Small Cap Value Report (Tue 9 July 2019) - RM, SIS, ADT, BEG, PAM, EHG, SYN

9th Jul '19 by Graham Neary

47 comments 11263 reads

Good morning!

A very busy morning in terms of the supply of updates. I will need to be very tactical about this!

I'm not covering all of these, but am mentioning them for completeness:

RM (LON:RM.) - interim results
Science in Sport (LON:SIS) - trading update
AdEPT Technology (LON:ADT) - final results
Begbies Traynor (LON:BEG) - final results
Premier Asset Management (LON:PAM) - trading statement
Elegant Hotels (LON:EHG) - update on Hodges Bay Resort
Synnovia (LON:SYN) - final results
Robert Walters (LON:RWA) - trading statement
Finncap (LON:FCAP) - final results
Young & Co's Brewery (LON:YNGA) - AGM statement
Knights Group (LON:KGH) - final results
K3 Business Technology (LON:KBT) - interim results
Renold (LON:RNO) - postponement of AGM
Sports Direct (SPD) - offer update re: GAME Digital (LON:GMD)
ClearStar Inc (LON:CLSU) - trading update

Elsewhere, in big-cap land, Ocado (LON:OCDO) shares are up more than 6% on the back of interim results. Bloomberg reported that short interest ticked up recently, so there might be a few bears licking their wounds this morning.

Please note that your suggestions make a difference - I will allocate more time to stocks which you have suggested.

Thanks,

Graham

RM (LON:RM.)

Share price: 259.5p (+2.6%)
No. of shares: 84 million
Market cap: £218 million

Interim Results

This educational group says that it is #1 in the UK, in the markets in which it operates, and it has major international activities, too.

Its three divisions are:

Resources - curriculum and other resources for schools and nurseries. It distributes 50,000 products, of which it has designed 4,000.
Results - "global high-stakes e-assessments". Processing exam scripts.
Education - software, services and technology. Outsourced IT and digital platforms.

Paul and I have covered this from time…

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Zipmanpeter

9th Jul '19

Request for education, please. Woodford has notified that it has sold off 3.5Mn shares of Non-Standard Finance (LON:NSF) (taking its stake from 25% to 23.9%. In the last week, the charting function in stockopedia shows only around 250K shares changing hands as the volume.

Am I correct in assuming this reveals an off-market sales eg from one institution to another - enabling the buyer to acquire in volume without disturbing the market price? .

What guidelines do people have for evidence of "reasonable" liquidity in shares?

mojomogoz

Hi Andrea

IMO Mercia Technologies (LON:MERC) NAV is higher quality for following reasons:

1) They have regularly written down investments in last few years. That Draper Esprit (LON:GROW) haven't shown any write down in portfolio holdings for 3 years since listing means they are either geniuses or are benefiting from momentum-crowding-market effects in their valuations. So great for mark to market valuation but the end route to value realisation is the same as Mercia's with either flotation or industry sale. In this respect both Draper and Mercia need to prove their exit. Note, to date, Mercia have made trade sales for two businesses both of which one could say disappointed but they still found a route out that created value for shareholders. Being smaller makes exit easier for Mercia and conservative valuation means mark downs less harmful

2) Mercia will have been involved with their companies from earlier stage than Draper. The process at Mercia is to promote cos from their early stage asset management business (eg EIS funds and other regionally focused venture funds) onto their balance sheet for investment.

3) My experience of VC and PE makes me suspicious of trendy businesses that invest in hot areas...that's Draper IMO. I've had interaction with both businesses as an investor and looking for funding from a business. Mercia approach is more conservative.

4) Mercia already start from a base that means lower valued businesses as they are non-London. Statistics show that non-London start-up businesses also create disproportionately more incremental value. The regions are quite hot....but not recognised for it as London is where the noise is.

5) Extension of above points....I see lots of potential for risk in the valuation of Draper's 'bigger and more mature' businesses. Yes bigger stakes and smaller firms are all things equal more risky....but then the upside should be greater when you win particularly if your valuation is cheaper. i cannot prove it but I have no doubt that Mercia will pay significantly less per unit of potential value than Draper do....but do you believe Draper can catch some of that magic unicorn moonbeams? If they can then they will be 'genius'.

I look for embedded hidden upside and i can see that in Mercia (with risks). I don't like being in momentum plays. Implicitly that is Draper IMO. Their valuations are likely to come down with the market even though their businesses are private. I'm very suspicious that there has been no write down of investments. That is a strong hint that they may be in things with too much money chasing up a narrow group. I'm happy Mercia are outside of this potential vortex. It will go in reverse and then you discover whether Draper are crowd or idiosyncratic genius.

My previous comment points out many issues for Mercia to manage including negative impact of size and funding .

Note, Draper have regularly tapped the market for cash. So momentum on top of momentum.

andrea34

I'd argue that the results from AdEPT Technology (LON:ADT) are pretty lacklustre if they can only manage 11% revenue growth with the help of acquisitions. A "steady start" to the current year doesn't give me much confidence either.

rmillaree

AdEPT Technology (LON:ADT)
Graham
For example, the founder and current Chairman of the business has given the lending banks a charge over his life assurance policy worth £1.5 million. What a terrific level of commitment! You don't see that sort of thing very often in companies of this size.

Is this as generous as it seems if for example the life assurance policy in question is a "freebie" provided by the company? - ie paid for by shareholders :)

I don't know if it something the company paid for but they did say the following in the 2018 annual report.

Benefits in place include pension contribution, car allowance and membershipof private health and life assurance schemes.

Vsihv

RM (LON:RM.) I looked into and on the face of it, it looks attractive but I had the following reservations:
Working capital increase ahead of sales (final and interim), big increase in accrued income which form a bigger part of sales
Volatility in year on year operating results.
Cash and overdraft at the same time.

Basically I do see some red flags (which might just be those flags that stick from reading The signs were there

Perhaps IFRS 15 can explain deterioration in receivables and increase in accrued income, and the volatility in (annual) results is a function of my misunderstanding of the business. If I excluded these considerations then I would buy in size as a potential long term compounder (which are hard to find).
Would be grateful if anyone could allay my concerns.

From a screens perspective, this hits a lot of momentum screen and Greenblatt, which I consider a contradiction.

Gromley

Despite first using RM (LON:RM.) services over three decades ago I have never really looked in any depth at the company!

A couple of things (maybe irrelevant) struck me about today's announcement.

Revenue up 1% to £95.5m with good growth in RM Results and timing benefits from the adoption of IFRS15 which more than offset a difficult UK schools market

The second bolding is mine.

We have to read quite a way down before seeing what the IRFS15 impacts actually (spelled out in laudable detail once you get there) Revenue +£1.3m & PBT +£1.1m

So the true headline is that revenues were down just less than 1%.

That reduction looks fine in the context of where the various business units are, but the presentation of the numbers speaks to me of an over emphasis on the "optics" and not wanting to headline a reduction in revenues.

Whilst it is not material - it does mean that I have now made a mental note not to trust any headlines they produce in the future.

The accounting change will negatively in the Full Year and I would wager (unless the FD is reading this) that we will see headline growth rates that strip out the IFRS changes.

The second point of interest is that after the acquisition which happened shortly after the HY net debt will be c. £28m (debt is cyclically higher at H1 than the end of the year - but its not clear if this is absolutely the seasonal high). At the same time they have increased their debt facilities to £100m.

This suggests to me that they have built up quite a "war chest" possibly indicating an aspiration for further acquisitions. Nothing wrong with acquisitions as such (so long as they make strategic sense), but a potential £50-60m in additional acquisitions (entirely my guesswork) would be pretty material for a company with a market cap of c. £200m - something I think I would want to bear in mind if doing a more detailed review.

No particular view as to RM (LON:RM.) as an investment at this stage, but these were just two points that jumped out at me reading the announcement.

Graham Neary

Hi FREng, I will try to get back to Mercia Technologies (LON:MERC) though I expect that many readers know far more about it than I do! Let's see how the afternoon plays out.

Cheers

Graham

sharw

Richard and SundayTrader-

Amino Technologies (LON:AMO) was my largest holding before last October's warning so that was very painful but I decided that the fundamentals of the company would cope with the trading environment and stuck with it. The reaction to the prelims in February did not help but again I did not bale out mainly because of this diagram:

To quote finnCap : "Amino’s position as the most profitable of the listed peer group, each of whom confront various aspects of the ecosystem, is testimony to its strategic choices and its flexibility, which it will continue to benefit from".

Today's interims, which confirm the previous trading statement, show that it is coping well with the changes in its markets. The sp is now the highest it has been since the Feb. prelims and the forward p/e of 10.2 is accompanied by a yield of over 6% 1.5x covered. My only worry is that forecasts for 2020 are flat.

TamzinPiworld

From 18th June, Castleton Technology (LON:CTP) FY19 results presentation by management:

Dean Dickinson, CEO & Haywood Chapman, CFO

https://www.piworld.co.uk/2019/07/09/castleton-technology-ctp-fy19-results-investor-presentation/ c.35 mins

Rev +7% EBITDA+13.5% >100% Op Cashflow, targeting 60% recurring rev.

Tech in social housing - an interesting space, where no one else is offering the same breadth of solutions.

RM (LON:RM.)
Gromley
So the true headline is that revenues were down just less than 1%.

Each to their own but with regard to this bit - but i don;t see anything particularly problematic here.

I would take this is being reasonably factual and transparent - they are saying there is good growth from the timing benefits and those numbers are referenced elsewhere - so i wouldn't nay it's misleading or non transparent in any respect - simply dig to the relevant notes to work out the splits between the 3 factors mentioned - this keeps the headline bit simple - the facts of the headlines are the sales are up 1% of LFL - JUST !!!!!

Note if you want to be further wound up but the announcement - the actual numbers only indicate an increase of 0.6% - so presumably they have just squeeked over the level where they can round up the increase by over 50% !!! by rounding to the nearest 1% - nice and handy that it just happened to come out like that !

Hi Sharmvr

As a holder of RM (LON:RM.) I'll put up the (delusional?) defence :)

1) "Working capital increase ahead of sales (final and interim), big increase in accrued income which form a bigger part of sales "

Over last 5 years business has been a dual turnaround and growth situation. Growth has come from selling more services particularly through results and education segments. This has lead to an increase in accruals and receivables. Over the first half this has been accentuated by new IFRS 15 accounting factors.

2) "Volatility in year on year operating results."

Two factors. First they have been closing down and/or integrating some areas leading to sales decline. If you go back 2+ years it overwhelmed growth elsewhere. Secondly, they are always clear that there is unpredictability and lumpiness of new wins.

3) "Cash and overdraft at the same time."

They were significantly net cash then made large acquisition that is currently be integrated into Resources division. Then they have had a meaningful WC impact too (c.£4m of which is accounting standard change). Ie they have been forced to be less conservative in revenue recognition.

They hit momentum and Greenblatt as they have had strong operating momentum for few years along with margin growth. In addition their use of capital has been strong.

The disappointment in their results is the revenue and margin in RM Resources business. This is the old trad RM that they have been diversifying out of. Its all also where they did an acquisition in UK to bring greater scale and synergy. Here is their explanation in results today:

"Adjusted operating profit fell to £3.1m (H1 2018: £4.2m) reflecting the lower revenues, increased investment in digital and international marketing and costs associated with the warehouse consolidation and automation project."

This is all credible IMO. There's a risk that Consortium acquisition is a duff move. That is perhaps what has people worried today along with debt increase. However, I believe they have proven very competent and tough in managing costs and firm resources and will not continue to throw money after a bad situation if that is what they appraise it to be.

However, I take a more positive view of Resources division and see the no1 resource supplier to schools who has been successful in streamlining and making more profitable an old business segment (taken op margin to just below 14%). The environment for school funding and bidding for contracts is tough so they have had to work hard to keep profit high. However, if this environment eases the upside surprise from this division could be meaningful. Along as they can stay afloat in the school resources area they have a fairly predictable revenue source.

The hint from management on call is that they are at preferred bidder stage for 3-4 contracts. This may have H2 upside surprise. 2018 was a year where they surprised to the upside on wins and there is maybe a deflation H1 19 that they haven't done more.

rmillaree / Gromley

My perception of CEO and CFO at RM (LON:RM.) is very competent but not very publicly confident. Listen to call today. They were a bit hesitant/awkward. Its a company that is trying to communicate more after a tough turnaround few years. I was only shareholder at their AGM. CFO and CEO were very clear and direct responding to questions (and email follow up).

Overall, they have improved disclosures over time. Partly I think its been quite a complicated situation and mini conglom to report on for a few years too.

See my other answers to Sharmvr too

RichardK

Thanks sharw and SundayTrader. I have bought some more Amino Technologies (LON:AMO) but will not blame you if I lose some more!

Richard

nhb001

My timing (for once) was good in AMO. In retrospect (IMO) the selloff was widely overdone after the profit warning. The moves it made were sensible and if the transition to SaaS O/S is successful (and they seem to have made a good start) then they are on the way to the low cost & repeatable revenue heaven that most technology companies dream of. Balance sheet is bullet proof. Not much not to like.

Thanks rmillaree (& mojo) - it's not that I thought the RM (LON:RM.) headline was especially problematic, but having being previously employed to paint lipstick on similar pigs, I am somewhat sensitive to flim-flam of this nature. (I like to think though that I was slightly more subtle than this effort however.)

Maybe the lipstick is thicker than I thought however, because you concluded :

the facts of the headlines are the sales are up 1% of LFL - JUST !!!!!

Those facts are 'alternative' - reported revenues are only 'up' because they are counting revenues this year that they were not allowed to count last year.

Anyway, it's far from a red flag but it would make it harder for me personally to invest here, simply because I will be looking out for how they 'spin' the headlines.

(On the other hand I am more comfortable with the fact that 0.6% becomes 1%)

Hi peter,

There have been a number of similar holdings RNSes recently that initially confused me too.

You have to look to box 2 of the Holding Notice "2. Reason for the notification "

"No trading in the stock - voting control interest over stock transferred to new manager"

Aside from managing his own branded funds, Woodford was also commissioned by several other institutions to manage funds on their behalf. This notice merely indicates that whatever institution it was has sacked Woodford as the outsourced fund manager and appointed someone else - they still, for the time being, retain their beneficial interest in the shares. (as the holding in question is only 1.12% we will probably never know if the new manager sells out or not).

The last spate of these I saw was about a month ago, so this Non-Standard Finance (LON:NSF) notification suggests that another institution has decided to dispense with Mr Woodford's services.

On the point of off-market transactions - I am not an expert, but no-one has ever (yet) contradicted me when I have stated my belief that these do have to be reported as traded volume. Look back to Mike Ashley's recent (off-market) acquisition of GAME Digital (LON:GMD) shares for example, which did appear in the traded volume.

To take the last two paragraphs of your question, I think such large "peer-to-peer" transactions generally occur at either a substantial discount or premium to the prevailing market price (depending on whether it is the buyer or the seller who are the most keen on the deal). Philip Day's purchase of Bonmarche Holdings (LON:BON) shares recently was another example (although subsequent events will fuel the conspiracy view that the price was low because the seller knew something the rest of us did not).

HTH

10th Jul '19

Gromley - Thanks for the explanation and education - and your many other constructive posts. Part of what I enjoy so much about this blog/community.

Gromley

¯\_(ツ)_/¯

I get your point generally but you are maybe abusing and stretching your pig in this case. Its hard to see that much if any of a crime has been committed

I'm sure you agree context and facts important....

They have fairly fully disclosed the impacts in these interims...but some fools may buy or sell on headlines and in this you have a point for their protection. Note, in addition that the prior year has not been restated. So the LfL headline is by design misleading as not LfL. I don't know what the adjusted FY18 would have been but their expectation for FY19 is negative so perhaps FY18 the same. If they'd have cleaned that up maybe they would have more than 1% to show? Dunno. I'd need to dig and think (but wont as its not salient to the investment case). It is very likely for FY19 they do restate FY18....that's just as its the full audit and report rather than anything conspiratorial.

The revenue figure is moderately disappointing....only moderately as the history of revenue is one of decline since 2010 when peaked just under £400m . This was masked in FY17 and 18 by the acquisition of £65m of revenue from Connect Group (called Consortium). As the deal was mid FY17 revenue was partially recognised in that year and then wholly in FY18....

So, HY19 is part of the same story and more decline...but at a much reduced pace. What would have been worse would have been not shuttering some legacy revenue as planned just to make sure of LfL revenue growth. In addition, growth success brings some risk and in FY18 they surprised positively on new business wins (they claim to be preferred bidder at moment for 3-4 new contracts so perhaps FY19 surprise possible too).

Revenue decline has been case for whole time under current mgt since current CEO took over in FY12 (first as COO for one reporting cycle, effectively promoted internally to sort out mess) with CFO arriving in FY15, and old Exec Chairman (CEO effective) being pushed out in FY13 I think. Since then revenues have always declined but profitability has improved greatly. This has been achieved with a dire UK education spending background.

Its true that management are very keen to show a turn to top line growth. They want to show the turnaround is ending and new period has begun. Perhaps too keen in your opinion...but important to judge how much sin in the context of the history of reporting sins is being committed. A more forward communication strategy with shareholders is obvs in place since FY18 indicating mgt do want to bat their eyelids at us more.

Based on margin improvement and business reorganisation its been an astoundingly well done job so far. Assuming they have reached a new cruising (revenue height) and they have growth and continue to hold or improve margin then the shares are likely decently undervalued on a spot level (at least 30%?) and have further upside over time through combined decent margin and growth.

HY19 figures could hint that the Consortium acquisition was a mistake. Let's say the proof that it is a success is not yet unequivocal. I'm impressed enough to believe that they will make a success of it. Although I note that on call yesterday they did respond to question on it by saying something along lines that they will remove costs and strip back rather than waste resources if doesn't work out to plan. I didn't take this as lack of belief on their part that the deal was a good one for RM but as a matter of fact "we'll do what we always do with underperforming businesses".

The extra debt room probably is for some acquisition (as seen with £7.3m SoNET acquisition) and as growth with their service orientated newer product creates development and working capital costs (as seen through results). But some of it is also related to plans to centralise into a single distribution centre in UK rather than current handful (this partly relates to Consortium acquisition but also their own legacy position). It seem prudent financial management overall rather than any sign of gung-ho mgt....though I will watch for hubris in case they over-believe in themselves as a result of excellent job done to date.

Anyway, nothings for sure. In the last 3 years I've been lucky that management have proved out so well (getting a double inc dividends). I reckon I've got good odds they'll double again in the next 3 years. The upside surprise to that may come from the least exciting bit of RM which is RM Resources business (that Consortium went into). It is most tied to the funding environment for schools. The place some think surprise is more likely is high margin and growing RM Results segment.

My greatest concern short term is that a bigger company recognises what a great job CEO has done over several years and poaches him

Hug a pig

Ciao

Certainly no crime mojo, just a minor (unnecessary) misdirection.

I they'd simple said "overall underlying revenues are down, but this is in line and fine - the growing bits are growing as expected and the shrinking bits are shrinking as expected and we're comfortable with the full year" then I would have been happier.

As it stands they've made me do some (unnecessary) work to establish the truth so as a result the next time they present a headline, I'll be less inclined to assume they are telling it as it is.

+1% vs -1% who cares? Other than that the negative number conventionally uses red ink.

Anyway I've laboured this much more than I originally intended.

On the plus side, the "intrigue" has probably brought forward the likelihood of me looking in more detail here!

12th Jul '19

Just noticed this reply re RM (LON:RM.) ...

Good news that you might look....I’ll be happy to receive problems from you

Small Cap Value Report (Tue 9 July 2019) - RM, SIS, ADT, BEG, PAM, EHG, SYN

RM (LON:RM.)

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Graham Neary

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