Small Cap Value Report (Thu 7 April 2022) - RWA, TRCS, DLAR, ANX, ATQT, ADT

7th Apr '22 by Paul Scott

44 comments 8022 reads

Good morning, it's Paul & Jack here with Thursday's SCVR. Today's report is now finished.

Agenda -

Paul's Section:

De La Rue (LON:DLAR) (I hold) - I have a good dig into this bank note & authentication group. Trading update for FY 3/2022 is in line with (lowered in Jan 2022) expectations. The pension scheme is a reduced, but still large drain on cashflow. Facilities are being upgraded, so heavy capex too. It's not the easiest share to analyse, but I think there's possibly good long-term risk:reward here.

Anexo (LON:ANX) - an in line update from this credit hire, and legal services group. PER is low, but that's usual for this sector, which can be quite high risk, due to regulatory changes, and danger of bad debts building up on the balance sheet. Today's update does sound positive though, with all parts of the business seemingly doing well. Why are the divis so small?

Attraqt (LON:ATQT) - 2021 results show continued losses, and cash is getting low. Outlook seems more positive though, with a strong Q1 2022 for new orders. This looks an interesting SaaS business, with potential, but it needs to scale up faster. In the meantime, £60m market cap looks too high. It's going on my watchlist.

Adept Technology (LON:ADT) - a broadly in line trading update. Positive-sounding commentary, but for me the weak, overly-indebted balance sheet rules it out.

Jack's section:

Robert Walters (LON:RWA) - strong trading continues in Q1, with group net fee income up 30% and growth across geographic regions and all forms of recruitment. Headcount has increased by 9% since the end of FY21. Wider market conditions might change at some point, but this continues to be one of the better picks in this space and the valuation remains fairly undemanding.

Tracsis (LON:TRCS) - remains an interesting prospect with growth opportunities in its existing UK market and a post-period acquisition opening up the US. This is transport software with potentially long sales cycles, but if Tracsis can keep building momentum and winning contracts (as it is doing) then that same market inertia could prove to be a barrier to entry.

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…

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BnB

7th Apr '22

What always seems to put me off recruiters is their small profit margins.

Good recruiter's margins are fine. It's the presentation of the data that confuses. The vast majority of the the costs are pass-through in the form of sub-contractor wages. And a high proportion of SG&A costs are commissions to salespersons that are simply a cost of sale (no sales = no commissions).

If you reverse these out by placing sub-contractor wages and sales commissions (but not basic salaries) as a COS and express operating margin as the relationship between GP and EBIT you get margins easily higher than 50% at the best run firms.

The most profitable businesses have a mix of contract and perm, with a 60/40 to 70/30 split optimal for sustained profitability and cashflow management. Contract is less cyclical, stickier and offers better visibility while perm promotes positive cashflow.

Gostevie

EPICs are funny things. Whenever I see BONH (whose CEO has scarpered) I can't help but think of Led Zeppelin's late drummer.

MichaelFBS

Not wanting to clutter up here with a Boohoo (LON:BOO) post I have posted one over on the General Discussion Boohoo thread about Shein’s latest valuation in case anybody is interested. It can be found at:

https://www.stockopedia.com/content/boohoo-boo-general-discussion-846980/comments/945904

Regards

Michael

Albertos

Gresham House Energy Storage Fund (LON:GRID)

"I think the fact it's trading at a premium to NAV of about 60% is a bit of a concern - although that NAV is itself subject to all sorts of assumptions and shouldn't be taken at face value."

I'm still trying to make myself comfortable with this but did add some yesterday based on:-

"Taking these statements together, the Investment Manager currently expects NAV per share to increase to at least 124p by 31 March 2022 and in the range of 140-145p by 30 June 2022 ² ."

I'm going to look at in more detail but this seems to relate to the assets becoming operational and generating revenues when they switch from a cost basis to "fair" value.

Phil

JohnEustace

Gresham House Energy Storage Fund (LON:GRID) said yesterday that their NAV per share is 117p, so I make that "just" a 32.5% premium.

Bristolian

Hi both, apologies as I have only just seen your messages. John has it spot on. In my view these gas peaker facilities are only going to be in greater demand in the coming years to ensure national capacity. Price announced by government earlier this year is already considerably higher than previously. I hope Paul or Jack have time to look at it if not today then perhaps on a quieter Friday. Many thanks!

abtan

Tracsis (LON:TRCS) (I hold)

I don't have much to add here, but sharing my (rough) notes for any interested.

FY22 Interims

-ve

Disappointed by lack of progress in Digital Rail + Infrastructure (see previous RNS on additional 15k new Railhub users.)
Seems like a big drop in MPEC revenue (?)
Apparently this is cyclical - company hoping to change this with move into US.
Also large contracts signed post-period end
Cash generation (c.£4.3m) looks poor for a company valued @£300m.
Hoping to see signs of this improving by now - perhaps picture will be clearer/better at YE?
Possible miss for FY22 revenue forecasts, but should hopefully hit/beat FY23.

+ve

RTS recurring software revenues continue their upward progression, with Rail Customer Experience yet to return to normal levels (where normal GP = c80%-90%)
DACE revenue still to return to pre-covid levels. Revenue growth despite this.
ROW revenues up (highest ever?). What is this?
Move into US

andrewdb

On De La Rue (LON:DLAR)

Companies like this (119m actuarial deficit, 15m pa payments) can be seen as a punt on interest rates rising.

The deficit is the gap between 2 v. big numbers. A small change in interest rates makes a big difference in the deficit.

scrooge

£TRCS (I hold) The potential game changer is the move into US. As noted, this is likely to be slow in generating sales and PBT; but I am comforted by the proven strategy of growth through acquisition but with no share issuance at all. It would be so easy to follow the US entry with a long string of further acquisitions- they must have many files full of notes on other potential candidates. On Tracsis previous record in the UK, any further acquisitions will be funded from cash flow.

chris2021

De La Rue (LON:DLAR) The Crystal Amber Crystal Amber Fund (LON:CRS) holding of 9.9% is either a negative feature, as CRS is in the process of running down, or the catalyst for a potential acquisition.

doug2500

The potential game changer for Tracsis (LON:TRCS) is the US. It has been for the whole 10 years I've been a holder!

It does feel like this time is different though with an easier route to market now?

Paul Scott

Hi BnB,

That's an excellent explanation on pass-through nature of most revenues for staffing companies, thanks & well done!

That's why I tend to use Net Fee Income (NFI) as the revenue number, when looking at staffing companies.

Similar sort of situation to car dealers - the huge revenue number is pretty meaningless, as what matters is the gross profit made on each unit, not the screen price.

Regards, Paul.

That’s very astute Paul. Unfortunately, if you try to burrow down too far, you reach significant obstacles such as trying to calculate what proportion of wages are floating (commissions) rather than fixed (basic salaries). Wage models vary greatly from company to company. I would suggest somewhere between and 10% and 20% of gross margin/NFI is appropriate for calculating commissions and the more profitable companies are probably paying out towards the higher end.

ridavies

Re car dealers, thanks to all included JohnEustace for your thoughts.

Why do you think that the car dealer shares have taken such a hit in the last few days? Vertu Motors (LON:VTU) down over NINE % yesterday, and another FOUR% today; Lookers (LON:LOOK) down nearly TEN % today.

What do you think is the base SP figure for these very profitable companies, though clearly not making as much as in 2021.?

Still, as Paul has said many times, the excess profit falls all the way to the bottom line and the strengthening of the balance sheet.

Additionally, there is the opportunity for some rationalization of companies, and of course sites (sell and lease back (an example came up recently with one of the dealers which Paul pointed out) and which took another company in another sector into a totally new SP level when they did it company wide a little while ago - Caretech Holdings (LON:CTH) in the care sector.)

Hi Bristolian,

I've had a quick look at Mast Energy Developments (LON:MAST) - unfortunately it's little more than a startup, so there are no historic numbers for me to work from. We're mainly reporting on more mature companies here, with a track record, and historic figures to work from.

With MAST you would need to run your own calculations, to guess at what future performance might be like, which is not my area (and there isn't time to do that anyway).

I see there's a research note out from WH Ireland today.

There was another small cap in this space, called Alkane Energy, which did well from "peaker" power generation, and attracted a takeover bid in the end. I remember meeting the company at WHI offices, and buying a few shares in it, a few years ago.

This type of share is all about management. So the main thing to research with MAST, I would guess, is find out (independently) what they've done in the past, what their track records are actually like (not always what they tell you!!). If they've succeeded in the past in this sector, then they're probably safe hands to do a good job again. If they're chancers, latching onto a trendy area, then I would steer clear.

I would also worry about capex & maintenance, for buying power stations. If it's a lucrative asset, why is someone else selling it? The seller probably knows the asset better than the buyer, which would worry me. It could be fine - a bigger company selling off non-core assets, etc, but always worth doing some digging.

I'm happy to look at MAST figures once it's got established, in maybe a year or two time, but for now it's too small & lacks a track record, for inclusion in the SCVRs. Good luck!

ACounsell

Gore Street Energy Storage Fund (LON:GSF) & Gresham House Energy Storage Fund (LON:GRID) are the two major investment trusts in the Energy Storage space so this thread is of interest given the rapid shift to intermittent renewable energy. This has perhaps been given another push by the European aim to eliminate Russian oil and gas in favour of more renewables. Gresham House Energy Storage Fund (LON:GRID) has significantly outperformed Gore Street Energy Storage Fund (LON:GSF) since August 2021 and in share price terms is up 17% YTD and trades at a premium of 25.66% to NAV at last close (Source: AJ Bell/Morningstar). This compares with Gore Street Energy Storage Fund (LON:GSF) where the share price is down 2.4% and the premium to NAV is 8.22%. Interestingly Gore Street Energy Storage Fund (LON:GSF) is in the process of issuing additional shares, including to retail investors, through the likes of AJ Bell. A possible reason for the discrepancy in performance between the two, aside from the underlying business performance, is the respective ongoing costs of the Trusts. Gresham House Energy Storage Fund (LON:GRID) ongoing costs are 1.52% compared to 2.24% for Gore Street Energy Storage Fund (LON:GSF) These are both pretty steep and in the top half dozen in terms of fee levels in the Infrastructure Direct Category (Morningstar). As someone interested in investing in this space this presents a bit of a dilemma! Pay a hefty premium to NAV for Gresham House Energy Storage Fund (LON:GRID) and incur lower (but still high fees) as this is clearly investors preference in the last 9 months. Alternatively go for a lower premium to NAV and incur the highest costs in the sector with Gore Street Energy Storage Fund (LON:GSF) in the anticipation that the share price will 'catch up' and the premium to NAV will widen thereby offsetting some of the extra ongoing cost .

Note: For income seekers target yields are c. 5% for Gresham House Energy Storage Fund (LON:GRID) & c. 7% for Gore Street Energy Storage Fund (LON:GSF) - though of course these are not guaranteed.

Thanks Paul - that’s absolutely fine and much appreciated.

I guess more people agree with the view that the car dealers are a Covid play that has run its' course. Lookers highlighted their gains from the mark up in their used car stock which is unlikely to repeat even if it doesn't quickly reverse.

I'm less optimistic about the supply chains reverting to normal or the car companies going back to shifting all the metal they can at the expense of profits. I think the manufacturers and dealers like the new paradigm fine. They are now price setters, not takers.

Currently the European manufacturers are constrained by lack of wiring harnesses that were being heavily sourced from Ukraine. I heard yesterday of someone who bought a new BMW for £40k and was phoned back by the dealer two weeks later offering to buy it back for £42k. He declined.

I smiled a bit at the FT article making it clear that BMW and Mercedes had independently decided to limit volumes and push their premium products. I'm sure the German makers know what happens if they are seen to be colluding to keep prices high. But they do have form. High prices for premium names gives more headroom for the mid market brands.

One thing that may undo their plans will be the anticipated volume launches of cheap Chinese EV's in a couple of years. They are already selling into Norway. Though they must be shipping by train across Russia so that may be an issue. The Germans have perhaps a year or two to maximise profits in my view.

Rusty2

Thanks that’s very useful, I’m only just starting to look at these 2, feel I have rather missed the boat on Gresham House Energy Storage Fund (LON:GRID) but will keep an eye on it. Did not realise the fees were so high. Energy storage going in demand as we switch away from fossil fuels.

On the same theme I see in the FT today that VW are axing dozens of models.

“The key target is not growth,” said Arno Antlitz, chief financial officer, in a reversal of the stance taken by former VW executives. “We are more focused on quality and on margins, rather than on volume and market share.”

https://www.ft.com/content/431...

Small Cap Value Report (Thu 7 April 2022) - RWA, TRCS, DLAR, ANX, ATQT, ADT

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Paul Scott

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