Small Cap Value Report (Tue 25 April 2023) - JUP, SMV, ABDP

25th Apr '23 by Paul Scott

62 comments 7630 reads

Good morning from Paul & Graham!

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.

Jupiter Fund Management (LON:JUP) - down 2% to 129p (£703m) - Graham - GREEN

I continue to take the contrarian view that these shares are underpriced. Retail outflows continued in Q1 but institutions stayed flat and market movements boosted AUM. Remains very cheap by historic standards.

Smoove (LON:SMV) - up 28% since Friday (£24m) - Graham - AMBER

Smoove’s assets may have strategic value, as a large Australian group is currently in talks to buy the entire company. After poor results released last year, this could be a nice way for shareholders to exit.

Ab Dynamics (LON:ABDP) - up 1.8% to £17.30 (£396m) - Graham - AMBER

Interim results are in line and full-year expectations are unchanged. Good visibility for H2 and acquisition integrating as planned. But valuation remains high even if you give the benefit of the doubt re: adjustments.

Graham's Section

Jupiter Fund Management (LON:JUP)

Share price: 132p (pre-market)
Market cap: £719m

This is one of the pure-play fund managers I’ve taken an interest in since late last year, when I noticed that valuations in the sector had become (in my opinion) excessively depressed.

As a consequence, I started to make positive noises even - or especially…

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WarrantStar

25th Apr '23

Hi Mojomogoz. I don't agree with you about hVIVO (LON:HVO) and have just bought some. As far as their expansions goes, they have already taken multiple actions to increase profits such as 1) Increase capacity for higher numbers of trial patents per clinical trial as requested by their customers. 2) Increase capacity so as to be able to run multiple different clinical trials at the same time. 3) New testing services. 4) Introduced ability to do trials for types of infection that they were previously unable to carry out. I expect forecast upgrades in due course.

On a lighter note, please can you enlighten us all by informing us what "A Cathal nonsense crapshoot" is?

davidjhill

I was with a large PE house the other day and the senior guys were complaining about the competitiveness in the bidding process. Valuations in the private sector have got more realistic but at the same time there are too many players chasing the same companies. As a result companies may give a PE preferred bidder status but whereas that previously led to a transaction now they are getting gazumped!

No real wonder they are turning more to public markets as the valuation difference is now stark enough to offset revealing their hand in a public environment.

For me the answer is no. What I actually want is to buy a business that gives me long term structural growth in its market of 10-12% p/a at a relatively low/reasonable valuation and sit on it for several years and get a double effect of growth plus a bit of a re-rating to achieve my 15%pa target. I'd like to get an income of at least 3% whilst I wait.

With these businesses getting taken out at low points in the cycle I'm left with a much smaller pool to choose from and of lower medium term quality, so I have to trade in and out and try and move with the hot money, which doesn't suit my style really.

Not great but not terminal yet for the UK market but something needs to be done quickly.

rmillaree

I would happily sell my whole portfolio for quick 30% profit and start over from scratch !!! hmmm being over 50 perhaps i would say better off putting all the proceeeds in premium bonds and going down the pub.

Harry Hindsight

I contribute to IG group (LON:IGG) profits by 'over trading' and losing 'spread bets', but at least hold so might get some peanuts back.

Seems to be clawing back recent 100p drop.

Iofina (LON:IOF) - iodine used in many products - including radiation tablets - which I was looking for on Sunday when the phone shook me out of my nap.

Is that a 'cup and handle' I see before me - albeit an old one. Perhaps wait for 35p.

Fishcake

I'm 100% with you. I always struggle with the sell decision, so it's nice to have the decision made for me, then I get the fun of looking for the next buy. Or as you say, invest them wisely in a real asset down the pub!

mojomogoz

Hi WarrantStar, re "Cathal nonsense crapshoot' -> I didn't like old CEO of Open Orphan. I believe he's a total huckster and hype guy. IMO Open Orphan progressed very differently from what he sold would happen. Some might say that was navigational skill...maybe...I think it was probably more luck. A lot of people like the guy so I'm not expecting agreement. Maybe I just don't see the genius!

But I do (to my surprise based on origin) like hVIVO (LON:HVO) and its CEO. My reservation is around valuation and growth. I'm a little out of date and need to catch up with news today so consider my comment here as a bit drive by rather than informed...

IMO hVIVO can earn really well from established infrastructure and capabilities and once the capability is physically established it will have a fairly long enduring and low cost to maintain moat around the capability -> nice high RoC and can support high div payout and earnings growth thro price inflation (likely higher in testing services than broad economy) and share buybacks.

But I see expanding capability has quite high degree of difficulty. It's not the basic cost of facilities but sourcing the 'resources' needed to support expansion and by that I mean mostly the pure and non exposed humans needed for testing (i've forgotten the technical terms they use for their 'guinea pigs')...and solving that difficulty likely feeds back to high hurdles to expansion and relatively high initial capital costs as they can't just incrementally expand infrastructure they have but need to set up new geographically specific hVIVO ecosystems.

So the above may be well off beam...but that is the nature of my hesitation on price and growth. I see modest growth and high capital return as the right route for this company. Its a nice business now...but I would want to buy (based on my views) at lower price

ACounsell

Appreciate it isn’t a typical small cap share but is anyone following the Thomaslloyd Energy Impact Trust (LON:TLEI) situation. I hold having bought at the IPO last year as focused on the renewable sector with a decent pipeline of projects in Asia & Far East where renewables are sorely needed to reduce dependence on fossil fuels (coal specifically). Yesterday’s RNS and the follow up one today don’t look good to me. I fear Thomaslloyd Energy Impact Trust (LON:TLEI) could turn out to be an absolute dud. Relatively unusual for an IT but the omens are not good. If it comes back from suspension at anyway near 30% below the IPO price I will exit but I fear a complete loss. One problem tends to be a forerunner of a lot worse!

JohnDoe2378

Bid rumours regarding Watches of Switzerland (LON:WOSG)

Snowbum

Agree with you entirely about Cathal Friel…. His last one I recall was Fastnet O&G, on which he shafted investors with his jam tomorrow Friel Spiel.

Hi Mojo

"But I see expanding capability has quite high degree of difficulty."

Fundamentally this is where I think you are wrong in your thinking.

1) Their strategy around capacity has been done as a hub and spoke model. This means that once they run out of room they can add a spoke at relatively little cost and in a few months. That in turn means they can first sign the contract and collect the 20% non refundable deposit and then commit the capex to increasing scale. It's quite neat. The hub is the really expensive bit and that would be hard to replicate, but there is no need.

2) Expansion of resources : hVIVO (LON:HVO) already have many thousands of signed up volunteers. You are correct that when your business is operating on a single challenge study this resource collection is expensive and eats margins because many of those volunteers have already been exposed and can't be used. However, when you expand into multiple challenge study types those already signed but redundant resources can be used in the new challenge studies. Again not all will qualify but some will and there will be no volunteer recruitment cost.

So actually the expansion into multiple challenge study types does two things. (1) It provides good future growth for the business and (2) it lowers the cost of resources so margins go up.

So in essence, no you don't need to set up geographically specific hVIVO ecosystems to expand. Hub and Spoke model - done from UK and actually resource costs are margin enhancing via expansion of study types.

Thus the business is scalable and at increasing margins, though I'd say margins will cap out in the early 20%'s medium term (as you still have to pay the volunteers for the actual study).

We've seen this effect already with margins rising to around 17%. Current capacity supports revenue of around £70m so plenty of room. Net cash should be around £33m.

Edit : I'd also note that the very same dynamics provide a moat to the business against competitors. Pharma want certainty about volunteer recruitment quality and hVIVO (LON:HVO) can provide that. Expensive for someone to come in from scratch and replicate. Plus the hub is expensive to replicate and would need full regulatory certification etc.

Hmm - Activeops (LON:AOM) look quite good value actually. As you say heavily overpriced at IPO but strip out £18m of cash and you're paying £40m for £22m of ARR so less than 2* sales, which given the product (looks to have a strong reputation) and market sector looks pretty decent value.

jonno

Bid targets, where would you like me to start! to add to Vertu Motors (LON:VTU) Somero Enterprises (LON:SOM) and Sanderson Design (LON:SDG)

Headlam (LON:HEAD) Portmeirion (LON:PMP) Videndum (LON:VID) Watkin Jones (LON:WJG) Palace Capital (LON:PCA) Real Estate Investors (LON:RLE) Forterra (LON:FORT) Centaur Media (LON:CAU) Harworth (LON:HWG) Flowtech Fluidpower (LON:FLO) Galliford Try Holdings (LON:GFRD) TT electronics (LON:TTG) Belvoir (LON:BLV) Hargreaves Services (LON:HSP)

With the exception of Sanderson Design (LON:SDG) all of the above are held in family portfolios and in my opinion are underappreciated and depending on which metric one uses undervalued.

A few have faced particular challenges caused by the rise in interest rates, notably the two REITS, Palace Capital (LON:PCA) and Real Estate Investors (LON:RLE), similarly I would mention Watkin Jones and Harworth (LON:HWG) (LON:WJG) but these are fully reflected in the share prices. I will leave you to do the homework.

Harworth (LON:HWG) Portmeirion (LON:PMP) despite the recent share price rise, Headlam (LON:HEAD) and Forterra (LON:FORT) stand out as especially vulnerable at current prices.

I see the hope of putting Unbound (LON:UBG) shareholders out of their misery (myself included) has gone with Woolovers saying no longer interested. Obviously they didn't like what they saw so guess the management of Unbound (LON:UBG) couldn't manage to hide their dire position from the aptly named interested party!!

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topvest

It looks like the US banking troubles are back on with the First Republic Bank (NYQ:FRC) share price collapsing by over 40% today. Looking at its Q1 financials it lost x5 its equity in deposits in Q1 which was replaced by short-term borrowings. Banks are truly scary when they have a run!

26th Apr '23

??? Woolovers has pulled out because Unbound (LON:UBG) management said they instead supported an injection of equity at 10.5p a share by another investor.

Someone prepared to ‘throw good money after bad’ I fear. Surely Unbound (LON:UBG) has demonstrated it cannot extract itself from the hole it was left in by the private equity outfit that sold the market a complete disaster!

M48

A large chunk of that cash belongs to customers though in the form of advance payments (not disclosed in the TU) - and after stripping out the intangibles, the balance sheet is not as strong as that headline cash number implies.

They don't capitalise as much internal development cost as some others in fairness, but they do capitalise a growing chunk (massive judgment within their control, and not disclosed in the TU). Throw in the share option dilution, this company is not really profitable at all. I see the share price fading when we get the proper year end accounts, this trading update is just the sugar coating in my view.

I like the concept of this business, I just am to be persuaded yet there is a potential return on investment.

Small Cap Value Report (Tue 25 April 2023) - JUP, SMV, ABDP

Graham's Section

Jupiter Fund Management (LON:JUP)

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Paul Scott

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