Small Cap Value Report (Thurs 10 Feb 2022) - KCT, SUS, SOLI

10th Feb '22 by Jack Brumby

47 comments 8533 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday. It looks like another quiet one after the January rush - here are some companies we've spotted so far, let us know if you've seen anything else out there worth covering.

Kin And Carta (LON:KCT)
S&u (LON:SUS)
Solid State (LON:SOLI)

Jack's section:

Kin And Carta (LON:KCT) - H1 net revenue of c£85m and adjusted operating margin of around 7%. A notable year-on-year improvement, and FY22 organic revenue growth is expected to be in the range of 35%-40%. There are signs of progress but that is reflected in the share price at these levels even after the recent fall, in my opinion.

S&u (LON:SUS) - I hold - positive update, with FY profit before tax to exceed current consensus expectations. The group is now back to pre-pandemic levels, with excellent collection rates in motor financing and strong momentum in property bridging. A well-run company on a modest valuation and a positive outlook.

Solid State (LON:SOLI) - another strong update and further broker upgrades. The performance here has been impressive, and that is reflected in the share price. Supply chain issues have so far been well managed. All in all a good company, although the expanding PER means it stays on the watchlist for now.

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

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ridavies

10th Feb '22

Hello shipoffrogs. Re Nanosynth (LON:NNN) and the independent directors, I would guess more likely to be PhDs since the company sun out of Nottingham Trent University, so doctorates rather than doctors!.

davidjhill

benefit you have with Somero Enterprises Inc (LON:SOM) is you are paid handsomely in dividends to wait for a re-rate. It is a quality company with quality management who know their industry inside out in my opinion. There are some bizarre lurches in good quality small caps at the moment but I have no temptation to take any profits from selling Somero Enterprises Inc (LON:SOM) personally.

What I would note is that resources, and particularly energy are well in demand from retail investors at the moment. Typically they were very oversold on the "death of carbon" theme, which is of course, complete rubbish but seemed to have people suckered in. So there are bargains out there trading on PE's of 1 & 2 (eg Petrotal (LON:PTAL) ) that are now gaining interest and moving. It would not surprise me if, at a retail level, there is a rotation from good quality small cap into the resource sector and because we know there is low liquidity this could impact on share prices. So, if you're not going to chase the current energy trend there are probably some good bargains out there. Somero Enterprises Inc (LON:SOM) i would say is probably one of them.

ckidcurrie23

Thanks John

Revs8

Personally, I believe Cannacord are still selling. I don’t know why. I saw some data that lead me to believe they may have had cash withdrawals but I’m not certain I understood the data correctly.

Occasionally there seem to be lurches down in the Somero Enterprises Inc (LON:SOM) price, often followed by a rebound. I started a discussion showing how I’ve significantly improved my return by buying at times like this and top slicing after a strong rally. I’ve made a little top up today. It’s always one of my largest holdings.

I agree this is an excellent company with strong other book and good dividends (make sure you hold in aSIPP to avoid tax).

Solid State (LON:SOLI) agree Jack. This is a superbly run business by the son of the founder and with good owner/director skin in the game. It is run conservatively but with ambition. I sold mine after holding for a number of years at 1400p (for about the first time in ages I seem to have got out at the top) because whilst I think Solid State (LON:SOLI) will almost certainly grow into its valuation, I couldn't justify the current price. They have ambitions to double EPS over 5 years and if they do that it will probably trade at 1800-2000p but from the 1400p I sold at a 30% return for a 5 year wait wasn't a great risk/reward however much I like them.

I almost bought back at 970p recently as things were selling off but missed the bounce. That's the kind of level I am looking for as are-entry point.

Jack Brumby

Hi David,

I'm roughly in the same ball park as you. Prospects look promising but priced about right for now and would want a little more upside on the table. Definitely one that got away.

Thanks Kieran! It's a busy week behind the scenes at Stocko HQ, I'll let the devs know you wish them luck.

hayashi22

Yes so many people use acronyms and assume other people are aware of them. Where I live if you asked 100 people what AWS meant there would not be one correct answer.

BnB

Thanks for your clarification. I think it's important to recognise this isn't a business expected to maintain 30%+ growth rates - high-teens falling to mid-teens are in the forecasts for '22-'24. Not bad but not market-beating. My aggressive picks would be Endava and Epam with Made Tech a ground floor opportunity having only recently floated.

Nevertheless we both seem to agree Kin And Carta (LON:KCT) is not a bad little business at all in a sector with powerful drivers - I'd expect it to outperform Kainos at least but with higher uncertainty (and a big tax bill if I sold Kainos!).

Deegee Eff

They appear to be trying the same trick on that the previous directors successfully pulled off when this company was called something else, which I can't remember.

Cricketfan

Re Somero Enterprises Inc (LON:SOM)

I agree with the conclusion that this is a really well managed company and I have held for some years. I take their reduction in effort to break into China as a plus: better opportunities at home given Biden funding. Management are however past spring chicken age and I wonder if SOM might become a takeover target. Anyone any thoughts?

Mark

ed_miller

Re: Kin And Carta (LON:KCT) a Good Little Company?
Not sure how we know whether or not Kin And Carta (LON:KCT) is a good little business yet - it's just sold all its cash-generative digital-marketing and consultancy businesses only bought and grown over the past few years, in favour of new, immature, all-the-rage trendy DX businesses whose revenues are currently growing pretty rapidly but not yet throwing off good cash, and the share price has taken a pounding in the current risk-off environment.

Management certainly talk the talk and burnish their ESG credentials. For now trading is good and the outlook encouraging - let's hope - for those who hold, as I do, any way - that continues so the share price doesn't tank some more.

Lucky dip

It is fine for people who have held this share for more than a year. it has served them well and they are biased towards the prospect of the company in the future.

for others there maybe better times to buy.

Ultimately I think Kin And Carta (LON:KCT) 's value lies in its the market positioning in DX rather than any inherent magic in the management. To call DX "all the rage" and "trendy" is somewhat understating the benefits. DX is a decades-long megatrend.

Hi Luckydip

The Somero Enterprises Inc (LON:SOM) share price is in a rising channel and has been for a long time. The bottom of the channel roughly coincides with the 200dMA. The share price is at this level now which means it’s possible buying opportunity. Almost 20% below last peak.

If the share price has peaked then it will drop out of the channel but there are many reasons why Somero Enterprises Inc (LON:SOM) is attractive to small investors (dividends and low PE plus a strong forward order book).

doug2500

There has recently been some orderly adjustment in management at Somero Enterprises Inc (LON:SOM) which should alleviate any fears of older management. Whether it's a target or not I've no idea.

I don't remember any time before when large indexes (or is it indicies?) are posting new highs while small caps and aim are getting hammered day after day. It may well be the rotation into energy as mentioned above? Either way it's been a harsh few weeks for my pf.

Helvellyn

Unfortunately JD, there is always a reason, we just don’t know what it is yet !

Lochinver

Hello Jack and Paul.

Thank you so much for your insightful, straight talking , unbelievably timely and straightforward analyses every single day.

I particularly like the tone of your appraisals - very clear, common sense, honest, no jargon and most importantly none of the all-knowing, slightly smug and self-congratulatory air that I seem to have encountered since starting my share investing journey a year ago in pretty well all other information sources I have visited - from the FT, to the IC, the well known bloggers and the weekend press money ‘experts’.

Thanks again

Tell me about it JD

For what it’s worth regarding Kape Technologies (LON:KAPE) I sold mine a couple of weeks ago on the back of

3 directors selling £3.5m shares at 400p in jan
Including the CEO who appeared to sell half his holdings
All this quite soon after a potentially transformation mega acquisition made only fairly recently
The CFO moving on recently after 9 years at the helm after presumably being instrumental in said acquisition
An underwhelming performance by his successor at the last investor presentation
One shareholder mopping up shares to hold over 50% which doesn’t feel healthy to me
Alarm bells from the recent acquisition regarding a fall out between staff and a very senior executive
And most importantly, on the back of all this, wanting to realise the gains that this share had accrued over the last 18 months or so

Re Kin And Carta (LON:KCT) & Digital Transformation (DX) - I take your point, BnB - it's clearly a n important business trend. I meant to refer to current investment vogue as perhaps a bit 'faddy' given values ascribed to future cashflows in immature and unproven businesses. Time will tell in the case of Kin And Carta (LON:KCT) Clearly, since I hold it I'm hoping it works out well for them.

Small Cap Value Report (Thurs 10 Feb 2022) - KCT, SUS, SOLI

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Jack Brumby

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