Small Cap Value Report (Tue 28 Feb 2023) - ELIX, NEXS, SSTY, MCB, AO., KITW

28th Feb '23 by Paul Scott

33 comments 7453 reads

Good morning! It's Paul & Graham here.

Today's report is now finished. That was a good 6 hour stint today, plus 2 hours last night, which is the most my eyes can cope with, so we'll leave it there for today.

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.

Paul's Section:

Kitwave (LON:KITW)

235p (up 7% at 11:44)

Market cap £165m

Final Results

Kitwave Group plc (AIM: KITW), the delivered wholesale business, is pleased to announce its final results for the twelve months ended 31 October 2022…

Kitwave is a delivered wholesale business, specialising in selling and delivering impulse products, frozen, chilled and fresh foods, alcohol, groceries and tobacco to approximately 42,000, mainly independent, customers.

I’ve got a favourable impression of Kitwave, and checking our archive, I reported favourably on it as good value here on 3 Nov 2022, when it was on a fwd PER of 8.5, with a 5% yield, and a solid trading update for FY 10/2022 under its belt. The share price was 170p then, and strangely there was a delayed response, with the shares only really moving up significantly more recently, in the first 2 weeks of Feb 2023. That’s a 38% share price rise in the last 4 months, so I’m wondering if the price is now up with events? Let’s find out!

Review of FY 10/2022…

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Lefty99

28th Feb '23

I am kicking myself, I needed to raise some cash to complete a house renovation last year and Kitwave (LON:KITW) got the chop. Looking like good results today.

Mark Tughan

Videndum (LON:VID) FY results announced today. Perhaps the market doesn't like what appear to be some impressive numbers because debt has risen and the free cash flow number was the outlier (down)? It complains of "short term macro headwinds", and mentions destocking and some purchase deferrals.

It's been on the watchlist for a while and wondered if other readers feel it is getting into value territory now it has come so far off it's recent (1595p) highs? Or is the market telling us something? Forward PE is <10 now and there's a decent and growing dividend. The company claims to be "uniquely positioned right at the heart of the growing content creation market with attractive market drivers".

I believe it is a Lord Lee long termer, at least it was in September 2020 when I noted it.

Again, like Plantex on Safestay, I'm open to being put off!

TBH I'm sitting on the sidelines right now as I think the rally of the last few months was a little bit too good to be true and might come off a fair bit. Or if you believe Mr Grantham, it's the mother of all bear market rallies!

eParo

AO World (LON:AO.) increases guidance again:

https://www.investegate.co.uk/ao-world-plc--ao.-/rns/trading-statement/202302280700082169R/

So called recession hyped by the mainstream media not happening!

zaracrest

great results from Kitwave which is a well managed company and one of the better ipo s of recent years

The Jayman

I think the debt level is an issue - for memory Paul flagged this when he last commented in November 2022 - and the softening of free cash flow might also be relevant.

£Videndum do have key positions in key market segments which have growth and this affords a degree of pricing power which supports margins.

Believe its been a core holding for Lord Lee for a good 5 years - he talks much of their facilitating content creation which is a rapidly growing opportunity. There are also interesting comments in the following interview (around 56 mins) which emphasises how agile they have been in adapting the business model to anticipate wider trends, e.g., moving away from strictly B2B towards B2C: Stockopedia | Fund manager interview with Stuart Widdowson of Odyssean Capital | By Paul Hill

Like so many shares featured here intrinsic worth and inherent value often don't reflect in share prices for years. I think getting to buy the business with its positioning and exposures at a PER < 10 is attractive, but others may disagree? Of course who knows whether it will be available at a lower price by year-end?

I hold (purchased in 2019 and was fortunate to substantially top-up <£8 in Q2, 2020).

WarrantStar

Kitwave (LON:KITW) I just bought some on today's results. They were on my waiting to buy list. Revenue result £503m compared to forecast of £432m. Eps reported 20p, Adjusted 22p, Forecast 19.1p.

Much appreciated comments The Jayman. I am leaning towards a purchase at what seems to be a good entry point.

Silver Moon

Nothing to do with Roman Abramovich owning 28.6% of Evraz (LON:EVR) then, or the CEO only having been in the job for 5 minutes?

The Boon Fund

On McBride (LON:MCB) - it is definitely not one for widow and orphans. Normally, I steer clear of any companies that has to secure a debt covenant waiver.

But I invested in this month for a few reasons:

Covenant holiday secured until Sep24, so there is plenty of time to sort out the issues
The issues are temporary. Their input costs increased rapidly due to inflation and supply chain issues. But they did not have the mechanics to pass through into unit prices to their customers quickly. But this is temporary - unit prices are now rising, and management is now focused on making sure they are not asleep again on this risk.
Secular demand growth in their sector, which is own-brand products for supermarkets, pharmacy chains, etc. Customers are trading down from branded goods to own-brand products. So we should see sales volume increases. This is backed up by operational metrics, like headcount increasing, and lots of open vacancies.
As sales volume increases, and unit price increases, and gross margin is restored and maintained, then naturally EBITDA should trend upwards. Obviously, there are three "IFs" here; but my view is that all three are low-risk. The momentum is already there, as you can see in the H1 report outlook.
As EBITDA trends upwards, then covenants stop being breached

My scenarios show that by FY24, we could see anything from like £25m PBT to £60m PBT, which would be huge compared to the c£40m market cap currently. Obviously, including the debt means c £220m EV and the valuation on EV terms are not as a screaming bargain as before.

(I hold in the Boon Fund)

iwright7

Paul,

Many thanks for the Elixirr International (LON:ELIX) review (I hold). A few of my notes from their December 22 webinar....

Taking business from the big consultancy firms.

3-5Y Mrk Cap target of $1B.

Employee share scheme to lock people in.

abtan

Videndum (LON:VID) (I hold)

Hi Mark (and Jonno)

I was quite disappointed with today's results; they didn't really give me much insight into future progress and I'm left scratching my head at what to do.

---

It seems clear that 2023 is going to be a stagnant year with possible upside coming later...but that applies to a lot of companies at the moment.

I'm also wondering when management are going to be able to meaningfully bring down the current high debt levels.

In the call just now they made a point of emphasising that this is a priority, but with higher finance costs and tax rates about to kick-in, I question their ability to do this.

There were a lot of adjustments again this year - primarily related to acquisition integrations and restructuring.

These looked to have taken £20m of cash out of the business. If these were truly exceptional, then their absence next year could really increase the debt position

Organic growth was +1% YOY, although for transparency this was all due to H1 performance.

Growth in North America was excellent and underlying operating margins went up across the board. This doesn't seem like a business going bust anytime soon.

I'm also intrigued by the growth in medical, though sadly no numbers have been given and I didn't think that they revealed much on today's call.

Interest-bearing net debt is £158.7m, which is high.
The company has a market cap of £440m as I write = an EV of c£600m.

I put Cash Generation for 2023 at between £20m and £45m, which for me is quite low relative to the above EV.

But if growth kicks in from 2024 and the company gets back on track for £100m operating profit in the next few years, then the debt will be repaid quickly and the current valuation will (obviously) look far too low.

But this of course applies to a lot of companies right now.

I see the share price has ticked up this morning, but I must admit to being more tempted to sell and buy back in when the story improves.

TEIN

They can publish after the market has closed and still hit their target of 'late February'! It's easier to think of down rather than up side in this scenario though. The price has been bouncing up and down rather since mid last week. (I hold)

Paul Scott

Thanks Boon,

It's great to hear someone clearly & logically explain the speculative upside potential on McBride (LON:MCB) - very well put.

I've also been giving some thought to the bigger picture side of things, that we could see many companies rebuilding their margins in the next year or two, particularly as freight costs have drastically reduced, and raw materials costs might reduce. That could give companies like MCB a chance to rebuild margins, and as you say, the high debt gives potentially big geared upside to equity.

We saw after both the 2008 and 2020 crashes, that some of the 10+ baggers in subsequent years were companies that looked like they could easily have gone bust! So I do think there's an argument for putting a sliver of our portfolios into riskier stuff, at this stage of the cycle.

Although whether banks will be quite so forgiving, now that interest rates have materially risen, is a big risk to this strategy.

My normal position size is about 5-10% of my portfolio (quite high, as I like a concentrated portfolio). But for the riskier things like MCB, I would probably only risk a position size of 2-3%, tops.

But if there's say a 50% chance of it going bust or being heavily diluted, but 5-10x upside on the equity if it recovers, then it's worth considering taking that risk, if you can afford to do so.

We focus on mainly pointing out the downside risks in the SCVRs, but experienced investors can then make up their own minds to take selected risks, fully armed with all the facts & figures. High risk can be high reward, sometimes!

Regards, Paul.

dunns_river_falls

Thank you for your efforts Paul + Graham. Really appreciate your views. Also to Mr Contrarian - very useful summary each day!

Snazzytime

Thanks for your commentary on this one Paul. Agree with all you say and would just add a few things.

This company was established in 1987 and has grown organically and by acquisition since inception. It is led by the founder who retains a 15% shareholding so he is very much aligned with shareholders. He did not sell shares at the flotation. The IPO raised £50m primarilly to reduce debt and allow for further acquisitions. So it's not hard to see why they have coped far better than most of the 2021 IPO dross.

Net debt, excluding leases, at 31/10/22 was £14.8m (0.5 x EBITDA). None of this was bank borrowing. The gross debt of £20.3m was all by way of invoice discounting.

Post balance sheet date Kitwave undertook a £21.2m (net) acquisition of West Country Food, wholly funded by debt. Add this to the invoice discounting above and net debt increases to £36m (1.2 x EBITDA).

Debt levels remain acceptable but shareholders should keep a close eye on further debt fuelled acquisitions.

I hold.

Snazzy

Indeed! McBride (LON:MCB) is definitely not one to go "big" in a portfolio, unless one has intimate knowledge of management, industry, and the financing situation. There is a sizeable risk it goes to zero. All it would take is another shock to come along.

Just had a second skim through the HY results. The numbers are staggering:

£97m of price increases YoY
£88m of input cost increases YoY
£8.5m of extra transport costs YoY

One can imagine when inflation moderates, but they manage to get another £97m of price increases (given that price increases usually lag cost input increases), but cost increase of £0 and transport increase of £0, that's a whopping extra +£97m/HY, +£194m/FY to the operating profit. Compared to a £220m EV.

Even if you assume only the final price increase is a quarter of that, when cost inflation is at zero, then that's still +£49m operating profit. Staggering scenarios. Just not sure how likely this scenario is. This is the first inflationary period I've gone through in my investing career!

Roger Baron

Tekcapital (LON:TEK) has been discussed here a few times most recently on the 20th by Paul. I have just listened to a recording of yesterday's Investor Meet Company presentation by CEO Cliff Gross,. Hadn't heard him before and I was very impressed. Worth a watch/listen if anyone is already investing or considering doing so. I have held a couple of years and have been topping up. Not for widows and orphans maybe - but I will be leaving a note for mine telling them not to sell.

Raleigh4343

I hold. Thanks for the nod to the interview. Will look it up.

xerxes

Thanks Paul for the Kitwave (LON:KITW) write up - I shall continue to hold!

Ross55

1st Mar '23

I wonder if anyone can help me through this logic as I feel that I could be missing something. On the face of it, Nexus Infrastructure (LON:NEXS) seems like a quasi-arbitrage opportunity. You could purchase the company for £75m, have £63m returned, leaving you with £12m exposure for the one remaining business operation (Tamdown).

Looking at the most recent Balance Sheet disclosure (Sep 2022) and ignoring the assets and liabilities held for sale, would I be correct in saying that the net working capital is approximately £18m, which I calculated as Trade Receivables, Contract Assets and Cash and Cash Equivalents minus Trade Payables and Contract Liabilities? This will then be supplemented by £12m of retained cash from the sale, leaving you with approximately £30m of net working capital to make Tamdown a success.

Tamdown has shown historical profits, although did post a loss of circa £1m last year and they are in the midst of their 2 year turnaround programme. Is it therefore fair to assume that Nexus should be worth, at the very least, its net working capital? If this is the case, then does this not mean we have an opportunity to almost treble our post tender investment?

For illustrative purposes, you could invest £7.5k today, have £6.3k returned leaving you with £1.2k invested that could be worth £3k if the company is trading at its net working capital value. I think I have done a bad job explaining this! Lol

Small Cap Value Report (Tue 28 Feb 2023) - ELIX, NEXS, SSTY, MCB, AO., KITW

Paul's Section:

Kitwave (LON:KITW)

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Paul Scott

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