Small Cap Value Report (Thu 30 Dec 2021) - CRL

Good morning, it's Paul here with the SCVR for New Year's Eve eve.

I'm not sure if there will be much news today, but as for yesterday, here is a placeholder for reader comments.

Agenda - just the one company reporting today -

Creightons (LON:CRL) - interim results. Tough prior year comparatives, due to the (previously flagged) one-off sales last year from pandemic-related products. Operating profit down about 14%. I flag up a couple of points of concern, re excessive share options, and negative cashflow. Overall, it looks a decent business, and maybe priced about right for now. Worth considering perhaps?

Also,

Parsley Box (LON:MEAL) - my mystery shopping experience is now concluded, you may be relieved to hear, with all the product consumed. My conclusion is that product quality is too variable, and the target niche looks too small. Shares remain uninvestable, due to it being close to running out of cash. Big dilution (or insolvency) look likely. Hence uninvestable until it's raised more cash.

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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 (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Parsley Box (LON:MEAL) mystery shopper - I've finished off all my remaining product from Parsley Box (LON:MEAL) and the last few were OK. So I think it's clear that MEAL has a real problem with variable product quality. Some items are OK quality (e.g. salmon & asaparagus, sweet & sour chicken, fish pie, toffee cake, half bottles of red wine (particularly good)), whilst others are just terrible quality (especially the beef hot pot & steak and ale - both of which hardly had any beef in them, and what little there was, was chewy & unpleasant).

Let's hope the new MD at MEAL sorts out product quality, and consistency, asap. The shares remain on my uninvestable list, because it has already told the market it needs to raise fresh equity. From a position of extreme weakness, I dread to think what terms the fundraising might be on. Hence I wouldn't go near it until there's plenty more cash in the bank, and maybe a change of strategy & management? Because what they've done so far has clearly gone badly wrong. It's a reminder that companies which raise a cash pile at IPO, to spend on a marketing splurge, often seem to fritter away the money, and then come back for more.

Is there a viable niche for ready meals that can be stored in a cupboard instead of a fridge? Possibly, but probably only a niche market. Practically everyone has a fridge/freezer, so it makes a lot more sense to buy supermarket ready meals, which are larger, tastier, and cheaper than MEAL offerings.

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Creightons (LON:CRL)

88p (yesterday’s close) - mkt cap £59m

This share has been a 40-bagger in the last 10 years, an example of what keeps many of us interested in small/micro caps - the occasional nugget of gold is lurking there somewhere, although it’s not usually obvious at the time.

More recently, the chart looks similar to many other small cap charts - getting a bit ahead of itself after a long run up, then correcting quite sharply in the last quarter of 2021. Is this a buying opportunity I wonder?

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Interim Results

Unaudited interim financial report for the six months ended 30 September 2021

It’s helpful when companies include a short description of what they do, at the top of RNS announcements, which Creightons hasn’t done. Again.

The StockReport description is -

Creightons plc is a United Kingdom-based company engaged in development, marketing and manufacturing of toiletries and fragrances. The Company operates through three business streams: own branded business, private label business, and contract manufacturing business.

The historical graphs look very impressive -

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The year end is 31 March. I reviewed its interim results here in July 2021, concluding with a positive overall impression.

The company is up against strong prior year comparatives, as H1 in FY 3/2021 was boosted considerably by opportunistic sales of covid-related sanitising products. Although the company also suffered reduced sales of other products due to the pandemic.

H1 key numbers today -

Revenue £30.0m (down 7%)

“One off” sales were £11.5m in H1 LY, so that’s about a third of the prior year H1 comparative, a big headwind, hence overall -7% doesn’t look bad at all, in that context.

Gross margin up, at 42.7% (from 39.3% in H1 LY) - which more than offset reduced revenues, with gross profit of £12.8m slightly up (H1 LY: £12.7m)

2 acquisitions - “integration progressing well”

Profit before tax (after removing £221k acquisition-related costs, which are exceptional) of £2.5m, versus £2.9m in H1 LY

Tax charge is lower this time, about 12% (down from 16%) which helps boost EPS

EPS - strangely, the company doesn’t give an adjusted EPS figure to remove the exceptional costs, which seems a bit of an own goal. Instead note 3 shows EPS has been calculated on the statutory after tax earnings of £1,988k. I think we could adjust this to strip out the £221k acquisition costs (less tax effect) to add £194k to earnings, adjusting it up to £2,182k, which gives 3.35p basic EPS, and 2.87p adj diluted EPS - note the excessive share options below, which is well above the usual 10% upper limit considered acceptable by many investors - so the question needs to be asked why the company has been so generous with share options? Are other shareholders comfortable with that? The answer may well be yes, given that the share price has 40-bagged! Rewards for management seem reasonable in that context.

Before investing here, I would definitely want to check out the terms of the share options in the most recent annual report, which is quick & easy to do online. I often just look up specific points in annual reports, rather than reading the whole thing.

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Balance sheet - there are some quite big movements here, relating to acquisitions. Note 7 shows how both acquisitions in the period had slightly negative net assets. So the £9.7m consideration due is more than all goodwill (£10.1m) - or brand value, as it’s described.

Acquisitions were part-funded with issuing more shares, and taking on more debt.

Trade & other receivables look high at £15.6m - suggesting the group may not be very good at collecting in cash from its customers?

Inventories also look a touch too high, at £13.2m

Overall though, working capital remains healthy, with the current ratio at 1.66

Gross debt has risen to £8.5m, with gross cash at £1.0m, giving net debt of £7.5m - the financial highlights doesn’t disclose this, instead it cherry picks the £2.9m as “Short term borrowings and loans” - which strikes me as misleading. It’s customary to show total net debt, not just short term debt. I wouldn’t want to see the company take on any more debt.

Stripping out intangible assets, NTAV is £13.7m, which looks OK.

Cashflow statement - cash generation is not very good. This is due to large increases in working capital, which more than absorbed all the profit.

Investing activities saw a cash outflow of £8.3m, which is mainly related to the 2 acquisitions in H1.

Put all of that together, and the company has effectively spent its previous cash pile, and taken on more debt. That’s fine if the acquisitions turn out to be worthwhile, but it’s a potential risk.

Valuation - I’m going to work on my 2.87p adjusted, diluted EPS figure for H1. Add in some extra for the acquisitions, and the full year might end up around 6p EPS perhaps?

The share price (at 08:27) is around 89p, so that’s a PER of 14.8 - which looks about right to me.

I can’t find any broker research, which is an oversight by the company. This share has a good following amongst private investors, so it’s really important to use a broker that publishes its research on Research Tree, not the case for CRL.

Hence I have to work purely on my only guess for how the full year might turn out.

There could be upside, if the acquisitions produce more profit, but I don’t have any numbers on what is expected from the acquisitions. Spending about £10m on them would suggest that CRL must foresee decent profitability from the new subsidiaries, otherwise they wouldn’t have bought them. So my 6p EPS guess could be light, who knows?

My opinion - if you like the company, then the sell-off from a peak of about 134p, to today’s 89p, could be a buying opportunity? The valuation looks about right to me, so I wouldn’t say it’s a particular bargain, but just reasonably priced.

A lot of it hinges on the acquisitions - if they turn out to be good, then that could drive the future share price up. So I’d want to find out what expertise & track record management have in doing acquisitions.

Overall then, CRL looks potentially interesting.

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