Small Cap Value Report (Thur 13 June 2019) - REC, TAP, VLE, SPE, WINE | Graham Neary

13th Jun '19 by Graham Neary

33 comments 10575 reads

Good morning!

A few things to look at today:

Record (LON:REC)
Taptica International (LON:TAP)
Volvere (LON:VLE)
Sopheon (LON:SPE)
Majestic Wine (LON:WINE)

Record (LON:REC)

Share price: 33.4p (+15%)
No. of shares: 199 million
Market cap: £66 million

Final Results

(Please note that I have a long position in REC.)

After a period of what feels like relentless decline, it's nice to finally see some positive results at Record.

I've described this as a low-conviction holding - see my discussions at the last trading update and in more detail at the interim results.

It's a currency manager, helping dozens of institutional clients to deal with their currency exposures.

In recent years, it has suffered from competitive pressures on pricing and overall growth has been very limited, particularly when it comes to client numbers. Performance fees have withered.

However, I took the view that downside risk was limited by Record's fortress-like balance sheet, and that its highly-invested managers and motivated staff might come up with ways to reinvigorate it. But it was impossible for me to have a strong belief in this!

Results

Today's results show almost everything moving in the right direction.

Fees - The company's pricing model has changed, so that certain products which used to charge a management fee only, now charge a reduced management fee but also come with a performance fee.

It turns out that this has increased the total fees charged, at least for FY 2019.

Record's long-term track record of outperforming its benchmark (in the "Enhanced Passive Hedging" product) suggests to me that there is scope for the performance fee element to increase in future years. It outperformed its benchmark by 5bps in 2019, but the 5-year average is 12bps per annum.

On a big-picture view, "Average management fee rates for most product lines have remained broadly constant throughout the year ended 31 March 2019" - it's hard to deny that there is still some pressure on fees.

Clients - This number of clients is unchanged since the recent Q1 update. 65 clients is encouraging vs. 60 at the previous year-end. Three commercial relationships were lost,…

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MrContrarian

13th Jun '19

My morning smallcap tweet: Zambeef still tough

Ten Lifestyle (LON:TENG), ValiRx (LON:VAL), NWF (LON:NWF), Sopheon (LON:SPE), Zambeef Products (LON:ZAM)

Ten Lifestyle Group (TENG) wins concierge contract with a Chinese bank. Initially <£250k PA but is expected to grow into a Medium contract (up to £2m) within 12 months and over £2m in the coming years.
ValiRx (VAL) a keep-the-lights-on small placing at 0.2p, a 33% discount. Free warrants. Expects £550k cash soon from asset sale and R&D tax credit.
Nwf Group (NWF) guides FY above market expectations. No numbers.
Sopheon (SPE) AGM stmt: FY rev visibility from contracted business and recurring revenue streams is flat at $23m. "We expect this to rise sharply through the summer. In previous years we have typically had a stronger second half and fourth quarter in particular, and we expect 2019 to follow this pattern."
Zambeef Products (ZAM) H1. Outlook "We anticipate the macro-economic climate to remain challenging in H2. The depreciation of the Kwacha in May, and continued concerns...over Zambian government debt repayments, is likely to place renewed pressure on market sentiment, investment and ultimately consumer spending..."

brianbathgate

WINE a bit outside your normal universe but would be interested in your comments, Rowan Gormley says "Majestic Wine started life with a disruptive model that challenged the status quo. Now is the right time to do it again under the Naked brand."

andrea34

Please can you cover Volex (LON:VLX) Graham? The final results look smashing, revenue +15.4% (+9% lfl), underlying profit +87.8%, underlying eps 12.7c+42.7% after an uplift in margins even after incurring costs to move some manufacturing out of China owing to the current trading spat between Trump and China.

brucepackard

I know that it's a bit big, and the trading statement doesn't say much. But interested in your thoughts on PZ Cussons (LON:PZC) ....it's struggled in recent years. My thesis was that it ought to be a mini Unilever (LON:ULVR) - but performance has diverged massively in the last 10 years.

mammyoko

Hi Graham - please could you comment on Record (LON:REC) final results? Special dividend of 0.69p and performance fees of £2.3m. Slight beat against consensus eps forecasts. The business feels as if it is in managed decline but perhaps it has become oversold and is due a bounce?

Mark Tughan

Morning all,

I too would be appreciative of a look/comment on both Volex (LON:VLX) and Record (LON:REC).

rmillaree

Tesco (LON:TSCO) - not a smallcap but lets look at it anyway - pretty anaemic figures announced this morning - rather scarily they are calling this a strong start to the year - the only saving grace is booker which they only recently purchased so giving themselves top marks after paying top dollar for well run business is a bit galling to say the least - give the booker top dog the job of running tesco i say !
per company
"We have had a strong start to the year, growing ahead of the UK market on both a volume and value basis.

Reality Errr uk sales (excl booker) down 0.4% - and only up 0.4% on lfl basis - less bad than the market is the words i would use.

Hey ho - Tesco is my largest remnant holding that i have never touched from the shares i would "hold to infinity and beyond" back in the day when i didn't believe they would be cooking the books whilst running the business like headless chickens. Rather annoyingly my other hold to infinity share at the time was greggs and i have sold that twice (and bought back once at higher price !) and the price keeps going up hey ho.

Anyway in the deference of my Tesco investment back in the day it did have decent NTAV backing of close to 200p per share based on revalued assets being factored in at the time - a lot of freehold - so for a poor investment business wise the share price decline of less than 50% from the 400p days ( i have ignored silly spike that took the price to 470p). at least the shares are up 40% from their low point (yay i could have sold then)

Looking forward I think though the decent upward trend in increasing EPS from the dark days may be coming to an end - if that is the case this may be the time to ditch this old dog at last - although the divi is creeping back up so that may keep me here if earnings can at least nudge in the right direction.

seadoc

Good Morning Graham, Last night I got the result of the tender for Volvere (LON:VLE) I put all my shares up and as the overall takeup was only 39%, I got all my shares taken up at 1290p. I know Volvere (LON:VLE) is/was in your portfolio and you did put up a few musings at the time of the announcement of the tender for half the shares. If you shared your decision I missed it. Can you share now, did you decide to hold on, tender some or all? I see yesterday that a total of 26 shares changed hands in the full day of trading! I like the company, they held a lot of cash for which they could see no immediate use so returned it. No doubt in the future they will find a suitable investment and at that time I will be very willing to jump back in, hopefully, at or below 1290p.

jonesj

For me, the bid-offer spread makes Volvere (LON:VLE) one to hold for the long term, rather than jump in and out of.

Wimbledonsprinter

Andrea

I have been looking to buy Volex (LON:VLX) as it looks reasonably priced and the director buying is encouraging. But I have not pressed the button yet. As you point out today’s numbers are pretty solid and Volex is still indicating that a div is likely to be paid for 2019/20. However, I have a few gripes (maybe it is just sour grapes for not having bought in yet):

* The true LfL growth number for revenue is 1.5%, I think - not the 9% prominently displayed in their headlines. The 9% is after adjustments not just for acquisitions but also for the decline in sales to their largest power cord customer (?Apple), which have admittedly been well flagged in advance. Sales to this customer still have further to fall, so this number is relevant.

*. Some of the adjustments to the earnings figures are I think a bit aggressive. I never like making adjustments for share based payments - but here they are quite significant > $2m. Also the restructuring costs look likely to recur in future years - particularly in China given the continuing decline in sales to this customer.

* There is a large difference between the earnings figures and the negative FCF in the year. While there are numerous (plausible) reasons given for the large build up of working capital in the commentary, It is always more reassuring to see strong cash conversion.

Another slight funny (but probably a positive) is that Volex says it wants to extend its £30m financing facility with Lloyds - but this facility expires this month - so negotiations with Lloyds clearly have not gone entirely smoothly. I say this is probably a positive, because clearly Volex feels it does not need the facility (currently unutilised) unless it were to make more acquisitions - indicating confidence about the cash flow.

I have really only focused on the negatives above, as I see it, I still quite like the company and am impressed by its strategy. (No position, but on my watchlist).

Graham Neary

mammyoko.... Record (LON:REC) is now covered.

Managed decline might be a bit harsh..? Progress has been slow and uneven, but over four years:

Clients: 55 to 65
AUME: $54.7 billion to $57.3 billion
Revenue: £20.8 million to £25 million
Employees: 68 to 85
Dividend: 1.65p to 2.99p

ATB

Graham

sharw

In November 2016 Redcentric (LON:RCN) crashed on the discovery of accounting misstatements. At the time Paul wrote:

"I don't understand how this got past the auditors. If you look at the announcement on 16 June 2016, which was the audited accounts for y/e 31 Mar 2016. Audits are supposed to verify balance sheet items - and one of the easiest to verify is the net cash/debt position. They should just write to the bank to ask for confirmation of the balances in all bank & loan accounts. They should also review the bank statements either side of the year end, to check for large & unusual transactions. This is pretty basic stuff, so I think the auditors, PWC, have some explaining to do".

https://www.stockopedia.com/co...

Two and a half years later and PWC have been fined £4.55m. Small beer compared to the £90m decrease in MCap lost by investors.

https://www.stockopedia.com/sh...

Hi seadoc, interesting stuff on Volvere (LON:VLE), thanks for sharing. I've still got all of mine and have added a few thoughts on it to the report. Cheers! G

Small Cap Value Report (Thur 13 June 2019) - REC, TAP, VLE, SPE, WINE

Record (LON:REC)

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Graham Neary

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