Small Cap Value Report (Thurs 17 Feb 2022) - BVC, CKT, UBG, IHC

17th Feb '22 by Jack Brumby

60 comments 9274 reads

Good morning, it's Jack & Roland here with Thursday's SCVR.

Agenda

Jack's section:

Checkit (LON:CKT) - group revenue down, but annual recurring revenue is up by 43%. This transition will continue to weigh on results as the non-recurring side declines, but it could result in a fundamentally more valuable enterprise. It remains loss-making though, and forecast revenue growth appears modest, so I’m neutral for now.

Unbound (LON:UBG) - a positive update for Unbound given the valuation. The recent changes (this was Electra Private Equity) appear to have caused some shareholder churn which has driven the share price down. Trading is good, moving in the right direction, but FY profit before tax is a negligible c£0.2m. If management can execute on their medium term targets, then the stock looks cheap, although I’m waiting for more detail in the prelims.

Roland's section:

Batm Advanced Communications (LON:BVC) - this Israeli medical device and tech company has upgraded its 2021 guidance for the second time in six months. The commentary seems positive to me, but I’m struggling to get a clear picture about the outlook for 2022. More research may be needed to understand whether BATM will be able to hold onto its pandemic gains.

Inspiration Healthcare (LON:IHC) - medical equipment supplier Inspiration has upgraded its guidance for the year ended 31 January. I have a positive impression of this founder-led business. Although current broker forecasts suggest a cautious outlook for the next 18 months, my view is that this stock could reward patient investors.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader…

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Viz

17th Feb '22

David - this is incredibly useful.

I wonder whether Stocko might get all of these elements together and, as PI's, we could try and use these tools to effectively evaluate a company. We could all contribute - some could analyse and some could mystery shop and share experiences...

mammyoko

BoD defence slides imply that management think it's worth £9.61 per share. Obviously, there's a strong chance that that number is just for public consumption and they would be happy to accept a (much?) lower offer. But NAS have played their hand now, this isn't the type of business that's easy to build organically, previous deals in this space have been at an EV/EBITDA of over 10x and those have been to PE who clearly are more likely to pay less than a trade buyer and there's still plenty of time for another bidder to appear. Profits, particularly in the short-haul business in the US are set to grow strongly. If the BoD's 'forecast' of EBITDA of £101.7m is out by even £10m and using a multiple of only 10x EBITDA still implies a price of £8.40. Perhaps a price of £7.50 might persuade the BoD?

unwise2

This is further evidence of the LSE valuing companies at pathetic valuations. That a trade bidder is willing to pay 605p per share for 13% of the company when it has been unable to break through the 330p area for months tells you all you need to know.

The recent correction has brought the FTSE all share and AIM all share back to Jan 2018 levels while the NASDAQ composite is double that level and the S&P 1500 is up 59% over the same time period.

grumpy5

interesting article in the FT today (rare for them to engage with UK midcaps, but I suppose it's because the predator is a Kuwaiti co ;-) ), which suggests there is not a raft of other potential suitors. I know that Cockney Rebel, for one, believes that Swissport, for example, would be interested in a stab at this.

JohnEustace

I did wonder if they were acquiring MNZS shares while they can in order to strengthen their position in the event of a different bidder emerging? That would be nice. The likes of Swissport must be at least considering their position.

gmtrader

Edison have just released broker update giving a DCF valuation of 165p.

Sorry, for Unbound (LON:UBG) iS the valuation of 165p by Edison.

Zipmanpeter

Davidjhill,

I really appreciate the time and trouble you've taken to respond with this note on the realities of DYOR research. I do all the elements you outline (I think I even asked the Q you reference!)

I will reflect on and maybe trial Research Tree. My portfolio/time spent on investing is growing and maybe I need to believe the extra cost will pay for its itself. In general I try to trade infrequently and keep my costs low but some things are a false economy. I always used to invest in market research when I was in a corporate career. It would take very few disasters averted to make it pay out.

I hear you on personal visits/mystery shopper (on consumer stocks, less possible on mining companies!) but always worry about non-representative samples. It does show you what their offer is though.

If you get research tree you can get a 25% discount with the 14day trial. Just use discount code -nakedtrader

abtan

Moneysupermarket.com (LON:MONY) (I hold)

I was wondering whether anyone here had an opinion on this one.

I previously held a small holding and have subsequently topped up twice this week, including today after the results announcement.

As you can see I like it a lot.

Even though I like the numbers as they are now:

in the short term I have hope that some of their big earners, like travel, will make a comeback and;
in the medium term there are those juicy energy switching revenues that possibly might come back (dependent on how many energy providers are left standing.)

---

In the meantime cash generation after capex in 2021 was c£70m (or £78m if excluding 2020 deferred VAT payment.)

The current market cap is c£1b.

Operating Profit for 2021 was a 'low' £73m, with competitors in the past selling at x20/x25 OP multiples (confused.com/gocompare respectively both sold at these multiples in the last 12 months)

= £1.4b-£1.8b valuation at 2021 OP levels for Moneysupermarket.com (LON:MONY) .

Based on today's guidance I am expecting Operating Profits of c£88m in 2022.

I should also add that I'm a big fan of companies naturally ranking high in web search results. These are enviable positions to be in and it's often hard to dislodge them.

So by all metrics, the valuation seems too low and I'm not sure what I'm missing. Perhaps I'm missing nothing and I just need to wait until the share price realises that it should be higher.

In the meantime there is a c.6% yield , which looks safe given the high levels of cash generation.

Any thoughts would be appreciated.

Cheers

Boon

Zytronic (LON:ZYT) announcing a firm start to their share buyback, up to 15% of shares outstanding. Impressive. Authority granted last March 2021 AGM, so looks like they waited till the last minute before the authority expires (before this year's AGM, 3 Mar 22) to deploy their cash. But it also implies that their recent trading is doing good. Further authority sought at this year's AGM to extend the buyback till the end of Mar23, so one year.

What irks me is that they did the announcement at 4:10pm. Could they not have waited till after markets closed, or tomorrow morning? The only people that benefitted from a 4:10pm announcement were MMs and day traders, and you can see from the price action today that the prices spiked to close up 10% higher. This was not information that could not have waited an extra 20 minutes to announce.

(I hold)

GrahamScott

Just a quick reminder to all readers in the South that we’re expecting to be hit by 80mph winds tomorrow morning. If you haven’t done so already secure anything in the garden that you don’t want turning into a missile.

Any thoughts on what companies will benefit from the storm? Obviously DIY stores should do a roaring trade in fence panels. Anyone know of large scale generator rental companies as I suspect there is going to be a lot of power outages in rural areas.

Its not just the targeting, but also the conversion reporting, which is then used by optimisation algorithms to find similar users (who are more likely to want to buy - affinity).

I have already seen the impact of the iOS impact on my marketing campaigns at the business I work with. But I concede that I only see the impact on just the business I work in, not others in the industry, so we might be the outlier.

Just on the Energy Comparison revenues at £MONY

My view is that FY22 will see lower revenues than FY21. The assumption I have is that up until Aug21, energy revenues were probably "normal". Then we saw a steep drop-off from Sep21 to Dec21, due to the spiralling cost of energy above the price cap.

We will see zero/minimal revenues from Jan22 to Apr22, as already guided by the company. The price cap goes up in Apr22, but not enough IMO to cover the true cost of energy. So there won't be any cheaper fixed or floating deals for customers to switch to. So my assumption is still zero revenues from Apr22 to Oct22. The price cap then goes up again then. I have no idea whether it will catch up to real market prices by then. Or if/when market prices plummet this year.

Anyways, my view is that I am expecting Energy Revenues to be lower YoY in FY22 vs FY21.

Insurance should be stable, seeing how they make positive noises of the regulatory changes in Jan22 not having a massive impact... yet.

Travel revenues should recover this year, but its been a slow start so far in Jan and Feb.

All in all, I haven't done my detailed analysis yet (going to this weekend), but my gut feel right now from a skim of the results is that FY22 results won't be materially higher than FY21 (like-for-like without Quidco, of course higher with Quidco).

How much to pay? I would argue its ex-high-growth at the moment, but probably a single digit revenue growth yearly going ahead, and I'd only be willing to pay a PE of 10-15x for this, given a big risk/dependency on Google search that is out of the company's control.

sharw

I you want a reminder about a great storm don't forget that of 15th/16th October 1987!!

Lochinver

Try following some ambulances ? Just a thought .

Moneysupermarket.com (LON:MONY)

Hi Boon

The company has already guided zero Energy revenues in 2022. I personally am assuming zero Energy revenues in 2022 and 2023.

It's worth adding that Broadband switching revenues were £25.3m in 2021.

I think this was a fairly new revenue stream for the group as in Q4 2020 revenue here was only £3.1m

On the topic of new Revenue Streams, there was one comment in the Presentation today on MoneySavingExpert starting a Car Insurance comparison services from this year. I think this will generate decent additional revenues in the future.
Fingers crossed.

I've actually assumed most revenue streams are stable in 2022, with travel understandibly making the largest recovery (but still well below pre-covid levels.)

I have also added £60m to account for a full 12 months of Quidco revenues (vs 2 months in 2021), which seems reasonable.

To be honest, even if my £88m FY22 Operating Profit is too high, I'd be completely comfortable with the £73m OP in 2021 repeating itself - the share price would still seem cheap, as I explained in my previous post.

Well I hope so anyway.

Onto your point about Moneysupermarket.com (LON:MONY) being ex-growth, I think one thing to add is that they generate enough cash each year (£100m pa pre-covid; £70m pa now) that they can simply buy their growth. As they have done with Quidco.

Also, as I mentioned with the Broadband switching revenue above, I'm a firm believer that these sorts of companies are so dominant that they will always find ways to optimise and grow.

That's an interesting point on being at risk of Google's algorithm changes. I listened to the recent Pinterest call and was surprised to hear that they had lost web traffic in November for exactly the same reason. And Pinterest is obviously a big online player.

But you're right this would always be a risk. Although presumably the company is doing everything above the board - unlike, for example, Xlmedia (LON:XLM) who were blatantly being naughty funnelling traffic between their different websites many year ago and eventually got caught out - and presumably any changes would hit all the comparison websites.

On your PE multiple, I'd probably agree with you, if it wasn't for the gocompare and comparethemarket takeovers last year, which sold for much more.

Anyway, thanks for sharing your thoughts. It's always good to hear more bearish comments - I do have a tendency to get carried away with the positives every now and then,

Henry Boot (LON:BOOT) (no position)

HI Doug

Thanks for sharing your thoughts on this, it had me intrigued that there might be a bargain here and who doesn't like one of those?

You said:

"trying to explain these points in the annual reports did tend to create a world of confusion among readers, I hope that I have not done the same, I really don't see how I can have."

I must admit to being somewhat confused!

I checked out the Hallam Land Management Limited accounts at Companies House and the value of the land bank is indeed categorised as Inventory on their balance sheet and it was valued at £115m in 2020.

For completeness, Henry Boot, the parent company, has land/non-rented property worth £160m in their 2020 Annual Report.

You mentioned that £BOOT have the same # of plots as Persimmon (LON:PSN), which is more or less correct, but that the former only take a 10-15% profit from each sale. I would therefore expect Persimmon (LON:PSN) to have a land bank on their balance sheet valued at c£2b.

Persimmon's Land Bank was valued at £1.7b in 2020 so the numbers makes sense and therefore Persimmon should be valued much more than Henry Boot (LON:BOOT) .

I'm not saying Henry Boot isn't a good business, but I don't understand why there's an assumption that is should be valued as highly as Persimmon, when the former essentially only own 10-15% of the profit of the #plots available to them.

If I've misunderstood something, I'd be really interested to understand what it is.

Doug2b

18th Feb '22

A couple of points. Boot has traditionally been viewed as a steady dependable operation that is unlikely to generate much growth. Indeed until around midway through last year that is how I tended to view Boot, then something caught my attention and I started to look deeper. The tangible surplus - tangible equity growth added to the divi - assuming the divi returns to 2019 levels shortly, which I am confident will happen, is around 8% of the current MCap per annum. Of course the tangible surplus is the wealth generated for shareholders and is by far the most important valuation metric. In terms of earnings growth and the outlook for an even higher tangible surplus going forward, whilst the calculation is not a precise one as in past years' acreages of land were often quoted rather than plots, doing the usual acreage to plot conversion, it does appear that Boot's land bank has grown by around 65% since 2014. This fact tends to slip under the radar as the plots are mostly planning promo and although a very lucrative arrangement for Boot, they will not impact the book value. We should therefore see significant earnings growth going forward from Boot.

The other point was in relation to the markets perception. You speak with a certain respect for the wider markets capacity to value a stock. Most investors, fund managers and analysts do the same. Indeed, it is always unwise to dismiss the markets view lightly, the wider market can often see risks that the individual may miss. However, sometimes circumstances conspire to lead the market to make a huge overesight. I rely upon the market doing this from time to time. The market has got it massively wrong with Boot, I am now convinced this is the case. But, as ever, the market will, in time, realise its mistake, assigning an appropriate share price for Boot which is significantly higher than the current share price.

Boot do recieve 15% to 20% of the sale value for planning promo agreements in addition to all their costs back - I have that straight from the horses mouth. For owned land holdings, the builder or land developer also has capital tied up for many years before construction is complete, which eats heavily into any price uplift. Only 12% of Boot's land holdings are actually owned - this is an up to date figure, again straight form the horses mouth, which makes the price to book remarkable even though to value Boot on price to book overlooks the majority of the businesses forward wealth creating capacity. Like I say, planning promo is a very healthy arrangement for Boot.

Small Cap Value Report (Thurs 17 Feb 2022) - BVC, CKT, UBG, IHC

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Jack Brumby

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