Small Cap Value Report (Tue 2 May 2023) - RTN, CARR, PHC, KITW, ADF, TRB, MTEC, VNET, TLY

2nd May '23 by Paul Scott

49 comments 8415 reads

Good morning from Paul & Graham!

Today's report is now finished at 13:13

My podcasts went up on Saturday, and my SCVR summary spreadsheet is also now up-to-date (links in the reader comments below), so we're starting the new week on the front foot!

Banking turmoil (again)

I see another troubled US bank, First Republic, has been put out of its misery this weekend, taken over by JP Morgan. First Republic's shareholders are wiped out. So far the system is holding together, and everyone knows what to do (and fast) with troubled banks. So I think this still ranks as "turmoil", rather than a "crisis". I've just seen a press report, saying that JP Morgan's longstanding boss Jamie Dimon has said that the collapse of SVB, Signature Bank, and and now First Republic, "pretty much resolves them all", in terms of problem banks. He also says the US banking system is "very stable". Let's hope he's right!

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.

I did start to look at Smoove, but ran out of time. It's heavily cash burning, but has cash remaining, and is in bid talks. Actually, my initial impression is that this could be worth a closer look another time.

Summaries

(with main sections further down)

Restaurant (LON:RTN) - up 12% to 45.3p (£344m) - TU - Paul - AMBER

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RDHOWARTH

2nd May '23

Hostmore (LON:MORE) I have just listened to the webinar.... I realise it's a sorry subject but if like me, you have some shares in the bottom draw....it was actually encouraging and worth a listen.

The plan... is to be debt free by 2025.... to generate £10m plus FCF ....to stop openings until finances are sound.... ie 2025... and debt covenants have been extended to cover this.

If this plan is achieved the share price will be well north of 17p. A debt free market cap of £17m with FCF £10m....leaves plenty of scope for recovery. Having said that they have guided to a small rise in net debt at half year....but have also said they are looking for more cost savings.

I think it's important that S Welker is Ch. as this plan is now classic Sherborne. In the past their track record of underpromising should serve them well. I would guess they squeeze another £1-2m cost savings and by 2025 are focussed on delivering £20m plus EBITDA.

I realise it's a sore point for many, but if you have held on until now then there would appear plenty of reason to continue to hold. I have been waiting for them to sound a little more on the front foot before averaging down.... today looks like a major step forward ... of course it's still risky .... but the debt reduction alone would accrue a 100% rise on the shares...for me it now looks interesting for recovery.

gmtrader

I use ResearchTree for RNS. You do not need to be a subscriber either and you can customise it. If you decide to subscribe, go to The Naked Traders website and get a 20% discount code off there. Thank you Robbie Burns.

https://www.nakedtrader.co.uk/

Silver Moon

I had to switch that function off, Oliver was not impressed. I now just use the RNS announcements on Stocko's front page to pick out the ones that I have an interest in as I was getting an avalanche in my mailbox.

Threepeat

Subscribe direct to LSE direct, you can also get alerts and a watchlist(s)

Simplesss

davidjhill

I agree - I listened to it and think Hostmore (LON:MORE) is a potential recovery multi-bagger.

The new strategy is much sounder. Capital allocation now positioned to eliminate debt over 2 years and then focus on shareholder returns, whilst at the same time not skimping on maintenance/makeover capex required to keep sites fresh. This is done from self help initiatives like no new roll outs until 2025 and around £6m of annual cost savings. Looking at the FCF waterfall chart they presented, which includes inflation drivers and conservative price increases (which are less than overall inflation) but no increase in sales that's more than achievable.

Gone back to TGI Friday brand as the "Fridays" initiative was clearly flawed and resulted in lower brand appreciation. Since new CEO came in net promoter scores and trip advisor reviews have gone up considerably. Utilisation of intelligent data to drive initiatives and enhance management of stores looks very effective. Even a very mild recovery from here will give a strong uplift. They mentioned circa 1% increase in covers adds £1m ebitda so that a useful metric to remember and compare in future.

Exec bonuses for this year don't kick in until ebitda hits £20m and the recovery plan only factors in £14m ebitda to generate the debt reduction so clearly management are more optimistic than they are guiding the market.

But if they achieve £20m ebitda free cash flow will come in around £14m (after interest and maintenance)

Use that as the potential recovery baseline and apply 5* (probably 8-10 in a good market) and we could see an EV of £75m -£125m which is multiples of current share price.

Might now be an interesting recovery story. No need for equity dilution either if debt is quickly reducing/eliminated, so that risk gets much diminished. Need to do some more analysis but am tempted in taking a 2 year view here.

jonno

Sigmaroc (LON:SRC) appears to be on a roll, up 9% at present, not aware of anything specific, possibly a delayed reaction to the recent positive AGM statement? I hold.

illiswilgig

Vianet (LON:VNET) (I hold) Trading update for year to end Mar23

Here are the notes I've written this morning:

And I am left with more questions than answers. Though why that should be a surprise with Vianet’s history of almost but not quite delivering – I’m not sure. As always I read these kind of reports – more for what they don’t say than what they do say……..

Revenue is up 7% to circa £14m – but that’s a big miss on the £15.7m currently shown on the stockreport. Is that right? It’s even a slight miss on the ttm figure of £14.1m. So what happened in H2? We are told contract renewals and contract wins have been encouraging – but it looks to me like something expected did not occur, in H2 at least? I await the FY results to learn more (Ed - just seen Paul's quick comment and am in agreement with him. Something here doesn't seem to add up very well - though it's likely that the capex, capitalised development and increases in working capital (flagged by the semiconductor surcharge - and remember that VNET is primarily in the IoT PGA/controller fields where auto dominates) there won't be a lot left when it trickles down to ptp?)

So. Operating profit is up significantly to £3.1m – That’s adjusted operating profit mind you – adjusted primarily for the amortisation of capitalised software development which was running at around £2m in 2022. Nevertheless it is apparently ahead of market expectations. Except that there aren’t any on the stockreport. But good all the same although it leaves me with the question – how did they miss on revenue and end up so far ahead on adj operating profit? - probably they haven't and the adjustments need to be seen as already surmised?

Cashflow does look even better with the pre- working capital and capex at £3.5m. Looks like good management of the business operations – even if the revenue trajectory has yet to achieve take-off. Again. The cash will come in handy for paying down the debt accrued during the lockdown. But once its gone – it’s looking like a good cash generative business.

No information on new connections. Which rather makes me think that there is nothing particularly good to report here?

For me this is an OK report in terms of recovery of the pre-pandemic business – but once again it seems as if it might have kicked the jam roly-poly down the road again in terms of its growth trajectory for its data-analytics led smartvend and smartdraught products.

The problem for Vianet is that it needs serious revenue growth in new contracts to generate operating leverage and produce sensible eps figures. Without that its never going to achieve escape velocity. I'm still holding, but for how long......? It seems an attractive product, ahead of the competition and a very attractive market which is growing strongly - I'll likely give it another 6-12months to show some significant top-line growth......famous last words.......but it is testing my patience now.

Cheers

Mark

NewInvestor1972

I just put April and March greens into a FOLIO looks like Watkin Jones (LON:WJG) could be an opportunity. -62% from the years high, EV/Sales of 0.53 50% revenue growth target over the next two years, the relative strength is moving up and a 7% divi. I've just bought a few

Macfarlane (LON:MACF) (my second largest holding) – Small acquisition

Macfarlanes second small acquisition of 2023 – a northwest regional protective packaging distributor - Gottlieb – for £2.75m (plus earnouts) with (historic) £4.5m sales and £0.7m ptp. The kind of small bolt-on that Macfarlane has excelled at now for years.

What is perhaps more remarkable – when added to the previous 2023 acquisition (on a pro-rata pro-forma basis) - Macfarlane (LON:MACF) has already achieved 2/3 of the forecast growth in revenue and 100% of the forecast increase in pre-tax profit for the current year. Leaving not very much to be achieved by the existing business – and Marfarlane do have a consistent record of improving revenue and profits over many years now.

Management forecasts are always cautious and have a record of under-promising and over-delivering. As there is an established seasonality to the results – this acquisition increases the likelihood of an upgrade towards the end of the year in my view.

The shares seem valued currently on the basis of a much less successful operation. As the company keeps doing what it does well I expect the shares to re-rate significantly. I just don’t know when.

zipstuck

Well, we have results in June and AGM in July - hopefully with a trading update. If the new partnerships come to anything there a strong baseline to add profit. If it is £0.5m in FY 23 then hopefully the finance costs will also disappear if they have managed to generate the cash they say and tax refund they expect by the end of June.

TamzinPiworld

Here's Property Franchise (LON:TPFG) full year results webinar from 18.4.23 video & podcast. Between the day of results/this webinar and today the seller has cleared and the share price is up of over 20%. It's now on a PE of 12.5% and a divi yield of just over 4%. Not as cheap as it was at results but still a predictable stock with a nice dividend. It's not as liquid as Belvoir (LON:BLV) but has less exposure to Financial Services. TPFG believes 2023 total property sales (TAM) will go back to 2019 volume, around 1-1.2m completions but rental income is extremely strong. TPFG has an operating margin of 41%, a ROCE 20% and is looking to grow both organically and through acquisition.

Robert Forrester, CEO, Vertu Motors (LON:VTU) will hold one of his legendary webinars next Wednesday 10th May, 3.30pm. Register here. We know the automotive retailers have been doing extremely well and there's consolidation in the sector. Robert is always extremely generous with his time and answers all questions. Do join us with Robert and Karen Anderson, CFO for what is always an entertaining session.

1Spatial (LON:SPA) presented FY23 results last week. Claire Milverton, CEO was joined by the new CFO, Stuart Richie. Claire sounds very excited about 1Streetworks, the Traffic Management Plan Automation solution, which is illustrated via a video. Worth a watch to understand their offering and strategy. Video & podcast.

Mark Carter

"Pretty much resolves them all". Hopefully not famous last words.

JASVFS

Thank you for your comments on Carr's today Graham, I'd noted Paul's caution on the 24th March and started to sell our holding when the shares were relisted, we sold the remaining third today after reading your opinion. Good luck to the company and remaining holders but we are happier building holdings in Anpario and Wynnstay, the latter highlighted on here recently by planetx.

Videndum (LON:VID) Just seen this afternoon's RNS. Doesn't look great. Trading is clearly not going well, but as is often the case, debt is the elephant in the room. I have a holding which fortunately is small and getting smaller, certainly in the short to medium term.

I think Videndum (LON:VID) operates in an attractive area, so I am unsure whether the current problems are due to management ineptness, an unfortunate confluence of events or a combination of both. To paraphrase the Clash "should I stay or should I go". Decision time!

peterthegreat

Glad to see that I am not the only one having problems with RNS announcements that are not in my Folios nor requested. I get many iShares RNSs every day, but I have never invested in any iShare. I contacted Stockopedia and they suggested that it might be because some of my old holdings are showing in my Folios but this is not the reason. This has been going on for months and gradually getting worse. I guess the easy way out is to use a different provider for this facility.

BnB

Is it not a confluence of pandemic hangover with macro uncertainty? I’m wary of anchoring to the chart but we are at levels last seen in the initial pandemic crash when the world was about to end. I don’t expect a swift turnaround - and the screenwriters’ strike is a further spanner in the works - but, long term, this looks an attractive entry to me rather than a valuation from which I’d be inclined to jump.

simoan

I get many iShares RNSs every day, but I have never invested in any iShare. I contacted Stockopedia and they suggested that it might be because some of my old holdings are showing in my Folios but this is not the reason.

I see this problem too. I believe the annoying ETF NAV releases may relate to having London Stock Exchange (LON:LSEG) in one of your portfolios.

The Jayman

3rd May '23

While lower debt levels would certainly be welcomed, I believe BnB is reading this in its proper context. I have a holding acquired from £5.5 to £11

Thanks to BnB and the Jayman for their comments on Videndum (LON:VID) . I went through the annual report last night. Too much debt is my concern , which too an extent has been eased. Covenant net debt to EBITDA is stated at 2.2 times at 31 December 22, with expectations for it to be slightly higher at June 2023

Yesterdays announcement states that

"An increased H2 weighting will slightly increase our covenant net debt to EBITDA ratio at 30 June 2023 from our previous expectations"."

The loan covenant taken from the last prelims is shown at 3.25, which should provide headroom.

The annual report also cited the going concern basis adopted by directors.

Much depends on how badly trading is impacted in the short term, but for the time being I shall sit on my hands. It had also occurred to me that Videndum (LON:VID) could pull the dividend. Sensible I suspect but unpopular?

Harry Hindsight

4th May '23

Good physical hedge. Like watches, jewellery, this is wealth you can 'bling'.

No interest but some flash enjoyment and fundamental family wealth. All the easy stuff has been found, so scarcity and cost of mining increases.

Gold cannot be destroyed.

Governments know this so grabbing like mad to support their weak fiat currencies. Argentina anybody.

Small Cap Value Report (Tue 2 May 2023) - RTN, CARR, PHC, KITW, ADF, TRB, MTEC, VNET, TLY

Banking turmoil (again)

Summaries

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Paul Scott

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