Small Cap Value Report (Thurs 3 Feb 2022) - SCS, ACT, BMS, HYVE

Good morning! It's Jack here. After a manic January, Paul is having a well deserved rest this morning so I'm putting up the placeholder. It looks like news flow might be quietening down a bit, ahead of full year reports in March.

The first port of call will likely be Scs (LON:SCS) - if anything else catches your eye then just leave a comment explaining why it might be worth a closer look.

Scs (LON:SCS) - I hold - a relatively solid update given the recent share price slide, although it’s light on detail and slightly frustrating in that regard. The order book has grown from £132m in November to £148m as of the end of January, but this is driven by ongoing demand and extended lead times. The key challenge over the next year is converting that order book into sales. There’s the net cash position to consider, as well as a nearly 6% forecast dividend yield, so the valuation remains attractive - although to be fair, the stock has always looked cheap so some kind of catalyst is needed.

Actual Experience (LON:ACT) - tiny micro cap, following dramatic slide in share price over multiple years. More of interest as a cautionary tale on low StockRank ‘jam tomorrow’ companies. Actual still needs to confirm that people are interested in the services it is now focusing on, and the longer than expected sales cycle casts some doubt.

Braemar Shipping Services (LON:BMS) - full year revenue to be not less than £101m, significantly up on FY21’s £84m. Conditions are buoyant right now due to global supply chain disruption, but there is a longer term growth strategy in place. £CKS has nearly 10x the market cap on three times as much annual revenue, so if Braemar can execute then there’s potential for both earnings growth and a rerating.

Hyve (LON:HYVE) - most events have run to schedule over the past four months, but there is still scope for further disruption. The balance sheet still looks precarious and a lot of money has been spent on acquisitions over the years, with not a lot to show for it right now. Trade could come roaring back at some point but I’m happy to sit on the sidelines here.

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Explanatory notes -

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

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

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Scs (LON:SCS)

Share price: 222.07p (+0.48%)

Shares in issue: 38,012,655

Market cap: £84.4m

(I hold)

Interim trading update for the 26wks to 29 January 2022

ScS traded well through the important winter sale period and order intake for the first half of the year was in line with the board's expectations. One year like-for-like order intake increased by 16.6% (against weak lockdown comps) and two year like-for-like order intake is in line with the pre-pandemic period to 25 January 2020.

The group is not including the actual sales figure here but the 2020 interims show gross sales of £160.1m. Gross profit then was £71.7m but perhaps in the current cost environment this will be less.

The group reports online order growth of 55.8% compared to the equivalent 26 week period to 25 January 2020.

Meanwhile, the order book ‘has grown significantly against previous comparative periods’, from £132m on 29 November 21 to £148m on 29 Jan 22, driven by the ongoing demand and supply chain challenges which have extended product lead times.

As at 29 January 2022, the order book is double the size it was at 25 January 2020, at £148m. ScS is working with suppliers to mitigate the risk of continued supply chain disruption in H2 and remains on track to meet full year expectations.

Interim results to be announced on Tuesday, 22 March 2022.

Conclusion

The detail in this update is lacking, but it’s in keeping with updates in previous years. We’ll just have to wait for the interims on the 22nd of March for a clearer picture.

What is there is reassuring, given how the market has been pricing the shares recently. Despite already being ‘cheap’ across several valuation metrics, a recent update detailing a sharp slowdown in order intake has caused a bit of a slide.

This latest update at least puts a more positive light on current trading, showing a strong rebound in sales through the important winter period.

I think it goes some way to dispelling the fears raised last November, although, while the growing order book is positive, ongoing extended product lead times shows that management has its hands full. Delivering on this order book amid ongoing supply disruption is probably the group’s biggest challenge.

Shore Capital has FY22E earnings per share pencilled in at 26.5p, which would value the stock at 8.3x earnings, and significantly less if you account for the group’s substantial net cash balance. That earnings figure includes £2.6m of business rates relief though. FY23E earnings per share are forecast to be 18.5p, so an FY23 PER of 12.1x.

There is a c6% forecast dividend payment, and the EV/EBITDA multiple is also notably low. ScS remains a strong bid candidate, although obviously there’s no certainty that a bidder will come forward.

Online order growth is encouraging, but what’s the absolute amount? There’s no mention at all of the group’s net cash position either, which is one of the shares’ key differentiators. I’d like to see more of a defined vision in terms of how this cash will benefit shareholders.

Ultimately, I’m not sure this update is enough to push the shares definitively higher, as the growing order book looks to be a function of extended lead times as much as customer demand. Detail is also lacking, but I would argue that it’s probably better than what the market might have been anticipating recently.

Perhaps, when coupled with the strong balance sheet, it might draw a line under the recent slide. Let’s see what the interim results reveal on the 22nd of March.

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Actual Experience (LON:ACT)

Share price: 12p (-21.3%)

Shares in issue: 57,296,533

Market cap: £6.9m

The first thing you see when you head over to the Actual Experience StockReport is a rather alarming one-year share price chart.

It’s a serial loss-making micro cap, currently generating negligible revenue.

The poor StockRanks were a good warning sign in this instance. Speculative, low StockRank stocks can go on to become big winners, but I think the share price chart above is typically the more likely outcome.

On a multi-year view, the picture is even worse. Shares listed at above 200p, now down to 17p with some equity dilution thrown in for good measure. I’ll likely rattle through this update on account of the company’s small size and poor track record.

Preliminary results for the year to 30 September 2021

Highlights:

• Revenue down from £1.96m to £1.74m,
• Gross profit down from £1.02m to £0.83m,
• Loss for the year increased from £4.68m to £5.85m,
• Net cash up from £2.75m to £8.22m following January 2021 placing.

Operational highlights: one order received, direct sales capability launched, and a new service introduced.

We have been working with global blue-chip organisations to provide a Hybrid Workplace Management System that prepares the digital workplace for new ways of working. It brings a fundamental new source of actionable data and intelligent visibility that helps our customers achieve their people goals, whilst benefiting the planet and enhancing their profitability ('people, planet and profit' as we have termed it).

This sounds very early stage to me. If you forget the change in strategy and just take the company as it is today, I don’t think it should be listed at this point in development.

Dave Page, CEO, comments:

Our strategic pivot to focus on the people, planet and profit issues of hybrid working is strongly aligned with ongoing changes to global working practices. While this is gaining traction with clients, our sales cycle has been longer than expected, and efforts to reduce this have been hampered by the pandemic and the resultant elongation of procurement processes and decision making across many industries. We are making every effort to speed up this process.

Conclusion

Micro cap, calamitous fall in share price, growing losses, equity dilution, a ‘strategic pivot’ that has led to a longer than expected sales cycle… I’m not convinced. I’m going to leave it here due to the small size of the company, but counterpoints are always welcome in the comments if anyone wants to put forward the case for buying.

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Braemar Shipping Services (LON:BMS)

Share price: 271.82p (+1.05%)

Shares in issue: 32,200,279

Market cap: £87.5m

Braemar is an international provider of knowledge and skill-based services to the shipping, marine, and energy industries. It was formed in 1982 and listed in 1997.

It has proven its ability to generate revenues and profits although performance has been choppy, if you’ll pardon the pun.

Shares remain comfortably below all-time highs despite what must be quite favourable market conditions due to the global supply chain environment. Shares in issue have increased though, from 21m in 2012 to 32m today.

Trading update for the year to 28 February 2022

The strong trading seen in the first half of the financial year has continued in the second half and Braemar now expects full year revenue to be not less than £101m (2021: £84m).

This is due to ongoing favourable market conditions and ‘investments made in increasing the breadth, focus and depth of the Group's shipbroking activities’. The Dry Cargo market has been volatile but has ultimately helped increase both revenue and market share (dry cargo is goods that are dry and require no special precautions for shipping).

The Sale and Purchase desk has concluded a significantly higher number of transactions, largely due to the strong Dry Cargo market, but also due to synergies gained from closer collaboration with the Financial Division on containers.

Tanker market rates have remained low, impacted by pandemic related weakness in oil demand. However, Tanker transaction volumes have increased by more than 25% compared to the previous year, aided by strategic hires.

The group expects underlying operating profit for the year to 28 February 2022 to be c£9.8m (28 February 2021: £7.7m).

Disposal of Cory Brothers - progress is being made in offloading the non-core logistics division and this is expected to conclude in the coming weeks. This will now be an outright disposal in the form of upfront cash and deferred payments based on a three year earn out, rather than by way of a joint venture. Trading here will be reported as ‘discontinued operations’ in the accounts.

Balance sheet - the group’s balance sheet is a concern, and is an area management is looking to improve. Negative NTAV of -£12.6m and a current ratio of less than 1x as of August 2021. Total debt is falling.

Conclusion

If you go back 20 years, you can see that Braemar has lagged Clarkson by some distance.

Both are shipbrokers, but clearly one has been managed better than the other. Braemar has made some bad acquisitions in the past and has not really gone anywhere.

There has since been a management change and the group is getting out of some of the non-core divisions, becoming more focused, and reducing its level of debt.

I’ve previously focused more on temporary Covid tailwinds and their potential to fade, but the longer term strategy might deserve a heavier weighting. There is a plan here, to refocus on core activities and double revenue over four or five years. If the group can accomplish that and prove it should trade on an earnings multiple closer to Clarkson’s, then there could be an opportunity.

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Hyve (LON:HYVE)

Share price: 98.6p (-3.33%)

Shares in issue: 291,640,907

Market cap: £287.6m

Another company that has had a tough time in recent years.

Here’s what Hyve does:

Hyve Group is a next-generation global events business whose purpose is to bring together and connect entire sector ecosystems from all corners of the globe. We meet our customer needs to learn, network and trade via both market-leading in-person and online events… Our vision is to create the world's leading portfolio of content-driven, must-attend events delivering an outstanding experience and ROI for our customers.

The balance sheet is weak, with £274.7m of the group’s £421 of total assets in the form of goodwill and intangibles. There’s a fair amount of debt, too, about £110m, meaning a net tangible asset value of -£137.7m as of September 30th 2021. The current ratio is also poor at less than 1x.

There has since been an additional placing, raising £14.79m gross at a price of 107p and a £14.26m subscription of shares at 112.35p by Strategic Value Partners. This has been used to fund the initial consideration of a recent acquisition, rather than to fix the balance sheet though.

Equity has been diluted considerably, so not a great start all in all. Current shares in issue are now 290m, higher than the 264m figure shown for 2021 in the chart below.

Trading update for the four months to 3 February 2022

Resilient trading and continued strong like-for-like customer spend, forward bookings and cash collection during the first four months of FY22

The majority of the group's global events in the period ran to schedule, although events in China continue to be affected by ongoing government restrictions.

The integration of 121 Group acquired in November 2021 is progressing in line with plan. The acquisition not only continues to accelerate the Group's omnichannel strategy, but also further enhances its growth opportunities.

Mark Shashoua, CEO, says:

Uncertainty with regards to new variants and geo-political developments in Russia and Ukraine remain. Preparations for all scheduled events continue as planned, while contingency plans are well rehearsed.

We are confident in the continuing recovery of our portfolio, have a strong liquidity position and remain focused on accelerating our omnichannel strategy.

Conclusion

There’s a lack of concrete numbers here and, given the group’s tendency to operate with such a weak balance sheet, I’m not prepared to give it the benefit of the doubt. That poor balance sheet led to a severe Covid crash, resulting in new equity at a deep discount.

The group has reported unusual expenses every year since 2014 and has spent some £564.5m on acquisitions since 2012, which is nearly double the current market cap. I’m skeptical as to whether or not that has been money well spent.

I’m not familiar with the company or the quality of its events. It could well be that business returns with a vengeance as we recover from Covid, but there’s simply not enough information in this update to convince me it’s worth taking that gamble.