Small Cap Value Report (Tue 6 November 2018) - VCP, FDP, CNCT
Good morning!
Today we are looking at:
- Victoria (LON:VCP)
- First Derivatives (LON:FDP)
- Connect (LON:CNCT)
This section by Paul Scott:
Victoria (LON:VCP)
- Share price: 410p (-5%)
- No. of shares: 125 million
- Market cap: £514 million
We had an interesting debate here (Mon) and here (Weds) last week about Victoria (LON:VCP) - issuing a profit warning, and simultaneously announcing that it was seeking to issue a junk bond to repay all its bank borrowings. This spooked me, and after various accounting shenanigans lately (such as CAKE, and YU.), my approach is this - if in doubt, run for cover. We can always buy back later. When writing last week, neither Graham not myself held any position in VCP shares - so as always, we were just giving our honest opinions, based on the facts available.
Graham took a more relaxed view, and gave an interesting alternative assessment of the situation, thinking that a bond issue seemed a good idea, and giving his view that the BB credit rating was not a worry.
The latest announcement today, says that the bond issue is being abandoned, as indicative pricing was too high. That's not at all surprising to me. After all, VCP has a stretched balance sheet, with too much debt. Plus it's just issued a profit warning. So why would anyone want to lend it money cheaply?
Management today says;
It is very disappointing that despite the positive, stable credit ratings, the indicative pricing for the Bond moved unfavourably over the course of last week, particularly when there have been no fundamental changes to the Group or its business.
Possibly the pricing moved because the company issued a profit warning here? The wording of that statement seemed to try to gloss over the negatives, but it was clearly a profit warning, and the market was not fooled. The share price plunged 25%, closing at 455p on the day of the main announcements (29 Oct 2018).
NB. my negative commentary on the situation was not published until the evening of Monday 29 Oct, after the market had shut, by which time the main damage to the share price had already happened.
Weak balance sheet - the pro forma 30 Sep 2018 financial information shows NTAV negative at -£169m, if you just write off goodwill and other intangible assets. That improves to -£99.6m if you also write off the deferred tax liability, which often relates to intangible assets. So still a significant negative balance sheet NTAV, whichever way you look at it. I don't normally invest in companies with negative NTAV, particularly if there is a large element of bank debt (relatively short term funding).
So I completely stand by my previous comments that the balance sheet is quite obviously weak, and over-reliant on bank debt.
Banking relationship - the group reassures today on its banking relationship;
Therefore, as we continue to have a close and positive relationships with our lending banks and operate with significant headroom with respect to covenants under our existing 2-year facilities put in place in August 2018, we will continue with these facilities. The banks have been, and continue to be, very supportive of our strategy and performance. Any suggestion to the contrary is untrue.
I think it would be helpful if the group publishes what its banking covenants are, and quantifies the headroom. Nothing reassures better than hard facts. A 2-year facility will clearly need to be refinanced in the not-too-distant future. That may not necessarily be a problem, if the company performs well. It would make sense for the company to pay down some of the debt from cashflows in the meantime. Maybe it needs to take a break from the frantic pace of acquisitions?
Directorspeak - how refreshing to hear a management team admit to their mistakes. This is impressive;
Nevertheless, last week was not the Board's finest hour in terms of the clarity of our communication. For the last six years, the Board has endeavoured to maintain an open dialogue, fully appreciating that it is the shareholders who own the company.
Unfortunately, we placed too much emphasis on technical guidance and market convention and not enough common sense was applied in terms of communication with shareholders.
By failing to communicate clearly last week and in the run-up to the Bond launch, the Company needlessly left shareholders feeling uncertain about the future.
Good for them, it takes courage to admit to mistakes made, and I think people will respect these comments, I certainly do.
However, it probably would have been better to have edited out this bit from the announcement, which is less impressive;
Critically, this also left an open goal for those with less than pure motives to spread outrageous untruths. This has damaged the value of the shares, although, of course, there has been no impact on the underlying business, which is high quality and continues to successfully design, manufacture, and distribute flooring products around the world as it always has done.
I've no idea who they are referring to, as I've not seen any other commentary about the profit warning or bond issue. Maybe the company was targeted by short-sellers on bulletin boards, or elsewhere, I have no idea?
The point is surely that, if management create an information vacuum, then this is likely to spook investors. For example, the last time I can remember a company suddenly announcing, out of the blue, that it intended to issue a junk bond, was Globo - which of course soon afterwards went bust. Many investors are also perplexed, and smarting, from the recent near-collapse of Patisserie Holdings(LON:CAKE) . Therefore, Victoria dropping a bombshell, with absolutely no explanation (initially) of why it had decided to issue a bond to repay all its bank debt, is very likely to trigger panic amongst investors, which is precisely what happened.
I'm sorry if my posts alarmed anyone, but if something unexpected, and potentially dangerous happens, then I'll try to protect my readers by airing my concerns straight away. The company has since clarified things, so hopefully they can get back on track. So it's not right for Victoria to both admit they are at fault, but in the next sentence to shoot the messenger.
Anyway, I wish the company well, and hope it recovers from this debacle. Whilst accepting that I probably won't be on their Christmas card list (although Graham might be).
My hunch is that it's probably over the worst now, and that the shares might bottom out fairly soon. So it could be an interesting situation, for more risk-tolerant punters, maybe?
Graham's' View
In the same way that I didn't think Victoria's attempt to secure bond financing was any reason for shareholders to panic, I don't think today's news is any reason to panic, either. Cancelled bond sales happen all the time. There is never a guarantee that a mutually agreeable price can be reached.
That said, it would clearly have been better news for shareholders and for the company if more attractive financing could have been secured. I wonder if the sharp plunge in the share price (in addition to the profit warning) may have spooked some bond investors who were on the margin of discussions. Or maybe there was never much chance of them securing the interest rate they were hoping for.
At the end of the day, the attempt to issue a bond hasn't changed anything. Victoria carries on with bank financing as before. Some fees may have been incurred but for the sake of potentially €450 million in issuance, that was probably worth taking the chance.
When the company says:
Unfortunately, we placed too much emphasis on technical guidance and market convention and not enough common sense was applied in terms of communication with shareholders.
I think that what they are saying here is that they acted as if they were a big-cap announcing an additional bond issue to institutions, simply following market conventions. When that happens, nobody bats an eyelid. It's just another day in the office.
For an AIM company announcing its first ever bond issue, maybe they didn't think hard enough about how their initial announcement could be misinterpreted by investors and commentators who might mistakenly conclude that it was an action taken from a position of financial distress, rather than for the simple reason that bond financing is more attractive than bank financing.
Ultimately, it doesn't matter. The company hasn't been damaged, only the share price (though the share price may have continued to fall on Oct 30 anyway, even without this confusion). Investors who believe in Victoria can take advantage of the weakness to pick up more shares.
For what it's worth, VCP equity remains outside my investible universe, as I take no interest in companies growing via debt and acquisitions.
First Derivatives (LON:FDP)
- Share price: £34.95 (+7.5%)
- No. of shares: 26 million
- Market cap: £909 million
This was the subject of a bear attack last month that now appears to be in danger of fizzling out.
Results published today are quite good, though very heavily adjusted. Adjusted profit after tax is presented with the following disclaimer:
Adjusted for amortisation of acquired intangibles, share-based payments, acquisition costs, foreign currency translation effect, share of loss on associate and exceptional taxation
It's a lot to take in. While some of the adjustments are reasonable and others are debatable, I much prefer companies with organic growth and simple accounts, rather than acquisitive growth and heavily adjusted numbers.
I also agree with the bears that FDP's activities don't look particularly attractive from an investment point of view. It has been described as a "low-margin consultancy business" by Matt Earl, who is short the stock. It describes itself as "a leading provider of products and services to some of the world's largest finance, technology and energy institutions".
Regular readers will be aware that IT managed services is an area I avoid (as it is too labour-intensive, and is better off owned by the employees and directors rather than by external shareholders). About 40% of FDP revenues are from managed services and consulting.
On the software side, the description of its technology platform makes very little sense to me. In simple language, it's a tool to analyse large quantities of data, either streaming or historical.
There are several references to artificial intelligence and machine learning, words which are undoubtedly very fashionable at the moment.
As far as the rest of the FDP revenue breakdown is concerned, about 31% of total revenue is from services related to software. The last c. 29% is from software sales.
Capitalised costs: the company has been capitalising R&D costs slightly faster than it has been amortising them, boosting pre-tax profits by £0.5 million during the period.
PBT is £7.6 million, or £12.6 million if you allow for all of the adjustments.
Operating cash flow is quite good at £13.5 million, but the company has lots of ways to use it up, so the debt load has increased.
My view: It looks to me like an impressively large managed services provider, with some software and venture capital-type activities thrown in. Not an attractive investment, but an impressively large company all the same.
As far as shorting it goes, the bears make some excellent points, but the problem for them is that FDP doesn't look likely to go bust or run out of money very soon, and there is no smoking gun in terms of fraud or anything like that either. So the bear case amounts to saying that it is not a very good investment and is overvalued.
That might very well be true (I think that it is), but aren't there lots of overvalued shares at the moment? I think the bears are missing a catalyst for it to really fall apart. They could be waiting a while for the valuation to shrink.
Connect (LON:CNCT)
- Share price: 35p (-6%)
- No. of shares: 248 million
- Market cap: £87 million
Audited Preliminary Results Year Ended 31 Aug 2018
I covered this logistics business in detail in September, and previously in June. It has been performing badly under the weight of debt and failed acquisitions (there seems to be a theme to today's report).
I've wondered if this one might be a value opportunity, as it does have a decent core business (Smiths News) and another business that seems to be doing ok (Dawson Media Direct, or DMD).
It mostly needs to do something about Tuffnells, the irregular dimension and weight business that has been a failure under its ownership. The failed Pass My Parcel unit is now closed.
Results:
- Revenue down 3.8% to £1,534 million.
- Pre-tax loss of £35.5 milllion, adjusted pre-tax profit of £28 million if you exclude goodwill impairment and various other things.
- Net debt stable at £83 million.
- Annual dividend cut by 68%, with no final dividend.
Free cash flow is £20.2 million, i.e. we have a trailing free cash flow yield of >20%.
Smiths News makes adjusted operating profit of £35.9 million, down by only c. 10% compared to the year before. This operating profit figure includes the losses at Pass My Parcel.
DMD makes a small but improved adjusted operating profit. This unit delivers to airlines.
Tuffnells makes a £5 million loss. Competition is blamed, e.g. DX (Group) (LON:DX.)
My view: I would be more excited about Connect if it was going to sell or shut down Tuffnells. In that case, I think I could make an argument that this offered better-than-average chances at the current share price.
Instead it is going to attempt what looks like a very difficult and distracting recovery. Therefore, after taking the debt load into account, this look priced about right to me.
That's all for now. I'm taking a break for a few weeks, see you in a while!
Graham
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
33 comments
Hi Graham
Please could you expand on your statement that you take no interest in companies which grow by debt & acquisition? Why don't you? Some acquirers can be good at selecting their acquisitions and do not overpay. Judges Scientific (LON:JDG) comes to mind as a company which has been good at selecting companies to acquire.
For anyone interested in Connect the results presentation is well worth listening to:- http://webcasting.buchanan.uk....
(hat tip to rhomboid for highlighting it elsewhere)
I agree with Tony that the cash flow is striking, and any real sign of a turnaround at Tufnells would be significantly positive. It won't happen overnight, and they are not pretending otherwise, but I don't see it as a write off - and there's a fair bit of healthy kitchen sinking going on here.
I bought in (too soon) earlier in the year after things started unravelling. However, I have no intention to sell where we are now, and I'll be keeping an eye open for a possible time to increase as things develop.
I had a brief scan of the Connect (LON:CNCT) results this morning before going out and found myself scratching my head as to what to pick out.
I think Graham definitely hones in on what has been (and potentially still is) the key potential value characteristic - CASHFLOW. Even in this tumultuous year, positive cashflow still stick outs.
In fact though, I think Graham slightly understates this figure citing FCF of £20.2m - in fact this includes negative £8.3m cashflow relating (I think) to the closure of Pass My Parcel.
On the other hand, I do not accept that cash used to fund the pension deficit recovery plan (£4.7m) should be considered part of FCF (I might be inventing another "GromleyRatio" if I'm flying in the face of convention here).
To my mind real free cash flow was £23.8m (in a bad year).
I also though differ with Graham on the point : " I would be more excited about Connect if it was going to sell or shut down Tuffnells."
Sell might be okay (at the right price) but shutdown absolutely not.
The core/legacy Smiths business might be the cash-cow but the sector is in secular decline (as a self-confessed owner of Reach (LON:RCH) shares believe me I know).
The principal reason for buying Tufnells (possible synergies with Smiths) may have effectively been written off (without researching it properly yet - I suspect that is the main part of the £46m write off of goodwill); but it is a business with growth prospects to balance the declining Smiths business.
In fact as a slight side-track I think that "proper" logistics businesses may get a bit of a Brexit Bonus when compared with businesses that have simply created a network of "(wo)man and van" operators - many of whom from personal experience are Eastern European. That is not intended to be overly political, but I think it is important to understand that "Freedom of movement of labour" (not people) has reduced costs and margins in some sectors.
Anyway to "un-digress" Tuffnells made a loss of £5m vs a previous year profit of £12m - I do not consider it to be valueless.
My interpretation of Tufnells is that Connect (LON:CNCT) bought a leading logistics company that they intended to integrate with Smiths and deliver some substantial synergies.
However, during this integration they discovered that Tufnells was actually just a collection of largely autonomous depots that just happened to sport the same logo. It is a business model that clearly worked for Tufnells in the past, but the assumption that it was a uniform business was a disaster.
My view is that the previously envisioned synergies between Smiths and Tufnells may still be achieved in due course but that Tufnells needs first to be "unified".
So when Graham suggests that Tufnells will be a "distracting recovery" I disagree . Connect (LON:CNCT) has now re-organised and essentially owns two (in the short term) unrelated businesses - Smiths & Tufnells
In due course there may still be achievable synergies here.
(Incidentally, for those wondering why I haven't explicitly mentioned Dawson Media Direct [DMD] it is simply because I regard them as effectively already part of Smiths.]
No position in Connect (LON:CNCT) at this time, but a likely buyer in the near future.
Regards,
Tony
Have a good break and thanks for your expert analysis.
BB
If I was a Victoria (LON:VCP) shareholder, I would not be particularly happy with recent events. I would also be asking some serious questions of my financial advisor. I completely understand why the company would have looked at a bond deal, but they are relatively small fry in those markets and I wonder if they really understood what they were doing in this field. Worse, if you announce it and then back off, it suggests a lack of understanding/competence. Bond issues work for very experienced customers who know what they are doing and take expert advice. For the rest, it can very easily end in tears. It might well have been the correct end decision, but it has caused a lot of uncertainty.
Great analysis Graham. Enjoy your break
Thanks mammyoko! G
All the best Graham.
Thanks Camtab.
Enjoy your break Graham. Thanks for all the SCVR analysis and see you at Mello.
Gostevie
It appears that Invesco has taken up a large slice of Patisserie Holdings (LON:CAKE) (how nice to be able to say that!) which will presumably give Luke Johnson some help in reestablishing the company's credibility. The investment is for 7.76% of the company and would I imagine be part of the previously announced share raise. With the shares still suspended it is not yet possible to see the effect on the share price.
Hi Graham _ could you have a quick look at Castleton plc (CTP) if time allows.
Morning Graham,
Any thoughts on Elecosoft's acquisition today? Appears to be a good product fit to me.
Michael
Morning all. Graham I second Connect if you have time? It looks like the new CEO has kitchen-sinked everything he can this AM. Divi gone (for now); PMP closed down (at last!) and a big write down in there. Dawson Media a decent biz and Smiths generating cash albeit in a declining market.
Hi Graham,
Any thoughts on the First Derivatives (LON:FDP) interims after the Bear attack on them last month (which they seem to have ignored, unless I missed their response)?
At a very quick glance the headline figures look fine.
The 'Business Review' reads well....... "The size of our total addressable market gives us unlimited growth potential and we are tremendously excited by the opportunities in our pipeline, which has never been as healthy or as diversified."
Net debt is a worry up 85% from £13.1 to £24.2 million, meaning it's just over four times their 'Reported profit after tax' (£5.9m) or just over twice the 'Adjusted Profit after tax' (£10.6m) The fact that their adjustments almost double 'Profit after tax' is disconcerting. Indeed, there are adjustments and adjustments and more adjustments. That's normally an amber flag for me.
Any thoughts more than welcome. Ex-holder.
Hi weasel, taking a look at First Derivatives (LON:FDP) now. Cheers. G
Thanks Graham, always good to have another opinion, especially from yourself (or Paul when he's on duty).
Enjoy the well earned break.
Morning All!
We had an interesting debate here (Mon) and here (Weds) last week about Victoria (LON:VCP) - issuing a profit warning, and simultaneously announcing that it was seeking to issue a junk bond to repay all its bank borrowings. This spooked me, and after various accounting shenanigans lately (such as CAKE, and YU.), my approach is this - if in doubt, run for cover. We can always buy back later. When writing last week, neither Graham not myself held any position in VCP shares - so as always, we were just giving our honest opinions, based on the facts available.
Graham took a more relaxed view, and gave an interesting alternative assessment of the situation, thinking that a bond issue seemed a good idea, and giving his view that the BB credit rating was not a worry.
The latest announcement today, says that the bond issue is being abandoned, as indicative pricing was too high. That's not at all surprising to me. After all, VCP has a stretched balance sheet, with too much debt. Plus it's just issued a profit warning. So why would anyone want to lend it money cheaply?
Management today says;
Possibly the pricing moved because the company issued a profit warning here? The wording of that statement seemed to try to gloss over the negatives, but it was clearly a profit warning, and the market was not fooled. The share price plunged 25%, closing at 455p on the day of the main announcements (29 Oct 2018).
NB. my negative commentary on the situation was not published until the evening of Monday 29 Oct, after the market had shut, by which time the main damage to the share price had already happened.
Weak balance sheet - the pro forma 30 Sep 2018 financial information shows NTAV negative at -£169m, if you just write off goodwill and other intangible assets. That improves to -£99.6m if you also write off the deferred tax liability, which often relates to intangible assets. So still a significant negative balance sheet NTAV, whichever way you look at it. I don't normally invest in companies with negative NTAV, particularly if there is a large element of bank debt (relatively short term funding).
So I completely stand by my previous comments that the balance sheet is quite obviously weak, and over-reliant on bank debt.
Banking relationship - the group reassures today on its banking relationship;
I think it would be helpful if the group publishes what its banking covenants are, and quantifies the headroom. Nothing reassures better than hard facts. A 2-year facility will clearly need to be refinanced in the not-too-distant future. That may not necessarily be a problem, if the company performs well. It would make sense for the company to pay down some of the debt from cashflows in the meantime. Maybe it needs to take a break from the frantic pace of acquisitions?
Directorspeak - how refreshing to hear a management team admit to their mistakes. This is impressive;
Good for them, it takes courage to admit to mistakes made, and I think people will respect these comments, I certainly do.
However, it probably would have been better to have edited out this bit from the announcement, which is less impressive;
I've no idea who they are referring to, as I've not seen any other commentary about the profit warning or bond issue. Maybe the company was targeted by short-sellers on bulletin boards, or elsewhere, I have no idea?
The point is surely that, if management create an information vacuum, then this is likely to spook investors. For example, the last time I can remember a company suddenly announcing, out of the blue, that it intended to issue a junk bond, was Globo - which of course soon afterwards went bust. Many investors are also perplexed, and smarting, from the recent near-collapse of Patisserie Holdings (LON:CAKE) . Therefore, Victoria dropping a bombshell, with absolutely no explanation (initially) of why it had decided to issue a bond to repay all its bank debt, is very likely to trigger panic amongst investors, which is precisely what happened.
I'm sorry if my posts alarmed anyone, but if something unexpected, and potentially dangerous happens, then I'll try to protect my readers by airing my concerns straight away. The company has since clarified things, so hopefully they can get back on track. So it's not right for Victoria to both admit they are at fault, but in the next sentence to shoot the messenger.
Anyway, I wish the company well, and hope it recovers from this debacle. Whilst accepting that I probably won't be on their Christmas card list (although Graham might be).
My hunch is that it's probably over the worst now, and that the shares might bottom out fairly soon. So it could be an interesting situation, for more risk-tolerant punters, maybe?
Regards, Paul.
Paul, what are the implications for Airea given Victoria's weak position? Is there anything to learn here? I appreciate that the Airea story is about closing a business and releasing their more niche and profitable activities, but I can't help feeling things are weakening, and if they are flooring would be an early casualty? Appreciate any thoughts you have. B W
Airea (LON:AIEA) is in a totally different space to Victoria (LON:VCP) as their product range is synthetic carpet tiles for commercial premises..especially where there are high traffic or very specific design characteristics required
Typically they are interior designer specified as part of the construction or refurbishment project ...much more akin to James Halstead (LON:JHD) albeit with a different product
They are currently expanding their range & growing their market coverage in terms of price points/design options (permitted by their new mega loom) and more interestingly they are growing exports fast & signing new international distributors
I hold a v large position in Airea (LON:AIEA) & believe it to be at the start of a major growth phase driven by recent Capex & the massive restructuring leaving the core Burmatex business a little understood hidden gem...
Thank you rhomboid1, that is useful. For clarity it is a company I have been looking at since Paul mentioned it a while back.I have a small position and continue to look for confidence to build it. Given that Victoria is acquisitive and presumably needs a bit of good press I wondered if they might be in the market to buy Airea for the very same reasons you mention. But their balance sheet is weak and that for me probably rules against it.
One further question if I may Rhomboid1. What is the size of the market they can profit from? I cannot see margins rising much above 7% (my guess). Lets say their rev doubles which would be a real achievement. So £44m at 7% is a profit of £3.08m.They have 41,341,353 shares in issue according to Stockopedia. Each share is earnings 7.4p. On 10 times 74p. You currently pay 55p which is a capital return of 34% over a discriminate period. Back of stamp calc but it doesn't excite me enough to buy a big holding maybe I have answered my own question.
I’ve looked at (companies house or US10k filings) all the companies that Airea (LON:AIEA) competes with...they mostly have v handsome margins & are highly cash generative...as I say James Halstead (LON:JHD) is the closest U.K. comparator and they do well on margins.
My view is there’s a vast (beautifully carpet tiled) runway ahead of Aeria ..not least from picking up projects where James Halstead product has been historically specified but where a less utilitarian carpet tile solution is now robust enough to be considered...if you download the spec sheets from the Burmatex site for their new ranges you’ll see what I mean .
In summary I can see this being a multiple of the current M’Cap in the next few years..not least as at the last AGM they were already talking about potentially needing another new mega loom to accommodate growth.
..and whist we wait the hefty dividend stream is handy
Six months to June 2018 of Airea (LON:AIEA) accounts show continuing operations had a turnover of £9.13 million and operating profit of £1.48 million, so operating margins around 16%. Given the chairman's optimistic outlook statement and the deferred tax asset it seems reasonable to hit that £3 million profit figure by the end of the year....
Hi Graham - Connect (LON:CNCT) looks an interesting one if you have time?
I appreciate itm is a difficult company to cover on this site as it is an ideas share. But that said given the urgency of the global warming story (according to scientists - who I would rather believe than Trumpy anyway) it seems an interesting stock. Heating is one of the major problems and they are now trialling the introduction of hydrogen into the national grid. I am no expert but my understanding is this will enable them to store renewables in the grid which at the moment is not possible and would obviously make a huge difference. They have been working in Germany with success on this project. I accept that it is virtually impossible to project profits or margins at this point but interested to know if anyone else has thoughts/views/comments on this. Best wishes
Castleton Technology (LON:CTP) H1 results out today. Revenue +20% (12% organic); adj EBITDA +31% (18% organic). Cash conversion 102%, so debt down to £5.3m. In line for full year. There's a slight H2 weighting to their business. Outlook 'optimistic'.
Continues to cite the cross-sell opportunity. 'Intention to commence a progressive dividend policy for the full year.'
Here Dean Dickenson,CEO & Haywood Chapman, CFO give an overview of the results.
https://www.piworld.co.uk/2018/11/06/castleton-technology-ctp-h1-results-november-2018/
Hi Graham,
ZOO looks at an interesting juncture but valued at 3x sales, justifiable if they can get operating margins in the 20s, No sign of that yet so would be interested in your thoughts. I only know the company in passing.
Best,
Peter
UP Global Sourcing Holdings (LON:UPGS) - Results much as expected. There is a good level of detail explaining working capital changes. There seems scope to beat the forecast 8.9% revenue growth and 5.3p FD Adj. EPS in 2019. Edit: These have indeed been raised slightly in a freely available Equity Development note.
Caledonia Mining (LON:CMCL) - Confirms production continuing despite foreign currency shortages and purchase of an increased stake in the mine (in exchange for equity) continuing despite share price fall. Looks cheap, but my appetite for exposure to Zimbabwean gold miners is limited.
Leo as you say the UP Global Sourcing Holdings (LON:UPGS) results were much in line with the previously announced trading statement and the October 2 Equity Development note, which had already informed us of the working capital outflow in FY2018 (partly caused by more "landed" as opposed to FOB sales). Good to see that management are still saying (3 months in) that 2019 is going in line with expectations - with Equity Development in this morning's note slightly upping its EBITDA forecast for FY2019.
What was new to me was the disclosure in note 6 of the results that of the £22million decline in sales in FY2018, £18 million of this was due to the sales to the two largest clients falling. Even after this 37% of FY18 sales were accounted for by the two largest clients, showing the concentration risk still in the business.
I hold both so happy for an analysis :)
Caledonia Mining (LON:CMCL) from just over 200p so up nicely even if down a lot recently. Undoubtedly there is a Zim risk factor and that is now back in the price heavily but had evaporated quite a bit at 700p. There is a visible risk of zero...but beside that there is a very manageable and executable growth plan that lead me to invest and see at least 5x my initial stake (that's v v conservative!) and with some gold and/or Zim upside much much more. Risky but can accept that in a portfolio context (and if you can accept political-country risk I recommend checking out Shanta Gold (LON:SHG) in neighbouring Tanzania - I expect it to fly in 2019 as a bunch of negative factors ameliorate, some company level and potentially some country level).
I have a sense of relief with UP Global Sourcing Holdings (LON:UPGS) I bought when it plunged (about 35p). I could not see what was so wrong with the business but others were much more negative. I still fear I'm wrong here but so far so good and the valuation is undemanding and the outlook improving with potential for operating leverage and growth upside. The client concentration risk is a big negative but I think their position and product makes them a bit less vulnerable than is perceived (low cost shelf fillers in products that have low branding appeal to retailers). An important thing to pick up on this year is that they have taken another internal brand forward - Progress sales up from £0.6m to £3.2m. This shows their ability to develop a brand and scale it up is still in play (as they did so well with Beldray and Intempo from zero to key brands within a few years). With B&M they obvs had some channel overstuff with the supply to rapid shop opening program and 2018 is a bottoming process in the sense that it shows the base level of demand (the oversupply and a tough retail year with clients being cautious)
My morning smallcap tweet:
Hydrogen (LON:HYDG), Proteome Sciences (LON:PRM), Pebble Beach Systems (LON:PEB)
Hydrogen Group (HYDG) guides FY profit ahead of market expectations.
Proteome Sciences (PRM) guides FY rev only flat YoY due to the time taken to execute orders.
Pebble Beach (PEB) A couple of £1m orders.
Victoria (LON:VCP) Have decided not to go ahead with their bond issue due to indicative pricing higher than anticipated.