Small Cap Value Report (Tue 30 May 2023) - DWF, HTG, BOWL, LIKE

30th May '23 by Paul Scott

41 comments 6821 reads

Good morning from Paul & Graham!

Weekend podcasts - I'm only publishing these on the main podcast platforms now, not on my own website. If you prefer a web-based version, this is the web page created by acast, the publisher I use for my podcasts, which you might want to bookmark, if interested. I must change that picture too for one with a smaller double chin!

My macro view is certainly getting more bearish, after the latest lurch higher in gilt yields, core inflation proving more stubborn than expected, and market expectations for peak interest rates being a lot higher than a week ago. One month's data is just that, but even so it strikes me that we might be inching closer to a recession. Who knows? It's difficult to see why small caps would start a bull market any time soon, given that people can earn a nice return, with little to no risk, from cash, or fixed interest instruments. So I think we should really be questioning valuations, that in some cases don't seem to adequately reflect the completely changed environment we now have. Mind you, once we're through this period of higher inflation, maybe interest rates might come back down again? All the more reason perhaps to lock in some higher yields on fixed interest stuff?

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.

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TEIN

30th May '23

Never mind Paul, none of us can do everything. I'm sure CentralNic (LON:CNIC) would respond to an interview request from you! They do seem pretty engaged with holders.

Did any other readers get any insight on CentralNic at Mello that are shareable here please?

Thanks, TEIN, [I hold]

truegent

The net debt should also include the "right-of-use assets" if it is going to include the leases. The right-of-use assets being the building being leased, the leases being the lease left on that building. One should negate the other, leaving 'net leases' (not an actual thing but you get my point) being £0 or close to it. I have contacted stocko about this and was told I was wrong but I do not think I am...

eParo

How do you know DX Group is in the same boat? My wife's workplace use them and she says they are very busy. DX are also opening new depots.

Going off the last set of results DX are doing well...

The Boon Fund

Also looming contract renewal with Network Rail, one of their largest physical space inventories. Worth checking to see how long their other supply side contracts are (shopping malls, etc) as I remember they were quite short contracts.

Spaceandpeople (LON:SAL)

Exciting situation over at Oxford Biodynamics (LON:OBD) - in both good and bad ways.

Good:

Rapid hockey-stick sales growth of their CIRT test. First 100 took 9 months, Second 100 took 4.5 months, and Third 100 took only 3 months. By later this year, we should easily see like 1200+ sales a year run-rate, which at $2500 avg would be $3m+ gross sales.
Only 20 oncologists currently prescribing. At the above 1200+ sales run-rate, that is probably only 50-100 oncologists. A quick google search suggests there are 13,000+ active oncologists in the USA. Granted, not all will be in the field that the CIRT tests are used for...
Which leads me to the other point. Seems like their prostate cancer test seems viable to be developed. Which then bodes well for the Episwitch platform overall, for more use cases.

Bad:

Oh dear, such a massive cash cost base at the moment.
They're going to run out of cash within the next 6 months.
And that's before taking into account R&D costs needed to bring the Episwitch prostate cancer test to market.
All indications are that a fundraising will be needed, soon.
Market cap (£20m-ish) does not support a good equity fundraising for existing shareholders.

Twist:

They managed to get an equity fundraising done last year, at a 30-40% premium to the share price! Can they pull it off again?
Last time the fundraising was at 20p. The same price would represent a big premium to the current 14p share price
Probably what would be better is some sort of debt facility, provided by a major shareholder (Vulpes?) given that the growth of sales is now on track, in exchange for convertibles/warrants to give Vulpes some future upside.

Tempted to buy some more now at 14p, as I do see the premium fundraising as a credible option, and the shares will pop upwards on that event. But also think these will drift downwards more, given the bearish market at the moment for anything loss-making and in need of fundraising...

Also think that maybe some of the major shareholders should put this company out of its public misery and take it private. IMHO it needs at least a £20-40m cash injection for the next 3 years to maximise CiRT sales as well as bring the prostate cancer test to market and maybe start R&D on more tests.

(I hold in the Boon Fund)

davidjhill

hi Tony - I agree, it is annoying. Would be better to be split out. In Ten Entertainment (LON:TEG) case they are actually net cash outside of leases so it's not really 300% debt at all. I never could understand the IFRS rationale for chaining the rules to include in the net debt number, as it's bonkers really. Are future lease costs an important metric to have easy sight of? yes! but should they be lumped in to mask the actual net debt/cash of the business? No - absolutely not!

mojomogoz

Pretty impressive turnaround by Tremor International (LON:TRMR) share price today. It hints that the shares are oversold and have bottomed. TBC I'm not a short term or tea leaf reader sort of guy so take that 'wisdom' with a big pinch of salt.

I wouldn't recommend Tremor to anyone as a difficult company to understand and like and I have my doubts! (that is beyond the simple negative biased view many hold of Israeli cos)

That said, I believe they have a differentiated ad tech platform and I like CEO Ofer Drucker.

My history with the stock is buying on a price puke down towards and even below the 100. Selling most of it through 400-700 range when it had covid bounce...and then buying back some more as it fell to 400 and below but rather timidly as I do have a concern I am missing something...I don't think so, but the sp performance is so out of whack with 'fundamentals' I've taken it as a caution rather than my (more usual) opportunity perspective. Plus its an environment where one doesn't lack for fallen shares!

And TBH I probably wouldn't start a new participation now without the history I share above...as its a complex and fast moving company...but my involvement leads me to think I get it (delusion!?). IMO they are doing loads of the right things that will give it durable and profitable scale...I believe we will see much higher sp, many fold the current assuming no cheap take out (that frustratingly the big fund managers holding seem to be angling for...making liquidity for them but ensuring suboptimal price achievement)

rogerh

It would be great to get Paul's comments on XP Factory. I listened to a couple of presentations by the CEO post results. I don't know how much they pay Vox Markets for the 'interview' but Vox were so fulsome in their praise for XPF, they really ought to double it. I took note of a comment by a subscriber here that they actually lost circa £1m this year. I spent a long time over the bank holiday reading through what seemed a complicated set of accounts. I'm not good at that at all but they do indeed seem to have lost £1m. Surprise surprise, no mention of that in their presentations, just the old positive adjusted Ebitda stuff. I don't mind companies losing money but they should be upfront about it

Wolf of Small Street

Sharepad allow Net debt - Total leases in historical numbers at least. I use it alongside IFRS junk figure. Unfortunately wont work on forecast figures when filtering for companies.

I dont see any reason why stocko couldnt show this, it cant be that difficult to calculate.

Dave Rose

Re XP Factory (LON:XPF). I am also eagerly awating Paul's write up but aso frustrated that Stockopedia have still not updated the strock report showing the the last set of results

Funnymoney

I don't. I didn't like the drift downwards though and I didn't have your inside information. Thanks for that, that is really useful and one reason why I posted as other views are interesting.

Caduceus

Hey Paul!

Hate to bring this up here, but I couldn't resist mentioning something about your website woes. It seems like you've been dealing with some unexpected and quite frankly 'flacid' "performance aids" popping up all over the place. I mean, who would've thought your site would turn into a hotbed of unwanted "enhancement" ads? It's a real mood killer, isn't it?

Anyway, I stumbled upon a nifty little solution that might help you out... There's this site (https://10web.io/) you could consider migrating to, which could save you from further encounters with those sneaky hacked advertisements. Think of it as your secret little pill against the unwelcome advances of those pesky promos. It's like the ultimate shield for your web presence!

Now, I won't guarantee that it'll work like magic, but hey, it's worth a shot, right? I'm just tossing the idea out there, hoping it might put a spring back in your website's step.

Cheers, and stay strong in the face of those unwanted "boosts"! (Yes, this post is filled with Viagra euphemisms, soz).

thepomisback

Don’t worry Paul. I was really being a little lazy by asking rather than contacting them directly. Really grateful for all of your good work as always.

Effortless Cool

Entirely correct. Stockopedia should be something more than a passive pipeline for third party data. They can and should provide the option to present net debt excluding lease liabilities. That is clearly what their subscribers want.

Raleigh4343

On a similar vein, but re: audio. It’s a pain to lose a recording one hour in. When Tim Ferriss interviewed Arnold Scwarzenegger for his book. He used 2 digital audio recorders. The Austrian oak asked him why he used two devices. Tim replied, “Redundancy. You won’t want to do the same interview twice in case my main recorder fails to record.”
The “Oh, FFS!” was funny though…

Yep. I watched that and another one. I haven’t bought yet as I can seem to convince myself to. I like Vox as a source of companies to look at but it does seem licky sometimes.

Albertos

ASOS (LON:ASC)

We live in interesting times - market cap now @ £350m - buy and hold looks dead.

The distrupters have become the distrupted.

WarrantStar

I expect that, if pushed, Stockopedia will blame their data provider for this. That is their standard response to all data problems and errors, and there is probably some truth in it. But I have to ask whether Stockopedia really has any choice as to who their data provider is. It looks like suitable data providers are in an oligopoly and are totally unresponsive to customer requests from Stockopedia and probably other customers. Also I believe that it would be extremely difficult for Stockopedia to change their data providers, and Refinitiv are very well aware of this. So Stockopedia and their subscribers are stuck with Refinitiv who couldn't care less because they know that it's too hard for their customers to go elsewhere.

Paul Scott

4th Jun '23

XP Factory (LON:XPF) is doing a rapid roll-out of new sites, many of which were opened towards the end of 2022. So the historic numbers are irrelevant. To assess the shares, it's all about working out the future profits, once a full year of the new site openings is included. That's where the broker notes are more useful than poring over historic numbers which are already out-of-date.

Everyone here seems to have forgotten how the numbers work for companies that are doing a roll-out of new sites! It's all about each new site adding say £200k extra contribution (profit before central costs), which means losses turn into profits once critical mass has been reached. XPF has already reached critical mass, and the site economics are excellent. So the 2023 and beyond figures should show a business that's growing profits strongly. But obviously that won't have come through in historic numbers yet, as most of the Boom Battle Bars sites have only been opened recently.

Regards, Paul (I hold XPF)

Small Cap Value Report (Tue 30 May 2023) - DWF, HTG, BOWL, LIKE

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