Small Cap Value Report (Tue 26 April 2022) - LGRS, CNS, TUNE
Good morning! We should be back up to full strength again today, with Paul & Roland on duty.
Roland's Section:
Loungers (LON:LGRS) - this bar / cafe operator has reported full-year sales and profitability ahead of consensus forecasts for the year ended 17 April. I’m impressed by the quality of this operation and its growth ambitions, but I’m wary of the impact of rising costs and capex.
Corero Network Security (LON:CNS) - this cybersecurity firm has reported a maiden profit. I think it may finally be starting to deliver on its potential, supported by favourable market dynamics. I’d want to do further research, but I’m definitely encouraged by today’s numbers.
Focusrite (LON:TUNE) - I think this musical equipment supplier has delivered a solid set of half-year results in somewhat trying circumstances. Although I expect more measured growth in the future, I remain a fan and do not think the current valuation is excessive.
Explanatory notes -
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Roland’s section
Loungers (LON:LGRS)
Share price: 257p (+4% at 08.30)
Shares in issue: 102.7m
Market cap: £253m
“Record sales for the 52 weeks ended 17 April 2022”
Loungers is a fast-growing cafe / bar operator with two brands, Cosy Club and Lounge. Both formats are all-day offerings that appeal to a wide range of customers. The business is highly-rated by us here at the SCVR. While the shares don’t look cheap, they have pulled back a little this year.
Today’s update reports continued strong trading and confirms the group’s roll-out of new venues is continuing at pace.
Financial highlights: Loungers’ financial year ended on 17 April, so this is a year-end trading update.
- Record full-year revenue of £237.3m, ahead of £226m consensus estimates
- Full-year profitability expected to be slightly ahead of market expectations
- Net debt ex-IFRS 16 was £2.6m at year end (April 2021: £47.5m)
It would have been helpful if Loungers could have quantified the expected change in profitability. We’ll have to wait until results day on 13 July for this information, now, making it harder to gauge any possible early impact from wage and input cost inflation.
Trading: Management say that although Omicron caused subdued trading in December, activity has bounced back very strongly since then.
Like-for-like sales rose by 22.1% during the 48 weeks to 17 April 2022 and “rebounded convincingly post-Christmas”, as the Omicron surge eased.
However, one-year like-for-like comparisons will inevitably be favourable, given the pandemic restrictions that existed a year ago. To provide more colour on performance, Loungers has provided two-year and three-year LFL figures.
Rather than type these out in full, I’ve included a screenshot below from today’s update. I’ve circled the numbers which seem most relevant to me:
New openings: Loungers opened a record 27 new sites over the last year, comprising 26 Lounges and one Cosy Club. This takes the group’s portfolio to 195 sites. The company says it’s “very pleased with the strength of these openings”.
Jack reviewed Loungers in December, when he noted the company was thinking about increasing its roll-out rate to 30-35 units per year, with an eventual target of c.500 locations.
My view: I’ve been consistently impressed with Loungers and today’s update does nothing to change this view. This group appears to be one of the best operators in the bar/cafe sectors and its expansion targets suggest the business could double in size again.
Pre-pandemic profitability was quite good for a business of this kind, with a FY19 operating margin of 8.3% (the equivalent figure for J D Wetherspoon (LON:JDW) was 6.9%).
Today’s update did not include an updated outlook statement for the year ahead. Nor was there any mention of costs or margins.
However, I’m struck by the caution implied by consensus forecasts ahead of today’s update. These suggest a 34% drop in adjusted earnings in FY23, despite continued revenue growth.
This puts Loungers on a forecast P/E of 25 for the year ahead. I’d argue that’s quite full for a fairly low margin, high capex business.
My reading of the consensus view is that analysts expect Loungers to absorb higher costs where possible, in order to limit price increases. This outlook may also reflect the impact of a return to higher rates of capex in 2022/3, as expansion accelerates.
Interestingly, forecasts I’ve seen for FY24 also show Loungers profits remaining below FY22 levels, despite continuing top-line growth.
On a short-term view, I think Loungers shares are probably up with events. But on a longer view, I suspect the stock could still offer significant upside if it can maintain its growth rate and fend off growing competition.
Corero Network Security (LON:CNS)
Share price: 14.7p (+10% at 08.45)
Shares in issue: 494.8m
Market cap: £73.6m
“Record performance, strong customer traction and maiden profit”
Cybersecurity specialist Corero Network Security is one of this morning’s top movers, up by around 10% at the time of writing. This business provides products and services to protect clients’ systems from distributed denial of service (DDoS) attacks.
DDoS attacks involve bombarding online services with requests so that they run out of resources and crash, or become unavailable. They’re one of the more common forms of cyber attack.
Corero has been a jam tomorrow stock for a long time. Shareholders have suffered significant dilution. But the company’s latest results do suggest to me that this business may be turning a corner in terms of both growth and profitability.
Today’s numbers include the company’s first ever post-tax profit and evidence of substantial revenue growth. Let’s take a look.
Financial highlights: Today’s results are billed as being ahead of expectations, but in fact upgraded EBITDA guidance was announced to the market in January.
However, consensus estimates were still showing a full-year loss for 2021, when in fact Corero has reported a profit. This may explain some of the share price movement we’ve seen this morning.
Here are the main numbers:
- Revenue +24% to $20.9m
- Annualised Recurring Revenue (ARR) +31% to $12.8m
- Gross margin: 85% (2020: 77%)
- EBITDA: $4bn (2020: EBITDA loss of $1.4m)
- Pre-tax profit: $1.4m (2020: pre-tax loss of $4.0m)
- Earnings per share: 0.3 cents (2020: loss of 0.8 cents)
- Net cash: $8.4m (2020: $7.6m)
These numbers certainly appear to represent a potential transformation for the group. Strong growth in recurring revenue is particularly encouraging, in my view.
Operational highlights: Corero says it has made significant operational progress with sales and marketing initiatives, alongside working with its established partners.
- Secured 44 new customers (2020: 42), adding six new countries. Now active in 47 countries. Significant traction in key markets such as hosting and SaaS Enterprise segments.
- Growth supported by structural growth in the DDoS mitigation marketplace. Corero estimates that its “serviceable addressable market” could reach $715m by 2026.
- Continued digitisation and awareness is driving global demand for such services.
- ARR growth should underpin future earnings
Profitability: Last year’s gross margin of 85% seems impressive and suggests to me that this business could become highly profitable if it can continue to scale.
Corero’s profitability has been gradually improving for a number of years:
Todays’ results continue this trend with an operating margin of 5%.
Happily, profitability does not seem to have been boosted by the capitalisation of development spending. Although Corero does capitalise some development spend, this was offset almost exactly by a corresponding amortisation charge last year.
We can see from the balance sheet that the overall figure remained largely unchanged in 2021:
Balance sheet/cash flow: My sums suggest Corero generated just $269k of free cash flow last year after finance costs, due to some large working capital movements.
However, underlying operating cash generation improved and the group’s year-end net cash position of $8.4m looks safe enough to me, assuming the business remains cash generative.
Although dilution has been dire in the past, I would hope that further share issuance will be minimal:
I would imagine that chairman Jens Montanana, who controls a 38% stake, will also be keen to preserve the value of his equity going forward.
Outlook: Corero’s outlook commentary is unsurprisingly positive. The company’s sales pipeline and new business momentum are said to be at record levels.
Meanwhile, exposure to Russia and Ukraine is said to be “very limited” and is expected to have “little direct impact on Corero”.
The board says it’s confident in Corero’s medium- to long-term growth prospects, but doesn’t mention the 2022 outlook explicitly. I wonder why?
My view: Corero’s valuation is still pricing in significant growth. But it does not look especially outlandish to me.
Based on today’s results and share price, I estimate the following multiples:
- Trailing P/E: 62
- Price/sales: 4.3
- EV/EBITDA: 16
The current valuation is clearly pricing in significant further growth. But if Corero can maintain the combination of growth and profitability it’s shown in 2021, then I think the stock could grow into this valuation on a medium-term view.
It’s worth remembering the potential impact of operating leverage to boost future profits. If fixed costs remain controlled while sales rise, then the marginal cost of sales is quite low. This can lead to a substantial improvement in operating margins.
I’d hope that Corero will perform in this way, with the possible caveat that sales and marketing expenses could increase sharply, limiting short-term margin gains.
It’s still early days, but I’m certainly encouraged by Corero’s 2021 results. The company seems to be starting to deliver on its potential, in my view.
Focusrite (LON:TUNE)
Share price: 1,129p (+2.7% at 10.00)
Shares in issue: 58.7m
Market cap: £646m
“Performance in the half year was in line with our expectations and remains on track for the full year.”
This musical equipment specialist is on the verge of becoming too large for us here at the SCVR, but it’s been an excellent growth stock since listing in 2014.
Given that Focusrite’s share price has fallen by more than 35% from last year’s peak, I reckon today’s interim results are worth a look. Is this growth story still on track?
Financial highlights: Today’s half-year results cover the six months to 28 February 2022.
- Revenue -2.5% to £92.9m
- Gross margin -1.4% to 36.6%
- Operating profit -33% to £16.3m
- Adjusted earnings -25% to 27.1p per share
- Interim dividend +23% to 1.85p per share
- Net cash -6% to £18m
Trading commentary: CEO Tim Carroll admits that the company is currently dealing with two contradictory sales trends, while also facing supply chain issues.
Demand from home buyers is down from the “unprecedented high levels” seen during lockdown periods.
In contrast, demand from professional buyers for live events is “continuing to grow” with positive signs “towards a full recovery of live events”.
Focusrite’s portfolio includes a broad mix of brands and equipment that target both small-scale creators and live events. What isn’t yet clear is just how this changing mix will affect the group’s margins and sales growth.
Today’s results include a breakdown of the impact on changing market demand on some of Focusrite’s key brands:
- Focusrite revenue down by 11.7% to £65.4m
- ADAM Audio (studio speakers) - revenue down by 33% to £8.4m. Blamed on component shortages.
- Martin Audio (professional speakers for live events) - revenue up by 44% to £12.5m
Focusrite says it’s launched a number of new products during the period and is also starting to rebuild inventories of the popular Scarlett devices.
My view: It looks like this year will be a transitional period for Focusrite. The group is navigating from the distorted demand of lockdown markets back to something like normality, while also dealing with component shortages.
In this context, I think today’s half-year results look pretty solid. Full-year guidance remains unchanged, implying revenue growth of 2.4% and a 15% fall in adjusted earnings.
These forecasts prices Focusrite shares on around 22 times forecast earnings, with a modest yield:
This is obviously not cheap, especially for a business with falling earnings. Although earnings are expected to return to growth in 2022/23, they are expected to remain below last year’s record highs.
My main concern here is that the market may re-rate this stock to a lower multiple, to reflect a more measured view of future growth.
Offsetting this, I remain impressed by the quality and profitability of this business. Focusrite boasts some notable brands and strong management, led by founder and executive chairman Phil Dudderidge.
On balance, my view is that Focusrite is probably reasonably valued at current levels and is likely to deliver further growth over time.
Obviously, there are some uncertainties here. But if I owned the shares, I’d certainly continue holding them after today’s results.
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27 comments
Today sees the inaugural results from Light Science Technologies Holdings (LON:LST) which floated last year raising £5M. It's main/original business is in Contract Electronics manufacture, mostly printed circuit boards and there is also a new division developing and installing Controlled Environment Agriculture (i.e. vertical farming) equipment. The market cap is about £12.5M, although the stocko report still does not have the basic details.
Despite the market cap being well below what I would normally look for I have taken a small starter position, mostly due my interest in the CEA division. Today's results were fine, revenue of £7.4M and a post tax loss of £2.35M, the outlook was a little cagey. I see it as a medium/long term opportunity in an attractive market that could do very well.
I would be interested to hear any other views.
Warpaint London (LON:W7L) audited results out, nice improvement in profitability and a strong outlook statement. Decent dividend of 6p for the year too. Happy holder.
Thanks for flagging. I haven't properly looked at Warpaint London (LON:W7L) before but on first glance at 16x estimated p/e for this financial year isn't it expensive compared to Creightons (LON:CRL) which is also showing good growth but is on around 10x for the year just ended? Cosmetics and beauty feels like the sort of consumer item that gets cut back on a bit during consumer belt tightening so I would instinctively feel cautious about paying a potentially high price.
Cosmetics and beauty feels like the sort of consumer item that gets cut back on a bit during consumer belt tightening
You’d think so. But historical data going back as far as the Great Depression suggests otherwise, although the mix might change. Currently skincare is running ahead of makeup.
RE: Corero Network Security (LON:CNS)
I've never looked at this company before but the thing that sticks out to me like a sore thumb is the 10% shareholding of Juniper Networks. IMHO you should never hold a share based on hopes of a takeover but I'd be interested to know the history behind Juniper's involvement.
All the best, Si
Very quick reply.... Juniper are a major reseller of Corero's DDoS product (and maybe other products too). Having Juniper bundle Corero's DDoS into their hardware sales is a great sales route for Corero Network Security (LON:CNS) . Which does make a takeover a possibility. Having said which, you are completely right... "you should never hold a share based on hopes of a takeover". I hold because of the good growth and the increased importance of cyber security in a world in which:
1. We seem to be entering a second cold war
2. Countries hostile to the West (not just Russia) are increasingly using cyber criminality as an easily deniable way to damage their enemies (us).
Very quick reply.... Juniper are a major reseller of Corero's DDoS product (and maybe other products too). Having Juniper bundle Corero's DDoS into their hardware sales is a great sales route for Corero Network Security (LON:CNS) . Which does make a takeover a possibility. Having said which, you are completely right... "you should never hold a share based on hopes of a takeover". I hold because of the good growth and the increased importance of cyber security in a world in which:
1. We seem to be entering a second cold war
2. Countries hostile to the West (not just Russia) are increasingly using cyber criminality as an easily deniable way to damage their enemies (us).
Thanks. Of course this holding is chump change for Juniper but interesting that there is a commercial reason behind their investment. I used to work in data security but have never come across the company or any of the management before. I know a few people that used to work at Cambridge Broadband though, so they will have some "colour" on the CEO. I agree it's an interesting product which is in the sweet spot for the world we live in right now.
All the best, Si
Thanks for the update on Corero Network Security (LON:CNS) Roland. Glad to read some positive support for my very overweigh position. Now one of my largest holdings having topped up under 3p a while ago. Originally brought to my notice by Gervais Williams' comments on a Smaller Companies report a few years back c7p.
£CNS Thats quite some turnaround "EBITDA: $4bn (2020: EBITDA loss of $1.4m)"
I wonder if it is worth a look at Immotion (LON:IMMO) . A company specialising in "immersive entertainment" mostly at major locations such as Zoos and Sea Life parks etc
"Group revenue increased 230% to £9.4m (2020: £2.8m)" but from a very low, covid impacted base. Nevertheless, it has done well to survive the last 2 years with relatively little debt and a very simple business model. Today announces that it is is going to "spin out" its home based entertainment and Ivisan divisions
It only has a market cap at just over 18M and it is not really in its stride yet so wont suit everybody . ( I hold )
Took kids to Sea Life in Brighton who have eight pods with VR headsets with several programmes - deep dive wreck with giant octopus, swim with sharks etc. The pods tilted and vibrated - but without the gravity/pressure etc bad bits of the real experience, safer (don't actually swim with a shark) and considerably cheaper and quicker for our low attention span heirs.
Pci- Pal (LON:PCIP) - I Can't tell from the RNS if the max damage PCI Pal would pay if they lose the case is £1.3m? or if this only covers the court costs?
Good question. I've just had a short look. Sadly it looks to me as if the £1.3 is the maximum that Pci- Pal (LON:PCIP) would have to pay in court costs (including the other sides court costs). There is no limit to the amount of damages that might be awarded. Except for this court case Pci- Pal (LON:PCIP) looks like a really good business. But how can we know how the courts will decide even if Pci-Pal's arguments are valid? I am holding off this one awaiting further developments in the court case
Pci- Pal (LON:PCIP)
Wording aint great but certainly seems to me that they are probably only talking about the court costs here - not what they may need to pay in addition ref damages etc.
I guess the fact they are sticking to their guns and have provided timely updates seesm to suggest they are doing what they need to from their side to defend what they do. Obviously the fact that one side is confident and the fact the other side is happy to splash the cash ref their funds going after Pic-Pal - suggests one party here may come out of this with the result they don't like or see as being right.
Good Morning all,
Nanocap Touchstar (LON:TST) (I have toehold) announces some respectable though still microcap FY numbers this morning, indicating that the turnaround may be bearing fruit. There's net cash, greatly increased profitability, though not a huge increase in turnover - yet? Outlook is positive, with SsaS revenue growth outpacing other revenue growth. Board hopes to eliminate negative distributable reserves, paving the way for dividends and buybacks.
SP probably up with the historic numbers (market cap of £6.1m at 77p) I think this could be one to watch going forward. I'd be interested in Paul's and other readers thoughts.
Hi Mark
I have a small holding in this and agree that things are moving in the right direction but just slowly. The catalyst to this getting much higher is seeing overall revenue growth rather than the SaaS replacing historical revenue.
Its dropped on todays news and I wouldn't be suprised to see it drift more without any contract announcements or anything. I don't plan to see though but equally I don't plan to add at this stage also. There are probably better options out there at the moment with many bombed out shares.
Any views on K3 Capital’s statement yesterday?
I'd missed that thanks. K3 Capital (LON:K3C) appointing a senior manager is mildly positive in my view with the caveat that I know nothing about the new man or his previous companies. Compared to a few years ago it's a much bigger, more business diverse and geographically diverse company so some help at the top seems reasonable.
Some googling after work on the new appointment seems in order.
Why the recent decline in K3 Capital (LON:K3C)? I see the share dilution has been highlighted as an issue, and the ability to fund future acquisitions...but looks like good competent management who have a proven track record to deliver, and with the increase in companies going to the wall, this should help impact this companies workload? SP looks good to me.
Interesting (free) note from Equity Development on Begbies Traynor (LON:BEG) this morning - I hadn't spotted these figures from the Government.
"The latest UK Government insolvency statistics data makes sobering reading, and suggests that BEG, which handles more corporate appointments by volume than any other UK insolvency practitioner, will find its services in increasing demand over the next 18 months.
The data confirmed 2,114 registered company insolvencies in March 2022, more than double the figure a year earlier (March ‘21: 999) and 34% above its pre-pandemic equivalent (March ‘19: 1,582). The majority (87%) comprised Creditors’ Voluntary Liquidations (CVLs), twice March ‘21 and 62% above March ‘19."
The comparison with last year might not be that insightful given the COVID support from Government but interesting it's a third above pre-pandemic levels in March 2019.
Begbies Traynor (LON:BEG) seems to have sold off with everything else lately which seems odd if the sell-off is driven by inflationary and recession fears which they should benefit from. Plus historically it's tended to trade on higher multiples according to the Stockopedia data. Shares are trading around 12x price to expected earnings for the year about to end on 30 April which looks decent value to me for a counter-cyclical. (I hold)
On Begbies Traynor (LON:BEG) they don't handle or make much money from CVLs. It is the compulsory liquidations and administrations that these insolvency practicioners make most of their money from, as they are complex and messy and sometimes acrimonious amongst stakeholders.
Those are rising too, but not as much as CVLs to date. So the key would be the trend over the next few months.
(I hold)
I am sure I read a write up last month where the Sdi (LON:SDI) CEO said their would be a trading update next month (so in April). Have I imagined that?
Forgot to comment on Mccoll's Retail (LON:MCLS) yesterday, but I remember one of the directors (CEO? Chairman?) put in £3m of his own money at the fundraising back in Sep last year. That must hurt now.
And it shows that while big Director buys could be seen as strong conviction by those who know the business best, sometimes they get it wrong. Or bad luck or external factors strikes.
Mccoll's Retail (LON:MCLS)
Ultimately buying bombed out shares is a gamble - perhaps with pocket change he thought it was worth the binary risk ? - not sure whether that was money originally earned in connection with he company in the first place. What is clear that the balance sheet of Mccolls has been basket case plus plus plus for several years now - so this should not really have been a share for anyone not happy with total wipeout prospects. Reasonably well flagged up in these parts that this has been case for somtime despite recent fundraise. Certainly IMHO anyone following this big money in here not expecting to have 50% + chance of being wiped out hasn't done their basic due diligence!
I remember looking at this at the time and deciding that the £3m was not material to him in terms of his absolute wealth - even if he lost it all he would never have to work again.
It was the take up of rights @ 20p. Could always short them to make the money back in bucket loads?