Small Cap Value Report (Thu 26 Nov 2020) - EKF, CTO, BOO, TRCS

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

Agenda - many thanks to Jack for covering the morning shift, with;

Ekf Diagnostics Holdings (LON:EKF) - 2 announcements

Tclarke (LON:CTO) - Trading update

Paul is doing the afternoon shift, and will be looking at;

Boohoo (LON:BOO) - Update on supply chain action, including appointing KPMG & Lord Leveson

Tracsis (LON:TRCS) - Final results

Shoe Zone (LON:SHOE) - Update buried in a "Date of results" announcement

Newriver Reit (LON:NRR) - Half year results - sorry, ran out of time, see Friday's report.

Motorpoint (LON:MOTR) - Interim results - sorry, ran out of time, see Friday's report.

(and possibly circling back to De La Rue (LON:DLAR) from yesterday, or I might do that tomorrow, it depends on time)

Timing - estimated time of completion, c.7pm. (extended, because I want to watch the webinar from Intercede at 16:15 on IMC). Today's report is now finished.

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Jack's section

EKF Diagnostics (LON:EKF)

Share price: 63.17p (+4.41%)

Shares in issue: 454,993,227

Market cap: £287.4m

We last talked about Ekf Diagnostics Holdings (LON:EKF) here, on the 9th of November - a ‘comfortably ahead’ trading update - but this was just before the first of the vaccine news.

Those stories seem to have sparked a fundamental rotation in market sentiment. This might last, or it might not, but it’s interesting to track EKF’s share price movements this month, up nearly 20% at one point before handing momentum over to the FTSE 100.

EKF is a global, integrated medical diagnostics business that designs and manufactures diagnostic equipment for use within Point-of-Care settings. Its portfolio includes small blood analysers used in testing patients for conditions including diabetes and anaemia.

As a transporter of Covid samples, its business has benefitted from recent conditions with the release of its PrimeStore MTM pathogenic sample collection product. Even now, the shares retain a punchy valuation of 29.8 times forecast earnings. This is based on FY21 numbers, though.

Brokers are forecasting a bumper FY20, with earnings set to come in at 3.41p, making for a more reasonable valuation of 18.8 times current year earnings.

As with other stocks, the question of whether EKF is expensive or not revolves around how long heightened trading lasts, how big the boom is, and what business looks like post-Covid.

On that last note, the group has more established revenues over the years and so is less likely to be a flash in the pan.

£m

COVID-SeroKlir - FDA Emergency Use Authorisation

EKF actually has two RNS statements out today - the first is its sale in shares of Renalytix, the developer of AI diagnostics for kidney disease, which it spun off a while back. It looks like a useful profit as ‘the sale has resulted in gross proceeds of £7.705m to EKF and generated a profit of over £5.6m after dealing expenses.’

In fact, heading over to the Renalytix StockReport, the company is now worth more than EKF after going from 120p to 517p in just over two years, so a very successful spin off so far.

The other bit of news today from EKF is the FDA emergency use authorisation of COVID-SeroKlir, a quantitative SARS-CoV-2 IgG antibody test kit. EKF has exclusive rights to market and distribute this product in the UK and Germany and non-exclusive rights in Europe.

Its partner in this venture is Kantaro Biosciences. COVID-SeroKlir is a high-performance semi-quantitative antibody test kit (demonstrating 98.8% sensitivity and 99.6% specificity for detecting SARS-CoV-2 specific IgG antibodies against two virus antigens), ‘with a broad range of applications in the fight against COVID-19’.

The Kantaro test is being manufactured at scale and immediately available in the U.S, with a capacity of up to 10 million tests per month.

Conclusion

The Renalytix spin off shows that EKF is capable of creating substantial value. The company has established revenue, double digit operating margins, and is cash flow positive.

Of all the stocks with Covid-related business, this looks like one that is more certain to continue creating value long past the pandemic. What’s more, some of those Covid stocks trade on a similar market cap to EKF without that track record of established revenue generation.

But it’s not a company I know well, just a company I’d like to know well. With a market cap approaching £300m and a forecast £61.2m of FY20 revenue falling to £49.9m in FY21, the valuation raises questions. That said, expectations have been upgraded several times this year already so there is good operating momentum here.

Analysts have clearly struggled to appropriately incorporate EKF’s improving prospects in recent times, so there’s always the chance of further surprises.

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T Clarke (LON:CTO)

Share price: 97.80p (+11.52%)

Shares in issue: 43,052,558

Market cap: £42.1m

Tclarke (LON:CTO) delivers electrical, mechanical, and IT services to buildings.

It’s a perennially cheap micro cap - note the stubbornly low PE ratio and high dividend yield juxtaposed against the rising revenue and income:

And then the StockRanks: good Value and decent Quality, but with poor Momentum. The kind of profile that, in a recovering market, could see it shoot up the StockRanks.

On the face of it then worth a closer look as a beaten up recovery play. Shares are up around 11% on this trading update so let’s take a look.

Trading update

This is a ‘resilient performance’ and the group ‘continues to trade in line’ - so it’s not shooting the lights out, but neither is it in severe distress. On a forecast PE ratio of 5.9, I would argue that’s more than adequate.

The group anticipates turnover in 2020 of c£240m and underlying EBIT of around £6m against a market cap of c£40m. What’s more, it is assisting with the rapid delivery and maintenance of COVID-19 Testing Stations across the UK.

Margins are low though: ‘TClarke achieved its target 3% EBIT margin in Q1, broke even on much reduced volumes in Q2 and expects to deliver a 3% margin for H2.’

Meanwhile, the outlook sounds ok.

The group is winning new projects across a wide range of sectors and the forward order book has increased to £422m - that’s £61m (17%) higher than at the same point in 2019. Revenues of £257m for 2021 have already been secured, compared to £232m this time last year and up from £191m at the group's interim results in August.

TClarke says it is strong in the healthcare, education and data centre market sectors and sees ‘exciting opportunities across all of these market sectors, providing excellent opportunities for growth over the next few years.’

Conclusion

Is this just a low multiple business model? CTO has had a single-digit PE ratio for years now, so what is about to cause an expansion in that multiple? That said, the value on offer is striking.

Operationally the group looks to be making the most of a challenging period. And the outlook sounds quite healthy. Ideally, I’d like to see this backed up by some director buys but you can at least tell from the net cash balance sheet and lack of shareholder dilution that this appears to be a sensibly run business for shareholders.

There is a £26m pension fund deficit - quite big for a small company. From the most recent annual report we see that the group is contributing £1.5m per annum for 12 years (from 2018). That’s something to keep an eye on.

All in all though, given the cheap valuation and solid outlook there could be good value here.

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Paul's Section

Boohoo (LON:BOO)

(I hold)

295p (up c.2%) - mkt cap £3.7bn

There's another step in the right direction to improve its supply chain, from this fast fashion business with 9 brands. It provides an update today on its “Agenda for Change”. To summarise;

• Sir Brian Leveson PC has been appointed to provide independent oversight into BOO’s supply chain changes - Leveson is a major figure in the legal profession. For anyone not familiar with his background, take a look at this article. Therefore this is quite a coup for BOO
• Leveson will report to BOO’s Board, and his reports will be published - top marks for transparency
• Leveson has appointed a legal, and independent enquiry & enforcement team - so this has teeth, it’s not just a window-dressing exercise
• The aim is to ensure that - "everyone associated with the Group's supply chain is treated fully in accordance with the law and the principles of ethical trading."
• KPMG also appointed to assist with improving the supply chain - working with 2 existing supply chain auditors, Bureau Veritas, and Verisio
• Chairman confirms he is onside with the Agenda for Change programme. It’s good that he’s stopped defending previous practices, and has moved with the times. I see this as part of the process of growing pains from a small family business, to a large global business.

My view - I think there’s a tremendous opportunity with this share. It’s a fantastic growth business, delivering superb financial performance. Yet the valuation is way below other similar growth companies. Look at $FTCH for example. Listed on the US market, it has similar revenues & growth to BOO, yet it loses money hand over fist! Whereas BOO is strongly profitable, but is only valued at a quarter of FarFetch. It’s a glaring anomaly. I’ve suggested to BOO that it lists in America, where the valuation would be so much higher than on AIM.

That’s one opportunity for a big re-rating. The other opportunity, is that the ESG fund managers who’ve been selling up over the supply chain issues, are likely, at some point (no idea when) to recognise that BOO is doing everything humanly possible to fix the problems, with total transparency, and considerable resources being used - I know KPMG are not cheap, and imagine that Lord Leveson’s hourly rate is not likely to be modest! Therefore, I can foresee all those forced sellers becoming keen to buy back in at some point, probably at a much higher price. Combine that with short sellers being forced buyers, and it's a recipe for a big & sustained move up in share price.

Hence this looks to me like a really terrific opportunity for private investors to get ahead of the curve. I’ve been buying more, and as mentioned before, it’s my largest personal holding.

The next trading update could be good, because we have Black Friday tomorrow, a major boost for online retailers in particular since their physical competitors on the High Street are currently shut.

It should be interesting to see what happens next. I think this is a seriously good risk:reward situation now. But obviously, DYOR as usual.

I wonder how long the UK press will keep trying to re-hash the supply chain problems? They’ve been dining out on this story for a couple of years now. Will any start reporting the fact that, actually the company has responded very positively, and extensively, to fixing these issues? I wouldn’t bet on it.

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Tracsis (LON:TRCS)

Share price: 565p (down c.3%, at 14:32)
No. shares: 29.16m
Market cap: £164.8m

Final Results

Tracsis, a leading provider of software, hardware and services for the rail, traffic data and wider transport industries, is pleased to announce its unaudited final results for the year ended 31 July 2020.

My report here on 19 Aug 2020 is worth revisiting, by way of background. In short, TRCS said that covid had a significant impact (£10m hit to pre-covid forecast, with guidance at revenues for FY 07/2020 of £48m), but that this was not as bad as originally feared. EBITDA forecast of £9.6m, down 8% down on LY, helped by cost-cutting. £18m cash at year end.

Let’s look at the actual results now, and see how they compare;

• Revenue £48.0m - tick, same as guided
• Adj EBITDA of £9.6m (excl IFRS 16) - tick, same as guided
• Cash £17.9m - just a smidge lower than £18.0m forecast, near enough

That’s fine then, the FY 07/2020 results are in line with expectations & previous guidance.

Valuation - fully diluted adj EPS is 23.7p (down 14% on LY) - which seems creditable, given the huge disruption covid/lockdown has caused. The PER is 23.8 - that looks about right to me, considering future performance should improve after covid, and factoring in the decent cash pile.

Balance sheet - TRCS has always been run on a conservative basis, with plenty of cash in the kitty. That, combined with plenty of recurring revenues, makes it a sleep soundly at night type of share.

Note that tangible fixed assets, and inventories, are low, which makes it a capital-light business model, a good thing.

Working capital looks fine, and includes £17.9m cash.

Note there is a total of £7.3m contingent consideration payable, which should probably be deducted from the cash pile, to arrive at a more conservative net cash position. Although the company would probably say that contingent consideration is paid out of future cashflows, which is a fair point.

NAV is £53.0m, less intangibles of £54.4m (goodwill from all the acquisitions I think), and NTAV is actually slightly negative at £(1.4)m. Maybe we should also ignore the £8.2m deferred tax liabilities? Doing so would turn NTAV positive again to £6.8m.

Overall, I’d say the balance sheet is OK.

Cashflow statement - often overlooked by investors, but in some ways this is more important than the P&L. In this case it clearly shows the business model - i.e. a strongly cash generative business, which uses that cashflow to acquire other businesses. Dividends are tiny, because the cash is being used for acquisitions.

Outlook - clear guidance here, which is helpful;

Q1 trading has been in line with the Board's expectations. As we look to the remainder of the financial year, we are aspiring to achieve modest revenue growth and EBITDA margin improvement despite the ongoing challenges of Covid-19, and we expect our cash position to remain equally as strong.

More detail is available in the RNS.

My opinion - I’ve always liked this share, but generally found it rather too expensive. I’d say the price now looks about right. Therefore anyone buying now, is not exactly getting a bargain, but it would be more of a long-term holding, if you believe the company will continue to grow, and generate a higher share price accordingly over time.

It’s got a good track record, seems well managed, and I imagine profits would be likely to rise, once covid is behind us.

I haven't read all the commentary, due to time constraints, remember I'm really only reviewing the numbers in these reports, not making predictions about what the future might hold. It's up to you to decide if you think the company's prospects make its shares attractive or not.

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Shoe Zone (LON:SHOE)

Share price: 56p (down 9% at 16:03)
No. shares: 50.0m
Market cap: £28.0m

(I hold)

Date of Final Results

This RNS has really been given the wrong title. It contains much more than just the results date (which I would normally ignore, because I look at results every day, and use an email alert service to flag up companies of interest). It should have been entitled: trading update and results date.

It has a strange 5 October year end date;

Shoe Zone announces that, as a result of the impact of the second Government mandated lockdown in the UK, it will now announce its Final Results for the period ended 5 October 2020 on 8 March 2021.

That’s 2 months later than last year’s 8 Jan 2020 announcement of preliminary results, which strikes me as a rather excessive delay.

Lockdown 2 - will see at least £12m lost revenue vs FY 9/2020, which takes into account “good gains” in online sales.

SHOE continues to have a “material net cash position”

Sufficient liquidity, providing no further Govt restrictions above already known

Cannot give meaningful guidance due to economic uncertainty

My opinion - I don’t see anything unexpected in this update, so can only assume that today’s 9% price drop must be some punters deciding to bank some of the big recent gains (from a low base I should add).

I like this well-managed, owner-managed retailer of cheap shoes. Once retailing conditions are back to normal, then it should return to profitability. It looks as if SHOE has enough cash to tide it through. Personally, I’m holding for medium/longer term upside. If profits get back to anything like pre-covid levels, then we could conceivably see this share usefully higher than now. Remember that there has been no dilution, as it has not needed to raise fresh equity. Therefore in theory the share price could recover to previous levels.

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See you tomorrow, for a big catch-up day.

Regards, Paul.