Small Cap Value Report (Tue 1 Aug 2017) - RGD

1st Aug '17 by Paul Scott

12 comments 9177 reads

Good afternoon, it's Paul here!

I was burning the midnight oil last night, adding 3 more sections to Graham's report yesterday. So please see this link for my additional comments on Utilitywise, Software Radio Tech, and Revolution Bars.

Let's start with a profit warning!

Real Good Food (LON:RGD)

Share price: 21.9p (down 37.6% today)
No. shares: 78.4m
Market cap: £17.2m

Two announcements today from this food manufacturing & distribution company. The first states that a NED, Peter Salter, has resigned from the Board with immediate effect.

The second announcement looks like quite a bad profit warning;

The Company announces that during the audit process of its full year accounts for the year ended 31 March 2017, two substantial anticipated claims regarding its sugar purchase arrangements have not yet materialised with the effect that it will not meet its previously forecasted profit figures.

They've also been too aggressive in capitalising costs;

In addition, the Board has concluded that certain development costs, which had previously been capitalised in FY 2017, should more appropriately have been expensed.

The Board expects the total of these adjustments and further accrued expenses will have the effect of reducing the anticipated EBITDA to approximately £2.0 million for FY 2017. This number is still subject to final audit.

Checking back to a FinnCap note from late Jun 2017, they were forecasting £5.2m EBITDA. So today's warning means that forecast EBITDA has more than halved. Not good at all.

What makes things even worse, is that the company raised £15.5m in fresh financing (a mixture of loans & new equity) just one month ago. The companies which provided that finance must be feeling well & truly stitched-up now.

They're also lowering forecasts for FY18;

As the injection of expansion capital was agreed about three months later than anticipated this has resulted in some delay in the implementation of these projects, particularly at Renshaw. This, combined with slightly softer trading conditions in Q1, has adversely affected the Board's expectations for the financial year ending 31 March 2018 with the result that EBITDA is now anticipated to be approximately £2.3 million lower than previously expected. However, the anticipated benefits of these projects remain robust and are expected to be fully realised in the financial year ending 31 March 2019.

To finish off, they also note that some related party disclosures were not…

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andrea34

1st Aug '17

Hi Paul. Would be interested in a write-up of FTC - the results to me look great, and p/e really low... but maybe investors are still spooked by comments about sales are to a small number of customers, lumpy orders, or that they are confident about long term prospects but don't say anything that solid about the near-term, etc.
                                                                             2017         2016
Sales Revenue    £35.4m    £13.6m
Adjusted operating profit/(loss)* £1.8m      (£6.8m)
Operating profit/(loss)                   £1.7m      (£7.0m)
Profit/(loss) before taxation             £2.2m      (£7.0m)
Basic earnings/(loss) per share                   1.51p        (3.20p)
Diluted earnings/(loss) per share               1.49p        (3.20p)
Net cash/(debt) balance                    £2.6m       (£0.3m)
Cash from/(used in) operating activities £3.9m    (£5.0m)

The progress made in FY2017 has demonstrated the capability of Filtronic to grow and deliver profit. However, the growth achieved has been with a concentrated number of customers and with relatively few products. Notwithstanding the growing opportunity and product pipeline we continue to remind shareholders that until there has been a further widening of the customer base, growth will continue to be lumpy and difficult to forecast in the short term, we also note that our major telecoms OEM customers have downgraded their projections for the current financial year. This underscores the importance for Filtronic to continue to reduce dependence on these customers and to seek opportunities in other markets.

We are encouraged by the breadth of opportunities being generated and remind investors that the substantial multi-year contract win of a defence related programme underpins Filtronic Broadband business revenues for several years. Consequently, the Board continues to have a positive outlook for the longer-term prospects for the Group.

jimbobjames2002

Hi Paul, if you get a chance it would be interesting to get your views on the update from £g4m last week and the subsequent drop in price. I know Graham covered it last week but it has been one of your biggest positions so would be good to hear your thoughts.

Congrats on Revolution Bars (LON:RBG) too, wish I'd had the patience to hold instead of selling out, c'est la vie I suppose.

Thanks, James

Rusty2

Paul, I would value your opinion on the G4M trading statement that came out at the end of last week which has caused the share price to fall somewhat. Another heavy fall today but price has partially recovered.

the0ni0nking

A truly shocking announcement from RGD.

I wondered whether the failure to disclose the related party transactions was simply an error in respect of the specific note to the accounts on one of the numerous notes pages to the accounts but that it would have been disclosed elsewhere (IIRC with PSCs you could disclose in the Directors Remuneration section). However, having taken a look, I believe this is not the case - it's simply not disclosed.

The FY16 remuneration report details Mr Totte's salary as £223k with no reference to any other incremental payments. It's not as if a further £1.5m as it was in FY16 is a small easy to miss incremental payment (whether it be to a consulting firm owned 100% by him or one of which he exercises significant control!)

This is all the more shocking as in recent audits I've experienced, the auditors require the directors to sign a specific document in respect of their earnings and related party earnings as a result of their positon as a director.

Failure to do this suggest at best a flagrant disregard to the audit process or at worse an intent to decieve.

Leaving aside the abysmal trading update and the somewhat frosty relationship they will now have with those that they tapped for funding, the positions of the CEO and the CFO have to be under review and ultimately the NEDs need to press for replacement if they are ever to be taken seriously as an investment opportunity again.

A CEO taking £1.7m from a company in the year that it made an operating profit of £2.1m (FY16) is a disgrace. (The actual PBT figure rather than Op Profit was flattered by a £3.3m fair value gain and so should be ignored from the underlying result).

As this is a public bulletin board, my language is significantly more restrained than it would be if I were down the Dog & Gun.

Thankfully not a holder and no desire to become one with the current management team in place.

At least Mr Salter, the other party identified in the related party transactions shambles has had the decency to resign but his payments are small (albeit he was only a NED). So IMO Totte and the FD should both resign - both culpable.

Regards,
0inK

I think some people on here have/had an interest in AMO; I have noticed that there appears to be a steady downward momentum with rather more selling than buying as of late; a week after the recent results a "Legal Person closely associated with Michael Bennett, Non-Executive Director" dumped a million shares at 190p; it's now gone through my stop-loss so have sold.

ricky65

Andrea I think that's a wise decision as I see Amino Technologies (LON:AMO) has dropped below the 200 day moving average.

Paul Scott

2nd Aug '17

Hi jimbojames,

As regards Gear4Music (G4M) - the update last week was in line with expectations.
The company had already flagged that, due to opening new distribution centres in Europe, profits would be H2-weighted.

I'm not interested in short term share price fluctuations. This stock is one that I want to hold long term (5 years+). Management are building a terrific, GLOBAL eCommerce business, with a nice moat - namely that they've spent 8 years developing own brand products.

I think that, as the business grows, then it should benefit from a phenomenon which we have seen with BOO, whereby marketing costs can increase at a slower pace than revenues. This leads to a gradual improvement in operating profit margins.

PER is the wrong metric to use when looking at rapid growth stocks. Also, we can't expect stocks like G4M to relentlessly rise. At some point market participants are bound to want to bank some profits. I'm not interested in that. For me, G4M is a hold forever stock, providing the entrepreneurial management keep doing such a great job.

If you can't cope with the share price volatility, then sell it & move on.

Regards, Paul.

Thanks Paul, really appreciated.

Cheers, James

shanklin100

Hi Paul

If you do speak with G4M management at some point in the future, and are happy to ask the question, it would be interesting to know why the company chose not to disclose any exact sales figures in contrast to the TS a year earlier...

https://www.investegate.co.uk/gear4music/rns/trading-statement/201607290700095849F/

Thank you and Best wishes, Martin

bertyboy

very informative

very informative but would you buy now?

Chrisp

Paul, Real Good Food Company's announcement is worse than you have indicated. The Consultancy payments were not disclosed as being paid to Directors. The amount paid to the Non Exec Peter Salter is small and he has resigned. The amount paid and not hitherto disclosed to the Exec Chairman Peter Tiotte is £1.2m which is fraud isn't it? It is another example (like at the AA yesterday) of the often poor Governance at companies who have Exec Chairmen. It is the role of the Chairman to run the Board and the role of the CEO to run the company and should absolutely not be run by the same individual. It is also another example of how retail shareholders should take more of a stand against bad Governance practice. I attended the RGF AGM a couple of years ago (with David Stredder) and was very uncomfortable with the dismissive response form Mr Tiotte to questions about the lack of diversity on his Board and the lack of Independent Non Execs. The chickens have come home to roost.

Small Cap Value Report (Tue 1 Aug 2017) - RGD

Real Good Food (LON:RGD)

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Paul Scott

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