Small Cap Value Report (Thur 30 August 2018) - DUKE, CHH, XAR, ARW, HSS, KETL, CRAW, OMI | Graham Neary

30th Aug '18 by Graham Neary

40 comments 13861 reads

Good morning!

Lots of interesting stories to digest today.

Duke Royalty (LON:DUKE)
Churchill China (LON:CHH)
Xaar (LON:XAR)
Arrow Global (LON:ARW)
HSS Hire (LON:HSS)
Strix (LON:KETL)
Crawshaw (LON:CRAW)
Orosur Mining Inc (LON:OMI)

Duke Royalty (LON:DUKE)

Share price: 45p (+1%)
No. of shares: 198 million
Market cap: £89 million

New royalty agreement

Please note that I currently own DUKE shares.

Duke is an unusual investment vehicle. I wrote about it last month, when it raised £44 million in new equity.

It has raised £79 million (gross) in total from investors so far, at 40p and 44p.

As I have written previously, it won't be a very confident hold for me until I feel happy with its level of diversification.

Today we have news of a £10 million deal, including the temporary option to increase the investment by a further US $5 million. I guess it will do that depending on progress with other deals over the next few months.

The yield is fantastic: over 13% in cash, received monthly. The payments will vary in future years depending on revenue generation by the investee's parent.

The investee is a Canadian company, operating internationally. It specialises "in the development, commissioning and management of healthcare facilities and services using a public-private partnership model. "

Payments will be received for 30 years unless the investee exercises its buyback option. Note that there is no repayment of principal at the end of 30 years. It works more like an annuity.

My opinion

The Duke portfolio has five investees now - it is gradually improving its diversification. My confidence is very slowly improving, the longer we go without a mishap. There is a long way to go yet.

The main attraction for me is the high yield that Duke achieves with each deal, and the possibility that it could compound this wealth over time by reinvesting the proceeds.

The dividend yield is of less importance, but it doesn't hurt. The most recent quarterly dividend was 0.7p, implying a…

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Effortless Cool

30th Aug '18

Arrow Global (LON:ARW) please, Graham. Interim results out today. These look good, but the company is complex and has been subject to sustained and significant short interest.

MrContrarian

My morning smallcap tweet: Crawshaw: bloody hell.

Filtronic (LON:FTC), Crawshaw (LON:CRAW), Xaar (LON:XAR), Watchstone (LON:WTG)

Filtronic (FTC) Wins follow-on order from a major European OEM for its Massive MIMO antenna. Order worth $1.1m is in line with the Company's expectations.
Crawshaw Group (CRAW) H1 trading: grim. Rev £21.6m (£22.1m), LFL -13%, a slight deterioration in last 6 weeks. Guides FY rev flat and underlying operating loss ~£3m. Cash down to £3.3m. The new mgmt has "identified the core issues affecting the business and will announce how it plans to rectify those...alongside the interim results."
Xaar (XAR) H1 trading: grim. "Underlying trading since the end of June has been, and is expected to continue to be, below the levels previously anticipated by the Board." 1201 printhead sales significantly slower than expected. Will announce recovery plan in interims.
Watchstone Group (WTG) H1 rev £19.7m down 14%. Pretax -£3.5m (nil). Cash £58.4m plus the disputed £50.2m in escrow. Healthcare Services rev up 3%, Ingenie rev down 38%. Slater & Gordon's claim expected to go to trial in late 2019. SFO investigation continues. "We are making good progress in developing the underlying quality of our businesses [really?] and their long term value whilst simultaneously resolving the Group's legacy matters as efficiently as possible." I'm short.

runthejoules

SCISYS (LON:SSY) & OptiBiotix Health (LON:OPTI) please Graham!

mammyoko

Please could you comment on interim results from Churchill China (LON:CHH), Graham? 6% constant currency growth, export sales up 19% constant currency. EPS up 24% and dividend up 18%. Export revenues up 17% and now 63% of total revenue. Comment that relatively low market share in exports

JohnWigg

The new-ish thread on Churchill China (LON:CHH) hasn't attracted much comment, but the interims are out today. I find the company quite appealing, but maybe fairly-valued. UK market is shrinking but EU exports growing well. (Potential vulnerability?) I'd welcome a comment if there's time.

Monty9

Have held Filtronic (FTC) for some time. Like IQE it seems to have some potentially valuable IP. The Massive MIMO antenna order, while not massive, seems to signal the early stages of supply in a major revamp to the 4G network. I don't know how much of this FTC could expect to win but from a market cap of £30M and sales £25M it wouldn't take much to give the company a major boost.

JonBirdy

Hi Graham

I’d be keen to hear any passing thoughts you may have on Duke Royalty (LON:DUKE) RNS this morning.

It looks like the type of diversification you were keen for them to pursue. Or am I completely wrong!

I don’t hold.

Jon

ROSS WHITE

not applicable to me in oz

Mark Tughan

Seconding Arrow Global (LON:ARW) and SCISYS (LON:SSY) please Graham. Arrow Global (LON:ARW) headline numbers appear excellent. Lets see if they stand scrutiny! As I dive deeper, I am gaining confidence that this is a well run business, but I'm concerned to hear it is the subject of short interest and plan to watch closely. You gave some initial thoughts recently too.

Also another shout out for OptiBiotix Health (LON:OPTI) but appreciate you don't usually cover pharma. It's a bit of a Tom Winnifrith favourite that has just has a great run up but now seems to be coming back down to earth.

Techno Trousers

Ditto SCISYS (LON:SSY) for me too please!

TT

fredericktug,

These are the leading shorters of Arrow Global (LON:ARW) ...

http://www.bybrookcapital.com/

... and this is a news article referring to their short thesis ...

http://www.thisismoney.co.uk/money/markets/article-5090709/Trader-s-bets-against-debt-collector-sink-1bn-flotation.html

I am long Arrow Global (LON:ARW) but hope to find time over the next few weeks to take a deep dive into the latest published numbers.

SundayTrader

Strix (LON:KETL)
As this is an in-line update, I don't know if it is worth a further look at this stage. It may be worth it now that the Stocko numbers are a bit clearer than they were when you last looked at this. Noteworthy numbers are ROCE of 110%, and a negative book value.
I hold, but only in a small way because of the balance sheet.

thanks, much appreciated Effortless Cool! I too am long but take short interest very seriously.

TheShareWhisperer

OPTI would be good, just because TW covers it, and the results today still show absolutely minimal revenue growth again.

dscollard

re Arrow Global (LON:ARW) , few more recent shorts too : total open interest near 8%

5b87ccb0674602018-08-30_11_40_48-Short_I

Graham Neary

Hi Jon - yes, I was very interested in today's Duke Royalty (LON:DUKE) announcement. Thanks for mentioning it. It's in the report now. Cheers. G

dustyie

Morses Club Morses Club (LON:MCL) share price drop after this morning trading update . Does any know why it share price is dropping the last few days , from 170p to 142p
It's trading update seems fine to me, Am i missing something ?

DJCP

Graham,

I too am a Duke Royalty (LON:DUKE) holder, so pleased with the diversification from today's RNS. Wasn't too sure why the initial investment was in GBP and the possible further investement in USD, not that it matters too much, just a bit confusing at first glance.

As I didn't know if you'd be covering Duke Royalty (LON:DUKE) today, I'd posted my comments below on another site (spit !).

I too have a spreadsheet, but concentrating on their monthly income and cash balance. It's one of the easiest companies to be able to monitor !

For each month, I have an opening cash, less expenses (£100k pm), Plus income from partners (£451k from Sept.), less investments, less divis, to give a monthly closing cash balance.

From my figures, I anticipate the Y/E finals (to 31st March) to show £9.6m in cash. Since then they've invested £18.5m (£2m Lynx, £6.5m Brownhills, £10m InterHealth) and received £42m from issued equity. The Sept.18 cash balance should be approx £33m.

I'm quite surprised that the divis have increased, even though the shares in issue has doubled once, and doubled again more recently - I've added the royalty income for the 3 months preceding the divi payment date and the divi amount.
Jan 18 - 0.5p on 97m shares - income £340k, Divi £484k
Apr 18 - 0.6p on 97m shares - income £535k, Divi £581k
Jul 18 - 0.7p on 97m shares - income £902k, Divi £678k
Oct 18 - ? on 198m shares - income 1,128k, Divi (at 0.7p) £1,385k

If these figures are correct, it shows DUKE have, in the past, paid more in quarterly divis than their royalty income, so perhaps they'll keep the next at 0.7p.

If they do have to reduce it, I can imagine poor reporting will headline "Duke slashes quarterly divi", which won't do the shareprice any favours ! I presume Duke understand this possibility, so hope they'll keep at the same level.

I'm tempted to double my holding in Duke Royalty (LON:DUKE) but will most probable wait until the finals are announced, just in case there's any errors in my calculations, or an SP pull-back for any illogical reason.

LovelyLovelyGorgeous

Arrow Global (LON:ARW) the main worry seems to be that company is deliberately running its cash flow negative. They have said that they do not intend to buy any more companies and to reduce leverage over the next year. All the debt collectors seem to be running a negative approach and my guess is that if things started to "turn down" they would stop buying new debt portfolios and use the cash inflows to then turn cash positive.

I am long, think the company is well run and think that the shorters / continued share price weakness is gradually wearing down the long term holders and so encouraging a downward spiral. I intend to stay long.

barnetpeter

Has anyone noticed the steady fall in RBG Revolution Bars recently? Popular stock on here hit 117p this morning. A long time it seems since it was subject to a takeover bid at £2. A bargain or going below the 100p levels?

Small Cap Value Report (Thur 30 August 2018) - DUKE, CHH, XAR, ARW, HSS, KETL, CRAW, OMI

Duke Royalty (LON:DUKE)

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Graham Neary

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