Small Cap Value Report (Tue 3 August 2021) - BLV, COG, NWF, JOUL, RST

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

Timing - today's report is now finished.

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, otherwise people won't necessarily know what company you are referring to.

Individual company discussion

I've been getting frustrated because we don't have anywhere to chat about, and swap views & information (press articles, etc) on individual companies. Everything tends to get sucked into the SCVRs, and then can be rather scattered about.

So I thought we would trial having some individual company, general discussion threads, to have a single place for general chat about companies. Instead of having to delve into the dreadful negative energy of other free bulletin boards elsewhere, where the default attitude seems to be replying to any posts with personal attacks on the poster! We can do better than that here.

Here are the trial threads I've set up for 3 companies which I like to chat about. I'll still report on them in the SCVRs on relevant trading updates & results statements, these threads are for anything else (and we can cross-link them on results days). I have personal holdings in all 3 of these -

Sosandar (SOS) general discussion thread

Saga (SAGA) general discussion thread

Revolution Bars (RBG) general discussion thread

If people like the idea, then we can extend it to any shares you want. Readers can set up your own threads of course, feel free to use the same title format.

Hopefully this way, if we use these threads, we can build some useful individual company discussions.

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Agenda -

Paul's Section:

Cambridge Cognition Holdings (LON:COG) (I hold) - another positive trading update, and broker raises FY 12/2021 forecast revenues by 19%. Order book surges further, and the company is now profitable. Cash has gone up, so very little dilution risk now I think. Lots to like!

Joules (LON:JOUL) - (I hold) - another fairly big personal holding of mine, so I've spent some time on its FY 05/2021 results. Bounced back into profit. Very strong online sales, now the bulk of its operations. Difficult to value at the moment, but I'm a happy long-term holder. I see this as a very distinctive brand, with a promising long-term future, especially now it has a successful marketplace website, accelerating growth.

Restore (LON:RST) - major shareholders oppose approach from Marlowe (LON:MRL)

Jack's section:

Belvoir (LON:BLV) - market conditions are proving to be more favourable for these property franchise companies than might have been expected at the start of the pandemic. Strong business model, organic and acquisitive growth opps, plus 'substantial rental increases on the horizon'.

Nwf (LON:NWF) - solid results from an enterprise established way back in 1871. Margins are low, but so is the earnings multiple, and the group has a strong track record as a dividend payer.

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Paul’s Section

Cambridge Cognition Holdings (LON:COG)

(I hold)

165p - mkt cap £52m

Trading Update

Cambridge Cognition Holdings Plc (AIM: COG), which develops and markets digital solutions to assess brain health, is pleased to announce a positive trading update for the six months ended 30 June 2021.

Summary from the company -

Strong financial performance with growth in revenues and sales orders of 50% and 74%, respectively

Key figures -

• H1 revenue £4.5m (up 50% on H1 LY)
• H1 EBITDA positive at £0.2m (improved from a negative £(0.3)m loss in H1 LY)
• Order intake in H1 above expectations at £8.6m (including 2 previously announced unusually large orders totalling £3.6m)
• Order backlog - big growth in the order book last year was the main signal that the company’s turnaround was gaining traction, and it’s improved further, up another 36% in the last 6 months, to £15.2m
• Cash up by £1.2m in 6 months, to £4.2m (that’s the same as net cash, because COG doesn’t have any borrowings) - therefore dilution risk now looks negligible
• Covid impact “minimal”, and has helped drive demand for remote clinical trials. This looks as if it could be a structural change potentially, because the company says -

“interest in virtual clinical trials as a result of the pandemic continues and more orders for home testing solutions were taken”

Outlook -

The outlook remains positive and the Company remains on track to be profitable in 2021. The Company has an attractive forward pipeline of opportunities, although, at this time, without the rare, one-off opportunities highlighted in the previous two half-year periods.

With increasing investment in commercial activities and continued product development, the Company is well positioned for further year-on-year revenue growth.

The rising cash balance provides the business with further opportunities to invest for future growth.

Diary date - 21 Sept for interim results (to 30 June 2021), with an investor presentation on the same day - see today’s RNS for registration details.

Forecasts raised - thanks to Finncap for its update note today, which significantly raises forecast revenue by 19% to £10.1m for this year FY 12/2021. A key point is that operational gearing is very high at COG, as its gross margin is c.80%. Therefore as the top line builds, it has a positive, geared effect on the bottom line profits.

In this case the company is also spending more on overheads, which blunts the profit growth - Finncap’s forecasts shows overheads rising 27% to £7.5m. That’s fine by me, it’s a growth company, so I’d rather management take full advantage of the opportunities, if they can generate a good return from increased spending (e.g. on R&D), rather than run the company on a shoestring for profits & divis. We have to trust management to manage the overheads wisely.

I’m ignoring Finncap’s new forecast for FY 12/2022 which shows growth almost shuddering to a halt, which doesn’t make sense to me, given the rapidly rising order book.

My opinion - firstly a quick moan. I have no idea why the company reports EBITDA rather than proper profit before tax in its trading updates? Many investors (including me) view EBITDA with suspicion, as an inflated number that ignores a whole bunch of real world costs. So that forced me to check last year’s numbers. In this case the depreciation, amortisation, and finance charges are very small (£143k last full year), and tax is negative, so there’s no benefit at all to reporting EBITDA, it would be much better to report PBT or PAT, in my view.

Overall I’m very happy with progress at COG, it’s playing out very much as I hoped. The company is now profitable, growing rapidly, and seems to be enjoying a favourable sector shift towards cognitive testing for drugs trials being done remotely, in peoples homes, rather than in person. This plays to COG’s strengths, and is what its services are aimed at. Hence the pandemic seems to have turbocharged COG’s business, and prospects. Remote testing is much easier, and more efficient, so it’s difficult to see why the pharma clients would go back to doing it the old way. If that’s correct, then COG could be at the start of a long-term, lucrative business model, with a considerable moat, and little competition.

That could make this a valuable company in the long term.

I did top slice a few, when dealing with margin calls on my geared account recently, but am determined to hold tight on the remainder. I’ve not touched any in my SIPP, as they’re safe, not being geared. In total I think it’s about my 4th largest personal portfolio position, so high conviction on this one.

Anyway, so far so good. It’s already been a multibagger, and if current performance & growth continues, then I think a >£100m market cap is a possibility.

With the move into profitability, rising cash pile, and good visibility from the growing order book (which spans several years), then I perceive very much reduced risk compared with where we were say two years ago. The company seems to have been transformed over that time, by CEO Matthew Stork and his team, who gave the company a much more commercial focus, which is clearly paying off now.

There’s a lovely chart below too, clearly reflecting the company’s transformed performance and prospects over the last 3 years. Even the StockRank has dragged itself out of the red!

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Joules (LON:JOUL)

(I hold)

258.5p (down 4%, at 11:56) - mkt cap £289m

Joules is a British lifestyle Group comprising the Joules brand, the fast-growing Friends of Joules digital marketplace, and Garden Trading, a leading digital-led brand in the home, garden and outdoor category.

Annual Results for the 52-week period ended 30 May 2021

There’s a lot of detailed commentary in this announcement, so I’ve had to weigh up digesting as much as possible, with getting a report up here before the 1pm email distribution. So I’ve jotted down the key points, as I see it, rather than trying to regurgitate everything in the RNS.

• Revenues £199.0m FY 05/2021, up 4% on LY
• Stripping out the £8.7m revenues for the c.4 months of Garden Trading (acquired 9 Feb 2021), then LFL (like-for-like) revenues would have been down £0.5m, basically flat on last year.
• Covid disruption closed the stores for 6 months this year, and 2 months last year, so achieving flat revenues is very impressive in the circumstances
• eCommerce revenues very strong, up 48% to £122m, or +43% LFL - which we already knew from previous trading updates - Joules should now be seen as mainly an eCommerce business - 77% of retail sales are online, and were strong & growing pre-pandemic. Some likely to shift back to stores this year
• Store & country shows - sales fell from £63.2m LY to £36.6m due to extended closures.
• Don’t ignore the strong growth in “other” revenues to £5.1m up 132% - this includes very high margin income from the Friends of Joules online marketplace (where partners do all the logistics, Joules just collects in a commission), and growth in lucrative licensing revenues.
• Profitability - bounced back from losses last year - underlying £6.1m PBT, versus £(3.9)m loss LY. Although that’s been mainly generated by taxpayer support measures of £4.6m furlough, and £2.3m business rates relief. Mind you, if the furlough scheme had not been used, Joules and other companies would have had no alternative but to make many redundancies, so the P&L effect might have worked out the same, by a different route.
• Exceptional costs are material, at £4.2m - mainly £2.9m non-cash impairment charge of leases & fixed assets (see note 3).
• Statutory profit is £2.0m, versus a thumping £(24.8)m loss last year.
• Gross margin - hit by increased freight costs, down from 50.7% to 49.0%
• Brexit - estimated to have cost JOUL £0.8-1.0m in additional duty & transport costs. Looking at ways to mitigate this partially.
• Net cash £4.1m, with plenty of headroom on bank facility - oddly, this bank facility is ESG-linked, which seems a step too far to me, but whatever.
• No divis yet - fine, it’s a growth company, I’d rather they use cashflows to make more acquisitions like Garden Trading, which was reasonably priced, and has done well.
• Tom Joule - stepping down to 1-day per week NED - might be perceived as a negative, as things often go wrong when a founder steps back.
• Current trading - in line with management expectations. I would have liked more detail on this, as there’s a wide range of broker forecasts out there.
• International - seems small, opportunity for future growth? A quintessentially British brand should prove popular in many overseas markets, as other brands have proven.
• Big depreciation charge of £16.0m stood out as unusual, but half of it is those awful IFRS 16 property lease adjustments.
• Marketing spend of £11.3m (up 22%) seems very high - but I see this as positive, because it drives growth, and makes it harder for smaller competitors to compete.
• Head office costs very high at £29.1m - the business seems to have an overhead for a much larger business - over-spending, or an opportunity for profits to increase fast as it grows?

Balance sheet - OK, but not amazing. NAV is £44.2m, but once we strip out the intangible assets of £31.1m, then NTAV is only £13.1m.

Speaking as a shareholder, I’d like to see the company build up its balance sheet, and not pay dividends. Other opinions are available.

Cashflow statement - I’m not entirely sure what the “right of return asset” and “right of return provision” lines are for, so there’s a query on that.

Cash generated by operations of £28.4m is a nonsense number, thanks to IFRS 16 which has wreaked havoc on financial statements since its introduction, it really needs to be abolished asap.

Near the bottom of the cashflow statement, there’s a £11.3m outflow relating to rents! So real world cashflow from operations is £17.1m, not £28.4m.

What a state of affairs, where IFRS 16 means we have to manually re-work the accounts, in order for them to make sense.

Broker forecasts & valuation - many thanks to analyst Wayne Brown at Liberum, who crunches the numbers for us, and has the balls to put out quite punchy forecasts, raised a lot earlier this year, instead of the extreme timidity that we see from many brokers at the moment.

Actual fully diluted, adjusted EPS is 4.6p for FY 05/2021, a PER of 56 times! That’s not a reliable base year for valuation, as the shops were shut for half the year.

Forecast EPS for FY 05/2022 is a big rise to 12.5p, then up again to 18.1p the following year, which would (if achieved) drop the PER to 20.7, and 14.3 - which looks a lot more reasonable.

Therefore, we’re paying up-front for a big rise in profitability. Is that likely to happen? I’d say there’s a good chance, due to the resumption of trading from stores, wholesale recovering, and a full year of Garden Trading should be material.

My opinion - I’m comfortable with the current valuation, and don’t see any particular reason why it should rise in the short term, but these things are impossible to predict, so I don’t try (usually). It would only take one fund manager to decide JOUL is the best thing since sliced onions, to start buying heavily in the market, and push up the price a lot (because it’s quite tightly held). Therefore price volatility is just something we have to live with. I ignore it for my long-term, coffee can holdings like this one.

Why do I like this share so much then (as a long-term, multi-year investment)? Key points for me are -

Bull points

• Distinctive brand/lifestyle, with differentiated products and a growing loyal customer base
• Most retail sales are now online, hence can be scaled up easily, and making the business very resilient in any future lockdowns
• Marketplace - Friends of Joules - could turbocharge growth, as it’s allowing JOUL to greatly expand product ranges, all funded & operated by the suppliers, and having all the data, JOUL can acquire the best suppliers (as it did with Garden Trading)
• Upside from shops re-opening

Downside risks?

• I suppose the main one would be if the company falls a long way short of the Liberum forecasts, then it would look too expensive in the short-term.
• Fashion risk - if the target demographic go off the products/brand
• There were logistics problems in the past, but I think it’s now outsourced that to Clipper Logistics (LON:CLG) .
• Tom Joule (the founder) taking a back seat to 1-day per week as a NED is maybe introducing some risk, but I don’t know as I’ve never met him. He’s still the largest shareholder with almost 22%, so the owner’s eye will still be on the business.

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Restore (LON:RST)

500p (up 2%, at 12:58) - mkt cap £683m

Significant Support Against Marlowe’s Proposal

This is a really interesting situation, where similar-sized Marlowe (LON:MRL) made private approaches to RST about a takeover funded mainly with new MRL shares (plus a small cash element). RST management rejected it because they said it;

• Undervalued RST
• Poorly structured, being mainly in shares, not cash, and
• Had little strategic rationale

Marlowe then went public with the proposal (not an actual offer), so I suppose we might call this a hostile approach, not a hostile takeover bid - something that sounds like it’s from the era of JR Ewing, in Dallas!

Personally I don’t see a problem with potential bidders going direct to shareholders & the market, actually I quite like it - why should takeover approaches all be cloak & dagger? Much better out in the open. May the best team win - i.e. whoever offers shareholders the best option.

Today’s update from Restore is headlined -

Restore plc goes from strength to strength and Significant shareholder support against Marlowe's proposal

This update seems to be mainly repeating previously published facts & figures.

This is new though -

The Board of Restore can confirm that it has received written confirmation from seven shareholders representing approximately 33.27 per cent. of Restore's issued share capital, stating that they do not intend to accept an offer on the terms set out in Marlowe's possible offer announcement dated 22 July 2021.

The following Restore shareholders have confirmed in writing that they do not intend to accept an offer on the terms set out in Marlowe's possible offer announcement dated 22 July 2021:

My opinion - private shareholders can be much more flexible, and take some money off the table in the open market, if they wish. That strikes me as a good idea, to top slice a few, given that the current price of RST looks about right, and is up a lot recently.

Restore's share price has been rising, and Marlowe's has been falling, so on balance I'm guessing that the bid approach may fail, unless it's sweetened, and with a higher cash element. Who knows though?

Blackrock (3.5%) and Invesco (10.2%) are missing from the above list, so presumably have not decided.

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Jack’s section

Belvoir (LON:BLV)

Share price: 307p (+3.72%)

Shares in issue: 36,351,774

Market cap: £111.6m

We covered Property Franchise (LON:TPFG) recently and here we have another of the property franchise groups. Belvoir has been a strong performer recently, with a one-year relative strength measure of +75.7%. The initial Covid drop already looks like a distant blip on the share price chart.

I won’t reiterate the merits of this business model too much, having gone into it last week. Suffice to say that these groups have strong cash generation and profit margin characteristics, along with relatively sticky revenues, operating in markets that offer the potential for steady growth over time.

The property market is important to the UK economy, hence it is being helped by government initiatives. If these get withdrawn, that does represent a risk to the investment case - but the business model here is sufficiently robust that headwinds can be navigated in my opinion.

Half year trading update

The Board is pleased to report that trading has continued to be exceptionally strong with Group revenue during the six months to 30 June 2021 up 41% on 2020, which had been impacted by the Covid-19 pandemic, and up 53% on 2019 (42% on a like-for-like basis), with substantial revenue growth across both divisions on the back of a very buoyant housing market.

The property division grew revenue by 45% on the same period in 2019. Of this, 25% was organic and 20% came from the investment in two additional franchise networks (Lovelle in January 2020 and Nicholas Humphreys in March 2021).

The financial services division reported revenue up 62% on H1 2019 through organic growth.

There is a demand for mortgages to fund house purchases, but Belvoir’s adviser network is also expanding, up by 21% to 221 (H1 2020: 176) advisers at the end of June 2021. The subsequent acquisition of Nottingham Mortgage Services Limited takes it up to 242.

Management Service Fees (MSF) from residential sales was up 100% on H1 2020 as the market swung from lockdown-related disruption in Q2 2020 to a ‘race for space’ in H1 2021. This has also been flattered by the stamp duty holiday. The figure was up 68% on the same period in 2019.

MSF from lettings - more resilient - was on par with H1 2019 and up 13% on H1 2020. The group says that ‘there are signs of more substantial rental increases on the horizon with the rental growth from new tenancies reportedly running at 5.9% UK-wide, and 8.0%, excluding London’.

Re. stamp duty:

Current pipelines and the ongoing demand for property suggests that the transitional approach to ending the stamp duty holiday, which finally ends on 30 September this year, has succeeded in avoiding the cliff edge feared at the start of 2021 with instead a gradual return to a more normal transaction level anticipated in Q4.

The balance sheet is strong - net debt of £4.0m (H1 2020: £5.7m) after having acquired Nicholas Humphreys for £4.0m, but supported by high levels of cash generation.

More detailed half year results will be provided on Monday, 6 September 2021 and retail investors will be able to listen to management on https://www.investormeetcompan...

Conclusion

Belvoir is cash generative, profitable, and is investing in growth opportunities. Beyond government support initiatives and possible changes in macro conditions at some point, there’s not much I can see that might interrupt the group’s steady expansion.

You might think valuation is a concern given the share price performance but that doesn’t seem to be the case. In fact, I'd argue the business model here warrants a higher multiple relative to other valuations you see around.

It’s fair to say that trading is far better than some had feared at the start of lockdowns. Pipelines remain strong, while the group anticipates upward pressure on rents. The financial services division is also expanding well.

So pending the more detailed results in September, I’d be a happy holder here.

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Nwf (LON:NWF)

Share price: 217p (+0.46%)

Shares in issue: 49,003,965

Market cap: £106.3m

This is a ​​specialist distributor of fuel, food and feed across the UK. Each of its trading divisions has scale and good market position and is profitable and cash generative.

NWF has got an extremely solid track record and was established in 1871 - so you’d back it to at least remain a going concern for the foreseeable future. Such longevity, sadly, is rare. For investors looking for genuine buy and hold stocks, identifying those that have already been in business for a long time is a good start.

This is not a high multiple business though. With operating margins of just 2.02%, you can see why the market prices the shares at 12.3x forecast earnings. But returns on capital are a solid 10%+ and earnings tend to be healthily covered by cash, so it looks like a robust business - but a steady dividend-payer rather than something promising significant capital gains in a hurry.

The five-year chart is unsurprising: a consistently high StockRank but with limited share price progression. You can add to this chart a healthy 3.4% forecast yield that grows steadily over time, but still, is there an opportunity cost to holding this type of share? Perhaps that depends on your timeframe.

Final results

Another strong set of results, ahead of expectations set before the pandemic, demonstrating continued performance delivery and resilience.

Highlights:

• Revenue -1.7% to £675.6m,
• Headline operating profit and profit before tax -9.8% to £12.9m and £11.9m respectively,
• Fully diluted earnings per share -4.2% to 20.4p,
• Total dividend per share +4.3% to 7.2p
• Net debt -53.7% to £5.7m

The headline figures exclude £0.5m of net exceptional costs including a ‘cyber incident’:

Headline PBT also takes away net finance cost for the defined benefit scheme. I’d probably add that £0.3m cost back in.

Highlights:

Performance is ahead of pre-pandemic market expectations. It’s the second highest profit performance on record for the group, with the prior year benefitting from a significant fall in the oil price.

Fuels outperformed with strong heating oil demand supported by a cold winter and an increase in home working during the pandemic. Headline operating profit here was £9.3m (2020: £11.0m).

Strong second half recovery in Food delivering on the anticipated benefits of the new Crewe warehouse, which has been fully utilised. Headline operating profit of £1.9m (2020: £1.4m). The new Crewe warehouse has been fully utilised and has delivered business benefits in line with expectations.

Feeds performance impacted by the significant increase in feed commodity prices and reduced management information as a result of the cyber incident. Headline operating profit of £1.7m (2020: £1.9m). Performance was impacted by unprecedented commodity price increases during key winter months, ‘exacerbated by a lack of visibility as a result of the cyber incident’.

All divisions remained open and operational through Covid, providing essential services and meaning to government support or furloughing of staff has been required.

Performance to date in the current financial year has been in line with the board's expectations.

Conclusion

Cost increases/volatility could be a concern, but NWF has navigated its way through various market conditions and is emerging from Covid in decent shape so it can likely handle most scenarios. It is investing for growth, searching for acquisition opportunities, and is increasing its total dividend for the tenth successive year.

Revenue trends are as you might expect: choppy, but with an underlying longer term growth trend.

So on the whole, solid results and scope for steady underlying growth from what seems to be a sensible, long-term company. It’s not perfect - low margin, with some level of volatility to be expected as par for the course - but a reliable dividend payer trading on an undemanding earnings multiple, so it might appeal to some.