Good morning, it's Paul & Jack here with Thursday's SCVR.
The volume of updates overwhelmed us yesterday, but the ones we missed were just in line with expectations, and didn't move much in price. When it's busy, we focus primarily on unusually good, or bad updates, as those are the ones that move share prices.
Brief preamble - inflation
By the way, one reader comment yesterday seemed to think I'm trying to set myself up as an economic forecaster, and (rightly!) cautioned on the futility of this. Just to clarify, when I do a preamble on the market, or the macro picture, I'm just airing my current thoughts on it, driven by news, as a discussion starter in the comments section. That also sets the scene for my investment decisions. For example, at the moment I'm not going to be buying any UK shares on toppy valuations (high PERs), because that type of stock has sold off big time in the US over the last year. The UK often follows the US, hence I feel risk:reward could now be unfavourable for highly rated shares. If they were still booming in the US, then I'd be more sanguine about paying up for a growth share here.
CPI inflation hitting 7% in the USA yesterday is another key piece of news, although the market seemed to take it in its stride (already anticipated?). That level of inflation hasn't been seen in the US since 1982, so it's bound to have a big impact on many companies. Inflation, and what happens because of it, is probably the biggest single issue we need to consider right now.
Look at Accrol Group (LON:ACRL) yesterday, which issued a profit warning due to higher input costs, but saying that it would pass them on to customers, but with a delay, thus hitting short term profits. Not good enough for the market - it hit the already battered shares by another 19%. So we ignore this issue at our peril.
Whereas Portmeirion (LON:PMP) has also suffered issues with cost inflation (especially freight), but grew sales more than enough to cover it, and issued a positive update yesterday, 9% ahead of profit guidance, leading to a 13% share price rise.
How on earth do we anticipate this? It's very difficult, and I think we just have to resign ourselves to getting some right, and some wrong. Or sitting on the sidelines, and buying back when companies issue positive updates. That means paying more for good performers, but it also avoids profit warnings. Everyone has their own way of doing things.
Interestingly though, a broker note for PMP points out that when freight costs reduce, that will provide a future profits tailwind, as the 2021 comparative numbers should be easier to beat. Especially since customer demand is high for PMP, so it's enjoying increased sales which could continue.
Lots to think about!
Agenda -
Paul's Section:
Asos (LON:ASC) - brief comment. Reassuring, in line trading update. Price rises being implemented, and expecting supply chain to improve. Hence good tailwinds for next year. I think sector sell-off looks overdone (Asos down over 60% in 9 months). Could be a buying opportunity perhaps? Moving to main market from AIM next month. I don't currently hold, but am thinking about buying back in.
Card Factory (LON:CARD) - this trading update starts off positively, but then delivers a bombshell at the end, with a huge increase in costs flagged up. Market doesn't like it, understandably, it's a profit warning for next year.
Countryside Properties (LON:CSP) - profit warning & unexpected CEO departure from this mid cap housebuilder. I briefly cover it, because there might be sector read-across for other housebuilders, and building supplies companies, possibly?
Science (LON:SAG) - another impressive trading update, following a series of good updates in 2021. I continue to like the look of the numbers here - strong earning growth in the last 2 years, very strong actually, helped by acquisitions. Valuation looks reasonable. Worthy of a closer look by readers, I think.
Finsbury Food (LON:FIF) - a reassuring update for H1. So far FIF has been able to mitigate increased costs & supply chain disruption. Looks a nice company, on an undemanding valuation, I like it.
Jack's Section:
Circassia (LON:CIR) - turnaround is gathering pace here. The company is now EBITDA positive and underlying cash generative, with revenue up 20% at constant currency rates. The market cap is already quite big relative to earnings so a lot depends upon continued growth of the group’s NIOX asthma products, but it’s a large market and the situation is becoming less risky.
Quixant (LON:QXT) - looks interesting. Founder/chairman remains largest shareholder. Ran into trouble before Covid, and lockdowns have since impacted. Some signs of quality though, and no equity dilution over what has been a difficult period. Solid balance sheet and possibly conservative forecasts, so could do quite well over the next year or two
Explanatory notes -
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Paul's Section
As regards larger retailers, I see both Sainsbury and Dunelm issued positive updates yesterday.
J Sainsbury (LON:SBRY) says it's gaining market share, and raised profit guidance to at least £720m for FY 3/2022.
Dunelm (LON:DNLM) says it's trading "materially ahead", and shares rose 5% yesterday. It's an excellent business, and the shares look priced about right to me (PER of 18.2)
Asos (LON:ASC)
£2.24bn mkt cap (yesterday's close)
This update looks reassuring, and could be a turning point for the shares maybe, which along with other eCommerce companies, have been battered in the last year (Asos is down over 60% from its recent peak in March 2021).
Key points -
“Robust results” in “challenging market conditions”
Guidance unchanged (for FY 8/2022) - revenue growth of 10-15%, and adj PBT £110-140m
Moving from AIM to main market by end Feb 2022 - I wonder if that might attract more institutional buying interest?
Biggest market good - UK revenues +13%. USA good, +11%. Weaker: EU +2% and RoW -15%
Price rises being implemented
Gross margin low, at only 43.0% (down 400 bps), but expected to improve
Returns rate normalised
Supply chains expected to ease - encouraging
My opinion - this update is much better than I feared. I’m currently sitting this one out, but think we could have reached a turning point today. Stockopedia shows the forward PER as 21.5. Growth is slower now, so maybe a lower PER is justified? I can’t see it getting back to previous stellar rating of a PER over 50.
Maybe competitive threat from Shein over-stated by investors? As Asos sells a lot of decent brands, perhaps Shein is less of a threat?
Asos is only heading for a low c.2.9% profit margin this year (£125m profit mid-range profit guidance, divided by c.£4.4bn forecast revenues), hence actual profit is volatile. It's never achieved a decent profit margin.
As supply chain problems ease, there’s scope for profit improvement next year maybe?
Overall - looks good, and I imagine there’s upside on the current share price. The sector sell-off is starting to look overdone to me.
Card Factory (LON:CARD)
Mkt cap £217m at yesterday’s close
Card Factory plc, the UK's leading specialist retailer of greeting cards and complementary products, announces a trading update for the eleven months ended 31 December 2021.
Company’s summary -
Trading ahead of Board expectations for FY22
Upward trend during the year, recovering “towards pre-Covid-2019 levels”
Dec 2021 good, similar to Dec 2019
11 month sales £337.3m (20.5% below 2019, mainly due to stores being closed for 20% of trading days, in early 2021 lockdown)
Online sales still very small, at £22.2m - CARD has missed the huge online opportunity that Moonpig (LON:MOON) and others grabbed from under their noses. Very poor.
Stores are outperforming market average footfall data
Net bank debt reduced to £60m (down from £87m at end 2020) - this is very encouraging, although we’d need to see the full numbers to be sure there are no stretched creditors, or other factors that flatter the year end figure. Has caught up with deferred rents & VAT, but £7m deferred rents remains, so I would add this back to net debt.
Supply chain disruption - managed well, only a small impact
Full year guidance for FY 1/2022: PBT £7-10m
Target remains >£600m revenues by FY 1/2026
Outlook / Inflation - this sounds bad, a £30m increase in the cost base!
This sounds like a profit warning to me -
The Board remains confident in delivering year on year revenue growth in FY23, towards the level delivered in FY20; however, EBITDA margins are expected to reflect significant inflationary headwinds. Whilst actions have been, and will be, taken to mitigate these headwinds, including price increases and a renewed focus on driving business efficiencies, the pressures will not be fully offset, resulting in lower profits than previously anticipated by the Board.
The Board expects that the combined impact of unmitigated headwinds; predominantly the increasing cost of freight but also the impact of inflation on staff costs and utilities; plus investment in headcount, IT and development of the online platform to support the delivery of the strategic plan, will add approximately £30m to the pre-Covid FY20 cost base net of mitigation.
Looking further out, the Board expects a number of these cost headwinds to subside, and the Company to be able to further mitigate certain cost pressures. In addition, the Company should realise the benefits of the growth investments.
Further details will be provided at the time of results.
My opinion - it was going so well, until the last bit about a huge increase in overheads, and lowering profit expectations (no figures provided) for next year.
The company is off the critical list, with debt now under control.
But the profit warning for next year, due to a huge increase in costs, and remember this is relative to pre-covid costs, kills off the investment case for me.
This very much reinforces my concern in the preamble about cost increases. It seems as if companies have to be delivering strong sales increases (price rises, and maintaining/increasing volumes), to be able to absorb rapidly rising costs.
Remember that the minimum (or is it living) wage is going up over 6% in April 2022 too, heaping misery on companies that employ a lot of staff. It causes a knock on effect up the ladder too, as higher paid staff seek to maintain their pay differential to lower paid people.
I’m steering clear of CARD. It looks financially stable, but it’s missed the boat on internet greetings cards, and costs seem to be soaring. Not good, on an initial glance. Let’s see what changes happen to broker forecasts.
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Countryside Properties (LON:CSP)
Down 18%, at 08:25
Unexpected CEO departure suggests there’s been some falling out at Board level.
Trading in Q1 (Oct-Dec 2021) has been below the Board’s expectations.
Further update in 8-10 weeks
Q1 figures provided, which look poor - adj operating profit more than halved vs Q1 LY
Cladding - a current issue in the news. Says provisions were made last year, so has some exposure to this issue. Industry-wide solution is mooted.
My opinion - none, as it’s too big for these reports. I’m only mentioning it because the price is down 18%, and there might be potential read-across to other smaller housebuilders, and suppliers of building products, which might be impacted, if the housing market is slowing down? Or this could be company-specific? I’d be wary of builders at the moment, due to the cladding issue - Govt obviously wants to avoid the taxpayer paying remediation costs. I wonder if they might look at some kind of levy, or windfall tax on housebuilders?
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Science (LON:SAG)
455p (up 1% at 10:13) - mkt cap £207m
Trading Update (FY 12/2021)
This looks really good -
The momentum reported during 2021, which resulted in multiple profit forecast upgrades during the year, continued through the final months.
As a result, 2021 will be another record for Science Group with revenue in excess of £80million and adjusted operating profit anticipated to be in the order of £16million, an increase of over 45% on the prior year (£10.9 million) and more than double that reported in 2019, the year before the pandemic outbreak.
An excellent update, but it seems it was already baked into the price, as it’s barely moved today.
All divisions doing well, and figures benefit from acquisition of Frontier.
Acquisitions - this sounds interesting, so 2022 and beyond are likely to see more deals -
The past year has seen significant corporate activity, including the acquisition of a strategic shareholding in TP Group, a royalty buy-out and the acquisition of Magic Systech.
Even so, due to the excellent operating cash conversion, enhanced by the Group's first equity fund raising in over a decade, at 31 December 2021 the Group had gross cash of £34.3 million and net funds of £19.0 million.
In addition, Science Group signed a new £25 million revolving credit facility with its bank in December.
The Group's robust balance sheet and undrawn facilities, enable the Board to continue to explore further corporate development opportunities in the year ahead.
Dividends - final divi will be 25% up, but still only small at 5p. Not really a reason to buy this share, but nice to have while you wait for further capital gains (hopefully).
Commentary also mentions sharing the upside with employees, through profit share & bonus schemes. I like that, as it helps build a good culture, and retain good people.
Broker update - many thanks to Liberum for providing an update on Research Tree. It says today’s update is a 7% profit beat against forecast.
Forecast for FY 12/2022 is raised by 3%, but is slightly below FY 12/2021.
Valuation - looks reasonable, considering earnings have almost tripled from 2019 to 2021. The forward PER is about 17 times, which assumes no earnings growth in FY 12/2022.
If you think earnings are likely to continue rising, then this share could be cheap.
If you think earnings are likely to remain static, or grow slowly, then it’s probably priced about right.
My opinion - we like SAG here at the SCVR, and have reported positively on it several times before. It looks a decent GARP share.
Also I think management seem to be good at acquisitions. So maybe this could be another star acquisition vehicle? (like Judges Scientific (LON:JDG), or Sdi (LON:SDI) )
I don’t really understand the business, or what drives its business model, so my opinion is of limited use. Just to say that the figures look really good, and it’s worth readers taking a closer look. It would be worth scrutinising each division, and maybe do a sum-of-the-parts type assessment. Let us know what you think, as I’ve got to move on to the next thing.
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Finsbury Food (LON:FIF)
98p (down 1% at 10:24) - mkt cap £128m
Finsbury Food Group Plc (AIM: FIF), a leading UK speciality bakery manufacturer of cake, bread and morning goods for both the retail and foodservice channels, announces an update on trading for the six months ended 25 December 2021.
Revenues look OK -
The Group delivered a robust H1 performance, notwithstanding the external challenges being faced by the Company, with total sales of £166.5m representing an 8.9% increase versus the corresponding period in the prior year. It also reflects a 4.4% increase on the first half of FY 2020 (30 June to 28 December 2019) which was a period unaffected by the pandemic.
This growth in sales has been driven by a stable performance in UK retail (+1.5%), a continuation of the robust recovery in foodservice (+25.9%) and a 32.3% increase in the Group's Overseas division.
Supply chain / inflation - sounds as if things are under control -
Throughout H1 the Group has faced persistent pressure from input cost inflation, staff shortages and other supply chain disruptions.
It has been able to successfully mitigate the impact of these pressures to date through commercial negotiations, operational improvements and other supply chain initiatives. It will continue in the same vein given further inflationary cost pressures are expected in H2.
In addition, the impact of Omicron on foodservice consumer demand and production disruption due to staff members required to self-isolate remains unpredictable, but the Company has a successful track record of navigating challenging market conditions, and will continue to use its experience as it works through the second half.
Diary date - 21 Feb 2022, for interim results (6m to 25 Dec 2021)
Webinar details -
…presentation for retail investors on the Investor Meet Company platform at 4:00pm GMT on Tuesday 22 February.
My opinion - the company has done well to mitigate supply & cost disruption.
I see the valuation as attractive, with a forward PER of 9.6
Today’s update reassures that it’s got the situation under control.
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Jack’s section
Circassia (LON:CIR)
Share price: 46.05p (pre-open)
Shares in issue: 418,461,921
Market cap: £192.7m
This came up as one of David Thornton’s 2022 picks on a recent Vox Markets chat I took part in. I’ll summarise his run through, as he knows the opportunity better than I do:
- Recovery stock,
- ‘Neil Woodford-backed disaster’,
- Phase 3 drug failed,
- New management (ex-Bioquell) has come in, backed by some ‘sensible’ shareholders (Christopher Mills has quite a big holding),
- They turned Bioquell round and sold it, could be a similar outcome here,
- The key target for mgmt team is that all their incentives get paid out at 62.4p,
- Mandate to clean whole thing up and to focus on asthma diagnostics (see NIOX), which is a huge market but a surprisingly small number of people get this test,
- It’s quite a cheap primary care test where you blow into a tube which gives you a reading - a ‘razorblade’ type business,
- Disrupted by Covid GP access,
- Decent acquisition candidate,
The shares were in the high 30s at the time of that talk, so you can see they’ve picked up a bit in the weeks since.
That’s a market cap of £192m on trailing twelve month revenue of £27.1m and double-digit million net losses, so the assumption is that the group’s asthma test starts generating a lot more business quite quickly. It could well happen, although I have no particular insight into the treatment at present.
Execution of business strategy delivers EBITDA ahead of expectations
Revenue growth of 20% on a constant currency basis to £27.9m, with recurring revenue stable at 84% of total. Gross margins are also holding steady at 68%, and the group is adjusted EBITDA positive for the first time at c£0.6m.
New distribution arrangements in the US and China could drive further growth. A renewed sales and marketing focus on these two large markets results in operating costs falling from £27.4m to £18.4m, a 33% reduction.
The result is that EBITDA for the NIOX business (the asthma treatment) rose from a loss of £6.8m to positive £2.3m.
Unaudited cash was £12.6m as of 31 December 2021 and Circassia generated £1.1m in cash in the second half once the discontinued COPD business is excluded.
Preliminary Results for the year will be released on 22 March 2022.
Conclusion
The shares have increased recently in the run up to this announcement, which shows the group is trading ahead of revised expectations. It’s the kind of situation where more knowledge of the management team and product is required. You have to invest with a bit of faith that the team can execute, as we don’t have the comfort of historical data or reassuring StockRanks.
Companies change though, and it’s a plausible story: previous management mistakes, distressed institutional selling compounding the share price drops, and a new management team parachuted in to execute the turnaround and realise value for shareholders.
Operationally, the direction of travel is clearly positive and if management can realise their incentives at 62.4p, that implies around 35.5% of potential upside. It could be more of course, should NIOX prove to be more valuable.
I don’t have much of an edge here, but there are promising signs: increasing revenues, decreased operating costs, a refocused sales and marketing strategy, a move to EBITDA positive and underlying cash generation. It doesn’t look like cash burn and equity dilution will be a concern.
So the share price has increased but the investment case has been somewhat derisked and Circassia does appear to be approaching an inflection point. It’s a totally different business to the one that floated back in 2014, with potentially long term growth in a defensive industry. The market cap is already quite large though at £193m (pre-market open) so I’d want to be a little more comfortable on the scale of the opportunity.
On that note, the group says that asthma affects over 340 million people worldwide with 1,000 deaths every day, and that NIOX is the market leader in FeNO testing.
Quixant (LON:QXT)
Share price: 180p (+4.96%)
Shares in issue: 66,450,060
Market cap: £119.6m
It’s been a fairly volatile ride for shareholders of Quixant over the past few years, so an operating history that will take some unpacking to understand what has gone wrong in the past and why (hopefully) that would not happen again.
I wonder how many shareholders from five years ago remain on the register? It looks to have been a pretty bruising experience so far.
There’s been a steady improvement in the price since the initial Covid drop though, it’s possible that the shares offer good value if the company has enacted self-help initiatives. Shares are up around 4% this morning.
The Group had a strong finish to 2021 and expects to report full year revenue of $87.1m, ahead of market expectations
Quixant helpfully notes that the current range of forecasts is revenue of $78m-$80m with a consensus of $79m and adjusted profit before tax of $4.9m. There’s been robust demand across both the Gaming and Densitron divisions. It looks like a roughly 50:50 split in terms of revenue between the two as of the half year report.
Gaming - Founded in 2005. Gaming hardware platforms and software solutions for wager-based gaming and sports betting.
Densitron - Acquired in 2015. Specialists in ‘human machine interaction’ (HMI). Control Surfaces provides displays and computing software for people to interact with. Control Systems includes integration software for the likes of Channel 4. Product Catalogue offers a range of displays and computing components.
Profit before tax is expected to be ahead of expectations, which have barely moved since the initial Covid markdown. There have been a couple of positive updates in the interim, so I imagine forecasts are pretty conservative and stand to be beaten.
The PBT progress is despite ‘continued pressure on margins presented by electronic component shortages and price inflation’. These pressures are expected to continue ‘into at least the second half of 2022’ however.
Net cash has increased from $15m in June 2021 to $17.6m at 31 December 2021.
Conclusion
There’s been a clear Covid impact here, forecast to recover but not immediately to FY18 or FY19 levels. Paul has written previously on a profit warning here.
Ignoring Covid for a second, there are some positive signs: double digit operating margins and ROCE, net cash, free cash flow generative, Quality Rank of 90. The non-exec chairman and founder remains the largest shareholder.
It’s worth noting that back in 2020 before the big downwards Covid adjustment, FY22 EPS forecasts were for 28c or so. If it can get back to those FY18 levels then obviously the shares look quite cheap. FinnCap covers the company, so subscribers should be able to access their broker notes on it. As I said above, I suspect the forecasts might prove to be too conservative.
There are some signs of a good business here, one that appears to be valued by its customers if website testimonials are anything to go by.
Quixant did have problems pre-Covid though, to do with key customers losing market share, so it’s been a tough 2-3 years for the company. That will require a bit more research, but I quite like what I see at first glance so further investigation probably is warranted. Worth noting that through that period there has been no equity dilution.
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