Small Cap Value Report (Tue 23 Nov 2021) - CLX, SFR
Good morning! It's Paul & Jack here with the SCVR for Tuesday.
Agenda -
Jack's section:
Calnex Solutions (LON:CLX) (I hold) - highly rated provider of network testing products and services. The valuation is expensive but Calnex has several promising growth drivers and a track record of successful product development. The valuation currently assumes the company executes on these opportunities, with a degree of future growth priced in. Notes from call with management now added.
Severfield (LON:SFR) - structural steel designer. A tough industry, but Severfield does have a leading position in the UK and is one of the biggest in Europe. Current trading looks good, although with some signs of customers delaying projects. It's not the type of company to trade on a premium rating but the current valuation is quite modest with a single-digit PER and forecast dividend of 4.5%.
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.
Jack’s section
Calnex Solutions (LON:CLX)
Share price: 135p (+2.27%)
Shares in issue: 87,500,000
Market cap: £118.1m
(I hold)
Calnex is one of the more promising floats from the class of 2020. It’s a provider of test and measurement solutions for the global telecommunications sector, which has built up a strong market position, a global distribution capability, and whose business is exposed to several growth trends.
The long term growth drivers for test instrumentation and solutions include the ongoing growth of data creation, a vast migration to the cloud, and an equally significant shift to 5G networks. The telecom infrastructure, networking and services markets are seeing an expanding number of market participants requiring testing solutions, so Calnex is well placed to benefit.
Its products have been used in over 600 customer sites in 68 countries across the world, and customers include BT, China Mobile, NTT, Ericsson, Nokia, Intel, Qualcomm, IBM and Facebook.
At the head of it all is the group’s founder, CEO, and major shareholder Tommy Cook, who founded the company in 2006. It remains headquartered in Linlithgow, Scotland, with additional locations in Belfast, Northern Ireland and California in the US, supported by sales teams in China and India.
The group generates good profitability metrics, but as you might expect, the shares are now quite expensive relative to other stocks.
The board is pleased to report that the group has experienced continued strong levels of trading in the first half of the year and expects this trend to continue through the second half of the year. The group's robust cash position has allowed the group to bring forward planned investment in the team to increase operational capability, in line with order growth.
Highlights:
- Revenue +19.8% to £9.25m,
- Gross profit +16.8% to £7.05m,m
- Adjusted PBT -4.4% to £2.31m, statutory PBT +18.4% to £2.31m,
- Adjusted diluted EPS -17.8% to 1.99p, statutory diluted EPS +3.1% to 1.99p,
- Maiden interim dividend of 0.28p,
- Closing cash up from £4.51m to £13.64m.
Revenue is up as a result of strong demand for telecoms testing equipment, ahead of management's expectations at the start of FY22.
Revenue rose by 22% in North America and by 33% in Rest of the World, with North Asia flat ‘due in part to the ongoing geopolitical tensions between the US and China’. Given the shift in sales, Americas now accounts for 35% of total revenues (FY21: 32%), ROW 41% (FY21: 35%) and North Asia 24% (FY21: 33%).
Some of the decline in adjusted profit comes from previously highlighted investment in product development and operational scalability, to support future growth. ‘All profit measures [are] ahead of management expectations at the start of FY22’.
Calnex has invested in business development resources, placing more sales team members in regions that are experiencing strong growth, such as the US and India, as well as adding to the operational teams to support growth.
The variance against the prior period [in underlying EBITDA margin] is driven by the planned step change in our cost base for FY22 as a result of investment to support the continued growth of the business.
Cash generated from operations during H1 was £3.1m (H1 2021: £3.0m) with a net increase in cash of £0.8m (H1 2021: £1.0m) to £13.6m despite an increase in R&D spending of £0.4m, an increase in PPE investment of £0.2m and £0.5m higher administrative costs (ex R&D) during the period.
Investment in R&D has continued across all product categories, with a total of £1.9m R&D investment in the period (H1/21: £1.5m). It looks likely that the full year figure here will be higher than FY20, reflecting the group’s comments re. investment.
Customers have returned to pre-Covid spending patterns in all regions apart from China, where demand has been in line with the previous year.
The transition to 5G and growth in cloud computing continue to drive demand for test instrumentation, from both new and existing customers, across each of the Group's customer categories. Factors driving the strong performance include a sustained positive response to the launch of the enhanced Paragon-Neo, Calnex's Lab Sync platform which is being adopted both by existing customers and new customers looking to deliver products addressing the new O-RAN standards. The latest version of Sentinel, Calnex's Field Sync platform, has also seen strong uptake from the telecoms customer base, plus hyperscale and enterprise customers who are investing in their own data centre operations.
Product development - Continued product innovation has allowed the group to capitalise on the transition to 5G. Calnex has experienced strong demand for its Lab Synchronisation solutions, with its newly launched enhanced Paragon-Neo Lab Sync Platform (a very high-speed interface) seeing strong early orders as existing customers and new customers look to deliver products addressing the new O-RAN (Radio Access Network) standards.
O-RAN is an industry initiative designed to open the RAN (Open Radio Access Network) network to wider vendor competition, which is leading to new companies entering the market, as well as additional developments with the established vendors creating products aligned to the O-RAN Implementation Recommendations.
The release in June of the new 5G OTA (Over-the-air) capability in Sentinel, Calnex's Field Sync solution, has experienced significant uptake from the telecoms customer base. This second-generation OTA implementation addresses 3G, 4G and the emerging 5G signal formats, and is driving growth in the telecoms market space.
In addition, sales to hyperscale customers who are investing in their data centre operations continue to grow.
The implementation of time distribution across data centres is creating a secondary market for testing of time distribution accuracy inside data centres. Together, both have meant that Calnex's Sentinel product has delivered ahead of target performance with a positive outlook moving forward.
The O-RAN initiative is also having a positive impact on Cloud & IT product lines as it requires testing using Network Emulators to prove interoperation between the various network elements defined by O-RAN.
Outlook - Strong H1 levels of trading seen have continued into the second half, demand for telecoms testing equipment remains strong, and the global semiconductor shortage is being closely monitored with ‘no negative impacts to date’.
Calnex remains confident of meeting upgraded market forecasts (the Cenkos note on Research Tree indicates FY22 and FY23 revenue upgrades of 17.5% and 16.2% to £20.2m and £22.1m respectively. FY22 and FY23 PBT forecasts raised by 27.2% and 20.4% to £5.6m and £6m).
Targeted acquisitions remain a favourable route to growth to complement the Group's organic growth. The Board continually assesses the market for select M&A opportunities, against strict criteria to ensure that any acquisitions are strategic and earnings enhancing. Opportunities that the Board would consider include complementary products or technologies that can enhance Calnex's existing portfolio, or where the acquisition target provides the Group with access to a related or adjacent growth market.
Interim results are due to be announced on 23 November 2021.
Conclusion
Calnex has invested in sales, business development resources, and R&D in order to support strong growth in order intake. New products have been well received, which speaks to the company’s established track record of successful R&D and product development.
The trends and organic growth prospects are favourable here, as reflected in the strong share price. At these levels, any dip in revenue growth or more of an impact from the semiconductor shortage could cause a derating in the short term. It wouldn’t be a terminal issue, but it could lead to better buying opportunities in future.
The requirement for design validation, and conformance and maintenance testing is more prevalent than ever. New standards and technology movements drive the need for network operators, equipment and component vendors and hyperscale/enterprise customers to validate equipment and network performance.
I view this as a good long term growth prospect, with multi-year drivers, albeit one you have to pay a premium for. I’m not sure these results are enough to drive any kind of immediate rerating given the existing valuation but everything appears to be on track.
Edit - call with management
A brief catch up with CEO Tommy Cook and CFO Ashleigh Greenan. Impressions are that they’re very down to earth and focused on the business of network testing, much more interested in new product development than the share price, for example. I mentioned the high ROCE figures and it doesn’t seem to be how the company thinks - rather it just identifies areas for improvement or growth and the good metrics follow common business sense. From the notes:
It all boils down to new things to sell to people, building them, and investing in teams where there is more opportunity to accelerate business growth.
No surprises in the period, business has been strong. The update spends time on the new products (which are being well received) and opportunities, but the established customer base has also been doing well. Calnex has now seen an extended period of good growth and the sales funnel fills nicely, with new deals coming through and underpinning confidence.
The group is excited about the new applications for its products. When asked to elaborate, Cook talked about how time is an increasingly important consideration. It wasn’t always the case but a shift has occurred and this increasing importance was Calnex’s big ‘lucky break’, appearing at just the right time to capitalise.
The emphasis on time and the new applications come from data communications and finance. Datacomms - accurate time syncing is important as it requires less ‘handshakes’ (an automated process of negotiation between two participants through the exchange of information) and enables greater throughput in data centres. Financial - this is to do with high frequency trading and MIFID.
Are there any big trends beyond the stated ones (Cloud, 5G, Data)? Can you quantify these trends in terms of scale and persistence?
It keeps changing. Hard to quantify, but it’s promising. The catalyst for the testing world is change, and there is a huge amount of evolution. Cook sees 5G as more of a euphemism for the future networks of smart cities, which suggests a huge implicit demand for increased levels of data. Networks will have to innovate to meet this demand, and as the picture keeps shifting, demand for testing should continue to grow. The cloud migration is also a strong driver.
Where do you see the industry heading over the next 10 years?
The challenge is to always find something new - mentality is to continually enhance the product and assume a need for new products every two years (even if that’s not the case). They’re always looking for the new emerging opportunity and keep close to the industry and market thought leaders.
ORAN network (the bit behind the radio towers) is a good example as it has been opened up. It was dominated by three big players, but five big networks have cracked it open, leading to new entrants and a disrupted market structure. More competition should be a good thing for the market and Calnex.
M&A
The company has form here, but the list of likely candidates is not huge (‘in the tens’) so the group is ready to act if an opportunity comes up. But there’s nothing immediately on the horizon and management seems focused on internal investment and organic growth.
Severfield (LON:SFR)
Share price: 71.13p (+0.18%)
Shares in issue: 309,301,108
Market cap: £220m
Severfield’s main activities are the design, fabrication and construction of structural steel for construction projects. It’s the largest of its kind in the UK and one of the largest in Europe, with a total steel capacity of around 165,000 tonnes in its five UK plants.
After incurring significant losses and a major restructuring in 2013, the company has since assembled a steady track record of profitable growth and has recently made a couple of acquisitions.
These include Harry Peers & Co in 2019 and Dam Structures in February 2021. Both have boosted capacity into sectors like nuclear and rail. The outlook appears positive for now, with pent up demand and a record order book.
Highlights:
- Revenue +5.3% to £195.9m,
- Underlying profit before tax +7.4% to £10.2m (before joint ventures and associates),
- Operating profit +1.2% to £8.2m,
- Underlying PBT +22.6% to £10.3m,
- Underlying EPS +22.7% to 2.7p,
- Interim dividend +9.1% to 1.2p.
Record UK and Europe order book of £393m at 1 November 2021 (1 June 2021: £301m), includes new industrial and distribution and bridge orders and the new stadium for Everton F.C. The India order book is stable at £140m. A share of profit from JSSL of £0.3m (H1 2020: loss of £0.7m) reflects ‘clear signs of recovery from second wave of COVID-19’ in this market.
UK and Europe - In terms of geographical spread of the order book of £393m, 95% represents projects in the UK, with the remaining 5% representing projects for delivery in Europe and the Republic of Ireland. The more UK-centric nature of the current order book is driven by the inclusion of DAM Structures' UK order book, following its acquisition in the previous year, together with a lower proportion of work in the Republic of Ireland.
We remain very encouraged by the current level of tendering and pipeline activity across the Group and are well-positioned to take advantage of some significant opportunities in the industrial and distribution (battery plants and distribution centres), transport infrastructure, nuclear and data centre sectors. We are also seeing new opportunities in the commercial office market, including in London, a trend which we expect to increase over the coming years, given that some of the challenges recently experienced by this sector are now alleviating.
Modular construction - this includes the growing product ranges of Severfield (Products & Processing) ('SPP') based in Sherburn and of CMF, a cold rolled steel joint venture business based in Wales.
SPP - originally established in 2019 to address smaller scale projects and provide a one-stop shop for smaller fabricators to source high-quality processed steel and ancillary products. The focus is on its 'Severstor' modular product range and 'Rotoflo' products, both of which attract higher margins.
CMF - has continued to develop its product range which now includes load bearing frame and deck profiles, purlins and side rail systems to service a cold formed steel market which has grown significantly in recent years through the increased use of steel in off-site and modular construction.
India - After a difficult start to the first half, JSSL has continued its recovery from the effects of the second wave of COVID-19. JSSL's revenue has increased from £23.1m to £41.2m, with an operating margin of 5.6%.
In terms of mix, 62% of the £140m order book represents higher margin commercial work, with the remaining 38% representing industrial projects.
JSSL's pipeline of potential orders continues to include several commercial projects for key developers and clients with whom it has established strong relationships, including in the commercial office, data centre and healthcare sectors. This, together with JSSL's healthy order book, reflects a strong and growing underlying demand for structural steel in India, leaving the business very well-positioned as the market continues to recover well from the second wave of COVID-19.
Supply chain -
During the first half, the Group has also experienced some increases in lead times and supply restrictions for a limited number of other products, together with upward pressures on costs due to tighter labour markets and more general inflationary pressures for certain products and services. Whilst not immune to this, the impact has been managed without any significant disruption to operations, and the Group is managing these pressures through contractual protection, operating efficiencies and by forward purchasing as appropriate, leveraging the Group's scale and supply chain and sub-contract management strengths.
Outlook
- UK and Europe - tendering and pipeline activity remain very encouraging, including opportunities in the industrial and distribution, transport infrastructure, nuclear and data centre sectors,
- India - strong and growing underlying demand for structural steel, JSSL is very well-positioned to take advantage of an improving economy,
- Expectations are unchanged despite ongoing supply chain and inflationary pressures for us and our clients,
- Record UK and Europe order book gives good profit visibility through FY23.
Alan Dunsmore, Chief Executive Officer commented:
While the inflationary outlook and labour market and supply chain pressures present challenges, our strong order book position and operational experience give us confidence for the rest of this year and provide good visibility through FY23.
Conclusion
Severfield has a strong market position, albeit in a business which brings risk (see the 2013 restructuring). Operating margins are fairly low currently, hovering around the 5% mark, with inflationary pressures being managed.
I’m wary of companies reporting an H2 bias, as this sometimes turns out to be a delayed profit warning. That does not appear to be the case here though, with good revenue visibility, although with some signs of delayed projects.
Longer term, Severfield stands to benefit from sectors such as infrastructure, logistics and datacentres going forward and has worked on diversifying its revenue base.
Current trading looks good considering those pressures across the construction industry. Steel prices have doubled in some places over the past year but have stabilised more recently. They are largely a pass-through cost for Severfield but there is some evidence that higher costs are leading to delays in clients starting projects.
Perhaps more important is the ongoing pent up demand shown in the record order books though, and, when you consider the single-digit PE valuation, this looks like decent value.
That said, I don’t think it’s the type of business to command a premium valuation, so any such rerating might be fairly modest. That comes across in the five-year share price chart, so it’s of limited interest to me.
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67 comments
RE: Lack of movement & liquidity. Could it be that Cryptocurrency is taking many smaller cap investors a way in search of something else that is risky. And appears to be making big gains/losses simply overnight?
Calnex Solutions ( CLX)
I agree with the other comments that this comes across as a well run business with an impressive yet down to earth CEO and founder, who is clearly extremely familiar with his products and marketplace.
It seems to me, though, that there are a number of significant risk areas in what is still a very small business and where these risks become magnified without the reassurance that large scale and size can provide .
These are (in my opinion) :
Apologies if this comes across as a bit negative. Despite these risks I did recently make a small share purchase. And, after having watched todays presentation, baring any disasters linked to the above, I now have even more confidence in the business.
Listening to Tommy Cook of Calnex Solutions (LON:CLX) answer questions on Investor Meet this lunchtime, I detect a hardening of the latest guidance in the statement that he now considers the "rush of orders" that has brought 3 upgrades to guidance since IPO to be worthy of calling "a more durable trend".
He comes across as very confident for an inherently level-headed and prudent business owner. I like him a lot, the company and its market position just as much, and today's sell-off looks a gift to long term investors. I have topped up at 121p.
Morning all,
This small cap sell off is getting boring now, although one or two bargains starting to appear...
which do you reckon are bargains John?
Companies that were clearly overpriced had become a bore too
Darktrace (LON:DARK) has dropped below £5 this morning - it is an exciting company in a growing area with lots of potential but do any of you have a view on what is a reasonable valuation for this company?
Given they were floated at £250 probably 6 months ago, I think that is a good place to start. Hard to imagine they could be taken over, although nothing would surprise me in this daft country. I agree nice business in a good place but got to justify existing numbers for me. I am not a buyer above £4.
Darktrace (LON:DARK) difficult to value, still making large losses. Their nearest rival is probably Mimecast Ltd. London based but listed in New York, they are doing well, beating forecasts, making profits and increasing guidance. I don't have the full figures for MIME, as I don't have the US region.
Profits seem some years away.
Director selling.
Their nearest rival is probably Mimecast Ltd
Not exactly. Mimecast is an email security platform which competes with Proofpoint.
Darktrace (LON:DARK) is an AI-driven enterprise-wide (networks, cloud, endpoints) threat detection and response technology. Most comparable competitors are Crowdstrike and SentinelOne, valued on multiples 3x and 8x higher - yes, you read that right, the latter is 8x more expensive than the already pricey DARK.
The valuation discrepancy reflects different listing regimes, ie London v Nasdaq, better cashflows for the profit-generating Crowdstrike, whose growth DARK matches, and MUCH higher growth for SentinelOne.
If DARK can convert its strong revenue growth into a cash flow margin in excess of 20% (Crowdstrike is moving towards 30% so that is not an outrageous ambition), then shares should at least treble from here - they are 50% off ATHs as it stands. If it simply maintains its current >30% revenue growth, shares should still appreciate but will be more vulnerable to disappointments.
Good Morning Paul & Jack
Severfierld (SFR) posted this morning's interims, which appear solid and progressive. Given your coverage in the past, do these figures change opinion?
Morning Paul. How was your Saga River Cruise? Feedback on this thread or the separate Saga one would be appreciated as I'm currently researching the company and possibly looking to buy some shares as I believe they offer great value. Thanks
Paul replied to a comment on yesterdays Small Cap Value Report. Yesterday morning if you look back through the comments. He decided to defer.
Paul said yesterday he cancelled the river cruise
If you want your laugh for the day Paul - the FCA have at last started legal proceedings against the ex Globo PLC executives - this all relates to issues that took place in 2015 and were well documented at the time (all the alleged cash balances vanished) whata joke twidding their thumbs for 6 years. more than slightly too late for money to be clawed back for ex shareholders if it was syphoned out the door by the relevant individials. Whether they syphoned money off or it never existed is probably only known by the individuals themselves . This is the kind of stuff they should do the minute any company mentions missing money that cannot be fully explained by the board at the point it vanishes. How the accountants got away with that shower of you know what auditing i do not know.
https://californianewstimes.co...
General sentiment question... is anybody else finding the last 2-3 months have been abysmal for UK small / medium caps?
My portfolio of ISA holdings (long term holds) are all heading south, seems to be constant selling pressure.
You are not alone. It’s been a difficult few months since 1st September, was my peak and then downhill from there. NAPS and other folios have had similar falls.
Agree, I have more losers than winners at the moment.
Agree - mojomogoz made a similar comment yesterday and had 40 0dd likes. Rule seems to be; if it's popular amongst Stockopedia users then its down over the last few weeks.
My portfolio has been terrible over the last 3 months. Was up 30% in June / July. Ive now given back all gains and capital invested is started to erode away. Boohoo (LON:BOO) was my largest holding. Also burned by £BOTB. But, generally, other good quality stocks I hold like Volex (LON:VLX) are drifting down. Just got to hold on and be patient :)
It’s painful and frustrating at the same time. My portfolio too has been battered over the past 2-3 months with day after day in the red with only the occasional green one. Definitely a buyers market although there doesn’t seem to be many! Boohoo (LON:BOO) is now lower than it was when the market crashed last March which just seems bonkers to me!!
Bit of a rambling post this once please skip as it contains no useful info.
I made a couple of purchases this morning (Toll Brothers one of my decent sized holdings has been chucked out the door ) i had 5 decent candidates on my list for abit of bottom fishing Card/Saga/Boohoo/Tremor/Hostmore - it does seem like at present many of the popular stocks here are getting hammered (is that coincidence?) . I split my purchase between 2 but i could just as easily split it 5 ways here. Of the 5 possibly only card is a little over what i would like to have paid (was looking for sub 50p) - i had other ones of interest like Sylvanium Platinum - somero starting to look good value but i have enough of that. Not quite an endless list but would be interesting to see how basket of these companies perform over the next 18 months - what seems cheap now could get cheaper again - history teaches us that we really have no idea whats coming our way - so always potential egg on our face when things don't end up as planned. Oh i havent even mentioned nice us stocks that look good value at present dropbox/corsair and Discovery being my 3 favourites. Perhaps i should be selling some of my largest holding (fevertree) as that one is at present bucking the trend and right back at recent highs. Might be an all change with regard to my top 10 holdings in 3 months compared to where i was 9 months ago - i do like to buy and hold where possible nowadays if the story hasn't changed for the worse though so not convinced my tweeking what i have is over sensible- but i do feel at present some stocks are still fully (reasonably) valued when other look dirt cheap.
Not a rambling post at all, rather an interesting read. I've also done a bit of shopping this morning as well and had three of the five on your list in mind. Ended up going with £SAGA; £SCS; and £BMS. Agreed, that certainly things could get a lot cheaper still, but quite a few things are now looking quite wrongly priced to me. All the best, Will
The pound has been declining against the dollar since early June and is under continued pressure amid mixed messaging from the BoE on interest rates. There have been near record withdrawals from UK equity funds.
Our political situation is not exactly inspiring confidence. Covid infections remain high. Supply chain disruption continues and inflation is surging.
So I guess we are rather swimming against some strong tides.
I thought this was interesting commentary from the FT's unhedged daily email briefing
But the Covid situation remains better than in Europe. There has been no rioting on UK streets (yet).
Yes that does seem to be the case, although strange as the broader market is doing fine. S&P 500 still strong, and even the FTSE 250 holding up ok, but various small caps do seem to have been clobbered!
That's a fair point re the indices Bouden. It's been my large caps and US holdings that are keeping me afloat.
Perhaps there's a pandemic effect unwinding here with some small cap investors taking their money off the table and going back to more normal work patterns? There does seem to be a shortage of buyers.
Yes you need to stay well diversified. I always keep a decent chunk in larger caps, such as Legal & General (LON:LGEN) and £BP and some global funds (mainly private equity funds where I see value right now such as Harbourvest Global Private Equity (LON:HVPE) and Nb Private Equity Partners (LON:NBPE) these are doing very well thankfully!)
That’s a coincidence- I bought Harbourvest Global Private Equity (LON:HVPE) yesterday. My other PE holdings have also stood up well - iii, Oakley Capital. And some family members have £IPRV for some global exposure.
I think you might be on to something there John. Of course this small cap dip is not down to one cause, but at the height of the UK pandemic IG were taking on some 7000 new investors a day. Many of them will be disenchanted and probably not have the time or the money to carry on the cause. They might also have cashed in to pay for Christmas, the Summer Hols or whatever. We also have to bear in mind that many small caps do not have many or indeed any significant institutional investor holders, so an exit of PIs will hit the SP of these companies particularly hard. As we all know someone has to pick up these 'bargain sells' and this does not seem to be happening as quickly as it was either leading to back to back falls. I have a few 'old faithful's' which I would back to recover, even in the medium term, but I also hold too many highly speculative positions with 'good stories' which are probably overpriced, particularly in pharma . They will likely take an age (if ever) before producing any meaningful impact on my total portfolio so if this carries on, most will probably go. I am a relative newbie investor (bet you can tell) so anything I say has to be taken with a huge pinch of salt unless it is from Tekcapital (LON:TEK) (I hold) where a very small pinch will do, - those who hold or follow the company will get the reference. As always DYOR and all the best to fellow travellers.
Hi Breakout Trader.
It pretty tough at the moment. I'm hoping that the World wakes up to the value that exists in the UK small cap market and the fact that the UK has reached a much higher level of resistance to Covid than Europe (we went through the pain this summer instead of now heading into winter).
The turning point is usually when investing seems hopeless. Are we at that point yet?
Breakout Trader, this has been on my mind so Excel's Forecast Sheet in the Data tools tab provided this:
Unsurprisingly the FTS All Share graph shows an opposite trend, upwards. So this must mean we must look away from Small Caps for the time being unless we are Contrarian.
This graph is of the figures from the portfolio I hold.
Silver
Yep completely agree. Good buying opportunities though. I always refer to Buffet's mindset where he talks about how you wouldn't be unhappy if you went shopping and everything was discounted. Just an opportunity to buy more at good prices.
Obviously a different kettle of fish if you're fully invested and can't top up.
there's no surprise: AIM all share index is lower than February this year!
My portfolio has suffered, I have been operating a buy and hold policy, think maybe trading style might be better.
Good set of interims from Record (LON:REC) (I hold) this morning with interim dividend increased 56%. Shame PIs have to wait a week before the Investor Meet Company presentation.
I continue to think Appreciate (LON:APP) (I hold), which basically sells gift vouchers and a Christmas savings plan, looks like an interesting short-term opportunity and it has posted its half year results today. It is still recovering from the pandemic (lockdown at the start of FY21 affected its ability to market its Christmas savings product) and there is potentially 100-200% upside here if it can return to its pre-pandemic earnings - it was at 60p pre-2020 lockdown and higher before then and it has not diluted shareholders during the pandemic.
In particular I think this is a useful way to play any interest rate rise as the company has historically made money from interest on its cash. The previous house broker Edison said if the current interest rate went up to 0.5% - which in my opinion looks likely - then profits in the next year would rise 25% which is not factored into broker forecasts at the moment.
Today's results are a bit mixed. Billings are catching up but Q3 looks a bit behind on where I'd want them to be. They also seem to have dipped into their overdraft suggesting the balance sheet and cash has come under pressure during the lower point for cash balances during the year. On the plus side some of their administration costs have reduced by £1m , they are not that far behind FY20 when they made 4.9p EPS adjusted and they say they expect to meet 'management' expectations for the full year. Divi is 6.5%. Brokers have previously expected 3p EPS here so recovery is not priced in yet, it historically traded on about 11-15x P/E, and I plan to hold this unless there are signs into FY23 that they are not making headway in returning to pre-pandemic billings and revenues.
This is not a business I'd want to hold long-term but I do think there is a potential 1-2 year opportunity here. There is a free and very detailed broker note here which may help anyone researching this share.
Interested in others' views.
Re Appreciate (LON:APP) - I hold on a similar view (ie it is at least a good recovery share that pays divis.)
The business was making big changes just before Covid that I liked (out of hampers, new offices better set up for digital, better location for better staff, focus on digital products, selling old site). This has all now been completed through lockdowns.
Most importantly, H1 overall billings are at 98% of pre-Covid when business was % split: Paper/Card/Digital 39/54/7% – now it is 15/62/24%. That is a big shift to higher margin digital (and card) ie they and their customers have made the jump from paper they needed to make. They say Digital redemption will give them much better insight into how their customers use their vouchers so products might evolve as well.
Critically, I think the structural cost benefits of this will come out over the next 2 years. It won’t need much for them to become a much more profitable business and their overall share of gift voucher market is very small.
Too much noise in results to be sure but I am happy to hold.
Re Appreciate. This is one of my largest holdings. The business is going through some changes in terms of moving to a digital business, as Zipmanpeter has noted.
A very solid balance sheet and a rock bottom price. Within the business, is the christmas savings business which is a 40 odd year old business that is down 16% YOY due to Covid. This Christmas savings business has stood the test of time and has a fantastic history. This christmas savings business alone, even with the -16% covid hit, accordingly to my calculations is worth the market cap today. On top of that you get a pile of cash and the rest of the vouchers business thrown in for free.
Seems like very little downside and a lot of growth potential as the business moves towards being digitised and a potential digital business re-rating along the way.
As you may have guessed....I like it a lot :)
In case anyone who is interested missed it - Harland & Wolff Group (LON:HARL) put out an RNS after the close of business yesterday announcing a placing. The share price promptly fell 26% this morning.
Personally, I see these deep discount placings through a combination of institutional book build and PrimaryBid retail offer such as today’s £HARL as the modern (and quicker/cheaper) way of doing an equity rights issue. Stick out an offering at a 20%+ discount and see what you can catch. No prospectus, no underwriting fees, no delays. If you’re a holder already, buy some to avoid dilution. If you don’t buy, see your existing holding’s value drop by a fair amount. If you aren’t already a holder, a chance to get some a shares that appear cheap (although that’s a bit of an illusion). Many seem to stag these issues and buy shares in the hope they can sell them quick before the market share price falls to the offer price, sometimes it works, sometimes it doesn’t. Not really an option to the PI as the PrimaryBid shares take a few days to come through (although could do the same thing via a matching spread bet short).
Gus.
Hi Gus.
Thank you form your comment and I tend agree with your assessment.
Any thought on the Harland & Wolff Group Holdings plc IPO offer on Primary Bid at a 27.9% discount, (20p) ending at noon today?
Ig Design (LON:IGR) H1 2022 results today, this overview by CEO and CFO summarises the moving parts. Video & podcast. Demand is strong but logistics/freight and inflation both headwinds, impacting delivery and margins. The former should be made up in the full year, the latter will be addressed with 'margin-improving mitigations for FY23'.
Join the Ig Design (LON:IGR) management webinar at 1pm today, 23rd November. Register here.
Separately, if you missed it, Oxford Metrics (LON:OMG) Capital Markets Day presentation here. Just c30 minutes, outlines their accelerated growth strategy. Fascinating tech which tracks the interface between the real world and virtual world. Used in healthcare, entertainment and gaming, defence and engineering. They are looking to grow and partner with many other sectors to grow revenues by 2.5x.
Morning Paul and Jack,
Would be great if you could look at Half Year results from Calnex Solutions (LON:CLX) please.
Thanks
On a more positive note the Reach (LON:RCH) trading update suggests that the business continues to deliver their digital transformation strategy, as they run fast to offset print declines. Trading ahead, with positive momentum, and a lot of investment in journalism/ content to attract and engage an increasing digital reader base, and advertisers. The model seems to be working but they are still taking baby steps. The potential to leverage the new platform in the next 3-5 years is what attracts me. They have not yet resolved their negotiations on the pension funding for the next three years, but they are confident in the outcome of that process. We will see what the market thinks.
Market reaction to an "ahead of expectations" trading statement is a nonsense but clearly this is the market we are in at the moment. Down 6% despite strong trading.
Reach (LON:RCH) now trades on sub 7* earnings this year, with a strong net cash position. Valuation looks ludicrously low to me but what do I know!!
Reach (LON:RCH) revenue only up 1.2%, there is a large pension deficit. Seems print is still a major part of Reach (LON:RCH)
Market is down today.
This is all well known and misses the point. Print will be around for a long time, far longer than its being given credit for. There are still 28m copies in print circulation each week. This isn't going away anytime soon. Meanwhile digital is doing well with sign ups close to target, margins going up and revenue growing at a good lick. The group is trading ahead of market expectations which were set when the price of the stock was 420p
We've talked about the pension deficit before and unless you believe Reach (LON:RCH) is going bust anytime soon then its nowhere near as big a deal as is being made out on here.
There are not many highly cash generative businesses (around 100% cash generation) with a net cash position growing a prominent sector of their offering (digital) that you can buy for 7* earnings.
I'm surprised that the share price of Reach (LON:RCH) hasn't fallen by more this morning.
The RNS mentions that Sales are ahead of expectations but makes no mention of profitability, so assume the worst.
Also in the six months to end June 21 digital revenues were up 42.7% but this growth rate has slumped to 17.2% in the past five months.
Far from encouraging.
I'm sorry but if profitability is worse than expected the directors are duty bound to say so, particularly in a trading update! So, let's not fear monger - you need to understand market rules before making comments like that!
So I assume profitability is at least in-line with expectations. However, the market has been consistently talking up worse profitability over the last 3 months hence the share price fall of over 30%....so this is way ahead of what the market has been expecting.
Secondly you want to compare apples and oranges in digital growth rate? really.......have you looked at the more comparable 2 year growth rates which are tracking far more consistently. You are comparing growth rate in H1 against lockdown and the period since not in lockdown. Nothing has "slumped".
I'm sorry but these comments are ill informed.
Supply@me Capital (LON:SYME) does make me laugh.
Supply@me Capital (LON:SYME)
Rumours are with every purchase via this new platform you get a free exclusive Mike Ashley in action NFT and also limited edition Sports Direct themed bitcoin. You also get some limited edition physical memorabilia - actual used signage from St James Park as seen on tv for the last 10 years - random letter from the follow list MOC.TCERIDSTROPS
More fun and games with Tremor International (LON:TRMR) today. Not sure I have the constitution for it. Since reporting strong results recently their share price has crashed, with investors unhappy about a few things including offensive Exec share based comp, and their propensity to cash them in continuously, regardless of the dire message it sends to the market. I personally was not impressed by their showing on IMC - if that is supposed to be a CEO and Exec team of global standing, then they seemed to fall short. However, I hoped to sell at nearer the £8 mark so took a deep breath. Major institutional shareholders are now baying for blood. NDA confirmed today, with potential sale speculation. Who knows. Every day is a roller coaster. The current price is my entry price, so any premium they attract will be accretive, to in some way compensate for the sleepless nights.
Finncap have again reiterated their 1700p target price against today's share price of 580p.
It seems the market isn't too impressed by the announcement this morning.
Share price action on Tremor International (LON:TRMR) is bizarre. Ahead of expectations led to an initial rise followed by a 25%+ fall which, for a growing business with such a good offering in CTV and Video (largely unimpacted by Apple's data hoarding) is a bit bewildering. They are in the right space for the future with a one stop end to end platform, so not as though they are milking an existing Ad trend that's likely to come to an end soon.
The Director sales didn't help but were clarified as part of a 12-18 month non discretionary plan common in the US. You may not like the compensation package for the directors but again is not exactly unusual, particularly in the US. Giving the exec team a few % in share based comp is the norm there. Personally I think it was excessive but that's not the point.
So it is an oddity to find the stock trade at 0.1 -0.3 times its competitors. Not least that it trades on an EV/EBITDA of 5* which, for that market sector is massively lowball. No surprise to see PE interest - you can buy the business on 5* cashflow before tax.
Not sure what has gone wrong with market dynamics on this stock but the price action is just weird.
I think Tremor International (LON:TRMR) is a case where you need to look at the ACTUAL profitability rather than an adjusted profitability number that the management would prefer you to use.
The adjusted EBITDA number favoured my Tremor International (LON:TRMR) excludes (amongst other things) depreciation, taxes & stock based compensation. Are these not relevant costs of doing business?
Re £TRMR I think US investors have been more thoroughly conditioned to discount the stock based compensation numbers than we are prepared to do in the UK and that partly explains the valuation gap.
This is the whole point. Stock based compensation is a cost of doing business but the depreciation masks profitability. The depreciation comes from previous mergers and acquisitions in building the business. This has to unwind in the form of depreciation but is a historic cost. Thus the actual profitability of the business (PE or EPS) is actually masked. The cash profits the business make is all that is important to the future.
It is key that people understand where things like PE fall down. In a business that has invested and is now reaping those rewards in cash profitability the PE looks relatively high, whereas a business that is ex growth the PE looks low.
Focus on cash
My money is with David...
Tremor International (LON:TRMR) are either a massive fraud and/or flash in the pan one trick pony ad platform that has no durability and just got covid lucky....or a biz trading their socks off with an attractive platform in a rapidly evolving and growing space.
There is a question re what rate growth is going forward. Its been so dramatic and dynamic that I don't think they really know at this point hence the rather muted guidance relative to recent spectacular trend.
Not for the feint-hearted though. Volatile stock in a biz that can be a bit brutal at times (people messing with data access etc) -> I think Tremor's end to end platform and private marketplace makes this sort of industry change a great opportunity for them but scope for surprise/volatility.
I'm hoping no low ball bid. TBH Schroders and Tosca will probably fall over themselves to get out at c.900p and get liquidity for a nice tidy exit (they've both come from the bottom). I'd rather take my chances as a high growth story with good margins and decent duration.
Price today is a giveaway IMO for what it appears to be.
But hey! What do I know. DYOR. (some detailed notes from finnCap explaining the platform)
It'd be great if you could take a look at the trading update from £RCH.
A vote for least unexpected takeover offer of the year - River And Mercantile (LON:RIV) being bid for by Assetco (LON:ASTO). I was expecting it but not quite this quickly. To make it more interesting Premier Miton (LON:PMI) are also bidding. All post the sale of the Solutions business and return of cash to shareholders.
Minus the cash return from the Solutions sale the remaining asset management business was on offer for £15 million or so last night. It'll be interesting to see where this goes today.
timarr
Paul take apart theAo World (LON:AO.) Results? A going concern poor margins will it be survival of the fittest on years to come for online opperaters? Read across for Argos and Curry's also.
how much will the SP drop today I wonder?
Victoria put out good interims this morning. Victoria (LON:VCP) 30% like for like revenue growth and record profits. They also say they have a healthy pipeline of acquisition opportunities, which indicates continued growth. I wish I had bought and held this stock from years ago. I don't own any shares.