Small Cap Value Report (Tue 28 June 2022) - KLR, WAND, PCIP, APP, IGR, POLR

27th Jun '22 by Paul Scott

31 comments 7739 reads

Good morning!

Agenda -

Paul's Section:

Here's something I prepared last night -

Keller (LON:KLR) - my first look at this niche, but large, international contracting business. It looks surprisingly interesting - low PER, decent balance sheet, and a potentially large Saudi Arabian contract win. I'd like to hear what readers think, who know more about this share than I do. Very impressive long-term track record of generous divis too. I'm intrigued, at a first, superficial look.

On to today's news -

WANdisco (LON:WAND) at long last, a serious contract win of $11.6m, with half receivable up-front. This looks significant - has this jam tomorrow cash burner reached an inflexion point where it might become a viable business? Looks interesting.

PCI- PAL (LON:PCIP) - update on patent infringement claim against it by a competitor. It's difficult for non-experts like me to judge how things might pan out. There's a positive sounding trading update buried in the announcement. Looks interesting, as organic growth is superb, albeit company still loss-making.

IG Design (LON:IGR) (I hold) - an interesting potential turnaround here. Not without risk though, but I like it.

Graham's Section:

Appreciate (LON:APP) (£54m) - This financial company’s main strength is in gift cards, especially for corporate customers and their employee reward schemes. The company announces full-year results today, and a small acquisition whose purpose is to speed up the growth of its B2B division. The results are comforting, the dividend increases, and the stock remains cheap according to conventional value metrics.

Polar Capital Holdings (LON:POLR) (£547m) - This fund manager has recently suffered outflows. Its fund offering is weighted towards technology, and outflows for FY March 2022 were concentrated in that area. However, other investment themes have been holding up better, and Polar has been attempting to further diversify its offering. The stock offers shareholders an attractive yield (>8%) while they wait for investor confidence to come back.

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…

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About the Author

Paul Scott

Premium Member

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

31 comments

planetx

28th Jun '22

I have held MS International .

Positives are good sector (defence) , loads of cash , good asset backing , Profitable .

Valuation is great and a bit of a classic Ben Graham share .

What is not to like though is the excessive executive pay and it is basically run for the benefit of the directors .

I sold out because of that ,at the time I was on a significant holding and with them being down the road I asked if I could meet the chairman go take a walk round and was introduced to him by company secretary but he never even replied .

That was “over the line” and I enough for me , we had a crude saying at my company that always served us well “We don’t work with wankers”

Sorry for the vulgarity but is actually quite a good rule .

Also hard to buy and illiquid .

But super solid company with assets and cash , you might get rich , management will for sure milk this cow for excessive reward and salaries which I think are way over the market rate .

I’m balls deep in Holders technology where the chairman , founder , and majority shareholder pays himself 20k a year ! This is “founder mentality “what I’m looking for in the very illiquid potential value traps .

BritishExpat70

28th Jun '22

Pleasing to see the momentum continues with Marlowe (LON:MRL) results today. Impressive track record of buy & build, in a non-discretionary compliance sector, and some strong progress with their transition to software. I already have my full holding size in this, down 20% on my investment to date, so I am hoping that patience pays off. Views and counter perspectives appreciated.

planetx

28th Jun '22

Two thumping great 500k buys at Sureserve yesterday .

Possibly Christopher Mills filling up .

Look for RNS

paulhunt999

28th Jun '22

£KEL A friend of mine was involved in the engineering consultancy side of building one of these amazing new cities out in the Middle East. They always had to wait forever and had trouble getting their money and then had to haggle for it which is why I don't invest in companies that have a lot of Middle East contracts

TheFloatingInvestor

28th Jun '22

Straight from Wynnstay (LON:WYN) RNS today.

"Revenue up 34% to £335.66m (2021: £249.71m), with significant inflation - accounted for c.£80m of the rise"

Pretty chilling insight into the effect of inflation on those companies unable to pass on costs, Wynnstay seem able to pass on costs currently.

truegent

28th Jun '22

Hi Graham - actually you *can* spend Love2Shop vouchers at Amazon, you have to log in to your Love2Shop account on line and select the option to exchange part (or all) of your Love2Shop balance to an Amazon gift card, which you can then use on Amazon...a small workaround but it can be done !

illiswilgig

28th Jun '22

MS International (LON:MSI) (I hold)

Mcap £45m (before results)

Price 277p (before results)

Audited accounts released around 7:30 this morning – might have been missed by the early birds – from this Doncaster based micro-conglomerate of Defence systems, Forgings, Superstructures and Branding divisions.

Results are much improved with Profit before Tax at £5.97m ( 1.59m) and 30.9p eps ( 7.2p) both of which are ahead of my – admittedly downgraded – expectations of 5.6m pbt and 25.3p eps.

Cash has risen to £18.1m (£17.4m) – a significant pile of cash compared with the market capital – and reduces the enterprise value to £26.9m ( on yesterday’s mcap). With profit of £4.932m the

Mcap/Earnings is 9.1x

EV/Earnings is 5.5x

at yesterdays 277p

Not expensive, arguably very cheap considering the prospects for the company. But then most companies are cheap at the moment and I expect MSI to be rated upon its continued improved performance rather than on its prospects.

I recognise that MS International (LON:MSI) is not to everyone’s taste being a perfect storm of illiquid micro-cap, based in Doncaster, with Defence interests and something of a patchy record (yes that’s an intentional understatement) for investor relations (and by which I mean those investors who are not relations of the family which controls the company) and corporate governance. I’ve tried to put into this note why I see this company as an attractive investment despite – and also in some ways because of – the nature of the board of directors.

I’d expect the share price to rise a bit today – but it’s notoriously illiquid with the executive chairman and family members the largest shareholders – and only 3.3k shares traded daily on average – so anything might happen for a while.

So what’s happened under the covers for this remarkable transformation – and is it a flash in the pan or the start of more sustainable growth?

The Chairman’s report is short and conservative as is the norm for this company over recent decades. The outlook statement is remarkably upbeat and positively excited in comparison with recent years. But there are no forecasts, not even from the house-broker and no analysts cover the company – so there are no figures to put flesh on the bones of the chairmans statement.

Looking at the segmental breakdown (note 1 of the accounts) gives more of an understanding of whats been happening under the covers.

Defence (primarily naval weapon systems and sensors) and Forgings have increased revenue significantly and the leverage has produced much higher operating profits. Higher than my expectations.

It’s worth putting a little bit more detail into both these divisions. The Defence division has supplied automatic small naval cannon for decades. With sales falling the company invested heavily in R&D for improved products – spurring the interest of the US Navy – and the system won a competition for the supply of a weapon system to the US specification in 2021. 7 out of 8 systems have now been delivered for evaluation and trials – the successful completion of which will lead to the award of a sole source contract for supply across the US Navy and Coastguard for this system. Hard to overstate the significance of the achievement. Selling coals to Newcastle is what comes to mind. Not least for the impact upon global sales of the system and its derivatives.

The company is caution over the award of the sole-source contract. Rightly so as a spanner can enter the works at any time and the US DoD has a reputation for delay and slow progress. On the other hand industry and defence commentators are more positive and looking towards the roll out of this system across both the US Navy and the US Coastguard fleets.

Disclosure. This is the main reason I have built my initial small position – it’s now 15% of my portfolio and my largest holding. But that does say something about the performance of my other investments as well (Tekmar – I’m looking at you!!!!).

Corporate Governance. A short digression. Whilst I’ve been building my position – I’ve also been ‘holding my nose’ – as the company has an appalling reputation for investor relations. Don’t expect them to turn up on Invest Meet Company type platforms! The directors also might seem to have an over-inflated sense of their worth judging by the excessive remuneration.

To be fair the executive chairman (together with his family) is by far the largest investor in the company and together with other directors accounts for over 50% of the shares.

Despite the excessive remuneration and appalling communications – there is reason to believe that the directors interests are aligned with shareholders. And a large part of the current positive prospects are due to the conservative nature of the directors in hoarding cash, investing in property and plant and fully funding R&D in years when shareholders have often considered shorter term solutions to improve shareholder returns. It reminds me somewhat of the situation at GEC under Lord Weinstock when I started my industrial and engineering career in the early 1980’s. Or more accurately what happened once Lord Weinstock was no longer in control.

My bottom line – I don’t like the management, but then I don’t have to, but I do respect their proven ability. The evidence suggests that their relationship with their customers and management teams is on a different level to that of the minority of shareholders who aren’t family or directors. We’re just along for the ride. Presumably we ought to be grateful. Very old school? What happens when Michael Bell retires – is a concern, as is the presence of his son Nicholas Bell as a director.

Forgings. Back to the divisional transformation. The forgings division is an example of long term investment. The division suffered mounting losses over multiple years as work moved to China. The company has invested in automated plant with increased efficiency and productivity at its UK, Brazil and South Carolina forges – with profitability returning. In the current year this improvement has been combined with the re-shoring of work returning from China to produce a huge increase in performance. I don’t see re-shoring going away in the near future, so this division is set to continue to expand on profitable work.

The two remaining divisions Superstructures (fuelling stations and forecourts) and Branding (Signage) – both divisions reporting lower than my expectations – as they have struggled with pandemic related conditions in Europe through 2021. Although revenue is increasing the operating profit is still subdued in Superstructures whilst paused programmes have meant branding remains in operating loss (probably due to extensive restructuring costs and write-downs).

Outlook. It is always difficult to assess the short term prospects for the group as lumpy contract deliveries can mean that contributions from one or more of the divisions will fall – and I expect improved performance at Superstructures and Branding to offset a pause in progress at Defence for the current H1 2023.

In the long term all of the divisions are set to increase both revenue and profits for some years at least by a modest few percent a year and potentially 20% plus with the award of the US Navy contract and increased flow of energy transition contracts for fuelling forecourts (the ability to to mount panels on the superstructure roof and improved kiosk spaces for sales and refreshment while you wait for fuelling) to both Superstructures and Branding.

News of the sole source US Navy contract award will clearly impact the share price in the coming year. But there is lot more to come here through the UK and global sales as well as future product development on both land and sea.

Meanwhilst the dividend has been increased by 1p to 9.25p for the year and the cash-pile continues to build. I wouldn’t discount a suitable bolt-on acquisition for either defence or superstructures in the near future either but I don’t expect them to rush into it, that’s not their style.

I continue to hold my nose – but am allowing myself to take a breath now and then after these results – and may consider taking some profits if the share price continues to rise in the next few weeks. In some ways its healthy that I am in two minds over this investment but there is a distinct possibility I will invest it in something that smells much nicer but loses me money in the current diabolical market!

Cheers

Mark

SCI20

28th Jun '22

This ties in with a conversation I had with an employee of Sureserve yesterday who was excited about the future growth of the business.

Paul Hill

28th Jun '22

Legendary investor Christopher Mills of Harwood Capital talks about Appreciate (starts 34:55), Onthemarket (43:00) , Hostmore (19:10) & 15 other top stock ideas here today.

https://www.linkedin.com/posts...

https://www.voxmarkets.co.uk/a...

Bullygig

28th Jun '22

Results looked good to me, shares down 5%.

zipstuck

28th Jun '22

PCIP - Coffee cup share - worth the risk IMO

Bouden54

28th Jun '22

Can't see the original research note, but the Times article says there are 12 that are considered particularly attractive targets, mentioning DS Smith, Future and Hikma (personally can't understand how DS Smith has not been snapped up at current price as it seems tailor made for PE). It then goes on to list several other potential targets - ITV, Next, BAE, and Flutter.

Boon

28th Jun '22

Interest Rates & Appreciate (LON:APP)

I'm not too familiar with corporate treasury interest rates, but presume they would move similarly to short term gilts? In which case it looks like that FY23 will see rates at least 1% higher than FY22, IMO, possibly 1.5% higher depending on what happens between now and Mar 2023.

That would be adding c£2.5m pre-tax income straight to the bottom line, c£2m post tax profit, c1.0p EPS.

Compared to FY22's underlying EPS of 3.46p.

I note though that monies held under trust has declined over FY22, and wondering if it will too over FY23, in which case maybe the 0.5% = £846k doesn't hold true.

(I hold in the Boon Fund)

Boon

28th Jun '22

On Oxford Biodynamics (LON:OBD) the CiRT product-market fit hasn't been achieved yet - we will know in the next 6 months. However, the cash could run out by September!

"the total cash and fixed-term deposits are relatively low compared to the Group's ongoing cost base and the Group will need to generate increased revenue and/or additional funding during the remainder of the calendar year. Early uptake of EpiSwitch CiRT has been encouraging, as have recent developments such as the signing of a master service agreement with a top-10 pharma company. At the date of this report, the quantum and timing of likely revenue from these developments remains difficult to predict. Accordingly, as explained in more detail in the Note 2 to the interim financial statements, the Board has concluded (as it did in the annual reports for the years ended 30 September 2020 and 30 September 2021) that there continues to be a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern."

Obviously equity fundraisings now are difficult to pull off. I can potentially see the largest shareholder, Vulpes, potentially offering credit. Or maybe deciding to offer a 20-30% premium to share price to take it private, as the IP should be worth more than that.

Either way, I'm annoyed that they didn't raise a bigger amount of money last year, to give them enough of a runway. Mulling what to do with my stake, but it has dwindled to such a small amount (down -60% and what was already my smallest holding when I bought it) that I might just let it ride.

(I hold in the Boon Fund)

Boon

28th Jun '22

Was the Oxford Biodynamics (LON:OBD) webinar recorded for playback?

Richard Goodwin

28th Jun '22

Thanks Mark.Great research on £MSI ! I've kept an eye on it for years but never pulled the trigger.

Graham Neary

28th Jun '22

Re: £APP

Very interesting, thank you! They should include Amazon on their list of accepted retailers for the voucher. G

skyvan

29th Jun '22

What is a "coffee cup share"?

WDWombat

1st Jul '22

I have only just seen these notes, I think the best I can remember. I used to be a holder of IGR (sold March 2019) and pleased to see they are reacting in a positive way to very difficult trading. I don't know Keller but it does look pretty good value and PCIP might be one to look at for those still prepared and able to take risks with micro cap (hopefully!) growth stocks.

Rusty2

2nd Jul '22

I think he means coffee can not cup.

Small Cap Value Report (Tue 28 June 2022) - KLR, WAND, PCIP, APP, IGR, POLR

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Paul Scott

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