Small Cap Value Report (Tue 21 May 2019) - NEXS, ACSO, SHOE, MYSL, BMY

22nd May '19 by Paul Scott

20 comments 9451 reads

Good morning, it's Paul here.

7-8am comments

Nexus Infrastructure (LON:NEXS)

Interim results - I'll have a proper look at these later, below.

The group warned on profits on 29 Apr 2019, which I didn't get round to looking at. So it's been on my list of things to catch up on, hence interim figures today being of interest.

Operating profit of £2.9m is down 17% on last year - hardly a disaster. There has been a 40% drop in share price since the Apr 2019 profit warning, so weaker performance looks baked in already.

Strong order book. Balance sheet looks OK, with some net cash.

Stockopedia shows forward PER at 8.7 - which looks about right to me, for a cyclical contracting business.

Outlook comments today sound positive, and interim divi is being maintained.

accesso Technology (LON:ACSO)

Trading statement (AGM) - this share is on my watchlist, because it hasn't bounced after the indiscriminate sell-off in growth shares last year. My feeling is that's either a buying opportunity, or not.

Today's update reads positively, but there aren't any figures.

Historically it's been a highly seasonal, H2-weighted business.

While the majority of the trading year still remains ahead of us, the Board is encouraged by the trading seen at this stage of the year and remains confident in the Group's outlook, maintaining Board expectations for the year ahead."

My view - I understand the bull case;

Commanding presence in a niche with little competition, globally
Tech companies are not valued on profits (look at Uber for a large example)
Once development spend is completed, then profits could flow
Potential bid target for private equity?

The drawbacks for me are;

Enormous capitalisation of development spending onto balance sheet
Weak balance sheet
It doesn't really make any money - I'm not happy with the adjusted numbers
Huge Director selling in recent years - if the future is so bright, why would they sell?

It's possible that today's update might reassure, and trigger some buying, maybe? Personally I can't see anything much to get excited about in this update. This one remains in my "too difficult" tray, but I am tempted to buy - because the market got wildly excited about this stock in the past, and once it starts rising again, there…

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TamzinPiworld

21st May '19

Entertainment One (LON:ETO) FY19 results released this morning. Here's an interview with CEO Darren Throop, who talks about the Group’s full year results for the year ending 31st March 2019.

EBITDA & EPS up over 20%, leverage 1.7x, library valued at $2bn.

piworld will publish this morning's analyst's presentation later on today.

MrContrarian

My morning smallcap tweet: Superyatch service sales so super

Tritax EuroBox (LON:EBOX), Knights Group (LON:KGH), GYG (LON:GYG), Integumen (LON:SKIN), 4D Pharma (LON:DDDD), Bloomsbury Publishing (LON:BMY)

Tritax EuroBox (EBOX) placing at 110p, a 2% discount, to fund investments.
Knights Group (KGH) guides FY adj pretax slightly ahead of market expectations at £9.7m, a 102% increase.
GYG (GYG) superyatch service co guides FY ahead of current market expectations due to improving market.
Integumen (SKIN) guides FY rev up 111%, ahead of previous expectations. EBITDA loss reduced by 12% to £1.25m. Also cgmn resigns immediate effect. He is thanked.
4D Pharma (DDDD) FY pretax -£24.3m (£19.4m) ,cash burn for the year was in line with expectation. "Directors are continuing to explore sources of finance available to the Group and have a reasonable expectation that they will be able to secure sufficient cash inflows into the Group to continue its activities for not less than twelve months."
Bloomsbury Publishing (BMY) FY adj-pretax up 9%, ahead of market expectations. FY div 7.96p up 6%. Still milking that Potter cow.

john652

Damian Cannon

Lucky escape with Shoe Zone (LON:SHOE). I became quite tempted by them at Mello but terrible liquidity meant that I couldn't purchase in any meaningful size. Could easily be a bit of a lobster trap.

Looking at the interims I can see why investors are a little disappointed. Profits are essentially flat, despite an improvement in gross margin, due to a fall in sales and the dividend is flat. Also online sales growth is low at 5% although these provided £1.5m of profits to offset the loss from high street stores.

Still Shoe Zone (LON:SHOE) never makes much money in H1 and the second-half is where the business needs to do well. It sounds as though the board are expanding sensibly and managing costs but the fact remains that analyst forecasts are for an 8% drop in EPS to 17.6p and right now the business is only trading in-line with these expectations.

Damian

andrea34

Results from APC Technology (LON:APC) look quite interesting to me, with revenue £10.7m+23.6%, EBITDA £851k+46.5% with operating profit still up 24.9%, and eps 0.4 (0.3). Acquisitions have helped progress, and it's not clear how much growth (if any) is organic. I'm not an accountant, but I can't see anything standing out. Debt is down, and high interest debt fully paid. Any views?

I don't understand how the valuation of Bloomsbury Publishing (LON:BMY) is as high as it is, with practically flat revenue and profit only up 3%. Note the following statement - "Excellent Academic & Professional performance, with profit before highlighted items of £3.1 million (2017/18: loss of £0.4 million) and revenue up 13", doesn't this therefore mean that the performance of everything else is pretty woeful?

Retail stalwart (and not so small co) WH Smith (LON:SMWH) announces what looks like a reasonable trading statement to me, with total sales +15% and lfl+1%. As always, the travel operations are the star, with sales up 26%, with new large format travel stores doing well, they are also making inroads into hospitals which has overtaken rail in size. The price was initially down 3% for some reason, but has ticked back up over 2000p. I keep on watching, but don't hold... and the chart is currently in downtrend.

There is an in-line 4-month update from Vitec (LON:VTC) (which I hold), all divisions show growth... though the overall tone is a bit lacklustre to me, one division has a challenging market and they say "the value of total cameras sold has remained constant since December 2015" which seems a bit dull. There is to be significant digital investment. There are very few trades going through.

Interim operating profit at Renew Holdings (LON:RNWH) is up 35% and revenue up 15%, with eps up 15%. The engineering division seems to be doing very well, the Specialist Building division is well down admittedly (due to "contract selectivity", which has actually reduced margin) and I wouldn't be surprised if they are winding this down to sell it. Perhaps previous blips in performance give it a subdued rating...?

iwright7

Andrea,

If you look at Bloomsbury Publishing (LON:BMY) as a book publisher its metrics don't look great and it's ex growth. But it also has growing revenues/profit from digital B2B publishing in the academic and professional information market and this is the where future growth is likely to come from. Priced at a PE of 14 and with cash, the B2B aspect looks like a decent punt.

Mh101

Hi Paul! Had a look over your slides from Mello as I did not attend and thought they were great - thank you for sharing. If you have time and are willing, do you think you could explain what your thinking was behind the comment that mean reversion may no longer work / stock picking based on low PER is now especially dangerous? Would be much appreciated. Thanks

abtan

My concerns with Nexus Infrastructure (LON:NEXS) are founded in this article and, more specifically, the section on Tamdown:

"...specialist concrete contractor Tamdown, which takes an average of 62 days to pay, with 24% of invoices not paid within agreed terms."

http://www.globalconstructionreview.com/news/contractor-takes-over-100-days-pay-invoices/

So sadly, despite many numbers looking like they're going the right way, it's on the naughty list for me.

A

Gromley

Shoe Zone (LON:SHOE)

I hate it when companies give false and misleading explanations of their numbers.

Cash generation continues to be a focus and the Group had net cash of £3.3m (2018 H1: £5.9m) at 30 March 2019 with no bank debt. The adverse variance to last year is due to increased capital expenditure, the £4m special dividend paid in 2019 and £1.2m of freehold disposal proceeds during 2018.

Now certainly the property disposal boosted cash-flow, and therefore, cash in 2018. But it has absolutely nothing to do with the fact that cash decreased since then.

To be fair the increased capex and £4m special dividend is more than enough to explain the £2.6m decrease in cash. So why do they need invent stuff to explain the numbers?

All this said, the results and outlook are pretty decent imho - the only justification I can see for the 6% fall today is that the price rose by more over the last couple of weeks, perhaps in hope or expectation of something better?

Despite my grumbles I've taken a small initial position (yikes another retailer in my portfolio!)

WarrantStar

With regard to development spending at accesso Technology (LON:ACSO) Paul Scott says above "Once development spend is completed, then profits could flow". The problem is that, like with many technology companies, development spend will never be completed! There will always be another exciting development project. The best outcome that we could possibly hope for would be that development spending decreases as a percentage of profits and that they start to have decent free cash flow and maybe even start paying dividends.

Mark Carter

Some commentary on Thomas Cook (LON:TCG) would be nice, even if it's a little bigger than you usually comment on.

Roger Lawson

I attended the Accesso AGM this morning and there was more enlightenment there about the causes of the share price fall and future prospects. Will probably do a write up in a few minutes for publication on my blog and ShareSoc's.

As promised earlier, here's the Entertainment One (LON:ETO) FY19 results presentation by CEO Darren Throop & CFO Joe Sparacio, given to analyst this morning. Including Q&A. c.55 mins.

https://www.piworld.co.uk/2019/05/21/entertainment-one-eto-fy19-results-presentation/

Bouvier

Shoe Zone (LON:SHOE)

I have to disagree with Gromley. The sale of the freeholds boosted cash at the interim stage of 2018. This additional cash was then paid out to shareholders as part of the special dividend during H1 2019 in line with Shoe Zones dividend policy. These two facts are part of the explanation for the difference in net cash between H1 2018 and H1 2019. There is nothing false or misleading in their numbers.

davidjhill

Thomas Cook (LON:TCG) - it's an interesting one Mark. Worth watching the H1 results to see where they are at from CEO and FD if you can. The problem they have is obviously challenging trading but H1 is also peak annual debt usage and that number has caused a panic. The additional liquidity they have put in place was to mitigate a worst case scenario for next winter but negotiated ahead of time for prudence. From now until y/e they are actually strongly cashflow generative as confirmed by FD, so some of the analyst and media comments are pretty mis-timed and alarmist. However, once the sharks get their teeth into a story the effects can be a vicious downward spiral and that is what is happening now. This media coverage spooks suppliers and customers which, can result in a further impact on trading and liquidity, causing further media stories.........and repeat until bust or rescued!

For me the actual undertones are that the airline has had some pretty decent bids. At the positive end of CEO expectations from the analyst presentation. Net debt at full year is expected around £350m I think. If that's the case then airline bids of circa €800m-1bn would kill the net debt and with facilities in place would easily cover peak mid year debts following year. So, there appears to be no real reason for them to go bust unless confidence is destroyed per above. The group should actually be profitable - eps of 4p was expected after H1 warning (7p before with 40% downgrade) though clearly another hot uk summer and/or solvency confidence issues could wreck that forecast. If they sell the airline then the group becomes loss making by approx £30-40m by my calcs for next year unless the cost restructuring can mitigate this. However, they should have net cash at that point.

So, it's a really difficult one to call. The citi analyst slashed price target to zero on the basis of debt and this caused a panic. I also saw reports that alluded to the additional liquidity being dependent on the sale of the airline but this was dismissed in the q&a of the analyst presentation. The same analyst said they should do a debt for equity swap and wipe out shareholders, but I find this argument bizarre. Any business that has a massive cashflow swing each year wouldn't hold cash to mitigate peak debt levels caused solely by working capital. They finance it. Thus Thomas Cook (LON:TCG) need to focus on the £350-£400m net y/e debt in my view. That's where airline sale should come in.

Personally I think management should have done a much better job at foreseeing this and managing it ahead of time. It is conceivable that events now spiral out of control when it is entirely unnecessary and I do think we are closeish to that inflection point. However, if they do extricate themselves from said cycle then there is still the matter of deciding whether to buy into their Hotel group forward strategy!

All in all an awful lot of moving parts and some of those are not directly in the companies control.
For what it is worth at a personal level I am distinctly unimpressed with managements execution. Since Harriet Green was replaced with the shares up at 150p in 2014 the current CEO has seen shareholder value destruction to the tune of 90+% !! However, he has been well paid to do so and remains in seat some 5 years on........hmmmm!! he has perhaps banked £5-8m less tax in that time whereas shareholders have lost most of their money!! That's a very poor indictment.
I actually think there is a lot more value in Thomas Cook (LON:TCG) than the current market cap suggests though as you can probably tell I'm not convinced current management can necessarily extract it. Feels like Thomas Cook (LON:TCG) is now in option territory.

I have to disagree with Gromley.

You should come and live at my house, you'd fit right in!

The sale of the freeholds boosted cash at the interim stage of 2018. This additional cash was then paid out to shareholders as part of the special dividend during H1 2019 in line with Shoe Zones dividend policy. These two facts are part of the explanation for the difference in net cash between H1 2018 and H1 2019. There is nothing false or misleading in their numbers.

All true, but their statement said :

"The adverse variance to last year is due to ....... , the £4m special dividend paid in 2019 and £1.2m of freehold disposal proceeds during 2018."

Whereas to meet your factual expression of events they should have said :

"......, the £4m special dividend paid in 2019 as a result and distribution of the £1.2m of freehold disposal proceeds during 2018."

Those are very different statements.

Perhaps I was wrong to infer that there we guilty of BS, but they were certainly guility of being factual.

When I used to write briefings, I would have been seriously hauled over the coals for such a misleading statement if it reached the PLC board; if if it reached the shareholders via an RNS , I am thinking more inline with Theon Greyjoy!

So perhaps they may not have been deliberately misleading, but my conclusion is that I cannot trust their commentary on results - it makes me do more work and makes me a more reluctant shareholder. I'm holding for now, but I really don't like having doubts about the management.

Effortless Cool

Thanks for that write up, Roger.

AnonymousUser318975

22nd May '19

David, you said..

"So, it's a really difficult one to call. The citi analyst slashed price target to zero on the basis of debt and this caused a panic. I also saw reports that alluded to the additional liquidity being dependent on the sale of the airline but this was dismissed in the q&a of the analyst presentation. The same analyst said they should do a debt for equity swap and wipe out shareholders, but I find this argument bizarre."

The Citi analyst said Thomas Cook (LON:TCG) was worth 0p. Yet Citi are also advisors to Fosun. Who currently have c18% at the moment. Additionally, Zhang Shengman, a director at Fosun used to be Chairman at Citi’s “Asian Pacific Region” arm. Humm. Now that is something I find bizarre.

There may be reason to think that Fosun want all of Thomas Cook (LON:TCG) (unlikely). However, they wouldn’t be able to do that even if they wanted to? Because strict EU laws would prevent the Chinese company from investing in an EU airline. If Thomas Cook were to offload the airline side though, would that not then open the door for Fosun to take what is left. And possibly the only bit which they might actually be after anyway.

Perhaps the conspiracy side in me coming out. But it just seams a bit to much of a coincidence that the price was crashed (mostly) by the very same firm which have been advising Fosun to buy. We know that Fosun has expressed its desire to take over Thomas Cook. I am quite sure that Thomas Cook will live on. My worry would be that it may result in private investors being shafted at some point during the process.

Jiggery pokery?

Lol - yep. A very valid point. One sometimes does wonder whether analysts are conflicted when you see this kind of thing. Of course there are supposed to be "chinese walls" in place to prevent it. Sorry, pun intended !!!
In todays compliance led market though I doubt there was any influence as it simply isn't worth it. However, I agree that some of the comments made seemed a bit amateurish from my lens and therefore open to such cynicism.

I don't disagree with your conclusion that shareholders could get shafted in this process.
I am not impressed with management, who I think have done a poor job and just don't think have understood how to play the analyst/sell side game. Horrible situation for shareholders and in my opinion avoidable!

29th May '19

Compliance led market? Just not worth it? Humm. I very much doubt that the City Boys will be too bothered by such minor technicalities ;-)

Small Cap Value Report (Tue 21 May 2019) - NEXS, ACSO, SHOE, MYSL, BMY

7-8am comments

Nexus Infrastructure (LON:NEXS)

accesso Technology (LON:ACSO)

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Paul Scott

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