Small Cap Value Report (Thu 23 June 2022) - VLX, WINE, LIO, IBPO

23rd Jun '22 by Paul Scott

87 comments 9525 reads

Good morning, it's Paul & Graham here.

Agenda -

Paul's section:

Volex (LON:VLX) (£379m) (I hold) results for FY 3/2022 look strong, and the valuation modest. Outlook comments are also surprisingly perky, with a strong start to FY 3/2023 indicated, with high demand & orders. Inflation is being passed through to customers. There's lots to like here, it's one of my favourite value/GARP shares at the moment. Patient, long-term investors should do very well on this, I reckon - with both earnings growth, and a higher PER possible once markets are through this current bear phase.

Naked Wines (LON:WINE) (£146m) - FY 3/2022 results don't look good - it's not making any profits, and growth has stalled, including forecast growth for this new year. Balance sheet is OK, but there is a cautious going concern statement. I'm worried that some customers might cancel wine subscription services, so WINE could be running to stand still. Not an attractive share at all, in my view.

iEnergizer (LON:IBPO) - readers flagged up sparkling results from this IT/outsourcing group. It looks highly profitable, and reasonably priced. But the CEO owns 83%. It's also up for sale at the moment, in bid talks. An intriguing situation for sure.

Graham's section:

Liontrust Asset Management (LON:LIO) (£610m) - Final Results yesterday showed an excellent performance in FY March 2022. However, the share price has been sliding lower for months as general investor sentiment has soured and Liontrust funds, with significant exposure to richly-valued US shares, have underperformed. The LIO share price decline has brought it arguably into value territory.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR…

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Diversification 99

23rd Jun '22

If any improvements can be made here it would certainly help the part time investor who doesn't always have the time to undertake the thorough research or at least not straight away. Often a company will raise cash and the Stocko data is still showing the old cash balances for example. Profit and loss forecasts can also be way out and so not adding to confidence when considering purchases or sales. If we are having to undertake that kind of research ourselves all the time then it kind of defeats the purpose to some extent of a service like this. Just my thoughts.

rmillaree

Volex (LON:VLX)

Does the 'diluted' EPS figure reflect the share based payments?

I have got bored of digging back into the figues but the "diluted" figures should by definition include the warts and all so i would say yes that will most certainly include what has been "expensed ref share based payments"- Note these amounts may be highly variable so the reality may be that $9mill over 3 years may be zero year one zero year 2 and $9 mill year 3.

MichaelFBS

Great new photo Paul and Graham! But they (Stocko) need to change the one of the email that notify’s readers that the SCVR is published. :-)

Regards

Michael

Benson

What chart does look good at the moment and how long does it last

drkelly1975

Thanks Paul. I think you could be right re another profit warning - I may wait a little before making a decision. If there is another it will likely overshoot on the downside to Luceco could offer even greater value than currently.

Funderstruck

£IBPO I consider the Golden Rule of understanding a company , certainly applies here, Gobbledegook like that just puts me off. Why take the risk?

Totally agree. I would want to know the basis for the NAV - everything they have floated is down significantly (Cazoo, Trustpilot, Ui Path) but fortunately the not listed, hard to value, less transparent parts of the portfolio have more than compensated to result in an increase to NAV for the last reporting period. This is despite the significant retrace in the Nasdaq and likely (but less visible) pullback in the technology PE / VC space. I think valuations take a lot longer to catch up - it's easy to avoid a downward valuation if there hasn't been a funding round for a private investment. Most of the portfolio is early / mid stage technology that is not yet cashflow positive or profitable after all costs are taken into account (i.e. net profitable). It's relatively easy to be profitable at the gross level.

Indie

If you’re on a phone, click your logo in the top right-hand corner and select ‘contact support’

jonno

Hi BritishPat

I have sizeable holdings in Somero Enterprises (LON:SOM) Volex (LON:VLX) and £SUP

All well and truly battered as are most of the other 25 small caps in my portfolio. One day it will change but until then need to be patient or should I say very patient.

All the best

bryaz

the high increase in debt for IBPO was £100 mill which was then paid out as a special divi 50p per share if memory serves i currently hold

Breakout Trader

See my 2 recent posts in the discussions section for possible answers to those very questions...

abtan

Oxford Metrics (LON:OMG) (I hold - small position)

I was initially quite disappointed with today's results.

Cash generation was non-existent, gross margins look slightly lower than PY (calculating it gives different figures to their own published number - I don't know why) and EBITDA (which I calculated) is £1.7m, slightly below what I was expecting.

But then things got a little more interesting as management said that the company was in line to meet Market Expectations.

From the Progressive Report a couple of months ago (April 2022), Vicon revenues for FY22, which ends September 2022, are expected to = £32.4m.

That would be a remarkable H2 and given that there's only 3 months left of the year, I can't imagine the company will miss this.

My own rough workings are below, in which I've included a material ramp-up in OPEX in H2 for prudence.

So a company with an EV of c£67m should generate an Operating Profit of at least c£4m.

That's a tad expensive for this market, but perhaps not enough to make me want to ditch my small holding. Especially if more growth is coming via acquisitions, which should bring with it increased operating leverage (note that Head Office costs previously allocated to the now disposed Yotta are now included wholly within Vicon.)

It seems like a fascinating little company with high gross margins and plenty of cash to help it get through whatever is happening now/might happen in the next 12-18 months.

I would be interested in hearing from others as this is a relatively new holding for me.

Cheers

Logical David

Alternatively, the 61% Fib level for Volex (LON:VLX) (I hold) could equally become support. Should the share price hit the 50% Fib line for the fourth time it might finally start to break out and then the 50% Fib line starts to become support rather than resistance. The truth is that nobody knows at this stage what will happen. I believe there will continue to be a bit more volatility in the market for another 3 months before Mr Market starts to see light at the end of the tunnel.

David.

Paul Scott

24th Jun '22

Thanks Michael, I've flagged that up to HQ, re outdated picture on SCVR daily email.

Regards, Paul.

Thanks David,

The presentation about bonds was very interesting, I learned a lot.

Risk:reward looked so bad with bond prices high, and yields ridiculously low, that the risk of bonds crashing in price was glaringly obvious really, as interest rates & inflation rose.

In a way it also makes it a bit easier stomaching losses on equities, knowing that everyone else (bonds, bitcoin, etc) are also seeing heavy losses.

Just shows how complacent we got last year :-(

simoan

Thanks Michael, I've flagged that up to HQ, re outdated picture on SCVR daily email.

Paul,

Whilst they are at it, can they improve Graham’s body language on the new one! :-)

All the best, Si

Hi sharw,

Ah yes, I forgot to mention the Q&A re falling Turkish currency. You're right, Volex (I hold) reassured on this in the webinar, saying most costs & revenues for its Turkish operation are denominated in Euros. The big cost in Turkish currency was wages, and the increases in wages tend to be offset by the depreciating Turkish currency, thus having little bottom line impact.

As you also mention, people seem to have been spooked by the fall in EPS, yet this was simply due to the corporation tax normalising (last year had a tax credit that boosted PAT, due to recognising a deferred tax asset). This is just numpties, selling the shares because they weren't paying attention to an obvious factor that was flagged well in advance, and fully included in broker forecasts!

With solid results, and a very positive outlook statement, Volex shares should have risen strongly yesterday. Instead they fell! That's totally illogical, and a buying opportunity created by panic/fear, and irrational selling, in my opinion.

Brilliant Leader

Hi abtan

Thanks for your note regarding Oxford Metrics (LON:OMG) in which I reached a similar conclusion. These interims and outlook are about as second half weighted as I can recall seeing. However, my own investment thesis (I bought in just after the sale of Yotta was announced) is based around the optionality provided by the cash pile upon which they now sit. Therefore, I shall reserve judgment until I see how this cash pile is deployed, hopefully supported by an outstanding second half.

Cheers
Simon

raggedtp

Thanks for this, Tamzin. I will certainly watch, as I did last year, which led to me investing in £BMO, NB Private Equity Partners (LON:NBPE) and £OCI. While I am saddened at recent price action, their NAVs have continued to perform, and I am even more convinced by their business models and am likely to drip feed more as time goes by. This three make an interesting balance of their overall sector, and I wonder if I'm mad to bother with small, individual PLCs with their stomach-churning volatility. Maybe these should make the core of everyone's portfolio. Given the consistency with which they are making realisations above book value, it's bonkers that they trade at 30-40% discounts.

26th Jun '22

Volex (LON:VLX) (no position)

There are a lot of positive points in the comments, so I hope people don't mind me throwing in a few negative ones:

The company is only passing on the absolute increase in raw material costs.
Whilst this seems okay, the gross margin % is actually declining (FY21 (23.4%) ---> FY (20.5%))

I was trying to get my head around the numbers so I may as well share the below.
Here a 10 increase in Cost of Sale (80-->90) is passed through to the customer (so revenues go from 100 --> 110).
The gross profit is still 20, but the gross margin % has dropped from 20% to 18.18%.

And here's the company's own words:

Does this classify as passing on raw material cost increases? I guess it does, but I'd still prefer the GM% to not decline. The company make it seem like raw material price increases are having no impact on the business.
Adjusted Operating Profit (before tax) moved from 6.4% to 5.8%.
Note that my operating profit figure includes
a) adjusting items, which do not look like one-offs as they seem to repeat every year and,
b) finance costs
The EURTRY recent exchange rate chart looks very scary.
The FX rate movements are possibly working out in De-Ka's favour right now, but any retraction to the rates seen just 3 months ago - alongside the 20-30% increase in Turkey minimum wage this year, which is also scary - and this division could start going into reverse.
It's a sizeable part of the entire business.
I see that refinancing costs have gone up again this year from $659k in FY20 to $$1,143k in FY21 to $2,500k in FY22. It's turning into a mildly expensive recurring cost.

I continue to be in 2 minds on this one.

Small Cap Value Report (Thu 23 June 2022) - VLX, WINE, LIO, IBPO

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Paul Scott

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