Small Cap Value Report (Tue 3 Sep 2019) - SYN, XAR, SOLI, MBH

Tuesday, Sep 03 2019 by

Good morning, it's Paul here.

Estimated timings today - late morning start time, should be finished by mid to late afternoon.

Synnovia (LON:SYN)

Share price: 122.5p (up 40% today, at 10:57)
No. shares: 39.0m
Market cap: £47.8m

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This small group was previously called Plastics Capital.

There's an agreed takeover bid announced today, at 125p in cash. That's a healthy 42.9% premium to the share price on the "last practicable date". This phrase is used 29 times in the announcement. At the end, in the definitions section, we are told that the last practicable date is yesterday. They could have saved a lot of ink.

The bidder is a Californian investment group, so here's another example of American investors finding UK listed companies attractive bid targets, due to the weak pound no doubt.

This looks a done deal, with 57.7% of shares already lined up to support the bid.

In my view this looks a fair price. Synnovia was going nowhere as a listed company, in my view. Cash generation was poor, hence it was not able to generate enough cashflow to both pay divis and fund acquisitions. I agree with the announcement today, that the group would be better off being privately owned, rather than being an illiquid listed company.

Well done to shareholders, this is a good deal, at a fair price.

Xaar (LON:XAR)

Share price: 64p (down 27% today, at 11:16)
No. shares: 78.2m
Market cap: £50.0m

Trading update (profit warning)

Bad news from this advanced printheads maker;

Revenue in the first half year to 30 June 2019 was £22.5 million, as previously announced, including the impact of a £4.3 million revenue reversal relating to Xaar 1201 Thin Film printhead inventory being returned to the business.

As part of the interim results process, a review of the Group's holding of Xaar 1201 printhead inventory and near term prospects for sale has taken place which has resulted in a reassessment of realisable value. We now consider it prudent to make a provision of £5.7 million which will be reflected in our first half results.

Trading in H2 is also set to be poor;

Trading for the remainder of the year is expected to be weaker than previously anticipated.  This…

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Synnovia PLC, formerly Plastics Capital PLC, is a holding company. The Company is principally engaged in the manufacture of plastic products focused on products for various markets exporting to over 80 countries across the world. Its segments include Industrial, which consists of hydraulic hose consumables, packaging consumables and plastic rotating parts, and Films, which includes high strength film packaging. Its operations are based on the six operating businesses: BNL (UK) Limited, which makes plastics rotating parts; Palagan Limited, which makes high strength film packaging; C&T Matrix Limited, which makes the packaging consumable of creasing matrix; Bell Plastics Limited, which makes hydraulic hose consumables; Beijing Higher Shengli Printing Science and Technology Co Ltd, which also makes creasing matrix, and Flexipol Packaging Limited, which makes high strength film packaging and bags. It has over five factories in the United Kingdom, approximately two in China. more »

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Xaar plc is engaged in the development of digital inkjet technology and manufacture of piezoelectric drop-on-demand industrial inkjet printheads. The Company's segments are product sales, commissions and fees, and royalties. It offers a range of industrial inkjet printheads and printhead systems, which are designed and produced to meet the customer-driven requirements of a range of manufacturing applications. Its primary markets include wide-format graphics, ceramic tiles, labels, packaging, coding and marking, three-dimensional (3D) printing, advanced manufacturing and decorative laminates. The Company sells its technology in component form (the printhead) to original equipment manufacturers (OEMs) producing and selling the complete digital printing solution to the end market. It partners and co-develops with fluid suppliers, hardware and software integrators, and substrate suppliers to deliver a total solution to the end user. more »

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Solid State PLC is engaged in manufacturing of electronic equipment and distribution of electronic components and materials. The Company is a manufacturer and specialist design-in distributor to the electronics industry. Its segments are Distribution division and Manufacturing division. The distribution division comprises Solid State Supplies Limited and Ginsbury Electronics Limited. The manufacturing division includes Steatite Limited and Q-Par Angus Limited. Its geographical segments include UK and Non UK. The Company is a supplier of computing technologies, electronic components, antennas, microwave systems, secure communications systems and battery power solutions. It markets its products through brands, including ndura RUGGED and RZ Pressure. It acts as both a distributor to original equipment manufacturers (OEMs) and manufacturer of specialist units to clients with complex requirements. It serves aerospace, environmental, government, oil and gas, and transportation markets. more »

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  Is LON:SYN fundamentally strong or weak? Find out More »

17 Comments on this Article show/hide all

MrContrarian 3rd Sep 1 of 17

My morning smallcap tweet: No cigar for Xaar

Xaar (LON:XAR), Solid State (LON:SOLI), Synnovia (LON:SYN), Newriver Reit (LON:NRR), Real Good Food (LON:RGD), Stirling Industries (LON:STRL), Qannas Investments (LON:QIL), Michelmersh Brick Holdings (LON:MBH)

Xaar (XAR) warns FY trading expected to be weaker than previously anticipated with H2 rev similar to H1. £5.7m stock write-down. "Management continues to focus on its strategic negotiations [for investing partner, RNS March] and expects that some additional time could enable the Board to provide a more meaningful update on progress" so interims delayed to 26 Sept.
Solid State (SOLI) guides FY profit significantly ahead of expectations but rev in line. Credits stronger margins, weak £ and the Pacer acquisition performing better than expected.
Synnovia (SYN) rec offer of 125p, a 43% premium.
NewRiver REIT (NRR) £58m disposals so far this FY at 1.2% above book value.
Real Good Food (RGD) CEO will leave end Sept. CEO role has become part time due to creation of two autonomous business units with their own separate strategies.
Stirling Industries (STRL) the cash shell shares are suspended pending an RTO.
Qannas Investments (QIL) suspended pending an RTO of portfolio includes shareholdings in a number of publicly traded GCC-focussed companies, in sectors such as real estate, maritime shipping services and insurance.
Michelmersh Brick (MBH) H1 rev up 17%, guides FY ahead of market expectations.

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timarr 3rd Sep 2 of 17

Just looking at the IHS Market Report, which gives a snapshot of UK manufacturing. "Highlights" are that PMI has fallen to its lowest level since 2012 and that the pace of decline is quickening. There's a double whammy here, as Brexit and Trump's trade wars have their impact:

There were reports that some EU-based clients were routing supply chains away from the UK due to Brexit. Inflows of new work from the USA and Asia also weakened.

No surprise that UK manufacturing is a poor place to be, there's only so much slack that the decline in sterling can take up. Having said that, 40% of manufacturers are still forecasting expansion in the next year. 

To put this in context, the Eurozone PMI is worse than the UK's, although it's actually improved this month. OTOH, as that's 40% of our exports I'm not sure it's particularly good news. The notable difference is that UK manufacturers are putting domestic prices up, while their Eurozone equivalents are reducing theirs. 

A time for sitting on one's hands, I feel.


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paraic84 3rd Sep 3 of 17

Great results from £BLV (LON:BLV) this morning. I am also pleased the already high dividend isn't being increased as that might provide an opportunity to pare down debt. This is looking like a decent value play. It's the balance sheet, housing market, and the fear of impact from the lettings fees ban that has put some investors off.

Two things to pull out from the detail I spotted:

Firstly growth in the underlying business minus the acquisition is 10% which is pretty good going for an estate agent in the current environment.

Secondly, these are the first set of results since the lettings fee ban came into place. It looks like the ban hasn't had a huge impact but in the whole of 2018 the like for like growth in lettings fees was 2.6% and this is now at 0.5%. So a bit of a slowdown but not a disaster like some investors were expecting. 

Within our property franchise division, MSF increased by 5% to £4,201,000 (H1 2018: £4,015,000) with the lettings element growing by 4%. The introduction of the tenant fee ban on 1 June 2019 reduced organic growth in the period to around 0.5% with the balance arising from franchisee-led acquisitions under the Belvoir Assisted Acquisitions programme.

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Snoo 3rd Sep 4 of 17

In reply to post #509536

As I understand it, the fee ban might take a bit longer to fully drop in, as fees are still allowed on existing contracts, until 31st May 2020.

I wonder if in a years time that price competition would become pretty fierce in this sector..... in the past charging tenants could subsidise a lower landlord fee, but now it seems that all firms will be directly comparable.

I think short-term the fees will end up at the feet of landlords, in longer-term the margins will end up declining in the industry due to competition..... assuming a rental for 2 years on an average London flat on a non-managed deal, current agents commission might be in the region of £3k-£5k for their efforts which is a Rightmove ad, showing clients around, and administrative chores.

Personally I think the lettings sector is ripe for disruption if a technology based product could manage to get the scale required.

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Martin C 3rd Sep 5 of 17

Serial dissappointer £IQE has slipped into 1H loss and the cash pile has gone completely. Still a BB favourite on a rediculously high PER given its history. Am short...

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ACounsell 3rd Sep 6 of 17

The trading update from Xaar (LON:XAR) suggests a business in terminal decline with yet another share price fall approaching 30%. It would seem that they are struggling to find a strategic partner to provide some form of cash injection. They will need it as their cash balance is falling at about the rate of £7m + per half year and stock write downs in the millions won’t help. At this rate of decline it will be exhausted by end 2020. It would seem that their technology/IP is no longer a strength and most probably has been superseded by developments elsewhere. If this wasn’t the case it would surely have been acquired at these share price levels. Sadly, as a holder, I should have heeded Stockopedia advice and sold at the 1st profit warning!. I fear now that it will be a complete loss.

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iwright7 3rd Sep 7 of 17

Paul Would be interested in your take on Gamma Communications (LON:GAMA) results if you get time. I think results look good and I have taken an initial position this morning.

My Buy In notes: Acquisition and operational gearing has boosted H1 EPS by +45%. New EPS broker upgrades over the next 3 years of between 11 and 19%/annum. 97QM score. Expensive, but high quality with price now near 52Wk High.

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cjg 3rd Sep 8 of 17

In reply to post #509581

Another vote for your thoughts on Gamma Communications where half year results look robust and should lead to broker upgrades for the full year. Interim eps of 19.2p v current broker estimate of 36.7p for full year. 

Return on equity and return on capital both around 25% and net cash around £30m. 

As highlighted by iwright 7 not cheap but that reflects the quality ranking of 91.

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rmillaree 3rd Sep 9 of 17

In reply to post #509571


Still a BB favourite on a ridiculously high PER given its history

Agreed in most respects although one never knows with the future may bring - i am pretty sure Public Enemy would never have bought shares in IQE though.

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Graham Ford 3rd Sep 10 of 17

In reply to post #509571

IQE (LON:IQE) are priced based on future potential. It would be very strange to base the price on history for a small company that can potentially be completely transformed by the emerging technologies of VCSELs and 5G.

Of course, if one believes that neither VCSELs nor 5G will ever take off, or one believes that even if they do the company will never make any profitable growth from them, then go short as much as you like. If on the other hand.....

I hold.

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John Robinson 3rd Sep 11 of 17

paul any thoughts on EKT

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Martin C 3rd Sep 12 of 17

In reply to post #509701

Trouble is the jam has always been just around the corner. My fear for them is that by the time 5G does come round the world will have moved on and whatever edge they have (if any) will have disappeared.

At the end of the day its a low margin, high capex industry that's at the whim of much bigger players - ie, they have no pricing power. So even if the market does explode they're going to have to spend a fortune on more plants and people just to keep up with demand... with all the risks that those entail in any economic downturn.

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Graham Ford 3rd Sep 13 of 17

In reply to post #509711


It is very clear that 5G is coming over the next 3 years. Trade wars between US and China may slow it down but it is definitely coming. I don’t see how the “world will have moved on”. What is this tech that the world will have moved on to that will mean that compound semiconductors will not be needed for 5G? (If we haven’t already heard something about it, it must be at least five years away).

Regarding margins, VCSELs are higher margin than the historic wireless products and newer products like their DFB products will also be higher. Once the customer base has diversified some more (e.g. many more android phone manufacturers will have adopted the technologies) the pricing power of individual large customers will be diluted, reducing margin pressure too.

High capex? The vast majority of capex investment needed is complete and they thus have considerable capacity to increase production without adding any additional tools. The Newport foundry infrastructure they have put in place means that when volume gets to the point where investment in additional tools becomes necessary it will be proportionally lower relative to the additional new volume than has been the case recently. The pay back on a new tool is around 18 months, so very reasonable. That’s far preferable to my mind than companies that are reliant on spending equally large sums on internet advertising etc. to win new customers and support the brand where as soon as you start to dial that back your sales suffer.

So, the idea that this will be a low margin business with constantly high and excessive capex seems wrong to me.

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Trident 3rd Sep 14 of 17

History has taught me not to hold my breath on upsides for IQE (LON:IQE)

Also the President/CEO has used again a strange complex device which effectively is selling shares subject to a buy back at a later date to apparently satisfy NI on a substantial options exercise.

This is legal, but as it is really a sale pretending to be something else as far as I can see, based on a complex instrument. You can say this reward for generally poor historic performance, is based on an over generous options machine working against the interests of shareholders, but others may be sanguine?

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Martin C 3rd Sep 15 of 17

In reply to post #509746

I remember being invested in GEO Interactive/Emblaze back in the early 2000's. They had the best mobile video technology around at the time, 3G and mobile video was just around the corner and we were promised that the market was going to be huge and the jam was coming.... but it never happened. 

Sure 3G and mobile video happened, but years after the initial trials, mainly due to a slowdown in global growth / global recession - and here we are in very similar macro circumstances, and also because of a lack of consumer appetite for it at the time. Again, i don't see any evidence that consumers are waiting anxiously for 5G.

I think by the time that 5G and VCSEL's take off in a big way then the big chip companies will have come in and taken over and IQE will remain a small, niche player, possibly bought out. At least they do have a business - unlike GEO/Emblaze - just don't think it will ever take off the way some people do.

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Gromley 3rd Sep 16 of 17

I wasn't going to comment on IQE (LON:IQE), no position currently but watching with interest, as the results were pretty much as expected. However, given that IQE (like Burford perhaps) has some little understood and complex items that can be subject to misunderstanding, both deliberate and otherwise, I thought I would address one point from this thread.

Also the President/CEO has used again a strange complex device which effectively is selling shares subject to a buy back at a later date to apparently satisfy NI on a substantial options exercise.
This is legal, but as it is really a sale pretending to be something else
It is categorically NOT "a sale pretending to be something else"; in fact it is really a complexly constructed loan.
  • Drew Nelson "sold" 11 millions shares to EFH @ 43.96p (£4.84m)
  • After 3 years (the loan term) DN is obligated to buy back the shares at the same price.
  • He will pay for the privilege (AKA "loan interest") but we have not been told how much - none of our business.
  • The price is a c. 30% discount to the market price at the time of the deal. So effectively the loan has an LTV of 70%.
  • The reason for the transaction (loan) was cited as being to meet Tax & NI obligations resulting from the exercise of 7.7m shares in options from the bonus scheme.
  • More commonly Directors sell a large portion of the shares from the option in order to satisfy the tax & NI obligations, thereby reducing their exposure to the company's share price.

So whilst the deal done by Drew Nelson takes a little bit of effort to understand, it is definately not a covert sale, in fact he has retained a significantly greater exposure to IQE's fate than the other more conventional approaches would allow.

All this said, and despite the fact I do still have faith that the 'bull case' still looks credible I have no interest in owning the shares currently. Someone commented today at ADVFN that IQE have been "unlucky" - this is probably true IMV, however there is plenty of bad luck out there waiting to kick companies and I would rather wait to invest in a company with a degree of insulation against "random chance", for me IQE is not there yet.

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Graham Ford 4th Sep 17 of 17

In reply to post #509791

Hello Martin

I appreciate what you are saying. There is always a doubt around the speed of uptake of new technologies.

In this particular case we need to understand that IQE have key technologies that serve multiple growing end applications; this is not dependent on consumer demand in a single application.

For example, the photonics technologies are finding application in LiDAR, facial recognition, augmented reality, telecom infrastructure etc. It is not so much the desire of consumers for any one end application that makes this a success or failure.

To take telecom infrastructure as an example. The growing need to transmit ever higher quantities of data means that the telecom infrastructure industry has to invest in these capabilities. So, the consumer doesn’t care two hoots how the Netflix pictures arrived on his screen but you can be certain that as more and more people use streaming TV they are not going to be satisfied if their HD pictures start to freeze. Meanwhile cloud computing growth rates are high. (Have you seen how much Amazon make from AWS?). So, business demands ever more data capacity too. We may not think “photonics” when we think about streaming TV or cloud computing but that’s what’s coming.

Now one thing to be absolutely clear about is that IQE do not manufacture chips. Component manufacturers buy wafers from IQE. No one can say whether or not these component manufacturers will want to take the wafer fabrication in house or set up in competition to IQE. But why would they? Some businesses vertically integrate others don’t, but one thing is for sure and that is that it is harder to bring something in house that is already protected by IP, trade secrets, economies of experience and know how not to mention having to justify the capex and risk involved in doing so. IQE are far better protected from their customers backwards integrating than companies in less technical fields.

The uptake of 5G handsets will obviously take time and we know the replacement cycles for smart phones have already slowed but replaced they will be. Neither you nor I may watch much video on our tablets and phones. And neither you nor I may play online video games on our mobiles. But there are plenty of people that do and will not settle for the old technology when they next replace their devices. It is going to happen. It is only a matter of when.

Photonics and 5G wireless comms will be key enabling technologies in the 2020s. IQE are well placed to take advantage of that.

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About Paul Scott

Paul Scott

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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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