Small Cap Value Report (Thur 21 Nov 2019) - CMCX, ALM, JDG, WINE, KGH, HSS, MANO

21st Nov '19 by Graham Neary

28 comments 7595 reads

Good morning!

Today we have:

CMC Markets (LON:CMCX)
Allied Minds (LON:ALM)
Judges Scientific (LON:JDG)
Naked Wines (LON:WINE)
Knights Group (LON:KGH)
HSS Hire (LON:HSS)
Manolete Partners (LON:MANO)

Finished around 5.30pm.

CMC Markets (LON:CMCX)

Share price: 136.7p (+8%)
No. of shares: 289 million
Market cap: £395 million

Interim Results

These are terrific results.

I bought a few of these shares at around 87p in February, but didn't have the conviction to hold on to them, and don't currently have a position. I remain heavily long IG Group (LON:IGG).

But wow, what a performance from CMC.

It has taken me a few minutes to figure out how they did it. Here's the answer, in a table:

Let me explain what's happening here!

Definitions:

Net client income is the trading income for CMC from client activity: spreads, financing charges and the like.
Net revenue is trading income minus introducing partners commissions and betting levies.

Now let's see what happened:

In H1 last year, ESMA trading income was £58.2 million (you'll find that number in the table above).

We also know that ESMA trading income fell to £54.6 million in H2 last year.

And we know that ESMA trading income fell again in H1 this year, to £49.8 million (also shown in the table above).

Clients (particularly retail clients) are trading much less than they used to, thanks to ESMA's leverage restrictions and other rules.

With client activity falling, you would expect ESMA revenue to fall, too.

But this is not exactly the case!

H1 2019 ESMA net revenue: £43.9 million (shown above)
H2 2019 ESMA net revenue: £30.5 million
H1 2020 ESMA net revenue: £45.6 million (shown above)

If you remember the definition, net revenue is trading income minus introducer commissions and betting levies.

In the last six-month period, CMC has figured out a way to spend many millions of pounds less on CFD introducer commissions, without revenue falling off a cliff.

As you might expect, the number of clients isn't growing…

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abtan

21st Nov '19

Manolete Partners (LON:MANO)

Some thoughts on this company (which I hold):

Initial results looked good until one realises that a rather large chunk (75%) of the reported revenue is unrealised.

This was worrying at first, but I was somewhat reassured after digging into some of the numbers:

18 completed cases in the period generated £1,904k of realised revenue.
The unrealised revenue previously included in the accounts for these cases was £1,109k.
So there was actually an understatement of £795k for the 18 cases ie an average revenue understatement per case of c£44k
This implies there was no over-exaggeration in previous financial statements
This hopefully implies that any other unrealised gains being recognised right now are also not being overstated.

Some more points:

I note that Manolete Partners (LON:MANO) bought a London property in order to allow creditors to be paid for one of its cases. The property is now actually being sold for a small profit < 1 year later, however, I found this unusual, especially as £50k was also spent on refurbishing the property. I'm personally not happy that the company is involved in this sort of arrangement.
On a similar note I noticed that the company had extended a loan of £500k to FH Gilman (albeit on a high 10%+ interest rate) secured against land in Lincolnshire valued at £2.4m This too is off putting, despite the apparently favourable terms.
2016 Vintage (which have all concluded) Total Invested figure has changed from £1,833k to £1,895k - WHY? This is actually my biggest concern from today's report. I'm never fan of numbers changing for no reason, especially in this case where all 2016 cases were concluded a long time ago.

Cheers

Andrew Mitchell

Hi Graham: any chance you can circle back a few days and have a look at Hydrogen (LON:HYDG) please?

Last Friday they reported on a deterioration of trading in 2 key markets (UK and AsiaPac). It has very high Quality and Value numbers according to the Stockopedia computers.

Cheers
Andrew

Gerard88

Abtan - points 1 & 2 don't concern me, as the Manolete management are all ex insolvency practitioners, as as such, very commercial in their approach. So if there's a way to expedite a case without risk, no doubt they'll take it.

garbetklb

Judges Scientific (LON:JDG) - the special dividend is paid 2 days before the election. My immediate reaction on reading the RNS was that this isn't a coincidence.........
Jarvis Securities (LON:JIM) have also recently paid a chunky special.

Re. point 3, this was the company's response, which I just received:

"The 2016 Vintage was closed in FY19 but we incurred £60k of legal costs in FY20 in enforcing a settlement on one case for £1.9m, which was agreed in April 2018.

This settlement has now been paid in full and we received an extra £179k in interest and legal costs recoveries in the first half of FY20, after spending this additional £60k of legal costs."

Kudos for the prompt response and positive outcome, however, it has raised a few questions about when cash is actually received.

I know Burford Capital (LON:BUR) were accused of not providing enough detail on cash collection in the recent short attack, and perhaps Manolete Partners (LON:MANO) should be more thorough going forward too. That aside, a re-assuring response.

grumpy5

Re Naked (LON:WINE), its not exactly a ringing endorsement in his own strategy for Gormley to announce he is cantering off into the sunset early next year. Bargepole to hand!

johnbush

Comparing CMC, IG Index and Plus500 on the Stocko metrics seems to make Plus500 the clear winner. What am I missing?

Effortless Cool

Moral hazard.

rmillaree

This settlement has now been paid in full and we received an extra £179k in interest and legal costs recoveries in the first half of FY20, after spending this additional £60k of legal costs."
Kudos for the prompt response and positive outcome, however, it has raised a few questions about when cash is actually received

Is it a postitive outcome as a whole for 2016 though? - with regard to the late change in numbers ref 2016?

From the same 2016 vintage line entries the "manolete gain" at the ye results date (june release) was £3.2 mill however per results today the "Manolete gain" is now only showing up as £2.995 million for 2016. Am i missing something or has the gain booked at year end been reversed back out by 200k in these interims? - i guess the 179k may have been received after 30/9/2019 in which case if it that gain was reversed back out in sep it might be reversed back in again at the year end perhaps?

Plus500 (LON:PLUS)

Have you read up on the history of Plus's releases over the last 18 months? - if not they are worth reading. I think (my recollection may be a bit fuzzy) everyone was under the impression they really didn't take positions against clients in a majorly material sense - taking a position can either add to profits or wipe out or add to losses. I think everyone was a bit gobsmacked when the size of their positions against clients was officially reported. I cannot comprehend how there can have been such confusion in this regard between what the company previously officially said and how that was interpreted by shareholders and what they said after the size of their gains and losses from taking positions was made known.

Graham Neary

Sorry Andrew, I won't get around to Hydrogen (LON:HYDG). G

GloucesterBob

Does anyone else hold Premier Miton Group Any idea when the special dividend following the merger will be paid, or have I missed it?

Robert Smith

That was incorporated to give the PMI SP now shown. 30% of PAM sp plus 4.9p special divi. per Miton share. Bit of a slow burner at the moment.

timarr

Always worth checking the discussion archives, the true nature of a company can never be discerned from metrics alone:

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

It's going to be difficult for me to avoid a triumphant tone with this one, as I have been very critical of its business model, and how it presents its results.

I think Graham could reasonably count this as a triumph of analysis.

Discodave4

Cmc Markets (LON:CMCX)

Hi, newbie here so apologies upfront but how do you get pre tax of £10m for H2?. Why isn’t it the same margin (29%) as H1 assuming flat expenses as per your analysis, so H2 net operating income forecast to be £78m, thus pre tax about £23m H2?.

Scratching my head and getting splinters, can anybody help?.

Thanks

If you leave the central overheads flat then if net revenue falls £20 million, pre-tax falls by £20 million.

Many thanks Graham......operational gearing!, sorry you did say op gearing in reverse, missed that point. Think I need to research more!, but truly appreciate you taking the time to answer.

Tommy H

Hi Graham, thank you for putting the finished at the top. It is appreciated. Tom

22nd Nov '19

Yes, I see what you mean, The 2016 vintage gains have been decreased from the Y/E results to the interim results today. That looks very odd. I wonder if it relates to bad debt? Or simply a mistake that has now been corrected?

I don't actually mind mistakes (everybody makes them), but I'm always a little on edge when there's a lack of detail.

Thank you for the shout out in today's report Graham.

I've been out since the morning so one more point to add if I may.

I noticed £3.54m of unrealised revenue relating to "New Cases Signed in the Period" was included in the interim results. I found this a little odd. Whilst I assumed that there would be revenue recognised for some news cases, it appears as though revenue is recognised as soon as any case is purchased by the company. The company's response:

"When we sign new cases, we normally ascribe a value to them but this tends to be a low value initially until we get to know the merits of the case better"

I'm not entirely convinced by this response (will every case really result in revenue generation?) and admit to having some concerns that revenue is being exaggerated.

Having said that there is a degree of FOMO when I see some of the detail on outstanding cases included in today's presentation, included below for reference. Even assuming a modest return on some of the headline values, implies big upside in the company's short-medium term future.

Small Cap Value Report (Thur 21 Nov 2019) - CMCX, ALM, JDG, WINE, KGH, HSS, MANO

CMC Markets (LON:CMCX)

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Graham Neary

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