Small Cap Value Report (Tue 16 Aug 2022) - TED, SPE, SMRT, HARL, TRB, TRMR, CGS

16th Aug '22 by Paul Scott

66 comments 7906 reads

Good morning! Paul & Graham are here with you today. Today's report is now finished.

Agenda -

Paul's Section:

Ted Baker (LON:TED) - an agreed cash takeover bid is announced at 110p, only an 18% premium. The 3 biggest shareholders (including the founder) have agreed it, so the company's trading and outlook can't be much good. This was not a convincing turnaround, so maybe this is a lucky escape for shareholders?

Sopheon (LON:SPE) (up 5% at c.550p - mkt cap £58m) [no section below] - announces a $11.2m, 5-year contract, with the US Navy’s submarines. It “will help to underpin financial goals for current and future years”, so forecasts not being raised at this stage. Sopheon always looks promising, but its profits have reduced every year since 2019, and only $0.8m PBT is forecast for FY 12/2022. So it’s certainly not a value share. Although longer-term, this could be an interesting company. Today’s contract win certainly sounds impressive as a reference for winning other business. If you like the company, then you can buy this share at half the price it was a year ago.

Smartspace Software (LON:SMRT) - H1 trading update today is in line with expectations. Still loss-making, but it seems to have enough cash (just), and cost control is mentioned. For such a tiny company, it seems to have lots of moving parts - different divisions/products, and operating in various countries. Despite some reservations, I think the share price shedding c.75% of last year's peak valuation, has brought it down to a more reasonable valuation which might be worth a little dabble at some point. Acceleration in growth is now key - if that happens, then the shares could do well. If it doesn't, then they might continue drifting down.

Tribal (LON:TRB) - interim results don't impress me at all. Too many adjustments that seem to recur each year, so genuine profit doesn't look much for the high market cap. Also I dislike the weak balance sheet, poor cash generation, and wobbly-sounding outlook statement. Risk:reward looks poor to me. Although sticky customers, with recurring revenues, could be attractive to a bidder - software companies often attract perplexingly high takeover bids. Or did anyway, in the latest tech boom.

Castings (LON:CGS) - a reassuring trading update today, shows that CGS is coping well with supply…

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ken mitchell

16th Aug '22

yiannos

I wasn’t being misleading. There are many many similar examples where buybacks have failed to reward shareholders. Indeed years ago Morgan Stanley did very detailed research on buybacks and subsequent share price performance and remarkably found that Companies buying back subsequently performed better (i.e subsequent share price) than Companies in the same sector that didn’t buyback.

Whereas it’s possible to give examples (e.g Tremor today)where buybacks clearly were a waste of money, we can’t when the share price subsequently did very well, know how much of that was thanks to upbeat trading news etc or mainly the effects of fewer shares in issue thanks to buybacks.

One thing is for sure though. No account is taken of previous buybacks or the amount spent on them when a share is priced either after a bad update as with Tremor International (LON:TRMR) today, nor after better than expected updates.

Benson

I have held James Fisher And Sons (LON:FSJ) on 2 or 3 occasions since about 2000 and done well out of my holdings It has always been a complex company with many parts that do not work well even before the last 3 years financial fun and games in world markets In my vey humble opinion the company needs a new simplified strategy to retain the parts of the company that can be run profitablely and with a chance of growth in turnover and profitability going forward and to get rid of the rest

I am not a fan of the present management but I have bought this company before on a change of management and done well

We live in interesting times!

yiannos1

From my experience, in the US they use the buybacks in a more effective way that benefits the shareholders. But we are talking about real growth companies being advised by the best bankers out there.

Thanks

Hi Paul ,

Any idea why the CEO of Anexo plc has just bought almost 10% of Ince plc?

I know that you do not like this stock ( I didn’t as well but I am more positive now ) , but the new CEO has just bought around 10% , Crux asset management bought also around 10%.

Maybe the restart of Ince?

illiswilgig

ridavies - thank you for mentioning James Fisher And Sons (LON:FSJ) (I hold). It's been an interesting ride.

I too have wondered what is behind the recent share price strength. Though perhaps its fair to also consider why the shareprice has been so weak previously?

It's not the only share in my folio that has changed price behaviour in the last few weeks. I have a feeling that these shares have swapped from longterm sellers in the market with few buyers - to longterm buyers in the market with few sellers? To add a little more colour - traders and short term holders probably sold prior to the summer break, whilst longterm selling down of positions finished or got bought up by the new 'value' holders recently appearing on the register. Leaving new buyers interested with few sellers around.

Note also - that the largest holder is the Sir John Fisher Foundation (charitable trust in and around Barrow) with around 25% with the next few longterm holding institutions taking it to over 50%. Which is also probably why there has been no shareholder dilution and why the shares are now quite tightly held.

I don't expect the H1 results to be very good. I do expect them to be reasonable and in-line with some positives and some negatives as the turn around is still work in progress. And as you say the new CEO is about to come on board.

A new CEO is a concern. But the FD and Chairman joined in mid 2021, there have been two extensive rounds of write downs already and the current CEO has only been in post for 3 years so I'm not expecting there to be a large new round of write downs. Maybe a tidying up exercise at the most and balanced by improvements . But really I don't think the management team will want to disrupt the currently improving sentiment? The new CEO appears to be more of a deal-maker - so perhaps he will be keen to forge new deals and set the future direction, taking the credit for future progress now that the bottom has been set? Whereas the current CEO is more a 'business improver' and in my opinion has been doing an excellent job under the covers. It's been a difficult balance to stabilise the ship, manage the heavy load of debt, lighten it a bit, keep the cash flowing, avoid selling off the crown jewels, and all without shareholder dilution under very difficult circumstances.

I note that the current CEO is staying with the company for a further 9 months until june 23 after the new CEO joins in September. They don't seem keen for him to depart swiftly and perhaps thats an indicator of the importance of the business improvement work thats underway across the company?

I've been adding recently at between 275p and 300p. The move upto 400p is welcome, but mainly reflects that it overshot on the downside at 260p. For me this is a Very-LTBH - I first purchased in 2001 at around 70p, rode it all the way up to 2200p. Failed to sell. Rode it all the way back down to 260p. Failed to sell. Bought more. No longer a more-than-thirty-bagger. A mere 5 bagger (or 27% a year on my initial purchase) for me. That ignoring the substantial dividends along the way.

But its the future that interests me most. At the moment this is one of my most risky holdings - because of the debt. They have some excellent businesses, technology and reputation, market leaders in their niches, and stand to gain hugely from multiple tailwinds across energy transition and security, renewables, oil and gas, decommissioning, nuclear, defence and national security. Provided of course that they can continue to juggle their way towards these future prospects.

James Fisher And Sons (LON:FSJ) was covered by jack in the 10th March SCVR ( and a note from me on what went wrong and how they are putting it right in the comments)

https://www.stockopedia.com/co...

cheers

Mark

ISAallowance

IMO buybacks are essentially disguised tax evasion on return-of-capital to shareholders, and should be taxed at the same rate as dividends.

Ignoring the above, personally I'm happy to see buybacks from financial companies priced at a discount to TNAV, but beyond that give me the dividend and let me decide if I want to buy more of your stock, or maybe someone else's.

Revs8

Surely it needs an overhaul of the management team before it can be considered for investment. At the moment it’s just the same people that have driven the SP into the ground.

Well I have asked Paul if he knows why the CEO of Anexo bought 10% of the company , a new CEO 10% and the well established Crux asset management another 10%.

Don’t just take 3 words out of the 50 or so that I have written and just write about past performances and events. We all know the past. It’s the future that matters.

TheRaven

Pretty much my situation - another (adopted) northerner.

davidjhill

I find that comment odd. Drucker (the CEO) has a good track record having previously built and sold similar ad businesses. No hint of any wrongdoing in those transactions from the buyers.

Would seem strange that he would risk his reputation / freedom on that basis. It’s not like he doesn’t have a mass of money from previous ventures.

People have questioned the cash for at least 6 or 7 years yet it does appear to exist. The company has been through several periods of external due diligence too where that cash evidence would need to be shown. Not infallible of course but I considered on balance that the evidence pointed to it not being a fraud.

Graham misses that the Amobee deal is for a loss making business so valuation metrics aren’t directly comparable. Assuming Tremor International (LON:TRMR) achieve the $50m of cost synergies then it will be decently profitable. Also Tremor has a lot of depreciation that masks the true cash generation of the business, so you need to unpack that to compare.

Guidance is $200m for next year which if hit puts this on 1* EV/EBITDA so irrespective of views as to how good the business is compared to peers looks like an anomaly.

As we know perception is reality though, and they are clearly disliked and not trusted. Peers in US are on multiples of that so also says that investors aren’t warming to the story. I don’t like the exec pay as I think it is excessive yet it isn’t that out of whack with US norms either (which I also consider way too excessive). So that doesn’t explain the valuation difference either.

Bit of a head scratcher for me.

MichaelFBS

Thx Graeme.

at around £6.50 good call.

Thx.

BnB

I find that comment odd

It really isn’t. They look and sound like a bunch of crooks (to me). That isn’t a forensic analysis or a reasoned critique. It’s an emotional response. As I think was clear in my post.

Just watch the video and listen to Drucker, looking for all the world like a minor actor in a TV gangster series, fail to explain why investors should take a ride with him while his goon, or is it a NED, looms menacingly at his side “you should be proud to be part of this business!” I honestly thought he might say “but you can never leave!”

And that strikes at the heart of my aversion. This is not a business I would be proud to own, no matter how attractive the opportunity for a profitable trade.

Others might take a different approach, hopefully to their, and your, considerable benefit.

The alarm bells were loud and clear on Tremor. Last year they have raised around $130m ( during their US listing ) money that according to their accounts and statements , they simply did not need.

You simply do not raise $130m when you claim you have double that in cash. I believe that this will eventually follow the same trend as XLMedia.

MIK

Hi Graham,

Thank you for your and Paul's work and coverage for the SCVR which I try to read daily.

Just a short comment regarding the brief valuation/multiple you gave for Tremor International Tremor International (LON:TRMR) (I hold). While I do think there are various reasons that the valuation muliple of Tremor International should be higher than the multiple applied to Amobee, not least because it is a larger business whose scale and focus also provides higher margins and apparently profitability whereas we are advised that Amobee is not profitable (the part that Tremor International has agreed to acquire taken as a stand alone entity) - the main point is it appears that only H1 figures were used to come to the valuation of $587m. Even on the low multiple used, the valuation based on trailing twelve months contribution ex-TAC should be approx. $850m. This is substantially higher than the current Mkt cap excluding any benefit from further scale and synergies etc as you mentioned. Sorry if I’ve missed something here.

Thanks and kind regards,

Michael

TheFly

17th Aug '22

James Fisher And Sons (LON:FSJ) was tipped in SCSW over the weekend.

Graham Neary

Hi Michael, thank you so much for the correction. We need readers like you to help us out, when we make mistakes. The article has been amended.

Best regards

Graham

You're welcome Graham. Thanks for your reply. Yes that seems a very important point since you're covering large amounts of news and data and readers will often know many of the companies they invest in quite well.

I'm not sure if there is a sort of notification system for readers when articles are amended though if not it might be worth adding a note on the current day's report if something material has been revised - in this case half year figures to full year do make a sizeable difference - as the write ups do have a bearing on people's thoughts and perceptions of companies and their valuations.

In any case thanks again and all the best,

mojomogoz

Re Tremor International (LON:TRMR)

I agree there's much that is uncertain in that we don't know what the 'true' run rate of business is currently (as much about how much they've grown over 2 years as is about short term headwinds) nor can we know what its durable growth rate is going to be (again due to change...and now the large acquisition).

However, the character assassination of CEO and hints at fraud are the worst sort of bs drive by banalysis. By all means identify fraudulent behaviour if you can...but if we want to call management names then there's a long list of oddballs and lacking in social skills. Plus most firms on AIM ain't very clear/realistic about what their business plan is or how they will really get there. Many have clear narratives obvs and a lot of us are suckers for that. By comparison...whatever the presentational flaws of Ofer Drucker are (he's defo got them...one being language/cultural...his problem to overcomes given UK listing tbc) the reality of what he says and does is pretty clear and comes with pretty good cash flow too and past impressive implementation on acquisitions...I would like a cleaner game on capital management but do note that the high share comp is partly a function of great success under Drucker who took over during a multifaceted hiatus in management direction and the comp was struck then at something much more like £1 per share. (This too is when I bought as my deep dive on the civil fraud case against old CEO made me believe it was a nothing-burger...and then the product/ growth and other issues were heavily discounted such that I got good value and an uncertain but potentially high growth option...and under Drucker that growth option has proven much better than I could ever see forward to...actions speak much louder than halting words)

...some dark brooding that the cash ain't real as they raised in US IPO and they are using part debt for Amobee acquisition. That's just silly and not a smoking gun. I was miffed at size of IPO raise but that is not uncommon...and quite a few would say that it was a good raise for 'dry powder' done at higher price if it was one of their narrative positive stocks given stated acquisitiveness. The accounts are tough reading (like other in the space in US too...lots of working capital) but comb through them and find evidence before shouting fraud if you want to be credible...of course feel free to shout what you like based on whatever you consider passes for analysis.

I rarely tip stocks and with Tremor I'd advise people not to get involved unless they do some work as there's a load of volatility and uncertainty in this for some good fundamental reasons and many poor/dodgy sentiment ones. However, I feel comfortable holding (I accept high risk) as I think the odds are high that I have durable value (even with some slowdown) and very high optionality on growth and future pricing. Low anxiety and looking through the noise required. I'm not telling you Tremor are saints and I'd change some things

A number of you on thread are now in my little black book of banalytical fools...you know who you are ;)

If you are lucky/unlucky (delete as appropriate) I will try put some detailed fundamental thoughts together on Tremor. But don't have time until next week earliest...

mojo out x

18th Aug '22

A number of you on thread are now in my little black book of banalytical fools...you know who you are

Mojo. I love your work. And I’m happy to be sat at the front of the banalysis class. However, I would not so lightly dismiss a dissatisfaction with a CEO’s presentational skills or his apparent motivations. When you buy shares in a company, certainly if it is with a long-term, buy and hold perspective, you inherit a hiring agreement with the board of directors. You have to be happy that the board, and CEO in particular, have the decades-long interests of shareholders at the forefront of their concerns. And that they are motivated by legacy - they want to build something that will endure beyond their passing for the benefit of the employees and the evolving owners. They should be motivated by their own enrichment of course. But that should not crowd out other more altruistic aims.

When I bought shares in Tremor International (LON:TRMR) I was swayed by the valuation and position in CTV. But my subsequent engagement with the company, including but not confined to their online presentation, persuaded me that the BoD did not pass my “hiring test”. I sold last autumn. The recent results, precipitating a 22% fall, are in stark contrast to my other adtech holdings, Trade Desk (up 37%) and Pubmatic (up 30%) and do nothing to change my perspective.

I wish you great investing success and look forward to your next exasperated attempt to educate us all :-)

Small Cap Value Report (Tue 16 Aug 2022) - TED, SPE, SMRT, HARL, TRB, TRMR, CGS

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Paul Scott

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