Small Cap Value Report (Tue 27 July 2021) - MOTR, ERGO, ITS, SLP, RST, RWA

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

Timing - TBC

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) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker.

Agenda -

Paul's Section:

Motorpoint (LON:MOTR) - shares rerated recently after the company communicated ambitious expansion plans to the market, but plenty of upside remains assuming the experienced management team can hit targets.

In Style (LON:ITS) - results for FY 03/2021 are as flagged in the last trading update. Very impressive growth rate of +132%, but I have some reservations about this share - can it scale up enough to consistently take on dominant brands like Boohoo and others?

Restore (LON:RST) - notes from my chat with management this morning. Taking into account net debt, and negative NTAV, I think the current share price looks about right.

Jack's Section:

Ergomed (LON:ERGO) - the transition to a services model is complete, growth continues to be strong, and the order book gives confidence on future prospects. But, at these levels and in the short term, 'in line' updates are unlikely to push the share price much higher.

Sylvania Platinum (LON:SLP) - sentiment has shifted recently due to social unrest in South Africa. Today the PGM producer reports a quarter-on-quarter decline in financials owing to a spike in rhodium prices in the previous quarter but year-on-year trends remain favourable. Share price volatility and commodity price risks remain but if you believe that the outlook for PGM prices is positive then SLP continues to look cheap.

Robert Walters (LON:RWA) - Positive momentum continues in recruitment. RWA share price is now comfortably ahead of pre-Covid levels, but the current environment appears to support that.

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Paul’s Section

Motorpoint (LON:MOTR)

(I hold)

350p (yesterday’s close) - mkt cap £316m

There’s been a significant re-rating of this car supermarket company, following it publishing “New strategic objectives” on 16 June 2021. These include a target of achieving £1bn p.a. In online sales, and over £2bn total revenues, in the medium term. MOTR also demonstrated that its business was resilient during lockdowns, with sales moving online. As flagged up originally by David Thornton, a UK online-only competitor, called Cazoo (which seems to be a bit smaller than MOTR at the moment) was reversed into a SPAC on the New York stock market, at an utterly bewildering $7bn valuation. Clearly Cazoo’s valuation is an absurd anomaly, but it being valued at 16 times MOTR, despite being similar-sized, and having similar online sales and offers, it does make me think that there’s good scope for MOTR shares to have a further re-rating.

Cazoo’s investor presentation seemed to imply that it’s disrupting a traditional market, and the valuation assumes exponential growth, and then values the business at 1x sales in 2023. What it doesn’t say, is that conventional car dealers are also selling online, and that MOTR has probably a better business model - in that it’s doing well online, plus it has large, efficient, low cost physical sites too, selling nearly new cars at competitive prices.

AGM Trading Update - for Q1 (Apr-Jun 2021) of FY 03/2022.

The Group enjoyed record sales in the first two months of the financial year, both online and in branch, significantly ahead of the same period in FY20 (which represents a more meaningful comparative than FY21)...

• “Moderation of revenues” in June & July 2021 (no figures provided) - caused by the well known issues with new car production (supply chain problems, especially semiconductors)
• Gross profit margins “remained strong” in Q1, due to rising prices for secondhand cars (also a well known factor, flagged by other companies in this sector)
• Overall - “trading is in line with the Board's expectations for the full year.”
• Online sales - were 61% of total sales in Q1 - strikingly high, considering that physical sites would have been open for some of that period.
• Spending on technology & marketing has increased.
• Buying cars direct from consumers was launched in July 2021. MOTR also has a successful online auction: Auction4Cars.com so the company has several strings to its bow.
• New physical sites planned - 2 new sites (Manchester & Maidstone) secured, with more new sites planned for this year. Remember these are large sites, not comparable with conventional car retailers.

Outlook -

It is important to note that some uncertainty persists given the well documented vehicle supply shortage, the potential continued disruption from COVID-19, and a realignment of used vehicle margins. However, progress on the Group's strategic goals means it is well placed to deal with any potential headwinds and the Board continues to look to the future with confidence, as the Group continues its exciting transformation into an E-commerce led business with huge potential.

My opinion - I’m pleased with the company’s more aggressive expansion plans, and the emphasis on online. These are the things that investors look for, and are prepared to pay more for. We’ve seen that already, with a meaningful re-rating in the last 6 weeks, when faster expansion plans were announced.

Management are experienced in the sector, not some tech startup with over-confident youngsters in charge with too much cash from VC/PE backers. Hence I think the expansion plans are credible.

Looking at a note from Shore Capital, from June 2021 (many thanks to them for putting some research on Research Tree, where people can see it), the forecast growth trajectory looks good: EPS of 15.8p this year (FY 03/2022), rising to 22.8p and 28.8p in the two following years. Put that on a PER of 20 (higher than other car dealers, due to the growth, and high online sales) and we get a price target of 576p in the foreseeable future. That’s 65% upside on the current 350p share price, which is more than enough to keep me interested. So personally, I’m happy to sit tight here.

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In Style (LON:ITS)

227.5p (up 2%, at 08:38) - mkt cap £119m

Preamble - this is an interesting company, which I’m keeping an eye on. ITS floated on AIM in March 2021. My initial feeling was that the company looked a me-too fast fashion business, with little to distinguish it from much larger competitors such as Boohoo, PrettyLittleThing, Missguided, ISawItFirst, and others - they’re all really battling for the same customers, and mostly clustered in the Manchester area.

This is an easy space to enter, but very difficult to achieve scale, and make profits - because the larger players (like Boohoo and PLT) can out-spend smaller rivals in marketing, and the important celebrity “influencers” which help drive sales.

My main concern with ITS is that, on checking its historic results filed at Companies House, performance was small and weak. Then stellar growth suddenly kicked in when the pandemic struck, raising the suspicion that the IPO might have been timed to take advantage of a one-off boost to sales/profits? I had similar concerns about new floats Virgin Wines Uk (LON:VINO) and Parsley Box (LON:MEAL) so have decided to monitor all 3 companies from a distance, rather than jump in at the sometimes inflated initial float valuation. Am happy to change my mind, once post pandemic trading has been proven.

Annual Results

Very good numbers are out today for FY 03/2021. Although that was previously known, as people bought into the IPO knowing that trading was strong. Also a trading update on 29 April 2021 flagged the draft year end numbers.

Hence why the share price is only up 2% today.

Key figures -

• Revenue £44.7m (compared with at least £44.5m flagged in trading update previously), up a very impressive +132% on the prior year, all organic growth.
• Adjusted EBITDA of £3.8m, much better than the previous year’s £(2.16)m loss.
• Adjusted Profit Before Tax (PBT) is £2.47m (LY: £(2.16)m loss)

Current trading - more important to me, in trying to ascertain whether one year’s profits is the start of a strong upward trend, or just a one-off?

· Sales in the first quarter of the FY22 financial year are 44% ahead of the prior year, despite the strong 'lockdown' comparatives in FY21.

· Both e-commerce and wholesale channels have performed strongly over the first quarter of the new financial year with several successful collection launches from the Group's existing influencers including the launch of the debut Stacey Solomon x In The Style collection.

· Underpinned by its unique and dynamic model, relevant brand and broad customer appeal, In The Style is very well-positioned to continue its strong growth.

A deceleration in growth rate from +132% to +44% is not a particular cause for concern, because percentage growth rates inevitably slow. That said, checking much larger Boohoo (LON:BOO) (I hold) overlapping most recent trading update (3 months to 31 May 2021), it produced +50% sales growth in the UK (the comparable number to ITS). So on reflection, a comparatively small competitor really should be producing a much stronger growth rate than BOO, but ITS hasn’t managed that.

Some of the growth at ITS is opening up new sales channels, such as ASDA, and other wholesaling. Note that wholesale revenues rose 353% to £8.3m in FY 03/2021, which flattered the overall growth rate to +132%. Direct to consumer sales were +108%.

Balance sheet - is quite strong, with plenty of cash, £11.9m, as indicated in the previous trading update. The only item on the balance sheet sheet which looks odd, is just £1.96m in inventories. Remember that inventories are valued at the lower of cost, or net realisable value, so usually that means cost (excl. VAT). Grossing that up to how much revenue it would produce, based on a gross margin of 46%, that’s only enough inventories to generate £3.62m of revenue, or about 29 days’ revenues. That could be a good thing - it suggests that stock is selling through fast, and there probably isn’t very much terminal stock (that needs discounting to clear it). Although it could also mean that inventories were too low, which flatters the cash figure, I’m not really sure, but thought I would flag it, as the numbers look unusual.

Cashflow statement - capitalising of intangibles is very small, at £325k. That could be spending on software, but it’s fine being so low. The stand out number is £11m cash inflow from the issue of new shares as part of the AIM listing. It’s good to see a company raising growth capital, rather than just providing an exit route for previous backers.

A £1.25m dividend was paid, but I imagine that is pre-IPO, and not likely to be repeated.

My opinion - this is a tricky one. The bull case is obvious - that this could be an early stage Boohoo or Asos (I hold both), and could be a major multibagger if it reaches their scale. The trouble is, it’s so difficult to achieve scale, in such a competitive market. But you need scale to be able to afford the big marketing budgets required to see off the competition.

The bear case on ITS is mainly valuation - too expensive, market cap of £119m for a business that has only had one year of successful trading. Also, it’s very difficult to see what’s different about ITS compared with all the others targeting the same market. Some product is perhaps more conservative, and not as raunchy as competitors? But they’re all using the same strategy of driving sales with influencers, and telling women to be empowered, express themselves, etc - all just generic fashion sector talk.

Another possible one-off boost to ITS was highly entertaining fly on the wall documentary “Breaking Fashion” which chronicled the chaotic and pressurised Head Office of InTheStyle, and followed them on fashion shoots, etc. Again, all generic to the industry. The airing of that series did seem to coincide with the start of the big surge in sales, so may be difficult to sustain growth at a high rate.

The key factor for me, is that the current trading of ITS this spring, was actually slower than Boohoo (LON:BOO) (I hold) reported in their last trading update for UK sales. If a small competitor cannot match BOO’s growth rate, then something’s wrong. Also, the marketing budget (reported in admin costs) is open-ended. Stacy Solomon might be great value for money, but a lot of these influencers that most of this readership have probably never heard of, command big bucks to endorsing product ranges. We saw on the TV series how ITS was massively out-spent by PLT, in trying to secure a key influencer, offering her £350k and a free Range Rover, but it turned out she didn’t drive, and PLT (part of Boohoo group) offered about a million pounds -which it can easily afford, being so much bigger.

On balance then, given that both Asos and Boohoo have significantly de-rated in the last year (presumably mainly on fears of increased competition) and can now be bought on quite reasonably earnings multiples, and have such advantages of scale (plus international growth), I can’t see enough of an attraction in ITS shares to want to take the plunge at this stage. I’ll keep it on the watchlist though.

The other problem with recent small cap floats, is that the shares tend to be placed with institutions in large blocks. Meaning that market liquidity is hopeless, often for several years, as you can see below -

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Restore (LON:RST)

469p (up c.2% at 11:34) - mkt cap £645m

Half Year Results

Restore plc (AIM: RST), the UK's leading provider of integrated information and data management services, secure technology recycling, and commercial relocation solutions, is pleased to announce its unaudited results for the six months ended 30 June 2021 ("H1" or "the period").

Preamble - this acquisitive group cropped up on my radar recently, with a positive trading update which I covered here on 5 July 2021, concluding that it looks reasonably valued, and is performing well. An adviser got in touch, to ask if I’d like a quick call with management on results day (today), so I’ve just come off that call, which was very interesting - key points, and then Q&A, which is my preferred format for calls with mgt. I’ll briefly review the interim results, then cover the Q&A below that.

Half Year Results - for the 6 months to 30 June 2021.

The Group achieved a strong performance in H1 ahead of the Board's expectation, with adjusted profit before tax up 56%, sustained momentum in trading across the entire business and significant progress made on Restore's strategy to grow through organic expansion, strategic acquisition and margin enhancement through synergy and efficiency.

• Highly acquisitive - 4 acquisitions made in H1, the largest being EDM, bought for £62.4m (partly funded with a placing)
• Cost & efficiency initiatives done - e.g. site consolidation, staffing efficiency, reduced fuel cost
• H1 revenue £106.1m, ahead of expectations. Up 19% on prior year (heavily impacted by pandemic, so not a real comparative)
• Annualised run rate is now £250m pa.
• H1 adjusted PBT of £15.6m, note the very strong profit margin of 14.7%
• Dividends reinstated, as flagged before, not a big amount though (2.5p interim divi)
• Active discussions with “a large number of potential target companies”, expecting to do deals £20-30m in H2

Balance sheet - dominated by intangible assets of £320.6m (goodwill & similar, on acquisitions). Deduct that from NAV of £259.2m, and NTAG is negative at £(61.4)m - not ideal. There’s quite a lot of debt, gross borrowings (excluding leases) is £113.6m - all in long-term creditors. That’s partially offset by £22.0m in cash, giving net debt of £(91.6)m, which in my view is a bit too high.

Cashflow statement - it was less cash generative than in H1 last year, generating £19.6m in H1 TY. We need to adjust that down by £9.1m “principal element of lease repayments”, which thanks to IFRS 16 have to be included irrationally within “financing activities” at the bottom of the cashflow statement. Making that adjustment, leaves us with £10.5m post tax cashflow in H1 - OK, but not amazing.

The big items are £71.1m purchase of subsidiary - i.e. acquisitions. Then a positive inflow of £38.1m from new issue of shares in the placing in April 2021 at 365p per share. Reading the placing announcement, it looks a decent deal to part-fund the £61m acquisition price of EDM, priced at 10x EBITDA based on current year forecast, falling to 7.5x once synergies done.

Q&A today with management

Q1. Takeover approach from Marlowe at 530p - why rejected, looks a good fit to me, and would create a larger, more liquid share. Wouldn’t it be fair to put it to shareholders for a vote?

A1. We’re very restricted in what we can say. Reiterated what was said in RST’s RNS rejection of the deal - believe is significantly undervalues RST, the structure (mostly shares, not cash) is unattractive, and RST doesn’t see a strategic fit between these different types of businesses - Marlowe is all about site visits to eg check fire alarms. Whereas RST’s visits to sites are very brief, eg to pick up boxes of documents to go into storage, or for shredding.

Q2. Document storage - still the biggest part of the business. Won’t this inevitably decline?

A2. It’s a mature market, yes, but opportunities to grow market share, and streamline cost/efficiencies, still very good margins.

Q3. Acquisitions - what degree of autonomy do acquired companies have?

A3. Acquisitions are carefully chosen for being a good fit with the group. So the strategy is very much dependent on finding the right target companies, and properly integrating them.

Q4. Isn’t the risk of a highly acquisitive group, that what you buy turns out to be not what you thought, problems emerge post acquisition?

A4. That is definitely the risk. We’re careful buyers, and have very experienced M&A teams who are not incentivised to do deals for the sake of it, they’ve incentivised on company profit & cashflow & EPS targets.

Q5. Did you benefit from Govt pandemic support schemes?

A5. Yes, mainly furlough scheme, meant staff could be retained. Govt will recoup cost many times over from Restore through its increased corporation tax remittances in future years.

Q6. How did your bank relationship hold up over the pandemic? Did they panic, did you get close to covenants.

A6. No in both cases. Very supportive. Bank didn’t see us as a problem, and let us get on with things, due to resilient trading.

Key points briefing from management -

• Very good H1 results, ahead of expectations
• Q2 better than Q1
• Real momentum in the business, as clients recover from the pandemic
• Costs reduced during the pandemic
• Growth is organic & by acquisition
• Delighted with all the acquisitions - we bought very well, with synergies being at least met, or beaten
• Good, growing markets being targeted with acquisitions, especially digital
• Acquisitions accounted for half growth
• Bank debt at 1.9x EBITDA - see broker forecast, they’re saying this should reduce, a snapshot at point in time

My opinion -

The current share price of 470p suggests the market doesn’t think the 530p (mostly paper, not cash) proposal from Marlowe is likely to go ahead.

It was really good to speak to the CEO, who strikes me as a safe pair of hands, with a logical strategy, obviously that’s subjective.

I’m not entirely comfortable with the level of intangibles & debt, although my approach on this is very prudent.

Thinking back to reading 100 Baggers, a key takeaway from that book, is that many shares which have achieved greatness, made a series of very good acquisitions along the way. Often under the watchful eye of an owner/manager.

In this case, the 2020 Annual Report shows that Director shareholdings are negligible. That said, they have an established track record of making good acquisitions, so does it matter than they have hardly any skin in the game personally?

Overall, my impression of Restore is positive. It seems a good business, and management seem to know what they’re doing re acquisitions. Also if Marlowe want to buy it, then that’s confirmed the valuation as quite attractive.

Looking at the Stockopedia stats below, the price looks about right to me, after the recent surge.

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Jack’s section

Ergomed (LON:ERGO)

Share price: 1,140p (-1.3%)

Shares in issue: 48,818,848

Market cap: £556.5m

(I hold)

Back in January Egomed released an update showing revenue up 26.5%, adjusted EBITDA ahead of expectations, and a strong forward order book.

This was followed by full year results in March showing revenue up 26.5% to £86.4m and adjusted EBITDA up 55.2% to £19.4m. Following on from that, in June, the group again guided to adjusted EBITDA ahead of market expectations.

Today we have an ‘in line’ statement for the first half of FY21. The figures are strong, but the shares trade at a premium valuation. Sometimes when that’s the case, in line isn’t good enough for the market.

Ergomed has been an excellent growth story for the past two years, however.

This is a service provider to the pharmaceutical industry. It does three main things:

• Clinical research - aka Contract Research Outsourcing (CRO) - running drug trials and handling administration and other services around this for other companies’ drug development,
• Pharmacovigilance (PrimeVigilance) - mandated by regulators and involves making sure that a company’s newly developed treatments are closely monitored and don’t have adverse effects, and
• Its own drug development.

The driver of share price performance has been the group’s shift away from co-developing new treatments towards providing more dependable services for other companies’ drug development.

The latter is more predictable with lower R&D costs, and there appears to be significant demand for the group’s expertise.

Half year trading update

EBITDA for the full year is expected to be in line with the upgraded market expectations

Highlights:

• Total revenue +38.8% to £56m (+48.1% in constant currency),
• Service fee revenue +28.6% to £47.6m (+37.2% in constant currency),
• Pharmacovigilance (PV) revenue +10.4% to £28.8m (+16.2% in constant currency),
• Clinical Research Services (CRO) revenue +90.7% to £27.2m (+106.4% in constant currency). MedSource performed in line.
• Excluding revenues from MedSource, CRO revenue grew by 16.1% (24.5% in constant currency) to £16.6m,
• CRO division revenue +90.7% to £27.2m, including the MedSource business acquired in 2020. Like-for-like growth of 16.1% (24.5% in constant currency),
• Net new sales awards in H1 +50.8%; order book has grown by 18% since 1 January 2021,
• Continued international expansion with growing presence in the USA,
• Net cash of £24.6m, no debt.

It’s worth remembering that these results are still impacted to some degree by the pandemics and various lockdowns. The fact that the group has used this as an opportunity to become a ‘recognised provider of COVID-19 research support with involvement in a number of COVID-19 projects in its CRO and PV businesses globally’ is testament to the utility of its services.

Net sales of new business for H1 2021 increased by 50.8% to £90.8m (H1 2020: £60.2m), accelerated by effective cross-selling activities between the CRO and PV businesses as well as the expanded geographic territory and client bases from the two US acquisitions in 2020.

PrimeVigilance has continued its strong growth, with the Ashfield Pharmacovigilance business now fully integrated as its US operation. The CRO business has seen further acceleration of the growth that resumed in the second half of 2020 and the integration of MedSource is progressing well.

Its operational presence in the US continues to develop rapidly with strong organic growth alongside the integration of the two new US businesses acquired in 2020.

There is also ongoing expansion into further geographic areas, including the establishment of new legal entities in key European countries and the recently announced new operation in Japan, which is the fourth largest pharmaceutical market in the world.

Cash balances at 30 June 2021 were £24.6m and the company continues to be debt-free with additional facilities of up to £30m available to support expansion.

Conclusion

It’s possible that the market will focus on this being an in line update rather than considering the longer term, global growth opportunity here. So far, the market has given a muted response.

A reason for this will no doubt be Ergomed’s relative valuation. It looks expensive compared to a lot of other listed companies - but then again, the group’s services are in demand and there is plenty of runway for both organic and acquisitive growth, with strong prospects in multiple geographic markets.

Ergomed's order book was some £227.8m at the end of H1 2021, up 18% on 31 December 2020 and up 50.5% on the prior year (H1 2020: £151.4 million). This gives visibility over H2 and FY22 revenue and must give management the confidence to invest in future expansion.

The strategic transition to a services-based business model is complete so now the group is well placed to seize that opportunity.

Valuation will be the key sticking point for those on the sidelines. If we assume a doubling of H1 revenue to £112m (less than broker forecasts) and take FY20’s profit margin of 11.2%, that gives a forecast of £12.5m or 25.7p per share and a forecast PER of some 44x.

Brokers are anticipating better results and Stockopedia instead has a forecast PER of 34.6x. It’s still expensive - probably already too expensive for some - so management needs to realise the potential here (which, so far, it has).

The shares can continue to gain in the medium and long term as the company grows according to its stated strategy, but for shorter term appreciation and at these prices, further ‘ahead of expectations’ updates are probably required.

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Sylvania Platinum (LON:SLP)

Share price: 104.7p (-9.74%)

Shares in issue: 272,473,865

Market cap: £285.3m

Sylvania Platinum is a lower-cost producer of platinum group metals (PGM) (platinum, palladium and rhodium) with operations located in South Africa.

The Sylvania Dump Operations (SDO) comprises six chrome beneficiation and PGM processing plants focusing on the retreatment of PGM-rich chrome tailings materials from mines in the Bushveld Igneous Complex. The group also holds mining rights for PGM projects and a chrome prospect in the Northern Limb of the Complex.

The prime culprit in this update is reporting quarter-on-quarter results rather than year-on-year. It’s not inherently wrong to do so, but it does frame the Q4 results against a big Q3 boost in rhodium prices, when attention could have equally been drawn to more favourable year-on-year trends.

Q4 update

Highlights:

• Sylvania Dump Operations (SDO): 16,289 4E PGM ounces (Q3: 17,420) and annual production of 70,043 (FY2020: 69,026),
• SDO Q4 net revenue $48.4m (Q3: $58.7m),
• Net profit of $14.7m (Q3: $41.3m),
• Cash balance of $101.1m (Q3: $102.1m) after payment of the second provisional income tax and royalty tax charges ($35.3m) as well as the Windfall dividend ($14.3m).

Challenges in the quarter included 4% lower PGM feed grades (to be addressed, and with PGM recovery expected to remain in the 52% to 54% range during the next financial year). There has also been higher logistics costs around securing additional RoM sources at Mooinooi.

Revenue (4E) for the quarter decreased 20% from $55.3m to $44.1m as a result of both the moderately lower ounce production and an 11% reduction in gross basket price for the quarter (from $4,576/ounce in Q3 to $4,059/ounce in Q4) due mainly to the 19% and 5% drop in rhodium and platinum prices.

Group cash costs per 4E PGM ounce increased 15% in ZAR from ZAR11,571/ounce ($773/ounce) to ZAR13,302/ounce ($941/ounce), Group EBITDA decreased from $58.7m to $28.7m and net profit decreased from $41.3m to $14.7m.

The 15% electricity tariff increase became effective in April 2021, further impacting cash costs. These costs will likely continue but should be set against what has been a huge run up in basket price.

The Lesedi secondary milling and flotation ("MF2") project is progressing well and should start contributing from the second half of FY2022. Development of the Tweefontein MF2 project has commenced with commissioning anticipated during H1 FY2023.

Sylvania has flagged power supply issues over the past year and expects to roll out power mitigation strategies in FY2022.

Broadly stable net cash is a good result considering $2.4m of ongoing capex, $35.5m in tax charges, and the payment of a $14.3m windfall dividend. Cash reserves allow Sylvania to continue funding both growth and maintenance capex, and asset exploration and evaluation.

​​Cash generated from operations before working capital movements was $29.0m with net changes in working capital amounting to $14.7m, mainly due to a change in trade debtors.

Commenting on the Q4 results, Sylvania's CEO, Jaco Prinsloo said:

Whilst the record profits realised in Q3 were boosted by the spike in the price of rhodium and its effect on our basket price, we have seen quite a pull-back in the rhodium price in recent months which has inevitably impacted the Group's revenue and profit for Q4...

Regarding civil unrest:

The Company notes enquiries made by some shareholders pertaining to the recent spate of civil unrest experienced in two of the country's provinces and any potential impact to Sylvania's operations. Where the Board acknowledges the devastating effects the unrest has had on the communities affected, the Directors wish to assure shareholders that there have been no impacts to operations to date. SDO are located in the provinces of Mpumalanga and North West where no protest action or riots have occurred and, as such, operations continue unabated. However, management continues to monitor the situation and to evaluate potential risks to operations, particularly from a supply chain point of view and to ensure that any potential risks are mitigated.

Conclusion

Given a year of Covid disruption and, more recently, social unrest I would view the production results positively. What has spooked the market is likely the drop in basket price from Q3 to Q4, alongside residual unease regarding recent riots.

So far, while the unrest is sobering, its impact on SLP operations has been overstated by the market.

But the fact remains that cash costs have increased and the gross basket price has come down. What is equally important to note is that this is quarterly data. Trends are of course important, but if you are making your decisions based on multi-year outlooks then they should be placed in context.

In such situations, seeing through the short term noise and volatility can be a challenge. Today’s basket price is still up on the first and second quarters of the financial year.

What’s important are your thoughts on the underlying fundamentals of these PGM markets. With rhodium supply in deficit and some strong demand drivers, the same arguments are still intact.

Even at the current basket price and with cash costs as they are, it is not unreasonable to see the cash balance doubling over the next year to closer to the $200m mark. And today’s cash balance, coming after a substantial dividend payment and tax charges, is still well ahead of broker forecasts made as recently as April.

Still, the metals and mining space is not generally a comfortable ride and rhodium is particularly volatile. The market forces that lead to euphoric share price gains can go just as easily the other way, with volatility both to the upside and downside. Today we are experiencing the latter.

This has become a hot part of the market, so it’s always possible that some of the money attracted to PGM stocks will flow back out. I can imagine some of the numbers put out by PGM producers in recent months have attracted shorter term investors and traders banking on a continuation of the Q3 spike.

Yes, cash costs are going up and the basket price has fallen over the past couple of months. But these factors at present continue to be outweighed by a longer term appreciation in basket prices driven by an ongoing positive supply/demand outlook for PGMs.

Annual net profit is up by more than 130% and the cash balance is around a quarter of the market cap. The group still looks cheap, in my view. But it’s still a volatile stock with commodity price risk.

I’ve got full year net profit at just under $100m or c36 cents per share, putting the shares on roughly 4x earnings. Using Liberum’s FY21 expected EBITDA forecast of around $149m, the shares trade at less than 2x EV/EBITDA.

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Robert Walters (LON:RWA)

Share price: 726p (+1.68%)

Shares in issue: 76,310,780

Market cap: £554m

This is a specialist professional recruitment group. Lots of companies in this space are reporting strong trading and RWA is no different (see recent coverage here and here). The share price is now comfortably ahead of pre-Covid levels as it becomes more apparent that this part of the market is doing well.

Given the above, it seems appropriate that the group currently qualifies for Stockopedia’s Earnings Upgrade Momentum screen.

The company was established in 1985 and today recruits across the accounting, finance, banking, IT, human resources, legal, sales and marketing, supply chain, procurement, engineering and support fields.

What perhaps separates it from some other recruiters is RWA’s international operations. It has offices in 31 countries with ‘strong local foundations’ and ‘unique insights into local industry and culture’.

Half year results

Record first half performance. Profit ahead of expectations… Wage inflation returning as demand for talent outstrips supply.

Highlights:

• Revenue -6% year-on-year and -26% on the same period in 2019 to £468.2m,
• Gross profit (net fee income) +5% on H1 20 and -19% on H1 19 to £166.2m,
• Operating profit +474% on H1 20 to £24.1m and +8% on H1 19 to £22.1m,
• Basic earnings per share +428% on H1 20 and -3% on H1 19 to 20.9p,
• Interim dividend of 5.4p per share (+20%)

Recruitment activity levels across all professional disciplines accelerated through the first half of the year.

Permanent recruitment now represents 67% (2020: 62%) of the group's net fee income. Some 79% (2020: 77%) of NFI now comes from international businesses and Asia Pacific is RWA’s largest region, accounting for 45% (2020: 40%).

The group notes an ‘acute shortage of professionals right across the region exacerbated by Covid impact on immigration and the mobility of talent’ here.

Europe net fee income grew 2% to £45.2m thanks to a rebound in France and Spain. UK net fee income was down 3% to £35.2m, although operating profit increased from breakeven to £3.3m. UK activity was strongest across commerce finance, legal, and technology.

Activity levels in Resource Solutions, the recruitment process outsourcing business, were impacted by lag effect of organisations rebuilding recruitment teams at the beginning of recovery cycles.

Other International (the Americas, Middle East and South Africa) net fee income fell 12% to £12.1m producing a 389% increase in operating profit to £0.6m.

RWA is investing in additional headcount to capitalise on market momentum where appropriate. It expects to add c200 people in H2 (current headcount: 3,230).

Net cash of £122.8m as at 30 June 2021 (30 June 2020: £119.0m) plus a £60.0m committed loan facility due for renewal in 2024. Of this, £9.4m is drawn down.

Conclusion

The balance sheet looks fine and trading momentum is strong here. Will this continue, or might it moderate? RWA sounds very optimistic, commenting that ‘a war for talent and significant wage inflation is beginning to emerge’.

It adds:

Trading is comfortably ahead of current market expectations for the full year, and we enter the second half of the year with cautious optimism and confidence that we will continue to take advantage of market opportunities as they arise.

Clearly recruitment is a strong part of the market that warrants a closer look assuming current trends continue. Today’s share price looks to be fully justified. These are cyclical companies of course, but for now most indicators are pointing towards buoyant near-term prospects.

The StockRanks are flagging it up.