Small Cap Value Report (Tue 1 Mar 2022) - CNIC, CLX, RCH

1st Mar '22 by Paul Scott

52 comments 11104 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Agenda -

Jack's section

Centralnic (LON:CNIC) - Notes from yesterday's call with CEO Ben Crawford, with some comments on the group's strong growth, balance sheet, adjustments, and acquisition of VGL.

Calnex Solutions (LON:CLX) - component availability is becoming more of an issue, but if this can be managed then the group is on course to meet expectations for the financial year. That’s to be expected given the valuation, but what’s moved the shares today is a new contract win with a large datacentre partner that means FY23 operating profit is now expected to be materially ahead of expectations.

Reach (LON:RCH) - digital growth continues, although H2 was lower than H1. Inflation and rising energy prices are going to impact profits next year, hence the negative market reaction. The group also continues to negotiate pension contributions with some trustees, which adds a bit more uncertainty. It remains cheap compared to the cash it generates but the momentum looks poor right now.

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.

Jack's section

Centralnic (LON:CNIC)

Notes from meeting with management

I hold

No surprise that revenues are again up 71% to $410m as this is in keeping with a revenue CAGR of roughly 73% since IPO. But, importantly, a lot of this growth is now organic (39% according to the update, up from mid single digits…

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slopsjon

1st Mar '22

Photo-me International (LON:PHTM) Yes there is an offer in place for 75p but there is a market open for the shares until the sale is completed. In the current climate, it's not surprising the market price is dropping.

truegent

Thank you - I've never noticed any share dropping after a bid has been made, the sp usually hangs around the offer price, eg Clipper right now hasn't budged. I was in at 60p anyway a while back...

JohnEustace

The bid vehicle for PHTM has acceptances from 0.01% of holders. The bid was only made to conform with the regulations after the CEO stake went above 30%. He never wanted it to be accepted.

ah that makes sense thanks.

Jeffvshepherd

Have to wonder how much Paul's "research" has influenced Revolution Bars (LON:RBG) numbers.

Doug2b

My share issuing observations are a little out of date, another 22% was added over the course of the past year. This more than accounts for the rise in tangible equity for this year, i.e. remove the share issuing and the tangible equity would fall once again.

You do understand that this is not a real business, the business exists only on the back of the annual share issuing, this years so called profit cannot be taken as real when so much cash has been generated from the dilution of shareholders.

The fact that the share price has been rising, we have been in markets which have risen indiscriminately, the valuation of this business is unsustainable, there is no business, there is only spin and share issuing.

Tortoise investor

Just to note there is a very thorough research note on Centralnic (LON:CNIC) from Zeus published today. it's freely available on Research Tree. It helpfully updates forecasts following the acquisition.

I like the look of this share but I am getting nervous about the debt given it is affected by interest rate rises.

Simon Rowan

Doug2b. re (LON:CNIC) and I suppose the 72% institutional investors are not real investors either?

Bouden54

Revolution Bars (LON:RBG) results looked good but seriously confused about why the broker (finncap) has such low eps estimates. Today's RNS says they delivered eps of 1.9p (ifrs) or 1.6p (IAS)the in H1. However, finncap are estimating 0.2p for the full year. They then expect this to rise to 1p the following year. Makes no sense as according to the RNS they have just delivered more than that in H1? I haven't looked at the company in any detail before so forgive me if I'm missing something obvious.

MiserableJacktPotato

Nope. IP has value. Tangible items depreciate. There's not much, if anything, inherently better about something you have than something you can sell. Why do companies ever bother doing R&D, adds nothing to the balance sheet right?

abtan

Vitec (LON:VTC) (no position)

Hi Rob

I've just looked through the Vitec (LON:VTC) results but must admit to being confused by all the moving parts.

There were 3 quite large acquisitions in 2021 and another one at the start of 2022.

Non-lease net debt seems high@£115m (and it will be higher in H1 FY22) and the revenue forecast for 2022 looks quite lofty relative to the additional revenues expected from the new acquisitions:

+£17.7m of annualised revenues from the 2021 purchases.
+ £9.3m from the Audix acquisition in January 2022.

I'm also accounting for +3% revenue growth from price increases but perhaps this is too low and I'm being overly pessimistic?

Anyway, I've decided to keep it on my watchlist. I like the areas the company serves and it looks like it generates decent cashflow. Hopefully the debt and cash generation picture will be clearer when the interim results are published.

Cheers

rmillaree

£brg

Don't know - vat increase alone is likely to make h2 look bad compared to h1 - thats the only obvious thing that jumps out. Perhaps the xmas season is peak and so we would normally expect h1 to be quieter? Inflation increases perhaps. Nice to see this company churning out some reasonably positive numbers - nice to see hospitality getting some of its mojo back.

Reach (LON:RCH) (no position)

Hi David

You might recall that I'm quasi Bullish/Bearish on this one.

I can certainly see the immense cash that will be generated once the pension scheme payments and deferred payments for the Star/Express acquisitions conclude.

The former had a plan in place to finish contributions in 2027* and the latter had a last big payment yesterday (£17.1m); the last payment for the acquisitions is due in exactly 1 year and is a smaller £7.0m**.

Personally I would only be interested in taking a position here if those annual pension payments are reduced/stopped, otherwise it seems like a very long time to wait before the cash starts rolling in and who knows what will happen in the next 5 years.

---

Other things I noticed from today's results:

There was a c£50.1m cash benefit from increased payables/reduced receivables. Without it cash generation (excluding the dividend) would have been zero.

Quite a big chunk of this +£50.1m increase is unexplained (there are no notes on the change in Payables on the balance sheet), but it looks like some of it is explained by a £29.0m increase in Provisions relating to the phone hacking scandal***
Will these provisions/payments ever stop?
There is still no update on digital profitability (or losses).
In light of crazy changes in CPMs over the last 18 months I definitely wouldn't invest unless the opportunity here was clearer.

----

* "At the reporting date, the funding deficits in all schemes are expected to be removed before or around 2027 by a combination of the contributions and asset returns. Contributions (which include funding for pension administrative expenses) are payable monthly. Contributions per the current schedule of contributions are for £55.1m pa in 2022 and 2023, £54.9m pa in 2024 to 2026 and £52.9m in 2027."

** " £17.1m is classified as current liabilities (payable on 28 February 2022) and £7.0m is classified as non-current liabilities (payable on 28 February 2023)."

*** "During 2021, the number of new claims, the progression of claims, the settlement amount and the associated legal costs have been ahead of historical trends and experience. This has resulted in a change to the provision estimate and a further charge of £29.0m in the year."

Revolution Bars (LON:RBG) (no position)

Hi Bouden54

I've been a big fan of Revolution Bars (LON:RBG) for many years, but eventually sold out right before Omicron hit.

I still like it and I'm tempted to buy back later in the year, but what's holding me back buying back today is that I didn't realise how much government support aided this period's results - £3.2m to be precise.

I wonder if this is masking potential reduced cash generation further down the line?

I must admit to not having looked at today's update in too much detail, but I'll definitely be revisiting this one later in the year as I believe their underlying cash generation will probably still be good.

The balance sheet helps to develop products that can be sold at a higher profit, creating wealth for the business and for the shareholders. When you factor in the sahre issuing, CNIC has never come close to creating wealth for its shareholder. The business listed in 2013, at which point will the business create a genuine profit, the 2021 results did not show a genuine profit, tangible equity would once again have fallen once you factor in the share issuing.

BnB

IP has value. Tangible items depreciate. There's not much, if anything, inherently better about something you have than something you can sell.

Even better if you can repeatedly sell the same intangible without any material extra cost. I’m thinking software in general and SaaS in particular, though patented pharma is another good example.

There are plenty of utterly clueless fund managers out there, are you now going to buy into a business because some fund managers think that it is okay, is that your basis of assessment.

NeilS

in addition they are going to maintain the existing stock market listing and not take it private.

Thanks Doug. Having made nearly 60p a share so far I'm quite convinced this is potentially a very sound business. I've no idea what you agenda is here to keep talking it down. Have you actually heard of a company called Kestrel finance? They helped found this business and others and have significant investment themselves, for staff and directors, currently around 30%. They also have put another 6 million more into the raise. So yes I do find that encouraging as it happens. Frankly to suggest this isn't a business is just unbelievably stupid

Rob3

2nd Mar '22

Thanks Abtan very helpful - i continue to hold

Small Cap Value Report (Tue 1 Mar 2022) - CNIC, CLX, RCH

Jack's section

Centralnic (LON:CNIC)

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Paul Scott

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