Small Cap Value Report (Thu 15 Dec 2022) - ZTF, CAR, SAG, HTG, CURY, DX., STVG

15th Dec '22 by Paul Scott

31 comments 7591 reads

Good morning from Paul & Graham!

Agenda

Paul's Section:

Zotefoams (LON:ZTF) - a positive, ahead of expectations, update for FY 12/2022. I explain why this is one of my favourite GARP shares (no holding personally, unfortunately). More detail below. Thumbs up from me.

Carclo (LON:CAR) [quick comment] - down 20% to 12p this morning (at 08:12), so market cap now tiny at £9m. It says H2 (of FY 3/2023 I assume, the RNS looks like a typo, saying FY 3/2022) will be “materially lower” than previously expected. Bank remains supportive, and in discussions about amending bank covenants. I went through the FY 3/2022 accounts here in some detail, explaining why the expensive debt, and pension scheme cash outflows use up all the profit. There does seem to be significant freehold property though, which could be why the company hasn’t already gone under. Very high risk of a dilutive equity fundraise (which could be on ruinous terms, as we saw yesterday with Trackwise), hence I would say this share looks too risky for now. (no section below)

Currys (LON:CURY) - Interim results from this £10bn pa revenues electrical retailer, making a surprising appearance within our small caps universe. The seasonally slower H1 has been soft, and full year guidance is trimmed, but still guiding a decent FY profit. The balance sheet concerns me - it's weak, and completely reliant on massive trade credit for buying the stock - if trade credit insurers get cold feet, that could kill the business. Divis look unsustainable. Thumbs down from me, as it's too risky if we see an extended consumer downturn.

DX (Group) (LON:DX.) [quick comment] - nothing particularly noteworthy in this AGM update. Trading continues to be in line with expectations for FY 6/2023 so far. Pipeline of new business opportunities is “very healthy”. Liquidity good, with “significant net cash”. The valuation metrics on the StockReport here look good - fwd PER of 7.6, and divi yield of 5.2%. There’s been a big improvement in profitability here, so it looks a successful turnaround. My view - might be worth a fresh look, after a troubled past.

STV (LON:STVG) [quick comment] - this is called a trading update, but it seems more like a PR release, talking up the good bits, but without giving figures for overall performance or outlook. Other than saying…

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bryaz

15th Dec '22

actually 6 year guar just bought the worst quality samsung from them !!

tic_tac_toe

appears to be related to this post, where Mark is almost being trolled https://www.stockopedia.com/co...

illiswilgig

Hi Graham,

Thank you for your review of Science (LON:SAG) (I hold)

I agree that it appears priced about right by the market given current conditions and for what appears on the face of it to be a consultancy business

But is the market right? I think its undervalued for multiple reasons.

[1] The business is more diversified than it appears. The R&D services division provides environmental, safety and science consultancy where independent services are sticky with customers. There is also a food science division which provides regulatory testing and research services from its labs. Lower margin but even stickier as customers have to have independent testing. The two main properties Harston Mill (Cambridge) and the Leatherhead Food Sciences Laboratories have been moved to a property subsidiary which leases to both science group companies and third parties. Frontier Smart technologies, a previous basket-case acquisition, is a high margin chip designer with a leading position in the sale of digital radio chips and modules.

[2] According to the forecasts on Stocko FY23 revenue and profits are forecast to be flat on FY22. But the existing businesses grew profits by 10% in H1. Zero growth through FY23 looks to be an undemanding steer from management at this point. Understandable under current circumstances but given past and current performance growth of between 5-10% would be more reasonable?

[3] The acquisition of TPG agreed by shareholders yesterday is said to be earnings enhancing. Yet there is nothing in the FY23 forecasts for this acquisition.

Based upon FY22 H1 TPG figures I’d anticipate FY23 revenue of £40m and adj op profit of £3m and that assumes just the contribution from TPG service division (which grew adj op profits at 12% in H1 FY22), shorn of corporate costs, and nothing for Maritime. Assuming close to a full year contibution for the acquisition.

Thats about +45% revenue and +17% adj op profit growth from the acquisition.

The acquisition is very unusual as SAG directors have controlled the TPG board for some months already, disposed of and written down under-performing businesses and assets and parchuted SAG senior management into the maritime subsidiary to renegotiate legacy contracts with customers and turnaround the business. As a result the acquisition is both almost entirely de-risked and already working alongside SAG. Very astute management.

[4] Longterm growth record of the company – including record profits through the pandemic years – and the medium term prospects from the TPG acquisition through synergies, organic growth, turnaround of the maritime subsidiary and access for SAG businesses to the UK MOD and TPG businesses to the US market are substantial. Which significantly understates it.

[5] I rate the management very highly. The Frontier acquisition, TPG acquistion and recent USD cap are good examples. Longterm ‘founder’ and largest shareholder Martyn Ratcliffe interests appear to be well aligned with shareholders.

I don’t see this as an instant multi-bagger more a long-term compounder combined with a buy-and-build ability. Future astute acquisitions are to be expected.

Something like 10-12x FY23 earnings, assuming some organic growth and including the acquisition appears to be very under-rated to me on the long-term view.

Just my opinion - others are welcomed - and written in something of a hurry today so apologies for any typos in advance.

If the price stays around the same level whilst I am looking for more cash down the back of the sofa – I’ll be buying some more,

cheers

Mark

Paul Scott

Thanks tic_tac_toe,

I see there's a vigorous debate in the comments section in this post form Mark Simpson about Luceco (LON:LUCE) where he then went on to express negative views on Zotefoams (LON:ZTF) focusing mainly on low ROE.

That's one way of looking at it, and he's entitled to his point of view. The writers here are all freelance, so we don't consult each other when writing or talking about shares - e.g. Graham did a very negative review of Boohoo (LON:BOO) whilst sitting next to me at Mello. It's fine, we just debated the various bull & bear points.

I agree with Mark that ZTF is capital-intensive, and it's spent a lot of money updating its factories. But now the benefits (higher profits & cashflows) are starting to flow through.

So personally I'm only interested in where the company is now, and where it's possibly going in the future. Analysing historic numbers looks to me a fairly pointless exercise.

I'm unusual in that I don't necessarily follow the current fashion for chasing high ROE and high ROCE. I like balance sheets stuffed with freeholds & cash, because that greatly reduces risk, and increases the likelihood of sustainable divis & buybacks.

So as with everything, there's no right or wrong in investing, just different perspectives. It's always good to hear different views, so I welcome the debate.

Regards, Paul.

P.S. but I'm pretty sure that I'm more correct on ZTF! ;-)

Rusty2

You were very sure about Boohoo (LON:BOO)

Camtab

This comment has been moderated

Snazzytime

hi Paul

All tags except for DX (Group) (LON:DX.) have disappeared.

Snazzy

Yes Rusty2, I was very sure on Boohoo (LON:BOO) when the facts & figures supported that bullish view. The facts & figures then gradually worsened, very considerably. So the investment case now has completely changed for the worse. That's what happens sometimes. Nobody can predict the future with any certainty, and these days business models seem to change much more rapidly than before, so it's not as easy as people think to pick the winners. In practice, we all have some winners and some losers every year.

So if the facts & figures at ZTF deteriorate, I'll amend my view accordingly.

Update - It's a clean sweep, yay!!! Well done Graham & I, wish this happened more often, but there are usually too many updates to cover everything.

TamzinPiworld

Sosandar (LON:SOS) here is the H1 23 presentation, including Q&A Q&A. Video & podcast. They are firing on all cylinders.

Net revenue +72%
Moved to postive PTP, £0.1m from loss of £1.1m
Cash £4.2m

A really comprehensive presentation embellished by some tremendous investor questions and answers. Probably 30 minutes of Q&A.

Secure Trust Bank: We met David McCreadie, CEO at STB last week. He gives a good overview of the business here, video & podcast. I liked him. He first joined as NED, saw the opportunities and became CEO 2 years ago. It trades on a PE 3.4 & divi yield of 7.4%. They are a retail bank, they use savings from retail customers to make loans to business clients in Retail (furniture, jewellery & used cars), Property (to developers) and Factor Invoicing to SMEs who supply large organisations with longer payment terms. They have a prudent approach to risk. Here are the medium term targets they set for themselves at their Capital Markets Day, November 2021:

14-16% ROE in the medium term
Cost income ratio <50%
Core net interest margin of greater than 5.5%
CET1 ratio of >12%

More broadly, it provides good insight to macro for finance sector generally.

SThree (LON:STEM) FY22 Trading Update analyst call from yesterday. Video and podcast.

Group net fees +19%
Strong growth in Technology +23% and Engineering +27%

They are starting to see evidence of the macro uncertainty but the contract order book is +19%, so they have good visibility.

Finally, Begbies Traynor (LON:BEG) interim results analyst presentation. Video and podcast. They had a strong first half and are confident in the full year.

Revenue +12% (6% organic)
Adj PTP +13%
Adj EPS +13%

Worth a listen for the macro picture too. Small company insolvencies are up 23% on pre-pandemic, interestingly larger company administrations are still 35% below pre-pandemic but they expect this to change. In the GFC, insolvency peaked at 26,000 cases, BEG think this time it will be higher.

The point is, as Paul admits he has many shares wrong recently, even jokes about people shorting all his picks. Maybe Zotefoams (LON:ZTF) will be different. Paul was still bullish on Boohoo (LON:BOO) long after the facts and figures changed.

You're a star, thank you Snazzy :-)

I've just put the disappearing tags back in. There must be loads more missing, so I must go through the old reports to check them all.

Best wishes, Paul.

TheFloatingInvestor

I mentioned a few days ago about if we write up on shares we are interested in and seemed to get a number of thumbs up, so here goes mine.....

Came across 1Spatial (LON:SPA) today via an RNS taking about replacing it's CFO and I must say I really like what I see here and have taken an opening stake in the business. CFO has been replaced and the old CFO is thanked and hanging around so should be a smooth transition (share price unmoved).

Seems to be gaining traction with a string of high profile orders, particularly state side with its location software. Also some high profile projects such as HS2.

I like how it has steadily grown revenue and gone from loss to profits over a number of years, and it appears that it is now starting to push into a decent profitable business. Constant director buys, small but no sells which looks good.

It has a number of broker notes on research tree so worth a look, with Stocko showing broker upgrades.

Downsides are no dividends at present and it is using a little of its cash, but still has a decent cash pile, and has no debt. It has had share dilution, but none in the last few years. Margins are tight, but growing and I assume scale is starting to kick in.

I would like to have paid 45p for it and would consider that my second tranche, but it does look like it could rerate.....and very unusually for a £50m market cap business the spread is good, shares seem available, with buy orders @ 48p from brokers.

Had a quick look back and it would appear Paul has not looked at it for a few years (unless the TAGS are not working?). Be interesting to hear if you recall this one Paul?

StockRank is not amazing but my gut feeling is, its on the up.

All the best

Paul

mojomogoz

Of interest to no-one I assume...but I looked at new IPO Smarttech247 today (I torture myself with cybersecurity cos trying to grasp something meaningful about them other than "fck we're cybersecurity screwed") as was interesting in that has revenue, clients and profits. Any view welcome.

eParo

On Beach group (LON:OTB) - Another director buy yesterday:

14 December 2022

On the Beach Group plc

("On the Beach", "OTB" or the "Group")

Director / PDMR / PCA / Shareholding

On the Beach Group plc (LSE: OTB.L), a leading UK online retailer for beach holidays, announces that Hawksford Trustees Jersey Limited (as trustees of the SC 2014 Settlement) , a PCA of Simon Cooper (Founder and Chief Executive Officer of On the Beach Group plc), notified the Company on 13 December that he had purchased 288,587 ordinary shares of 1 pence each in the Company ("Ordinary Shares") at price of 117.91 pence per Ordinary Share (GBP340,272.93 in aggregate).

EPS forecast of 12p 2023, followed by 15.7p for 2024. EPS growth +496% followed by 31%. PE/PEG 11.2/0.364 followed by 8.58/0.311.

Cash at bank should start earning a decent income now. Dropped to near 100p on results day; a serious rebound since.

Helvellyn

excellent work on £SOS

Thanks Tamzin, very interesting, with some good questions and even better answers IMHO.

Richard

Boon

Not small cap, but it just struck me that on inflation, we have a market that has a very optimistic view that inflation will fall back down easily, against the Feds and BoE who are keen to stress that the picture is not so rosy, or at least not enough data yet to make that call.

Surely the smart bet is on the Fed and BoE view? They have data points we don't, as well as being the experts in poring through the price data in both countries.

Whereas most market participants, have never been in their profession during the last big inflationary period.

Granted, there are the two super doves on the BoE; but it looks like their dovish position is not because they think inflation is no longer a threat, but more about whether we're hurtling in a deep recession, and they'd rather prefer inflationary risks than recession risks.

Any thoughts from others more knowledgeable on this than I am?

I agree the stubborn outlook on inflation announced yesterday and today by the central banks and the sustained height of future interest rate predictions, I think is driving this sell down, which could very well continue. Europe's inflation looks set to be more stubborn, and the fear must be that a deep recession in Europe and perhaps the UK is more of a possibility.

I am however reassured by the low values of UK companies generally and the lack of any sort of meaningful rally in the small and midcap space to date. This makes me think that although we could see some pressure on share prices, I can't imagine it breaking previous lows. That said the potential for a big Covid outbreak in China, with substantial loss of life, and emergency lock downs while the Government scrambles to vaccinate the population, could add additional pressure...

It's going to be challenging 6 months ahead, but don't feel compelled to join the sell off unless stop losses are breached.

BnB

Your question is covered today both by John Authers on Bloomberg and Robert Armstrong in the FT. Both worth reading and not just today

sevenccc

Surely we've all come to accept there will be a significant recession in EU and UK through at least part of 2023? Inflation caused by COVID supply chain issues has just about worked through and now we need to get past the response to Putin's invasion. My guess is that will be April or maybe a little later so expect high inflation print for a few more months yet, though hopefully dropping below double figures as we've massaged the energy impact out already with all the Govt subsidies.

USA may have a shallow recession but that will be it. They will yet again make money out of war and emerge with a stronger global position enhanced by China suffering quite badly from their botched COVID release and general unrest.

Too soon to look through it just yet? Won't be long though IMO.

Small Cap Value Report (Thu 15 Dec 2022) - ZTF, CAR, SAG, HTG, CURY, DX., STVG

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Paul Scott

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