Small Cap Value Report (Thu 6 April 2023) - G4M, MOTR, RWA, SOLI, XPD, FUL, ANX

6th Apr '23 by Roland Head

21 comments 7025 reads

Good morning from Graham and Roland!

This will be the final SCVR until Tuesday, as the UK market is closed for Easter bank holidays on Friday and Monday.

Today's report is now complete (10.15). Enjoy the long weekend!

Quick comments -

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.

Graham's section

Gear4music (HOLDINGS) (LON:G4M)

Share price: 74p (-16%)
Market cap: £15m

This is a stock that Paul usually covers, but here we are! Gear4Music is an eCommerce business that sells musical instruments. It has an amazingly volatile share price history:

U1uHJyyuoaY7L6jse5mGpyUzbeZTMqkKKjaX3MoG6eK1MHiTUSYRLpiYlQoKX8s6qPyizCbpGLt3fPlWk9Yj8fHiaWvrCSV0zuF7h3l6vvUkYIgafCJABjJcRbNztpeewp0lEknpX_Nwubah1m5f7uA

Today we have a year-end update for FY March 2023.

These numbers are below expectations, as revenues and profits were “impacted by weaker consumer demand during February and March”.

Total sales £152m (expectations: £155.1m). The UK underperforms Europe and Rest of World.
Gross margin at 25.7% is weaker than last year, but perhaps this is the “normal” level for margins?
EBITDA £7.3 - £7.7m (expectations: £8.9m)

Net debt reduced by £10m during the year to £14.5m - that’s one bit of good news, as it was only expected to reduce to £17.5m.

Even if the numbers are disappointing on…

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truegent

6th Apr '23

Pretty poor takeover price for Xpediator (LON:XPD) I thought - 44p giving a forward p/e of 10x still too cheap. Any shareholders here happy with that ?

carvalio

Hi Graham and Roland, any chance of please looking at a backlog item CMC Markets (LON:CMCX)? Has good stocko metrics, but has taken big fall on a reduced outlook. P/E of just under 9, loads of cash in the bank, some new regions opening up. I'm a holder, but wondering if it's a falling knife.

Howard Adams

Gresham House Energy Storage Fund (LON:GRID) just about in SCVR range. Current Stocko PE 6.9, div. 4.54%.

Full year results to 31/12/22. Copy from top 2022 highlights ....

2022 performance highlights

· EBITDA of the underlying portfolio of £48.8mn, a like-for-like increase of 23.2%

· 155.51p NAV per share as of 31 December 2022, up 33.1% (31 December 2021: 116.86p)

· 7p per share dividend to be paid in respect of 2022, covered 1.28x

· NAV total return (TR) of 39.1%

· NAV TR since IPO increased to 93.2%; 17.2% on an annualised basis

· Performance mostly driven by revaluation of new projects and increases in third-party revenue forecasts

Full RNS here ...

https://www.investegate.co.uk/...

Copy of 2023 outlook .....

2023 outlook

· Q1 NAV per share expected to be driven by +3.3p from incremental project revaluations and +2.2p from newly awarded Capacity Market contracts. Other factors, including any changes to revenue curves or discount rates are still to be determined

· Operational capacity is expected to reach 1GW in 2023 and c.1.5GW in 2024; growth of 80% and 170% respectively vs year-end 2022 which is expected to drive NAV per share and EBITDA growth

· In light of growth in EBITDA from increased operational capacity in 2022 and expected in 2023, the Board intends to pay a dividend of 7.35p per share for 2023, a 5% increase over 2022. The Board will periodically review the dividend policy to maintain a competitive dividend yield while also ensuring that dividend cover is strong

· The Manager is trialling a new trading revenue opportunity on a small number of MW which has the potential to add a new income line to our revenue stack if the trial is successful

Share price has been in tight range recently but dipped over pas few days. It is up +0.88% as I type. This might tick up a bit further possibly?

In RNS there is link to live Webinar 6/6/23 11AM. If you are new to this sector, Gresham House Energy Storage Fund (LON:GRID) usually do a very informative presentation about their fund and the battery storage sector in general.

I hold a little.

Regards

Howard

Toad1957

No! Xpediator (LON:XPD) gone for a song!

TEIN

The thing that bothers me is Jefferies downgrade last week and open questioning as to whether CMC Markets (LON:CMCX) [I hold] is losing market share in its core business. I see also the Stockopedia now ranks as a Contrarian (from Super Stock at the end of March), the value and momentum metrics are in the process of passing each other as the ranking switches rapidly from QM to QV.

Like you I've noted the Stock Rank has ticked up a little the last few days, and so have also sat on the fence wondering whether to stick or twist. Normally I'm out at the first sign of trouble but we weren't given the chance with the announcement made near the end of a trading day catching me out, (maybe that's an alarm bell in its own right).

Right on cue though I see there's a small bounce today, (showing signs of petering out before my coffee's brewed)...

The broker downgrades have stopped me jumping in as well. I do wonder whether the mistimed RNS has added to the fall.

HarishMPatel

The broker valuations are widely different: The 6 analysts offering 12 month price targets for CMC Markets Plc have a median target of 242.00, with a high estimate of 355.00 and a low estimate of 190.00 (Jefferies). The next trading update on the 14th should provide further clarity. I too hold but will decide whether to add or dump after the 14th.

BnB

Robert Walters (LON:RWA)

I’m quite comfortable with prospects at this quality recruiter. Obviously a global recession, if it occurs, would send shares lower, but most of the business is exposed to markets that are not in imminent danger of recession, being continental Europe and the APAC region. The TU this morning specifically highlights China’s lockdown, still in progress or at least influential in its aftermath for the whole of the first quarter, as the primary drag on growth - but the brakes are coming off now. Meanwhile, big changes in Japanese employment trends point to an upturn in the company’s biggest single market. The secondary limiting factor has been the shake-out in tech recruitment, to which RWA is more exposed through its heavier emphasis on perm. But these hiatuses are usually fairly brief, lasting 2-4 quarters, before tech hiring goes full steam again. This will be a fairly flat year, in my opinion, with a small drop in earnings from record levels, but you are compensated by a historically low valuation and a superb, well covered dividend. Things could get worse and deliver an even lower price, or they might improve to reveal that this is the bottom. Over a reasonable investment period, this looks a good entry to me into a company of significant quality.

Paul Scott

Good morning!

Here are my brief thoughts on Gear4music (HOLDINGS) (LON:G4M) profit warning today.

Disclosure: I bought a small opening position earlier today, at 79p. I'll sit and wait, before deciding whether to buy any more, but no plans to do so for the time being.

My notes & comments -

Mild profit warning, as weaker demand in Feb & Mar.

Lower gross margin of 25.7% - remember this includes cost of P&P, so the clean margin on the product itself is in the low thirties. Still a low margin, but average transaction value is high, and returns are low. So it does still stack up, and the company makes a profit from the first purchase, ie. it's not dependent on repeat business.

Net debt nicely down, to £14.5m. This is the key point for me. I'm not worried about slightly softer trading currently, it was the bank debt that concerned me most. It's now come down a lot, driven by reducing excessive inventories, which was what the company said it was going to do, and it's worked. So for me, the much lower level of debt now makes me comfortable to buy - I've been sitting on the sidelines, waiting for an update, and in particular would not buy unless happy with debt, which I am now happy with.

Singers says G4M now comfortably within bank covenants. So again, this shouldn't now be a concern for investors. That removal of a serious concern is worth the share price going up, not down! Also it means with lower debt, and a lower share price, there's a double benefit to enterprise value (i.e. it's lower, so cheaper for investors buying the share now).

Expecting a further reduction in debt in FY 3/2024, is reassuring.

Only trading around breakeven, Singers new note says £(0.4)m LBT for FY 3/2023. I wish G4M would stop quoting nonsensical EBITDA numbers!

Confident profits should recover in FY 3/2024 - mgt has a good track record of being straight with investors about the outlook, so I'm encouraged by this. It's not mentioned today, but much lower freight costs from China should be a nice tailwind now. Other supply chain costs & disruption may also be normalising.

Secondhand trade-in marketplace, you can see this on G4M's website. This is a nice idea, and should be an incremental boost to profitability. It pays more for trade-ins (ie. money off new purchases) than cash sales. I suspect this is likely to be popular with customers, and comments today sound encouraging about it.

Overall - is it a great business and/or sector? No. But it's a well-managed growth company, going through a tough patch as the pandemic boom hangover works through the system. I think this year's results could be the base level, with future years building on it, and hence a re-rating of the shares likely in calendar 2023 & 2024 possibly? I've bought today with a 2-year timeframe for waiting to see what happens. I'm looking for a double or tripling of the current share price, as my upside case. Downside case is limited now, because debt is falling, and is no longer a problem to my mind. As a low margin business it doesn't have to worry too much about a decline in demand, as it can just cut costs if necessary, and on a c.26% gross margin, there's precious little leverage to the bottom line.

I now find the valuation attractive, so have dipped my toe in with a little purchase today, then I'll watch and see what happens, and buy more (hopefully) if it drops to say 50p, which would be the level I'd be inclined to up my position to a full size one.

There's also bid potential. The founder is loaded, after some lucrative share sales, and might just decide to take it private again. Although as we saw this week with Fulham Shore (LON:FUL) don't expect founder buybacks to be generous.

Above is obviously just my personal opinions, which might turn out to be wrong, or right, as the facts change constantly, and I'm not a clairvoyant.

ryanc106

G4M looks a decent bet at these levels. I had an order in at 70p that got filled this morning. Never thought that order would get filled to be honest so very surprised we've come down to these levels.

Let's see what happens from here... has the worst been priced in or more downside to go I wonder? Interesting times for sure

Cracking SCVR today fellas! It's been really strange reading the report as a customer instead of a writer! But it's reinforced to me what a great format this is - a really quick way to read about company updates, to find new stock ideas, with useful background about the companies, written by experienced investors/analysts.

nicobos

Xpediator (LON:XPD)

I'm 'inside' so can't go into detail but trust me, it's a fair deal and creates a good liquidity event for investors.

proffittpar

XPD - As Paul has expressed a low margin business, however I'm amazed that despite an offer of 42p on the table the share price has traded below this at around 37p for a considerable time since it was made despite a good set of recent results.

Caper4

Thanks for your thought ‘s Paul. Topped up my already fairly substantial position as I think it highly unlikely we will see levels as low as 70 again . Obviously, there is a risk of a bid but suspect this will not be lower than 120p so it’s a no brainer at these levels .

sharw

Revised forecasts from Progressive now published:

https://progressive-research.c...

davidjhill

Arbuthnot Banking (LON:ARBB) I know a few interested folk in these. Couple of broker notes out and a bit of divergence between the two looking for somewhere between 180p adj EPS and 240p next year. Quite a spread! but puts it on a PE of just 4 and with a price to book of 0.6 share price looks anomalous to me. Particularly with divi at 5% for income.

Brokers appear to have 1600-2000p as 12M target valuation which would be 1.1 - 1.3 * book.

Very high liquidity ratio with immediately available cash of circa 50% of depositor base so little risk of a run. Balances held at BoE in central bank accounts - ie no mismatched duration to see here either!

davidallen77

Stockopedia have updated arbb forecast and stock ranks big jump into the green, when buying comes arbb will fly 1000p resistance. Half year results will look amazing v last year, agm soon. Value to win out.

ridavies

RE Arbuthnot Banking (LON:ARBB) David do you have any issues finding what prices will be - bid and offer - because on Aquis?

Hi ridavies

Arbuthnot Banking (LON:ARBB) is AIM listed (not aquis) so should have no issues on bid/offer.

Do note though that there is a non voting share listed on Aquis, which from memory was a sort of dividend given to existing shareholders a year or so ago. I had forgotten I had these but they are only Aquis listed I think and trade around half the price of the ordinary.

I'm not inside, but I agree with nocobos! Xpediator (LON:XPD) has always struck me as a poor quality business, eking out a tiny profit on ever-growing revenues. The shares have gone nowhere in almost 6 years on AIM. With all the interesting companies out there, why anyone saw anything attractive in this share, is completely beyond me.

Management told some cock & bull story a few years ago when I met the boss, about some exciting eCommerce new service, which came to nothing as far as I can tell.

The exit valuation looks attractive, so I would gratefully accept it, and move on. If you absolutely have to invest in a logistics company, Wincanton (LON:WIN) is a bargain right now, after a recent contract loss, and far better quality than XPD, yet on a similar PER. This deal looks a lucky escape for XPD shareholders.

Small Cap Value Report (Thu 6 April 2023) - G4M, MOTR, RWA, SOLI, XPD, FUL, ANX

Graham's section

Gear4music (HOLDINGS) (LON:G4M)

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Roland Head

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