Small Cap Value Report (Tue 22 Mar 2022) - BKS, SCS, LUCE, KGH

22nd Mar '22 by Paul Scott

60 comments 9672 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Agenda -

Paul's Section:

Beeks Financial Cloud (LON:BKS) (I hold) - I review its interim results to 12/2021. Very strong organic growth, and lots of recent contract wins, suggests the future is bright. At this stage though, it's little above breakeven, so tricky to value.

Scs (LON:SCS) (I hold) - poor H1 results, but that's against unusually strong, distorted prior year comps. Outlook comments seem confident about recouping backed up orders into revenue in H2, with an in line with expectations guidance. Balance sheet laden with cash. Looks interesting, and I'm tempted to average down.

Luceco (LON:LUCE) - 2021 results look solid. The big question, is how much the doubling of profits from 2019 to 2021 was lockdown-fuelled? A PER of 12 looks attractive, but we could have just seen peak earnings maybe? At this stage it's tricky to value, and really depends on your personal view of the macro outlook.

Knights Group (LON:KGH) - profit warning from this legal services group has collapsed the share price by an astonishing 50%. Is this an over-reaction? Possibly, but I don't know the share well enough to be sure. I don't see solvency risk, and it remains decently profitable. So there could be a trade here for a rebound, maybe? I'm more worried about the read across to the whole sector, with corporate work slowing.

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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Alan Partridge

22nd Mar '22

I know a couple of lawyers that TUPEd over to Knights when their firms got taken over. A year later and these lawyers have left for other firms.

The success of a law firm is dependent on keeping fee-earning talent. When lawyers move, often so do the clients. This is a big risk and warning sign, for me.

gringo

Scs (LON:SCS) are tighter with money than me. At this rate theyll be able to spin the buyback out until 2023

On buybacks they say - "The maximum daily number of Ordinary Shares that will be purchased is 18,733, which is 25% of the average daily volume traded in February 2022, the month prior to this announcement. The Programme is currently expected to end no later than 12 months from the date of this announcement."

Chrisfarrell21

Hi John,

Yes, correct on both points. I think of them as a hairdresser: the lawyer is self-employed, and pays Keystone a % of their takings for a seat in a shop (central offices, PI insurance, technology, a brand, admin team and Keystone's profit margin).

If you go in to Keystone as a partner, you get a very high % of the fees you bring in yourself, and get a smaller % of fees for work you do which was brought in by someone else. In theory, still much more money than you would earn in a law firm, no (or certainly much less) politics, and no one really cares if you down tools for 12 months because they don't owe you a base salary.

Similar for junior lawyers, you can still go in and do work brought in by the partners, and collect a decent % of the fees, although you don't have as much job/income security should work dry up for a bit.

If the lawyer chooses to have their own office, which some lawyers do, Keystone doesn't pay for that. I'm guessing rent for Keystone is a much lower % cost than any comparable law firm. Keystone has a central office for Keystone's overhead staff and some office/meetings space, but it's not big enough to accommodate the amount of lawyers they have, and it's not intended to.

I like the company and the business model, I was pondering buying in before seeing the gigantic director share sales. Will watch from here.

Cheers

Chris

Helvellyn

Are you talking about £WYN ?

The reason for my query is that I have held for a while and topped up twice when it has dipped to around 500p recently where there seems to be support !!

Richard

abtan

Circassia (LON:CIR) (no position)

Brief comments on this one in response to some of the comments below:

The FDA approval of LungFit was already been delayed more than once in 2021.
On listening to a previous Chris Mills interview I was initially under the impression that approval was a given, but after the x2 2021 delays I am more wary.
If I held I would conservatively assume the $10.5m + $6m potential royalty uplift here is zero for now.
There were a few seemingly one-off benefits in the 2021 results:
a)a £0.7m PPP uplift, which will not repeat;
b) £4.4m tax benefit due to prior losses from a Swedish subsidiary.
I know there are lots of historical losses on the balance sheet, but for me it was unclear how much of these could be used in the future.
I wasn't sure what to make of the +24% YOY Jan/Feb comparative given the £0.6m one-off China revenues booked in H1 2021.
If these China revenues were booked in March-June 2021, then perhaps the comparatives will get harder for the rest of H1 2022?
Of course if this is +24% on top of the £0.6m China revenues, that would be most impressive.

I think it's also worth adding that Clinical revenues are +24% vs Jan/Feb last year, with no mention of Research revenues (which are c 16% of group revenues for completeness.)

I also don't know why they didn't give a YOY% value up to 20th/21st March?
Sales and Marketing spend looks much lower now and should hopefully lead to positive profit going forward.

Playing devil's advocate I can't work out where their 3rd party distributor costs are now?
Gross Margins have barely changed in the last 2 years, which is where I would expect these presumably quite significant costs to sit.
Where are they?

I continue to remain tentatively interested. It still looks expensive to me at the moment, but if growth can kick in then I would certainly be more interested.

GL to all holders.

planetx

yes Wynnstay , WYN - well done for topping up at 500 level , can’t see it going there again .

ACounsell

I know strictly speaking that Gamma Communications (LON:GAMA) isn't in the SCVR universe but I wondered whether anyone had any views on why the share price is down c. 12% today. I have read the results announcement and in my view there appear to be very few negatives - just some difficulty in recruitment perhaps. The adjustments to the accounts seem reasonable noting the exceptional item recorded in 2020 (profit on a sale of business) meaning that the true comparator is up 25% at Adjusted PBT level. Cash generation is excellent and after major expenditures on Capex, acquisitions, etc. during 2021 there is still nearly £50m at the bank. Consequently the balance sheet looks healthy with a decent NTAV despite significant intangibles (attributable to acquisitions). Management comments on the outlook are positive and the business is performing well so far in 2022. Results appear to be in line with analyst consensus expectations. Despite all this after today's fall the share price is down c. 50% since September 2021. Maybe some of the fall is attributable to a rerating from a fairly toppy valuation but prospects and growth appear strong and in line with historical growth rates. What am I missing!

BnB

Gamma Communications (LON:GAMA)

What am I missing!

I sold today because:

a) the rate of growth is slowing

b) the runway for adoption in the UK ends fairly soon as traditional phone lines are phased out

c) the anticipated European growth is not coming through

d) this is a very competitive market globally and I hold a faster growing international alternative

e) taking into account the above and the general rerating of growth stocks, the reduced valuation is still not compelling

f) should I have sold last summer? too bloody right!!

Fortunately I did sell 1/3 of my holding in June 2021 at just shy of £20 so did manage 50% profit on that tranche. Sadly should probably have sold the balance as now effectively at break even on my original investment. However, past experience tells me as soon as I sell the share price will rocket! Guess we will have to see if your analysis proves correct and I should also have got out sooner.

Some stonking trades gone through in the last hour on Supreme (SUP) .

1.1 million shares traded today, normal daily volume is 20-50k shares .

240k shares at £462k value twice

280k shares at £539k value twice

Thats someone just spent 2 million quid so around 1% of the company which actually isn't that much I guess .

But someone like it, price is starting to creep up to £2 level which it has made several attempts to clear previously , looked like it had made it until Ukraine invasion torpedoed (excuse the wording) that .

A lot of people like it due to the entrepreneurial CEO and it looks a decent business with a CEO who loves his company and is not in it for a quick buck.

RutlandRam

Very good point re Luceco (LUCE). It will be interesting to see if the score remains the same after STOCKO updates for todays final results. To be fair to them, they appear a pretty genuine outfit to me and I am impressed by the level of information provided in todays presentation. There may be an opportunity to get some answers from the Investors presentation scheduled for next week.

Just to add, my main concern here is the dependancy the company may have on B & Q. I know a few years ago it was 40% of sales - I assume that has reduced since then, possibly considerably. I see Kingfisher shares got a hammering today despite pretty good results, presumably because of their reference to a slow down in current trading.

JonBirdy

Hi Paul

Thanks for your comments on Scs (LON:SCS) (I hold).

I recently used SCS to re-carpet my house. They were cheap and contrary to common opinion, they don’t just sell tat! John Lewis sell the same carpets I bought but costing a lot more.

One aspect of the Scs (LON:SCS) business model is ‘free fitting’ but only IF you buy their overpriced underlay. I bought my own underlay (a small hassle) and saved money overall. Many busy people won’t be bothered, so as an investor I applaud their model!

Customer service was great and with four years interest free credit my carpets feel basically free, costing me the same as a few cups of coffee each month

There were initial supply chain issues with my fitting delayed. But Scs (LON:SCS) then came good with getting my carpets in over a month earlier than they first said.

I would use them again for price, customer service and interest free credit alone.

I know you like to sample your hospitality shares. So I thought sharing my Scs (LON:SCS) customer experience might be useful.

cwatson

hi BnB, just out of interest what’s the faster growing international alternative?

Sad to see Gamma falling so far today. Fundamentally still a solid business still growing at a fine pace. The market is brutal at the moment and is taking no prisoners. I believe in 3 years times the share price will be substantially higher again. The partnership with Microsoft and European expansion will prove crucial

GN100

Wynnstay (LON:WYN) I love their CEO's & CFo's presentation. they come across as really straight guys with no pretensions whatsoever. The sort of rock-solid persons you want to be running a Company.

Hunter18

Looking at Scs (LON:SCS) I also think as JonBirdy advises below, that the quality is not as bad as some may suspect and I think potentially as consumers tighten the purse strings, those who shop at more expensive retailers may end up buying from Scs (LON:SCS) as an alternative.

It is always hard to predict but for some retailers, a squeeze on consumer spending may benefit them.

ExpectingValue

23rd Mar '22

Since someone sold, you could also say that someone doesn't like it :)

nevphillips

I see LUCE as part of a bigger trend..

Have electricity prices gone up? - Yes

Are businesses/consumers wanting to switch to more efficient LED lighting to save money/do good? - Yes

Will LUCE benefit from that? - It has good products, competitively priced, good place in the market, so on balance probably yes.

Denzil Morgan

Hi Paul, did you have a chance to review LON: DNL diurnal, although I may have missed it, please?
best, Neil.

24th Mar '22

Diurnal (LON:DNL) some signs of life today. Any views whether this has bottomed out?

Small Cap Value Report (Tue 22 Mar 2022) - BKS, SCS, LUCE, KGH

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Paul Scott

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