Small Cap Value Report (Thurs 16 Sept 2021) - EKF, CIR, SDRY, GFRD

16th Sep '21 by Jack Brumby

60 comments 8549 reads

Good morning, it's Jack here with the SCVR for Thursday. Paul’s in transit this morning and has his hands full with airport admin so hopefully he gets back here without any complications!

Edit - Paul's got an hour to spare at the airport so currently has the laptop out and Superdry in his sights.

Today's report is now finished.

Agenda:

Jack's section

Ekf Diagnostics Holdings (LON:EKF) - attended the company's presentation yesterday evening. A complex and in-demand company with multiple lines of business and some promising growth opportunities. It's a high relative valuation and the group has received a lot of business around Covid testing, so it needs to be able to justify that valuation should Covid business subside.

Circassia (LON:CIR) - full year EBITDA to be materially ahead of expectations, although the market cap of £167m is still pricing in a lot of future growth. Still there's a clear story and catalyst revolving around its market-leading asthma testing products and patents, and new management has done a good job of dealing with legacy issues.

Galliford Try Holdings (LON:GFRD) - return to profits and dividends after recovering from a horrible 2019. It's got good revenue visibility, a strong order book, and a balance sheet stacked with cash (but also a lot of creditors). It could do well - the outlook certainly sounds supportive - but the thin margins will always be a concern.

Paul's section:

Superdry (LON:SDRY) - Shares are up today, but the company is still loss-making and faces cost headwinds. I remain sceptical of the turnaround.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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 -…

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rmillaree

16th Sep '21

Made.com (LON:MADE)

Briliant stuff as ever abtan - most appreciated.

I think your thoughts align very closely with mine here.

comments having done my very own quick basic research

It does appear they are having supply issues that are affecting some customers - thats probably to be expected as everyone is at present - there is some scathing criticism on trustpilot (which i would expect to be there due to volume of sales) - replies from company seem reasonably sensible (it is what it is sorry) - however the overall score remains over 4 which aint bad for internet retailer (i guess)

I suspect supply issues amy get worse before getting better.

Ref marketing - i wander if they have suferred the same issues as BOTB in that prices charged by google have gone up materially. It would also make sense that there would bee slight dropoff anyway too post lockdown end.

ref cancellations - perhaps supply chain issues are starting to bite - perhaps as they get bigger they simply loose the personal touch and or the stuff they are adding now is the less "easy" stuff to sell and not have it returned. You would guess thye would have up to now concentrated on stuff that was easier and then add other morre complicated lines later on the basis they had limited amount of new lines they could cope with?

ref year end exppectations - they were clear in the webinar recently (worth watching for the comedy allo allo accent alone) that they are still(?) on track for the 2025 plan - over 1 bill revenue and over 10% EBITDA (i think exact details elude me). I would be surprised if they are burying their head in the sand ref H2 shortfall - but they do have the perfect excuse lined up already "supply chain issues and knock on cancellations" - so it will be a good test of how intact the 2025 plan is IF they can hit revenue targets this year. I am guesing they have black friday and xmas peak season so perhaps they are confident that the peak period will deliver biggie ? - Perhaps they will fall short and use the "but we have this defered revenue" as an excuse.

"It would be worrying if Gross Sales are artificially elevated here."

Should that matter as long as the accounting principles are correctly treated ?

Eg to me

sale 100 - cost 50 -cost 100 (cancelled sale) + sale 70 - cost 0 = 20 profit

sale 70 - cost 50 = profit 20

as long as the cancelled sale expense is NOT included in the admin its no biggie - higher sales and lower margin = same bottom line result.

Although perhaps they could be inflating the margins with timing issues which would be a worry - i am hoping they are "honest" bods in charge - as long as the 2025 plans are intact - its not the end fo then world to me if margins are slightly less short term - but i do like stuff to be simple clear and transparent.

Ref the bottom line numbers summary for 2025 - useful info - i think there is scope to be positive or negative here - they say 10%+ you say 3.5% and that is the difference IMHO between decent value at current price and potential multibagger. 2/3/1% difference on fullfillemt - marketing and overheeds would make up the difference close to their 10% number - this does appear to be a somewhat more promising business than something like AO online.

I guess in next 3 years will they be subject to competitors underctting them bring margins down - perhaps - but normally if you get big quickly and have prresence you tend to reap the rewards so this does look very appealing.

Ref short term as you say i think there are enough uncertainties here that may keep a lid on shareprice - albeit if they update with good news next time out the shareprice really could go places IMHO. I remain on the sidelines for but i can be a sucker when the jackanory is good unfortunately.

timarr

RE: Made.com (LON:MADE)

I agree with both abtan and rmillaree. Made.com looks like an interesting proposition but is probably heading into short term headwinds. As ever when I like something I ignore the potential for short term upset and take a small position to keep an eye on it.

Generally the business is a bit H2 weighted but it's not stunningly so - I don't think furniture is a big winner from the Black Friday / Christmas period, although normally you'd expect more homeware purchases outside of the summer - so I'm not sure how relevant comparisons are to last year, when presumably everyone was stuck at home looking for ways of spending the money they couldn't go out and use?

Generally the supply chain issues will obviously impact businesses, but I'd have thought the problem for Made was more likely to be deferred revenue than lost revenue. The one thing I don't understand is why cancelled and returned orders are increasing. Perhaps longer lead times are causing people to reconsider? Again, though, it would seem to be short term issue, assuming their wide range of suppliers haven't suddenly all developed quality problems.

Anyway, I think it's an interesting company with some real brand value. How it monetises that will be interesting to watch over the next few years.

Cricketfan

Ig Group (LON:IGG) Thanks to all who have contributed to the CMC/ IG dialogue. Widened my knowledge a lot with some really interesting views and insights .

jonno

I cannot praise the detailed analysis provided by Paul, Jack and Roland et al too highly. As a UK small cap investor I find it invaluable. I may not always agree with the view expressed but consider that a positive as it forces me re-think the investment thesis. As I commented recently where else would one get such rich analysis for an annual subscription of £245. That apart the Stockopedia pages form an essential part of my initial research.

There is always room for improvement however and I would find information on director shareholdings, as opposed to purchases/sales a useful addition, plus as has been mentioned previously coverage of investment trusts.

doublelutz

I am a bit puzzled by the concern of Abtan of sales being counted twice. Is he suggesting that weeks after flotation we are already in a Patisserie Valerie situation! As he is obviously well aware, goods are sold and they are credited to sales. If they were returned you would have to raise a credit note. If you didn't you would have ever increasing non-collectable debtors. You sell it again and the new figure goes into sales. If you posted the non-collectable debtors as an admin charge, not only would the accounts be wrong (although not necessarily the profit) but it would probably stick out like a sore thumb in the detailed management accounts which a half competent auditor may notice. I think you could apply such a "what if" to almost any company but I am pleased to confirm they do have a popular business and it is not a mirage!

Silver Moon

Hi Paul, just to remind you that I didn't get an answer from you when I asked if you were the main man in Ecotricity if you wouldn't want to buy out Good Energy (LON:GOOD) just for its name. I hold and recently voted against the take-over offer having bought in at 341 pence against the 340 pence offered and now I see Ecotricity has come back with a new offer of 400 pence. Now that is more like it and proves to me that Ecotricity wants that name. We shall see feathers fly!

Silver

abtan

Hi Doublelutz

To be honest I think duplicated gross sales are probably removed.

I was simply intrigued after seeing the returns/cancellation rate going up, and then reading the definition of Gross Sales:

"Measure of customer demand which, unlike IFRS revenue, does not include cancellations, returns or the timing difference between customer order and delivery"

If you Control+F "60%" in the IPO doc I'm sure you'll find the returned good resold metric.

In any case the most important thing is Revenue (which would factor in returns and is audited).

Though of course Gross Sales (which is not included in the audited accounts and therefore it doesn't matter whether returns are included or not) is useful in order to work out marketing effectiveness and hopefully as a useful indicator of what revenue should be going forward.

Cheers

GN100

Ken,

I read the SCVR every day and generally open it at about 0700 while I also wait for the RNSs to come in. The SCVR is one of the main reasons I use Stocko (there are others too). Generally, the SCVR stays open on a tab on my laptop all day and I refresh the page each time I come back to it, so that shows that I am an appreciative user. I hadn't realised that ticking the thumbs up box for the report was of any interest but I see where I was wrong now and will do so in the future. In the meantime - Paul & Jack, keep up the good work and don't burn out.

Tommy H

I am watching Wynnstay (LON:WYN) having sold out previously and missed the last up and down in price.

I think that Wynnstay (LON:WYN) like a lot of shares is just slowly dropping as people who bought on the way up are getting disinterested and selling with a loss or the fact it is not continuing to rocket upwards.

So simply yes the company has headwinds which are applicable across so many industries right now. But they also have some capacity to pass on these costs to the end user.

The one unknown is the quality of harvest this year, so what the demand for feedstocks for over the winter will be. But that is beyond my crystal ball today.

Tommy

gus 1065

For a bit of novelty, I see that Augean (LON:AUG) and its two prospective suitors have agreed to go for a formal TOP auction process to decide who will acquire the company. I don’t recall seeing this before. Proposed process is described in the attached RNS but the gist of it is that there will be a finite round of up to five bids made by the two parties on the evening of 22nd September (presumably once the market has shut). I might see if I can get a ringside seat, could be fun to watch.

https://www.investegate.co.uk/...

Gus.

davidjhill

yep - same is happening at Morrisons takeover. Good to get to a conclusion and should encourage best bids so at least shareholders get better value. I was mortified at 280p but much more comfortable at 350p+

remember that a material amount of sales were not recognised in the period that would ordinarily have been had supply issues not been extending delivery times. These will be realised in H2, they were bemoaning it in the analyst call to make sure we understood that the result would have been even better in H1. I can't remember how much now (I want to say £70m but that doesn't sound right). Anyway point is that the growth in H2 isn't actually as big a jump as you may be thinking.

Not that they couldn't have a similar problem at year end though frankly I don't mind a few weeks overlap of accounting period due to fulfilment issues as long as the revenue growth is clearly visible, I am capable of looking through that though I appreciate Mr Market sometimes isn't.

Neil W

Very good write up on Superdry. Thanks for taking the time on holiday

CamRaid

Jack,

You are a gentleman. There is a decent podcast here about the Eenergy (LON:EAAS) acquisition: https://www.voxmarkets.co.uk/a...

The team at eEnergy seem impressive. The CFO Ric Williams was the M&A partner at Deloitte. The CEO Harvey Sinclair has a good track record of buy and build. They have a good mix of other directors with energy backgrounds or M&A experience. Arguably it is rather heavyweight for the size of the business. I see this as an indication of their ambition. See more here: https://eenergyplc.com/leaders...

There is an earn out element which varies according to the performance of Utility Team. They stated, "An earn-out consideration of a maximum of £5,145,000 will be paid in cash up to £1,472,500 and any balance in Ordinary Shares (at the higher of 24 pence per Ordinary Share or the 30 day VWAP to 31 December 2021), based on a multiple of UtilityTeam's EBITDA for the year ending 31 December 2021, paying £7 for every £1 of EBITDA generated in excess of £2,265,000, up to a maximum EBITDA of £3,000,000."

What they do really makes sense. It is a win win for everyone. It is going to be a hot topic especially in the public sector that they target. There are so many bolt on opportunities, great opportunities for cross selling and the opportunity for geographic expansion.

The podcast is short and explains a lot about the acquisition and their future plans.

Thanks again Jack for casting your eye over this. I have been accumulating a position for some time. I like it but the dilution worries me.

Investment4Adam

Excellent stuff abtan & rmillaree - had a quick read & will compare to my numbers at the weekend. In case you haven’t seen it there is also a short presentation on Tamzin’s piworld platform / twitter - obviously its their “story” but some useful points.

I am a LT holder (if you believe the 2022 story imho you need to commit to holding until then unless something changes) - I am not a trader but sometimes use the c10% cash I generally hold to trade an odd position which I think is just wrong; so I took more at 144.4p at 08.37 yesterday. Will close that in the next few days.

I was very encouraged by the consistent growth in UK & Europe. I work across Europe and arguably their designs are more suited to DE, NL, BE, DK etc, and with their 150 designers they can produce a variety of designs and adapt to trends.

I have been tracking them for some years & visited their showrooms at Redbrick & Mailbox (latter now closed post its purchase by M7). I think their products sit in a really nice price point for the quality. A lot cheaper than higher end, but much better than low end (you really notice when walking round the Redbrick concessions).

My take on the deferred sales is while it is “bad news” the other side of that is customers want to buy more they just cant deliver it quick enough. This is a 6-12 months problem IMHO - I agree the share price is going nowhere in the ST but this is actually positive LT.

We also bought a number of items from them having moved house in Jan. The large L shape sofa is fantastic & brilliant value for money - much cheaper for what it is v Barker & Stonehouse etc. Also bought a couple of tables & a chair. Their lead times were long (8 to 12 weeks) but they delivered quicker. My biggest gripe with them is they use Arrow XL to deliver who we have had problems with every time (a couple of other stores delivered through them & items arrived late or damaged). We bought a drinks cabinet from MADE & it was badly damaged. Had to wait another 12 weeks (well 10) & same thing happened. When the damaged good is collected they use a different courier (who were brilliant!). I think they will link the damages to courier and change accordingly. When we gave up & bought a replacement cabinet elsewhere is was 50% more from elsewhere (and not as good quality). I know its all anecdotal but gave me a little insight i thought I would share.

If they deliver £1.2bn (+) sales in 2025 on the low teens EBITDA margin then it is worth 2 to 4x current market cap. You have to judge if you believe they will get there or not. On my numbers they get to £1.3bn…..

Hope I gave a little back as I really appreciate your much more insightful thoughts!

Paul Scott

Hi Silver Moon,

Sorry, I don't have any view on Good Energy (LON:GOOD)

The 400p improved takeover offer is clearly good news for shareholders, so enjoy your windfall!

Regards, Paul.

Made.com (LON:MADE) (no position)

Thanks for your comment Adam.

2 additional thoughts if I may:

1 - "My take on the deferred sales is while it is “bad news” the other side of that is customers want to buy more they just cant deliver it quick enough."

The main reason I think increasing deferred sales is bad is because cancellations increase, so you have a pissed off, and possibly lost, customer and extra inventory to shift.

In any case, this should hopefully just be a short term issue, so I agree, it's not an issue.

2 - "My biggest gripe with them is they use Arrow XL to deliver"

One thing I liked about Westwing recently (German-based competitor, which I hold) is that they are investing in their own fleet of delivery vans. Well, they're testing it out at the moment.

Capex is higher of course, but given the size of the business now (it's a wee bit bigger than Made.com) the additional cost is easily covered by cash generation.

Hopefully fewer damaged delivered goods, happier customers and more repeat orders will aid long term growth.

I imagine that Made.com (LON:MADE) will need to go down this route eventually too.

19th Sep '21

Thanks abtan. Very good points. On the deferred sales one thing I dont understand why companies dont report as a KPI is actual v expected delivery. When a customer places an order they are quoted a delivery. If the customer receives the product within the lead time they are happy. #MADE should report delivery within customer forecast. On the logistics I totally agree - I was surprised they use Arrow XL given they seem to be a low quality provider. Hopefully they follow your suggestion on this….

Hi Adam

I completely agree with you; in these unusual times a metric indicating average lead times would be most useful.

The next best thing we have are comments made in the IPO doc (published after Q1), which shows the increasing lead times:

"The carrying balance of customer orders not yet fulfilled at 31 December 2020...is expected to be recognised within 1 to 6 months of the year end (2019: 1 to 3 months; 2018: 1 to 3 months)."
The carrying balance of customer orders not yet fulfilled at 31 March 2021 is expected to be recognised within 1 to 6 months of the period end."

So if you ordered today, you might not receive your item(s) until Feb/March 2022.

I'd really be interested in seeing cancellation rates given the potentially very long wait.

Rusty2

But this seems to affecting most other similar companies. I have just been reading reviews on sofas for other companies and delayed deliveries is quite common complaint. So yes can cancel your order but then you may have a long wait from another supplier.

Small Cap Value Report (Thurs 16 Sept 2021) - EKF, CIR, SDRY, GFRD

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Jack Brumby

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