Good morning, it's Paul & Jack here with Tuesday's SCVR.
Timing - today's report is now finished.
Disclaimer -
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Agenda -
Paul's Section:
Churchill China (LON:CHH) - continued good trading, it's back to pre-pandemic 2019 revenue levels in both May & June 2021. Could this be benefiting from pent-up demand as restaurants re-open, and is it sustainable? Valuation fully factors in recovery, so where's the upside from here?
Gateley Holdings (LON:GTLY) - accounts delayed a week. Strange trading update, which doesn't confirm market guidance for FY 04/2021, but instead strangely refers to FY 04/2022 performance. I think this could be a typo. Have lodged a query with the company, and its broker. I'll update here if they respond.
Ilika (LON:IKA) - a quick, and fairly pointless look at the accounts for FY 04/2021. It's blue sky, and valued at £248m, so not something I can meaningfully analyse.
Purplebricks (LON:PURP) - quick review of results for FY 04/2021. This is starting to look interesting again, in my view.
Here are recordings of a couple of recent webinars which I found particularly interesting (no sections below, these are standalone) -
Cake Box Holdings (LON:CBOX) - FY results webinar from last week. I'm impressed with entrepreneurial management & the business model. A bit pricey now though. On my watch list, and I might buy on any weakness in future -
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Studio Retail (LON:STU) (I hold) - excellent results, and it looks stunningly cheap (PER of less than 7!). Could soar if management succeeds in growth plans. Mike Ashley's Frasers stake is an overhang, so I suspect this Capital Markets Day (CMD) was to drum up some buying interest. I'm still researching this, but might add to my position next week. Andy Brough of Schroders likes it, and is second largest shareholder -
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Jack's Section:
Alfa Financial Software Holdings (LON:ALFA) - shareholders got hurt here in an overvalued IPO back in 2017. The top 10 shareholders own around 82% and the spread is sizable for such a big company, but trading momentum is encouraging and a Quality Rank of 99 suggests Alfa might be worth a fresh look.
Kinovo (LON:KINO) - Formerly known as Bilby. Illiquid, risky micro cap in turnaround mode, but a market cap of c£22m on annual revenue of more than £60m suggests that the shares could rerate at some point if management can execute.
Paul’s Section
Churchill China (LON:CHH)
1712p (last night’s close) - mkt cap £189m
Half Year Trading Update & Interim Dividend
Churchill China plc (AIM: CHH), the manufacturer of innovative performance ceramic products serving hospitality markets worldwide, is pleased to provide an update in relation to trading for the six months ended 30 June 2021.
My summary of today’s update -
- Improved trading previously reported at AGM on 1 June 2021
- Maintained in June trading - both May & June 2021 recovered to pre-pandemic revenues of 2019
- Good forward order book (no figures provided)
- “Degree of uncertainty” due to covid
- Interim dividend of 6.7p declared
- Job Retention Scheme (furlough) monies have been repaid - bravo!
- Diary date - H1 results (6m to June 2021) due out on 1 Sept 2021
My opinion - I’m quite surprised it has recovered to 2019 level of revenues already, given that the customers are in the hospitality sector. There have been so many (permanent) restaurant closures in the UK, from CVAs, etc.
TGI Fridays (I hold, via Electra Private Equity (LON:ELTA) ) said in a recent webinar that 18% of Italian-style restaurants (the worst hit niche) in the UK had closed, mainly due to restructuring/insolvency of some large chains. With so much capacity gone, I would have expected CHH to have only partially recovered. There again, with restaurants re-opening, perhaps there is pent-up demand? So my worry here would be that the initial demand might ebb later this year, possibly?
Although anecdotally, I’ve noticed that some closed-down restaurants seem to have shopfitters in remarkably quickly, and some have already re-opened under new owners, in a new format. The attraction is that a fully-fitted out restaurant is an attractive option to new tenants, as they don’t need to spend much to refresh the site. The main items (kitchen equipment) is already there. On lower rents, and probably with a rent-free period too, the new operator of empty restaurants stand a fighting chance, and have a competitive advantage (lower costs) compared with existing competitors that survived the pandemic, but have higher fixed costs now (if they’ve been unable to negotiate a reduced rent).
So the main question is, will CHH be able to sustainably get back to 70-80p peak pre-pandemic earnings? Maybe, maybe not, I don’t know. At 1712p share price, the PER is nearly 23 times 75p peak earnings, and the company probably won’t get to that level of earnings in 2021, but possibly could in 2022. That’s what broker consensus currently stands at: 37.7p in 2021, and 75.8p in 2022.
Personally, I can’t see the attraction, as recovery is now fully priced-in. So where’s the upside for me, if I pay full price now?
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Gateley Holdings (LON:GTLY)
220p (unchanged, at 09:13) - mkt cap £259m
Gateley (AIM: GTLY), the legal and professional services group…
Today’s update seems rather confusing, and I wonder if it might contain a typo? Not what you expect from a firm of lawyers! To unpick it, you first need to read the upbeat pre-close trading update dated 26 May 2021, which relates to FY 04/2021.
That update indicated a diary date of 13 July 2021 for the FY 04/2021 final results.
Today we are told this has been pushed back a week to 20 July 2021.
Fair enough, I don’t think that’s a disaster - some companies are having problems with getting audits done in time, although no reason is given today by GTLY as to why the accounts are going to be a week late.
Note that the company previously announced a cyber-attack here on 16 June 2021 indicating that the incident was small, and had been dealt with. Maybe that distracted management and caused the week’s delay to the accounts?
The next paragraph of today’s update is confusing. It starts by saying -
As previously announced on 28 May 2021, the Group entered the second half of the year with high activity levels, strong trading momentum and a sense of optimism and confidence…
[Paul: the announcement was actually on 26 May, not 28 May, that's a typo]
Why refer to the start of H2 (which has now finished, H2 being the 6 months from Nov 2020 to Apr 2021)?
Looking back to the update on 26 May 2021, it gave chapter & verse on how the group had performed in FY 04/2021 -
Revenue for FY21 will be not less than £120m (FY20: £109.8m), an increase of more than 9.3% for the year as a whole. Prudent cost and cash management measures, initiated by the Board at the start of the pandemic and augmented by the stronger than anticipated H2 trading, have yielded a net cash position at 30 April 2021 of £20m, significantly ahead of management's previous expectations. The Group expects to report FY21 profit before tax of not less than £16.0m, compared with £14.8m for FY20, an increase of not less than 8.1%.
[ from 26 May 2021 pre-close trading update]
None of this is mentioned in today’s update. When accounts are delayed, I would expect the announcement to confirm previous guidance, which today’s announcement does not.
Instead, bizarrely, it confirms performance against market expectations for the current, new financial year, ending 30 April 2022 -
The Board confirms that the Group is on track to meet market expectations for the year ending 30 April 2022.
[Paul: possible typo no.2? Did they mean 2021? Since clarified, no this is not a typo]
My opinion - as it stands, this announcement doesn’t make sense to me.
I suspect there might be 2 typos, in that it should say 2021, not 2022 in the quote immediately above, and the reference to a previous announcement has the wrong date. Update - advisers have confirmed to me it's not a typo, and is intended to communicate that the new financial year is trading in line with expectations.
Accordingly, I’ve left a message on the voicemail of the Head of Investor Relations, Nick Smith, pointing out that the context suggests it should read 2021, not 2022. I've also flagged my query to the broker.
If they reply, I’ll update this piece (see below). For the moment though, it looks confusing, and probably a typo. If it’s not a typo, then it would be a concern, as it would seem that the company might be glossing over a potentially bigger problem, if it cannot confirm that FY 04/2021 is in line with expectations, which importantly as it stands, today’s announcement does not. They’re lawyers, so should be getting these things right.
Hence an important outstanding query exists here.
UPDATE: I've spoken to the company's advisers, who say the announcement intended to communicate that the guidance given on 26 May 2021 still stands. If so, why didn't the company just say so?! Also the final sentence was intended to communicate that current trading is in line with expectations (so the 04/2022 is not a typo).
I've suggested that the company re-issues today's update, with the RNS date corrected, and also a clearer explanation of guidance for both FY 04/2021, and FY 04/2022.
UPDATE: (7 July) - just checked my voicemail, and the company did indeed return my call, thanks for that. They also confirmed that the reference to FY 04/2022 was deliberate, and not a typo, they wanted to convey that current trading is going well, and in line with expectations.
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Ilika (LON:IKA)
200p - mkt cap £278m
It’s fairly pointless getting a value/GARP investor like me to look at the accounts of a blue sky speculative share like Ilika.
Ilika (AIM: IKA), a pioneer in solid-state battery technology, announces its full-year results for the year ended 30 April 2021.
It’s more of the same in terms of numbers -
The loss after tax is not included in the highlights, but is £(3.5)m. I’m happy to use after-tax figures for companies which receive R&D tax credits, as that’s a genuine income.
Of the £2.3m revenues, 90% came from grants. The other income stream historically has been paid-for research for third parties, rather than selling products, which it has not yet got round to on any meaningful scale.
Therefore the £278m market cap rests entirely on hopes for future commercialisation of its research projects. There’s not really anything I have to say about that, as I’m a numbers man, not a technical specialist in battery technology.
Manufacturing facility - is in the pipeline, but they’re only talking about scaling up production by 70x. Given that existing production is very low, then that’s not exciting at all. The commentary does drop a few big names, in terms of collaborations, framework agreements, etc.
Goliath car batteries are still at prototype stage. We’re told more funding may be needed to progress that.
My opinion - with a £278m market cap, and a sexy story in a very topical area, I would encourage management at Ilika to absolutely go for it - do a huge placing of say £100m, and really get on the radar. Float on NASDAQ maybe, through a SPAC?!
There must be loads of companies doing similar work all over the world, in battery technology. In my view, the UK is very good at early stage innovation, but not very good at commercialising things.
Good luck to Ilika, but for me this share would be nothing more than a punt, hence is not of interest. I think investors need sector-specific technical knowledge to meaningfully assess the chances of success or failure. Very few blue sky shares like this succeed in the long term, but can be great speculative things in a bull market like the one we have now! Whatever floats your boat.
There have been 2 false dawns before, as you can see from the long-term chart below. Same management, same strategy.
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Purplebricks (LON:PURP)
85.5p (roughly flat, at 11:46) - mkt cap £261m
Purplebricks Group plc (AIM: PURP), the UK's leading tech-led estate agency business, announces its results for the year ended 30 April 2021 ("FY21") and provides an update on its strategy execution.
Just a quick look at this today.
The business has been simplified now, with disposals of overseas operations, so it’s just UK now.
Financial highlights look strong, but will have benefited from the Govt stimulus to the housing market (e.g. Stamp Duty holiday)
Revenue up 13% to £90.9m
Adj EBITDA up 314% to £12.0m, although I don’t know how real that figure is, I tend to ignore EBITDA for companies like this.
Footnote 8 is important to take into account, as this is where half the operating profit came from -
Operating profit of £8.2m (FY20: loss £5.7m), including a benefit of £4.3m from non-trading items8
8 These non-trading items are a share-based payment credit of £2.3m and gains of £2.0m on deemed disposal relating to the investment in Homeday and are discussed in the financial review.
Repaid £1.0m furlough monies, which personally I like, but there are other opinions
Cash pile is strikingly high (originating from the disposal of the overseas businesses), at £74.0m, that’s 28% of the market cap, so is important. But what will they do with the cash pile, and will it add, or destroy value?
Probably the most important strategic change is to the pricing model. A new money back guarantee (on non-sale of a property) has been successfully trialled, and is being rolled out shortly. That addresses the main criticism of PURP’s business model previously - that it left behind a long tail of dissatisfied customers who paid a fee for effectively nothing. Also previously it meant that PURP had no financial incentive to actually sell anything!
Outlook - lots of detail, but the most important bits say -
Our current expectation is for FY22 EBITDA to be flat year-on-year, in line with market expectations9, with these strategies expected to accelerate revenue growth and drive progress towards the Group's medium-term targets over the next few years. Once these initiatives have been successfully rolled out, the Group will accelerate its marketing strategy to grow instructions and share. As a result of these strategic changes, the Board expects Purplebricks to be able to deliver annual revenue growth in excess of 20% in the medium-term, with confidence in the Group's ability to deliver against its growth strategy.
9 See Company compiled consensus on the investor website https://www.purplebricksplc.com/investors/analyst-and-consensus/
Link to watch replay of results presentation is here.
My opinion - this is starting to look potentially interesting again.
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Jack’s section
Alfa Financial Software Holdings (LON:ALFA)
Share price: 139p (pre-open)
Shares in issue: 300,000,000
Market cap: £417m
Alfa Financial Software is a developer of mission-critical software for the asset finance industry. Its main software is Alfa Systems, which allows auto, equipment, and wholesale finance businesses to manage their loans and leases.
It floated back in 2017 at far higher levels than we see today but came unstuck with a profit warning, which Alfa attributed to ‘broader macro uncertainty’. In truth it looks to have been significantly overvalued (an overvalued IPO? Who’d’ve thought.) with a market cap north of £1.2bn on revenue of £73m and adjusted EBIT of £33m.
The share price tumbled by more than 75% and you can see from the chart below there was a significant amount of shareholder churn as the story came undone.
Since then it’s been a thankless ride for shareholders, although it has to be said that the trend looks more encouraging in recent months (albeit on relatively low volumes).
Our revenue expectations for H1 remain unchanged, however the increased contractual cover for the second half as a result of these recent contract wins, along with further statements of work for existing customers, means that our revenue expectations for the second half have increased.
The group now expects revenues for the full year to be c5% higher than previous expectations, with most of that benefiting operating profit performance and should surpass 2020 underlying revenues (excluding one-off licence income).
Full contract packs have been signed with three prospects since its last update:
- One contract is for a new Alfa implementation for a large European automotive OEM;
- One is for a new Alfa wholesale finance implementation for a large US automotive dealer services customer; and
- One is for an upgrade from Alfa Systems v4 to v5 for a UK merchant bank.
The group has another seven prospects in its late-stage pipeline.
Alfa is changing the way it reports revenue to better reflect changing client trends. Going forward it will report across three categories:
Software - 25% of FY20 revenue - sales from selling or developing software for new or existing customers. Will include the software perpetual licence revenue along with revenue from any development efforts required to customise the software and any maintenance or development fees for the period during which the Alfa software is being implemented.
Subscription - 23% of FY20 revenue - includes charges to clients on a subscription basis. This is recurring revenue and includes all revenue charged on a subscription basis.
Services - 52% of FY20 revenue - professional services to implement software for clients. Will include all other sources of revenue, principally based on charging clients on a day rate basis for professional services.
Conclusion
The shares are tightly held. Alfa’s major shareholder is CHP with 66%. This is actually the maker of Alfa Systems and directors include the exec chairman and CEO of Alfa (credit here goes to subscribers’ investigative work in a 2020 SCVR).
This goes some way to explaining the sparse director buying - although there has been one recent £20k transaction at close to today’s pre-open.
The Quality Rank is 99 here, which is usually a sign that there is something worth investigating. Of course, past disappointments must also be considered.
There has been no equity dilution since listing and, while net cash looks to have gone down, that’s more a reflection of the IFRS change in lease accounting than any actual increase in debt. The fall in cash appears to have come from a bumper £44m special dividend payment made in 2020 (15p per share).
That’s more than 10% of today’s pre-open share price and must go some way to restoring goodwill. All in all, this could be worth a deeper analysis. The price looks far more appropriate today than it did a couple of years ago but it’s always worth bearing in mind shareholders have been badly burned here in the past.
This is another stock with conservative looking broker forecasts that are getting nudged up. Alfa is on course to surpass FY20 revenue minus one-off license income, which was £73.3m. I’m not sure why brokers are expecting such a sharp drop in profit margin.
There could be a very good reason for that, but if we assume for a second that Alfa matches the FY20 margin of 26%, then that would make for £19m of net profit or 6.3p of earnings and a forecast PE ratio of 22x. Again, I don’t know if that will happen, but the actual forecast PE ratio is 42.8x, which to me suggests at least the possibility of further upgrades.
Kinovo (LON:KINO)
Share price: 36.5p (-3.95%)
Shares in issue: 61,214,703
Market cap: £22.3m
You might know this one by its former name of Bilby. It’s a specialist property services group that delivers compliance and sustainability solutions, with a focus on home and workplace regulation, regeneration, and renewables.
A couple of years back, Bilby came unstuck after chasing large, low-margin contracts. Since then a new management team has been installed, spearheaded by David Bullen, and we are beginning to see signs of a resurgence in the stock price with renewed buying activity.
This is a micro cap, just £22m or so, and the shares are not liquid. They’re down around 4% at time of writing, so perhaps we are seeing a setback in this recovery.
Highlights:
- Revenue -8% to £60.2m,
- Operating profit -74% to £601,000,
- Adjusted EBITDA -36% to £3m,
- Net debt down from £7.2m to £2.7m,
- Adjusted operating cash flow steady at £4.7m (FY20: £4.6m),
- Basic earnings per share (EPS) -91% to 0.27p,
- Adjusted EPS -45% to 3.91p,
- Restructured debt facilities comprised of £7.3m loan and £2.5m overdraft,
- Proposed reinstatement of dividend of 0.5p per share.
Visible revenues over the next three years are £170m (2020: £172m) including £8m in visible revenues secured since the year end with a strong pipeline.
It’s been a particularly tough year to enact a turnaround, but this is exactly what Kinovo management has been tasked with. It has instituted a new vision and purpose, pushed through structural changes, reduced debt, generated cash, invested in the business, and is now proposing dividends.
The old Bilby was ‘buy and build’ but there is now a renewed focus on organic growth alongside strategic acquisition opportunities. Investment was undertaken to grow the Business Development team during the year which will continue in the year ahead.
Management says performance in the three months to 30 June 2021 has been in line with expectations and conditions could strengthen as lockdowns ease.
Conclusion
This is a riskier stock to consider, but it’s worth remembering that this micro cap generates upwards of £60m in annual revenue. So if it can get this turnaround working, there is potential upside.
While earnings have certainly taken a big hit, cash conversion is strong (adjusted cash conversion of 156%), which suggests the underlying business is in ok shape and has the ability to self-fund its improvement initiatives going forward. Net debt also fell handily in the period.
This early in the game, I’d rather see that dividend cash being used to further strengthen the group’s balance sheet. And if the shares really are cheap, why not just buy them back? There are ongoing adjustments to results and various non-recurring charges to sort through, as is often the case with rapidly changing turnarounds.
Ultimately, the fundamental case here remains the same: a risky, illiquid micro cap - but one with what looks to be a solid new management team, a market cap of just £22.3m, annual revenue of more than £60m, and that managed to remain profitable through the global pandemic.
It won’t be for everyone and you’ll need a certain risk tolerance to consider it, but with a fair wind and able management the stock could double over the next year or two, so it’s worth monitoring.
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