Small Cap Value Report (Thu 18 August 2022) - MADE, AEO, ZYT, ANG, SPEC, IMMO, IUG

18th Aug '22 by Paul Scott

87 comments 7993 reads

Good morning from Paul & Graham!

Agenda -

Paul's Section:

Brief comments (no sections below):

Aeorema Communications (LON:AEO) (82p - £7m) [no section bellow]- Too small for us to cover in detail, but thanks to members Dieselhead2 and tiswas, for flagging up in the comments section below a positive trading update from this live events company, now guiding FY 6/2022 results to be £12.2m revenues, and £830k+ profit before tax. The commentary sounds upbeat too. I know 4 of the >3% shareholders, all shrewdies! So this looks worth a closer look.

Intelligent Ultrasound (LON:IUG) (13p - £35m) [no section below] - I reviewed this serial loss-making company here in May 2022, and could see some appeal, but overall it looks too high risk. Looks like it could run out of cash in 2023. Dilution has been massive already, with a 10x increase in shares in issue in the last 6 years, as it remained relentlessly loss-making and cash-burning. Today’s interim results is more of the same. Good revenue growth, but some of that is a one-off big order from the NHS. Cash is down to £3.5m. Risk:reward doesn’t look good to me.

Full sections:

Made.Com (LON:MADE) - confirms press speculation that it is looking at a possible equity fundraising. It's been a disaster since floating just over a year ago, collapsing by 95% in price already. I don't see any way out of this, other than a deeply discounted placing, to keep the lights on into 2023. Longer term, unless it can drastically slash costs, it's difficult to see this becoming a viable business, so likely to disappear in 2023 I suspect. Hence it remains uninvestable for me. Pity, as it looked quite an interesting company originally, before growth collapsed.

Angling Direct (LON:ANG) - it's a profit warning, due to a variety of fairly predictable reasons. Although the dry weather here and in Europe has also had an adverse impact on fishing conditions. Forecasts are trimmed, with adj PBT now only £1.5m for FY 1/2023. It's the cash pile that is of most interest, which is almost 3/4 of the whole market cap! That nicely underpins this share, even if trading deteriorates further, which it might.

Immotion (LON:IMMO) - several readers have been discussing this VR entertainment company's trading update in the reader comments, which got me interested. I've…

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Revs8

18th Aug '22

For info on Capital (LON:CAPD)

Berenberg analyst Richard Hatch raised the price target on Capital Limited (LN) to GBP1.73 (from GBP1.69) while maintaining a Buy rating.

BnB

Inspecs (LON:SPEC) - Seconded. This was tipped in Sunday Times

I think Graham’s point about IP is a really good one. And the relative valuations of this business and EssilorLuxotica in the face of more challenging market conditions today really underlines the value of the eyewear behemoth’s multiple enduring luxury brands (Ray-Ban, Oakley, and most of the big fashion houses on licence), it’s dominance of lens technology IP and its globally significant distribution outlets (18,000 opticians and retail). Now that’s a moat.

illiswilgig

Hello Reacher,

Re: Zytronic (LON:ZYT)

you have ' 2H22 (est) £5.8m (2H21: £6.9m) -16%'

Yes that made me concerned.

However, for the FY 5% up on £11.7m is just under £12.3m? With H1 at £5.91m that leaves

H2 22 at just under £6.9m

or between -7% and -8% rather than -16%? Or have my big thumbs mixed up my calculator digits?

In any case, the result is the same, revenue has gone into reverse in H2, which is a shame after an excellent H1.

Not sure about the price and competition. My feeling is that once an OEM has engineered in the component they are less than comfortable with changing them at will. But thats just a gut feel.

In the presentation and Q&A management indicated that they were passing on price rises but being careful where it involved new business and/or large opportunities. Clearly there is some level of issue, but my current judgement is to trust management and accept their explanation that its down to OEM disruption and production.

However trusting management is a weak point and I could be wrong here. In any case current orders are primarily older products, my main interest is to see how the new products take off now that they are actively being sold,

cheers

Mark

MichaelFBS

I never held Made.Com (LON:MADE) but on the subject of IPO’s, I have been listening to the Berkshire AGMs on Spotify in the car and while running (possibly a bit sad but I, and even my wife, find the “Wazza and Chaza” show riveting listening and incredibly educational, to the extent I might now read the transcripts.). I have reached 2016 and in 2016 or 2015 Buffett turns to Munger (in the course of answering a question) “I don’t think we have ever invested in an IPO have we Charlie” and Charlie replies “no we never have”.

Of course we don’t have to slavishly follow Buffett but in general the buyer in an IPO is at a disadvantage the seller holds most of the cards I feel.

Regards

Michael.

The meetings are at

https://open.spotify.com/show/...

A link to the transcripts can be found here:

https://www.dropbox.com/sh/k42...

Reacher

Thanks Mark - that's useful narrative. And thank you for re-checking my numbers. The correct numbers are:

1H22 £5.9m (1H21: £4.8m) +23%

2H22 £6.4m (2H21: £6.9m) -7%

I previously held the view ZYT management had a good grip on the business and were conservative in capital allocation. I would want to see some stability in the level of orders. The step-up in marketing might help alleviate this and something I will look at.

Tommy H

Hi Plantx

I saw this too late last night on Wynnstay (LON:WYN) and was like thanks for all the support. I like the company, have done ok out of it to date and the decision to raise more funds and the narrative behind it does not make me feel like this is a what the beep, vanity purchase that means it changes my investment case...

Though I will write a letter to the CEO tonight, old fashioned paper one obviously, and obviously that it is a do not a lot option for the banks to just go to their mates and get a deal away at a discount, and how much off their fees did they give you for undertaking that option?

Especially when there are more options available the likes of Supermarket Income REIT (LON:SUPR) and Impact Healthcare REIT (LON:IHR) regularly raise but always give a chance to existing holders to by in, I just get a corporate action through Halifax and IWeb and say yes or no to buying more at the price offered, and unless it is an emergency, which this is not, the few extra days to even put something through primary bid (doesn't help me as in an ISA) at least gives you a chance to say yes.

Sometimes an old fashioned letter does have some effect, rather than yet another email.

Cheers

Tommy

Somero Enterprises (LON:SOM) possibly interesting info on US construction.
Non residential is up 79% might explain recent SP strength.
Typo in the top slide should be Jun 2021

Joe Turner

I think Berkshire bought shares in Snowflake at IPO in 2020 but they may have been adding to an existing holding bought when co was still private. It may also have had not much to do with Buffett or Munger, it could have been a decision of the guys who run Berkshire now who will eventually replace them.

Andy Sav

I see Boohoo (LON:BOO) has continued building its stake in Revolution Beauty (LON:REVB) . Its ownership is now up to 12%. The market doesn't seem to like it as Boohoo (LON:BOO) has slipped 4% today. I wonder where this will end?

MrContrarian

Worst IPOs since Jan 2020 https://www.ft.com/content/a8e...

Seven worst based on first day's price: "MusicMagpie (-77.2%), Guild ESports (-79.5%), Victoria Plumbing (-80.6%), In The Style (-85.3%), Revolution Beauty (-88.4%) or Seraphine (-91.8%). But the IPO crapco title goes Parsley Box, an ambient ready-meal delivery thing, which is down an exciting 94.6% since arriving in March 2021" But Made.com is worst based on IPO price (200p), down 95.2%.

JCPr

Capital (LON:CAPD) hold a portfolio of investments in miners - mainly gold miners and mainly their own customers I think. They said in the figures today that $26m of their revenue was from these companies in the last half (figure from recollection of what i read this morning). Anyway, gold miners in general have not done so well the last six months - counter-intuitive in an inflationary scenario but the price of fuel and chemicals for extracting metals have gone up while the price of gold has not. I don't know what's in their portfolio so I don't know if there have been any company specific issues.

I hold.

Joe

Looks like you are right (though this is post the AGM I was listening to) https://www.fool.com/investing... but looking at the price since maybe Todd Coombs when asked the same question (have you ever invested in an IPO) in say 20 years time may reply "we did once in 2020, never again, I learnt my lesson".

Michael

Zipmanpeter

Re Angling Direct (LON:ANG) - Like with so many consumer focused shares at the moment I think we need to be patient. It is doing the right thing, steadily opening physical stores whilst also establishing itself as the no UK fishing site online and thus growing share. Its hybrid model approach makes sense (cheap stores for live bait, chatting to fellow fishing enthusiasts instore, getting their emails for free!) whilst online is low cost to re-serve, cross- and up-sell and to serve those outside efficient catchment areas. The online part is key because look at the trend from the ONS graph below - structurally transactions are moving online. Covid was a blip up yes but in 10 years will be a bump

UK angling is an ageing/white/male sport but showing some signs of diversifying and creating new audiences, with some countervailing forces helping (healthier, longer lived retirees, mental health benefits of the outdoors increasingly seen). In short I can easily see its market holding at £600Mn in real terms for years to come (assuming we start looking after rivers and seas better).

Europe is said to be the same dynamic as the UK (I have to take this on trust) but even more fragmented and offline.

I see Angling Direct (LON:ANG) as the same as Gear4music Holdings (LON:G4M), a leading player in a slow growing niche slowly building a great online position and own label business in a consolidating market. Lots of cash and not going obsolete inventory means it can keep going with its strategy. At some point, all this will be highly valued again. Just may have to wait 3-5 years. With that non-trading perspective, a small profit miss is small fry.

I hold and may buy more if it gets any cheaper.

Dieselhead2

Thanks very much for your resume on AEO Paul. I have been cursing to myself each time I see a trading update/results from them, as I sold back in early Nov 21 (although it was at a nice premium). I have been waiting for a decent pull back to re-enter, but it never happens...! I know Alan Charlton was/is an investor and it was his comments on them on Mello Monday which piqued my interest a couple of years back. I live in hope of that re-trace, but suspect I will continue to be disappointed!

More on UK IPO’s this year in the FT at:

https://www.ft.com/content/a8e...

which includes talk of Made.Com (LON:MADE)

krtpforever

Take the dog out and buy on dips

Bronstein

Thank you - very helpful. TBH sounds a big suspect to me investing in your customers. Any idea if this is common practise amongst mining service firms? I'd rather see them invest the funds in the core business given ROCE is nearly 20% or return it to shareholders via higher divs or a buy back.

daz123

Immotion (LON:IMMO). Just to reply to a couple of points Paul made above. It's not that useful to compare H2 2021 revenue to H1 2022 because of the seasonality in the business as school holidays mean June, July and August are the peak months and so there is a H2 bias, the company wouldn't provide the exact split when I asked but full year figures for 2022 should make this clear. 2021 is not a good example because of the impact of Covid.

The company also very usefully provided average weekly revenue per headset in the 2021 results £441 at partner sites and £284 at owned sites, which allows calculations to be made as the number of headsets increase and it will be interesting to see whether those figures increase slightly as installations mature.
Also their broker W H Ireland have forecasts which say they can fund expansion from existing cash reserves, which don't include any proceeds from the sale of the HBE and Uvisan businesses. They could of course raise to increase the speed of rollouts but they seem to be doing fine as they are.
Finally, there is a useful vox markets interview with Martin Higginson, the CEO at https://t.co/ogqNwlMyon which provides some background on the data gathering at the large Milwaukee zoo installation, as well as the smaller pop-up at Chester zoo, which will inform discussions with prospective zoo customers

Bouden54

My understanding is that in most cases they received equity as part of the drilling contract - these stakes generally had a minimal cost but have since appreciated strongly, so not as if they've been investing millions in these companies.

Paul Scott

19th Aug '22

Hi Zipmanpeter,

What a fantastic post on Angling Direct (LON:ANG) thank you very much!

In particular your graph from the ONS very much supports what Next (LON:NXT) said recently, and my key argument about eCommerce being a good place to look for recovery shares, because the stock market is wrongly pricing these companies as ex-growth, when actually the pandemic pulled forward growth, with a hangover in 2021/2, and we should now start to see normal, structural growth resume. That's the big trigger for a possible sector re-rating from irrationally low levels.

Although declining consumer confidence (record low reported in today's papers) could mask the return of structural growth until into next year maybe, who knows?

I hadn't thought of the impact of filthy rivers (due to the scandal of criminal water companies pumping raw sewage into them) on fishing. That's another good point.

Best wishes, Paul.

Small Cap Value Report (Thu 18 August 2022) - MADE, AEO, ZYT, ANG, SPEC, IMMO, IUG

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Paul Scott

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