Small Cap Value Report (Tue 11 Jan 2022) - RWA, GHT, KGH, SHOE

11th Jan '22 by Paul Scott

27 comments 9274 reads

Good morning, it's Paul and Jack here.

Agenda -

Paul's Section:

Gresham Technologies (LON:GHT) - a positive, ahead of expectations year end update. Repeated broker upgrades to forecasts throughout 2021 is good. Looks interesting. Valuation looks about right to me.

Shoe Zone (LON:SHOE) - very impressive results for FY 9/2021, following several positive updates in Oct-Nov. My initial view is positive, but I need to clarify an accounting detail about changes in the net lease liabilities, which may have boosted profits by £2.9m. I've lodged a call with the company, so hopefully they might get back to me.

Jack's Section:

Robert Walters (LON:RWA) - another profit upgrade from this international recruiter. The shares have rerated but the outlook remains positive, with ongoing signs of wage inflation, and it’s been buying back stock and investing in headcount. It suggests, on balance, that the good times might continue for a while yet.

Knights Group (LON:KGH) - another acquisitive legal and professional services company. Revenue is growing but the group makes an H1 loss after tax after accounting for contingent consideration payments relating to acquisitions. It is more expensive than some of its listed peers, while margins and ROCE have so far fallen, so I’m not yet sure why you would pick this one over the others.

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.

Paul’s Section

Gresham Technologies (LON:GHT)

…

Unlock with Email

Unlock with Google

Already have an account?
Login here

About the Author

Paul Scott

Premium Member

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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

27 comments

Paul Scott

11th Jan '22

Hi kuronagi,

Re Vianet (LON:VNET) contract win announcement (NB it's a RNS Reach announcement, so non-regulatory - i.e. doesn't change forecasts)

How do you know it's a "good contract win", since no figures are provided, and it says immaterial to the current financial year?

I know Paul Scott does not like Vianet. I recall him wondering why it bothered to remain listed.

You're putting words into my mouth there! These things are nuanced, so I prefer to word opinions carefully, myself. And of course opinions are based on the current facts & figures, so change all the time.

Overall, VNET is an OK business - the Brulines business is mature/ in structural decline, but a cash cow. The vending operations seem very small, and despite positive newsflow over the years, haven't really moved the dial much.

I don't see any benefit to the company from being listed, since in the 15 years it's been listed, nothing of any significance has happened, apart from it paying good divis. So why have all the costs & hassle of a listing?

It would get more interesting if a game-changing acquisition could be found, that added value, in a way that previous acquisitions haven't.

I cannot see why anyone would buy this share, when there are so many other, better companies out there? It's not even cheap.

Regards, Paul.

Paul Scott

11th Jan '22

Morning matylda,

Great, thanks for flagging the note on SHOE, it hasn't come through on my email yet. I'll take a look.

Thanks, Paul.

bohenie

11th Jan '22

News today from £RQIH. (I hold) stating that they are now also trading on OTCQX market in US. I guess an inexpensive way to get a quote on the US Mkt - are there other better known UK companies trading on this exchange - any views out there please..?

https://www.rqih.com/rq-commen...

Gostevie

11th Jan '22

Hello Paul,

Just a quick post to thank you for your superb section on Shoe Zone (LON:SHOE) . Truly the SCVR at its very best.

(Disc: I do not hold SHOE but have done previously.)

Steve

planetx

11th Jan '22

More happennings at Rockwood Realisations (RKW) which was supposed to be on a 2 year wind down returning cash to shareholder.

Looks like Christopher Mills doesn't seem to be ready to follow that script , buying again today £176k more shares taking him to 5.73% , seems to be a daily RNS out and seems pretty intent on building . maybe he wants to take out the discenting shareholders and rewrite the script ? .

Also Rockwood increased their holding in Northbridge by 3.53% which is a circa 1.5 million investment inbound which doesn't seem to tie in with a controlled wind down.

I hold (now) am following the money though quite hard to buy .

Neil W

11th Jan '22

Can anyone recommend a dividend tracker here please? Would be really useful if Stocko had one.

illiswilgig

11th Jan '22

Vianet (LON:VNET) (I hold)

Mcap £28m, EV £30.5m Revenue £8.4m

Now this is getting more interesting.

'Overall, VNET is an OK business - the Brulines business is mature/ in structural decline, but a cash cow. The vending operations seem very small, and despite positive newsflow over the years, haven't really moved the dial much.'

Thank you Paul - that's a fair summary of the past.

As you say, the company has some form on this - false dawns and slow starts over the years. Now the pandemic on top of that. Which doesn't mean that it won't come good in the end - but it certainly makes us more sceptical.

Is it a fair prediction of the future?

Well that all depends. It's certainly not without execution risk, but I think there is clear evidence that this is not the same company it was a decade ago - and similarly the prospects have changed.

'I cannot see why anyone would buy this share, when there are so many other, better companies out there? It's not even cheap.'

Well you did ask - so here goes. And it's ok I won't take that personally :-)

That's because I see it as a turnaround with growth prospects rather than the value share it used to be. At least that's the way that I look at it - and these are shares I like to find - having had some success with the likes Haynes, Eleco and similar. Both near 10 baggers for me, being apparently moribund businesses whilst transforming themselves into software and service companies. But they are not easy to find in the UK market and almost always come with some form of history and risk - otherwise they would not be overlooked?

So what's changed under the covers for Vianet? This is the opportunity and the bit I always struggle with expressing. So apologies if this is overlong and waffly-ing.

The business has always been about the data. It still is but the old telemetry box (which monitored beer flow or counted mars bars) is now an internet hub capable of connecting one machine or many machines in a zone with virtually limitless sensors and actuators as well as software - and the icing on the cake - contactless payment services ( they bought the payment services company over a decade ago - but its only just coming into its own).

But Vianet don't make the hub anymore - they've outsourced it. Essentially they are moving up the value chain. They've spent the last few years building a cloud based real time data analytics and management platform sold on a Software as a Service basis. Which has the effect of depressing revenues whilst annual recurring revenue grows. This has particularly been the case in the smart machines (currently mainly vending) division where the change from capital box sales has masked the growth in annual recurring revenue. The revenue is still about the same - though its hard to tell with the pandemic effects - but where it used to be 80% capital sales and 20% recurring - now its 80% recurring and 20% capital sales. At the same time old sites and machines (offices for example) have been shaken out by the lockdowns – and replaced by new smart-machine connections. A far better base to move forwards from?

Talking of depressing revenues - there is also the pandemic to consider.

I've also been of the popular view that the old beer monitoring is a business in gently decline. Indeed I've been pleasantly surprised by how resilient its been as pubs shut. Largely that's because the old brulines equipment has been 'upgraded' to the smart-zone system with data analytics and reconciliation to the epos system available to the customer via the cloud platform in real-time across their whole estate. Contactless payment and vending connections being options in the zone. It turns out - that with lockdowns and rolling restrictions - the old stable business of bar sales has changed abruptly. Sales are much more volatile than they used to be and real-time data is much more valuable. As a result of the pandemic - smart zones could well be a growth division. But not in wet-led pubs that were the core of brulines. The future is more like the 300 site AMC theatre installation they have in the US?

In the smart machines division - the opportunity for real-time data analytics and management has been transformed even more and also more quickly by the pandemic. Vending services are now referred to as 'unattended retailing' and have the advantage of being much more resilient in the face of a lockdown as well as removing the cost of labour. Though I have to say I am not at all a convert to the idea of doing my shopping from a machine - let alone drinking in a pub with no annoying bar staff to keep me entertained! But I can see the opportunities?

Even more ironic - is that Vianet sold their forecourt fuel flow monitoring division for a good profit a few years ago and reinvested the proceeds into the development of their software service. Now it appears that the future of fuel flow will be transformed over the next decade or two - and its all unattended retailing - with flow monitoring of energy and contactless payment - already in trials for Vianet's new platform. But that's classic Vianet jam tomorrow?

Back to the present. I agree that this mornings release is just newsflow. Though the number of connections is something we can hang a figure on - the last AR clarified the revenue per connection for the smart machines division at something just over £100 annually if I remember correctly. Which would put the annual recurring revenue from the 3000 initial connections at around £300k plus the installation/connection costs for the box. Virtually zero reveue in this year to end of March.

All that does is confirm that - on its own - its not signficant. Though if more of the estate of 10,000 machines comes on board then it starts to look better.

But I don't think that’s the point of this rns. The division has a sales target of 50,000 connections over the 2 year period ending in march2023 - though personally I'd give them a little longer to achieve this -which helps to put this contract into some context? And based upon the same £100 per connection would be an annual recurring revenue increase of £5m.

Anyway this has turned out to be a lot longer - and more descriptive note than I'd prefer.

I fully appreciate that this opportunity will not be too many investors taste. Not yet anyway – indeed I’ve been counting on it. I’d much prefer that the shareprice reflects actual progress – rather than become another overhyped tech transition.

Hopefully I've given a flavour of the reasons why I see this as a company in transition from a moribund beerflow and marsbar vending machine outfit to a cloud data analytics and management plaform making realtime data available to customers based upon hospitality venues and vending in the present but with a much wider range of applications in the future.

FWIW the eps this year (to end of March) will likely be just above zero - say between 0.3 and 0.5p - but that does reflect an H1 with partial lockdown and many restrictions. The pile of goodwill and intangible assets hides the underlying profitability. I forecast 6p. 11p and then 19p eps for the years end march23 - end march25. But that's my glass-half-full view. I’ll need to revisit those figures when I get to see the H2 underlying earnings - and there are a lot more customers for them to win before these figures become a reality - though the technology is now in place and today's win helps to show that they are actually on the runway .

Cheers

Mark

SundayTrader

11th Jan '22

Thank you for these thoughts. I have had Vianet (LON:VNET) vaguely on my radar for many years, and have also had many of the doubts that Paul has expressed - essentially static looking revenues are always off-putting. But I will stir my stumps and look again more closely after seeing your thoughts.

GN100

11th Jan '22

Neil W. Try this free one:-

https://www.dividendmax.com/di...

illiswilgig

11th Jan '22

You're welcome.

Just to be clear - my thoughts were more a reply to Paul's questioning of the rationale for investment - rather than suggesting its a buy at a particular share price.

I prefer more 'meat on the bones' in terms of figures for me to forecast from than is the case here, but the pandemic has certainly thrown a spanner in the works and I could be wildly off. It is the glass-half-full view as I say,

cheers

Mark

Boon

11th Jan '22

Does the dividend alert in Stocko not meet your requirements?

Dachsis Capital

11th Jan '22

@ Paul - re LON:SHOE - can you help square their statement that they are now 'debt free' with Stockopedia forecast of £51m of net debt. Maybe you covered this in your comment but I am a bit busy to read everything right now!

BnB

11th Jan '22

Have I got this right? You want Paul to re-iterate what he might have already written in his review above because you can't be bothered to read the review in full? You don't think he's working hard enough for us already? My apologies if I've misunderstood.

GibboP

11th Jan '22

'bit busy' - that is funny

sharw

11th Jan '22

Dear Robin,

I find it difficult to believe your comment re Shoe Zone (LON:SHOE) - you want Paul, who is probably a "bit" more busy than you are to do your 'DYOR' for you? If I were him I would either post something in the early hours that Stocko had to remove or go off in a sulk and not write anything more until next week (please don't do that Paul!).

Stocko does NOT have a "forecast of £51m of net debt". It has a statement of net debt at the interims of £51.6m.

Please go to https://www.investegate.co.uk/... , study the balance sheet, get out your calculator and put in 14473 - 15629 - 4800 - 40042 - 5600 = and see what you come up with.

As for the rest DYOR! (CLUE FRS 16)

FREng

11th Jan '22

I contacted A J Bell to ask why they had blocked trading in £ELTA. They replied that they blocked trading ahead of the AGM vote but omitted to remove the block afterwards. They say they have have now done so.

SaarfLondon

11th Jan '22

Well batted ,you've really done your homework

Rusty2

11th Jan '22

Why are they blocking £ELTA anyway? Not come across this sort of thing before.

peterg

12th Jan '22

Because they will have to suspend trading when it delists, and then should have reallowed it once relisted on AIM. It has to be listed on an exchange to trade.

Rusty2

12th Jan '22

Yes but that has not happened yet. AJB suspended it because of the AGM, never had that experience on other platforms. On Ig Group (LON:IGG) I could buy and sell as normal.

Small Cap Value Report (Tue 11 Jan 2022) - RWA, GHT, KGH, SHOE

Paul’s Section

Gresham Technologies (LON:GHT)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

27 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...