Small Cap Value Report (Tue 10 Dec 2019) - ZYT, TED, BEG, KOOV, PHTM, NEXS

10th Dec '19 by Paul Scott

44 comments 9161 reads

Good morning, it's Paul here again.

My initial review of the RNS has thrown up 5 interesting small cap sets of results for us to look at;

Zytronic (LON:ZYT) (in which I hold a long position) - full year results

Ted Baker (LON:TED) - another profit warning, and management leaving

Begbies Traynor (LON:BEG)

Photo-Me International (LON:PHTM)

Nexus Infrastructure (LON:NEXS)

Estimated time of completion - circa 4pm - let's see how we get on.
Update at 16:15 - fairly predictably, I'm running late. Should be finished by 17:30. Apologies for any inconvenience.
Update at 17:51 - today's report is now finished.

Zytronic (LON:ZYT)

Share price: 192.5p (pre-market open)
No. shares: 16.0m
Market cap: £30.8m

(at the time of writing, I hold a long position in this company)

Preliminary results

Zytronic plc, a leading specialist manufacturer of touch sensors, announces its preliminary results for the year ended 30 September 2019.

I've braced myself for lousy results here, because the share price has been grinding relentlessly downhill since the profit warning, which I reported on here on 2 May 2019. However, the figures this morning are actually not that bad - only slightly below broker consensus forecast (16.8p actual EPS, versus 17.0p forecast). That's a PER of 11.5

Key numbers for FY 09/2019;

Revenues £20.1m, down 9.2% on LY, and down 0.5% on forecast (near enough to not matter)
Gross profit down 17.6% on last year
Profit before tax down 27% in LY
Dividends - final payout of 15.2p flat against last year, giving 22.8p total divis - which is only covered 74% by earnings, yielding a monstrous 11.8% yield - divis are under review, so it sounds like a cut might be on the cards in future.

Balance sheet - a stand-out feature of this share, is its astonishingly strong. It's tying up unnecessarily large amounts of surplus cash, and this really should be paid out to shareholders, or otherwise used (e.g. buybacks make a lot of sense at the current valuation), or used for a sensible acquisition.

Cash has fallen 10%, but is still way above what the company needs,…

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rmillaree

10th Dec '19

£JDG - Judges Scientific (LON:JDG)

Ref the registration of charges - these are normally reasonably self explanatory if you click on the charges tab on the company summary on the companies house website , then click view pdf - this should take you to a very detailed summary of what the charges are and who has levied them.

As an example for MOORFIELD NANOTECHNOLOGY LIMITED - Bank Of Scotland have issued the charge - i am guessing this change is on most of if not all the business assets and presumably relates to loans/overdrafts/other financing that this company has with BOS.

Trident

Hi Abtan

Re Judges Scientific (LON:JDG)

The charges are effectively loans secured on all fixed or floating (moveable) assets of the subsidiary in favour of the Holding Company, Judges.

There maybe technical finance reasons for this, in some obscure capital ratio that I have no knowledge, but it also probably makes the Holding Company the principle creditor should anything go wrong with the business, and there are other competing creditors. Rather in the same way that Banks get first sniff if anything fundamental goes wrong.

It seems Judges use this mechanism regularly, as I note one of the subsids has four charges 3 of which are outstanding.

I guess depending on how its structured it could be a way of gouging subsidiaries of cash irrespective of their profit history. Unlike a dividend it is not a decision a subsidiary board makes based on their profitabiIlty, and their balance sheet, it is an obligation.

It can be a way of forcing subsidiary companies not to take for granted the cash they generate for granted, as this is owed to the holding company, so that they take into account a cost of allocating capital as determined by the Group board when making their annual budgets. It keeps local management on their toes.

That's my guess, but better informed contributors may have something meatier to add

STOCKWATCH UK

This comment is under review

stuartb58

Photo-me International (LON:PHTM) Long term holder and interim results today better than I had expected. No reason on the face of it why yield 9% not sustainable - unless other countries follow UK in permitting smartphone use for official purposes. Laundry growing nicely and fruit juice acquisition Sempa looks a steal. Investment property in the books at £640K has rental income just over £1million, so a healthy reserve there to bolster what is already a decent balance sheet.

Snoo

I keep getting tempted by Photo-Me International (LON:PHTM), but I have been burned before so I probably won't be going back. It does seem like very good value at these levels, it has to be said.

The photo business I think is in structural decline, in the long run the booths could be cut out altogether. I don't see why the weakness in seen in the UK markets might not suddenly materialise in the European markets.

Not a fan of the laundry business although I can accept that other territories are much better suited to this. But this too, I think could be in decline - with washing machines seemingly remaining the same for over a generation, could there be a new technology that upsurps it one day? Perhaps there may be something like how the air fryer was versus the deep fat fryer and clothes could be cleaned with much less water.

They also hold huge cash balances and also debt, I did realise at the last time the reason for this: with something like 46,000 machines in operation and many of them still taking cash there must be quite a lot of money kicking around before it can be banked; many are in secure locations like malls.

Ben1

I feel the same about £BEGS I have been a happy holder for 6 years, with one top-up along the way. Currently up 70%. Can't see me selling up anytime soon.

Part of my rational at the time was that at some point interest rates are going to go back up, and there will be rise a in insolvencies. Hasn't happened yet, but doesn't seem to have stopped them from doing OK anyway.

bryans1311

I would also hope not. Or is there a joke there somewhere that’s gone over my head? Entirely feasible!

peterg

Snoo, I haven't used a Photo-me International (LON:PHTM) machine for many years, but I wonder if the idea that they have a lot of cash sitting in them may not be somewhat dated? Surely these days they must take cards? And I'd assume that most transactions are no longer in cash?

Elsie

Paul & stuartb58 I wouldn't be quite so pessimistic about smart phones taking over from photo booths. I recently renewed my passport, which meant I had to produce a new ID photo. Despite numerous attempts I failed to provide the system with an acceptable photo using an iPhone - too much shadow, shading on the background etc. Eventually I used a Photo-Me International booth while out shopping. It provided me with a print containing 4 photos and a code. Puting the code into the Passport Office website uploaded my photo direct into the system. Five minutes later my passport was approved.

john2

I had a similar experience with a passport photo, first one was rejected but second was accepted after I waited for a cloudy day when the shadows weren't too strong.

Paul Scott

Be interested to know Paul why you sold Begs

I was probably on margin call!

I last used one two years ago, and paid cash. But they do take contactless.

In fact, their website says that their machines are still fitted with coin and note acceptors. And for the laundry machines, it says it's coins only, no card accepted. I don't know if that's for all of them though.

But on average, each machine only takes £100 a week in revenues, (£76.5m/28436/26 weeks), if most people pay on card it isn't going to be worth regularly sending someone to empty the machine of cash and then bank it. Maybe the machine could send an alert once it reaches £1,000 or something, but that could take months.

But anyway it would explain why there is lots of cash and debt, it wouldn't make sense at a different company.

ed_miller

Re: Photo-Me International (LON:PHTM) and self-provided smartphone photos - the Passport Office won't tolerate any shade on the face. Avoid this by avoiding too much sunlight or harsh lighting, and follow the instructions and advice on their website, and most people will find it more convenient to take (perhaps with the help of a friend) and supply their own photo.

Regarding implementation of new ERP (Enterprise Resource Planning) systems for the management of all aspects of a company's operations, "we're introducing a new, exciting ERP system next year" isn't quite as bad as "we've just discovered some significant accounting mis-statements for the current and previous two financial years we need to declare," but based on witnessing botched and chaotic ERP implementations at both a small manufacturer and at a multi-national manufacturer/service-provider I used to work for, I view both declarations as highly undesirable for investors.

abtan

Re Judges Scientific (LON:JDG)

Thank you for your response, much appreciated

(also thanks to rmillaree)

My biggest issue with Photo-me International (LON:PHTM) is that I have no idea how profitable the laundry business is and the company refuses to publish any details on this part of the business (unless I've missed it!).

So sadly it's one that I will stay away from until they do (hopefully one day) publish gross profit/operating margins.

Whitbourne

Just catching up with the SCVR after time away from the laptop - what a brilliant report and comments we had today... insightful, thought-provoking and some fun takes on the day's news.

It reminds me of the old (maybe still current) mission of the BBC to "educate, inform and entertain" this certainly does all three. Thanks Paul!

jwebster

11th Dec '19

Photo-Me International (LON:PHTM)

Previously I’ve passed on PHTM on the basis photo booths will not survive the digital age. UK passport photos are uploaded and checked on-line on the government’s web site. No need for a photo booth. Eventually other Governments will move down this path, although it will take time.

However, in today’s results PHTM, with a market cap of £328m, generated 38m in net operating cash, in six months. While somewhat flattered by 15.6m in depreciation, if you annualise this number, it implies a 23% operating cash yield on market cap, which is high. Capex is a drain, as they need to maintain 28,439 booths and rollout the washing machines across Europe, but the dividend for the year at 8.44p looks safe for now providing a hefty 9.5% yield. And they have no debt, with 25m net cash on hand.

The outlook is difficult. Revenues from the booths is fading slowly, with revenue dropping 3.3% from 79.1m to 76.5m. Of interest, PHTM states “under European regulations, ID photos taken at home are not permitted for official documents due to security risks”. I tried to verify this, but the regs seem wordy along the lines of “To this end, Member States could consider collecting biometric identifiers, particularly the facial image, by means of live enrolment by the national authorities issuing identity cards” as opposed to banning home pictures. So I suspect if a government could be bothered, an official government app which took the picture on your phone would be fine. I’m surprised a clever European Fintech hasn’t nailed this one. That would be PHTM’s nemesis.

What was interesting is the EU has released new rules for standard electronic ID cards, with the old cards to be replaced within two years. So this should create fresh demand for booth pictures. Overall, I think the photo booths will still die eventually, just slowly.

Laundry revenues up 25% from 13.9m to 17.4m but capex grew faster by 51% from 4.3m to 6.5m so this area will consume cash for growth. Printing services small at 7m revenue. Sadly, no reported gross profit numbers for the laundry division although commentary hints at EBITDA expansion. I worry longer term about laundry as eventually water-light technology will come.

That leave KIS food the orange juice acquisition which generated 3.5m revenue and 1.8m profit. This is the growth wild card, with expansion potential leveraging their booth footprint experience and expansion into apple and pineapple juice as well. But the lead here is this funky orange juice booth they have developed which dispenses a cup of fresh orange juice.

https://www.photo-me.co.uk/wp-content/uploads/2019/11/Orange-Juice-Machine.pdf

Might work, might not, hard to tell, but I can see the idea. Obviously, there is competition from just walking into a nearby coffee shop and buying a juice drink there. Still, it is something different.

The founder owns 22.4% of the company.

PHTM is a tough call. Great cash yield, high dividend, but core photo booth revenues in decline. Expanding the washing machines and trialling the juice booths, both adjacent markets to the photo booths. I have bought a small number, to see how this plays out.

Zorbatheleek

NEXS - Agree on margin comments - My understanding was that previous profit warning was blamed on BREXIT uncertainty, which will hopefully clear tomorrow. Happy to see directors with skin in the games and buying on lows. Electric vehicle charging points hopefully a growth market so happy to hold.

Small Cap Value Report (Tue 10 Dec 2019) - ZYT, TED, BEG, KOOV, PHTM, NEXS

Zytronic (LON:ZYT)

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Paul Scott

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