Small Cap Value Report (Tue 24 Aug 2021) - IGR, ESYS, BVC

24th Aug '21 by Paul Scott

42 comments 7810 reads

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

Agenda -

Paul's Section:

Ig Design (LON:IGR) - trading update today flags cost of sea freight, and supply chain disruption - no surprise there, everyone is experiencing problems in that area. Strong demand & cost mitigation have kept things on track to meet market expectations. So a reassuring update today I think.

Batm Advanced Communications (LON:BVC) - outstanding interim results caught my eye yesterday, but two thirds of the profit is from a one-off disposal. Also there seem some one-off contracts from covid - ventilators and testing kits. Looks an innovative group, but I've no idea how to value it, given the difficulty in ascertaining future profit levels.

Jack's Section:

Essensys (LON:ESYS) - fairly robust results over a disrupted year. The group's SaaS products are well-positioned for the growing flexible work market and the US sounds like a big opportunity. The recent fundraise gives the group c£37m of net cash to accelerate growth plans, but for now this appears to be reflected in the valuation given revenue of £22m and a market cap of more than £200m.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 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.

Paul’s Section

Ig Design (LON:IGR)

522p (pre market open) - mkt cap £506m

Trading Update

IG Design Group plc, one of the world's leading designers, innovators and manufacturers of celebrations, craft, gifting, stationery and creative play products, today…

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mammyoko

24th Aug '21

Just because they say that they won't increase their bid doesn't mean that they can't. Or won't.

Rusty2

My profile name has changed also.

Paul Scott

Hi cojode,

Indeed, I think Hotter Shoes looks a very good business. The listing for Electra Private Equity (LON:ELTA) (I hold) will become Hotter Shoes (to be called Unbound) once TGI has been spun out into a separate listing quite soon.

At the moment the valuation put on Hotter within ELTA looks ridiculously low, both in NAV, and also in the Edison research notes. With pro forma EBITDA possibly over £7m p.a., and high gross margins, and selling mostly online now most shops were closed in the pandemic restructuring, I think we could see a good long-term investment result from Unbound/Hotter.

It's also planning to branch out into other products for the over-55s, and is already a well-known & trusted brand for that lucrative demographic.

There's a Capital Markets Day (CMD) online on Sept 15, which I should be attending, so I'll report back.

Regards, Paul.

slopsjon

Tp (LON:TPG) Another 22m shares moving hands @6.5p

That's interesting, thanks John. I wonder if Ig Design (LON:IGR) disclose the % of production in each country or region? Companies often disclose sales by region, but it's often harder to find out where production happens. And even then, raw materials probably come from the Far East.

Clearly IGR has some issues with supply chains, because they just told us today they did!

In the main article I meandered more into my general worries about how reliant the West has become on China, so that bit wasn't specific to IGR only.

JohnEustace

I'm not an Ig Design (LON:IGR) holder currently so not necessarily up to date. The video here shows their South Wales manufacturing site making twist paper carrier bags for retail customers. They were able to adapt their gift wrapping paper line to make these bags very efficiently, smoothing out the seasonal demand. They do also say that they manufacture in China.

But basically everyone has international supply chains to some degree. I don't suppose the paper they use is from Welsh trees.

Yes it does. The takeover code says:

where the statement concerned includes reference to the fact
that the terms of the possible offer “will not be increased” or are
“final” or uses a similar expression, the potential offeror will not be
allowed subsequently to make an offer on better terms.

timarr

Just because they say that they won't increase their bid doesn't mean that they can't. Or won't

AFAIK according to the Takeover Code they can't. 6.5p is where they stick unless there's a competing bid.

Hi Simoan,

I share your revulsion for so-called value creation plans.

To my mind they're little more than legalised theft of part of the company from its rightful owners.

With so much more emphasis on ESG these days, I hope no more of those dreadful schemes will be approved by institutional shareholders for any management, in future.

I've had a response from the Helpdesk "We performed a system upgrade late last night which caused a small number of users to see another user's account. As soon as we discovered this, we reversed the change and force logged everyone out of the site."

Jack Brumby

Thanks for the additional insights, Abtan. These recurring revenue software companies trade on such high multiples, but some of them really do deserve it and as you say, will end up looking cheap in hindsight. Essensys certainly looks to be in a good spot with years specialising in flexible working.

I wonder what the competition here might be like? Perhaps it will increase as the opportunity becomes more apparent - this fundraise and growth acceleration strategy could be important in terms of staying on the front foot.

Yes, you're right, thank you for pointing that out. On the basis of that, I have sold my holding in Tp (LON:TPG) as I don't think a competing offer is likely to appear.

I have also top-sliced some Science (LON:SAG) as I think that Tp (LON:TPG) may be a bigger can of worms than they expect plus I think that they will have to either take on more debt than would be comfortable for me or dilute shareholders or a combination of the two.

Acquiring Tp (LON:TPG) may or may not prove be a good move but I am, personally, not convinced by the arguments of synergies.

Probably correct. Science (LON:SAG) have now gone to 21%, getting close to the 25% threshold where they'll have a blocking stake for any competitor.

https://www.investegate.co.uk/...

Tp (LON:TPG) Looks like Science (LON:SAG) are going for 25% another 12m @6.5p

A quick note to say that I also looked at the Q3 results today (required by bond holders) for Benchmark Holdings (LON:BMK) and rapidly came to the conclusion that I have no idea how to analyse or value the company. It's involved in biotechnology for fish. So had to abandon that one. We need to focus on fairly simple companies here, with numbers that are easy to interpret, otherwise there's no way we could cover so many companies.

Threepeat

Absolutely agree Si.

I bought last year and remember this announcement when the SP was 400p ish after the CEO sold most of his holding. Was patient enough to wait for price recovery but trust in management was gone so lucky enough to get out at 550p. Still leaves a nasty taste though. Total disrespect for us small PIs

rmillaree

Northern Bear (LON:NTBR) Northern Bear

Ok - bit of an oi oi update from the company today.

It appears there has been something akin to a bloodless coup today , this really has kind of come from out of nowhere as the old clasic song would say (sigh 80's is old skool now) .

What is interesting here is that the price has been drifting very much nowhere - currently just over 50p compared to its historical pre covid levels of 70p plus. As a holder i would say the business is in as rude health as it was before covid so i have zilch concerns trading wisea dn 50p does seem in the doldrums.

The old and preumably tired chair of the board has been replaced by the wrinkeless (is that photoshop at play?) Jeff Baryshnik - who has previously loaded up on shares at the 70p ish price back in 2019.

https://northernbearplc.com/ne...

His first comments on taking over as chairman of the board are as follows.

“As a major shareholder in Northern Bear plc I am delighted to be appointed Chairman of the Company and look forward to increased engagement with all of the Company’s stakeholders in due course.”

Many on bulletin boards have been crying out for increased shareholder agreement for some time now - it appears those voices have got their wishes answered.

Not sure what this means going forward - i am kind of guesing if this bod wanted to take the company private he could have already put a bid in - so we wil have to wait and see.

His interests as large shareholder certainly should be more aligned with shareholders than the previous board who were deemed to be a bit of an old boys club sucking out shedloads of directors salaries (personally i wouldnt necessarily agree with that sentiment)

It will be interesting to see what plans for shareholder value creation Jeff has - i could be tempted to add a few myself here if the price is close to the 50p level in the morning. Note this is the ultimate in illiquid small caps so you pay your money and take your chance - delisting has to be a possibility here.

Ref the agm that did take place today 2 of the proposed resolutions failed - the one relating to issuing boatload of new shares - i am not unhappy with that situation. Sahme i didn't hop on the metro to see what all the fun is about. Rumour is JB was heard singing along to a Michael Jackson song as he entered the building (that rumour is made up by mee)

all resolutions, other than Resolutions 7 and 8 in respect of share issuance authorities and pre-emption rights, were duly passed.

Resolutions 7 and 8: Authority to allot shares and dis-apply pre-emption rights
As part of its strategy, the Company continues to assess acquisition opportunities as they arise. The ability to issue shares for cash without the need for further shareholder approval will enable the Company to take advantage of such opportunities in a timely manner.Accordingly, Resolution 7, which will be proposed as an ordinary resolution, renews the Directors’ authority to allot up to 5,599,582 Ordinary Shares (representing 30 per cent. of the Issued Share Capital). Resolution 8, which will be proposed as a special resolution, renews the Directors’ power to allot up to 933,263 Ordinary Shares (representing 5 per cent of the Issued Share Capital), for cash, without first offering such shares toexisting Shareholders. This special resolution also enables the Company, in the event of a rights issue or openoffer, to overcome certain practical difficulties which may arise in connection with fractional entitlements.
The authorities conferred by Resolutions 7 and 8 shall expire at the earlier of the conclusion of the Company’s annual general meeting held in 2021 or (if earlier) 31st August 2021.

Good luck to everyone involved!

Boon

Interesting share, but I agree... Benchmark Holdings (LON:BMK) is like the animal equivalent of a blue-sky pharma company.

I see that its trading at 4x revenues, with next year's revenue growth only less than 20%, according to brokers.

Eco Animal Health (LON:EAH) which has similar revenue (£100m-ish) also does animal healthcare products, is profitable, and only trading at 2x. Whereas BMK is still very loss-making, even when getting to 9-digit revenues... and 9-digits since 2016... if management can't turn a profit at that level of turnover once in the 5 years, what does that say?

Not a recommendation for Eco Animal Health, as it has its own major risks, but highlights some of the insane valuations.

sharw

rmillaree - thanks for that re Northern Bear (LON:NTBR) , which I would not have otherwise spotted. I am one of those who accepted Jeff Baryshnik's 72p tender offer in 2019 giving me a marginal profit.

I was glad to get out because of so many instances of management failing to engage with PIs. This began for me in Jan. 18 when it took two weeks of badgering by PI's as the sp sank before they put out a statement saying no material consequences from Carillion liquidation.

Small Cap Value Report (Tue 24 Aug 2021) - IGR, ESYS, BVC

Paul’s Section

Ig Design (LON:IGR)

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Paul Scott

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