Small Cap Value Report (Tue 19 April 2022) - D4T4, CBOX, CER

19th Apr '22 by Paul Scott

38 comments 8294 reads

Good morning, it's Paul here with the SCVR.

Agenda -

D4t4 Solutions (LON:D4T4) (I hold) - a reassuring trading update for FY 3/2022, and confident outlook. It has a particularly strong balance sheet too. With hindsight, the valuation probably got a bit frothy last year. It's since dropped a lot (like almost all small caps) and now looks a decent company, on a more reasonable valuation.

Cake Box Holdings (LON:CBOX) - a reassuring trading update from this rapidly expanding franchise business for fresh cakes. Valuation is cheap, because the market choked on revelations from the outgoing auditor last year. Is it time to forgive & forget, now a new CFO is in place, and tightening up financial controls? Possibly, but I can't decide.

Cerillion (LON:CER) - an impressive half year update today. It's in line with expectations, but reading between the lines, I reckon the company looks set to beat forecasts. very impressive growth, and cash is pouring in. Valuation looks reasonable. I like this a lot.

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:

D4t4 Solutions (LON:D4T4) (I hold)

230p (pre market open)

Market cap £92m

Trading Update

D4t4 Solutions Plc (AIM: D4T4, "the Group", "D4t4"), the AIM-listed data solutions provider, announces the following trading update for the year ended 31 March 2022.

FY 3/2022 revenues are in line with expectations (£24.3m forecast, per Finncap, Feb 2022)

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FREng

19th Apr '22

I doubt that tablets for radiation protection is a significant market for Iofina (LON:IOF) ! Iodine has many commercial uses. For example, iodide salts are used in pharmaceuticals and disinfectants, printing inks and dyes, catalysts, animal feed supplements and in medical xray imaging. Iodine is also used to make polarising filters for LCD displays and an iodide is added in small amounts to table salt, for thyroid health.

Auto

Hi BnB, please do elaborate.

Paul Scott

Hi Chris,

I'e had a quick look at the update today from Deepverge (LON:DVRG) - reporting very strong revenue growth in Q1. The rest of the narrative is all about operational developments, and it means nothing to me.

Historically it's generated significant losses every year. We tend to steer away from speculative, small, loss-making, jam tomorrow stuff here, as there's not really anything factual to report on, whilst a business is loss-making.

It's all down to whether investors/punters think the products will take off or not, which I wouldn't want to speculate on.

As regards broker forecasts, I understand that the problem is difficulty in the data provider getting hold of all broker research. So, especially at the smaller company end, there are inevitably going to be gaps, as some brokers actively withhold their research.

Regards, Paul.

TheFloatingInvestor

I looked to invest a few months back but read they piggy back oil/gas production so was a little put off..with the medium term seeming to support oil/gas, then its worth another look, although it had a big price jump about four months ago...its done pretty well since! Share dilution a slight worry for me.

turbo

Any thoughts on the majority of large shareholders being individuals rather than institutions?

KevinS1

Looking at the three main UK solar funds Bluefield Solar Income Fund (LON:BSIF) Foresight Solar Fund (LON:FSFL) Nextenergy Solar Fund (LON:NESF) does anyone have any thoughts as to what the main differences are.

They all pay a similar Div (6%-7.5%), are all similar mkt cap (£600m+), but have varying discounts/premiums - lowest being 0.7% discount for Nextenergy Solar Fund (LON:NESF) through to 7.5% premium for Bluefield Solar Income Fund (LON:BSIF)

Their performances have been pretty similar and very hard to differentiate across 3 & 5yr periods.

Does anyone have any reasoning for their preferences?

I am going to look into them in a bit more detail, but before I do that does anyone know of anything specific.

Whitbourne

Hi KevinS1, agree with you that the similarities between these solar energy funds are greater than the differences.

I only hold Nextenergy Solar Fund (LON:NESF) of the 3 you mention and my reasoning was (a) price = NAV so why pay a premium for the others, (b) management seem credible and effective, and (c) the move into energy storage, which I think will be a big theme over the next few years. I also hold Gresham House Energy Storage Fund (LON:GRID) for the same reason.

@turbo. re Iofina (LON:IOF) major investors

Sneller seems to be a professional investor and previous head of a Ballie Gifford fund.

David Newlands and Monique Newlands seem to be professional investors: see https://www.investegate.co.uk/...

Jeffrey Ploen is non-exec Deputy Chairmen of Iofina (LON:IOF) according to their website though this appears to be unknown to Stockopedia.

Aaron Banks has appeared in newspaper reports as a wealthy individual who supported Brexit.

Lance Bailer is Iofina's non-exec Chairman.

... ... follow the money?

Bouden54

This is an area I've always meant to look at in more detail too, as surely has to be a good sector in this environment. Nextenergy Solar Fund (LON:NESF) certainly looks attractive versus the others you mention, with a solid track record, 7% dividend yield and well diversified portfolio.

Without doing further research, I suspect it could be the NAVs are all calculated slightly differently (eg using different assumptions and discount rates) - perhaps the other funds use slightly more prudent assumptions and hence warrant an additional premium? Would be interested if you manage to find out anything further in your research.

Please let us know what you discover and decide.

ricardow

Hi KevinS1,

The devil is in the detail of what they actually own, and which subsidy regime their solar farms fall under. Generally, the earlier a solar farm was built, the higher the subsidies (usually for 25 years), and this may explain the differences in discount/premium for apparently similar companies. I think that Bluefield Solar Income Fund (LON:BSIF) was the first mover.

Howard Adams

Hi KevinS1

If you do a Stocko compare of the three Nextenergy Solar Fund (LON:NESF) Bluefield Solar Income Fund (LON:BSIF) £FSFL which you may have already done, then Foresight Solar Fund (LON:FSFL) is the winner leading 25/36

But, take note the Stock Compare is a very broad based test and often is too simplistic, but its quite useful to eyeball the three listed against each other to see the variations across the 36 tests.

I do not hold any nor have I ever looked at any of these before. I might look deeper though.

Regards

Howard

Just further on this, there is a 39 page broker note from Cenkos (available on Research Tree) which covers Nextenergy Solar Fund (LON:NESF) in some detail. Having a quick flick through, it notes that the three funds are pretty similar in terms of how they calculate NAV, although NESF has lower sensitivity to movements in power prices due to hedging - this has proved helpful for most of the time since IPO due to declining power prices, but could be a short term headwind due to recent spike in power prices. That could explain part of the discount versus its peers.

BnB

Hi BnB, please do elaborate.

Re Cake Box Holdings (LON:CBOX) - I’m sure Paul and others with similar experience can chip in with better, and more accounting-focused observations. And I could be completely WRONG. But my intuition on the slapdash accounting is that it stems from the evolution of the business rather than from a fraudulent intent.

It’s important to remember that entrepreneurs are often motivated by the desire for independence and self-realisation ahead of financial gain. After all, success in the former ambition usually takes care of the latter. And successful SMEs evolve haphazardly more than they are professionally planned, with the original entrepreneur(s) playing an outsized role. This tends to result in the creation of a personal fiefdom where the business becomes a vehicle for the entrepreneur’s needs, and possibly ego. This is not necessarily bad for the business as the owner’s and the company’s needs are well-aligned. But it is very common, even in the most profitable businesses, for the accounting procedures to be lightweight. After all, who needs cash flow forecasts when the business is printing money and the owner has a strong feel for the performance of debtors and solvency? Indeed, who cares about a trial balance when everything is going fine?

I can personally vouch for the fact that a business can be built to an eight figure valuation - and sale - over a number of years without employing anyone in “accounts” and without recourse to outside help - audits aside. That means no budgets, cash flow forecasts or even rudimentary attention to the balance sheet, so long as the financial characteristics of the enterprise - asset light, fast-growing, highly profitable, cash generating - are propitious and the owner has a strong, if unconventional, grasp of the numbers

And that, in my view, likely very much describes Cakebox before it’s IPO. The features that make the company attractive as an investment are the same qualities which enabled it to flourish without more professional accounting procedures. This professional deficit is then compounded by the understandable difficulties experienced by entrepreneurs who transition at IPO from lords of all they survey to servants of institutional and private shareholders. It is not unusual for existing directors to underestimate the shift required in mindset and, more pertinently, procedures. It is my best guess is that the CFO ran up against these difficulties and, when challenged by the auditors, became obstructively defensive about the slapdash nature of the record-keeping. When you have been in complete charge for a decade and suddenly these impertinent outsiders dare to make demands of you - requests that you consider superfluous given the health of the business - it can be hard not to show irritation.

It’s certainly reasonable to question the timing of the CFOs share disposals, but they could be explained by the very attractive price in the market at the time as much as other theories. And I repeat. I could be completely wrong! A possibility reflected in my only half-sized stake. But I take comfort from the measures enacted so far. The departure of the CFO and his replacement by a seasoned practitioner with a more professional background is of real comfort. Frankly, I expect new deficiencies to come to light when the replacement CFO gets his feet under the table. But, provided these are not fraudulent, they might continue the necessary evolution of the company from entrepreneurial to shareholder-focused. That is my hope and best guess. For absolute conviction, I shall need more data and await the next audited numbers with interest.

Chris1011

Thanks, Paul - I appreciate your response.

So, if I read what you are saying correctly about broker research, Turner Pope (in this instance) are withholding their forecast data from Stockopedia and that is why information is blank when you call up this share (stocko suggests there are no brokers; no eps forecasts of future FY numbers)?

The reason I ask is that their research/forecast papers has all this information but this isn’t displayed on Stocko.

Kind regards,

Chris

Cricketfan

Cake Box Holdings (LON:CBOX)

I am surprised at the TrustPilot feedback as a couple of visits to my local outlet have been positive. Good, well presented product, clean environment and an enthusiastic person in charge. Most of the customers appeared to be returnees.

I order how much control ‘head office’ has over the franchised outlets and their product and would be interested if anyone has info on this. Of course, any franchisee will not last long if they are not up to scratch…but could damage the brand name.

timarr

RE: Cake Box Holdings (LON:CBOX)

I order how much control ‘head office’ has over the franchised outlets and their product and would be interested if anyone has info on this.

Interview with the CEO, worth a listen:

https://open.spotify.com/episo...

stockscreen

20th Apr '22

Cracking business which has not put a foot wrong since its IPO. I am always astonished by the detail available in my phone bills, which is what CER is all about.

21st Apr '22

Hi BnB, thank you - very interesting and there is certainly no substitute for personal experience.

22nd Apr '22

Thanks timarr.

Small Cap Value Report (Tue 19 April 2022) - D4T4, CBOX, CER

Paul’s Section:

D4t4 Solutions (LON:D4T4) (I hold)

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Paul Scott

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