Small Cap Value Report (Thu 9 June 2022) - SPE, XPD, WATR

9th Jun '22 by Jack Brumby

40 comments 6677 reads

Good morning! Paul & Jack here.

Agenda -

Jack's section:

Sopheon (LON:SPE) - decent results but low current and forecast earnings are weighing on the share price. This results from an ongoing shift to recurring revenues, well flagged by management but still requiring a degree of faith and patience from investors. There are signs of quality here, and other valuation metrics (beside forecast PE) look more attractive, so there’s enough to warrant a closer look. But, depending on how the market chooses to value the shares, there is also scope for a further derating. I think it’s finely balanced.

Xpediator (LON:XPD) - seems to be managing the impact of the Ukraine conflict, which is more of a risk here due to the markets it operates in. Inflation is also a concern though and, while there’s potential for a rerating if things go well, business is low margin, there are risks, and the share price is illiquid.

Water Intelligence (LON:WATR) - audited FY21 results out. Revenue up 44% so the growth continues and the share price has moderated, meaning the shares trade on a more attractive forecast PER than they have done in the past. Still expensive though, and I wonder if in the current market there are more attractive opportunities out there.

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.

Jack's section

Sopheon (LON:SPE)

Share price: 579p (+3.79%)

Shares in issue:…

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Paul Scott

9th Jun '22

Hi, Paul here. Sorry I overslept this morning, and couldn't get going on work stuff. So am doing the afternoon shift instead! I've got a CEO zoom set up for 2pm, then will write up some sections for tomorrow's report early. Things I'm looking at are:

DFS Furniture (LON:DFS) - predictable profit warning, down 11% at time of writing - not too bad - are profit warnings finally priced-in? Seems we might be getting somewhere near that for many bombed out small caps.

AO. in line, closing Germany - sensible decision.

CMC Markets - down 19%

Norcros (LON:NXR) in line results.

So I'll aim to get sections done on those, and will publish them early, in tomorrow's report.

Best wishes, Paul.

cafcash49

Thanks for another excellent resume, as always. Good to meet you again at Mello. Big respect to you for doing this day after day. Charles

JohnDoe2378

Possible bid for iEnergizer (LON:IBPO) announced this lunchtime, in talks.

I hold.

angelogr21

Any comments on Sylvania Platinum (LON:SLP) ? I know Paul used to hold this and the company has announced a few share buybacks recently but the share falls 2% today. Any thoughts?

BnB

Re Water Intelligence (LON:WATR)

An apposite response, but, if you must invest in the water scarcity theme, then there are surprisingly few names to choose from - and none that are good value by traditional measures. I have bought at current levels, though this may prove too early (or late, depending on you time window).

Epsilon

Re ways to play the water scarcity theme.

I find the quickest way to generate stocks ideas within a secular growth theme is to simply look at the holdings of the ETF's that track that theme.

The Global X Clean Water ETF (AQUA) for example contains the following holdings:

The First Trust Water ETF (FIW) largest holdings are as follows:

If analysis reveals that the majority of these stocks are poor value by traditional measures then the answer is simple - either don't invest else cross your fingers & follow the greater fool theory!

DaviStoVest

Sylvania Platinum (LON:SLP) (I hold) has long been highly volatile for a variety of understandable reasons. A 2% up or down move on any particular day is not unexpected IMHO. If you invest in South African natural resources (mining related) stocks, you are in for a bumpy ride.

Yes. Perusing the ETFs is a well-proven method. I actually hold several of the named stocks. They are an incoherent bunch but give breadth to the theme.

Good luck in your hunt for value. I look for long-term winners in growing sectors and those are only cheap in a big downturn, which is no good for anyone committed to remaining fully invested. And it’s been painful of late. My companies’ financials are significantly outperforming the wider market with SPs contrarily underperforming. Hey ho. But the greater fool theory presupposes that your intended hold period is not measured in years. Water scarcity, however, is a theme with decades of potential. Different strokes for different folks, eh?

ChrisW

IBPO is only up 4.2% on this announcement. At this price it is on a prospective p/e of 12.4x for a company whose turnover 2017-23 has doubled. According to Arden at this price the company is on a free cash flow yield of 9% prospectively.

Surely, a p/e of 16x and fcf yield of say 6% would be a fair price?

That would be over 530p.

That's the price at which they get my stock. Even the top up i did 15 mins ago.

However the 82% shareholder, Mr Aggarwal, might have a greater say then me!!!

One company not listed in those holdings that I think is a good play on the Water theme and offering growth at a reasonable price is Fluidra. Worth further investigation for anyone whose horizons extend to Europe. Very much not expensive, growing, and with a large, well covered dividend.

ThumbsUp

Yes. Exactly the same for me. Lost a lot of potential profits during the covid bounce from selling too early so I've tried to change my approach (and subsequently been hammered by current conditions). Perhaps a good reminder for me that the market has not been behaving normally for over 2 years now. I'll continue to hold CMC Markets (LON:CMCX) because I think it's a solid company with half decent divis and is also a very plausible takeover target. Even after today's dip I'm still up (a bit, at least) and there's nowhere else I'm inclined to put my money right now.

joshwood976

Hi Paul - might be worth looking at Northbridge Industrial Services (LON:NBI) too following their positive trading update.

muzmano

IG is interesting seeing as it's year end was the end of May and there were 4 director buys in May at share prices above 700p (we're now around 670p)

Ok thanks. I don't really mind volatility if the company is good (and with a good dividend) .But do you think there is value at this price?

TheFloatingInvestor

Starting to go a bit cold on the spread betting companies, just get the feeling they are quiet ATM, I think this level of volatility has just got people sat on cash, as up or down seems very difficult to predict, just look at these companies of late that have been hammered with what are decent results.

For me, IGG stop lossed out today, happy its gone, and bought into CMCX late on today, as despite all the focus on bad News I think the plans going forwards look good, and achievable.

Well, I hold Sylvania Platinum (LON:SLP) (in very significant amounts relative to the overall size of my portfolio) and have done for three or four years now.

Over that time, I have only added to my holding. I have never sold. So I think it is clear where I stand. But that means that I am sitting on something like a 350% gain on my initial investment. Although the actual valuation issue (and the decision whether to hold, buy or sell) is the same whether you bought yesterday or three or four years ago, psychologically it is much easier and more straightforward to continue to hold in the face of price volatility if you are sitting on a large accumulated paper gain (as I am) than if you bought in yesterday at a much higher price.

Of course, if I were a skilled trader and 'bang on' in my ability to time the market, I could have done a lot better from SLP. At one time my gains stood at 500% of my breakeven price. If I'd sold then and bought back in somewhere near the bottom, I'd have really 'coined it'. But I am a very poor trader and my efforts at timing the market have been risible.

Investing in SLP is essentially a 'play' on the platinum group metals (most notably rhodium). I think the fundamentals continue to point towards a significant increase in PGM prices over the next decade and that there is plenty of room for future SLP SP increases to reflect that. I also expect SLP to pay good dividends over that period. I have enjoyed excellent income from SLP so far ... and, in my circumstances, that's not to be sniffed at.

But ... ... SLP is always going to be a volatile holding and it is definitely risky. I still think it makes great sense as a long-term investment, even for widows and orphans, as long as it is held as part of a well-diversified portfolio.

All in my own personal opinion and, of course, DYOR.

Hi Chris,

I would personally attribute a higher rating than 16, I'm hoping for closer to 600p. Very surprised the share price didn't bounce more. Further buying opportunity!

wolfspirit

With 82% in the hands of the CEO - this could put us in the position of minority shareholder in a company that is delisted.

garbetklb

10th Jun '22

MTI Wireless Edge (LON:MWE) MTI Wireless Edge has about 1/3 of its business in water management in dry places. Historically watering municipal parks etc, but a recent, interesting, move into vinyards, esp in France.

Overseas (Israeli) - which will put some people off. But AIM listed 15+ years and regularly attend Mello & Investor Meet Company

Yes. I’ve looked at MTI Wireless Edge (LON:MWE) a few times but it almost always looks way too expensive for a low margin Israeli business, especially one that is a little broadly focused. Holders have done okay though.

Small Cap Value Report (Thu 9 June 2022) - SPE, XPD, WATR

Jack's section

Sopheon (LON:SPE)

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Jack Brumby

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