Small Cap Value Report (Thu 9 June 2022) - SPE, XPD, WATR
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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: 10,553,325
Market cap: £61.1m
This is an international provider of software for enterprise innovation management solutions. It’s a falling star now, but one with a Quality Rank of 96 and strong financial health measures. So there’s minimal danger of bankruptcy but plenty of scope for a further derating if people look solely at near term earnings.
The current poor level of profitability results from the group’s transition from a traditional perpetual software license business to a higher-quality recurring revenue business.
But recurring revenue can lead to higher quality earnings and operational leverage, so there’s a potentially valuable prize at the end of the road. By year end, 90 percent of the new customer pipeline by value was SaaS focused.
Strategic progress made and results are ahead of management expectations
Both recognized revenues and annual recurring revenues ("ARR") for the year to 31 December 2021 grew by approximately 15% to $34.4m and $20.7m respectively. A new CEO, Greg Coticchia, was appointed in the year and additional senior hires were made in key marketing, sales, and product areas.
Sopheon continues to spend on R&D, with a focus on cloud solutions, and I see it qualifies for an R&D related guru screen.
Acquisitions - At year end Sopheon completed the acquisition of ROI Blueprints, which is already playing a material role in both existing and new customer opportunities. Solverboard was acquired in May 2022, and should accelerate the SaaS strategy. It looks like Solverboard is quite early-stage, so the jury's out here.
Solverboard brings the innovation and product needs of professionals together so that they can focus on addressing front-end innovation challenges, by helping companies dynamically find, align, test and deliver the best innovation and product ideas from employees and customers.
Current trading
Since the start of the year (financial year to 31 December 2022), Sopheon has closed six new customer wins compared to ten in the whole of 2021. ARR has risen to $21.7m compared to $19m a year ago, and gross retention has held above 98% on a year-to-date basis.
Confidence in our full year performance is sustained by a sales pipeline that includes several major extensions with existing customers, alongside a growing list of new prospects. Net cash at the end of May stood at $25m compared to $23m at this time last year, underlining our cash generative nature and our ability to execute.
Conclusion
The ongoing source of frustration, uncertainty, and potential opportunity is the strategic shift to SaaS and the manner in which it affects revenue and profits. A lower share of one-off revenue contributions from perpetual and consulting sales year to date means that FY visibility for recognizable 2022 revenue is currently at $28m, a similar level last year.
That doesn’t sound exciting given the valuation, but it is a dynamic that has been repeatedly flagged by management. The question is whether or not we can see through this transition period to a more attractive end state.
Sopheon maintains a net cash position, now at $25m despite two acquisitions, and remains healthily cash generative.
The 98% gross retention figure is a positive, signalling a good product fit with customers, so if the group can generate genuine organic growth with a recurring revenue model, then that sounds like a promising mix. Underlying momentum is decent given the acquisitions and the six customer wins so far this year.
There’s a problem in valuing the group’s shares though, given the shifting strategy. Brokers forecast FY23 EPS of 11.9p - an improvement on recent results but that would still value the shares at 47x forecast earnings. So you really need to believe that the shift to SaaS will lead to much higher profits in the medium term.
The group is generating free cash flow far in excess of earnings per share at the moment though, and other metrics such as EV/EBITDA paint a more favourable picture, so perhaps it is worth spending more time on this one to look beyond near term earnings.
I think there are signs of a good business here and if you can get comfortable with the low level of current earnings, future profitability might look very different. One attraction of the SaaS model is that it should provide attractive operating leverage as incremental sales add more to profits. So on that basis I think it’s worth spending a bit more time on at current levels, although clearly the market is uncertain as to whether or not this will materialise.
Xpediator (LON:XPD)
Share price: 36.59p (+4.26%)
Shares in issue: 141,688,425
Market cap: £51.8m
I recall looking at Xpediator when it was first becoming obvious there was lockdown-related supply chain disruption and freight cost inflation. It stood to reason back then that logistics companies could stand to benefit in such an environment, but that doesn’t seem to have happened here.
You can almost see the build up in expectations and the resulting disappointment in the share price chart. Also note the precipitous drop in StockRank heading into May of this year.
Following a strong initial start to trading in the year, particularly from the Group's CEE operations, the Company has continued to trade well despite the effect of Russia's invasion of Ukraine, the impact from which, to date, has been largely offset with increased volumes in other markets.
Xpediator’s strength is in its pan-European operations and CEE focus, so the Ukraine invasion is a bigger risk here than for other companies.
The Group is in a good position, and with its asset light base, it is shielded from some energy and other inflationary cost pressures, but not all.
Conclusion
Brokers are forecasting an uptick in earnings per share but past performance has been patchy, which makes me cautious.
The valuation is starting to look cheap at 8.6x forecast earnings, but this is a very low margin business facing into an inflationary environment.
I can see that the group has expertise in the Central and Eastern Europe region, which might be enough to differentiate it from some other listed logistics peers, and it has traded well in the past. But ultimately I find it hard to get excited about this part of the market. If things go well then there is scope for a rerating at some point, but there are also risks and the share price is illiquid, so I’m happy to leave this for others.
Water Intelligence (LON:WATR)
Share price: 746p (+5.07%)
Shares in issue: 17,361,188
Market cap: £129.5m
Audited results for the year to 31 December 2021
This is a multinational provider of precision, minimally-invasive leak detection, an area set to grow in importance globally.
Despite Covid-19 disruptions, we delivered across the board in both 2020 and 2021 to deliver on our mission of building a world-class multinational growth company in an important space - water infrastructure.
There’s plenty to like about Water Intelligence - increasingly important market, strong growth track record, and double digit returns on capital. But the valuation remains fairly high even after a near halving of the share price in recent months.
A forecast PER of c28x is more reasonable than it has been in the past, if not cheap.
On 7th February the group released an FY21 Trading Update which showed revenues +44% to $54.5m, confirmed again today, with organic growth of +19% in corporate-owned locations helped by franchise reacquisitions and M&A.
Adjusted FY results (not including one-time gain) in line with February trading update with revenues +44%, Adjusted EBITDA +48% and EPS +29%
- Revenue +44% to $54.5m,
- Adjusted EBITDA +48% to $10.3m,
- Adjusted PBT +36% to $6.9m,
- Adjusted EPS +29% to 30.2 cents.
So that’s about 24p of earnings per share, 31.1x FY21 earnings.
Outlook:
Confident in further corporate development through 2022; well placed to navigate inflationary challenges in order to be in line with market expectations for 2022 with a strong Q1 already reported
On 30th May, Water Intelligence released a strong Q1 trading update with sales growth of +44% to $16.5m driven by same store corporate sales growing +26%, while Adjusted EBITDA advanced +26% to $3.0m.
Conclusion
Following the placing last year and extension of its banking facilities, Water has resources to continue franchise reacquisition and pursue other M&A opportunities. The group's shares have derated but there is a strong operational track record and potential upside to forecasts.
That should be a given though, seeing as forecast growth is not set to match previous results. Perhaps these are undercooked but, considering valuations elsewhere, I would want to see more anticipated growth for a c28x forecast PER.
It’s still a company worth keeping tabs on though, given the level of growth it has achieved in the past.
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40 comments
Hi
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?
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.
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?
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.
Possible bid for iEnergizer (LON:IBPO) announced this lunchtime, in talks.
I hold.
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!!!
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!
With 82% in the hands of the CEO - this could put us in the position of minority shareholder in a company that is delisted.
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.
Hi Paul - might be worth looking at Northbridge Industrial Services (LON:NBI) too following their positive trading update.
IG group (LON:IGG) suffering today, down 5% read across to CMC Markets (LON:CMCX)
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)
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.
Not a small cap but the results yesterday from Inditex (owner of Zara the fashion/clothing retailer) struck me as being very surprising with a possible read across.
In their first quarter to end April, sales were up 36%, profits up 80% and most interesting profit margins at a 10 year high. Apparently they have been increasing prices significantly each month in that quarter and yet footfall and demand has been growing.
I'm a little wary currently of all comparative measures referred to by pretty well all companies at the moment given the huge disruptions of the last few years making such comparisons very cloudy. And of course Inditex operates worldwide, not just the uk, where circumstances may be different from elsewhere.
But it genuinely does seems that Zara have had some significant pricing power. This surprises me because I would have thought there were plenty of competitors and I wouldn't class Zara as being a particularly desirable high end or niche clothing retailer that commands a wealthy and loyal customer base. I understand that they manufacture from their own factories in Spain which may also play a part.
It would be interesting to hear others' thoughts .
Comments noted on WATR, I agree the share is pricey but when you say there are more attractive buys out there (in the sector?) like what?
Will Marsh
Re your question as to what are the more attractive alternatives to Water Intelligence (LON:WATR) ?
Just look at the company's metrics regarding Value & Momentum:
By definition there are literally thousands of stocks globally with more attractive V & M metrics, and thousands of stocks with superior overall StockRanks.
DYOR.
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).
BnB
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!
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?
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.
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.
Trufin (LON:TRU) subsidiary Satago, a leading provider of invoice financing and Lending as a Service software solutions, has signed a letter of intent to enter into a three-way partnership with Sage and Lloyds Bank. Lloyds have already invested £5m into Satago in the last few months. Trufin own 4 companies, 2 are profitable and the other two (the interesting fast growing ones) , Satago and Playstack are funded to profitability. Worth a look?
Peculiar market reaction to the CMC Markets (LON:CMCX) results
CMC Markets (LON:CMCX) had been a strong run in the weeks leading up to this - perhaps market expecting a bit more?
Re £CMCX I think the headlines look poor to the untrained eye (not sure mine is trained but heh ho) - big drops in profit/eps/revenue etc. But look a little closer and you see a steadily growing business with loads of cash and a clear strategy. Drops are due to the massive comparatives fuelled by lock down. If you look at every metric the announced figures are actually better than broker forecasts.
I was expecting a mixed reaction (not a major drop). More than likely the sellers are small private investors running scared. Later in the day/tomorrow I would expect bigger buyers to come in and hoover up the shares at a nice little discount. Can't see anything in these results that looks remotely like a profit warning - and that's the only thing that would shake me out.
RE: CMC Markets (LON:CMCX)
Can't see anything in these results that looks remotely like a profit warning - and that's the only thing that would shake me out.
I haven't looked closely yet, but I think the forecast operating cost figure is higher than expected, which probably means that the forecasts for next year are a bit high.
The nature of the spreadbetters is to be volatile, along with the ever present threat of more regulation. But it's a good business, executing well. There are a lot worse places to be in current conditions.
timarr
My impression, in this skittish market, that any talk of investment with the prospect of "jam tomorrow" is being heavily punished. Similar thing seemed to happen to ITV (LON:ITV) recently with their proposed investment in their streaming platform. Todays number were perfectly aligned with £CMCX's previous trading update in April and even there, their intention to invest in their platform was described.
It is a strange world when this is what happens to successful and growing businesses.
The market is very nervous at the moment and we can expect some selling on even good news. I suspect the reduction of the dividend did not help either.
I still feel bullish with CMC Markets (LON:CMCX) and have been bottom fishing today. I feel that the share price should recover back to where it started this morning over the oncoming months. As the £30mil share buyback program has not ended and provides gentle upward pressure to the Share Price.
Also, I find comfort in the fact that the founder & CEO owns 57% of the shares.
Looking at the shareholder's list again I wonder if the fact that there are only 67.3 mil , 23% shares available in the market, would mean the daily buyback will have more of an impact as we go along.
My rudimental calculations predict that there will be approximate 50mil 17.5% at completion of the buyback in Early Oct.
One of my many weaknesses in this game has been failing to run winners, I normally take profits too early.
But in the last 6-9 months that has not been the case and taking profits on a quick 20-30% mark up has almost always proved to be the right decision.
Sadly, CMC Markets (LON:CMCX) was one where I was tempted to bank profits at £3.00 but thought that I would run it and this morning I am paying the price.
My point is that generally, are we in a traders market where quick gains should be banked far more regularly than taking a LTBH position?
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.
Yesterday Paul commented on Intercede (LON:IGP)
There is a presentation at 16 30 today on IMC
I remember Paul writing in the past that this share is highly illiquid. This was very much demonstrated yesterday when this share with MCap of £26m went up 10% as a result of just 22 trades and the largest was valued at £5,250 - and that was on results day!
Intercede (LON:IGP)
I owned a decent portion of shares and yes they are highly illiquid. Started buying at 30p around 3/4 years ago. Lots of operational improvement and balance sheet progress and shares rose to around 110p
Since the shares have fallen back. The problem has been a lack of revenue growth - no rev growth in 3/4 years when we hear that Cyber crime is such a danger - surprising. Their list of clients is highly impressive but I think (by omission from their RNS about a year ago) that they lost a large long-term government contract. I was hoping there would have been growth by now. IGP are a tiny company, operate in a tiny segment of the credential management market and sell through partners in the US which is not as good as doing it yourself. They blame the slow progress on Covid and now say it is taking 12-24 months longer. You need to take a view on this.
I decided I had waited long enough and sold my shares a few months ago. It is true they could win a couple of large contracts which along with their 90% + GM would have a significant impact on the SP, but I decided to invest the proceeds elsewhere.
Very positive results from £NXR Norcros . Underlying operating profit up 29.4% on 2020. Dividend increased 22% for this year. Strategy seeming to pay off including continuing acquisitions and transition into a much larger group . Appreciate Paul/Jack view
Cracking update from Northbridge (NBI) which is looking a great share in a great sector .
Northbridge provide load bank for energy back up / supply .
They just completed a new fsctory on time and on budget .
Importantly their historic load bank assets are not accounted for in their NAV so that is understated .
The share price has responded and punched through the 2 pound barrier out of a trading range of 175 to 195 .
Interesting in that Rockwood Strategic are the biggest shareholder , yet their share price is static / slightly down and now trades at a good discount to its own NAV , around 20% .
With Northbridge jumping today that’s added another 3.5 million to Rockwood NAV but this is going unnoticed .
I hold both , may add to Rockwood at the 1372 available in market today as it is normally only 7-12 % below NAV and this is getting towards 20-25% assuming Northbridge maintains its upwards trajectory .
Just a note - picked up Rockwood at 1359p today .
That’s going to be around 23% discount for Mondays NAV update .
I don’t recall GHS (Gresham house strategic ) as Rockwood was previously known going over 20% , was usually 8-12% .
With their chunky holding in Northbridge and also Saatchi I think there is long term upside and a real anchor / foundation to anyone buying around 1359p
Topped up 20k this morning which is showing as a sell .
Hargreaves Services (LON:HSP) Excellent trading update this morning. With several strings to their bow Hargreaves continue to deliver - although the real value in the company is the undervalued land bank.....
Another 'ahead of expectations' announcement from £HSP as a result of ongoing positive trading at its joint German venture 'HMRS' due to continued strong commodity prices. Hargreaves Services (LON:HSP) states that this will result in an increase post tax profit of £3.5m greater than consensus.
For year just ended it adds that while revenue will be lower than the prior year due to a cessation of coal related activities, PBT is expected to be higher due to increased contributions from the Services and HMRS businesses.
Also an interesting and positive announcement from EKF Diagnostics Holdings (LON:EKF) regarding the launch of EKF link, which enables users of its point of care devices used to monitor various parameters relating to diabetes and cardiological conditions to send and receive results digitally.
I hold both
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