Small Cap Value Report (Tue 19 Mar 2019) - BON, NAH, SCS, TUNE, JDG, BMY, ZTF, TRB, ELCO, BGO | Paul Scott

19th Mar '19 by Paul Scott

55 comments 16513 reads

Good morning, it's Paul here - with my rather erratic reporting schedule - apologies - we get there in the end.

Monday's report is here.

Rightly or not, I reckon the premium bid for FOOT could be what we need, to highlight value amongst small caps. The trick is finding the ones that are under-priced, and avoiding the ones that are in permanent decline. If any of us could do that perfectly, we'd be billionaires! In truth, we're trying to predict the future, so it's educated guesswork.

Ultimately, your success comes from your own skill and luck (and genius!)!

Bonmarche Holdings (LON:BON)

Share price: 29.5p (down 20% here today, at market close)
No. shares: 50.0m
Market cap: £14.8m

Trading update (profit warning)

It's remarkable to see that this womenswear retailer has now lost about 90% of its share price since its series of profit warnings began, in Dec 2015.

As you can see from the Stockopedia broker consensus graph, expectations for the current financial year (ending 31 Mar 2019) have collapsed, and this is before any downgrades resulting from today's profit warning have been taken into account;

My notes from the last trading update in Jan 2019 are here. I concluded then that there's little likelihood of the business recovering, and the divis would probably soon stop altogether. A slowly dying business, by the looks of it.

Current trading - is grim. When I last reported (in late Jan 2019) the company was expecting a loss for FY 03/2019 of around -£2m. Today things are looking much worse;

... However, trading since the beginning of March has been significantly weaker, reversing sales gains made in the previous months. In light of this, we now believe there is a likelihood of sales levels for the remainder of the month continuing to follow this trend, which would…

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Richard Vasey

19th Mar '19

Market seems to have taken a dim view of Elecosoft (LON:ELCO) preliminary results (currently down 8%) despite 11% growth in turnover and operating profit and increased dividend.Downsides are fall in reported eps (but an increase after adjustment for acquisition related expenses,goodwill etc) and weakened cash position from last year, mainly due to new facility to fund acquisitions. The underlying performance of the business seems strong, with the full impact from acquisitions still to flow through, but Paul's views and those of others would be appreciated.

I hold.

davidjhill

Agreed re Taptica International (LON:TAP) Mojo. I know people don't like it because it is a foreign Israeli tech stock and has a large cash balance and these seem to have picked up a bad rep on AIM. The CEO debacle didn't help obviously. However, if you look back over the last 5 years companies like Batm Advanced Communications (LON:BVC) and Plus500 (LON:PLUS) have actually performed very well for shareholders (if more than a bit volatile in the case of the latter!!) so I suspect it is more a case of an unrepresentative sample biasing views rather than having any real validity, but the bias exists nonetheless.

I think with Taptica International (LON:TAP) and RhythmOne (LON:RTHM) you will have to wait post merger in April to see any real re-rating. I suspect the $15m buyback will indeed mop up any loose stock but I think more importantly will act as a confidence booster for those that doubt the cash balance actually exists. Assuming this passes without incident it's hard to see it not moving forward. The RhythmOne (LON:RTHM) merger creates a lot of complimentary synergies and scale so I think it is a very good addition but time will tell. Ironically it probably only happened because both businesses were rated equally lowly and thus a merger was not dilutive for either party.

fred9566

Can't remember wehen I had 3 of my companies reporting on the same day -Softcat ,Learning Tech and Team 17 -so far so good but Team 17 is the most interesting . -it has been on AIM less than a year and in my view the numbers are impressive
Financial highlights:
● Revenue increased 46% to £43.2m (2017: £29.6m)
● Gross profit up 18% to £19.8m (2017: £16.9m)
● Gross profit margin of 46% (2017: 57%) due to increasing contribution from third-party sales in the period
● Adjusted EBITDA* up 18% to £15.3m (2017: £12.9m)
● Basic and diluted Earnings per share ("EPS")** of 6.1 pence (2017: 4.3 pence)
● Adjusted EPS*** of 8.1 pence (2017: 4.9 pence)
● Operating cash conversion**** of 107% (2017: 107%)
● Net cash and cash equivalents at year end of £23.5m (2017: £8.4m)

These numbers are after taking the costs of the IPO which make them even more impressive

More importnatly they are operating in the "Games" market which is forecast to worth $180 billion by 2021
Balance sheet in good order with cash at £23.5 million so it should pass the Paul Scott balance sheet tests - in fact i would be delighted if you would have a look at this and see if you agree with me that this looks pretty good for a new IPO

Gromley

From a quick glance Zotefoams (LON:ZTF) results look like a small 'beat' to me, although I note that forecasts were downgraded slightly over the last month, so probably overall on par.

" MuCell Extrusion (MEL) had a disappointing year. " - It was ever thus. I've yet to be convinced as to why they continue with this line as it provides a significant drag on the (otherwise excellent) overall group profits. I shall have a look at the results presentation later to see if much is revealed about the grand plan here. Failing that, I may a rare foray to a company AGM in May as I was unable to pump David Stirling on the subject at Mello.

I remain long.

Elsewhere, Bango (LON:BGO) results look to be best summed up by a comment over on ADVFN : "Will be interesting to see whether the market treats it as a profits warning rather than investment in 2019 will see profits rise faster in 2020 and 2021."

Same old same old, no profits now, but the future looks rosier than ever. Hmmm!

The business as a whole was apparently "profitable" in Q4 2019, but it is not clear what "profitable" means here - it seems to mean EBITDA positive. I'm pretty sure they have made that claim before.

It's curious therefore that they also say "the Board believes there is sufficient cash in place to see the business through to cash breakeven and profitability."

I remain entirely unconvinced here and will stick with my small short, in the absence of any material evidence here that there is a profitable business struggling to get out.

Also interested in £LTG (no position currently) but haven't had time to look properly at the results yet - the market seems to like them with the SP up c. 8% at the moment - but over the course of the last year the SP has been more than a little erratic.

Another one to look at in more detail later - must dash.

AnonymousUser595388

Hi Paul,

I'd be interested in your views on Learning Technologies (LON:LTG) results released today. I've had a 'read' through and if I've interpreted them correctly, (I'm no accountant), it seems like they've reduced net debt to £5m within the last 2 months.

Taken from Results:

Financial highlights:
Excellent cash generation, resulting in net debt of £11.5m

Current Trading and Outlook:
Continuing excellent cash generation; net debt at end February 2019 down to c£5.0m

I hold.

mikelevie

I second the request for Judges Scientific (LON:JDG) - share price response appears subdued given today's bullish results.

wildshot

I'd welcome any comments on today's results from Mitchells & Butlers (LON:MAB1). NOTE that should be Mortgage Advice Bureau not Mitchells & Butler (seems like a read error from Stockopedia?). Due to work I've not had time to look in detail at the report yet but the brief detail I did get is:

- turnover up
- profits up
- dividend up
- margins declining (which is probably why the share price is being hit this morning)

Would welcome any commentary from Paul or otherwise to balance with my detailed review tonight (after work!)

Interesting observation Justmo, so that would be a £6.5m cash inflow over two months - we of course need to be consider whether there are movements in working capital or other timing differences in the cash/debt position, but at face value that figure is potentially significant compared to cash generation last year of c. £1.5/ month. (Of course peoplefluent was only incorporated for part of last year).

rmillaree

Zotefoams (LON:ZTF)
Gromley
" MuCell Extrusion (MEL) had a disappointing year. " - It was ever thus. I've yet to be convinced as to why they continue with this line as it provides a significant drag on the (otherwise excellent) overall group profits. I shall have a look at the results presentation later to see if much is revealed about the grand plan here. Failing that, I may a rare foray to a company AGM in May as I was unable to pump David Stirling on the subject at Mello.

I think in some respects we just have to trust the board here they will know the long term prospects much better than us , i look at it unit as a bit of a safety net in that they could ditch this section and presumably that would improve results. They have indicated 2019 will be better so i take the woeful performance one year as a bit of a one off in exactly the same manner as when a bumper year boosts profits - they do at least seem to be reasonably transparent with regard to prospects (or lack of them) in this regard. I am still guessing it will though be further losses to advised otherwise.

Reacher

There does seem to be a number of red flags about Bango (LON:BGO) The numbers published today tell a different story to the narrative contained in the Annual Report (IMO).

1) Whilst End User Spend (EUS) has doubled in 2018 to £558m, the revenue margin generated has decreased to 1.19% from 1.53%. I haven't read anything that explains this drop.

2) Heavy spend relating to its core platform technology which were partially moved to the cloud to enable smooth processing. Previously the platform was capable of managing significantly higher levels of transactions (I believe £5bn, but this has now increased to £10bn). There was investment made in new technology. £2.6m was spent on internally developed intangible assets plus £2.8 on acquired intangibles along with £2.5m of goodwill. This had the effect of increasing profits by £6m (£7.3m less £1.3 amortisation). This has a significant impact to the Income Statement.

3) Even though it is still heavily loss making, share based payments increased 52% to £1m.

4) Removing £12m of intangibles from the Balance Sheet results in Net Assets of £4m.

5) Net cash used in operations £1.6m plus intangible asset expenditure of £2.6m gives an approximation of cash outflow in the year of £4.2m. Cash at year end was £3.8m. They would need to scale down their spending or a capital raise is on the cards in the next year.

4) Rightly or wrongly, I am wary when the auditors are Grant Thornton (recall Patisserie Holdings (LON:CAKE) ).

mojomogoz

Good points David.

I have a little sympathy for old CEO as I've said elsewhere here. Not trying to make excuses but IMO part of the problem with the civil fraud case against him is the private equity buyers were a bit dumb and didn't understand the business they were buying nor the general payment processing backdrop at the time.

I had a start-up business a few years back that overlapped into the payment processing space and I had a lot of interactions with companies, regulators, investors, etc in the space. Wild west. Regulators way behind the curve. Investors driven by concepts and greed without knowing the inside skinny. Mainstream financial players doing what they could to mess with the upstarts (pulling services on them no notice, changing terms, general threats re services etc). We were always in fear of getting accounts pulled and terms changed, always felt on the back foot.

The fraud case against old CEO revolved around him not telling the PE buyer that paypal had threatened to pull the relationship with his firm due to chargebacks. CEO claims he told them face to face. Analyst says he didn't (and I guess probably might not have understood if he had). CEO should have disclosed it more clearly....but I reckon to him it was an every other week thing to be getting a bit of grief from paypal.

I'm being over generous above...however, I know from first hand experience that absolute honesty about all your warts and potential events does not work with most earlier stage PE/VC investors. They want you to sell them the hope story...then they apply their own cynicism twist from whatever is their particular thing...you answer that...and if it all goes well the deal goes through and then the warts are revealed slowly through reality. Its an absolutely irrational space. Not all investors in it are bad....but most are IMO.

So, still does not excuse the old CEO...but I feel sympathy and feel that it would have been easy for something similar to happen to me. The shame is he looked very good and astute hard-assed operator so his departure is loss.

Reacher

bit surprised by your comments as Bango (LON:BGO) have pretty much explained all of this. Worth reading Cenkos analyst report out today on Research Tree if you are interested.

Revenue margin has been flagged as coming down for the last year as the business has pivoted towards large-scale EUS. To incentivise customers to switch wholesale amounts the company has been effectively taking lower margin. Analysts expect this to come down further to conservatively 0.7% (though up to 1%) next year, so further to go from last years 1.19%.

Statement from company today is that not only will they be profitable this financial year but Cashflow will cover both operating costs and product development. Thus should be no further cash drain.

The broad thesis is that the data analytics and Bango Marketplace looks like being the real icing on the cake for the business in terms of high margin profitability. To accelerate this you want to get as much data flowing through your payments platform as possible. To do that you incentivise EUS growth through a reduction in margins in exchange for large scale switches ($4bn late stage pipeline). To do that you scale up your processing platform to cope seamlessly.

This is a bit of a departure in strategy from say 24 months ago. Not necessarily the wrong thing; there is definitely higher value attributed to data analytics, but it is a pivot/shift in the original strategy nonetheless. It was pretty obvious, even to me 18 months ago, that the current direction of travel was highly likely so I am a little bemused it wasn't flagged as such by management (or maybe I just missed it.I do think investors need to revisit the investment thesis to get comfortable or otherwise with the shift. However, I don't agree with the red flags for the reasons above, outside of (4) on which, I offer no comment either way!

gbjbaanb

Yes, I've not seen the old "results look great, so share price down 14%" for a long while now. What is in them that the market really doesn't like, because I've seen other results that are far, far worse that have not hit the price anywhere near as badly as this.

Tortoise investor

Isn't the profit today a miss against broker expectations? I've invested in this before but I've never thought the valuation was justified by the modest profit growth and today they say the first 3 months of the year have been flat. They have a nice amount of cash but what are they doing with it? Although it should have some moat its profit margins have been squeezed a bit in recent years. It should be below 100p I think.

shanklin100

Hi Paul

If possible please would you ask Graham for his thoughts re the Volvere (LON:VLE) TS of today.

Thank you, Martin

aflash

I'll do my best, as your small caps guide. But please remember that I'll be right:wrong about 60:40 in a good year. 75:25 in an amazing year (e.g. 2017). And maybe 40:60 (or less?) in a bad year. So the onus is to figure things out for yourself. If I can help, by pointing out a wobbly balance sheet, etc., then I'll try.

Put that as your C.V. instead of 'I trained as an accountant etc..' and you will save yourself a lot of trouble answering the critics and save the energy of posters who defend you. To my mind it expresses perfectly what this column is about.

Paul has recently talked about opportunities in some oversold small caps and I thought I'd highlight one idea. Fulcrum Utility Services (LON:FCRM) is looking attractively priced and I've just bought some. It seems to be down a lot, including 7% today, on no news. I am putting this down to the fact that the market is readjusting it from a growth to a value rating, given revenue growth is tailing off. But EPS is expected to be 4.5p this year (so it is on a PE of around 8-9 right now) and dividend is now 6%. It has a bit of a moat due to its infrastructure work. Am I missing anything? It's not a sector I know very well so it may be I am missing the bigger picture. Both Paul and Graham wrote favourably about it at much higher prices.

PortsmouthPirate

As a shareholder in Judges, I'm pretty delighted. I'm looking to increase my holding over the next year or so, when/if cash appears. The long-term track record is outstanding and I reckon it can continue.

Albertos

Fulcrum Utility Services (LON:FCRM)

Lot to like here and I'm tempted myself. The market may well be spooked by the Chancellors commitment to no gas into new houses from 2025 - this is a large part of Fulcrum Utility Services (LON:FCRM) 's business.

Phil

Watching

Edit: PS - Going from memory the figures are not going ex-growth in 2020 the low increase in EPS is due to the company running out of tax losses.

TamzinPiworld

piworld will be publishing the Judges Scientific (LON:JDG) results presentation with CEO, CFO & COO, over the next few days. Excellent results. Excellent management.

Small Cap Value Report (Tue 19 Mar 2019) - BON, NAH, SCS, TUNE, JDG, BMY, ZTF, TRB, ELCO, BGO

Bonmarche Holdings (LON:BON)

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Paul Scott

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