Small Cap Value Report (Tue 24 Nov 2020) - MCB, CARR, TRAK, CBOX, IGP, TET, CWD

Good evening/morning, it's Paul and Jack here with the SCVR for Tuesday.

I'm putting up the first few sections late on Monday night. The reason being that something has cropped up, and I have to spend c.4 hours travelling on Tuesday (essential), hence won't have much time for writing about shares. So as not to short-change you, I'm doing the work beforehand to catch up with some loose ends.

Timing - Today's report is now finished.

Agenda -

Mcbride (LON:MCB) - AGM trading update (Paul, done)

Carr's (LON:CARR) - Final results, FY 08/2020 (Paul, done)

Trakm8 Holdings (LON:TRAK) - Interim results 6 months to 09/2020 (Paul, done)

Cake Box Holdings (LON:CBOX) - Interim results (Paul done)

Intercede (LON:IGP) - Half year report (Paul, done)

Treatt (LON:TET) - FY 09/2020 results (Paul, done)

Countrywide (LON:CWD) - Update on strategic options & board update (Jack, done)

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Mcbride (LON:MCB)

Share price: 61p (down 7% on Monday)
No. shares: 182.2m
Market cap: £111.1m

AGM Trading Update

McBride (the "Group"), the leading European manufacturer and supplier of Contract Manufactured and Private Label products for the domestic household and professional cleaning/hygiene markets, provides the following trading update ahead of its 2020 Annual General Meeting to be held later today.

It’s a 30 June 2021 financial year end.

Different product categories are performing in a varied fashion. Overall;

Total revenues are broadly flat after the first four months and are expected to show modest growth for the first half of the year.

Profits and outlook, it says;

Earnings growth is expected to be weighted to the first half of the year, reflecting weak comparatives in the prior period and improved margins from efficiencies, lower operating costs as well as lower input costs for certain raw material and packaging items.

Whilst all factories are currently operating as normal and the supply chain for inbound and outbound materials is functioning well, the Board's full year view is cautious in light of the potential for future operational challenges resulting from Covid-19, the uncertainty arising from the Brexit process and the unknown impact on consumer demand from renewed lockdowns in our principal markets.

Our full year outlook on trading therefore remains unchanged, with our current expectations for a modest improvement in year‑on‑year profitability.

That sounds reasonably OK to me, so I’m a little surprised the share price dropped c.7% in response. The worries about H2 sound more like they’re just being cautious. I wonder if there is an issue that customers might be pulling forward orders to build up inventories before a potential 31 Dec 2020 Brexit disruption? Although recent press reports suggest negotiators have come close to finalising a deal. The EU usually does things last minute, and finds a way of fudging around potential problems, so I can’t see why Brexit would be any different, particularly as both sides surely realise they have to compromise?

MCB reported 9.5p adj EPS for FY 06/2020 so the broker forecast shown on the StockReport of 9.95p for FY 06/2021 looks consistent with today’s trading update.

As an aside, when I view the broker consensus graph, I’m looking for it being constantly updated, so wiggly lines. That’s a good sign that the forecasts are probably up-to-date. Whereas, if it’s a horizontal line, then guidance was probably withdrawn, and we’re looking at outdated numbers.

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Roughly 10p EPS, and a share price of c.60p, means it’s priced on a very modest PER of just 6.

What’s the catch then? Too much debt, and a pension deficit, probably!

I’ll look back at the FY 06/2020 figures now, and see if I can find anything untoward.

FY 06/2020 results (quick review);

Adj profit before tax of £24.2m is roughly flat vs LY, but relies on £13.0m adjustments, quite hefty - my worry is that there could be multiple restructuring rounds, over several years

Balance sheet - NAV is £66.9m, less £28.4m intangibles = NTAV £38.5m. It’s striking how big the balance sheet is - lots of fixed assets (capital intensive) of £134.7m, plus large current assets of £287.6m, less current liabilities of £253.9m - these are really big numbers for a business worth £111m.

It’s not really generating that much profit from such a large balance sheet.

As I suspected, interest-bearing debt is high, at £137m, less cash of £44.2m, giving net debt of £92.8m.

Pension deficit? Yes. An accounting deficit of £31.5m, so the actuarial deficit is likely to be more. Annual overpayments of £4.0m is actually quite modest in the context of a decently cash generative business.

Although cash generation before capex is very impressive, it has a recurring large capex spend.

Cashflow statement - looks impressive, but I wonder if the big cash generation last year might have involved stretching some creditors, possibly?

Dividends - paying 1.1p via a B shares scheme - I’m not entirely sure what that is, do any readers know? Note that the recent RNSs show a share buybacks of up to 10% of the equity underway.

My opinion - I think MCB has too much debt, and I’m not keen on its pension deficit either. It is a very capital-intensive business, eking out a smallish profit on big revenues. Supplying supermarkets isn’t a good sector, in my opinion, so I’m not interested in getting involved here.

On the upside, looking at the 3-year chart below, it seems to have found a solid base, and the StockRank is now close to maximum. Maybe I’m being too harsh then? We’re seeing a lot of takeover bids going on at the moment. Maybe an overseas bidder might see it as a cheap way to bolt on extra revenues & profit? Is it worth taking a small, speculative, long position on this I wonder? That PER of 6 does look appealing. Hmmm I’ll have to sleep on this one.

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Carr's (LON:CARR)

124p - mkt cap £114m

Final Results

Here are my notes from a positive trading update in July 2020, where I concluded that Carr’s looks a good value share.

Carr's (CARR.L), the Agriculture and Engineering Group, announces its full year results for the year ended 29 August 2020.

This is another business that is quite large, and capital-intensive, but only makes a fairly slim profit margin.

Note that it doesn’t own 100% of all its operations, so there are minority interest lines on the P&L and balance sheet. This relates to JVs and associates. Fear not though, as the EPS line adjusts for this, hence we can rely on the adjusted EPS of 11.9p. This is down 18.5% on LY - not bad considering covid. It’s also ahead of forecast (I have 11.2p) and management confirms a beat against its expectations in the text today.

The PER is 124p divided by 11.9 actual adj EPS = 10.4 - a decent value share, as hopefully the future should see earnings rise, if covid ebbs away in 2021.

Current trading - new year trading in line with expectations.

Dividends - maintained at 4.75p, a signal of management confidence, yielding 3.85 - not bad at all, in a zero interest rate world.

Balance sheet - net debt of £18.9m looks reasonable.

NAV is £134.2m, less intangibles of £41.2m, gives NTAV of £93.0m - that’s a lot of asset backing for the £114m market cap.

Pension scheme - shown as a surplus of £8.0m, so probably not something we have to worry about.

My opinion - this looks a decent value share - low PER, divis, good asset backing. Worth considering I think, especially for income seekers who want something dependable in a crisis.

The trouble is, if you look at the 5-year chart below, and even add on the decent divis paid over the last 5 years, the total shareholder return has been - nothing! Over a period when the market has produced many multi-baggers. So that makes me wonder if this is a situation where the opportunity cost could be a problem, if that trend of no shareholder returns continues?

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Trakm8 Holdings (LON:TRAK)

14.5p - mkt cap £7.2m

Too small to be of interest here really, but I’ve had a very quick look at interim results to 30 Sept 2020;

Revenues down 17% to £7.3m

Adj loss of £(314)k, statutory loss of £(845)k

Says that it would have been profitable without covid

H2 outlook more positive, based on strong order book

Costs being cut

Balance sheet weakness - reliant on £4.5m borrowings from HSBC, due for renewal on 30 Sept 2021. This could be a problem and a further £1.5m loan charging 8% p.a.

My opinion - this company has disappointed too many times for me to want to get involved again. The debt is a worry too - small, loss-making companies should not have debt on the balance sheet. Look at the share price - would investors want to support a placing here to pay down debt? Possibly only if trading moved back into profit, so I think the clock is ticking here for management. Not something I would touch without some convincing progress on improved trading, and the debt being cleared.

Looking at the 5-year chart below, it’s not really clear to me what went wrong in 2018. What was a nicely profitable little company, seemed to lose the ability to make any money. Perhaps it just got overtaken by competitors with better products? Telematics is a very competitive space after all.

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Cake Box Holdings (LON:CBOX)

187p - mkt cap £75m

Half year report

Here are my notes on the half year trading update, issued on 12 Oct 2020. As you can see from that report, I was impressed. Strong trading, a decent balance sheet, dividends reinstated, positive LFLs after lockdown. Impressive stuff!

Today we get the full half year figures;

Cake Box Holdings plc, the specialist retailer of fresh cream cakes, today announces its half year results for the six months ended 30 September 2020.

As you can see, the financial highlights look very good, considering all shops were closed for 6 weeks during this 6 month period. How can this be?

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139 franchised stores operating at 30 Sept 2020 (up from 122 a year earlier)

Strong pipeline of new franchisees, and 5 new stores opened in Oct/Nov 2020. Expect to open 20 new franchise stores this FY- that’s quite a rapid rollout, in these very difficult times

LFL sales up 12.1% in the 20 weeks since re-opening

Most stores have remained open in the second lockdown

Online sales good

Balance sheet - doesn't need a lot of capital, as the franchisees provide it. Looks fine to me, no issues that I can see.

My opinion - I’ve reported positively on CBOX before, and think it’s looking increasingly good. I must admit to not fully understanding how it’s managed to power through covid with barely a scratch.

Equity Development did a webinar today, which I missed. However, I’m about to settle down to watch the recording now, which is about 35 minutes long, here it is;

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Intercede (LON:IGP)

Share price: 85p (down 5%, at 11:34)
No. shares: 50.5m
Market cap: £42.9m

(I hold)

Half year report

Intercede, the leading specialist in digital identity, credential management and secure mobility, today announces its interim results for the six months ended 30 September 2020.

Jack covered its half year trading update here on 8 Oct 2020. It said revenues were up 9%, and cash had risen considerably to £8.1m.

The actual numbers today are the same, so no surprises here.

• Finncap update note is available on Research Tree, raises price target from 100p to 125p
• H1 revenues £4.8m, up 9% on LY
• Note that Intercede has an H2 seasonal weighting
• Breakeven in H1 at PBT level
• Receives tax credits for R&D, so H1 PAT is £441k (£1.0m last full year)
• Conservative accounting - no capitalisation of development spending
• Balance sheet is quite thin, with negative NTAV of £(845)k - but that’s fine, because customers pay up-front, so as with many software companies, it can operate fine with a modest balance sheet
• Cash pile of £8.1m helped by unusually low receivables, so I would expect this to fall somewhat as receivables normalise
• Convertible loan notes outstanding of £4.9m - these expire Dec 2021, and are likely to be part repaid in cash, and part converted into shares, which I believe is at the discretion of the holders. NB this is expensive debt, costing £600k p.a. in interest, so the P&L will get a £600k p.a. boost from the beginning of calendar 2022 onwards, which is quite material to profits & hence valuation upside
• Geographic spread is heavily concentrated in USA, 81% of all revenues
• The company has proven itself to be very resilient to covid, with strong recurring revenues

Nothing of concern above, it’s all as expected.

Outlook -

Sales pipeline remains strong and ahead of prior year, notwithstanding the impact of COVID-19…. there has been significant growth in the US where Intercede's MyID platform is seen as a market leader amongst US Federal government departments. Intercede is proud that the MyID platform is extremely relevant in the current climate as its derived credential and mobile technology help our customers to work remotely in a secure fashion.

It sounds like these results were impacted by covid, and otherwise would have been stronger. Hopefully that augurs well for future growth;

We currently have MyID deployments active on four Continents and each of them has inevitably been impacted by the pandemic. Europe and the Middle East has been particularly hard hit simply by the severity of individual country lockdowns. It has been very difficult for our partners to progress demonstrations and close out sales leads.

Opportunities with Government departments and public utilities have been particularly affected as their priorities have been very much focused on public health challenges rather than the commissioning and deployment of new digital ID solutions.

Whilst the broader impact of a second wave of COVID-19 on the remainder of the current financial year remains as yet uncertain, Intercede's fundamentals remain very much intact and year-on-year growth is still anticipated in FY21. As full or part-time remote working may increasingly become the norm, secure remote access to systems, applications and data will be essential and Intercede's derived credential and mobile technology is already well ahead of many others in the market. As in previous years, revenue is expected to be weighted towards the second half of the year.

Whilst the nature of Intercede's business and customer profile is such that the precise timing of orders is difficult to predict, the current sales pipeline and levels of bid activity continue to support management's revenue and profitability targets.

My opinion - these results are as expected, and we have an in line with expectations outlook comment above. It seems to me that Intercede probably would have delivered significantly stronger growth without covid. Therefore, I am hopeful of an acceleration in future growth.

This share is all about the size of the opportunity. We’ve seen from recent RNSs that the company wins quite large contracts, and if a few more of those roll in, then profitability could really take off. That’s what I’m hoping for anyway.

This is an interesting product demonstration, at a FinnCap tech day, worth a look.

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Treatt (LON:TET)

Share price: 644p (flat on the day)
No. shares: 59.6m
Market cap: £383.8m

Full year results

Just a quick look here, as I’m out of time.

Impressive highlights, given what a difficult year it has been with covid;

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Note the big increase in gross profit margin. A commendable +10.7% rise in adj EPS. The divis are up too, although that’s yielding less than 1%.

Current trading sounds fine;

Building on the excellent fundamentals of our business and broad added-value product offering, we have made a strong start to our new financial year ending 30 September 2021 and the Group continues to perform in line with the Board's expectations."

Balance sheet is strong, with c.£90m NTAV

Cashflow statement - as expected, it has spent heavily on capex, for new/enlarged production facilities.

My opinion - an interesting company, for sure. The PER is 33, which strikes me as too rich. Enlarged production capacity coming on stream could help boost profits, but why would I want to pay for the benefit of that up-front? Shareholders must believe that future profits are likely to considerably exceed existing forecasts. If not, then it’s too expensive.

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Jack’s section

Countrywide (LON:CWD)

Share price: 225.67p

Shares in issue: 50,633,756

Market cap: £114.3m

Interesting update here, as there could be longer term contrarian value to be found in a couple of well run listed estate agencies. This one is definitely at the riskier end of the spectrum, though.

Paul considered Connells’ 250p per share offer for Countrywide (LON:CWD) in a recent SCVR report. Shares spiked up some 40% on the news, highlighting the group’s distressed valuation.

This was in November and came after Alchemy’s offer to underwrite a £90m equity raise. Today Countrywide updates the market: shareholders do not support Alchemy’s offer in its current form but the potential Connells acquisition is still on the table...

Update on strategic options & changes to the Board

There’s insufficient shareholder support for the Alchemy Transaction, but also a recognition of the need for new capital and a readiness among shareholders to invest in the company.

Possible options include:

• a capital raise to be underwritten by Alchemy Partners on amended terms;
• the indicative approach received from Connells at 250p; and
• a capital raise from existing shareholders of the company.

Furthermore, there are some changes to the board:

• Peter Long has stepped down as executive chairman and is retiring.
• Philip Bowcock is now interim CEO, having previously worked as CEO of William Hill.
• Paul Creffield, managing director, will retire from on 24 November 2021.

Conclusion

Countrywide is very much ‘in play’ but the terms of any agreed upon recapitalisation are key to the investment case. That’s a big unknown right now.

And then the rapid change in senior management at such a critical juncture is a concern. If the company can recapitalise (at decent terms) and free itself from its debt burdens then there could be an opportunity here later down the line.

I’m watching from the sidelines until the dust settles a little but this is a live situation - a risky one to possibly keep on the watchlist depending on how events play out.

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All done for today! See you tomorrow.

Regards, Paul.