in case someone has something that has come via email or another source?

Thanks

Paul Scott

I'm certain I was the ONLY commentator at the time who said AVOID ALL the Chinese AIM floats (frauds)

Also I was the commentator who wrote 29 articles pointing out the fraud at Globo - over many years - I saved it all - here is the link.

We’re just speculating here but the two could be connected and it’s possible that the CFO was allowed to resign (rather than being sacked) for the good of her CV because of poor cash management i.e. leaving cash in non-interest bearing accounts. She certainly had no previous experience of being a CFO of a listed company and the low interest income period covers the entire time she was with the company. I guess time will tell if Spectra Systems (LON:SPSY) is some kind of fraud as you and timarr seem to be implying, or whether they just need to do very much better with the new CFO appointment.

Dear Santawani,

There are times that I could feast upon your lovely comments! How marvellous - thank you!

I'm so sorry if you were caught on IBPO. What a terrible situation.

Best wishes, Paul.

Simon Cannell

25th Apr '23

Abtan,

Ditto I also contacted them 3 times about the same query (both to company direct & WH Ireland) and eventually received an answer after a couple of weeks - on 6th April (so think your response may not coincide with departure of CFO just down to slow response) saying that it was due to lag in rates, as you mentioned, but also down to the fact that ‘Restricted cash (CD) account with locked-in higher interest rate decreased by 50% in late 2021 as customer’s requirements eased.’

In terms of lag to funds rate the explanation may explain why they got a slightly higher interest in 2021 than fed funds rate but historically they have always had a interest income slightly under but not as much as in 2022

year/ interest income /effective percentage/fed funds rate that year

2022 : 17 (17,496) 0.01% (0.08-4.3%)

2021 : 40 (16,775) 0.2% (0.09%)

2020 : 114,628 (14,038,295) 0.8% (1.5- 0.9%)

2019 : 197,497 (14,250,353) 1.3% (2.4-1.5%)

2018 157,630 (12,662,410) 1.2% (1.5- 2.4%)

2017 60,480 (11,180,578) 0.5% (0.6 – 1.4%)

On the restricted cash part they were referring to this was , according to annual report a ‘ certificate of deposit held as collateral for certain performance requirements in accordance with terms of a services contract. As of both December 31, 2021 and 2020, a service contract required that US$500,000 be maintained as collateral for contract performance. As of December 31, 2021 and 2020, the Company collateralized the service contract with a certificate of deposit of US$500,000 and US$1,099,021, respectively, whose maturity exceeded 90 days at the date of acquisition.’

Obviously this represents $500,000 less in this higher interest but (obviously) still leaves an apparent almost $17m languishing with limited interest , so still leaves you scratching your head a bit?

ken mitchell

Thanks Tommy

I’m pleased you found it useful and it’s very good of you to post to say so.

Andrew Hanson

I held Medica for three years or so. About a fortnight back IC Alpha were very downbeat on it, the final sentence of the report saying "Expect little in terms of total shareholder return." I wasn't sure but decided to sell out and go elsewhere. Last week.

Talking Money

28th Apr '23

Medica (LON:MGP) piqued my interest a year or so ago when it was highlighted in the Slater growth screen. After doing some further research it seemed a well run company and decided to invest. My strategy tends to be buy and hold (forever sometimes) - in part because I am not particularly good at selling. Glad that this has had a bid, but 20% premium seems a little on the low side given that it's a much better/bigger company now.

RebelChatRoom

CARD mention here in an interview I did with Paul Hill on Vox. Includes a number of stocks and a reference to Paul Scot's interview with Mike Raybould, CEO of PMP

https://www.youtube.com/watch?v=tgM9631JnT8&t=143s

The Boon Fund

31st May '23

I'm very late in getting round to looking at the Checkit (LON:CKT) results.

But there is a big red flag.

ARR at end of FY Jan23 was £11.5m. This grew +28% YoY.
This would be the combination of winning new subscription customers, but also any increase in subscriptions (xsell, upsell) from existing customers
However, revenue retention rate was 116% during the year. This means that, on average, their customers increased their recurring commitment with Check-it by 16% during the year
So this suggests that organic, new customer growth was less than 10%?

If so then that is a really anemic rate of growth. My guess is that they need to get to around £18.5m to start breaking even. ARR currently is £11.5m, so another +61% growth needs to be found. Before their cash pile runs out.

I think this is looking like a tall order... hard to see a £26m market cap.

Small Cap Value Report (Monday 24 April 2023) - De-listings, MGP, MIND, LOK, CKT, SPSY, CARD, CNIC

Delistings

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Paul Scott

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