Small Cap Value Report (Tue 31 July 2018) - TWD, WATR, GOCO, NWF, GAW

31st Jul '18 by Graham Neary

49 comments 14053 reads

Good morning!

Various things I have spotted today, with your help from the comments:

Trackwise - admission to AIM
Water Intelligence (LON:WATR) - trading update
Gocompare.Com (LON:GOCO) - interim results
NWF (LON:NWF) - final results
Games Workshop (LON:GAW) - annual financial report

Trackwise (TWD)

Admission to AIM - This is a small IPO, raising £5.5 million for the company and £1.5 million for selling shareholders. Trackwise makes specialist circuit boards with applications in telecoms, aviation, etc.

It's topical because I was only yesterday talking about the results at Arden Partners (LON:ARDN), who it turns out will be Nomad and Broker to Trackwise. Arden is earning commission of up to £900k from this transaction.

A quick look at the admission document tells me that Trackwise made an adjusted operating profit of £270k last year, after adding back some non-recurring expenses, from revenues of £2.8 million.

Its largest two customers accounted for 46% of revenues. That gives the appearance of a very high degree of customer concentration risk, at least for now.

And the market cap at the IPO price is £15.5 million. So we don't have much of a cushion in terms of the historic earnings multiple.

So it's not for me, but perhaps you will be able to build a more bullish perspective. It has a patent for a new method of manufacturing flexible circuit boards, which it thinks opens a huge opportunity for future growth. It might be worth looking into in more detail.

Water Intelligence (LON:WATR)

Share price: 413p (+6%)
No. of shares: 15 million
Market cap: £63 million

First Half Trading Update

This US-based leak detection business is another example of a High Flyer (aren't these categorisations very useful?)

For the uninitiated, that means high quality and high momentum, but little value, at least as value is traditionally understood.

Paul last covered it with the share price at 200p, in February. So congratulations to anyone who has earned a 100% return so quickly, by holding it since then. Some of you have probably been holding it for a lot longer than that, and have a much…

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Tristan_Treacy

31st Jul '18

Thanks for comments on Gocompare.Com (LON:GOCO), Graham. Even for the best companies trading doesn't progress a linear fashion - there are always going to be "bumps" caused by temporary competitive pressures or new products not performing. As you say though, Gocompare.Com (LON:GOCO) looks to be a quality company. I hold.

cholertonandrew

Re Avacta

Thanks Guy, it’s good to hear your thoughts too. I agree it’s often better to wait on these things, I’ve learnt that the hard way!

Kind regards
Andrew

Alexgedla

900k for such a piddly ipo. Wowsers. Hope it works out for them

AnonymousUser192020

I think that's often Normal for Norfolk at the micro-cap end of the market. Some years ago when I was targeted with 'can't afford to miss this one' private company and sometimes AIM blue sky placements by the Charles Street Securities rogues they regularly trousered c 25% of the gross proceeds (albeit partly as 'free' shares). Not that I'm suggesting Trackwise is in this category. I don't know how reputable Arden Partners are, eg whether they avoid acting for bargepole companies. Anyway, £900k is quoted in the prospectus, though I didn't see any meaningful breakdown.

john2

Thanks for covering Gocompare. I hold some in my Zulu Principle portfolio, and was rather taken aback by today's sharp drop. I'll continue to hold as you suggest.

ezlifeme

Seems a little like the mentality of adding the Estate Agent and Solicitors fee onto the Mortgage over the next zillion years when you buy your 1st House!
Can't pay for it now so I'll just add it on without checking if its "reasonably priced"

Graham Neary

You're welcome Tristan, good luck with it. G

Hi Julian, I covered them both in the end! Many thanks for the suggestions. G

Thanks for the tip-off Peter! I saw an Non-Standard Finance (LON:NSF) presentation at Mello and I do intend to keep an eye on them. All the best. G

Hi jpatel, sorry I didn't get around to Sabre Insurance (LON:SBRE) in the end. It was a good suggestion though. G

gus 1065

11.00am AGM statement and trading update from Volex (LON:VLX) that some may have missed.

https://www.investegate.co.uk/volex-plc--vlx-/rns/agm-statement-and-trading-update/201807311100012994W/

Annoying it wasn’t posted at 7am pre market open, but can possibly forgive them given its upbeat and ahead of expectations. Shares are up just under 10% on the day.

Gus.

Hi Camtab, re: Avacta (LON:AVCT) it is better if I just stay away from life sciences/biotech because I know I know nothing about it (a known unknown, if you will). But I'm glad to see that others have been providing you with comments on it in this thread. G

Andrew L

Interesting comments on Gocompare.Com (LON:GOCO) "I don't mind whether earnings are increased through top-line growth or improved margins." I guess this is effectively stating that profit growth is profit growth no matter where it comes from. From a one period perspective that makes sense.

However, I take the view that we are really looking for sources of profit growth that are sustainable. Profit growth that is driven by long-term organic revenue growth is high quality in nature. Profit growth driven by margin growth is transitory as margins cannot be increased forever. Profit growth driven by acquisitions is likely to be high risk and may depress the return on capital.

I would also split up the source of revenue growth into market share and the underlying market. If you have a company that is reliant on taking market share it will eventually reach its market share potential. A company that has a sector demand tailwind is in a strong position.

So from the perspective of the long-term outlook of a business I think the sources of profit growth are very important: margins, acquisitions, market share, market demand etc. The source of profit growth determines the quality of profit growth for investors and whether it is sustainable. I think it is a very important question to ask when results come out: how did they grow their profits?

I would prefer profit growth to be driven by underlying demand which translates into revenue growth without significant price increases. I would prefer some operational gearing. Revenue growth of 5-10% a year with some operational gearing can work wonders.

With regard to Gocompare it grew profits by increasing margins in its price comparison business and also through acquisitions. Revenue in its price comparison business fell, which suggests a lack of sector demand drivers. So we have to question the whole growth narrative around price comparison websites. Perhaps they are now mature in the UK. Alternatively, Gocompare lost some market share.

Gocompare's management is trying to spin the result as not chasing unprofitable business etc. This may be true or it could be the case that the sector is mature and/or Gocompare has lost market share. I would guard against buying into the management spin. They always want to sell themselves as managers.

I do agree that Gocompare is a profitable business but is it a growing one? The signs appear to be that price comparison is mature. Gocompare's management talk a lot about converting the non-switchers etc. If people can't be bothered to switch with wall to wall price comparison adverts are they really going to start doing so? Some people have been with British Gas etc for decades and just don't care. I think the price comparison sector might be dreaming if they think these people will ever switch.

So in summary, Gocompare is a profitable business with a good brand. However, it has relied on more transitory sources of growth in the first half in the form of acquisitions and margin improvements. I thought the MyVoucherCodes business was meant to boost the core business. Certainly they did adverts highlighting you could get a restaurant voucher when switching.

I do broadly agree with the conclusion that good companies are worth holding onto. All with have sticky patches. But I also think we must be careful on the sources of profit growth in any period. Some sources of profit growth are faddish and may reverse.

Gocompare.Com (LON:GOCO) performed well in 2017 but things appear more tricky in 2018. This is not to say it is a bad business but it is just one of the price comparison companies out there. People also don't need to switch products and so revenue is hard to predict.

In my view, we need to focus in on the franchise and risks of a business rather than just growth and valuation. The valuation is easy to assess in terms of market value relative to forecast earnings. Growth is easy to assess in terms of historic growth but future growth is harder. Franchise is easy to assess in terms of past margins/ROCE. However, it is hard to assess in terms fo the future. Risk is also hard to assess.

For a business like Gocompare the strength of its franchise, its growth potential and risk factors are all pretty hard to figure out in my view. This isn't a business with recurring revenue, stable demand and a locked in customer base. It is a business in a competitive market place and with unpredictable customer demand.

AlanJenkins2

How reliant are GOCO on a certain Welsh tenor ? :-]

The Welsh tenor - Gio Compario- will hopefully be digitised!!! I think Gocompare's brand name is pretty good. Although I think Gio Compario is a bit annoying and hard to take seriously.

Having a further think and £GOCO's improvement in the conversion rate is pretty impressive - up 10.7% in Q2 on a year ago. The increase in the marketing margin was also pretty robust up 6.8% on a year ago in the first half to 46.4%.

I am not really sure what "savings as a service" actually means. What does concern me is the 13% decline in customer interactions on a year ago. Overall, I think Gocompare.Com (LON:GOCO) is a reasonable company but am not sure on its long-term potential. It isn't clear if the acquisition strategy will pay off in my view. The mortgage gym thing looks slightly tenuous.

But an adjusted operating profit margin of 27.7% in the first half of 2018 is not to be sniffed at even if recent growth has been lacklustre.

Someone posted on Linkedin that "focus on margin" translates as "because there is no growth." Feels somewhat similar to £GOCO's first half results!

riosurfer

1st Aug '18

Agree. Margin growth is the focus of lower growth businesses like Unilever. Nothing wrong with margin growth of course, but slower growth is the key issue. Moneysupermarket recently changed advertising agency and GoCompare has come back to the screens with the annoying but memorable welsh tenor. I think the brand that is top-of-mind will win a disproportionate share of market growth, and I don’t think Go Compare is near top of mind in this market.

Gromley

2nd Aug '18

Graham, if you do look at Water Intelligence (LON:WATR) can you look at what has been happening with the cash flow trend per share please? Despite the growth, there appears to be less operating cash flow per share than a few years ago. Does this leak detection company have a cash flow leak somewhere?

Hi Graham, I think your point is basically illustrated by this view.

I know virtually nothing about what the business was like 5 years ago (although it is interesting to note also that it had a higher operating margin but on lower revenues) so I'm more interested in the current position.

It is certainly true to note that in the last two years the ratio Cash from Ops vs Operating Profit has been 57% and 49% respectively.

However this is more than explained by changes in working capital and specifically increases in trade receivables.

This is not unexpected for a business growing so strongly and their trade receivables do not look problematic to me sitting at around 2 months turnover. Only a tiny portion of this is "past due" and none of that considered materially at risk.

So rather than having a leak, I think they are just filling up the tank!

If and when growth begins to slow (no sign of that anytime soon as far as I can see) this situation will start to go into reverse - so imho this is one of those nice problems to have.

GrahamF

Thanks Gromley

Thanks to Gromley from me too! Cheers.

grishas

18th Oct '18

Hi Graham, re-reading this previous comment about GAW. The stock has come off a bit recently (and today), back to June-18 level. What would be the entry level for you for this company? Thanks!

Small Cap Value Report (Tue 31 July 2018) - TWD, WATR, GOCO, NWF, GAW

Trackwise (TWD)

Water Intelligence (LON:WATR)

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Graham Neary

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