Small Cap Value Report (Tue 28 May 2019) - AFHP, RFX, SONG, GOAL, ALT, RNO, ALB

Tuesday, May 28 2019 by

Good morning!

Welcome back after the long weekend. The political noise in the background is very loud, but we will crack on with a look at companies:

AFH Financial (OFEX:AFHP)

  • Share price: 335.3p (+8%)
  • No. of shares: 42.6 million
  • Market cap: £143 million

Half-year report

This is an ambitious financial stock, looking to achieve funds under management (FuM) of £10 billion within a 3-5 year timeframe. FuM are currently £5.4 billion.

It has several hundred IFAs working for it, and describes itself as:

"an IFA business acting as gate keeper to the wealth management sector through its primary position in the client relationship"

Most of the gain in FuM in H1 was from acquisitions, with only about 20% representing organic inflows.

The main theme with this share seems to be consolidation in the IFA sector. AFH's strategy is to use its size to reduce platform and fund management charges, boosting margins (the target underlying EBITDA margin is 25%). Acquisition opportunities are found, for example, with retiring IFAs who are looking for an exit.

Balance sheet

Reading some of the small print, I note that AFH's receivables book has grown from £13.6 million to £22.1 million in six months. Its intangibles, naturally, have increased too, during the acquisition spree.

The company's financial KPIs are all about top-line growth and margins, which can sometimes be achieved at the expense of optimising the balance sheet. Just something to keep an eye on. This share's Quality metrics, according to Stocko, are just average (e.g. Return on Capital 9%).

The company has negative tangible equity (negative to the tune of almost £20 million). This isn't necessarily a problem. For AFH, most of the liabilities are contingent consideration, so I guess they can be paid out of future profits. While there is likely to be an element of financial risk, my initial…

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All my own views. I am not regulated by the FSA. No advice.

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37 Comments on this Article show/hide all

Whitbourne 28th May 18 of 37

In reply to post #478826

Thanks David,

Key metrics going forward look like being number of AIM customers, Transactional value, Tiered package sign ups and then revenue, profitability & cashflow. That makes sense to me.

It makes sense to me too and I wish the company had been equally clear - and set out the numbers in a table as they've done before.

I don't mean to be grumpy, it's just that doing this well isn't so hard and I don't understand why companies employ expensive financial PR firms who then fail to give them basic advice on how to write a user-friendly RNS.

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davidjhill 28th May 19 of 37

Galliford Try (LON:GFRD) At a slightly higher than our usual market cap it was interesting to see this morning confirm that its house builder arm had been subject to a £950m bid from Bovis. That is a 50% premium to the entire group market cap and excluded £100m of debt being take on. That would have meant 850p in cash to shareholders.

Residual group would have remained as fully listed entity, and looks to me like it would have a circa 200p value, largely attributable to partnerships and regeneration with some value on construction assuming the reset 2% operating target margin is met.

So this feels like a 1000 to 1050p event for £GFRD shareholders, almost double existing share price!!! I wonder why that was rejected by management. Either they genuinely believe it undervalues the group on a 3-5yr view, in which case they now need to deliver a share price of 1200p+ or they have stiffed shareholders from an immediate realisation of value, through either some misplaced over optimism, or worse!
I am fearful of the latter alas, and from a shareholder perspective would now want all incentive award metrics to be reset at achieving in excess of the value of a straight sale plus an annual ROE %age........that would focus management minds on shareholder value!!

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jonesj 28th May 20 of 37

Ref: AFH Financial
It's a little tricky to assess this as Stockopedia doesn't have the data & the other sources I googled were not comprehensive either.
However, they have had at least one placing within the last 12 months, for over 10% of market cap.
For companies that issue new shares to fund acquisitions, it would seem reasonable to correct the PEG for this.

As for Ramsdens Holdings (LON:RFX),   whilst they do pawnbroking like H & T (LON:HAT), from analysis earlier in the year, the pawnbroking was only responsible for about 25% of Ramsdens gross profit, compared with about 50% at H&T.    Travel money contributed 40%.     

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Firtashia 28th May 21 of 37

In reply to post #478821

Great stuff, iwright7, well done. Commentators regularly advise PIs to stay away from IPO's due to concerns about who is selling to them and why. Yet there have been a significant number of high quality companies floated in the last 5 or 6 years that would have handsomely transformed the portfolio of a PI who chose not to tar all IPOs with the same brush. Kainos (LON:KNOS) and Ab Dynamics (LON:ABDP) are two of them, Boohoo (LON:BOO), FDM (Holdings) (LON:FDM), Fevertree Drinks (LON:FEVR), Watkin Jones (LON:WJG) and Softcat (LON:SCT) are others I can think of off the top of my head.

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aflash 28th May 22 of 37

In reply to post #478736


There is a Stephen English video review of his portfolio when he talks about 1) the profit warning 2) his knowledge of the company. It is not in the P.I. world series, I cannot pull it up at short notice, maybe someone else can.

I bought after that and was briefly in profit. Now down slightly but keeping the faith.

K3C (K3 capital) has a very interesting participation model, close to private equity principles but without loading the target company up on debt.

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Mick Harkins 28th May 23 of 37

In reply to post #478846

Totally agree with you Whitbourne, regarding ALT.

All sounded a bit iffy to me:
- as you mentioned, the change of focus and no longer tracking the previous key KPI;
- a wishy washy outlook statement, mentioning that they are ‘pleased with progress’, ‘look to the future with confidence’, etc. Why can't they be more concrete and say whether they expect to meet/beat the current year market EPS forecast of around 7p per share!?;
- talk of changing the year-end accounting date from Dec. to Mar. Always a red flag and the reason given (to bring the Group more in line with the US promotional product industry and would provide a better accounting cut-off date for auditable visibility of revenue due from those suppliers on calendar year settlement terms)...didn't make much sense to me.

FWIW, I sold the majority of my holding first thing and will keep watching as IF they can do the 7p EPS this year they are undoubtedly very good value at this level...I just doubt they will.

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JohnEustace 28th May 24 of 37

Re Altitude (LON:ALT) there's an interview with the CEO recorded today by Proactive at

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mojomogoz 28th May 25 of 37

In reply to post #478736

I bought some £K3C at recent price lows and have spoken to CFO at length about business and model. Obviously no guidance on the big potential corporate finance transactions that are delayed other than they are still contracted with them.

CFO says big deals have partly slowed down as forward order books have become cloudy so slowing acquirers down as they look for clarity or, my assumption, they are looking for a nice price cut. This seems plausible. He also confessed to randomness in these things and effectively talked down the the extent to which these large deals should be part of the forward valuation for K3C. Obviously, the internal stock owners (who have a lot of the company) are feeling sore about the fall in paper wealth from these and want to set a stabler footing in future...will be interesting to see how they talk this in the annual report.

Talks up the prospects for 'corporate finance lite' business segment which sits below the big corporate finance and above the mid size (for them) corporate services business. I think the point here is that the prize commission is still large (>£100k on £5m+ deals, whereas as the elephants are >£500k per case) and they feel it fits closer with their process driven sales model rather than high maintenance big deal hand holding.

Small and mid sized deals doing better than previous years. Overall, they are working their way up the value scale. Years ago they might be selling lots of chippies whereas that's less common (less valuable) and more likely small engineering shops at the bottom end.

I didn't discuss the dividend (he can't say anything worthwhile) but there's a high chance its cut when they release results given their payment formula. If there's no clarity on big deals or the report they've died away then this could hit the price. IMO that would be a buying opp

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john652 28th May 26 of 37

In reply to post #478826

Hi David, I posted this in Matilda’s thread this morning ‘’Re Altitude (LON:ALT), jury out for me on this, I think CEO is inexperienced in dealing with results for the market, as is chairman but the narrative in the report is a mess. It’s hard to follow, very wordy, not clear what service, software, revenue stream relates to what. The only mention of kpi’s Is saying what was their main KPI now longer is relavent!! Ffs! At Mello they have numerous slides on ‘think promo now’, a big service, but now no mention of it, very poor. There might be a big opportunity hidden in here but no clear number, as KPI’s in a table, showing previous and current numbers for members, users etc is an amateur error, or worse. Poor.’’

My issue is there is no context, 149 supplies have signed up to the new three tiers, 149 out of how many, are they the biggest suppliers or the smallest, how many signed to what tier.

I agree Aim Tech Pro growth looks fantastic, but they are dropping this focus and KPI. In the video link John E posted the CEO is ‘very excited’ about all sorts but I don’t follow that they get revenue no matter how the order is placed, online, a fax (really), but surely getting buyers into the platform is still needed.

‘Think promo now’ was a mello main slide growth area, isn’t even mentioned! 

In summary, the results raise a lot more questions than they answer, which isn’t very useful in figuring out if this is a fantastic opportunity or another disaster like Tungsten Plc, of which there are a number of similarities.

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aflash 29th May 27 of 37

In reply to post #478736

Here you go, about 4 minutes in. The dividend seems part of the original business model..

Older video than I remember, must have found it after the profit warning.

Also talks about Accrol before it unravelled,...

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Graham Neary 29th May 28 of 37

In reply to post #478791

Hey SundayTrader, thanks for recommending Renold (LON:RNO) yesterday. Covered it. G

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mojomogoz 29th May 29 of 37

In reply to post #479001

Thanks for vid


Based on policy and current mgt EBITDA expectations £4.5-5m (compares to bumper £7.5m in 2018 and EBITDA is very close to pre-tax for this capital light cash on balance sheet co) then dividend will be nearly cut in half and the stock will be on a 20x current earnings.

Its hard to know how the market takes this. My guess is that there is some upside to the £4.5-5m EBITDA by end of May just from ongoing business below the supersized corporate finance stuff. Mgt style seems to be to lowball IMO rather than account for the future hopefully. Below the big corporate finance transactions they are transacting with more and bigger clients in general...operating well and growing....

That hints to me that £4.5-5m could be known non-contingent fee income over April and May (recognised over term of contract not when paid at beginning of contract) with no assumptions on contingent fee income for those two months. That would mean adding approx 30-40% on top of their assumed non-contingent fee income over this two month period (1/6th of year so guessestimate this could be extra £250-500k depending on business mix). My hunch (and its totally that) is that they will not have assumed anything but the absolutely most visible non-contingent fee at most.

In addition, conservative forecasting could mean that they have not forecast any new business in that 2 month window...if that's the case there could be up to an extra £1m in fee income.

My impression from contact is of a business that is confident and working well and is doing better than last year in terms of volume of clients (just not the very big fish high £££ finishes) but tends to work with a cautious even pessimistic outlook as a way to be prudent in it business management. This is a hunch by me and 2019 results when they come will be the proof point. On balance, I think its likely that they included a run rate level of non-contingent fee income in their expectations for last 2 months but that this had a safety haircut applied to it...guess the figure and call it 30-50%.

Conclusion from the above. There's a high probability IMO that they lowballed their EBITDA by about £500k. Completing a whopper is a straight c.£500k onto EBITDA too. In 2018 they had approx £6.6m of contingent fees from the whoppers so they are losing a lot of that (I don't think its all but it is a majority).

Some K3C watchers are looking at the company website where they report completed deals for a clue as to whether whoppers have been landed. I think its is unlikely they would post them there (even with deal size blanked) as it would be material information and would need a RNS. I suspect we are in the dark until early June update as to whether they landed any whoppers.

Stocko estimates are too high based on what the company is guiding. I started this with what I believe current p/e and dividend is based on what they say. My discussion then explains why it will be a bit better but uncertain how much better. So, what's going to happen with share price?...

This is interesting. I have bought a half position as this is a high quality business long term. However, there's a real uncertainty gap that needs to be filled with some current facts (not as the company is not being straight but just a combo of conditions and the expectations in market or at least what is on stocko). For there to be upside surge on the share price when they update for the year end then I believe K3C needs to have landed (ie closed the transactions) 2-3 whoppers in April and May. Possible but not something that can be bet on.

To hold the current price and have high expectations not shattered (with the really the guidance they have already given but not in the forecast numbers from market/stock!!) they need to have landed a biggie and/or had a surge in non-contingent fees.

No whoppers landed and there's probably downside in the price. If I'm wrong about company conservatism above then the downside could be sharp and we see a price spike below 100p. That will be a helluva buying opp IMO.

Note, Its possible that they decide to 'signal confidence' and use some cash on balance sheet to bolster 2019 dividend. That too will probably support price.

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brucepackard 29th May 30 of 37

In reply to post #478746

Thanks for your opinion. Do you have any evidence to support your assertion that you "think things have moved on" from Cowan v Scargill (1984) ?
Or is that just your opinion?

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timarr 29th May 31 of 37

In reply to post #479191

Thanks for your opinion. Do you have any evidence to support your assertion that you "think things have moved on" from Cowan v Scargill (1984) ?
Or is that just your opinion?

I don't know about investing in competitors but in terms of the original comment about pensions schemes investing in oil and gas there has indeed been a change in the pension regulations which require trustees to take ethical considerations into account. For example:

It's not clear to me in principle whether this changes much as the trustees still have to have the interests of members as their number one priority, but it does look as though a determined set of trustees could institute ethical policies around (say) climate change and make these stick.


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shipoffrogs 29th May 32 of 37

In reply to post #479191

Timarr largely covers it - there's much more of a debate in pension schemes and institutional investment about ethical matters, corporate governance, climate change etc than there used to be where arguably there is a wider interest than immediate financial gain - it's getting blurry.
And there is a case for arguing that investing in competitors is detrimental to member interests, that's not just my opinion.

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JohnEustace 29th May 33 of 37

In reply to post #479221

The Church of England ethical investment guidelines tick all the boxes including climate change.

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mojomogoz 29th May 34 of 37

In reply to post #479176

Well, for the sake of thoroughness I realised I should check the trading update from last year. Doh! ...

It blows my conjecture out of the water in that for FY18 the appeared to have provided guidance that does contain assumptions about how non-contingent fees will be earned at least and probably also contingent.

In that case the guidance from management is good and current expectations are well ahead of what they have guided! Needs big transactions to close to make a big difference!

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jonesj 29th May 35 of 37

In reply to post #479236

I'm not sure what percentage of company pension schemes have any form of company input any more.

The old defined benefit schemes may have some company trustees, but the newer defined contribution schemes tend to have a few default funds managed by the large fund managers and the employee can typically choose different funds if so desired. So the choice is with the employee, albeit with a limited list of funds.

Once the employee moves to a different employer, it's easy to move the money from the old scheme straight into a SIPP, providing even more control. So rather than hypothesizing over how others should invest, we can choose for ourselves.

I have no qualms at all about investing in oil companies, tobacco, defence etc. Until I stop consuming diesel, gas, plastics and anything else that requires them, it would be hypocritical to blacklist the oil producers. Furthermore, even though it might be the right thing to do, Britain closing a few coal powered power stations will have negligible effect on the climate, if they continue to build coal fired plants in China, India, Vietnam etc.
Whilst on the subject, all these climate protesters should realize that Britain is doing quite well on carbon reduction compared with Germany, which is carrying on burning coal for a high percentage of power generation.   Better to protest in Berlin than London, assuming they set the right example by cycling there of course.

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JohnEustace 29th May 36 of 37

In reply to post #479251

Before we get too smug about our carbon reduction I would point out that we have largely stopped making things here and therefore shifted a share of our carbon footprint to those dirty coal plants in the rest of the world.
Ed Miliband et al found it too difficult to take the whole supply chain into account when setting policy.

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timarr 29th May 37 of 37

Before we get too smug about our carbon reduction I would point out that we have largely stopped making things here and therefore shifted a share of our carbon footprint to those dirty coal plants in the rest of the world.

It's a good point. This is the most recent article I can find (the excellent Gapminder is currently being updated, but last time I looked the numbers were all in the same direction):

If we look at the consumption footprints - i.e. focusing on where the C02 emissions are used (i.e. where goods are consumed) - then we have Belgium, USA, Ireland, Finland, Australia and UK as the main perpetrators, all over 10%. China has only 4.3% and India 1.3%. No doubt those figures have moved somewhat in the last 8 years, but you can see the point: coal burning power stations in China that are needed to manufacture goods for developed nations are simply outsourcing our carbon production.

Also we need to consider that historical C02 emissions hang around for centuries, so in terms of the worst offender overall it's the USA by a long way. And if we look at current emissions per capita then China and India at 7.5% and 1.7% are way behind the worst offenders - the USA, Australia, Canada and those eco-friendly Dutch:

Like all statistics we need to look carefully at who's delivering the message and why. It's pointless expecting people in emerging nations to not want washing machines and fridges, but if we're not to leave our grandchildren with an unmanageable legacy we need to figure out how to decarbonise - and fast.


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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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