Small Cap Value Report (Thu 13 Feb 2020) - FLO, DOM, ACSO, HYNS, FEN, FLTA, KEYS

13th Feb '20 by Paul Scott

37 comments 7698 reads

Good morning, it's Paul here with the SCVR for Thursday.

No lengthy preamble today, as I was too tired last night to write up anything, and lacked inspiration on topics.

Estimated time of completion: 1pm
Edit at 13:04 - today's report is now finished.

It all looks really boring today, so I'll try not to let my lack of motivation show! In fact, it is worth putting in the effort ploughing through lots of apparently boring companies, as occasionally a nugget of gold is unearthed.

Coronavirus update

Reported cases in China have shot up overnight. The website I follow (after I verified it's from a trustworthy source, essential these days in the era of fake noooz) showed a jump to 60,332 cases (59,807 in China) this morning. 24 hours earlier it was showing c.45k cases. Although the 15k jump overnight could be due to changes in how the numbers are being calculated in China. It's been previously reported that the Chinese were under-stating cases, by reclassifying some outside of the reported numbers. Plus of course there could be any number of milder cases where people don't seek any medical help at all.

Edit: the BBC website confirms that the way cases are being reported in China has indeed been changed, hence the big jump overnight. It also points out that this has thrown trend analysis into chaos. End of edit.

I'm conscious of the fact that we're talking about a situation with horrible human consequences. Please take that as a given in the discussions here, nobody needs reminding of that, I'm sure we're all concerned. We have to focus here on the impact to businesses, and shares, because that's the topic here. It's probably the biggest single risk factor to markets & the economy right now.

The overnight jump in cases, even if it's due to a recalculation of the numbers, clearly moves this issue up the priority list, and has slightly dented futures overnight.

I remain of the view that markets seem far too sanguine about coronavirus, and it could cause a lot more disruption than is currently factored in. Particularly in the US, where amazingly markets are hitting new highs. They must just see the virus outbreak as a temporary & remote issue that doesn't affect them. I'm not sure that is correct, but time will tell.

It seems to me that this is probably…

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Paul Scott

13th Feb '20

Thanks Sunday Trader, that's really helpful.

If an OEM is buying parts from a distributor, then presumably they must be a low volume producer? As otherwise they would presumably be buying in bulk direct from the parts manufacturer?

I wonder if you could give any examples of companies & products that FLO might supply on the OEM side? That would help me visualise things, and hence understand the business model better!

I get the distribution business for lots of hydraulic parts, to end users - e.g. if the hydraulics on a digger on a building site goes wrong, then the builder or the hire company would need to buy a new O-ring for it, or something like that. Hence FLO holding lots of items in stock, and supplying them fast, creates their opportunity to make a decent profit margin - both customers and suppliers need a distributor to sit in between and hold the inventories.

Thanks, Paul.

cmpeckham

Yes, MXC Capital (LON:MXCP) looks interesting, but it raises the question of how to deal with unlisted shares in an efficient way. I used to hold share certificates years ago but have no idea how to manage unlisted shares today.

I would normally file in the "too dfficult" draw and move on, but it seems to be a question worth answering due to the apparent trend towards more delisting. Sooner or later, it seems likely, a share I hold will delist and there may be opportunities such as MXC Capital (LON:MXCP) in the unlisted space.

Does anyone have any knowledge or suggestions?

How interesting, many thanks!

I love the new feature allowing videos to be embedded in posts/comments.

Howard Adams

Hi OldManFit

Very insightful posting, thank you. What a great guy Dr John Cambell.

Regards

Howard

SundayTrader

Paul

I know nothing about £FLO's business other than what is on their website and what I think is the one Annual Report since they went public. Mind you, if I had made a rule of never buying shares in a company without studying the Annual Report first I would be a lot better off.

They give a revenue split of 87%/13% between distribution and services. Services is the design and supply of bespoke equipment to OEMs. Distribution includes both supply for repair and maintenance, and supply to OEMs. I can't find a breakdown between the two - they may not have been able to do one given the comments about centralising their IT systems.

Their markets are heavy equipment and industrial, not consumer. In transport they talk about off-highway, construction, and waste management vehicles, for example. Their segmental reporting breaks down approximately as FlowTechnology 40%, PowerMotionControl 54%, Process 6%.

PowerMotionControl(Hydraulics) they illustrate with the hydraulics on a digger - there is a wide range of industries, from Agriculture through to Shipbuilding, but all relating to heavy duty equipment. FlowTechnology (Pneumatics) they illustrate with a range of pneumatic equipment used in a factory. Process they define as the "process sector". In these markets I would expect their OEM customers to be making small volumes of specialised kit to order - as you say, the likes of JCB have their own parts warehouses.

They estimate an underlying 4% growth in the markets they serve. The geographical breakdown is approximately 80% UK, 18% Europe (Belgium and Netherlands) and 2% rest of the world.

abtan

Re Filta Group (LON:FLTA)

Hi Paul

Thanks for the report on Filta Group (LON:FLTA) (which I bought recently).

I was happy with today's updates, due to the following reasons:

2019 Adjusted EBITDA = £3.2m
Assuming all else being equal, the £100k of cost savings per month that were alluded to in today's update should produce an Adj. EBITDA of c £4.4m in 2020
CAPEX is minimal for the company, just £150k in H1 2019 (and £300k in 2018).
Assigning a reasonable multiple, for what I believe is a "sticky" revenue business, of say x15 gives me a target Market Cap of c.£62m
The market cap after today's jump is c.£50m
So there's stilla c.20% upside to today's price, albeit on some basic assumptions, and that's only looking 1 year out.

You mentioned some risk around revenue from signing up new franchises slipping away.

This of course could be an issue, though there is perhaps some downside protection in the fact that 81% of H1 revenues were recurring in nature. It's also worth noting that 9 franchises were added in that same period to bring the total to 204 franchises. Quite a small amount relative to the size of the group. And as you rightly pointed out, the entry into the US leaves a lot of room for upside, alongside already expanding franchises in Europe right now.

Like you it will be interesting to see the final results in detail when they're published.

Thanks again for today's report.

Cheers

Economic_Literate

Coronavirus - just to cheer everybody up - this BBC documentary (along with Cambridge University) from 2018 on a simulated pandemic to Spanish Flu of 2018:

Contagion: The BBC Four Pandemic: www.bbc.co.uk/iplayer/episode/... via @bbciplayer

43 million UK citizens infected resulting in approx 900,000 deaths.

Equity Development

FYI - financial forecasts for accesso can be found here:

https://twitter.com/CapitalPmh/status/1227897503477051392

Thanks abtan, that's great additional detail from you! All makes sense to me.

Best wishes, Paul.

Pantastic1

Keystone Law - down 6% . I feel that as a 'people business' that is an overkill drop. This appears to be a very well run operation which is growing nicely. Personally I have bought more today - I'm not worried about the forward PER

Howard Marx

Coronavirus - just to cheer everybody up - this BBC documentary (along with Cambridge University) from 2018 on a simulated pandemic to Spanish Flu of 2018.

But we're not in the EU anymore, so it can't affect us, surely?

Hi Paul - Just to let you know on accesso that I suspect Stockpedia's EPS numbers should be in dollars, not pence. The last broker note I saw from Peel Hunt forecast an adjusted EPS of 43 cents for 2019 - admittedly back in Sept'19

Tortoise investor

Strange activity over at Malvern International (LON:MLVN) (assuming my app isn't faulty) as looks like volume of 1.78m today for this tiddler market cap of £1.55m. But the share price hasn't moved. Major shareholder exiting?

ezlifeme

Evening Paul i’ve just noticed you are continuing dry January into Feb. I wondered if by March you might think of adopting Melvyn Braggs drinking habits

Mr Google will explain if asked just that

Hi edmonda,

I've just checked, and Stockopedia does correctly show Accesso's figures and forecasts in US dollars.

It was me who had a brainstorm, and wrongly added the annotations in pence, not cents. Drat, I'll have to re-do it now! Apologies for my error, and thank you for pointing it out. Now fixed!

Regards, Paul.

That's about a £9k trade!

Good point!

nquaile875

The sunny uplands of Brexit!!

gus 1065

14th Feb '20

Had a bit of a dig into Mxc Capital (LON:MXCP) that announced its AIM delisting and orderly self liquidation of its investment portfolio over the next five years. Plenty of information on the company website and the annual report as of August 31 2019 is reasonably current. Then then cash position was £21.5m and the investment book was valued at £30.1m. The listed book included a 15% shareholding in Adept4 (now Cloudcoco (LON:CLCO) ) which at current market value is about £750k and a 45% holding in Ide Group (LON:IDE) worth about £6m. There are also various loans outstanding so attributable book values/exposures shown are higher than this (see accounts for more detail). In addition there is a further £15m invested various unlisted companies. Stock ranks on the two listed companies are not great (don’t think I would invest in either personally but this kind of tech is not my bag). All told NAV as at August 2019 is stated at £71.3m but not entirely sure what else there is apart from the cash and the investment book. As of last night close after the markets have digested news of the delisting, the reduced market cap was about £38m so discount to NAV is now over 40%.

Ongoing Opex is shown as approximately £2.2m per annum which would hopefully come down during the wind down if the company is not actively increasing its book. Company shares are quite tightly held by directors and individuals. Not a lot of institutional holdings but presumably those that are will probably look to sell ahead of delisting. Given the alignment of interests, one would hope the company liquidation will focus on maximising exit value given the big equity stakes of the principal directors. (The cynic might even suggest the delisting is more about creating an opportunity for personal nest feathering rather than what’s in the best interest of the company).

At first blush it does seem interesting. Main questions for me is what is the real value in the investment book as they may be a lot of dogs, yet one killer investment could make a huge difference. Also need to get happy that the liquidation proceeds will go to shareholders rather than be bled out via fees and emoluments to the executive. Initial thinking is the risk:reward trade off is quite attractive, especially if the share price continues to drift downwards in the run up to delisting. Worth watching also to see if the current executives/individual shareholders start hoovering up more shares which for me would be a strong buy signal.

Gus.

Irishmanabroad

27th May '20

Accesso Technology (LON:ACSO)

The rights offer arrived at my brokers this morning, with Tom Burnet leaving, is there any future for this company?

Small Cap Value Report (Thu 13 Feb 2020) - FLO, DOM, ACSO, HYNS, FEN, FLTA, KEYS

Coronavirus update

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Paul Scott

37 comments

Accesso Technology (LON:ACSO)

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