Small Cap Value Report (Tue 10 Sep 2019) - SBIZ, ARE, RAI, TPG

Tuesday, Sep 10 2019 by

Hi, it's Paul here.

Estimated timings for today's report - similar to yesterday. I'll start writing sections from late morning, then will work mainly in the afternoon. Estimated completion time: 5 pm.

Update at 16:44 - today's report is now finished.

SimplyBiz (LON:SBIZ)

Share price: 200p
No. shares: 96.8m
Market cap: £193.6m

Interim results

SimplyBiz (AIM: SBIZ), the independent provider of compliance and business services to financial advisers and financial institutions in the UK, today announces its unaudited results for the six months ended 30 June 2019.

The headline figures look great, but the growth has almost all come from an acquisition. Organic revenue growth was only 3%. Net debt looks a bit high too, so I'll check out the balance sheet below.

Very good adjusted EBITDA margin, of 23.4%

Note that exceptional costs are very high, at £3.0m in H1 TY, and £3.8m in H1 LY - that's worth checking out, to determine how exceptional these costs really are.

Outlook - sounds fine;

Trading has continued in line with the Board's expectations, since the end of the period. The Group remains on track to achieve market expectations for earnings for the full year.

Stockopedia is showing 12.6p forecast EPS for FY 12/2019, giving a PER of 15.9 - probably about right.

Balance sheet - this is where it goes wrong for me. It's very top-heavy, with £106.6m intangibles.

NAV is £63.3m, so once we write off the intangibles that becomes heavily negative, with NTAV of -£43.3m

It has £11.6m of cash, and £41.5m of debt, giving net debt of £30.1m - that looks too high to me. Although the acquisition RNS in Mar 2019 indicated that net debt should reduce to under 2 times EBITDA by the end of 2019.

Given that revenues are recurring in nature, then maybe a stretched balance sheet doesn't matter that much? Although it makes me uneasy, as there's no cushion if anything were to go wrong.

Cashflow statement - it doesn't look very cash generative. Maybe there's an H2 weighting to cashflow? Note that £930k of development spending was capitalised in H1 2019, more than double the prior year H1 comparative.

My opinion - for me, the stretched balance sheet puts me off.

Did SBIZ over-pay for the large acquisition earlier this year? It seems to have…

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SimplyBiz Group PLC is a United Kingdom-based company, which provides business support and financial market services. The Company provides with access to advice on a range of financial needs, from mortgages protection, to investments, estate planning and taxation. The Company provides guidance and support from a regulatory perspective and provides access to business development support, such as technology solutions, marketing and events. The Company has partnered with insurance, investment and mortgage providers. more »

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Arena Events Group Plc is a United Kingdom-based international turnkey event design and delivery company. The Company provides managed solutions from concept and design through to the construction and delivery of temporary structures, seating and interiors for a host of sporting, outdoor and leisure events around the world. Its contracts range in size and complexity from a simple equipment rental for a local outdoor event, to an integrated solution of multiple structures and interiors for an international sporting event. It provides a wide range of services from temporary demountable seating and project management, to the installation of ice rinks as well as the provision of high end catering equipment and event furniture. The Company has operations in the United Kingdom and Europe, Middle East and Asia and the Americas. more »

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RA International Group PLC is a United Kingdom-based remote site service provider. The Company offers integrated camp services, from the construction of camp facilities to full life support services- including camp catering and camp maintenance services foe clientele operating in remote and challenging environments. It focuses on providing remote site solutions for those involved in humanitarian operations, and the oil and gas and mining industries. The Company’s service offerings include construction, operation and maintenance, integrated facilities management, supply chain, and accommodation. It provides its services to mining, oil and gas, and humanitarian. more »

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  Is LON:SBIZ fundamentally strong or weak? Find out More »

32 Comments on this Article show/hide all

MrContrarian 10th Sep 13 of 32

In reply to post #511601

Ignore the going concern stm for Concurrent Technologies (LON:CNC), it's just a regular one.

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jwebster 10th Sep 14 of 32

In reply to post #511666

RA International (LON:RAI)

An interesting share. The CEO and COO (the husband and wife team presumably given they have the same surname) own 79.4% of the shares. Bit of a lifestyle business then. Probably should have kept it private.

Yes, they certainly talked up the revenue value of recent deals in the pipeline. Loads of cash on hand. Usual risk with a services firm reliant on constantly winning contracts.

I did buy a small amount just to see what happens from here.

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millen 10th Sep 15 of 32

I see that Hipgnosis Songs Fund (LON:SONG) have today released an analysis of their music catalogue income Showing quite strong growth, eg streaming income up 49% in two years (though I'm unclear whey 'streaming' is deemed to be 50% 'mechanical' sale and 50% 'performance' sales). Another RNS today talks of a further £300m equity fund raise and appointment of JP Morgan as joint broker. Clearly there's institutional demand for this novel investment but it is rapidly growing beyond small-cap territory.

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Wimbledonsprinter 10th Sep 16 of 32

In reply to post #511696

In relation, to whether RA International (LON:RAI) should be quoted, the interim report states that the cash raised through the IPO, which “strengthened [our] balance sheet has enabled us to bid for larger contracts which if awarded to the Group would be transformational in nature. Being a quoted company has also enhanced our profile and brought us a number of new opportunities, particularly with western governments.”.

The key rationale at the time of the IPO was that the strengthened balance sheet would allow it to bid for and win these new larger transformational contracts. So far no such transformational contracts have been secured since the IPO in June 2018. The large fall in the share price around the turn of the year was related to earnings downgrades and the brokers removing any future transformational contracts from their forecasts. Hence, the key rationale for the IPO could be argued to have disappeared.

Obviously, the company hasn’t given up hope of winning such contracts and so, with the rose-coloured spectacles on, there is now potentially a significant upside potential to forecasts.

Because of the lack of very large contract wins, the actual and current broker forecasts are well below those at the time at the IPO for basically all lines, apart from the dividend. The higher dividend payments maybe a sign that management itself is becoming sceptical of the benefit of sitting on such a large pile of cash.

Therefore, I think it is a worry that the 80% shareholders might one day decide that life was easier as a private company. But, on the other hand, the current dividend pay outs, also give me some comfort that the Narfeldts are not out to abuse the minority shareholders.

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Trident 10th Sep 17 of 32

Re: Revolution Bars (LON:RBG)

I am little bit surprised by the fact there has been no trading update from Revolution Bars (LON:RBG) (last three years there was an update in June/July)

I think Paul's view when we last kicked this around was that this may be good news (or not bad news), inasmuch as the last few updates concerned disappointing performance news.On the optimistic side it could be that maybe the new CEO (on board since Jun last year) wants to stretch reporting as far as possible to take in any new initiatives that may be bearing fruit, to offset the historic performance of the last two years. Or it could be that he doesn't think there is anymore to be added to the slightly downbeat statement they made at the last trading announcement:

'The uplift in like-for-like* sales performance over the festive period gives us momentum going into the second half and I'm pleased with the progress being made in refreshing the Revolution brand proposition. However, given the uncertain economic and political outlook we are adopting a more cautious outlook on trading in the coming months.'

They should report preliminary results in Oct, so not too far away.

I am a holder

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rmillaree 10th Sep 18 of 32

In reply to post #511756

Revolution Bars (LON:RBG)
I would agree that no news is presumably not bad news unless its going to be along the lines of "trading since the start of the new year has been below expectations" - so hopefully (surely) last years numbers are in the bag.
One additional glimmer of hope is that for the first time broker forecasts have nudged slightly up in the last month - not sure if this is a new broker - removal of a broker or whatever. As ever though the future trading needed to match up to current expectations and i guess we won't know the tone in that regard till they report next - the Durham outlet was rammed last time i was doing my listed beer pubs research tour the other saturday. One needs to put in a proper 6 or 7 hour session minimum to get the gist of the flow of bods flowing between the different listed outlets during the day in that regard tho.

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Chrisspencerphillips 10th Sep 19 of 32

Are you reviewing Luceco who came out with interims yesterday?

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Trident 10th Sep 20 of 32

Solid to good Interim Announcement from Property Franchise (LON:TPFG) today for holders of which I am one.

They say they expect their usual heavier weighting to H2 to be repeated, which promises on the back of a good H1 to be decent.

They are increasing their interim dividend by 8%, and according to Stocko their current overall annual dividend yield is circa 5.22%. Not growing spectacularly, but a solid performer to date.

Only cloud on the horizon is their CEO is leaving but not for a while yet.

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grumpy5 10th Sep 21 of 32

In reply to post #511761

Tough job, but someone has to do it! Mark Brumby and his sons take this approach to a professional degree.

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Michael C 10th Sep 22 of 32

In reply to post #511626

I think Ford may be a canary. Other macro data points which chime with me are mostly USA:

  1. Not just Ford - a lot of corporate debt is floating around like unmentionable items. Big companies have taken on massive debts, partly to finance buybacks, and not all are retiring that debt, many are expecting to roll it over at ever-decreasing (even negative?) interest rates.
  2. Dotcom mania v2 appears to be dying (Uber, Slack, WeWork, Softbank, probably Tesla)
  3. Boeing is in deep, deep poo of its own making and it's a big company. Probably TBTF but shareholder capital is definitely at risk and a failure would affect sentiment - latest bad news here
  4. Liquidity is probably an illusion because of the growth of index funds and ETFs - I agree with Ruffer's latest investment report (make sure link still goes to July 2019 - my favourite line: 'Ultimately? Might we be talking a few millionths of a second here?')

But then I'm naturally a pessimist, or so my wife says.

Edit: This will be relevant to some of the UK small caps if there is a long-term mood shift away from "jam tomorrow" businesses.

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Paul Scott 10th Sep 23 of 32

In reply to post #511756

Hi Trident,

Revolution Bars (LON:RBG) (in which I hold a long position) must have traded in line with expectations for FY 06/2019, otherwise they would have been obliged to inform the market.

They're up against soft comparatives from last summer, and no longer have the distraction of bid talks, nor new site openings. Therefore they really should be able to deliver positive LFLs from now on.

If so, that should trigger a re-rating (or another takeover bid). But as always, we can't guarantee that the upside case will actually play out.

Regards, Paul.

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Andrew Mitchell 10th Sep 24 of 32

Hi: Revolution Bars (LON:RBG) Prelims for the 52 weeks to 29 June will be out on 1 October.

Cheers, Andrew

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Paul Scott 10th Sep 25 of 32

In reply to post #511766

Hi Chrisspencerphilips,

Are you reviewing Luceco who came out with interims yesterday?

At your prompting, I've just had a very quick skim of the interims from Luceco (LON:LUCE)

They look good. A strong improvement in profit, and a good outlook statement (currently trading ahead of expectations, but keeping guidance unchanged due to uncertain macro outlook).

Balance sheet has a bit too much debt for my liking, but not dangerously so.

Forward PER of 10.2 looks reasonable.

Nice StockRank of 84, and a "High Flyer" classification.

Overall, this looks quite good - worthy of a closer look, I'd say.

Thanks for flagging it up.

Regards, Paul.

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andrea34l 10th Sep 26 of 32

A good write up Paul!!

Just one point on TP (LON:TPG) (which I hold), doesn't pretty much every company adjust their profit by both depreciation and amortisation? If so, then TP Group don't seem to be out of line in this respect.

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JohnEustace 10th Sep 27 of 32

In reply to post #511796

Boeing continues to confound me. It should be an obvious short but it keeps going up. I assume shareholders are believing the company line that the 737 Max will soon be cleared to return to service. But if you look at the European regulatory concerns that seems very unlikely. There's an almighty political and regulatory crunch brewing with potential for major market fall-out. The LEAP engines supplier is 50% GE owned and they are already in a fragile state.

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john652 10th Sep 28 of 32

In reply to post #511636

Hi FREng,

I'd also be interested in Litigation Capital Management (LON:LIT) if anyone has any views. They make a big deal about NOT applying fair value accounting like Burford Capital (LON:BUR) in the accounts and give the impression their's is the model to follow in this sector (cause we is honest).

Given how many people were keen on Burford Capital (LON:BUR) judged by the 400 odd comments on the 'exception to the rule' thread I am assuming some of the readers will have run the slide rule over Litigation Capital Management (LON:LIT) ?

Is Litigation Capital Management (LON:LIT) good value now, worth a look, as they have been tarred with the same brush?

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ISAallowance 11th Sep 29 of 32

In reply to post #511856

I think adjusting by amortisation of acquired goodwill is OK, since an acquisition resulting in goodwill is something that has been done and completed, and is reflected in the balance sheet and/or equity statement depending on how it was financed.

Depreciation of equipment in ongoing use, or amortisation of intangibles in ongoing developement though would be a different matter, and IMHO would not merit an adjustment unless there was some clearly expressed reason why this was genuinely exceptional.

I hold TP (LON:TPG), but haven't yet formed an opinion as to whether the adjustments are OK or not in this case.

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jwebster 11th Sep 30 of 32

In reply to post #511796

Ford has been downgraded by Moody's but S&P Global and Fitch still rate as investment grade so the bond yield only increased 15 bp on the news. Yes they have $100B out there, but not so much really.

I think the real excitement is in BBB where US corporates have issued just over $3 Trillion to fund the last few year's share buybacks. About the same size as the $3.2T CDO and MBS sub-prime mortgage market in the 2009 crisis.

Now, from a balance sheet perspective, swapping equity yielding ROE 8%+ for 3% debt makes sense on an EPS accretive basis. Also the BBB debt current enjoy low default rates so all is fine.

The bomb would be a default rise, this round of BBB is covenant light so downgrades to junk follow, bond funds typically have a 'no junk' mandate and would become forced sellers, thus splat. Interestingly, a lot of 'safe' blue chips hold BBB, I picked up on this the other day with some UK firms, epic gap between long term pension liabilities and assets if this happens.

Funny if it happened, imagine 'solid' companies coming back to shareholders 'remember those lovely defined benefits schemes we scooped up at juicy margins and then dished out 9% divy's to you, well, errmmm...... we need it all back again and more to recapitalise'

I have no idea where the next crisis will come from, but each time it's something new !

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davidjhill 11th Sep 31 of 32

In reply to post #511881

Hi John - There's been quite a bit of discussion on here previously on Litigation Capital Management (LON:LIT) versus Manolete Partners (LON:MANO) and Burford Capital (LON:BUR). I have argued for a while that I much prefer Litigation Capital Management (LON:LIT) ahead of the others for a few reasons, principally that relate to value rather than quality of business.

1) PNAV is only 1.9* and that is based on a cash investment accounting, not fair value adjustment. Assuming the existing 135% ROIC continues anywhere close to those levels then the shares look cheap to me. I previously compared this to the others whose PNAV was between 4 & 6 but on a more aggressive fair value basis (Litigation Capital Management (LON:LIT) would be 1.4* PNAV on same accounting treatment).

Whilst Litigation Capital Management (LON:LIT) looked cheap in comparison I couldn't justify to myself why the others should trade so richly. It really assumes perfect execution and that is usually set up to fail. My analysis suggested I was happy to pay up to 2* book on a fair value basis as I felt this gave me a decent risk/reward.

What I also quite like is that on a more traditional valuation metric Litigation Capital Management (LON:LIT) trade on a fwd PE of 14 and have strong cash position. Doesn't feel expensive.

When I compared the sector I did like the Manolete Partners (LON:MANO) business model, just not the valuation. If they had a fall towards 300p I would be a buyer but will keep powder dry unless they either get there or the relative forward value changes.

I did buy Litigation Capital Management (LON:LIT) slightly higher than current price but was also encouraged in the results to see that they now also intend to act as a competitor and do similar insolvency business to Manolete Partners (LON:MANO) in both the UK and AUS. That puts them in the middle of the Burford Capital (LON:BUR) & Manolete Partners (LON:MANO) business model and means more of a mix of capital light short duration cases and longer duration bigger investments.

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Paul Scott 11th Sep 32 of 32

In reply to post #511856

Hi andrea34l,

Just one point on TP (LON:TPG) (which I hold), doesn't pretty much every company adjust their profit by both depreciation and amortisation? If so, then TP Group don't seem to be out of line in this respect.

No. When reporting adjusted profits, most companies remove goodwill (and similar) amortisation charges, but leave in depreciation charge.

The depreciation charge is only removed when reporting EBITDA, but not for adjusted profitability.

Therefore the adjusted profit figure for TP (LON:TPG) appears to actually be an EBITDA number, which isn't correct, not standard practice. Hence why I flagged it in the report above.

Regards, Paul.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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