Small Cap Value Report (Tue 17 May 2022) - ACSO, MER, TRMR, NANO

Good morning! Paul & Jack here.

Agenda - 

Paul's Section:

accesso Technology (LON:ACSO) - a fact & figures-free commentary for its AGM today. Although as waffle goes, at least this is positive-sounding waffle!

Nanoco (LON:NANO) - a positive-sounding update on the all-important patent infringement case against Samsung. We don't have enough information to value this share at the moment.

Jack's section:

Mears (LON:MER) - trading ahead of expectations thanks to improving margins and a strong cash performance. The valuation is modest and the yield is good, but this is an historically low-margin business and the share price has struggled to move over the years, which limits my interest.

Tremor International (LON:TRMR) - revenue and EBITDA at record levels in a seasonally quiet Q1, although revenue comes in slightly below forecasts. The valuation is attractive here though, given previous and anticipated rates of growth. Tremor has its fair share of amber flags to investigate - it remains a divisive stock - but a relatively cheap one with some interesting growth prospects. Certainly not without risk though and the share price has been volatile, so I would expect more of the same in future.

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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.

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Paul’s Section:

accesso Technology (LON:ACSO)

750p (pre market open)

Market cap £310m

Trading Statement (AGM)

accesso Technology Group plc (AIM: ACSO), the premier technology solutions provider to leisure, entertainment and cultural markets…

Nothing much here, but at least it’s upbeat waffle -

"I'm very pleased with how accesso has started 2022. We've continued our momentum from 2021 and we are executing in line with our plan for the year.  
Technology like ours is now a must-have for attraction operators across our industry who are working harder than ever to put guest experience at the forefront of their thinking.  
Our solutions enable them to drive revenue, reduce costs and create memorable customer propositions all at once. This year we're continuing to invest to ensure we capture as much of our opportunity as possible, and with our team working with more motivation than ever, we're excited about the future for our business".

My opinion - I generally like trading updates to include some facts & figures.

Is “executing in line with our [Paul: typo corrected, my apologies] plan for the year…” the same as trading in line with expectations? It sounds like it might be, but why introduce doubt by not directly saying so?

This update looks to me as if the PRs have run riot, and managed to avoid saying anything specific!

Accesso is obviously a re-opening share, given that it provides ticketing & virtual queuing systems for theme parks. It’s almost impossible to value at this stage, because there’s not a consistent track record of profits or cash generation pre-pandemic.

How much can we rely on broker forecasts, in uncertain times, and with an uncertain business model at Accesso? The StockReport shows the forward PER at 32.6, so it's priced to exceed expectations - brave in the current macro environment. No divis either, because it doesn't generate much (if any) cash.

Good luck to holders, but I can’t see why this is valued at £310m. Particularly as nobody was interested, when it put itself up for sale a while ago.

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Nanoco (LON:NANO)

38p (up 43% at 13:53)

Market cap £117m

Litigation Update

We’ve followed this micro cap in the past, but came to the conclusion that the value in the company was entirely dependent on the outcome of patent litigation it had initiated against Samsung. Hence we have no way of knowing what the outcome would be, hence there wasn’t much point in following the company until the outcome of the litigation became known.

As you can see from the 1-year chart below, things seem to be moving in Nanoco’s favour, with a 43% rise today -

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Today’s update - sounds very positive.

Nanoco Group plc (LSE: NANO), a world leader in the development and manufacture of cadmium-free quantum dots and other specific nanomaterials emanating from its technology platform, announces a significant update to its litigation against Samsung for the willful infringement of the Group's IP.

The US Patent Trial and Appeal Board ('PTAB') has ruled in favour of Nanoco in respect of all 47 claims in the five patents that were subject to inter partes review (IPRs) in the case…

The process is not over yet though, this is just an intermediate stage.

A trial date is expected for late 2022.

Brian Tenner, Chief Executive Officer of Nanoco Group plc, said:

"The strength of Nanoco's case has been amply demonstrated by the PTAB finding in favour of every single one of the 47 claims under the five patents. The question of the validity of our intellectual property has now been very clearly resolved in favour of Nanoco.

"As a result, the trial can now focus on the issue of Samsung's alleged wilful infringement and the appropriate level of damages.

"Nanoco has overcome the first of two major hurdles in the litigation, the validity of our IP. As a result, our confidence in this case has increased further. While there is still much to be done, successfully overcoming this hurdle allows a straight run in to a trial later in 2022. A favourable trial outcome should then deliver a substantial inflection point for Nanoco's prospects and shareholder value."

My opinion - none really, as I’m not an expert on patent trials, so have no idea how much damages would be likely to receive.

A note from Edison today provides more detail. It reckons that Samsung has sold 26m TVs with Nanoco’s technology in them, so presumably damages would be a £x per unit type of settlement? Plus ongoing royalties for use of Nanoco’s patents? Guesswork there on my part. Edison ducks the issue of trying to estimate what damages might be payable by Samsung to Edison, which is a pity, because that’s the key information everyone needs to be able to value the share!

It’s certainly an interesting situation, but with no way of knowing what the upside might be, I can’t value Nanoco shares.

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Jack's section

Mears (LON:MER)

Share price: 193.78p (+3.63%)

Shares in issue: 110,953,453

Market cap: £215m

AGM statement

Mears is a services provider to the UK Housing sector, with a range of capabilities including housing management and maintenance. In fact, it is responsible for the maintenance of c.10% of the UK's social housing stock and manages over 10,000 homes for local and central government.

The Group has experienced strong trading in the first four months of its financial year, in particular, driven by continued elevated revenues in its Management-led activities, improving operating margins and excellent cash performance. The Board is therefore pleased to report that the Group's financial results for the first four months to April 2022 are ahead of its expectations, and the Board is increasingly confident in the outturn for the full financial year.

Strong trading, and the valuation is not expensive, so the shares could move this morning. This is a low-margin business though, and things have gone wrong before.

The group adds:

This strong performance has been achieved, notwithstanding a challenging operational backdrop including price inflation and skills shortages, and through a busy period of new contract mobilisations.

After over twenty-six years at Mears, CEO David Miles is set to retire. The group’s COO will replace him.

Conclusion

It’s good to see Mears doing well, but this is a low margin stock with lacklustre returns on capital and this limits my interest.

Profitability is volatile, and I think the business model could remain susceptible to bumps along the road.

The dividend track record is surprisingly good however, and the valuation is modest at around 9.5x forecast rolling earnings with a forecast yield of 4.93%, although dividend cover tends to be below 2x though. Given the pedestrian profitability metrics, I would want a bit more security there.

But the above still signals a desire to return capital to shareholders, and management seems quite stable. The retiring CEO has been at Mears for decades, and the COO that will replace him joined back in 2004.

Ultimately though I come back to the multi-year share price chart, which shows a company struggling to generate serious value for shareholders. If it can keep up the dividend payments then there is an income element to the investment, and it has recently attracted a degree of institutional interest, but it’s not enough to tempt me.

The liquidity scores look quite tight, too, which comes across in the low Z-Score (although the stronger F-Score suggests improvement).

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Tremor International (LON:TRMR)

Share price: 460.86p (+3.24%)

Shares in issue: 153,451,112

Market cap: £707.2m

Q1 trading update for the quarter ended 31 March 2022

After a strong run, the Tremor share price has fallen c50% and the company is now back (just about) in SCVR territory. There was a shift in perception here a couple of years back as investors realised that, after many years of acquisitions, the group was finally reaching some sort of inflection point.

That’s because the company, which deals in programmatic advertising, had created an end-to-end platform, meaning it could attract advertisers on one side, websites with advertising space on the other, and add value in the middle with its machine-learning algorithms to quickly and effectively place adverts in a way that both improved advertising rates of return and increased the value of the advertising space in question.

That said, this is a newer type of business model, which comes with its own risk, and there is a degree of mistrust around this stock in my view. That’s due to a few things: director selling, Israeli-based, past disappointments.

Q1 revenue of $71m (+13% organic growth) and a record adjusted EBITDA of $33.6m (+22%), making for an adjusted EBITDA Margin of 47%. That suggests to me the platform is scaling and there is operating leverage here. And it’s worth remembering that Q1 is usually the quietest quarter in terms of ad tech. This does seem to be a slight revenue miss though.

There is a difference between statutory and adjusted results, as well, and you have to go quite far down the press release to find it. Statutory operating profit actually fell by 6% from $15.2m to $14.3m and diluted earnings per share is down 22% from 9 cents to 7 cents (while adjusted diluted EPS is up 20% to 15 cents). This requires a closer look, given the trust issues flagged above. I think, in general, Tremor could probably make its reporting clearer for shareholders.

Video revenue continued to represent the overwhelming majority of total Contribution ex-TAC at approximately 80%. As with a lot regarding Tremor, ‘Contribution ex-TAC’ requires some explanation.

Contribution ex-TAC is defined as our gross profit plus depreciation and amortization attributable to cost of revenues and cost of revenues (exclusive of depreciation and amortization) minus the Performance media cost ("traffic acquisition costs" or "TAC"). Contribution ex-TAC is a supplemental measure of our financial performance that is not required by, or presented in accordance with, IFRS… We believe Contribution ex-TAC is a useful measure in assessing the performance of Tremor International, because it facilitates a consistent comparison against our core business without considering the impact of traffic acquisition costs related to revenue reported on a gross basis.

I would think that traffic acquisition costs are quite an important part of the equation to include?

It looks like M&A might become more of a feature again, with management seeing more attractive valuations:

These strong fundamentals are particularly crucial and beneficial during challenging macro environments and position us well to continue investing in technology, sales, and marketing to drive additional organic growth, continue repurchasing shares, and continue evaluating potential strategic M&A opportunities in a market where valuations and premiums have decreased, to deliver material long-term value to our shareholders.

I think there’s also scope for somebody to bid for Tremor itself, given that it trades at a discount to US peers.

This is a fairly expansive Q1 update. Operational highlights from the company include:

• The completed integration of CTV Ad Server and Header Bidder, Spearad, into Unruly SSP. This is expected to accelerate US growth.
• Unruly and Spearad selected by VIDAA as the group’s ‘strategic sell-side platform’.
• Expansion of TV intelligence solution Reach to 44m US households.
• Strong customer and partner traction in general.

Balance sheet

Is healthy, with $370.8m of net cash position. In fact, the company launched a $75m share repurchase program on 1 March 2022 and has so far repurchased 1,684,510 ordinary shares at an average price of 572.89 pence (total spend of approximately £9.7m in March).

Outlook

Management remains confident in the medium- to long-term prospects of the Company with Tremor well-positioned to further benefit from expected growth trends within digital advertising, CTV, and video, particularly during the second half of the year when it expects to monetize the integration of Spearad, and global ACR data partnership and media relationship with VIDAA.

Q2 guidance is given, with the assumption of ‘no major Covid-19-related setbacks or significant escalation of war’:

• Q2 2022 Contribution ex-TAC in a range of $75 - $80m,
• Q2 2022 Adjusted EBITDA of approximately $40m,
• Q2 2022 Adjusted EBITDA margin as a percentage of Contribution ex-TAC of approximately 50%.

Q1 22 net revenue and Q2 22 guidance of $75-80m are c3-10% light, as some advertisers have postponed spend due to supply chain shortages. Tremor says it has considered this in its projections:

Our guidance also considers the widespread global supply chain issues that limited advertising activity in Q1 2022 in certain verticals such as automobile manufacturing, with the expectation that these challenges could continue to have an impact in Q2 2022, as well as inflationary pressures, and geopolitical and macroeconomic uncertainty.

Conclusion

Tremor has been quite a divisive company in the past, but one that is now much closer to the finished article. It’s very profitable and cash generative, it’s buying back shares, and the enterprise value is currently at just 4x trailing twelve month EBITDA. That suggests to me it’s worth revisiting in more detail after the recent derating.

The group is an Israeli-based UK listing and unfortunately that comes with some baggage. There has been director selling too but from memory this is at least in part due to the group’s US listing. Something to check. Also, there’s no getting around the fact that the business model and terminology used takes some getting used to. Tremor can be a difficult business to understand, and that might make investors pass up on it.

Given the growth on offer and the current valuation, I do think this is a stock to take a closer look at again though. Today is actually a slight revenue miss but we’ve got to consider the valuation here in light of previous and expected double digit growth rates.

PubMatic, for example, trades on c29x forecast earnings with a TTM EV/EBITDA of 11.08x. I see Finn Cap has a price target of 1,700p, some way above today’s share price, so there’s certainly scope for divergent views here. That presents a potential opportunity, but it has also made for a volatile share price in the past.