Small Cap Value Report (Tue 24 July 2018) - IGG, FEVR, FUL, IQE, XLM, CNKS

Tuesday, Jul 24 2018 by

Good morning everyone!

First up, I'd like to mention that there are a few spaces left in the "StockSlam" coming up this Thursday, July 26th. It's an opportunity to meet other investors, and (while there are still a few spaces left) to present the case for your favourite stock. Here's the link.

In terms of company news today, we have:

There are lots of trading updates, including from:

3.30pm: Putting in some quick comments now, as I'm running out of time.

  • Cenkos Securities (LON:CNKS) (-13%) - full year revenue for 2018 is set to be materially below 2017, due to tough comparatives and a difficult start to the year. I don't intend to buy back into this labour-intensive company but I can't deny that its shares are exceedingly cheap for a business which has never made a loss and has been very generous to shareholders in the good times. At the end of last year, it had net assets of £30 million and cash of £37 million. The market cap is now £48 million.
  • Motorpoint (LON:MOTR) - trading in line with expectations, no change.
  • Charles Stanley (LON:CAY) - trading in line with expectations. As you were.

IG Group (LON:IGG)

  • Share price: 860p (-0.6%)
  • No. of shares: 368 million
  • Market cap: £3,164 million

Results for the Year ended 31 May 2018

(Please note that I currently own IGG shares.)

These results from IG are in line with expectations.

The company has performed very well, yet again. Operating profit is up 32% thanks to improvement both in net revenue (+16%) and in the operating margin.

Cash flow generation remains excellent. Net cash of £228 million is generated from operating activities, about the same as reported net income of £226 million. Of this, less than 10% is reinvested in PPE and intangible assets.


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All my own views. I am not regulated by the FSA. No advice.

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IG Group Holdings plc is a United Kingdom-based company, which is engaged in online trading. The Company provides contracts for difference (CFDs) in over 17 countries globally. The Company's segments include UK, Australia, Europe and Rest of World. The UK segment consists of its operations in the United Kingdom and Ireland, and derives its revenue from financial spread bets, CFDs, binary options and execution only stockbroking. The Australian segment derives its revenue from CFDs and binary options. The Europe segment consists of its operations in France, Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden and Switzerland, and derives its revenue from CFDs, binary options and execution only stockbroking. The Rest of World segment consists of its operations in Japan, South Africa, Singapore, the United States, the United Arab Emirates and Dubai, and derives revenue from the operation of a regulated futures and options exchange, as well as CFDs and binary options. more »

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Fevertree Drinks plc is a United Kingdom-based holding and investment company. The Company is a developer and supplier of premium mixer drinks. The Company's premium mixers consist of a range of all natural carbonated mixers, including Tonics, Ginger Ale, Ginger Beer, Bitter Lemon and Lemonades. The Company sells a range of products under the Fever-Tree brand, which include Indian Tonic Water, Naturally Light Tonic Water, Elderflower Tonic Water, Mediterranean Tonic Water, Ginger Ale, Ginger Beer, Naturally Light Ginger Beer, Bitter Lemon, Sicilian Lemonade, Lemonade, Spring Soda Water and Premium Cola. The Company caters to hotels, restaurants, bars and cafes, as well as supermarkets. The Company sells its products to a range of markets, such as the United Kingdom, Europe and North America. more »

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The Fulham Shore PLC is engaged in the management and operation of The Real Greek, Franco Manca and Bukowski restaurants in the United Kingdom. The Real Greek food centre serves dishes of Greece and the Eastern Mediterranean. Franco Manca serves Neapolitan sourdough pizza, which is baked in a wood burning brick oven. Bukowski is a London-based, charcoal-grill restaurant and bar, serving breakfasts, burgers and grills. The Company operates 45 restaurants, comprising 32 Franco Manca, 12 The Real Greek, and one Bukowski Grill franchise in Soho. The Company’s subsidiaries include Kefi Limited, FM6 Limited and Souvlaki & Bar Limited. more »

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  Is LON:IGG fundamentally strong or weak? Find out More »

61 Comments on this Article show/hide all

LeoInvestorUK 24th Jul '18 42 of 61

Walker Greenbank (LON:WGB) have issued an interestingly timed profit warning.

Edit: Stranger still, they think they can predict their FY Jan 2019 results within a 5% band!

Blog: LeoInvestorUK
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tomps3 24th Jul '18 43 of 61

Following up the first AI presentation from the series of seven we filmed at the RedleafPR AI seminar, we've just published the second (link below). This is worth a listen: Cyber Security and Transport systems.

Alex Cowan, CEO of RazorSecure is a charismatic presenter, and gives a great insight to our transport systems and the risks it faces. RazorSecure use machine-based learning to identify security threats.

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Laughton 24th Jul '18 44 of 61

In reply to post #384769

Hi Mark,

Re Fevertree Drinks (LON:FEVR) - Southern Glazer's Wine and Spirits ("SGWS"), the largest North American wine and spirits distribution company, to be the Group's exclusive distribution partner in the On-Trade channel across 29 US states effective from 1 August 2018

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Trident 24th Jul '18 45 of 61

Revolution Bars (LON:RBG) share price seems to be sinking a bit more. Last time they reported due to the make up of their estate (not enough outside space) the hot weather limited the takings of some of their sites. That weather situation has gone on, and on!
Is there now a concern that performance overall may have been affected?

I also notice a recent report that Deltic, a previous rival bidder for Revolution Bars (LON:RBG) is considering Stock Market flotation. Deltic was previously Lumina, a night club and bar owner, that proposed in effect a reverse takeover of Revolution Bars (LON:RBG).

Considering the original failed Stonegate bid was 203 pence, Revolution Bars (LON:RBG) is starting to look vulnerable again at these price levels of circa £1.2 ish. Of course, thinking that was the case at £1.30 ish, I bought some more, and have seen it sink a bit further. A trading announcement in June suggested that year-end results would be flat on prior year, citing weather, issues arising from the bid, and a new CEO coming on board after the board recommended bid was rejected by shareholders. Could this one fall further?

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simoan 24th Jul '18 46 of 61

In reply to post #384774

Walker Greenbank (LON:WGB) have issued an interestingly timed profit warning.

Blimey! Floods, fires and profit warning announcements three minutes before the close. The first two you could put down to "Acts of God" but the last is the act of incompetent and inconsiderate management. I used to own shares in Walker Greenbank (LON:WGB) and still follow them with an Investegate alert but alas no longer. Another company consigned to the Bargepole pile.

All the best, Si

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willhampson 24th Jul '18 47 of 61

In reply to post #384794

Hi Trident, I suspect the fall in the last few days is linked to Stonegate's acquisition of Be At One for circa £50m. It could be read both ways in terms of +/- for Revolution Bars (LON:RBG), but perhaps this could signal that Stonegate don't intend to make another offer anytime soon.

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Monty9 24th Jul '18 48 of 61

In reply to post #384734

I reckon that is a pretty good description of the bull case CliveBorg. I would only add that the company is often seen as a mobile phone parts supplier, but in fact produce quality technologically based products for many sectors, any or all of which might grow like the VCSEL wafers product.

The main concern Graham raises is valid of course, a lot of value is tied up in the manufacturing facilities and the cost of developing IPR, and this poses some obsolescence risk. If the technologies are here to stay, and I suspect they are, then the corollary is a wide mote, which a large customer may well pay handsomely to control.

Disclosure - I have held for some years.

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mmarkkj777 24th Jul '18 49 of 61

In reply to post #384789

Hi Laughton,

Much appreciated. I'll check out SGWS later.

I still like Fevertree Drinks (LON:FEVR) as a continuing growth play.

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AnonymousUser252054 24th Jul '18 50 of 61

Interesting that IG Group (LON:IGG) wants to direct EU clients onto non-EU platforms. I'd have thought ESMA and the FCA might want to take a look at that as presumably it defeats the whole point of the new regulatory regime. Then again it wouldn't be the first time they've tried to be crafty and got caught out.

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Gromley 24th Jul '18 51 of 61


Trading is reported in line with expectations, though I understand that the top-line performance of £73 million sales for H1 is materially below consensus.

I'm puzzled by that comment I haven't seen mention of any  broker updates referencing that. As you say they have been flagging for sometime the likely 40:60 split this year (not an after the event "we hope things improve" view)  - £73m therefore suggests £183m which is marginally ahead of the FY £179m forecast as per stocko.

It will need about £106 million of sales in H2 to meet forecasts - this could be challenging.

You might think that, but the company statement is oozing with confidence on this I feel.

"The H2 2018 ramp for Photonics has already started and we look forward to the rest of 2018 and in particular the further ramp up which is expected in 2019, with considerable anticipation.”

They also note that "Revenue from our largest Photonics customer [Apple being the ultimate customer for the iPhone X] was broadly flat when compared with H1 2017, as the supply chain absorbed inventory following a very successful and steep production ramp up for VCSELs relating to a 3D sensing application in H2 2017."

Given that the "ramp" for the iPhone X happened in H2 2017 - sales to Apple were in fact substantially down vs H2 and that was expected.

"Excluding revenue from this customer, underlying Photonics revenues are up approximately 40% on a constant currency basis when compared with H1 2017."

So that H2 number does not in fact seem so challenging to me - Apple is likely to include 3D sensing in more devices and  they have a broadening group of customers for the VCSEL wafers.

I do agree though that it is a very capital intensive business and therefore not very cash generative in a growth phase, but at the same time the recent very strong uplift in capex commitments demonstrates a high degree of confidence in the near term growth prospects.

Today's announcement was in truth not that exciting, but I really cannot see any negative connotations in it.

Disc :

Long IQE.

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pka 24th Jul '18 52 of 61

In reply to post #384849

Hi Gromley, you wrote about IQE:

"I do agree though that it is a very capital intensive business and therefore not very cash generative in a growth phase, but at the same time the recent very strong uplift in capex commitments demonstrates a high degree of confidence in the near term growth prospects."

Good points. But this extract from IQE's Final Results announcement on 20th March 2018 suggests that the payback time on installing a new reactor to manufacture epiwafers for VCSELs is about 2 years, after which time I assume that each of those new reactors should be very profitable for IQE:

"The establishment of the new foundry is being supported by the Cardiff City Region City Deal, which is funding the construction of the infrastructure. IQE is leasing the building under an 11 year lease, which has a 3 year rent free period and an option to purchase. This support has enabled IQE to focus its own investment on adding new tools, which requires upfront investment in both opex and capex. The lead time to get new tools into production is approximately 9-12 months, from which time a fully utilised tool making VCSELs has a payback of c. 1 year."

IQE seems to me to be very cautious in only investing in new reactors if it has firm orders from its customers for the products from those new reactors. So I assume that the production of epiwafers for VCSELs is particularly profitable for IQE, and that if and when this current capex phase ends IQE's profits should increase markedly. By the way, IQE is now debt free, following its recent capital raise from a number of institutional investors, so all its capex on new reactors is self-funded.

Disclosure: I also am long IQE.

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DJCP 24th Jul '18 53 of 61

Hi Graham,

As you're quite interested in the Financial sector, Metro Bank (LON:MTRO) issued the dreaded after-trading Half-Year report RNS, plus an accelerated book-build placing to raise over £300m.

I bought just over two years ago, as a very happy customer, at just below £22. They reached £40 in March, but have dropped since, to £34.22 today (which is the placing price too, so no discount). I don't usually invest in companies of this size, and at £3b mkt cap, Metro Bank (LON:MTRO) is the largest company in my 'folio.

A few highlights from the H/Y report:
- Continued strong deposit growth of £2,067m, up 40% year-on-year to £13.7b
- Underlying profit before tax1 at £24.1m ($32.0m), a four-fold increase from £6.0m ($8.0m) in H1 2017, and exceeding the £20.8m ($27.7m) total in full year 2017
- 201,000 increase in customer accounts in the six months from 31 December 2017 to 1,418,000
- Opened a new store in Watford in June as well as Southampton in July, growing the network to 57. On track to open 12 new locations in 2018, with eight stores already in build

I've still to read the report fully, and not expecting your analysis, as this is outside the SCVR realm on so many aspects, but thought I'd bring to the attention of you and readers.

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Edward John Canham 25th Jul '18 54 of 61

In reply to post #384864

Just as well there are certain institutions and people who will invest in capital intensive industries otherwise virtually no customer consumables would be made - including the computer I write this on and the one Graham wrote his report on.

It does bemuse me that there seem to be a lot of people out there that will "forgive" a massive increase in marketing or "investment in product" (price cuts) but have a hernia if purchasing a machine is mentioned.


Disc: Long in IQE and getting longer

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Graham Ford 25th Jul '18 55 of 61

In reply to post #384864

I agree with that pka.

I think that people are still over fixated on the manufacture of VCSELs for component manufacturers which are ultimately supplying Apple for the iPhone X. Thus, people think this is all about Apple when it is not.

The wider opportunities with other phone manufacturers, plus applications in LiDAR for autonomous vehicles are huge growth opportunities for VCSELs. Furthermore, as 5G communications roll out the demand for components which use the compound semiconductor wafers that IQE manufacture will also increase substantially.

Apple have made a commitment to Finisar, as I understand it, to take some VCSEL wafers from them so they have dual sourcing so there seems little reason for them to take the manufacture of these wafers in house. Some are worried about the Apple/Finisar relationship but as Apple gradually introduce facial recognition and AR to their other phones and iPads there will be plenty more growth from Apple for IQE.

Many have pointed at what the shorters are doing with a sort of “Ooh! Look the stock is significantly shorted, there must be something wrong with it” gut reaction. But they don’t stop to look at T Rowe Price gradually adding more and more to their substantial holding that they have had for a long time and give that vote of confidence appropriate counter weight.

I don’t think this is set for any meteoric rise but the business is set to grow in not one but several growth markets with a quick payback on investment in new machines. So, I believe that, while it doesn’t have the attraction of being a capital light business, it is a good prospect.

For these reasons I continue to hold.

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RustySpanner 25th Jul '18 56 of 61

Fulham Shore was an expensive lesson for me not to take tips from anyone without doing sufficient research and understanding the market and it's social context. My shares dropped by 60% after I bought them two years ago while my ASOS shares doubled over same time - having a daughter in her twenties I understood the ASOS business model and demographic.

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pka 25th Jul '18 57 of 61

In reply to post #384939

You made some good points, Graham Ford, about IQE, including:

'Many have pointed at what the shorters are doing with a sort of “Ooh! Look the stock is significantly shorted, there must be something wrong with it” gut reaction. But they don’t stop to look at T Rowe Price gradually adding more and more to their substantial holding that they have had for a long time and give that vote of confidence appropriate counter weight.'

My understanding is that the fund manager, T Rowe Price, is one of the largest lenders of IQE shares to shorters. I wonder whether T Rowe Price is doing this solely for the income it gets from lending the shares. Another motive might be that, as a long-term holder, it hopes the selling of IQE stock by shorters will depress the share price in the short term, allowing it to buy more IQE shares on the stock market at lower prices than it would otherwise have paid.

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Graham Ford 25th Jul '18 58 of 61

In reply to post #385134

Hi pka,

“Another motive might be that, as a long-term holder, it hopes the selling of IQE stock by shorters will depress the share price in the short term, allowing it to buy more IQE shares on the stock market at lower prices than it would otherwise have paid.”

T Rowe Price keep hoovering them up little by little so they must believe there is a good long scenario here despite the fact they loan them out to shorters. So, yes, I think that you are right and it is a double win for TRP - revenues from loaning shares out plus opportunities to buy more at depressed prices. In due course, and I’ve no idea when that will be, presumably the shorting will naturally have run its course as the sp rises and thus will come to an end, or TRP decide they want to reduce their holdings and so call back in the loan stock to drive the price up again.

Either way, the positive news in the TU makes the possibility that the sp will drop significantly from here less and less likely in my view.

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Trident 25th Jul '18 59 of 61

In reply to post #384809

Hi willhampson

Interesting news from Stonegate. As you say could be read both ways, but seems credible this has helped depress the Revolution Bars (LON:RBG) shareprice.

In the spirit of self-delusion, I am choosing to believe this justifies my recent purchase :-)

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smatthews1 25th Jul '18 60 of 61

In reply to post #384934

I think you make a very valid point there, for a technology company expanding at the rate they are with no debt strikes me as very bullish from investors point of view, especially when Interest rates are low.

I also find the support from Cardiff city/Government for the new foundry reassuring, I'm sure they wouldn't want it to fail.

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Maddox 26th Jul '18 61 of 61

In reply to post #384864

IQE: The disclosed short positions has increased to 11.22% (9 hedgies) and the sp is down 4p as I write (Thurs 26th). I'm always intrigued that a hedgy would take the risk of being short on a highly speculative share such as IQE (unless of course, you know that some damning report is due for publication!?!).

One piece of positive news, large order, new customer in a big market, and your likely to be severely squeezed.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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