Small Cap Value Report (Tue 28 Mar 2023) - ALT, UBG, XAR, MRL

28th Mar '23 by Paul Scott

53 comments 7095 reads

Good morning, it's Paul & Graham here!

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.

SCVR Agenda - Tuesday 28 March 2023

Main Sections

(summaries here, main sections further down)

Altitude (LON:ALT)

Trading Update (ahead) - 47.5p (up 17% at 08:34) - market cap £34m - Graham - GREEN

FY 2023 adj. EBITDA is ahead and broker estimates for 2024/2025 increase. A speculative but promising share. Based on last night’s close, FY March 2024 price/sales ratio is only 1.1x.

Xaar (LON:XAR)

Finals - up 5% to 189.8p (market cap £149m) - Graham - AMBER

Weak 2023 estimates and nobody wants to forecast 2024. Chinese demand, margins too unpredictable. A shame that the company can’t generate better performance with its proprietary technology.

Marlowe (LON:MRL)

Trading Update - down 4% to 480p (market cap £460m) - Paul - AMBER

In line with expectations for FY 3/2023, and the tone of today's update sounds positive. Although on closer inspection, I dislike the very weak, overly indebted balance sheet, and poor cash generation. Looks like they've been in too much of a rush to do too many acquisitions, so it's not for me.

Quick Comments -

Unbound (LON:UBG) - Possible offer - 7.75p (up 87% at 09:00) - market cap £ 5m - Paul - RED

This footwear company was a disastrous demerger from Electra Private Equity. It today…

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Guybrush

28th Mar '23

Thanks for the info davidjhill.

This is a new company to me and I have done no research other than a glance at the stockreports, so apologies if I have misrepresented the company. However, from experince, the Stockreports has provided an excellant INITIAL filter for research, but obviously it is backward looking not forwards(not including analyst projections), so it won't capture any future potentially beneficial changes to the fundamentals. For that yes, deeper research is required.

proffittpar

Hi Silver Moon - yes you are quite right the share price was at this level and although in profit then, it is a long term hold for me and I thought it was still cheap at this point in time hence a decision not to sell, in hindsight a poor one. One of my problems is deciding exit point as when I do share price normally keeps going up rather than down but should stick to the old adage maybe, its never wrong to take a profit.

JASVFS

Thank you Guybrush, checking it out now.

simoan

hVIVO (LON:HVO)

Anyone willing to offer any thoughts on the huge fall over the course of March. For my part I felt it was way overvalued in the 20s comparing it to better established CROs in the normally pricier US with more stable revenues, so a dip was due. But it’s almost halved. And it’s looking sensible value to me today, albeit not much cheaper than industry-leading comparators for a mere niche-leader.

I know it's just me being old fashioned, but why on earth does it take a £100m market cap company with a December year end until the first week of June to release its results? I imagine many holders have just got bored waiting for the FY22 results announcement :)

All the best, Si

Hi Rusty, agree entirely with your comments that Robbies approach works better at least during market volatility in recent years. Argentex reached nearly £1.40 and still looked relatively good value but a decline of 20% since then even with companies in similar sector providing good results. Reading between the lines a few investors have been extremely annoyed that their stop losses have been taken out at a low price which is maybe the reason why the share price has fallen so significantly for no apparent reason rather than Banking sector which surely can't affect every share.

The Jedi Investor

JohnDoe, Profittpar,

Thanks for sharing your thoughts. I've actually found it quite cathartic reading both these posts as I've been having similar thoughts and it's a real mental test at the moment. My portfolio is only relatively small but the constant red on the screen can be hard to take everyday.

If it's any help, I've been reading articles and watching videos of/by Terry Smith who is a famous investor and even he openly admits he's not smart enough to time the market. I'm trying to take comfort in the fact I have a discilplined process and try (mostly badly!) to pick good companies, with no debt and that actually make money and that overtime this will play out as successful.

All the best with whatever you decide,

Rich

yiannos1

You are definitely old fashioned :)

BnB

On a price to sales basis a target in the 30s does look viable but this requires the operating leverage of improving margins to kick in without unforeseen complications. I think a target in the mid-20s splitting the difference between today’s valuation and the blue sky level better accounts for the risks in the model. In other words, still good potential upside and I’ve been watching via alerts on my software for a dip back into this lower band.

So we agree on hVIVO (LON:HVO) and I’ve an order in since 11am at 14p. Who knows how much, if any, will get dealt?

carvalio

I also bet there are a lot of companies that could release RNSs earlier but don't.

bensummers

Is it my impression or many UK domestic stocks are having a very hard March? I'm seeing so many stocks bleeding?

timarr

CMC Markets (LON:CMCX)

So it could be an attempt to sneak out a profit warning or it could be that the company had a board review that day where the numbers were discussed and then released. Hard to tell definitively either way of course.

Of course, these late announcements are never missed by the markets. Given that CMC have done this before, with the same result, in this case it looks like policy rather than subterfuge.

davidjhill

Agreed BnB - I know Mo targets margins in the 20% range over next couple of years. That would put it in similar quality category to Amryt pharma which recently got taken out at almost double.

I think mid 20's to mid 30's is reasonable. There are two other businesses that are hidden in the hVIVO (LON:HVO) balance sheet that will get divested once market conditions turn round (whenever that may be) that should add decent upside. I include them at zero in my calcs for now but am mindful there is a plan to realise value from them when conditions are right.

Yes, and CROs have been selling off across the board this year on expectations of a cyclical downturn - see IQVIA, Medpace, Ergomed, which accounts for a dose of reality setting into the share price.

MetalMaid

I don't know Hvivo but when I look at the stock report, my uninformed view is that this is a long term gamble - no idea about the short term. I can't see any moat or severe barriers to entry. So when I hear someone say they are the only company doing something - my first question is - is their product / service proprietary (ie. IP) or protected through their brand / reputation - or can anyone take them on. I don't know the answer to this - but I think its an important consideration. The worry is that if they have found a very profitable niche, that then would likely attract competition within a sector that is very capex and investment heavy - what is the likelihood in 3 - 5 years that there is still no competition?

Also you say they are highly profitable. However according to the stock report they have been a perennial loss maker! The stock report for their profitability section is horrendous - these numbers suggest they have been selling £10 notes for £9 - not hard to grow a business if you operate on negative margins and are selling at a loss! Also in terms of the 'true profitability', is there a worry that this will be one those companies that incur a lot of regular annual capex in order to keep growing - or do you expect them to be very cashflow generative in the future - again a worthwhile consideration imo.

I do also wonder about the £30m net cash position you mention. As the company appears to have not made any real profit - in fact years of quite high loses. So where has the cash pile come from. I can see they have also heavily diluted share holders - about 10x in 4/5 years! So am I correct in thinking the cash position is actually just investors' money? Also metrics like book value and eps normalised look unimpressive, and although not necessarily indicative of a poorly run company, it also may be something to be weary of.

As I said, I am not knowledgeable on this stock and these are my thoughts after just a cursory 5 minute glance. However the stock report looks fairly hideous to my eyes. Years of building a business on negative margins, negative ROE and ROCE - screams warning bells imo.

Ps. I am usually wrong though. But this is a very open minded discussion board where I think most people want to hear bear views if they have them. So just throwing it out there for further discussion.

Good luck to all holders and I hope this one works out well for you.

cheers

Matt

Silver Moon

Long term holds, proffittpar, are best not neglected in that a selling point is easily missed. My Norcros (LON:NXR) was a two-year hold, most of the holds I have kept for longer were, sorry, are there because they never showed me a gain and I'm still waiting for that delicious moment. Today I look at my peakers: Anglo Asian Mining (LON:AAZ) BAE Systems (LON:BA.) Shanta Gold (LON:SHG) Moneysupermarket.Com (LON:MONY) and decide to watch the BAE Systems (LON:BA.) closely since I'm in profit there and if it twitches, will sell.

Hi Matt - the problem is that you are coming to a turnaround story of two businesses combined by new management and investors and then looking firmly in the past, which is exactly what I'd expect from someone taking a 5 min cursory glance at a bunch of outdated information, that is now completely irrelevant. Like all investments, if you do that you will miss the change in the business. You have to look at more than one piece of outdated information to understand and assess the business.

This a complicated story to go through the history of so I'm not going into that here but I suggest if you have any genuine interest to go and watch a couple of the latest IMC presentations Mo Khan did (or maybe the capital markets presentation) which will give you a much better context.

The business is profitable at all levels and generating increasing cashflow. Post publication of the results they are going to be paying dividends from operating cashflow. It has contracted revenue for the year with over 97% visibility. It has margins of 14-17% and these are growing because the business now has scale. Medium term target is 20%. So no, they are not selling £10 notes for £9. They are now strongly profitable at all levels including FCF, which is what I care most about.

hVIVO (LON:HVO) actually has a pretty strong moat - I've described this before so I'm not going to repeat but check out previous comments on that. It's also in the presentations.

Westway001

I think that's the problem at the moment, there are so many shares that are underwater that as soon as one sees a holding actually in profit, one's instinct is to sell it before it goes the same way as the others!

AcornInvestor

Thanks for your knowledgeable input David. Does it have bed capacity for further growth if it is maxed out this FY do you know?

Hi Rich, my main investment policy is of a similar ilk with a strict screening process and criteria using Stockopedia and the valued commentary provided by Paul & Graham with a bit of intuition, dyor of my own. A few small punts in "jam tomorrow" stocks of my own choice, the jam gets further away each day. Paul is right that not many do produce. Despite the frustration I do intend to hold most and not change my policy and keep the faith that in the long term the well run companies will bear fruit. All the best too.

Hi AcornInvestor

I believe Mo said they have current capacity to support £70m p/a of revenues versus circa £55-60m now. However, revenue growth that exceeds the £70m would have a good few months notice so they don't need to expend capital upfront without contracted revenue.

Note also that they operate a hub and spoke model. The hub is very expensive to replicate, the spokes can be added quickly and cheaply (months I think). Capacity increase is a new spoke so relatively inexpensive.

Small Cap Value Report (Tue 28 Mar 2023) - ALT, UBG, XAR, MRL

SCVR Agenda - Tuesday 28 March 2023

Main Sections

Altitude (LON:ALT)

Xaar (LON:XAR)

Marlowe (LON:MRL)

Quick Comments -

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Paul Scott

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