Small Cap Value Report (Thurs 16 Sept 2021) - EKF, CIR, SDRY, GFRD
.jpg&w=384&q=75)
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 - 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
Ekf Diagnostics Holdings (LON:EKF)
Meeting notes
The company is at an inflection point in terms of growth; upgrade in results earlier this week.
EKF has moved into working with very large customers over the last 18mths so longer payment terms from key accounts.
Still managed to generate net cash of £20.38m, dividend to be paid.
Operations - Core business has seen a 'tremendous return to pre-Covid times in H1'; revenue up. Key products here grew at double-digits. PBS +142% to £18.5m.
PrimeStore MTM - EKF was concerned that there's a perception of one big customer in the kitting business and this isn't the case. It also supplies all the kits to major pharmacy outlets in the UK, Public Health England, Signpost (Paddington Station, airports), Irish healthcare system.
This year EMEA outperformed the US due to above demand.
Significant growth in MTM, now three sites outside Cardiff producing these kits.
- Cannot see testing for Covid declining
- Entering flu season
On one MTM test device you can test Flu A, Flu B, and Covid so market will grow and grow over next 3m - but what about next year, or three years from now? Is at-home diagnostics testing here to stay?
The group is starting to really grow kitting business in other areas outside the pandemic.
The kits are CE marked and FDA approved so EKF is one of the few authorised manufacturer of kits that this big global partner can choose from. Very few out there actually supplying the kitting due to strong regulatory environment.
CEO's new job is working with Mount Sinai to drive further opportunities here.
Growth plan
- Contract manufacturing: Life Sciences
- placed orders with two companies for fermentation build, in progress. 3,000l faciltiy ready for Q3 next year, 14,500l for Q4 next year. Total investment of $9.3m and aims for $20m in revenues by 2024
- Contract manufacturing: molecular diagnostics and other applications
- continued expansion of facilities in UK and UK
- Demand for services driving non-Covid related products
- Increased production of components and kits for Covid sample collection to meet demand
- Earnings enhancing acquisition talks ongoing
- Can't say too much right now; looking for nice fit between point-of-care and contract manufacturing
- Also for core business
- It will be a company already generating revenue with products on market
- Will not be raising more money for acquisitions and no debt
- Leveraging distribution channels for organic growth
- delivering growth for core business
- Has identified additional products to expand core range; adding a bit of life to core products by eg. helping hospital physicians to handle data
- Major distributor private label agreement
- Value creating investments - new Mt Sinai opps
- Best form of dividend - you can invest in company or technology, receive dividend in specie via shares, and investors gain exposure to various new technologies
- Biggest blocker to this kind of thing is trying to get key opinion leaders on board; this way around with Mt Sinai, those opinion leaders are already present
- There is another opportunity right now the board is considering, again in a brand new market, 'extremely exciting' & will talk with Mt Sinai, hopes to make a new investment in a new tech by end of 2021
- Then potentially spin business out onto AIM in H2 2022
- Progressive dividend policy for enhanced shareholder returns
- paying 1.1p per share in December
US - Things are ramping up in the US this half due to new rules from Joe Biden.
Biden a few days ago: any company that employs more than 100 staff has to test staff on a weekly basis —> EKF was immediately pulled up by global partner to significantly increase test packs. US demand really growing. Three new sites in Texas.
Testing is going to continue for the next six months re tests.
Global partner - kitting business is not just Covid now. They want to test for other diseases & will leverage distribution network to drive a cultural change in at-home testing. Kitting / testing is not going away even if Covid does die off.
Business unit performance
All biz units grew
- Diabetes £10.18m rev
- Hematology £5.86
- Life Sciences £18.5m
Central Lab & Life Sciences - only declining business is clinical something. Old products, from the 60s, commodity products, competition from China
Hematology - revenue flat - DiaSpect Tm, HemataStat II, Hemo Control, HemoPoint H2, UltracCrit
Regions
APAC £2.322m, +£490k
EMEA £19.195m, +10.791m
LATAM £870k, -£366k
USCAN £16.172m, +£1.316m
Outlook
Really very confident of being comfortably ahead for the year
Could be more upgrades in the next few months. Very strong trading in Q2. All of the core product lines have improved significantly in the past 6m and demand not going away.
Targeting double-digit growth in adjusted EBITDA over next 3-4y.
Cash generation
Since big problems in 2015, EKF has managed to reduce inventory yoy consistently
Inventory went up yoy this year by £1.6m as things last year were beginning to get scarce. Started building safety stock from China product early. Since then things have got more difficult sourcing across the board
Printed circuit boards in point-of-care testing, plastic resin in consumables etc., most products have some component that is causing a bottleneck of some kind. Therefore the company began stockpiling last year. Printed circuit boards - was asked 2 weeks ago to place orders for 2023 to ensure supply.
Long term should actually be a benefit as there will be a positive cash flow effect in future. Most of the stock has long expiry date.
It's forcing EKF to look for alternatives, a good discipline, should pay dividends in future as will take bargaining power from suppliers and give some flexibility back to EKF.
Receivables is the other number that sticks out - went up by more than £5m. Of that, £3.5m was prepayments on equipment as factories are full. Has questioned its inclusion in receivables line, slightly deceptive. Benefits of having this equipment will be big so best thing is to just install ASAP. Another £1m is from a deep pocketed customer being a little bit difficult. Nothing to worry about. The team has cleared out about £1m and the rest should be done by end of October.
Gross margin has decreased - H1 last year was selling MTM in buld back to Longhorn at high margins which influenced average margin. there was none of that this year. Kitting business is not its most profitable so this pulled the margin down. Longhorn has asked to start making bulk MTM again, a good sign; margins should go up in Q4.
Longhorn relationship over 12y, currently negotiating new contract. Was global distributor outside of the US but will now take US as well and will make Longhorn MTM test kits there.
Luke as chief scientific officer- molecular biologist. Wants to take EKF into early detection of disease. Will be full time, lives near San Antonio
Questions
AGM statement - private sector partner in discussions for testing beyond Covid.
- EKF has potential orders in for about 500k kits a week from the big industrial partner
- Was concerned that investors would think EKF is too dependent on. asingle customer
- Wants investors to know this isn't the only game in town, many other customers being supplied
- One of very few companies that has registered kits. Very fast moving dynamic
- It is looking at other products to sell into the diagnostics market as well. D2C diagnostics could be big as the barrier to entry (swabbing) has been overcome. It sees more and more reliance on home testing for the basics
- Industrial partner has asked to make molecular enzyme for them to use in diagnostics. Very well embedded with this industrial partner
Are any individual customers material ie. more than 15% of revenue. And are they new or existing clients?
- Not one that's over 15% however Public Health England was ordering 40k a month, then 20k, now 60k. Very fast moving
- Only new customer is Signpost, who does testing at train stations etc.
- 'Beautiful spread across a number of customers';
Clear Lab for diagnostics tests
- If it had the opp to do this then it would be a stepchange as it combines POC with kitting
- Atm so busy with kits that it hasn't had time
- Would combine EKF ops into one very strong diagnostic offering for people
Major molecular diagnostics players in the US being supplied to, decent growth opp. Mike has great connections
Type of non-covid products?
- CRISPR tech for gene editing. that's how MRNA vaccines are made at the moment, gene edited. DNA sequencing and products that fit into a molecular workflow and allow single-cell analysis.
Mexico supply arrangement - raw material shortages?
- EKF doesn't need to produce its own but has secured a dedicated line in Mexico. Biggest risk was swabs and tubes, this has been sorted now.
- Issue is not making the stuff - EKF could make them. The shortage is the plastic resin and similar components. Nearly the same problem with everything. This is why they have secured extra inventory, no benefit making it themselves.
Old products overhaul?
- Part of R&D programme includes this over the next 2y so yes looking to update all the time.
Chairman as Harwood Funds and EKF - may have to reduce holding. How to reconcile fund and EKF duties.
- Biggest issue that Christopher has got is that every fund must have a balanced portfolio and EKF is too large in the fund. He does not have to sell quickly. At the right time, he would have to sell down a bit. A big concern is that there is not enough free float. As it moves towards mid cap, will need more and more free float. Not a conflict of interest.
Plans for website refresh given expansion of business?
- Yes. Something to look at in the very near future.
Conclusion
The management team sounds competent and business is clearly in demand. EKF's regulated status and the consequent barriers to entry for other businesses is something to investigate.
The call confirms my view that EKF is an exciting company, but one with a quite a broad range of ongoing activities that is evolving all the time according to exceptional market conditions. It will require quite a lot more research to really get a handle on all of the group's product lines and to gauge their prospects.
That time investment made in researching the company might prove to be worth it though, as EKF looks to be a fairly unusual proposition. One with potential barriers to entry, relatively high margins, growing markets (but testing has an uncertain long term future in terms of mass adoption), and a hard to quantify opportunity with this unusual Mt Sinai agreement.
The valuation is a concern, particularly as there has been an influx of Covid-related business. The group is regularly posting earnings upgrades, but could this tail off at some point, or is the company on a more sustainable growth path?
At the very least, EKF justifies a closer look. Possibly heading back to 'the big problems' seen in 2015 and tracking progress since then could be a good way of getting to grips with the group's progress and prospects.
Circassia (LON:CIR)
Share price: 39.82p (+6.18%)
Shares in issue: 418,216,495
Market cap: £166.5m
Circassia is a dedicated diagnostics and management company focused on point of care asthma diagnosis and management. Its market-leading NIOX® products are used by physicians in over 50 countries to help improve asthma diagnosis and management. The group also provides customer service and after sales support.
This is a live situation in that a fairly drastic turnaround or reshaping of the business is taking place here. Over the past five or so years, the share price has fallen from the 300p-400p range to the 30s and shares in issue have gone up from around 250m to 418m.
It’s a vastly different company now, although still quite heavily loss-making, but brokers are forecasting an uptick in revenue over the next couple of years. Woodford was a holder and then distressed seller here.
Circassia has recently sold its loss-making division though and a new management team is in place. The remaining business is Niox, which is growing fast. The prospects here have previously been obscured by the recently offloaded business.
Niox is something of a leader in a fragmented market, with over 70 patents, revenue growth, and high gross margins.
The story is there but the StockRanks remain lukewarm here for now, with a StockRank of just 28 and some financial health concerns getting flagged up.
the Board believes the full year EBITDA performance is likely to be materially ahead of current market expectations.
Financial highlights:
- Niox sales +28% to £14.6m and seeing a post-Covid recovery,
- Gross margin steady at 68%,
- Niox EBITDA profit for the first time of £0.6m (up from a £4.9m loss),
- Total group EBITDA still negative but up from a loss of £6.2m to a loss of £0.1m,
- Operating loss down from £9.4m to £2m,
- Net cash of £11.3m, up from £7.4m in December 2020, helped by £5m of equity finance raised in the period.
COPD products have now been transferred back to AstraZeneca. A settlement with Beyond Air which, ‘subject to FDA approval of their product may provide further cash resources of up to $16.5m’.
Circassia has been named 'Global Leaders in FeNO Testing 2021' by Global Health & Pharma Awards and has sold more than 40m FeNO tests since launch. FeNO is Fractional Exhaled nitric oxide, a non-invasive and simple way to measure airway inflammation and assist in asthma identification.
Niox trading marginally above break even EBITDA is a milestone for the company and this (low) level of EBITDA profitability has continued in July and August. The group has reduced its cost base over Covid and the board therefore believes that full year EBITDA performance is likely to be materially ahead of current market expectations.
H1 2021 saw a much improved performance at Niox, which has a ‘dominant’ market share outside of China with over 17,000 devices sold worldwide.
Clinical sales grew by 11% compared with the first half of 2020 and were 10% higher than the second half of 2020. Recurring revenues from test kit sales were 90% of total clinical sales in H1 2021 (H1 2020: 85%).
In terms of regions, revenues in EMEA were up 17% to £4.2m, Americas revenues were up 4% to £2.9m, and revenues in APAC were up 24% to £5.1m, benefitting from a one-off recovery in China of £0.6m from prior years.
Research sales more than doubled to £2.4m in H1 2021 from £0.9m year-on-year and were 50% up on H2 2020. Circassia doesn’t expect this level of business to continue in H2 but the ‘medium-term outlook for this business is good’. Recurring revenues from test kit sales were 54% of total research sales in H1 2021 (H1 2020: 65%), reflecting the higher number of new devices purchased in this half compared with H1 2020.
Beyond Air - the dispute here has concluded. Under the terms of the Settlement, Circassia will surrender its rights to the LungFit® product in exchange for payments by Beyond Air for up to a maximum of $16.5m, payable in cash over the next few years. Circassia is entitled to a further royalty of 5% of net sales from the second anniversary of FDA approval, capped at $6m.
Ian Johnson, Executive Chairman, says:
We are pleased to report that the Company has reached a significant milestone with the continuing NIOX® business now profitable at the EBITDA level. Management has made substantial progress in implementing a new strategy, right sizing the business and ensuring it has the capability to generate profitable revenue growth. The cost base is now stable and plans to expand international distribution are being executed.
Cash burn - there was just a £0.5m cash outflow from operations, which looks manageable. This is in sharp contrast to prior periods: a £19.4m negative CFO in H1 2020 and negative £23.9m for the full year 2020. If the company returns to anything like those rates then additional equity finance will be required.
Conclusion
Asthma testing sounds like a large and attractive market to operate in.
Circassia is now exclusively focussed on this and, with the business now restructured (this has taken 18 months of hard work), management is turning its attention to driving top-line growth.
It is at the early stages of implementing a NIOX growth strategy that will raise the awareness of the benefits of FeNO testing and NIOX®, significantly improve its availability worldwide by expanding distribution, and, in the medium term, explore its use in the home and workplace as greater emphasis is placed on managing patients in non-hospital locations.
This is an interesting point - we’ve seen EKF make similar remarks about a cultural shift towards more at-home testing. I don’t think that’s a certainty, but it is a possibility which could lead to intriguing commercial opportunities.
The outlook is obscured by ongoing limited visibility due to the pandemic but Singer has improved its FY22 and FY23 forecasts as a result of the reduced cost base, with estimates of 0.2p and 1p in adjusted earnings per share. At 33p today given the ongoing risks, holders will be hoping for far more growth than that in the years ahead. The broker sees scope for revenue to grow to c£50m on a 3-5 year view. Most of this would be recurring, with good margin potential.
I think it’s a company to keep an eye on although I can’t yet say more than that. Its market cap is already £167m so it’s hardly a bargain on historic figures, but it looks like management is doing a good job here
Galliford Try Holdings (LON:GFRD)
Share price: 176.07p (+2.6%)
Shares in issue: 111,053,489
Market cap: £195.5m
There’s a bit of a story here. Galliford was set up back in 2000 following the merger of Try Group and Galliford. The enlarged group then purchased housebuilders which it consolidated into Linden Homes.
The failure of Carillion contributed to an increasingly costly large, fixed price contract. What followed was a restructuring and recapitalisation of the business. Bovis Group then bought Linden Homes in January 2020. This transaction got rid of the debt and pension liabilities and allowed the group to focus on core construction businesses.
As you might imagine, management is extremely focused on high quality contracts now, in order to prevent a repeat of 2019. This will always be a risk when the business model is low margin with large fixed price contracts though.
Financial highlights:
- Revenue +3.2% to £1.125bn,
- Operating profit before amortisation of £10.1m, up from a loss of £62.2m,
- Profit before tax up to £11.4m from a loss of £59.7m,
- Earnings per share of 9.5p,
- Divisional operating profit margin ahead of expectations at 2%,
- Final dividend of 3.5p; total dividend of 4.7p,
- Order book stable at £3.3bn (2020: £3.2bn),
Building and Infrastucture - appointed to contracts and frameworks worth over £641m and £590m respectively. Frameworks provide certainty of pipeline of work with repeat clients and established terms and conditions, and amount to 87% of the order book (2020: 90%) affording good visibility of future revenues. Wins include:
- The £400m NEPO Civil Works framework,
- Scottish Water’s £350m SR21 Non-Infrastructure framework,
- Scottish Water’s £350m Delivery Vehicle 2 programme, and
- Leicestershire County Council’s £48m Grantham Southern Relief Road.
Building revenue is up 9.6% to £789.2m and an operating margin of 2% makes for operating profit of £15.9m. The order book of £1.92bn (2020: £2.15bn), is split 27% in Education, 20% in Defence and Custodial, 16% in Health, and 21% in Facilities Management.
Infrastructure revenue is down 7.8% to £329.2m at a margin of 1.8%, so operating profit of £6m. Infrastructure currently has an order book of £1.35bn (2020: £1.01bn), comprising 38% in Highways and 62% in Environment.
PPP Investments - this division delivers major building and infrastructure projects through public-private partnerships, generating work for the wider group in the process. Revenue fell from £8.2m to £6.4m and there’s a loss of £1.8m, but also net interest income of £3.9m. The directors’ valuation has risen from £40.7m to £49.1m.
Current trading and outlook:
We are encouraged by the pipeline of new opportunities across our chosen sectors in the public, regulated and private markets together with our significant contract wins during the period. The Government's plans to increase capital expenditure, together with the Group's strong balance sheet and quality order book, mean that the Group is well placed to meet its growth objectives for the new financial year.
Targets for 2026:
- 3% operating margin across Building and Infrastructure,
- £1.6bn of revenue,
- Strong balance sheet and operating cash flows,
- Sustainable dividends with cover in the range 2.0 to 2.5 times earnings
Getting to that point would see a company generating around £50m of operating profit by 2026.
Balance sheet - looks strong. Average month end cash for the period was £164m (2020: £141m1), PPP asset portfolio of £49m (2020: £41m), and no pension liabilities. That’s nearly as much cash as the entire market cap, making for a tiny enterprise value. Net cash reported at the balance sheet date is £216.2m, which is more than the entire market cap. There are a lot of trade creditors though, £485.4m.
Conclusion
The important points here are around balance sheet strength and valuation. Galliford ended the year with a larger net cash position than its entire market cap, which is rare. The group does have a lot of current liabilities though, £492.7m in total.
After the sale to Vistry, Galliford is now a pure-play construction business with a large, high quality order book and good visibility on revenue. Much of the pipeline comes from repeat clients and existing frameworks, and Galliford started the new financial year with 90% of planned revenue secured for the 2022 financial year (2020: 90%).
And by all accounts the government is going to continue spending on projects, so the company looks well placed to continue winning good contracts.
Operating margins are very thin though, so there’s not much leeway if a contract falls through or anything else crops up. It’s potentially interesting, but the risk is also plain to see in the low margins.
That said, broker forecasts are improving and the outlook does appear supportive.
Paul's section
Superdry announces its Preliminary results covering the 52-week period from 26 April 2020 to 24 April 2021 ("FY21") and a trading update covering the 18-week period from 25 April 2021 to 28 August 2021.
Sharpened strategy sets out key pillars of brand reset; Performance significantly impacted by Covid-19 disruption
My initial reaction to the headline loss, is that it’s nowhere near as bad as I feared. Although note the considerable size of adjustments.
There are a lot of unusual items in these results, so I don’t think we can draw much from the figures, e.g. -
Full year adjusted loss before tax of £(12.6)m (FY20: £(41.8)m), with cost saving measures and government support helping to offset trading shortfalls. FY21 includes a £33.8m year-on-year benefit from reduced depreciation, primarily due to the FY20 impairment charge, and a £14.3m accounting credit due to lease modifications…
We expect to generate operating leverage from reduced store rents and payroll compared to pre-Covid levels, although we anticipate a £35-45m year-on-year increase in costs due to one-off benefits recognised in FY21, such as the return of UK business rates, the end of furlough support, and the normalisation of other variable and discretionary costs.
Those increased costs are going to be a massive headwind. At say a 53% gross margin, the company will need to increase sales by c.£75m to generate enough additional gross profit just to cover the increased costs (based on the mid range figure of £40m). That’s a 13.5% increase in revenues needed next year, just to stand still, due to those increased costs.
The table below shows that for the first 18 weeks, sales are only up 1.9% - nowhere near enough.
eCommerce - is vital for any fashion brand. I’m looking for ideally half sales to be online, and showing strong growth. There’s very good growth in eCommerce reported today for FY 04/2021, see table below, so it does look encouraging that so much business has moved online -
.
Current trading - sales from stores are improving against very soft comparatives, but are still way below pre-pandemic levels.
Also, what concerns me with SDRY, is that online sales recently are actually considerably down on last year, and have barely grown against the 2-year comparative. Whatever the reasons are, that’s just not good enough. Although to be fair, the online gross margin is much better, up 10.5%, as less discounting was done.
The table below shows the revenue change on a 1- and 2-year basis for the 18-week period ending 28 August 2021:
.
Rents - there’s some progress on rent reductions -
As part of our continued lease renegotiations, we renewed 39 stores in FY21 representing an annualised cash saving of £5.3m6. In addition, there were £7.7m of one-off rent savings recognised in FY21, and we are targeting in excess of £10m in FY22.
Outlook - no change to expectations, although we’re not told what those expectations are!
Whilst significant market uncertainty remains, we do expect a recovery in total revenue in FY22, driven by:
* Improving store trading from gradually improving footfall throughout the year, although not reaching historic levels;
* Strong 2-year Ecommerce growth compared to FY20, but supressed year-on-year as we anniversary tough promotion-driven comparatives and some trade switches back into physical stores; and
* A modest, but sustainable revenue recovery in Wholesale
We expect margin to increase across all channels as we transition towards a full price stance, supported by further mix benefits from the switch back into stores.
We expect to generate operating leverage from reduced store rents and payroll compared to pre-Covid levels, although we anticipate a £35-45m year-on-year increase in costs due to one-off benefits recognised in FY21, such as the return of UK business rates, the end of furlough support, and the normalisation of other variable and discretionary costs.
Considering the above, we don't expect a change to the adjusted PBT market expectations for FY22...
Recognising the structural growth opportunity in Ecommerce, as well as the geographic and customer segmental targeting opportunities in our Wholesale business, we expect revenue to exceed peak historic levels in the medium term. Disciplined full price trading, continuing rent renegotiations, and the operating leverage from cost savings will also return the business to historic operating profit margins.
That’s a very bold statement at the end there. If it can return to historic profit margins, then the share would be a multibagger from here. I remain sceptical about the likelihood of that happening, and there’s no evidence in these numbers that it’s even begun to happen.
Balance sheet - quite complicated. Liquidity & working capital look OK, so no concerns there. It can probably keep going without having to dilute shareholders.
However, the lease liabilities really jump out at me. Right of use assets are £91.1m, but lease liabilities total £270m! That’s telling us that the company has got a big problem with onerous leases, and loss-making retail units, despite a considerable reduction in liabilities compared with last year.
My opinion - I have no idea why the share price has shot up 14% today, because the company is still loss-making, is facing huge cost headwinds, and there’s no change to market expectations.
Stockopedia is showing broker consensus of £7.5m profit after tax this year, FY 04/2022. I reckon that could be too optimistic. After that, who knows what might happen?
The commentary is the usual super-bullish stuff I expect from Mr Dunkerton, who believes he’s carrying out a “brand reset”, even though the figures don’t show any evidence of progress.
Personally I like turnarounds, but don’t invest in them until there’s clear evidence of a return to meaningful levels of profit. That’s not been demonstrated yet at Superdry, hence I remain sceptical.
.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
60 comments
Very good write up on Superdry. Thanks for taking the time on holiday
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.
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+
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
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.
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.
Made.com (LON:MADE) (no position)
I'm a little late on this one, but here are some of my own views following this week's update:
The Short Version: Lots of Short Term risk, but the Long Term looks interesting.
The Long Version:
Slow growth in 1st time orders
This is worrying as Q2 in 2020 was actually a weak quarter.
So either Marketing in Q2 was:
a) less effective,
b) more expensive,
c) both,
or simply nobody wanted to buy any furniture after the easing of restrictions.
Although if this last point is true, then why increase marketing spend in the quarter?
Gross Margins
I am assuming the depressed level seen in Q2 (driven by higher freight costs) continues for the rest of the year.
Elevated Returns/Cancelled Orders
I should caveat the below points with the fact that I'm not sure if my calculations are actually correct and I'm happy to be corrected if I have misunderstood anything!
There are 2 important figures that stand out:
This seems like madness vs the 30% experienced over the last 18 months.
There are only 2 ways I can rationalise this.
a) the company will completely miss Gross Sales/Revenue forecasts; or
b) the company will increase their use of air freight to get goods to Europe quicker, which will lower the already depressed gross margins.
Quick thought on Gross Sales
I should also add a worrying thought that Gross Sales might include the same item sold twice, as it's a metric that doesn't factor in returns or cancelled orders (as per the company's own definition).
From the IPO doc 60% of returned items are put back on sale so, in theory (I think!), an item can be bought, cancelled and then re-bought.
It would be worrying if Gross Sales are artificially elevated here.
Long Term Thoughts
I've highlighted my short term worries, which I personally think will depress the share price this year.
Nonetheless I remain quite bullish about the long term.
Rmillaree published their thoughts yesterday and for the most part I agreed with them.
Here are my own very rough workings for reference looking 4 years out and assuming that most trends return to normal and some economies of scale are realised.
Capex for the business is quite low and given the growth I would apply a high multiple.
The current EV is c £550m.
I don't have a position yet - I think the short term risks are too high - but it's quite high on my watchlist for now.
Cheers
A
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
v
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.
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.
timarr
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!
Made.com (LON:MADE)
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
A
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.
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!
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.
Cheers
A
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….
Made.com (LON:MADE)
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:
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.
Cheers
A
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.
TechMarketView today says the Oxford Nanopore has now registered its intention to float with the LSE. Schroder Uk Public Private Trust (LON:SUPP) owns 3.7% of Oxford Nanopore.
EDIT:
Dow Jones News says:
Oxford Nanopore Technologies Ltd. said Thursday that it intends to raise around 300 million pounds ($415.3 million) at its initial public offering in London, half of which will be provided by Texas-based software provider Oracle Corp.
The DNA-sequencing specialist, which had announced its intention to list in London last week, said it has signed a cornerstone investment agreement with a vehicle controlled by Oracle for the latter to subscribe for GBP150 million of new shares in Oxford Nanopore.
The IPO will also include a secondary offer of shares to be sold by certain existing shareholders, Oxford Nanopore said.
The company has recently entered into a memorandum of understanding with Oracle for them to collaboratively explore new solutions. As part of this deal, Oxford Nanopore intends to migrate its EPI2ME data analysis platform to Oracle's cloud infrastructure.
"The directors believe that the group remains only in the early stages of what is possible and believe that the offer and admission will position the group for the next stage of its development and support its ambitious growth plans," Oxford Nanopore said.
IP Group PLC has a 14.4% stake in Oxford Nanopore. Schroder Uk Public Private Trust (LON:SUPP) has a 3.7% interest, and said it will seek a partial realization of its shareholding.
So many results and hence a massive workload for Paul and Jack. Even on holiday in Malta Paul spent a vast amount of his time checking out results and statements and then writing in considerable detail on them.
Paul posted late yesterday how he was disappointed at only 107 recommendations from 6700 readers of yesterday’s Small Cap Report. . That’s fewer than 2% of us. A lot just don’t bother and some might not even know how to. BUT I don’t recommend early in the day before Jack and Paul have hardly started and then simply forget to do it later. That could also be a reason for the very small number ticking their updates.
It’s none of my business but I worry that Paul who has had this excessive workload for years now could burn himself out. If that is a risk is an answer, especially so at times like now when there are so many Companies updating, for Paul and Jack to focus on Companies issuing better or worse than expected updates, and to reduce considerably the content on the rest? Sometimes there are no replies on those Companies and it seems a lot of work for not enough return.
The many appreciative comments here show how highly regarded Paul and Jack are, but since Paul really appreciates that being shown too by people recommending his efforts, perhaps we could all make a point of ticking up their superb commentary.
Ken,
I for one massively appreciate Paul, Jack and occasionally Roland's work and without their contribution possibly would reconsider my subsciption however if each time a subscriber opens the Small Cap Value Report counts as a "read" , which i bet it would, then yesterday for example i spent all day dipping in and out of it so I may have clocked up as many as 50 "reads" , if other subscribers do the same then the percentage of "likers" would be much higher.
I do however agree with your sentiment,
Thank you for yesterday Paul and Jack .
Have a safe flight Paul.
Richard
Dare I say a more tangible vote of thanks to Paul and colleagues for their excellent SCVR output might be to follow Paul’s recent update on the Zane charity for its work in Zimbabwe and maybe consider making a donation via the link at the bottom of the write up ……
https://www.stockopedia.com/co...
Gus.
It cannot be expected, Ken, that all readers will have an interest in the companies whose reports Paul and Jack analyse, so there will be not so many ticks. I worry too about the vulnerability to burn-out, having experienced myself in the past. If I remember rightly, when I first engaged with Stocko Paul's write-ups were much less expansive as they are today. The present form is a great learning tool for us readers but I wonder if one can go too far down the well. I do admit to rarely giving thumbs up as I am intent on catching up with all the other RNS's put out daily.
Silver
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.
from Superdry (LON:SDRY)
Paul says '
Those increased costs are going to be a massive headwind. At say a 53% gross margin, the company will need to increase sales by c.£75m to generate enough additional gross profit just to cover the increased costs (based on the mid range figure of £40m). That’s a 13.5% increase in revenues needed next year, just to stand still, due to those increased costs.
The table below shows that for the first 18 weeks, sales are only up 1.9% - nowhere near enough.
'
I find this type of insight so extremely valuable, it really helps me to think and learn how to analyse statements. Great,
Although not a small company, Games workshop share price has taken a big hit. I guess many of hold it
Ref Games Workshop (LON:GAW) . Rarely a day passes now without updates referencing supply chain / logistics / input cost headwinds. I think profit warnings are inevitable for exposed companies (can't think of many that would not be exposed). I've trimmed positions where companies have obvious exposure ( Up Global Sourcing Holdings (LON:UPGS) for example) and I reduced my Games Workshop (LON:GAW) exposure further this morning.
I'm surprised that Wynnstay (LON:WYN) shares have declined as much as they have these last couple of weeks on no news. I'd be interested to know if other holders have any insight into this? Maybe just fears of increased energy costs and all the other headwinds too - lack of HGV drivers perhaps?
Wynnstay (LON:WYN) I'm not a holder but it's been on my watchlist for a while. Reading elsewhere it could be because of HGV driver shortage and also gas price rise which will affect their costs, it's not a fear it has already happened but could get worse. Not sure if the shortage of agricultural workers will be an issue or not.
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.
Cheers
Tommy
Many hydrogen shares have been hammered recently, presumably because investors are realizing that profitability is some time off! However, this is in direct contrast to many pharma companies with similar profit projection profiles. Nevertheless, there are continuing company developments and announcements which demonstrate the widespread applications of the hydrogen technology. AFCEnergy and Powerhouse Energy (LON:PHE) are two in the UK. Unlike Itm Power (LON:ITM) which is based on larger scale applications, both offer small individual unit x large number of units, and at the same time are very community beneficial. AFCEnergy have already announced a series of links with large worldwide companies – see below – but today have come out with another what I call ‘small units x large numbers’ which seem to me to be eminently practical.
Sorry – I have to put AFCEnergy on this site because if I do thee right thing, it shows some Arsenal Fc Ordinary Offex share!!
AFCEnergy have announced the signing of a Hydrogen Fuel Cell Supply and Collaboration Agreement with a new partner, Urban-Air Port Limited. Urban-Air Port is a leading UK designer, developer and operator of innovative ground infrastructure for the growing demand in autonomous airborne drones and electric take-off and landing ("eVTOL") passenger vehicles. In partnership with Hyundai Motor Group announced today, Urban-Air Port plans to develop 65 electric urban air ports worldwide, adopting sustainable energy solutions. The first Urban-Air Port's world first deployment, "Air-One", in Coventry in early 2022. This is the first of more than 200 discreet sites identified for prospective development by Urban-Air Port in the next five years.
Urban-Air Port's philosophy is to design integrated sustainable transport hubs with a decarbonised ethos at their centre that, in addition to airborne vehicles, will accommodate electric vehicles (EVs), buses and scooters. Their unique modular and compact hub design facilitates airport deployment in urban centres, whilst also being ideal for disaster emergency relief.
I look forward to seeing the results early next year in Coventry.
More generally however, the key points for me are AFCEnergy is working with some big players, like ABB and Mace; the individual units are small, manageable and affordable; the numbers are huge, especially in construction; and the developments can come to fruition in applications in numbers on the ground in construction etc as early as 2022.
In April 21, building on that collaboration, they signed a new agreement with ABB involving ABB investment and development agreement to test, design and integrate AFC Energy’s alkaline fuel cell technology into ABB’s data center system portfolio.
Back in 2020, Arsenal Fc Ord (OFEX:AFC) and ABB had already announced the launch of a strategic partnership to create the next generation of high power sustainable electric vehicle (EV) charging solutions for grid constrained locations.
The goal of the revised partnership is to work towards a zero emission, sustainable turn-key power solution for the growing number of current and prospective data centers currently servicing the world’s data storage and processing requirements.
On another very big application, in March 21, AFCEnergy signed up with Mace the first partnership in using hydrogen power to decarbonise construction sites. Globally, the construction sector accounts for a staggering 38% of energy related emissions, and in London 14.5% of the most harmful emissions such as PM2.5 are from stationary diesel generators on construction sites.
Mace and AFCEnergy are working together in deploying zero emission hydrogen generators to deliver a transition away from the use of highly polluting diesel generators on construction sites both in the UK and internationally. The partners aim to commission the first AFC Energy H-PowerTM systems on site in early 2022.
The partnership is a part of Mace’s commitment to achieve a 10% year on year reduction in carbon emissions from its operations and to remove diesel generators from its sites by 2026.
In addition to introducing AFCEnergy fuel cell systems across Mace’s construction sites, the two companies will work with plant hire companies and Government to promote the benefits of utilising hydrogen-based fuels to help the industry sustainably move away from diesel in construction.
More detailed information on the AFCEnergy website.
You might also be interested in the recent partnership between the German SFC Energy and NEL.
SFC Energy and Nel ASA enter into a joint development partnership for world’s first integrated electrolyzer and hydrogen fuel cell system for industrial markets - key product to replace diesel generators
(I have edited this because I had the number of shares issued wrong. Stockopedia is wrong. There are now 344m shares. I could really do with some help on this)
Looking at the acquisition by Eenergy (LON:EAAS) they have paid £15.8m to acquire Utility Team. They have paid 7.3 X adjusted EBITDA.
eEnergy had an adjusted EBITDA of £700k and the above implies additional adjusted EBITDA of £2.2m. This could be as high as £3m reading the structure of the deal. So currently the groups adjusted EBITDA will be £2.9m - £3.7m
There has been a placing and now there are 344m shares in issue so some serious dilution.
Good Energy trades at 9.71 X EBITDA.
There are some slides on Eenergy (LON:EAAS) and the acquisition available here https://eenergyplc.com/2021/09...
The acquisition means that Eenergy (LON:EAAS) is now in the top 5 TPI's (Third Party Intermediaries) in the UK energy market.
I would welcome thoughts from Jack, Paul and the wider community.
Thanks for your notes on Ekf Diagnostics Holdings (LON:EKF) Jack. It sounds very positive and feels like although it has profited from Covid that there is a little more juice left in the tank.
If you get the opportunity, could you take a look at another Harwood Capital holding which is Circassia (LON:CIR) The management team here of Ian Johnson and Michael Roller were at Bioquell prior to its acquisition in Jan 2019 by Ecolab, and did a great job for shareholders. The company is now refocused as a pure asthma play with its NIOX product where it is the dominant player outside China, has rid itself of legacy business and settled a dispute with Beyond Air. Its turnaround has been delayed by Covid but as things open again its looking ahead to the future with confidence and notes that the full year EBITDA is likely to be materially ahead of current market operations.
Checkit (LON:CKT) also put out a positive sounding statement today. The CEO's statement is worth a read imo and talks about the large addressable markets. The Chairman Keith Daley has a substantial holding.
I hold both the above.
Jack,
Many thanks for this report on Ekf Diagnostics Holdings (LON:EKF) .
I am a long term holder: the company has a record of under-promising and over-delivering, and a great share price performance. In addition, it regularly spins out Mount Sinai Health System (a large US research based organisation) subsidiaries on AIM by way of dividends in specie - eg Renalytix (LON:RENX) and £VRCI
Recommended.
Ricardo
EKF is a company I hold and like very much. Each time - as yesterday - I see a company presentation I am reassured that they are being led by some extremely able and numerate managers in a very specialised field, albeit an extremely diversified one also. I know pharma and medical equipment is difficult for the average joe investor but I also think that it is much too important to dismiss. There is also a clear 'covid effect' whih has boosted the valuation dramatically in the past eighteen months. But one is always looking for one of those very few companies that might really propel a portfolio well above the mean. There is an outside chance that this may be one of them.
Importantly for me, EKF has made big advances in the US market. This is a key plus point for a UK company. The deal to manufacture on contract for a huge US logistics company is extremely positive, as is the information that EKF is co-operating with two West Coast majors on CRISPR and molecular. The fact that Harwood will almost certainly have to sell more of its very large holding is not a concern. They have 132mn shares currently but if EKF produces 'the goods' other institutions will be only too glad to take further blocks in my opinion. The company is well financed and it has this very interesting tie with Mount Sinai that has already benefitted investors and should again do so in future. I am very positive but I must also be very patient.
Decent results from Duke Royalty (LON:DUKE) (I hold).
Neil Johnson, CEO of Duke Royalty, said:
"These results show Duke is in good health, delivering record revenues ahead of those pre-pandemic and returning to a strong cash dividend. Our positive financial performance is testament to both the resilience of our underlying royalty partners and the swift actions taken by Duke's investment team which lessened the pandemic's effects on the Company. We are proud to have successfully navigated these economic headwinds and I thank the team and our royalty partners for their considerable efforts.
"Looking ahead, the royalty finance market remains an attractive area of investment in the United Kingdom, Europe and North America. In the UK, the effects of the Government's Coronavirus Business Interruption Loan Scheme (CIBL) on SMEs will be felt and better understood in the years ahead. But what has become clear to us is that the market opportunity is larger now that it was before the pandemic.
"Duke is well placed to take an important share of this market, demonstrated by the rapid delivery of three additional royalty partners in the first five months of our current financial year up to 31 March 2022. We have a significant pipeline of deployment opportunities, consisting of both existing and potential new royalty partners, and are well positioned to continue our growth in the months ahead."
Trading update today from Electra Private Equity (LON:ELTA) (I hold) main subsidiary, casual dining chain "Friday'" (TGI). Performing well since re-opening. Transparent reporting, with benefit from reduced VAT explained clearly.
Most impressive point is £10m cash generation, reduction in debt.
This should be a very attractive share, once it lists separately. ELTA shareholders will receive free shares in Friday's shortly, and the price of ELTA will simultaneously drop to reflect the spin out of Fridays. I'm quite excited about this, it will be fascinating to see the price discovery happen once ELTA becomes 2 listed companies.
ELTA looks great value to me, on a sum of the parts basis, but that's for the market to decide in due course.
Regards, Paul.
Thanks Paul for the comments on Electra Private Equity (LON:ELTA) but you should be chilling out today after after you mammoth session yesterday.
Good trading update from Electra Private Equity (LON:ELTA) (I hold) I agree but note that the update also reveals the demerger of TGI's into its own listing is now Q4 and not Q3 as planned. I'm sure that couldn't have been helped for various reasons although I'm a bit nervous that any listing going further into the year might get delayed or not reach as good a price if we start to see COVID hospitalisations climbing as people socialise more indoors during the colder months - we know it spreads more easily indoors. To people planning to hold TGI's long-term the delay might not matter but I am in the short-term hold camp for the TGI element. Hotter Shoes interests me more as a long-term hold for the sales growth.
Re reduced VAT, am I right in assuming that restaurants are paying reduced VAT right now? Is this explicitly time limited? I am guilty of missing that.
Hi Patrick,
I am fairly sure that VAT for hospitality etc. was reduced to 5% up until 30/9/21 and then 12.5% until 31/3/22.
Richard
I am fairly sure that VAT for hospitality etc. was reduced to 5% up until 30/9/21 and then 12.5% until 31/3/22.
Yes this is correct - potentially at present there is quite a bit of unmentioned (to a certain degree) tailwinds being experienced by hospality in that regard - no doubt we will be slapped in the face with the headwinds as soon as the vat rate flips upover.
My back of the envelope calcs say that if they charge the same £10 cash price for room or food that will be 12.5% "net" sales drop comparing the 5% rate to the 20% rate (why is maths never simple!!) - i am presuming that prices must go up to partly compensate even if they didn't go down in the first place !! - possibly with whetherspoons specifically advertising they will do the opposite as is normally the case albeit they may have upped their prices now in anticipation.
I am sure that the Government did not expect business to pass on the VAT saving to customers but to use it to offset the loss of profit whilst they were closed. or disrupted. So it should have been a one-off margin boost. However I imagine that some of that will have been eroded by increased labour and raw material costs and when VAT goes back to normal, prices WILL have to rise to reflect this.
Did someone mention inflation ??
Richard
Thanks for the note Paul.
Do you, or anyone else, know how the calculation for 'VAT Adjusted' LFL growth works?
I am guess that it is something like:
In 2019 sales including VAT (so what the customer pays) were £100, and with 20% VAT taken off £83.
Since July, LFL sales (non-adj) are up 2.6%, so customer pays £102.60 but with only 5% VAT TGIF receives revenue of £98. Doesn't work out exactly at 15.2% LFL but gets pretty close - maybe some items come in for different rates of VAT.
Once VAT increases to 12.5% that then works out at c.9% non-adj LFL growth to 31st March 2022 (assuming everything else stays the same).
So based on that TGIF have kept the VAT as additional revenue/margin as opposed to passing on savings to customers to encourage more visits - but maybe they are close to capacity anyway so that would make sense.
Once VAT normalises next year, this could then lead to poor comparable growth unless they put prices up signficantly. I'm sure they'll keep expressing it as VAT adj, but that doesn't always get the headlines.
Still think it's a good opportunity though.
hjg123
"Do you, or anyone else, know how the calculation for 'VAT Adjusted' LFL growth works?"
In 2019 sales including VAT (so what the customer pays) were £100, and with 20% VAT taken off £83.Since July, LFL sales (non-adj) are up 2.6%, so customer pays £102.60 but with only 5% VAT TGIF receives revenue of £98. Doesn't work out exactly at 15.2% LFL but gets pretty close - maybe some items come in for different rates of VAT.
Strewth must admit this is one of those tricky puzzles that probably don't work as you would expect - alcohol sales are still at 20% so its likley as you have speculated that totals includes unknown 20% element - this bing tyhe case i think its probably easiest to simply take adjustemnts at face value without tyhnking about the detail if you dont want a headache !
I have run my own calcs here though for fun and they back up your calcs exactly.
Ok if we say in 2019 they had net sale of £83.33 (£100 cash) - i would say this would be benchmark comparitor figure.
IF lfl sales are up 2.6% i would expect the net sales are now 83.33*1.026 = 85.50 (102.60 cash received as you confirmed )
With 5% vat we need to use the 100/105 vat fraction (beats 20/23!) to get back to the net sales total so i make that 97.71 - so i agree 100% with your calcs here
Paul Scott posted a reply late yesterday about the Electra Private Equity (LON:ELTA) Capital Markets event. As some might not have seen it I’ve posted that post here too.
The following was written by Paul!
“I did actually listen to the Electra Private Equity (LON:ELTA) Capital Markets Day for Hotter shoes, which will become Unbound, as a separately listed company, once TGIs is spun out shortly.
I thought it was OK. Nothing special. Unbound looks set to make £5-7m EBITDA pa, and mgt have sensible plans to expand in low risk ways into the over 55 demographic.
I think Unbound could be worth £50m+ as a separately listed company.
Mgt - generally seem OK. There was a bit too much MBA management speak for my liking. I prefer hands-on entrepreneurs. Also, the Q&A was not handled well. They clammed up & refused to answer many questions, saying it was too commercially sensitive. I think that displayed inexperience as listed company Directors. There is always a way to talk around a question, and give a sensible answer, rather than clamming up & upsetting the audience. But it's a tiny company, so I don't expect miracles from mgt, they're learning on the job, when it comes to managing a listed company, which is fine.? We'll see
TGIs is the star. Anything we get from Hotter (Unbound) is a bonus. I like the strategy, and intend running with it for maybe 2 years or so? This could become a mini SAGA, and I love the focus on over 55s, so let's see what happens. Timings don’t matter.”
Hi Paul, thanks for all your analysis and hope you have a better flight back from France than I did last week when it took me so long to fill in the track and trace form that I missed my flight. Re Electra Private Equity (LON:ELTA) it would not surprise me if there was a steady stream of selling by institutions and individuals who do not want or are not allowed to hold shares on AIM in the short term.
Semafone is alleging that “Agent Assist” by £PCI infringes it US and UK patents. Semafone’s press release in link below
https://semafone.com/gb/press-...
Interestingly, Eckoh and Semaphone settled their dispute over this same patent in 2015. "In consideration of the licence, Eckoh will pay Semafone royalties in respect of the patents."
Also Keystone Law (KEYS) guides FY materially ahead of current market expectations.
Jack, good morning to you. Paul, safe travels.
I would really welcome your thoughts on yesterday's acquisition by Eenergy (LON:EAAS)
Many thanks
Hi CamRaid,
I’ve taken a quick look but Eenergy (LON:EAAS) is a new one to me.
It’s a £12m placing at 15p a share (14.3% discount to closing price on 14 September) to acquire UtilityTeam; total consideration of £21m. The initial consideration values the company at 7.1x adjusted EBITDA, which implies £2.233m of adjusted EBITDA, but the transaction multiple presumably increases to 9.4x after accounting for the total £21m consideration.
My concern would be overpaying here and I don’t think there’s enough information about UtilityTeam for me to comment on that. It depends on the experience and character of the eEnergy management team and their valuation discipline. The group does say it expects it to be ‘significantly earnings enhancing immediately’, so that’s a good sign.
‘Buy and Build’ strategy is not a silver bullet though. Plenty get it wrong and large acquisitions tend to be the riskiest use of capital. Brokers might also encourage M&A for the wrong reasons if they are incentivised by related fees. In the past, I’ve spent more time on companies with longer track records like Sdi (LON:SDI) and Judges Scientific (LON:JDG) . Perhaps you have a more informed view of the management team here?
The basic positioning of energy conservation is obviously a big theme going forwards. It looks interesting but I’ll be waiting to hear more about how the integration is going, as I don’t know this company or the track record.
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.
There is a webinar today at 12pm with Capita (LON:CPI) Capita Head of IR Stuart Morgan.
Capita is undergoing a transformation under the leadership of Jonathan Lewis who was brought in as CEO in December 2017.
HY results released on 12 August showed organic revenue growth for the first time in 6 years. The orderbook has grown to £6.7bn and there is a growing pipeline of attractive opportunities. The average bid margin on new contracts won is now in double digits and they have lifted the margin on renewal by 6 percentage points. Debt which was £1.4bn in 2018 is down to £894m and is expected to fall further when the earmarked disposals are completed. This could raise an additional £200m.
Register here:
Ig Group (LON:IGG) posting a solid update today which is reassuring after Cmc Markets (LON:CMCX) ‘s weaker outlook a couple of weeks ago.
Ig Group (LON:IGG) posting a solid update today which is reassuring after Cmc Markets (LON:CMCX) ‘s weaker outlook a couple of weeks ago.
Neither are very small cap ... but it does show the diversity of IG's business compared to CMC and the benefit of the tastytrade acquistion coming through. Underlying this, however, IGG are also showing a drop in the spreadbetting business and equivalently weaker outlook:
Excluding tastytrade, adjusted net trading revenue for the quarter was £200.9 million, 4% lower than Q1 FY21, reflecting anticipated moderation in trading activity.
Separately CMC have announced the purchase of ANZ's share investing base, using their windfall profits from the last couple of years to diversify their business too.
Both excellent businesses looking to reduce their exposure to cyclical factors but unlikely to shine until volatility trips upwards again.
timarr
The key difference with IG is that it was anticipated, as opposed to CMC's outlook being below what was anticipated by them. i.e. They both had similar views on the market, but CMC's business underperformed.
The longer term revenue mix has IGG much less dependent on OTC derivative revenue and much more diversified globally than it's competitors, as well as having a higher percentage of professional clients. IGG 's acquisition also has provides the opportunity for organic growth in the US listed derivative space, and educational media space which is an growing TAM that it's competitors do not have.
All the best,
S.
The key difference with IG is that it was anticipated, as opposed to CMC's outlook being below what was anticipated by them. i.e. They both had similar views on the market, but CMC's business underperformed.
The key to investing in these businesses is to recognise that Ig Group (LON:IGG) has more stable earnings than Cmc Markets (LON:CMCX) due to its hedging policy. Therefore - by definition - anyone investing should expect more volatilty, including profit warnings, from the latter than the former. On the other hand CMC is also more likely to surprise on the upside.
Swings and roundabouts, but no one should invest in CMC expecting a smooth ride. IGG is the better quality business but is four times the size, so is likely to exhibit slower growth, all things being equal (which they're not, obviously).
Of course, all of this requires a longer term perspective. For anyone interested in short-run profits there are better places for their money than either of the spreadbetters. But I've been in IGG for nearly a decade (it's roughly doubled) and CMC for about 3 years (it's tripled, even after the significant falls). You pays your money and you takes your choice.
timarr
Cmc Markets (LON:CMCX)
timar
Separately CMC have announced the purchase of ANZ's share investing base, using their windfall profits from the last couple of years to diversify their business too.
Thanks for that - seems like for $25 million they are getting a very decent customer bank here - albeit perhaps if they are losing the very chunky revenue stream (£39 mill last year) that they were getting (probably for minimnal hassle??) on a lfl basis perhaps CMC were the ones making the money from the previous argreement that was in place ?
The Transaction involves the transition of over 500,000 ANZ Share investing clients, with total assets in excess of AUD$45 billion. The AUD$25m consideration will be funded from the Group's existing cash resources.
. The existing white label partnership generated £39.5 million in net trading revenue for CMC in FY 2021. The CMC platform will offer clients a wide range of additional benefits currently unavailable with ANZ.
either way at present with all the covid related tailwinds gone with regard to shareprice boost at least this is an al cash deal.
I have always thought of IG as being a more quality outfit than cmc (with cmc being more quality than the "spivy like" plus500 (sorryplus fans))- but with p/e of 10 this year and 9 next with expectations "suitably lowered" (in dramatic fashion) - CMC like IG index do sort of look a nice contrarian play at present. As timarr has rightly pointed out though if we are currently in a period of low volatility (or more normal volatility?) is now the wrong time to be taking the plunge - all i know is i don't know in that regard.
Finally what is interesting is that in last 2 years IG price has increased 36% CMC 82% and Plus500 161% - so in recent past backing the "spivy type"buisness here has been the winning tactic in this sector!
Ig Group (LON:IGG)
I would agree update here is reassuring - note generally ig are pretty much in the ultra cautious camp - so in some respects it’s a good job that they have bit their targets as they are of the glass 3/4 empty variety to start with. This is evidenced by the fact current year forecasts are expecting 18% drop in profits and 30% drop in eps - possibly a sigh of relief here from shareholders after the cmc debacle.
I don’t hold here at present but pe of under 12 seems decent value here and pe drops to under 10.5 on next years expected numbers. This does seem great value albeit as ever the visibility is never good here ? - ig have done very well the last 3 years will they continue to function equally well going forward ? Who knows but looks like they just need to keep ticking over here for shareprice to be supported by current expectations.
From what they have said ref tasty I can’t really make much sense of how the new us unit is doing - I am more positive on prospects for this new acquisition than most. I am guessing unit may be in line with expectations but it would have been nice for specific like for like comparisons red last year here.
I would be happy to buy in here at current prices today if I had cash and there wasn’t other options that are perhaps slightly more tempting. With ig unfortunately due to lack of visibility I like to get a bargain when I buy but I would be surprised if price goes much lower than it is without bad news so I may miss the boat again here.
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 .