Small Cap Value Report (Tue 21 June 2022) - REC, G4M, ASTO, HSS, K3C

21st Jun '22 by Paul Scott

49 comments 8240 reads

Good morning! Paul & Graham are here with you today, for our usual trawl through the RNS, looking for opportunities in the small caps space.

Agenda -

Paul's Section:

Gear4music Holdings (LON:G4M) - my initial review of the final results for FY 3/2022 leads me to believe this share could be very cheap, taking a longer term view. In the short term there are obvious macro headwinds. Big changes in the balance sheet are worth noting, and not all investors will be comfortable with the large increase in inventories & bank debt. Slide deck is here.

Also, I had a quick Q&A with G4M management, with brief notes added here below.

K3 Capital (LON:K3C) - readers have asked me to review a strong trading update today. This looks an interesting, and highly profitable professional services business. If profits are sustainable at this level, then it looks cheap.

Graham's Section:

Record (LON:REC) - this currency manager is trying a new strategy of moving into fund management, after many difficult years of price compression in currency services. The strategy is already bearing fruit with large increases in revenues, margins and profits. I’m excited about the potential for the company to grow over time and become a larger, much more profitable business. It has built up an excellent reputation over many years, so I rate its chances of success highly.

Quick comments from Graham -

Assetco (LON:ASTO) [No section below] - As recently as February 2020, the purpose of this company was to provide “management and resources to the fire and emergency services in the Middle East”. That business suffered a revenue collapse, but was cash-rich, and so the company changed strategy. It is now involved in “acquiring, managing, and operating asset and wealth management activities and interests”.

It is led by three former top executives at Standard Life Aberdeen, including the co-founder of Aberdeen Asset Management. Today it announces the debt-funded, conditional acquisition of SVM Asset Management for £9 million. SVM is a well-known and long-established but, in an industry context, small-scale fund manager based in Edinburgh. This appears to be a sensible acquisition, both strategically and in terms of the purchase price.

HSS Hire (LON:HSS) [No section below] - this equipment hire business reports Q2 revenue up 10% versus 2021. Adjusted earnings are still set to be in…

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JCPr

21st Jun '22

Gear4music Holdings (LON:G4M) (I hold) have increased inventories by £17m in a year. They're far from the first figures I've read over this year where a company has significantly increased inventories to handle supply chain issues. So, speculating vaguely, when supply chains return to normal is there not quite a risk of a significant slow down as inventories are unwound, particularly for B2B businesses?

Paul Scott

Morning ridavies,

I don't know K3 Capital (LON:K3C) because Jack used to cover that. But I see it's up c.10% today, and your synopsis has engaged my interest, so I'll have a fairly brief (nearly lunch time) and non-expert look at it next!

Regards, Paul.

truegent

they have to do something with all that cash...

Hi truegent,

I'm sceptical on Tremor International (LON:TRMR) and it's a complicated one, so not something I follow. Am happy to look at the next results, if readers want me to, but I don't have anything to say about potential acquisitions. Feel free to discuss here though, if you think it's interesting :-)

rmillaree

Patrick L

Brokers expect low single digit revenue growth for Boohoo (LON:BOO) and double digit growth for Gear4music Holdings (LON:G4M) during FY23. I'd suggest Gear4music Holdings (LON:G4M) is the better investment.

Its not all about revenues though is it - short term Boohoo's profits have taken a massive hit but they are currently expected to double profits next year - so yes of course it will look expensive in comparison to pretty much everything if you ignore the expected doubling of profits next year (and hopefully further progress after that) . In similar manner G4M probably looked expensive on current year metrics compared to boohoo or pretty much anything else in 2019 when they temporarily hit the buffers ref profit evaporation!

ridavies

Re Tremor International (LON:TRMR) and Amobee, this was on Morningstar this morning.

Alliance News) - Tremor International Ltd on Tuesday confirmed it is in talks to take over an American advertising company, and announced an investment in the connected television market.

In response to a Sky News report, the London-listed digital advertising firm confirmed it is in talks to acquire Amobee, a digital marketing technology company.

The talks come "alongside a number of ongoing strategic discussions with other third parties, which is considered normal course of business by management and in line with its stated [mergers and acquisitions] policy", Tremor said.

Gostevie

I agree. It really does help if people can name the company they are refering to when posting about it in the comments section.

FREng

jape

Surely being able to reduce inventories will increase profits assuming constant sales and other costs.

Not for their suppliers.

grandmA

I bought Record (LON:REC) 10 months ago at .92p, have I done the correct thing in still holding them?

Cuddlesticks

LON:K3C

"it’s clearly doing very lucrative work, which makes me wonder how it manages the split of the loot between staff & shareholders, which is often an issue with professional services businesses."

I asked a related question at an InvestorMeetCompany presentation. The CEO explained that their clients are small and so the nature of their M&A business is high volume, relatively low value. This means they don’t rely on expensive ‘rainmaker’ partners to drum up new business. The business model is partially predicated on embedding clients into an on-line ‘support community’ with multiple resources available and managing data to identify client cross sell opportunities e.g. tax optimised post M&A Capex or restructuring.

Unfortunately, the answer to my specific question wasn’t included in the available recording but I thought the presentation was excellent and well worth watching.

https://www.investormeetcompan...

Gear4music Holdings (LON:G4M) has a high volume of trades today without the price moving after the opening rise. If ADVFN's trades screen is to be believed, there have been almost no sales and that high (for G4M) volume has been almost all buys. Seems odd.

GavSmith01

There might be a broker faciliating a big sell order which will be late reported.

sharw

Paul - of Gear4music Holdings (LON:G4M) you say "Mgt has sold a lot, but the CEO still owns almost 23%, so plenty of skin in the game".

The same is true of K3Capital (LON:K3C) where CEO John Rigby has 10.36% (a smaller % but around twice the value cf G4M and nothing substantial sold since 2018). It comes across to me that he is very much the vision and drive behind what is going on there and I very much agree with Cuddlesticks that the best way to get the feel of that is to watch the most recent interim presentation at IMC - https://www.investormeetcompan... If you only have a couple of minutes watch the bit on Growth Strategy starting 13m 14s in.

Camtab

Ask yourself why you bought them. Ask yourself if anything has changed. Consider the change and ask yourself if you are still happy with them. If you want advice see an adviser I am sure they will be happy to take your money.

Surely being able to reduce inventories will increase profits assuming constant sales and other costs.
generally reducing or increasing inventories with static sales will be profit neutral - if you reduce inventories you simply take the cost from your available stock rather than having to buy it in - so the cash cost of buying in stock items will be less but the profit will be the same as the stock item is moved from balance sheet assets to profit and loss costs which creates the same p and l charge as buying in similar item.

Funderstruck

23rd Jun '22

Paul; Thanks again for your extensive indepth analysis. Particularly welcome in this difficult period.

Snazzytime

11th Jul '22

hi Graham

Just a follow up on your recent write up on Record (LON:REC)

Your write up was very positive although in your summary you said 'I’ve allowed myself to get excited about this change in Record’s strategy. Now I’m going to have to go and reflect on all the reasons why it might not work!'

Over the weekend I had a read of the FY '22 Annual Report and one particular aspect (Directors' Remuneration) rather took me by surprise and I'd appreciate your views on this please.

The CEO, Leslie Hill received total remuneration of £2.395m (£724k fixed, £1.671m variable) whilst the CFO, Steve Cullen, received £258k (£153k fixed, £105k variable). So the CEO's total remuneration was a multiple of 9.3 times the CFO's. I find this quite staggering.

I wonder what the CFO thinks of this and what effect it might have on their working relationship?

In the company's defence the Remuneration Committee Chair states;

'The Group is in a three-year transitional phase where the current senior managers prepare to hand over to the next generation under our succession plans'

and

'To deliver the Group's three-year strategy, the Board believes that it is imperative that our current CEO, Leslie Hill, continues to drive this strategy. Our new Remuneration Policy for our CEO has therefore been designed to ensure that she is motivated and incentivised to deliver this three‑year
strategy'

Although Leslie Hill does appear to be doing a good job in this transitional phase the huge imbalance in total remuneration between CEO and CFO seems way out of kilter to me. I'd very much appreciate your views please.

I hold.

peterg

Looks like they had to pay her in excess to get her to stay. She will get up to around 30% of the total forecast increase in revenue (over the next 2 years). I'd think that if they really feel they need to pay those sorts of sums to keep her they should be speeding up their transition.

Small Cap Value Report (Tue 21 June 2022) - REC, G4M, ASTO, HSS, K3C

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Paul Scott

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