Small Cap Value Report (Tue 15 June 2021) - ECK, CML, VNET, TPFG, K3C, KCT

15th Jun '21 by Paul Scott

34 comments 10626 reads

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

Today's report is now finished.

BOO trading update discussion - please note that I've posted a separate article to look at & discuss the Boohoo (LON:BOO) (I hold) trading update this morning, which is here. So please let's keep the SCVR clear of BOO comments, as it doesn't fit the small caps remit here. Thanks.

Mello - There's a Mello on tonight, this one to do with Funds & Trusts specifically. So if that catches your interest you can read more in David's post here, or check out the web page here. Stockopedia subscribers can register for free with this code: STOCKO1506

Quick note - we said last week we would create a disclaimer for these posts. For now, just a friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day.

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the blog post itself!

Agenda

Paul's Section:

Eckoh (LON:ECK) - results for FY 03/2021 lack sparkle (probably due to covid). Guidance is for a flat year in FY 03/2022, then growth thereafter. Price looks toppy to me, considering we're being asked to pay up-front for growth well into the future.

Cml Microsystems (LON:CML) - a special situation, where about half the current market cap is net cash mainly from the disposal of its storage division. Another 50p special divi is imminent. Upbeat outlook comments. Looks intriguing.

Vianet (LON:VNET) - as expected, FY 03/2021 was poor. Note the large amount of development costs capitalised onto the balance sheet. Funding position looking a little tight. A recovery in trading already seems priced in, so doesn't interest me.

Jack's Section:

Property Franchise (LON:TPFG) - Market conditions currently more favourable than before Covid, but are being helped by government initiatives which could at some point change; Hunters integration going well; cash generation should allow the group to continue funding organic…

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Paul Scott

15th Jun '21

Hi Poker111,

Again, Triad (LON:TRD) is really tiny, only c.£21m market cap after today's 13% rise in share price. It's been a 5-bagger since the big vaccine-driven rally began in Oct 2020.

I won't do a full section on it, as we're trying to focus less on the nano cap end of the market. Although having a quick skim of its results today, the numbers look (small) but good. Turnaround from a £0.6m loss last year, to a £0.6m profit this year. Dividend reinstated at 2.0p.

4.24p EPS, so at 130p share price, the PER is 30.7 times - very pricey indeed for a tiny staffing company. So the market is already pricing in a substantial further increase in future profits.

Balance sheet looks excellent, with plenty of net cash, and a very strong overall NTAV position.

Overall, it looks a very good turnaround, and well done to people who spotted it early. The price looks up with (or ahead of) events now, so it wouldn't interest me at this stage. A good spot though, thanks for flagging it up.

Regards, Paul.

UK_Investor_8888

International Personal Finance (LON:IPF) (My largest holding +106%)

International Personal Finance (LON:IPF) shareholders and I have woken up this morning with a large rise on a fairly undetailed trading update. Things were not as bad as they feared.

https://www.stockopedia.com/share-prices/international-personal-finance-LON:IPF/news/intnl-personal-fin-upgrade-to-market-expectations-urn:newsml:reuters.com:20210615:nRSO8638Ba/

"In contrast, our actual collections performance has continued to be very strong resulting in a faster-than-anticipated improvement in impairment as a percentage of revenue."

(They must be fans of "W1A". Oh brilliant!)

Poker111

Thanks for the quick reply Paul. Relatively new subscriber here and finding my way. I bought Triad (LON:TRD) in January at 76p so I'm quite happy so far. I also topped up around 120p after seeing an NED buy at over 140p. I'm thinking that if all that profit came in H2, then the ongoing run rate is double or more. Conservatively I'd expect to see 9p + of EPS this year. If rated as a higher value consultancy, not a staffing business, maybe the PE could be higher - is 15 reasonable? Add in 30p of cash and I we could justify 165p next year and maybe more the year ahead.

mojomogoz

Jack, re K3 Capital (LON:K3C) acquisitions and dilution ->

I believe the £30m dilution can be justified entirely by randd. Here's the info on biz released at time of raise

And then then interim results for randd as part of K3C:

EBITDA is roughly equivalent to PBT for randd. So what valuation a growing, c.50% net margin business with inherent strong recurring revenue and nearly £3m PBT? Operational synergies very high between KBS and randd businesses and randd benefits from the unusual sales lead approach KBS employ.

People focus more on Quantuma. I was less keen on that acquisition as core insolvency biz doesn't align with the K3C model so easily. The thing to watch there is can K3C and Quantuma find a way to utilise the KBS sales lead approach to expand Quantuma's engagement.

FY22 guidance from finncap is very conservative. It implies a modest fall in run rate revenue. FY21 missed 2 months from Quantuma as acquisition not until August. Quantuma generates c.£2m rev per month.

What's going on? K3C no longer forecast any revenue or profit from commissions. So the FY22 they give to finncap assumes no revenue from commissions (successful deal completion) and based on prior guidance it doesn't seem to me that finncap correct that and put in a bit of commission. That is 30-60% of revenue typically for KBS division (from memory rather than checked but approx that). 60% is bumper year where big deals go down like 2018...very profitable.

So guidance out there for fy22 is assuming modest growth for Quantuma and randd and quite a step back for KBS. Clearly the wheels could come off in some way (most likely if we hit a post covid recession/depression etc)...though after an initial hiatus that would suit the largest and somewhat subdued in current environment division of Quantuma.

So, K3C is not screaming cheap like a year ago but it seems decent value for what is biz with high likelihood continued revenue surprise and high margins.

Current adj earnings from finncap put company on approx 23x fy21 eps. Taking my points above and adjusting finncap outlook accordingly fy22 looks conservatively to be <18x (lots of hand waving).

Is that expensive compared to lots of the market? Dividend approx 3%, op margins >30%, growth looks continued with at near 10% coming from just having Quantuma for 12 rather than 10 months and then there is the commissions to place on top -> 20% revenue growth fy22 on fy21 looks not to be too much of a stretch with scope to surprise on top of that decent

I'm surprised you stocko people don't have it in your portfolio yet ;)

Yes, your logic makes a lot of sense! I see Triad (LON:TRD) shares are tightly held, with John Rigg and Mira Makar owning 28.0% and 24.5%. Rigg is shown as Chairman, but I can't find any reference to Makar on the company's IR website.

Triad qualifies for the Tiny Titans stock screen, which has thrown up some good micro caps in the past, I've found. This is a clickable link below, to Tiny Titans, if anyone is interested.

illiswilgig

Vianet (LON:VNET)

Thank you Mojo - that is the link I was looking for.

As you rightly say the results - 0.7m operating loss and 1.1m operating cashflow are as foretold in the April trading update so no surprise.

The results do give more detail on revenue and profit in the two divisions which is useful - I need a few hours to try to work that into a forecast if I can.

The price fall this morning looks like an exit by those looking for a quick profit?

My sense is that a return to pre-covid profits will be a stretch for this year FY22, due to the speed (or lack of it) of opening up - but FY23 should see a return to growth - primarily from the unattended retail (vending) division. I've seen nothing in the results to change that view and my existing forecasts are for 6.9p eps this (FY22) year and 10.4p eps in FY23

Accordingly I've added a few this morning at 96p, possibly unwise in advance of revisiting my numbers, we'll see.

cheers

Mark

Chriskay

A little anecdote. Here I am sitting watching my portfolio on IG this morning and suddenly one of my positions Tekcapital (LON:TEK) soars up 7.00% (+ 13.3 % now) from nowhere on no material news. At almost the same time a new post pops up from Investors’ Chronical with an article from Simon Thompson. I download and guess what (ah you already have?) He recommends Tekcapital – one of his previous buys which I acted on. I am aware of ST’s influence on SPs, but I have never seen it in real time in the space of about 10 minutes. Not sure what to think. It's a nice surprise but maybe a little worrying that one person can have such influence.

Camtab

Fair enough. Thanks Paul.

Sovereign Individual

An in line H1 update from Ramsdens Holdings (LON:RFX) today. Very small loss and have managed to conserve cash. Reducing administrative expenses by £3.8M YoY admittedly flattered by £900K of furlough etc.

This looks to me like one where the balance sheet is strong and there is an opportunity to reduce costs by renegotiating rents.

"Where appropriate, lease renewals have generally resulted in rent reductions, greater flexibility or sometimes both"

They are looking to start expansion plan again in H2 and will be looking further south.

The delay to holidays will inhibit the FX part of the business but surely this will come back eventually? In the mean time stronger gold prices and a growing watch/jewellery business will help the business avoid losses.

I get numbers similar to analysts forecasts for 2021 and get a forward PE of 7 on my forecast earnings for 2022.

Is there something i am missing?

Looks like HL.co.uk are having problems at the moment. No Live Prices and errors when I try to trade. Anyone else having issues, please?

laurie

Triad (LON:TRD)

It is my understanding that Mira Makar is no longer involved with Triad. She, I vaguely remember, became bankrupt sometime after 2006. The administrators (Atkinson) sold her holding in Triad by 2019 (probably some years before this). There was some uproar at the time. SharePad does not list Makar/Atkinson as a holder; I believe that Stocko's info is out of date. Here is some general background: https://www.theguardian.com/business/2006/nov/07/3 https://www.wiggin.co.uk/insig...

Ms Makar is the ex-girlfriend of Mr Riggs, as well as being the ex-CEO. It was all quite nasty...a very messy and public divorce-of-sorts.

hampsob

Hi Paul/Jack, I would be interested to hear your views on Chapel Down Group, CDGP. Revenue growth has been extremeley strong, but they are not following this up with good profitabilty. However, they have a fantastic range of products, and are well oversubscribed on their current fundraising through SEEDRS (£5.5m invested with £3m target). What do you guys think? Cheers!

Helvellyn

HL's platform is clearly not fit for purpose. They have become far too greedy and have not scaled their offering to accommodate the number of customers.

I get so many problems using them. I will not be with them much longer but changing is not that easy as they well know.

Richard

I have noticed that when Paul and Jack 'like' a stock it does sometimes have a similar effect.

SCS last week or RNO a little while ago being good examples.

Hi hampsob,

Welcome to Stockopedia! :-)

We last looked at Chapel Down (OFEX:CDGP) here when it last issued Final Results here on 4 June. Jack reviewed the results, and I chipped in with a comment in the comments section. Bottom line, we don't rate it as an investment but wish it well.

FYI, and I can see you're new to Stockopedia, these Small Cap Value Reports (SCVRs) are driven by the days newsflow, principally trading updates, and results statements.

You can check the archive for previous comments on any company we cover, by clicking on the Discussion tab via the StockReport.

ezlifeme

Richard - re your examples of Paul and Jacks “likes”

The effect only happens after a delay for a bit of DYOR obviously

Silver Moon

By the time the DYOR has been completed the train has left the station, you could do worse by taking a chance.

Silver

davidjhill

Hi Mojo - I rather wish I did. I looked at it when you added it to my 2021 best small cap ideas column and concluded it looked rather cheap but ended up buying some other stuff and this passed me by. Shame but as you say still looks reasonable value if no longer cheap.

16th Jun '21

Many thanks for that Paul, I must have checked in the wrong place for any previous reports. I think Jack's report and your subsequent comment make complete.

Best, Barry

abtan

Ramsdens Holdings (LON:RFX) (I hold)

Hi Sovereign Individual

Thanks for your thoughts on this one. Here are a few of my own:

FORECASTS

I actually think that the company will miss this year's forecasts for both Revenue and Net Profit (well, Net Loss by my estimates).

But that doesn't really matter as the most important thing is that cash burn is low and current resources and trading is strong enough to last through to "normality."

When that happens I would hope for annual cash generation of at least £6m-£7m.

That seems remarkably low for a company worth £47m with lots of assets on the balance sheet. Even excluding the £15m cash balance (it's debatable whether to include this as an excess resource given that it is used to make loans) there is still £10m worth of jewellery stock.

---

ONLINE + NEW JEWELLERY SALES

Another point of interest from the results was the year-on-year rise in:

Online jewellery sales (£0.8m ---> £1.6m); and
New Jewellery sales (£2.2m ---> £3.1m)

Why anyone is buying new jewellery/watches from a pawnbroker's website I don't really understand, but the numbers don't lie and if they can keep momentum here, then it's another avenue for future organic growth.

Note that Offline sales and 2nd Hand sales are relatively flat year-on-year, so the above increases don't seem to have cannibalised the company's legacy jewellery operations.

I remain a happy holder for now and continue to hope for a re-rating over the next 12-18 months.

Small Cap Value Report (Tue 15 June 2021) - ECK, CML, VNET, TPFG, K3C, KCT

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Paul Scott

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