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

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. 

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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.

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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)

Adj Profit Before Tax (PBT) at upper end of market expectations.

Annual Recurring Revenues rose 32% to £14.0m, so about 58% of total revenues - a solid base, so this should reduce lumpiness of licence wins seen in the past.

Results due out in mid- July.

Confident outlook -

The Board remains highly confident in the Group's strategy, and we start the new financial year with a strengthened management team, good revenue visibility, and a strong pipeline of opportunities across both the Celebrus Customer Data Platform (CDP) and Fraud Data Platform (FDP) products. We expect to announce further contract wins in the coming months.

My opinion - in common with almost all UK small caps, the share price has drifted down a lot from last year’s peak of almost 400p. It’s now only 230p.

Is it a bargain then? Not really, if you use a PER multiple. Forecast EPS is only 5.6p for FY 3/2022 (PER of 41), which would represent the third consecutive year of falling earnings. Although the strategy has been targeting top line growth, which required increased overheads to achieve it. Hence no surprises here, with today’s in line update.

EDIT: many thanks to Finncap for an update note that's just come through on my email. It's increasing forecast EPS from 5.6p to 6.9p for FY 3/2022. Finncap leaves its FY 3/2023 forecast at 9.8p.  Finncap also stresses the very good point that transitioning to SaaS model suppresses top line growth for a number of years, but results in a better, more predictable business in the future. The growth in ARR of 32% is a more realistic picture of underlying growth, a great point, and this makes the shares look more attractive than the headline numbers suggest. End of edit.

Forecast for FY 3/2023 is a 75% rise in EPS to 9.8p, quite a tall order, and if achieved the PER would not be cheap at 23.5 times.

Checking the last balance sheet, it’s outstandingly good. There was a cash pile (which looks like surplus cash, i.e. not offset by deferred income, as is often the case with software companies) of about £16m. That’s about 17% of the market cap, so we could adjust the PERs down by that figure, which makes the valuation look more reasonable.

The main attraction for me of this share, is that it seems to operate in a very interesting & growing niche in data analytics, and is winning big clients. So the hope is that growth could accelerate, and potentially deliver a greater valuation, or a premium-priced takeover bid perhaps?

In the meantime, I think the valuation can be justified on fundamentals, with the speculative froth in last year’s price (with hindsight) having gone. That makes it more attractive in my eyes, now that we can buy it more cheaply. If it continues falling, I’d be looking to top up my position.

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Cake Box Holdings (LON:CBOX)

192p (pre market open)

Market cap £77m

Trading Update

Cake Box Holdings plc, the specialist retailer of fresh cream cakes, is pleased to announce a full year trading update for the 12 months ended 31 March 2022.

The background here is that the share price has been particularly battered by the auditor resigning, and taking the unusual step of writing to shareholders pointing out a number of areas of concern. The performance & conduct of the former CFO seems particularly bad - in dumping a large number of shares days before the auditor resigned, having poor financial controls, and not being open with the auditors, which is appalling really, and does taint the company.

Anyway, he’s now gone, and sensible changes have been made, which I covered here in March.

Today’s update starts with a buoyant-sounding headline -

Continued sustainable growth with an exceptional year for store openings

Impressive growth indeed - helped by soft comparatives from lockdown 1, but still impressive underlying growth -

Trading during the second half has continued to be strong across the Group's store estate and online delivery channels. Accordingly, the Group expects to report revenues for the year as up c.50% year-on-year, with adjusted profit before tax in line with market expectations.

New sites - this is noteworthy, with CBOX accelerating the pace of expansion, 31 new shops opened in the year, bringing the total to 185. Kiosks are also being rolled out, with 35 now operating (e.g. within ASDA).

Pipeline - deposits are held for a further 53 new sites, so this is an impressively rapid expansion, via franchisees, who take on the risk, and capex - a very nice business model for CBOX.

Net cash - is £5.2m. I think the balance sheet looks OK, assuming the former CFO wasn’t fiddling the figures.

My opinion - if it hadn’t been for the accounting problems, then this share would look remarkably good value now, for a rapid roll-out of a proven format. Stockopedia is showing a forward PER of only 11.9, and a 4% dividend yield.

Can we trust the numbers though? Playing it safe, it might be best to wait for the new auditors to review & approve the FY 3/2022 numbers before investing here.

That might mean missing out on a bargain though, so I’m torn on what to do.

As previously mentioned, the major shareholders seem to almost all be trying to sell! That suggests to me a potentially lengthy process for institutional shareholdings to be sold down, and find new owners, probably private investors. This is a structural problem with UK small caps - brokers tend to float new companies by placing shares in large blocks with institutions. Then there’s a lack of liquidity. If something happens to shatter the confidence of institutions (which is what happened at CBOX), then who are the institutions going to sell to? The risk is that it takes a very long time for institutions to dribble out their shares in the market, creating a permanent overhang, limiting the share price from recovering. The only solution is for the share price to fall so low, that new investors find it irresistible in numbers large enough to clear the overhang.

The upside is that confidence might return over time, with a new CFO now in place.

It does seem a fundamentally good business, and rapidly expanding. So it might be worth taking a small initial position here, and then monitor how things progress. I can’t make up my mind. It’s cheap, but for a good reason! IF there hadn’t been these audit problems, then I reckon the share price would be about 50% higher than it is now.

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Cerillion (LON:CER)

795p (up 4% at 11:41)

Market cap £235m

Half Year Trading Update

Cerillion, the billing, charging and customer relationship management software solutions provider, is pleased to announce an update on trading for the first six months of its current financial year ending 30 September 2022.

Record Six Months

“Very strong” H1 trading - new records for revs & EBITDA.

H1 revenues £16.1m, up 26% vs LY.

H1 adj EBITDA up 48% to £7.1m

Net cash up 114% to £16.5m

Sales pipeline remains strong.

Confident that FY 9/2022 will achieve company expectations (which are usually the same as market expectations, so why not say so, instead of introducing uncertainty?)

H1 results due out in mid-May.

Positive outlook -

"The business has delivered a record performance for any six-month period, driven by our backlog of new customer implementations and strong demand from existing customers. The market backdrop remains highly favourable for Cerillion. With a strong pipeline of new business, we remain well-placed for continuing growth this financial year and next."

Valuation - as we know, growth/tech valuations have plunged in the last year. CER dipped down to 600p, but has shot back up again recently - fully justified by today’s excellent update, in my view.

Liberum has issued a helpful update note today, with forecast EPS of 28.4p for this year (FY 9/2022). This is a bit below Stockopedia’s consensus forecast of 30.2p. Since Liberum comments that it sees upside on its lower forecast, then I’m happy to work on c.30p EPS current year earnings, and maybe a beat against that, and possibly closer to 40p next year.

Hence we’re looking at a PER of about 20 times next year’s earnings. That’s certainly not expensive, for one of the best growth companies in the small caps space.

My opinion - performance at Cerillion has been outstanding for several years now. Providing growth can be maintained, then this share looks really attractive, as a long-term tuck away and forget. So it gets a thumbs up from me.

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