Good morning from Paul & Graham!

Mello Results Show - is today, starting at 2pm - full details here. "Our Graham" is doing a spot at 15:00-15:30, so we’ll have to tune in for that! Plus there are several companies which interest me, and it’s so much more relaxing to watch/listen to a company presentation, compared with ploughing through an RNS.

Organiser, my old friend David Stredder says -

“We have a cracking results show tomorrow with about 20 companies being covered and five presenting. Plus David Stevenson from Amati and Peel Hunt talking about REX so worth watching “

I would add that we don’t have to watch the whole thing. I tend to have it on in the background, and zone in & out, depending on what interests me or not, whilst getting on with other things.

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Agenda -

Paul's Section:

XP Factory (LON:XPF) (I hold) - a rapid roll-out of the Boom Battle Bars concept is underway, along with the existing Escape Hunt business. Deals from landlords are spectacularly good at the moment, and TripAdvisor shows high customer satisfaction at most sites. Interim figures show positive EBITDA, but a loss before tax. However, forecasts from Shore show profits from 2023 onwards, as the business is rapidly scaling up, helped by franchising many sites on good economics. Good current trading, with no downturn in demand noted. Could be good, once stock markets normalise.

Loopup (LON:LOOP) [no section below] - announces a small, discounted placing - at 5.0p (22% discount), to raise at least £3m. The trouble is, I don’t think that’s enough. LOOP is fond of issuing upbeat updates, but if you look at the results statements & broker forecasts, it’s still a heavily cash-burning business. The last update trumpeted a big contract that was supposed to generate a lot of cash, but here we are just a month later, and it’s trying to dredge up more money from shareholders. Forecasts also show that, whilst it sounds promising, the cloud telephony new business is still tiny, and cash burning. There’s debt as well. I think LOOP could really struggle, now that investors are not keen to continue pouring money into loss-making, speculative ventures. Very high risk now. Even just a small £3m raise will increase the share count from 106m, to 166m. Expect a lot more dilution after that too. It might survive into 2023, but is increasingly looking like this could end up at 0p at some stage in 2023. 

Update: £3.5m has been raised (69.5m new shares) in the placing. 25m of those were taken by Andrew Scott, a major shareholder, who heavily backed a previous placing at a much higher price. He now owns 29.4%. So good to see his continued support for LOOP. Maybe he'll take it private next time it runs out of cash? (speculation on my part). A further £1.0m could be raised in a broker offer, which is open until close of play tomorrow.  [no section below]

Next (LON:NXT) - Publishes its interim results here. As usual, it gives crystal clear guidance (slightly trimming forecast, but not much). There's also some brilliant commentary on the outlook, and economic factors, which is well worth everyone reading (particularly part II) for read-across to other shares and sectors, so I recommend you take a look. I'll summarise it later here.  I've now typed up my notes, see the new section below. The short version is that NEXT says sterling weakness vs the dollar will mean it might need to raise selling prices by more than the current +8% rate, in the second half of  2023. Could this mean inflation remains high for longer than economic forecasts are currently suggesting?  

Attraqt (LON:ATQT) [no section below] - receives a 30p cash, recommended takeover bid from US software company Crownpoint. No doubt the strong dollar/weak pound is likely to encourage many more such takeovers. The c.79% bid premium looks great, until you look at the chart (below) and see it’s only recouping the sell-off of recent months. There again, ATQT has never posted a profit or paid any divis since listing on AIM in 2014. Its share count rose from 28m on IPO, to 201m now. This is the trouble with jam tomorrow shares - even if they do eventually succeed, by that point the share count has gone up so much, that there can be little upside (if any) on the original share price, then someone comes along and buys it, as has happened here, so upside is snatched away.

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Crestchic (LON:LOAD) - I have a look at its excellent interim results, including a review of the balance sheet & cashflows. All looks good to me. The commentary & outlook are dripping with positives, so it seems that the buoyant trading & growth are set to continue. Valaution is still quite reasonable, despite the share price zooming up this year. My main query is whether the high profit margins are sustainable, or might attract competition? Overall though, LOAD gets a thumbs up from me. More detail below. (Also see the comments section below, for excellent additional research from Planetx)

Graham’s Section:

Everyman Media (LON:EMAN) (£89m) - this premium cinema chain reports a decent H1. The company did generate positive cash flow despite making a loss at the operating level. Three big movie releases helped the H1 performance and it looks like movie scheduling will be back to normal from now on. This should be good news for Everyman, as should its growing estate of venues - six new sites are already in the pipeline for next year. I like this stock but must acknowledge that it has failed to generate much cash flow over the years (even pre-Covid) and I lack conviction that it will succeed in doing this by 2024, as predicted by consensus forecasts. For these reasons, the valuation looks top-heavy to me. (more detail below)

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Paul's Section

XP Factory (LON:XPF) (I hold)

12.0p

Market cap £18m

Interim Results

XP Factory plc (AIM: XPF), a global leader in the experiential leisure sector, is pleased to announce its unaudited interim results for the six months ended 30 June 2022 ("H1 2022").

This is a very interesting share, being a rapidly expanding “experiential leisure” company. The original business is Escape Hunt (escape rooms, which never madly excited me, and obviously was shut down in the pandemic), but a transformational acquisition was made last year of Boom Battle Bars (this is the bit that excites me). Both concepts are now being rolled out very rapidly, with the key point being that the company is securing highly advantageous deals from landlords, locking in attractive site economics for years to come (i.e. low rents, with big cash subsidies up-front [reverse premiums]). Some sites are company operated, others are franchised (thus being funded by the franchisees).

The best time to expand any leisure/hospitality format, is during recessions, because the deals available from landlords are so good. David Page at Fulham Shore (LON:FUL) has also made this point, that the deals currently being offered are stunningly good, which is why they are also expanding rapidly. Landlords want experiential leisure operators, because they pull in footfall, and favour XPF over over more standard type bars, in agreeing new site lettings.

The Escape Hunt, and Boom Battle Bars formats have an obvious synergy, so leases on some larger sites are being signed which have both operations in the same site, which strikes me as a really good idea, and avoids duplicated costs.

Even in a consumer downturn, concepts that are popular, value for money, and new, still do well - as evidenced in FUL’s last trading update.

H1 figures - it’s early days, so XPF is still loss-making, but see the note from Shore Capital to see how rapid the roll-out of new sites is -

FY 12/2021 actual revenue £7.0m
FY 12/2022 forecast revenue £25.3m
FY 12/2023 forecast revenue £39.8m

H1 2022 revenue is £8.1m. Adj EBITDA is positive at £1,070k, but there are so many costs excluded from that, I’m largely ignoring it. The loss before tax was £(3.3)m.

Shore’s forecasts show that H2 should be profitable though, with a FY 12/2022 adj PBT of £(0.8)m - getting close to breakeven. Then significant profits from 2023 onwards.

Site economics - this is all that matters - do the opened sites make money? We have to take management’s word for it, but the answer seems to be yes - with the Escape Hunt sites achieving a site level EBITDA of 39% of revenue, which looks very good.

Most of the Boom Battle Bar sites are franchised, which looks a terrific arrangement, where the company charges a fee of 10% of revenue. That’s very good business for XPF (but not necessarily for the franchisee!)

TripAdvisor reviews - are excellent for most sites, so clearly this is a popular concept that works well for the vast majority of customers. Although a couple of sites were clearly also having teething problems (especially Cardiff). Note that Cardiff was bought back from the franchisee in Sept 2022, so it looks like there might have been an issue there with the franchisee not running the business properly, hence the bad reviews, which now seem to have stopped.

Balance sheet - NAV is £18.8m, less intangibles of £21.7m, gives NTAV of negative £(2.9)m - not great at first sight. However, bear in mind that a liability of £9.9m for provisions is mostly deferred consideration, payable in shares (not cash), at a much higher fixed share price than the current share price. So we can adjust this off the balance sheet, which takes adj NTAV positive at £7.0m, which looks adequate.

The beauty of its rapid expansion, is that other people are funding most of the capex - namely franchisees, and landlords. So the cash requirement is quite modest, and I think there’s a good chance XPF could reach profits & positive cashflow without needing another placing.

Due to the deferred consideration in shares, and share options schemes, I’m valuing this share on the basis that it might have about 200m shares in issue in due course, as opposed to 150m currently in issue.

Current trading - this reassures, e.g. post period end -

Escape Hunt and Boom currently performing well with pleasing level of sales being achieved…

Recent performance across the estate has been encouraging with no discernible impact from consumer weakness. ..

Notwithstanding the encouraging recent performance, the Group's full year results are heavily weighted to the final quarter's trading and will be influenced by, inter alia, the dates on which sites currently in build are able to open, how quickly the performance at those sites tracks through the maturity curve, and the strength of pre-Christmas trading generally.

My opinion - a very interesting, rapidly growing, differentiated hospitality/leisure concept.

There’s obvious appeal to a bar where you can also do social gaming activities, which really differentiates this from the rest of the bars sector, where people just stand around or sit, and talk and maybe dance. You can do that anywhere. Whereas BBB is a clearly differentiated concept. There are competitors cropping up though, so this is likely to become a more crowded area in time.

However, BBB is locking in some terrific site economics, the CEO explained to me on a call - getting deals now on leases that should provide 10 years profitable trading from each site. So I see it as being a business that is grabbing an opportunity, doing the right things, at the right time.

Note that bowling is currently very popular, which reinforces the point that people want activities, not just sitting around drinking.

This could be a very good share, once the economy is straightened out.

In the meantime, I doubt anyone will be interested, as investors are mostly spending our time hiding in the cellar, or under the kitchen table! But bear markets end, when people start to see recovery potential, and I think XPF could be a good one to add to your watch lists, as something with good potential, once markets start behaving normally again.

I’ve already taken the plunge, and put some in my SIPP, as a long-term hold. Currently down 23%, but that doesn’t matter, because I’m not interested in selling, and the company fundamentals look good to me. So it should recover in price and move into profit in future, providing nothing goes seriously wrong.

If you want to invest in a rapidly expanding hospitality/leisure business, then XPF looks much better to me that say Nightcap (LON:NGHT) . I must look at Brighton Pier (LON:PIER) again, I’ve not got round to reviewing the recent update from them, it was looking promising earlier this year, but must have gone off the boil, judging from the wilting share price.

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Crestchic (LON:LOAD)

262p (pre market open)

Market cap £74m

Interim Results

Crestchic plc, the power reliability company, is pleased to announce its unaudited interim results for the six-month period ended 30 June 2022

Strong trading delivers record first half profit

It seems so strange to be reviewing accounts for a company where everything seems to be going really well! LOAD is clearly operating in a lucrative niche, and I’m tremendously impressed with the figures, and the upbeat commentary, dripping with positives.

Here are my notes from the interim results -

H1 revenue up 35% to £21.3m

Gross margin up from 44% LY, to 50% this time, due to better sales mix (more higher margin hire revenues).

Operating profit more than doubled to £4.2m in H1 (LY H1: £1.8m)

PBT £4.0m

Order book at record level.

Expecting strong growth to continue into 2023.

Management expectations are being raised again (4th time this year!) for both 2022 and 2023.

H1 adj EPS 11.3p (big rise on 1.0p H1 LY, but that was partly hampered by exceptional costs, so not like-for-like comparison). Still very good though.

New Equity Development note shows FY 12/2022 raising forecast EPS from 19.5p, to 24.6p - that’s a big upgrade, not reflected in much of a share price move (yet). Revenues forecast at £45.3m this year, and PBT a thumping great £9.0m - that’s a high net profit margin of 20% - but is that sustainable, I wonder? Could attract competition.

Global operations.

Forex benefit possibly, manufacturing in the UK (weak sterling) and exporting? Does anyone know?

Big recovery from pandemic is helping growth this year, might moderate in future.

Divis - very small, at 1.33p (interim), but if strong performance continues then I think LOAD has much greater dividend paying capacity (Paul’s view).

New factory - has helped raise productivity & margins. Now expecting “well above” the original 50-60% growth in production capacity (which constrained growth previously).

Managing macro factors well, e.g. supply chain & inflation.

Balance sheet - looks fine to me, healthy. NAV: £25.6m, less intangibles of £4.4m = NTAV £21.2m. Net debt is only £1.4m, so it looks like the hire fleet is almost owned outright (hire groups usually have a lot of debt, this doesn’t).

Cashflow statement - over half H1 cash generation was absorbed into working capital. Not a problem, as that money hasn’t disappeared, it’s just supporting the growth. Share buybacks of £1.9m, negligible divis, £2.7m cash inflow from disposal of non-core businesses.

Valuation - based on new forecast of 24.6p this year, and 262p share price, the current year PER is a modest 10.7 - and what’s the betting they’ve held a bit back, so actual becomes another beat? Hence maybe the PER could be 10 in reality? That seems good value to me, for a company that is growing so strongly.

My opinion - this all looks marvellous! Based on such strong numbers, repeated forecast upgrades, a sound balance sheet & cash generation, and a PER of 10, this share looks very attractive to me, and well worth readers doing some of your own research - remember we’re only doing a quick overview here, of hundreds of companies, so the detail is up to you!

My only concern here is whether such a strong profit margin is sustainable? What is to stop cheaper competition copying the products, manufacturing them cheaply in say the Far East, and then under-cutting LOAD? A 20% PBT margin is an invitation for competitors to get involved and take away some sales and margin. So key questions to ask management (and independently research) would focus on what moat, or barriers to entry there are? 

EDIT: many thanks to subscriber Planetx who has answered this question about competition in the comments section below, really useful, thanks! End of edit.

In the meantime though, LOAD seems to be making hay, in sectors where demand is strong. It’s great to see some good news & figures, in these depressing times! Thumbs up from me.

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£NEXT

My notes from interim results macro commentary

Good interims (6m to July 2022) - PBT £401m, up 16% on LY, and up 22% on 2019.

Current trading - Aug 22 below expectations (probably heatwave), improved in Sept 22.

Trimming H2 revenues guidance from +1% to -1.5%

Profit guidance for FY 1/2023 trimmed from £860m to £840m - seems remarkably resilient to me, in the current circumstances.

EPS guidance 545p - gives a PER of only 8.9 (based on current price of 4830p/share)

PART II (this is the most interesting section about macro)

Difficult to forecast, so many variables - so forecasts (generally) are just a “best guess”.

Supply - need to find new sources, to mitigate sterling weakness.

Inflation - caused by supply problems (pandemic, then energy crisis).

Sterling devaluation - likely to prolong inflation, even once factory gate prices ease.

Cost of living crisis, might be 2: supply side caused 2022, currency causing 2023.

NEXT favours these policy measures - radical overhaul of planning laws, relax immigration rules, energy market reform, liberalising trade tariffs, reduce Govt borrowings by scrapping wasteful capex like HS2.

Prices - for Autumn/Winter (A/W) 2022 will be raised by 8% vs LY.

Prices - for Spring/Summer (S/S) 2023 similar increase, by c.8%.

Prices - for A/W 2023 could be higher than 8%, due to sterling devaluation effect, even if factory gate dollar prices are static/falling, and freight costs lower.

Forex hedging - fully hedged for S/S 2023. 30% hedged for A/W 2023 (at materially lower £:$ rate).

Mitigation of currency moves - some is possible, “but probably not enough”.

Key point - producer countries have also devalued against the dollar, so this lowers their domestic costs in US dollar terms.

Dollar costs of commodities & shipping costs may fall further.

BUT, the scale of sterling devaluation vs dollar is too great to fully mitigate - pressure will be worst in A/W 2023.

Positive macro factors - high employment, and vacancies have grown to equal unemployment - best position since 2013 chart starting point. This should mean fewer debt defaults on Next’s consumer receivables book. Household gross savings still high (see graph). External sources for the macro data are provided in footnotes. Govt support measures are likely to help consumer spending this A/W.

Remainder of FY 1/2023, sales guidance lowered from +3% to -2%

Balance sheet - net debt of £862m, is considerably less than customer receivables book of £1,182m. Healthy position.

Self-help measures identified, to improve margins, and become more efficient, I love this quote -

“It is only when the river begins to run dry that the upturned supermarket trolleys become visible” -

which sounds like a nicely anglicised version of Warren Buffett's comment about the tide going out, and lack of bathing costumes!

My view - fascinating stuff, and gives us lots to ponder, and questions to ask other companies about how they’re mitigating inflationary inputs.

The key point is that sterling vs dollar is going to put upward pressure on inflation in 2023. Although remember that there will be plenty of opposing inflationary factors going the other way, as the big energy cost hikes annualise.

This all makes me wonder whether the forecasts for rapidly falling inflation (e.g. from the Bank of England) in 2023 might be too optimistic currently?

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Graham’s Section:

Everyman Media (LON:EMAN)

Share price: 98p (+1%)

Market cap: £89m

As anticipated, this premium cinema chain reveals £40.7m of revenue and £7.5m of adjusted EBITDA for H1.

Since depreciation of its equipment and other physical property strikes me as a very real and ongoing cost for a cinema chain, I’m inclined to dump the £7.5m figure entirely and look for the stricter numbers lower down the income statement:

• Operating profit £0.8m
• Loss for the period £0.8m after £1.6m of financial expenses, mostly related to lease liabilities.

Remember that under IFRS 16, lease costs are charged to depreciation and finance expense. This means that if a company needs to lease a lot of equipment or property, that its EBITDA becomes a useless number.

So in summary, the use of EBITDA by Everyman is not something I can agree with.

Performance

Operationally, the company reports admissions up 20% against H1 2019, with increased market share of 4.5%. The growth in these metrics is at least partially due to the opening of new venues.

CEO commentary:

"The first half of the financial year has been a period of progress on all fronts, with healthy admissions growth and robust spend per head, suggesting we are now back on track following the turbulence of recent years. Despite reduced film output due to the effect of low production during the pandemic, we've enjoyed three of the ten highest-ever box office releases in the past twelve months.

The three biggest releases during H1 were Top Gun: Maverick, The Batman and Doctor Strange. (I must admit that The Batman motivated me to get down to my own local cinema earlier this year.)

Film production is now thought to be “back up to full speed”, with good new releases coming over the rest of this year and next year.

H2 is in line with expectations and the outlook for the rest of the year is “promising”. The company should “at least meet expectations for the full year”.

With 38 cinemas currently, it has plans to open a new venue in November and has another six in the pipeline for next year.

Balance sheet - tangible equity is £38.9m. Some of the biggest balance sheet items relate to property, plant and equipment (£85m) and lease liabilities (£80m). This is a seriously capital-intensive business. Several venues have recently been refurbished.

My view

I have mixed views on this. I like the concept and I believe it has more merit than the “mainstream” cinema chains.

On the other hand, Everyman has been around for a while now and its cash flows are leaving me underwhelmed. In H1, the company managed to generate £1.7m and if you annualise that then perhaps the valuation doesn’t look too bad.

But given the permanent competition from streaming services, the exposure to a weakened consumer, its capital intensity, and its failure to deliver meaningful cash flows to date, I think a market cap closer to book value makes sense here.

Analyst forecasts suggest that it will come good in FY 2024. More compelling buying opportunities must be out there today.

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Volvere (LON:VLE)

Share price: 810p (-10%)

Market cap: £20m

At the time of publication, Graham has a long position in Volvere (VLE).

As some of you may know, this was my largest personal holding for a few years.

That changed, as of earlier this week. Not because I made any trades, however: the Volvere share price has been weak for about two years, and it has finally been overtaken by one of my other holdings:

Volvere share price

(The holding in my portfolio that now stands at number one is a little company based out of Omaha, Nebraska.)

Let’s dig into these interim results and see if we can understand the difficulties faced by Volvere at this time.

Overview - Volvere is a company that invests in struggling businesses and turns them around (the Latin verb volvere means to turn or to roll).

It currently owns two food businesses: pastry manufacturer Shire Foods and dessert maker Indulgence Patisserie, its most recent acquisition (Feb 2020). Aside from that, it has a large cash pile and good net asset backing. It is still managed by its founders - the Lander brothers - who collectively retain a c. 15% ownership stake.

H1 results

• Revenue +14% to £17.9m
• Pre-tax loss £1.1m (H1 last year: £0.3m)
• Net assets per share down 1% over the six-month period to £13.33.
• Cash and available-for-sale investments £20.39m

These results are hardly inspiring, but it’s more meaningful when we look at the performance of each of its two businesses separately.

Shire Foods - “acceptable performance”.

Revenues here grew by 13.9% to £15.78m (nearly 90% of Volvere’s total revenues).

Profits were almost unchanged, just below £0.6m.

The lack of profits growth is attributed to:

“...a fall in the materials margin, which reduced by approximately 4.2% compared to the first half of 2021 and by 4.7% compared to the whole of 2021. This was due to the rapid increase in raw materials' costs which were not, in the timescales available, able to be passed on to customers.”

Shire has been raising prices since the end of H1, and “it is hoped that this will ensure a recovery in margins over time. It is, however, difficult to predict given the continuing inflationary pressures across the economy as a whole.”

Shire has been a successful investment for Volvere, but I’ve never thought of it as a particularly high-quality business. Although it is possible that Shire-owned Naughty Vegan could be a valuable brand some day.

I have to agree with management that this H1 performance from Shire is acceptable: it could have easily swung to a loss. It’s worth noting that the company’s energy costs are fixed - hopefully they are fixed for some time to come.

In “normal” times (do they exist?) Shire should be able to generate £2m in pre-tax profit. That’s approximately what it earned in both 2020 and 2021. It comes with freehold property asset backing and I think it could eventually be sold at a modest earnings multiple (although there are no signs of any intention by Volvere to sell it).

Or if the Naughty Vegan brand captured the public’s imagination, perhaps with the help of some marketing investment, then who knows what it could be worth? Brand development doesn’t always work out, though, and not much is being spent on this.

Indulgence Patisserie - “poor performance”.

This is where things don’t look so good.

Volvere bought Indulgence out of administration for £1.25m in Feb 2020.

Since then, it has ploughed money into the company in the form of loans.

Total loans are now £6.83m, a figure which includes the original acquisition price.

But it now looks as if this business may not be viable.

Its energy costs weren’t fixed, and it entered this inflationary period from a position of relative weakness. During H1, it made a loss of £1.5m on revenues of £2.1m.

I would not expect Volvere to put up with a cash bleed like this for long, and indeed it sounds like they might choose to cut their losses soon:

Following the period end, headcount has been reduced and, in order to generate cash, manufacturing has been suspended indefinitely as finished stock levels of £0.60 million are sufficient to satisfy foodservice and existing retail customers for several months. We continue to assess the ongoing viability of the Indulgence business in the light of the future sales opportunities, product margins and overhead costs associated with it.

Currently, “a period of de-stocking of finished goods is now underway”. I don’t know which way it will go, but I think this might be the end of the road for Indulgence.

Other matters

While these trading results aren’t great, there are a few other bits and pieces worth mentioning.

Firstly, Indulgence’s freehold properties “were independently valued in July 2022, resulting in an upwards revaluation of £1.11 million (before a deferred tax liability of £0.28 million).”

This revaluation means that the “net” result for Indulgence, including property ownership, was a lot closer to breakeven.

Volvere also tells us that the properties are owned by a separate entity to the Indulgence trading entity. So legally I guess it would be easy to sell the properties and to put the trading business into voluntary liquidation separately, if that is the decision taken.

Secondly, management have been trading with Volvere’s cash balance, although they don’t tell us what they’ve been buying with it:

During the period the Group invested £4.55 million in available-for-sale investments, the income from which amounted to £86,000. Some of these investments were subsequently sold in the period, realising gains on disposal of £310,000.

I think shareholders should be informed of the nature of these investments - hopefully we will be told more in the full-year results. The balance sheet shows £1.6m of available-for-sale investments still held at the end of June.

My view

When all is said and done, the final reduction in balance sheet equity for Volvere shareholders is less than £0.5m (see the Statement of Comprehensive Income). Not a big hit, in the grand scheme of things.

This includes the positive effect of property revaluations. You might argue that they aren’t reflective of “underlying” performance, but I would counter that by saying that a) the trading losses at Indulgence aren’t reflective of underlying performance either, because that company has stopped manufacturing indefinitely, and b) when Indulgence was purchased, management will have been keenly aware that they were getting freehold property assets that would help to offset any future trading losses.

I now expect that Indulgence will end up costing Volvere several million pounds. The capital poured into it (nearly £7m) is at least offset by the value of its properties and whatever cash it can raise from de-stocking.

The overall group balance sheet is still worth £33.5m and this is fully tangible consisting of freehold properties, working capital, available-for-sale investments and cash.

Volvere’s cash and investments alone are worth 92% of its £22m market cap. Then you also have whatever net cash Indulgence might be able to wring out of its assets. And then you also have whatever cash Shire might be worth - remember that a return to “normal” margins would see it earn pre-tax profits of £2m.

So on valuation grounds, it would be very difficult for me to sell my stake in Volvere today.

Future deals?

I think one of the major issues here is that it’s been quite some time since the company made a successful acquisition. It has made spectacular disposals, but nothing good on the acquisition side for some time.

Management are earning over £650k p.a. (2% of balance sheet equity) and with so many economic sectors struggling, I think shareholders are wondering for how much longer they will continue to sit with cash on the sidelines.

They raised £10m in October 2020, expecting an increase in opportunities. It is nearly two years later and still no acquisition!

The only clue we get on that front today is:

There is a significant degree of instability across the UK economy and consequently we are seeing an increase in potential investment opportunities. Not surprisingly we have reviewed a number of businesses where the continuing uncertainty in relation to energy costs is a particular challenge. Our preference is for investments in companies where we can make a substantive change to effect a turnaround, but high energy costs are not something we can influence. We believe some good opportunities will emerge, but timing is critical and the current macroeconomic and geopolitical situation make that issue very challenging.

So, will we get a deal any time soon? I don’t know. I have great respect for the judgement of management here, and I do think it’s reasonable for them to be wary of investing in anything else where energy costs could be a problem, even if this greatly limits their range of opportunities. But they do need to make a deal at some point.

If they can’t find anything better to do, I still support share buybacks and hope to see more of them. If they could buy back a decent chunk at 850p, for example, that would be a 36% discount to net assets. Since net assets are (in my opinion) a low-ball estimate of the company’s worth, I’d be glad to see repurchases happening right now.