Small Cap Value Report (Tue 7 Sep 2021) - TED, CNC, MIDW, LUCE, MEAL, RNWH

Good morning, it's Paul & Jack here with the SCVR for Tuesday. Welcome back Jack, and thank you to Roland for covering, much appreciated, as it makes my workload a lot more manageable, especially welcome when I'm away from home.

Today's report is now finished - we covered 6 companies, trying to focus on the more interesting ones. Apologies if we missed anything you like, there were far too many companies reporting today to cover everything.
Agenda -

Paul's Section:

Ted Baker (LON:TED) - a lacklustre Q2 trading update, in my opinion. It's in line with expectations, but it's expected to be loss-making this year. Not much sign of online growth, and store sales still well below pre-pandemic levels. An unconvincing turnaround so far, in my view, so why get involved?

Luceco (LON:LUCE) - sparkling interim results - this company has done amazingly well in the last year. Fascinating commentary on supply chain issues, and cost inflation - worth everyone reading, as it has read-across for many other companies.

Parsley Box (LON:MEAL) - this niche ready meals company has flopped since floating about 6 months ago, with the price now roughly half the peak. Slower growth, and heavy marketing spend combine to produce a thumping H1 loss.

Renew Holdings (LON:RNWH) - another strong update, materially ahead of forecast for FY 09/2021. Impressive!

Jack's Section:

Concurrent Technologies (LON:CNC) - solid company with a multi-decade operating track record but pedestrian growth in recent years. This is a good company with a strong balance sheet and decent longer term potential, but management is clearly communicating short term headwinds.

Midwich (LON:MIDW) - specialist audiovisual distributor reporting improving trading momentum. It has scale on its side and a busy acquisition pipeline, but business is relatively low margin and a recent c40% rerating limits the attraction

---

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

---

Paul's Section

Ted Baker (LON:TED)

167p (y’days close) - mkt cap £308m

Q2 Trading Update

Ted Baker Plc, the global lifestyle brand, today provides an update on trading for the 16-week period from 25 April 2021 to 14 August 2021.

The current financial year is FY 01/2022.

Sales in line with expectations, significant improvement in full price mix

There’s lots of detail in this announcement, so I’ll try to pick out the key points.

Store sales - still well below (minus 45%) pre-pandemic levels. The +142% rise against last year is meaningless, as shops were mostly closed in lockdown 1 -

Store sales were +142% vs Q2 FY2021 and -45% vs Q2 FY2020. While many of our stores were open during the trading period, footfall remains below prior levels and continues to be stronger in out-of-town and regional locations where we have a smaller physical presence.

This confirms what we’re hearing from many other retailers - that town centres are struggling, and not returning to previous levels of footfall. Although that could improve as workers return to offices.

Out-of-town sites doing better, which again is in line with what other retailers have been saying.

Ecommerce sales - this doesn’t impress either, although last year’s comps would be tough, because stores were closed, so most business moved online last year -

Group eCommerce sales decreased 25% and represented 39% of total retail sales (2021: 67%), reflecting highly promotional stance last year ahead of balance sheet recapitalisation. Compared to Q2 FY2020, Group eCommerce sales increased 17%.

Wholesale & licence revenue is 29% down on pre-pandemic levels.

Eyewear licence partners doing well, up 27% on pre-pandemic sales, but no context is given. Instead of a text based update, it would have been much more illuminating to have provided data, in a table, showing the breakdown of sales, and performance of each channel - which is conspicuous by its absence.

Gross margin - up 500bps for retail sales, but again no context is given. Sounds like the business was discounting heavily last year, so the margin should be better this year.

Liquidity -

As of 14 August 2021, net liquidity was £105.8m comprising £15.8m of cash and £90m of bank facilities. The Group has material liquidity headroom against anticipated peak cash requirements in September/October 2021.

Net cash seems to have fallen from £66.7m when last reported at end Jan 2021, to £15.8m now. End January does tend to be a seasonal peak for cash in this sector, so it’s not particularly surprising that cash has since fallen.

That said, I’m not comfortable with TED being reliant on bank facilities. Banks don’t like lending to loss-making companies, so I’d say there’s an elevated risk of TED needing another placing to shore up its balance sheet.

Tosca Fund are big backers, and they tend to be very gung-ho, so would probably prop it up if more funds were needed, but who knows what the price would be? The price of further support from Tosca could be to heavily dilute other holders, maybe? It’s happened once already.

Diary date - this will be more useful than a trading update which gives various statistics, but little overall context. Whereas results will reveal how trading & the financial position look in detail. I look forward to crunching these numbers in November -

Ted Baker will announce its results for the 28-week period ended 14 August 2021 on 11 November 2021.

Outlook - note they claim a strong balance sheet - often an amber flag to check because like so many things, if it needs to be said, then it may not necessarily be correct (but that's open to interpretation of course with balance sheets) -

"The Ted Baker brand remains strong, evidenced by YouGov's recognition of Ted Baker as the second most popular luxury brand in the UK. Our product also continues to strengthen, and we are pleased by the start to the Autumn/Winter 2021 collections which is being well received by our customers. Combined with our robust balance sheet and strong cash management we are well placed for the future. It is still early days in the recovery, but we are confident that Ted is starting to emerge from Covid a stronger and more resilient business."...

Trading momentum continued to build through the period, with the last four week exit rate for Retail better than the overall Q2 performance for Retail sales.

The point about brand recognition is important - there’s no doubt that TED is a valuable brand, which is pretty much the entire bull case for this share - that dismal performance (pre-pandemic, as well as during the pandemic) can be turned around.

Forecasts - the latest numbers from Liberum (many thanks to them for sharing with us) are for a loss before tax of £(22.6)m this year FY 01/2022, bouncing to a profit of £28.8m for FY 01/2023.

My opinion - I remain negative on this share. There's not enough evidence yet of a proper turnaround. Things seem to be improving, but from very bad, to just bad (so far).

I’d be surprised if the 2023 profit forecast is achieved, it’s usually more of a struggle to drag a fashion business back into profit, after a long period of under-performance, if it’s achieved at all.

Many (probably most actually) attempted turnarounds in this sector fail. The critical success factor is getting out of expensive leases, and moving sales largely online. I don’t see any evidence that is happening here, on anything like the scale needed.

Another placing looks likely to me, with unknown further dilution. The share count has already ballooned from 55m to 185m, hence the share price won’t be returning to anything like former glories, because there are so many more shares in issue now.

I’d say this share is just a gamble on a possible turnaround. There’s not much evidence of a turnaround to anything like the level needed to make it a significantly profitable business again.

Today’s update is too vague - you wouldn’t find Next (LON:NXT) issuing such a woolly update. Whenever companies/advisers ask me what information investors want I say “Just do what Next does - chapter & verse, facts & figures, not waffle, or cherry-picked numbers with no context”.

I look forward to seeing the interim results in November, which should give us a better idea of what’s really going on. As things stand, the company still seems to be loss-making, and it could need additional funding, if the bank get jittery (e.g. if covenants are breached).

I cannot see any reason to take on the risk of owning this share, just on wishful thinking that a turnaround might happen.

.

.

Zooming in, for clarity -

.

---

.

---

Luceco (LON:LUCE)

474p (slightly up) - mkt cap £760m

Interim Results

Luceco plc ("Luceco", or the "Group" or the "Company"), a manufacturer and distributor of high quality and innovative wiring accessories, LED lighting, and portable power products, today announces its unaudited results for the six months ended 30 June 2021 ("H1 2021" or "the period").

Strong progress and well positioned for long-term growth

Key numbers for H1 -

• Revenues £108.2m (up 51% on H1 LY, and more impressively up 31% on pre-pandemic H1)
• Very high profit margin, with adj PBT at £18.5m - is that sustainable though?
• H1 adj EPS of 9.8p

Current trading - sounds like a little wobble here, and being an importer the key issue is container ship freight cost/delays -

We have made a decent start to the third quarter. We have an encouraging order book from Hybrid and Retail customers that we are working hard to ship amid continued sea container shortages, and macro leading indicators such as planning applications and architect/surveyor workloads suggest a good second half.

We have recently seen a softening in late July and August in previously very robust UK Professional Wholesale demand which has slowed the Group's rate of revenue growth compared to H1. This could be attributable to both contractors and homeowners taking well-earned post-lockdown holidays en masse at the end of the academic year, but we are keeping the situation under review.

Supply chain disruption - this section is worth repeating in full, because it has much wider significance for other companies in any sector that makes, or imports physical goods. I’m impressed with Luceco’s openness in explaining the situation to investors. It sounds like they have things under control -

Healthy market conditions have been beneficial to our performance but increased demand for goods over services during COVID has also brought widespread supply chain disruption, making it more difficult for us all to serve the customer, and resulting in cost inflation. The average cost of copper and plastic in 2021 to date has been 37% and 71% higher than 2020 respectively. The cost of a sea container from China to the UK has increased nearly five-fold over the same period. We estimate the total annual cost of inflation to Luceco to date will be £20m, a 15% increase in our cost of goods sold, of which £13m will arise in 2021 and £7m will be deferred into later years by hedging arrangements.

We have had little option but to update our selling prices in response to this industry-wide phenomenon, albeit with a slight lag due to notice periods and order lead times. We expect 75% of our update to be in place by the start of the fourth quarter, with the remaining 25% to follow in early 2022. Some of the profit gap caused by the lag has been filled by impressive efficiency gains from earlier manufacturing investment, whilst strong operating leverage from 2021's sales growth has further mitigated the impact at the operating margin level.

Outlook/Guidance - a very clear update is given -

A selling price update of this magnitude whilst gaining share underlines both the value of our brands and the widespread nature of the underlying inflation. We have navigated the inflation challenge well to date but we are not complacent. The mathematical reality is that cost inflation will always dilute the gross margin % even if every pound is passed through. This situation is also fast moving. For instance, we have recently received notification of a further 40% increase in sea container rates for the fourth quarter that we may not be able to pass through until early 2022. All of this leads me to conclude that we will see some gross margin compression as we navigate this post-lockdown inflationary phase in the second half, albeit mitigated by solid operating leverage on strong sales growth. We continue to expect to achieve Adjusted Operating Profit of £39m for FY 2021, as previously guided, although temporary margin compression and the recent softening in Professional Wholesale demand over the summer may have curtailed any potential upside.

There’s more detail given, but I’m already reaching the limits of what is reasonable to copy/paste here! I suggest that all readers should have a look at Luceco’s commentary today, as it’s full of pointers which are very likely to have read-across for many other companies. In short, it seems to me that we’re entering a period where there’s likely to be very considerable supply chain disruption, and considerable inflation.

That’s creating a lot of opportunities for the best managed companies, which have stocked up in advance (as LUCE has), and are hence able to raise selling prices, with less competition.

However, it’s also likely to lead to profit warnings from (maybe smaller?) companies with less supply chain expertise. This is going to be a very interesting autumn/winter, for sure, with banana skins galore, we just don’t know where they are.

Balance sheet - looks absolutely fine to me. Inventories have gone up considerably, but in the current situation of supply chain disruption, I see that as a positive thing, as it means continuity of sales to customers, rather than running out of things. The small amount of debt is not a problem.

My opinion - this is a tricky one. Luceco has performed brilliantly in the last year, with profits soaring thanks to strong demand, combined with production efficiency gains.

That’s been reflected in a roaring share price rise, and repeated hikes in broker forecasts.

Today’s commentary is impressively detailed and open, which gives me confidence that management are in control. I certainly wouldn’t bet against this company.

However, it seems to me that demand may have peaked, and that supply chain issues and cost inflation are very clear headwinds, introducing uncertainty. It sounds like LUCE will be able to pass on price rises, with a time lag. It has leading brands that are trusted in the trade, as the commentary explains. However, the very high net profit margin could leave it vulnerable to being undercut on price by competitors, maybe? One company’s bumper profit margin, is someone else’s opportunity, especially with products that don’t seem to contain much unique IP.

On balance, if I held (which I don’t), I’d probably be top-slicing some of the profits after a great run, just to be on the safe side, and running the rest for the long-term. As always, that’s just a personal opinion, and everyone will see things their own way.

No doubt doing the precise opposite would probably work out best, that seems to happen so often!

.

.

---

Parsley Box (LON:MEAL)

110p (down 9% at 10:54) - mkt cap £46m

Interim Results

Parsley Box Group plc (AIM: MEAL), the rapidly growing direct to consumer provider of ready meals focused on the Baby Boomer + demographic, today issues its results for the six months ending 30 June 2020 (the "Period").

A trading update on 19 July announced that H1 revenue growth would be c.26% up on H1 LY.

So revenue announced today is in line with that, hence shouldn’t have surprised the market.

Maybe it’s the scale of the H1 loss that has spooked investors? Key figures for H1 -

• Revenue £14.0m (in line with expectations), up 26% on H1 LY
• Most revenue, £11.0m is repeat custom - an impressive statistic - but it also calls into question the effectiveness of the heavy marketing spend in attracting new business
• Gross margin of 51% is respectable, and slightly increased
• Pre-exceptional EBITDA is a heavy loss of £(3.6)m
• Exceptionals relate to IPO costs, so it's fine to strip out those costs of £1.35m
• Net cash of £6.5m

Marketing spend was £4.85m in H1 - a staggering amount, to generate only 26% rise in revenues. On the plus side, this is discretionary spending, so could be switched off, or greatly reduced, leaving what would then probably be a breakeven, or modestly profitable business relying on repeat orders (which are much larger than average orders).

Balance sheet - is fine for now, but won’t be if they keep burning through the cash pile on not very effective marketing spending.

My opinion - they need a re-think here, with massive marketing spending only delivering slower growth - so I think a much leaner marketing approach is needed - a bit like the position Sosandar (LON:SOS) (I hold) found itself in a while back. The beauty of online businesses, is they have so much flexibility on costs (with marketing spend being the big one, and it’s discretionary, and can be flexed almost immediately to whatever suits market conditions).

The concept is niche in my view, with a small addressable market, but once some customers repeat order, then MEAL can do well from larger repeat orders. So it’s an interesting niche business in my view.

My concern since the IPO in March 2021 was that the float on AIM could have been timed to benefit from one-off growth from the pandemic. That concern seems to have proven correct, with slower growth since, despite a huge hike in marketing spending.

Having said all of that, the market cap has almost halved, and is now only £46m. Should it be any higher than that though? Probably not, as things currently stand.

I hardly ever touch IPOs, because they’re nearly always over-priced, and over-promoted, and often miss growth forecasts. However, once the hype has dissipated, and the price halved, then things could be worth a fresh look, with improved risk:reward, arguably.

The other thing to consider is that small cap IPOs are usually very illiquid, because the brokers are lazy, and just place chunks of shares with institutions, leaving very little subsequent market liquidity. Hence there could be an opportunity here if an institutional holder loses patience and decides to exit, dumping stock in the market. If that happens, I’d be a buyer at say 50-60p - that's roughly what it's worth to me, so the current price of 110p doesn't attract me. There are plenty of other shares to choose from.

.

.

---

Renew Holdings (LON:RNWH)

835p (up c.4% at 11:55) - mkt cap £650m

Trading Update

Renew (AIM: RNWH), the leading Engineering Services Group supporting UK infrastructure, provides the following trading update ahead of the release of its full year results for the financial year ended 30 September 2021 on 7 December 2021.

Continued strong trading; full year performance expected to be ahead of current market expectations

Guidance is usefully raised, impressive coming near the end of the financial year -

As a result of this sustained positive momentum, the Board now expects the Group's full year results to be materially ahead of current market expectations with adjusted operating profit expected to be no less than £50m versus a current consensus forecast of £45.8m.

Forecasts - I can’t find any broker updates, which seems a bit bizarre for a company with a decent sized market cap.

Working from existing consensus EPS for FY 09/2021 of 46p, and lifting it by 10% (as indicated in today’s guidance for operating profit) suggests about 51p EPS for this year.

A share price of 835p puts RNWH on a PER of 16.4 - quite high for a sector that is often problematic & hence lowly rated. Although a premium looks justified due to RNWH’s superb long-term track record.

My opinion - not a sector that interests me, but RNWH seems to have a better business model than others in its sector which have come a cropper.

Performance has been really good, and shareholders have been rewarded with a big rise in share price.

Looking at this chart, and the valuation, I wonder if it might need to pause for breath & consolidate a bit at some point?

.

.

---

Jack’s section

Concurrent Technologies (LON:CNC)

Share price: 98p (-5%)

Shares in issue: 73,363,490

Market cap: £71.9m

(I hold)

Concurrent produces a range of high performance Intel processor boards used by customers in the Defense, Security, Aerospace, Telecommunications, Transportation, Medical, and Industrial markets. These chips are designed to withstand harsh conditions and are sold worldwide. It was classed as an essential defence supplier through Covid so maintained production and did not need any government support.

But the group has struggled to excite the market in the past. Revenue progress over the years has been steady but costs have tended to rise as well, meaning profits haven’t quite taken off. This comes across in the modestly declining operating margins.

We last covered it here in an update to the market that saw shares down on the day. I interpreted the update more positively and took a small position after a drop in the share price.

There are issues - supply chain problems are being flagged by management - but this is a cash generative, dividend paying small cap that habitually invests millions of pounds into research and development so it strikes me as well run over longer time frames.

The question is can the group translate all this hard work into profitable growth for shareholders? The group is closing its India office, which will cut costs, and the savings can be reinvested in UK headcount and other ventures, so that’s a possible catalyst, along with some management changes. Nevertheless, this remains more in the ‘sensible, quality’ category compared to stocks with riskier and more aggressive rerating potential.

Interim results

I am pleased to announce the trading performance has continued on from the strong results reported for 2020, with solid sales in the first half of 2021 and a growing order book, despite the challenging worldwide supply chain disruption.

Financial highlights:

• Revenue +1.1% to £9.3m,
• Gross profit +4.1% to £5.1m, gross margin up from 52.9% to 54.3%,
• Operating profit +33.3% to £1.6m,
• Profit before tax +25% to £1.5m,
• Earnings per share +29% to 2.09p,
• Interim dividend per share +4.5% to 1.15p,
• Cash balance up from £10m to £12.4m.

Probably the two key dynamics to highlight are the record order book of £15.9m (up from £13.9m on the same period last year) set against ongoing component shortages, which are ‘being managed’.

The chairman says:

There remains uncertainty on the timing of some shipments in Q4 2021 and into 2022, driven by component availability, which may slip revenues into 2022 but there is no evidence yet of cancellations from customers.

The unprecedented worldwide supply chain shortages are a major risk to all companies. Although Concurrent has so far protected the supply of goods, ‘the situation is deteriorating and is expected to last well into 2022’. So the group is not out of the woods yet, in fact the risk here is increasing.

Net cash from operations is up strongly, from £1.48m to £2.79m, but this is helped in part by trade payables growing from £0.49m to £1.65m. Perhaps this is a consequence of the strong order book, perhaps it is Concurrent stockpiling inventory.

Sales within the defence market increased to £6.6m (H1 2020: £6.3m) representing 71% (H1 2020: 68%) of revenue and exports were 91% (H1 2020: 96%). While defence is still the primary target market, the team sees opportunities in the telecoms and other sectors ‘which are being pursued with vigour’.

India office - this is now closed and savings here are funding the expansion and re-alignment of engineering capabilities in the UK.

Product launches - Intel has elevated Concurrent to Titanium partner status, which is a vote of confidence. Meanwhile, the launches and deployment of the new 3U CompactPCI and AMC boards have continued, along with the development of software products.

Management changes - The end of the first half also saw the beginning of the transition from Jane Annear to Miles Adcock as CEO. Additional senior hires are being made with the introduction of an HR Director and a Quality & Business Improvement Director. The new team will revise the medium and long-term strategic plan focusing on product lead times and revenue growth.

Balance sheet - is strong, with no debt and cash balances at 30 June 2021 of £12.4m (H1 2020: £10.0m).

Conclusion

Assuming a simple doubling of HY EPS gives a possible FY figure of 4.18p, which would put the group on 23.4x forecast earnings. That’s quite punchy based on the growth track record and supply chain dangers, but there is scope for better levels of growth in future. Concurrent has a good reputation and continues to invest - R&D spend is down but still comes in at a healthy £1.6m.

Importantly, the group has so far been able to pass on supply chain cost increases resulting from wide-scale electronic component shortages. Gross margins are actually up in spite of these pressures.

The record order book currently gives good visibility of future revenues but the timing of some shipments in Q4/21 and into 2022 is uncertain due to the widely reported electronic component availability. This could be an area to focus on for those considering the timing of a potential investment, particularly given the valuation.

Yes this is a well run company managed for the long term, but there are developing headwinds out there and the short term could be bumpy. Today the market might well focus on the growing supply chain risks and delayed revenue. If things deteriorate then a profit warning is possible, due to events beyond management’s control. It’s impossible to say for sure.

It’s a good company, but is now the right time to be invested in it? Or should we not overthink the purchases of high Quality Rank stocks? Something to think about. I lean towards the latter over the long term (within reason) but management is clearly communicating some shorter term risks here.

Ultimately it comes down to your investment horizon. Some investors trade and others accumulate long term holdings over time. The strong demand and record order book here is key for the longer term and Concurrent has been a solid, dividend-paying hold for truly patient investors.

But in the short term the shares have risen and there are well flagged headwinds that might keep the neutral investor on the sidelines for now, to see how the next year plays out.

Midwich (LON:MIDW)

Share price: 618p (+1.31%)

Shares in issue: 88,735,612

Market cap: £548.4m

This is a specialist AV distributor to the trade market with operations in the UK and Ireland, EMEA, Asia Pacific and North America. Distribution business models are tough - most of the profit typically flows to the manufacturers that own the IP.

Some do well. Usually those that are sensibly well run and have a scale advantage over competitors. Those players can then leverage their scale advantages, outcompete rivals, and acquire them if it makes economic sense, thus further strengthening their advantage.

Midwich might fit this mold, saying it ‘operates as the sole or largest in-country distributor for a number of its vendors in their respective product sets’. So it’s a distributor of scale operating a buy and build model with strong customer relationships. I’d still mark margins and competition as areas of concern though.

Interim results

Trading momentum continues, with margins recovering

Financial highlights:

• Revenue +29% to £390.1m,
• Gross margin up from 14.5% to 15.1%,
• Gross profit +35% to £59.1m,
• Adjusted operating profit +240% to £13.9m,
• Adjusted profit before tax +306% to £13m,
• Adjusted earnings per share +278% to 9.4p

There is some difference between the adjusted and statutory results. Statutory profit before tax was £7.1m (up from £2.5m loss before tax), and earnings per share was 4.79p (up from 3.29p loss per share).

The differences come from acquisition related expenses, share based payments, amortisation charges, and changes in fair value of derivatives.

Quite a lot of adjustments, particularly with the share based payments. Should they really be adjusted out?

Flipping over to the cash flow statement confirms that Midwich is an acquisitive company.

There is a further difference between earnings and cash flows. Operating cash conversion is just 31% due to investment in working capital to support business growth. The same period last year did see cash conversion at 127%, however. And working capital investment does hint at a favourable outlook.

Furthermore, the group paid out a 3p special dividend in the period, on top of a 3.3p declared interim dividend. Quite a small special dividend in comparison to the 614.4p share price though.

Trading momentum continues to improve, as do gross margins, while market share has remained stable.

The Board continues to monitor its share of vendor business in each of its key markets and remains confident that, overall, the Group has at least maintained and in many cases grown its market share.

Trading since the period end is in line with the board’s expectations and ‘well ahead of the comparative period’.

The higher margin live events and hospitality markets are starting to recover in a number of territories, although we believe there is still a considerable way to go… There is a more significant level of enquiries and activity in [the corporate] market, and we now expect that this will start to be converted into orders and revenue in early 2022.

Gross margin up is positive, with signs of operational gearing. This represents a significant step towards returning to the margin of 16.5% achieved in 2019.

Acquisitions - NMK Group at the start of the year, Midwich’s first Middle East business. eLink in Germany. A strong pipeline of further acquisition candidates.

Territories - Trading in EMEA showed the greatest improvement, with revenues up 65% year on year, and net profit substantially higher. Both acquisitions contributed positively and organic revenue growth was 58% to £210.2m.

Performance in the UK & Ireland improved significantly after the easing of the severe lockdowns earlier in the period. Revenues increased 25% to £128.6m, helped particularly by the contribution from new vendors launched in late 2020 and H1 2021. The live events, entertainment and hospitality markets have remained subdued, but it is anticipated that further easing of restrictions should enable these markets recover.

Revenue in North America was 41.8% lower than the same period in 2020 at £29.1m due to exiting a low margin fulfilment arrangement in North America. Asia Pacific was relatively flat (£22.2m) but recent lockdowns in Australia and New Zealand are now affecting business.

Balance sheet - a lot of goodwill and intangibles here on account of the acquisitions. A net debt position of around £73m. It looks a little weak to me.

Conclusion

This is a big, acquisitive business with operations across multiple geographies. As noted above, consolidating distributors of sufficient scale can do well if they are managed competently and acquire with discipline. They often remain low margin however and so external price pressures or a drop in quality of strategy execution can hurt.

Putting that to one side for now, it does seem as though Midwich is well placed for a continued improvement in trading momentum (but does that make it a trade or a long term hold?)

Its markets and business should continue to improve steadily across the remainder of 2021 and into 2022. Midwich points to research published by industry trade body AVIXA in June 2021, which suggests that following a sharp Covid reduction the market is expected to grow by 8.4% in 2021 and then at a compound annual rate of 7.2% for the next five years.

But the shares are already up c40% over the past quarter. Returning to FY19 levels of profitability (21.7p of earnings per share) would put the group on a PER of 28x. That sounds expensive for what this business is.

Brokers are forecasting FY22 EPS of 26.5p though, so whether or not that truly is expensive depends on the rate of acquisitions and the prices paid for them. Midwich has managed to grow revenue at a fair clip but margins here will likely always be low so it’s hard to get too excited about the opportunity.

It does stand to benefit from a return to normal though.