Small Cap Value Report (Tue 17 July 2018) - SOM, IDEA, SNX, CALL, SBIZ, BILB, FLO

Tuesday, Jul 17 2018 by

Good morning!

We have plenty to digest today.

Somero Enterprises Inc (LON:SOM)

  • Share price: 405p (+2%)
  • No. of shares: 56 million
  • Market cap: £228 million

Trading Update

This is the maker of concrete leveling equipment we have covered many times before.

H1 trading is as anticipated, and guidance for the full year remains in line with market expectations

Four of Somero's six territories produced growth, including Europe and US (the most important territories).

China is down sightly, but Somero is still "encouraged" by activity levels there (I have frequently expressed doubt as to whether it will ever achieve much success in that country).

Latin America is also down. Again, the company reckons this is set to improve.

CEO comment:

The first half of the year has seen solid growth in terms of profitability and cash flow generation. The positive momentum of our business and favorable market conditions point to a positive H2 2018. In addition, we are truly excited about the significant opportunities for Somero that lie ahead derived from our continued investment in new product development, a key element to our long-term growth strategy."

My view

No change to my view on this. A good company, with limited competition, and conservative management. I expect it to continue to do very well in Europe and the US.

The algorithms love it. Many investors are now familiar with the story, so its rating is at a suitably high level. Quality and moment remain strong:


It is sensitive to conditions in the construction industry, as you would expect. These conditions have been favourable for a lengthy period of time. If I was going to put Somero in my portfolio, I would want to be sure that I was comfortable with that risk.

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All my own views. I am not regulated by the FSA. No advice.

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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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Ideagen plc is engaged in the development and sale of information management software to businesses in various industries, and the provision of associated professional services and support. The Company is engaged in supplying governance, risk and compliance (GRC) solutions primarily to the healthcare, transport, aerospace and defense, manufacturing and financial services sectors. The Company’s portfolio products include Q-Pulse, Coruson, Pentana Audit, Pentana Performance and PleaseReview. Q-Pulse, which provides quality and safety management. Coruson,which provides cloud-based software solution. Pentana is an auditing software within its internal audit.It has operations in the United Kingdom, European Union, the United States, Middle East and Southeast Asia. more »

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Synectics plc is a United Kingdom-based company that designs, delivers and manages integrated security and surveillance systems for security environments. The Company operates through two divisions: Systems, and Integration and Managed Services (IMS). The Systems division provides specialist electronic surveillance systems based on its technology to customers in oil and gas operations, gaming, infrastructure protection, high security and public spaces. The IMS division supplies products and technology from its Systems division. The IMS focuses on delivering end-to-end, security and surveillance solutions, specialist mobile systems for transport operators, as well as service-led solutions for the management of facilities and security services. The Company primarily works across oil and gas, gaming, transport and infrastructure, and high security and public space sectors. It offers Synergy 3, which a command and control software platform for security. more »

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

42 Comments on this Article show/hide all

Graham Neary 17th Jul '18 23 of 42

In reply to post #382604

Hi Jonno, good to hear from you again - yep, Bilby (LON:BILB) is on the list. Cheers! G

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Graham Neary 17th Jul '18 24 of 42

In reply to post #382714

Hey matylda, cheers, yes I'm planning to take a look at SimplyBiz (LON:SBIZ). Thanks. G

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mmarkkj777 17th Jul '18 25 of 42

Hi Graham. It may already be on your list, but I would be interested in your views on Cloudcall (LON:CALL) . I don't hold, but its on my watch list for a possible purchase at some point. I'd like to be able to formulate a picture at what point in the future this growing company will start to make a profit, but it seems a bit cloudy at the moment.

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Andrew L 17th Jul '18 26 of 42

Ideagen (LON:IDEA) Can understand that you like the other way of seeing things presented. I.e. organic growth of existing business. However, it is also relevant to have organic growth of all businesses including those that have been acquired. This gives an idea of the organic momentum of the business as it is currently constituted.

I also agree though that it would be useful to have the organic growth of the business excluding acquisitions. Also perhaps the organic growth of acquired businesses. This helps us see if the group has just been buying higher quality businesses when the existing businesses.

If I had to choose one metric I would probably go for what Ideagen (LON:IDEA) has given us. The organic growth of the whole business including acquisitions. This is what matters going forward.

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IanMartin 17th Jul '18 27 of 42

Another vote for Amino please. Poor H1 results as expected. H2 looks better, but good enough?

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CliveBorg 17th Jul '18 28 of 42

In reply to post #382664

I emailed Cloudcall expressing similar dissatisfaction to their trading update as rmillaree. I received the following reply from their CEO:

Thank you for your comments and I appreciate your frustration. However, we don’t and can’t release any P&L info in Trading statements, this is only released in our full set of accounts - due out in September.

The purpose of the Trading Statement is to provide shareholders with a ‘flash update’ of trading as soon as possible after the period end – which was 30th June, in this case. In them we include revenue, user numbers, cash and some commentary on trading for the period and outlook. We don’t include any information on P&L as with all the implications involved with depreciation, capitalisation, share and option based costs and allowance etc. it would be impossible to calculate accurately and reliably in such a short time frame.

I agree it’s not perfect, but we still believe that producing a trading statement quickly after the period end rather than waiting for the full accounts 2 or 3 months later, is beneficial to shareholders.

Simon Cleaver


CloudCall Group plc

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Paul Scott 17th Jul '18 29 of 42

In reply to post #382664

Hi rmillaree,

There are 2 broker updates available today on Research Tree, from Arden & Cenkos.

Now that RT has recruited Cenkos & WH Ireland, on top of existing quality outfits like N+1 Singer & Finncap, then I think the £25 per month to get access to lots of very useful research is an absolute no-brainer, hence why I've been a susbscriber for a while. Heartily recommended, as a useful tool for investors who like to do proper research.

It amazes me the way some people will punt many thousands on a share, without doing proper research on it, because they're too tight to pay for a Stockopedia & Research Tree subscriptions - those are the two that I couldn't manage without. 

Regards, Paul.

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matylda 17th Jul '18 30 of 42

In reply to post #382789

Agreed - For me now it's a must have, must check, before clicking Buy!

BTW Paul - You're probably aware but your fantasy fund is currently not meeting requirements to be included in the leaderboard or whatever it's called - One holding is greater than 25%.

Blog: Briefed Up
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davidjhill 17th Jul '18 31 of 42

In reply to post #382669

I have a slightly different take on Cloudcall (LON:CALL) but it is a longer term view.

I don't find 30% growth pedestrian by any stretch. In fact if they can keep that up for the next 2 or 3 years and given the market opportunity & size I expect them to do so, then FYE 2021 I expect revenues of circa £20m+.
They operate on a gross margin of 80% so that leaves £16m gross profit. Company overheads including R&D shouldn't need to ramp up proportionately to service that level of revenue as the variable costs are already built into the gross margin.
Thus I reckon on central costs increasing from £8.3m to £9m (inc R&D spend) leaving a £7m pbt. Corp tax less R&D credits should mean a net outflow of £0.8m in tax, so let's round up & say profit after tax of £6m.
This type of business trades 16-20 PE meaning a market cap of circa £96m - £120m so 3-4 times the current share price, but with plenty of upside potential in my view. On a 3 year view that exceeds 40% annualised compound ROI and I am generally happy with half that, so comfortable holding / thinking of adding a few.

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davidjhill 17th Jul '18 32 of 42

In reply to post #382794

Agree with Paul & Matylda, Research Tree should be a no brainer for any investor with a reasonable size portfolio; especially given recent broker additions giving pretty comprehensive coverage. I often dig our some gems of notes.

for disclosure purposes I am long RT !

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ExpectingValue 17th Jul '18 33 of 42

In reply to post #382799

Do you think they can get there without any dilution, given the cash burn in the first half?

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pablo28 17th Jul '18 34 of 42

Following on from your previous comments on Flowtech (FLO) would you please try to have a quick look at this mornings trading update.

Many thanks


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Graham Neary 17th Jul '18 35 of 42

In reply to post #382824

Hi Paul, it's a long list today but I may be able to get to Flowtech Fluidpower (LON:FLO). Thanks for asking. G

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Graham Neary 17th Jul '18 36 of 42

In reply to post #382689

Hi, well spotted on the Bilby receivables. With revenues up 23% an increase in receivables of 34% is not so outrageous. Carrying a big receivables bill seems to go with the territory with this type of company. I don't know why inventories went up but again it is not such a huge % increase relative to sales growth. Thanks for the comment. G

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HornBlower 17th Jul '18 37 of 42

did Paul manage to look at Mothercare on Friday? was in his list for the part 2 but I can't find any comment

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rmillaree 17th Jul '18 38 of 42

In reply to post #382799

Hello davidjhill
Cloudcall (LON:CALL)
I agree 100% that the growth isn't shabby and heck if they need to invest some extra cash to facilitate faster growth that should certainly pay dividends albeit cash now does look a bit skinny. As you say it's very decent upside potential.

My beef this morning was more with the overall package where they are going compared to prior expectations and how they glossed this over by the wording today. If the broker notes are now saying expected EBITDA losses are to rise from 2 mill loss to 3 mill loss that a big downgrade and is effectively a profit warning in my books. We are sort of into the same thing the second time (or is it third?) round where they previously had problems getting the growth up to cashflow neutral position and had to raise funds - as mentioned by Graham we are less than 18 months away from the pot running dry again if the broker estimates are to be believed so unfortunately now my glass is more empty than full short term.

PS - Paul thanks for your comments - out of interest how quickly on average do updated broker notes tend to show up after trading update like todays. Are they ever available before the opening of play for the day (8 am) or do they just turn up in dribs and drabs at completely random times?

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Wimbledonsprinter 17th Jul '18 39 of 42

In reply to post #382779

I think Cleaver’s reply is quite sensible. But it does wind me up when company’s pick and choose their reporting date for different items. In the case of Cloudcall (LON:CALL) , the £3m cash number is of 4 July (obviously because it is higher than the 30 June number because of the R&D credit). OK, we can imply the 30 June number was £2.4 million - and it will be reported in the half year results.

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davidjhill 17th Jul '18 40 of 42

In reply to post #382874

Hi rmillaree

Yes, I certainly get you on that front. My read on the trading statement is that it was constructed to give the following messages.......

"Hey, we are are growing revenues at compound 30%+" : ie the business opportunity isn't going away
"We've invested in sales but it took us longer than expected to train and deploy them, otherwise we would have made even more revenue" : ie the change in expected loss is directly attributable to a sales investment timing (rather than just an increase in corp overheads), so not really a profits warning per se.
"We've got plenty of cash for now" - no placing imminent, possibly to breakeven so please don't fret.

Probably also designed being very mindful that they have had a couple of false starts.

Not sure the market took it that way........

The key for me however, was simple. If you look at the forecast expected loss increase it is solely related to a £1m increase in sales/marketing so nothing else has actually gone awry. It was an expected cost, so nothing to fix, but the timing meant that no revenue has been realised on that particular investment during the period.

No big deal in my book as long as in the next statement I see the expected increase in revenues starting to come through as a return on investment. If I don't then I will worry at that point.

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Paul Scott 18th Jul '18 41 of 42

In reply to post #382794

BTW Paul - You're probably aware but your fantasy fund is currently not meeting requirements to be included in the leaderboard or whatever it's called - One holding is greater than 25%.

Hi Matylda, yes I am aware of this. It's more important to me to put in whatever positions sizes I want to in BMUS, rather than worrying about whether or not it appears in the leaderboard tables or not!

If Sosandar (LON:SOS) (my largest position) does what I think it could do, then it would end up being a lot more than 25% of the total fund. As always no guarantees though, but I have very high conviction on this one, after the very encouraging recent update. I've revised my forecast for current year sales upwards to £5-6m. The original plan was for just over £3m, so I think it looks like the business is roaring ahead of plan. The market doesn't seem to have twigged this properly yet - perhaps because it wasn't explicitly stated, you have to work it out from dissecting the results.

Cheers, Paul.

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Paul Scott 18th Jul '18 42 of 42


Somewhat belatedly, here are my comments, in response to reader requests above, on the Cloudcall (LON:CALL) trading update yesterday. I hold a long position in CALL shares.

Firstly, it was clearly a profit warning, but a fairly mild one. The 2 brokers which report on CALL (both make their research available to subscribers of Research Tree) both put out updates, reducing 2018 revenue forecasts from c.£9.5m to c.£9.0m. 

One broker reduces its 2018 EBITDA loss from £2.4m to £3.1m, and the other reduces from a £1.9m EBITDA loss, to a £2.9m loss, so quite a significant drop in forecasts at the EBITDA level.

What's gone wrong? The company says it's all down to timing of recruiting & training new sales people, which has taken longer than expected. It says there's not a problem with customer demand, they just didn't have the internal resource to bolt on new customers at the pace required.

The brokers clearly believe that explanation, as they have not reduced revenues forecasts for 2019. The company also talks about expecting a strong H2 in 2018, as the new recruits kick in.

If it all pans out as the company suggests, then the current share price weakness should prove negative. The trouble is that the company has proven somewhat accident-prone in the past (repeatedly missing targets, especially on cash burn), so investors are wise to take the company's outlook comments with a degree of scepticism. That doesn't make it a bad company, but I'm just pointing out that it tends to be overly optimistic, and then disappoints a bit. But that's within an overall picture of strongly growing revenues (which have risen organically from £3.3m just 3 years ago, to forecast c.£9m this year - that's very impressive growth).

Organic growth - is still very impressive, as noted above. The market tends to put a significant premium on the price of any company delivering over, say 20% organic growth at the top line. CALL is still well above that, at +31% Y-on-Y revenues growth in H1 of 2018. That's still a very impressive growth rate, albeit below the previous forecast of c.39%. I don't think the company should be punished too hard for this.

I like to look at not just year-on-year growth, but also sequential half year growth. This has been;

H1 2017  £3.2m

H2 2017  £3.7m (up 15.6% on previous half year)

H1 2018  £4.1m  (up 10.8% on previous half year)

So there's been a slowing there, but still good growth.

Note also that the company has sticky, recurring revenues - because its product is excellent (I use it myself). Cashflow is hence highly predictable, with customer receipts coming in regular as clockwork each month. Customer retention levels are high, because people find the product so useful. That's key for building a SaaS business. Gross margins are also very high - again a key point.

Will it need more cash? Almost certainly, yes in my view. Does that matter? Not at all, in my view. There is no reason for shareholders to worry about another fundraising, because the company is well beyond the blue sky stage, when fundraisings are uncertain & can be done at deep discounts if investors are nervous. CloudCall's business model is now proven, and if it needs say another £3m to push it over the line into profitability, then that would only be about 10% dilution, and I reckon Instis would be queuing up to participate.

Evidence for this is that the last placing raised £5.7m in late 2017, and was priced at 143.5p, only a 5.3% discount to the then share price of 151.5p.

The only circumstances in which CALL would struggle to raise more equity, would be if the whole market turns bearish, and/or if CALL's revenue growth grinds to a halt. If that happens, then we'd be looking at a much lower share price, for sure. But that hasn't happened, hence why I think worries about another placing are wide of the mark. It's not a worry to me at all, for the reasons given.

Note that the company has a track record of repeatedly stating that it will not need to raise more cash, and then going on to raise more cash! So the reassurances given in the latest update that it has adequate cash resources, and worthless in my view, given the history. But it doesn't actually matter either way.

Is this a buying opportunity? That's obviously up to each individual to decide for themselves. I see this as a "good" profit warning - i.e. temporary, fixable problems, with the business model & growth story intact, just slightly blunted in H1.

The share price recently peaked at 193p. So being able to buy at 135p today, seems an attractive proposition to me. I can understand emotions kicking in, and some investors' patience wearing thin, but taking a longer term view, this share could be worth substantially more, once you factor in a few more years' strong growth, and the eventual move into profit.

Tech shares like this are not really valued on profits at the moment. The market is instead placing more emphasis on growth, with strong organic growth (combined with lots of operational gearing here, from high gross margin) should attract a premium rating.

There are plenty of private equity buyers around, willing to pay eye-watering valuations for growth tech companies. I would welcome a takeover bid for CloudCall, providing the premium is sufficiently large. It doesn't sit well in the stock market, where people are too focused on short term performance. Whereas, the better option for a growth company is to set aside short term profitability, and instead "go for it" in terms of growth, which might mean incurring heavy losses in the short term.

For stock market investors, CloudCall has been frustrating, in that the runway to profitability seems to be extended each year, by a year! The company is increasing its costs to take advantage of growth potential (and extending the features of its product), but with the time-lag inherent with that type of spending, it results in administrative costs relentlessly increasing, and absorbing the benefits of increased sales/gross margin. Hence why I don't think CALL should be listed on the stock market - it would be better off as a private company, and able to press on with faster, but more cash-consuming growth in the short term.

Overall, I think that for investors who are prepared to be patient, then we should do well out of this one in the long-term. The current market cap is extremely low for a SaaS business that's not far off profitability. Just look at the valuation of LoopUp (LON:LOOP) to see what can be achieved in this sector.

Regards, Paul.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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