Small Cap Value Report (Tues 11 Aug 2020) - ZTF, HAT, CDM, AMO, SOLI
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Morning, it's Jack here.
Humans are funny aren’t they? I was reading last night about how ex-McDonald’s CEO Steve Easterbrook is being sued over alleged workplace relationships. It got me thinking about corporate governance. Even the biggest and most polished companies can get caught up in human mischief.
For years I paid lip service to corporate governance but it took a while to cotton on to its true importance. One day I made an investment in a small cap with an inexperienced and small corporate team. Communication with shareholders was non-existent and RNS statements were unreliable. Pretty quickly I began to worry that my investment might be misplaced - in time those fears were justified. Lesson learned.
It’s one of those hard to screen for, qualitative aspects of investment, but it is a very real consideration. Not all companies are focused on shareholder value.
Some companies that do seem genuinely concerned with this point include Games Workshop and Judges Scientific. There are more but those are the two that immediately spring to mind.
Some of the things I’ve started to look out for in spotting that type of company include:
- Founder-owners or long term management with significant shareholdings,
- Cash-generative companies with strong balance sheets,
- Management commentary that is considered and distinctive (too many statements feel phoned in or boilerplate), and
- A lack of equity dilution over time.
These help but they’re not foolproof. Given that it’s hard to screen for, I’m curious to hear any other suggestions of companies with good shareholder alignment. And what do you look for to identify those companies? Anyway, nearly 7am.
Zotefoams (LON:ZTF)
Share price: 357p (before market opens)
No. shares: 49m
Market cap: £173.58m
Zotefoams (LON:ZTF) is a foam and insulation specialist. It was highly rated in the past but shares have come off a little:
I’m not familiar with the story here. My guess is this is due to some missed growth targets and a lack of cash generation.
If you head over to the group’s cash flow statement you can see it has had to raise debt and equity in the past two years.
Note the dividend payments too. I’m not a fan of companies that insist on paying dividends while funding operations externally, but ZTF is in an interesting niche and calls itself a ‘world leader’, so let’s take a look at today’s update.
Highlights:
- Group revenue down 18% to £34.6m, driven by:
- 7% decline in High-Performance Products
- 23% decline in Polyolefin Foams
- 2% increase in MuCell Extrusion sales
- £6.0m (30 June 2019: £5.2m) cash generated from operations but capital expenditure of £7.4m (mainly related to a new facility in Poland),
- Operating profit down 38%, net income down 45%, and basic earnings per share down 48%
- Liquidity headroom of £18.8m,
- Net debt up 55% to £36.2m but within covenants (net borrowings to EBITDA ratio of 2.6x vs. bank covenant 4.0x),
- Interim dividend of 2.03p declared (30 June 2019: 2.03p), ‘reflecting the resilience of the H1 performance as well as the Board's confidence in future prospects’.
A lot of today’s reaction depends on what has already been priced in by the market, but these results don’t scream growth to me. In fact the increase in net debt is a bit of a red flag.
The group says H1 was ‘challenging in a number of markets’ and expects a ‘subdued but stable H2’. That sounds like a slog for a company on an historic PE ratio of just under 24x.
The group did remain profitable over the period though, which is better than a lot of companies out there. ZTF’s CEO, David Stirling, does add:
We expect the second six months of 2020 to deliver record sales, beating the previous best half year sales of £43.1m. Our expectations are based on relatively subdued but stable demand in most polyolefin foams markets other than PPE, where demand is very strong, and a much stronger second half for footwear products and T-FIT® technical insulation, continuing the momentum experienced late in the first half.
So strong growth momentum in T-FIT could drive a record H2, which sounds a bit more like the type of swagger you would hope for in a small cap world leader. The group has some registered trademarks as well (AZOTE®, ZOTEK®, ReZorce® and T-FIT®), which might allow it to generate above average returns in future.
In fact it is already generating decent returns:
I do wonder about the disconnect between earnings and free cash flow though.
During Q1 ZTF experienced a continuation of the lower level of demand in its western European and North American markets ‘that we witnessed during the latter part of 2019.’ It seems as though momentum has been faltering here despite many millions of pounds in investment.
Conclusion
For now, the lack of free cash flow and mixed trading momentum pre-COVID are enough to put me off. It seems as though ZTF might have enough about it to reclaim momentum with its trademarks and technology, but at current levels it feels like a lot of this is priced in.
A quick look at the Analyst Consensus chart shows downgrades were feeding through long before economies began locking down:
Regarding high levels of capex, the group says
The recent large capital expenditure programme has created ample capacity to support future growth and any economic recovery. As a result, capital expenditure across the business is now returning to much lower levels, more in line with depreciation.
FY19 depreciation was £5.8m compared to capex of £24.4m - so if the group can get the latter closer to the former then perhaps ZTF is on the cusp of free cash flow generation. Such a development could help rerate shares and support its financial position, particularly if broad-based trading momentum returned.
In the meantime there are some balance sheet concerns with net debt increasing by more than 50%. Given the historic lack of cash generation I would be concerned about the risk of a rights issue or placing while the company attempts to either revive broad-based trading momentum or wait for T-FIT growth to come through.
Shares trade at more than 2x sales. ZTF’s time may come, but I think there are probably better and safer growth opportunities out there for that kind of valuation.
H&T (LON:HAT)
Share price: 319p (+1.27%)
No. shares: 40m
Market cap: £125.57m
The share prices of H & T (LON:HAT) and Ramsdens Holdings (LON:RFX) both got hit during lockdown but their strong balance sheets, cash generative business models, and modest valuations limited the downside.
These pawnbrokers aren’t for everyone, but for those that focus on the quantitative there is plenty to appreciate, including high margins and returns on capital. It’s no surprise that HAT qualifies as a Super Stock, with broad-based factor strength:
The group’s valuation metrics are strong across the board versus the rest of the market, too.
HAT qualifies for two screens - one Bargain and one Growth, suggesting a blend of Value and Momentum. A quick look at the Recent History box lower down the StockReport shows some promising compound annual growth rates.
This is a promising starting point but lockdowns cast a shadow so I’d like to see more management commentary on HAT’s short-term prospects. Recent trading might not have been pretty, but the group’s valuation and cash generation provides some comfort.
Highlights:
- Operating profit down 32.9% to £5.5m
- Profit before tax down 26.5% to £5.0m
- Net pledge book, including accrued interest, increased by 4.6% to £56.3m, but the Personal Loan book reduced 43.8% to £10.0m
- Net debt reduced to nothing (30 June 2019: £11.6m)
- Net assets up £19.3m to £126.9m
- Reduced interim dividend of 2.5p (2019 interim: 4.7p)
Stores were closed on the 24th of March but have since all reopened. During that time clearly revenue and profitability took a substantial hit but the group’s net debt reduction is impressive and maintaining the dividend (albeit reduced) is a good sign.
Group CEO John Nichols says:
"Pre lock-down the Group was well on track to deliver revenue growth and increased profitability, underpinned by our diversified income streams, increased footprint and investment in digital initiatives… The Group has a strong balance sheet, no debt and a good cash position. This will enable us to build back our pawnbroking book, a resilient secured asset in times of economic uncertainty, and deliver our long-term growth plans which remain intact.
Conclusion
I can see the attractions here: modest valuation, strong balance sheet and market position, double-digit returns and profitability, and strong, consistent annualised growth rates. HAT could be a good long term hold with a useful yield attached.
There may be some regulatory concerns. I’ve not read up on this point for a while, but it’s something I’d want to check before investing. H&T pawnbrokers has very good reviews on Trustpilot, which is a good start.
Directors appear to be net sellers in recent years. I’m not reading too much into that, but it would be nice to see either directors or the company buying shares given the mix of modest valuation multiples and historic growth rates. Perhaps further growth in HAT’s markets (and therefore share price upside) is limited?
I would guess there is plenty of scope for expansion into alternative forms of lending, as well as market consolidation opportunities going forwards. Broker estimates are buoyant.
All in all the above makes for a favourable impression - there could be good value here.
Codemasters (LON:CDM)
Share price: 412.00p (+9.28%)
No. shares: 151m
Market cap: £570.58m
(I hold)
This UK video game developer is too big for the SCVR really but I can see some chat about today’s results so I’ll quickly touch on the update on trading so far in FY21.
Codemasters Group (LON:CDM) shares are breaking all-time highs and are now above 400p, which is exciting.
Trading since the start of the year has been particularly strong and the Board now anticipates that Revenue and Adjusted EBITDA for the full year will be significantly ahead of current market expectations.
CDM specialises in racing games. Some may view this as a lack of diversification across game styles, but I view it as a deep technical expertise in a core, evergreen gaming genre. The engines used to create racing games are unique and highly optimised. CDM is one of the best in the business.
The group adds:
These revised expectations are driven by the particularly strong performance to date both of the annual instalment of its Formula One title, F1® 2020, and the continued strength of the Company's growing back catalogue of games. Fast & Furious Crossroads, which was released on 7 August 2020, has to date performed as anticipated, and the Board is pleased to report that levels of pre-orders from both retailers and consumers for the title launches scheduled for the remainder of the year also remain consistent with original expectations.
Conclusion
One thing I would point to with these companies is the accounting for software, development costs etc. These measures can require subjectivity and cash generation can be left wanting.
It’s not ideal, but the video games market represents a vast opportunity for many years to come, with exciting (and better) business models being established as the industry matures. We have some fantastic companies in this space listed on AIM and other indexes (including KWS, FDEV, TM17, and SUMO).
The high relative valuations may prove to be deceptive if those companies can execute and grow quickly, which I think is possible. Coupled with that you have unique gaming IP and proprietary software engines. It’s a promising space albeit one that can get hyped up and that comes with valuation risk.
That said, FY21 looks bright for CDM.
Amino Technologies (LON:AMO)
Share price: 132.50p (-3.28%)
No. shares: 76m
Market cap: £100.76m
This is strange - clearly there is an ongoing story here - but Amino Technologies (LON:AMO) has released an additional statement today saying it will provide an investor presentation on Thursday so that ‘its strategy, business model and performance are clearly understood.’
So presumably group strategy needed clarification. You can sign up to the Thursday presentation here.
So what does the group do then, I wonder? AMO calls itself ‘a new breed of Media Tech business, focused on enabling operators to meet the challenge of the rapidly converging worlds of broadcast and next-generation streaming services.’
It has two operating companies: Amino, with TV-centric solutions, and 24i, focused on streaming. ‘The two companies can combine their products and services to create an industry-leading eco-system to provide full end-to-end, yet highly modular, solutions,’ apparently.
I’ll need a little more time to really dig into this company and understand just how it adds value and makes money. If anyone can help out in the comments that would be appreciated. On that note, I’ll probably sign up for the presentation linked above.
Anyway, it’s an intriguing backdrop for this High Flyer (soon to be a Falling Star?), whose shares have fallen markedly so far this month.
On valuation grounds alone, AMO looks attractive with a forecast PEG of just 0.5 - but can these growth projections be trusted? The group’s historic profit figures are mixed.
Through it all, cash generation has proven more robust than earnings which could be a positive sign of underlying strength. On the whole though I’m concerned about the mixed historic results.
Highlights:
- Revenue +10% to $38m
- Adjusted operating profit -11% to $4.2m; statutory operating profit -68% to $0.7m
- Adjusted basic earnings per share -21% to 4.88c; statutory basic EPS -69% to 0.92c
- Net cash down from $19.3m to $2.1m
- Interim dividend withheld
These are alarming results and a wide gap between adjusted and statutory figures always sets lights flashing.
The group is pushing forward with a ‘transformation to [a] software-led strategy’ that has driven a doubling in recurring revenue to $10m and is leading to a ‘higher quality of earnings’. It sounds like AMO has to pivot its business. Perhaps its old model was outdated?
This seems like a dangerous time to make such a shift, with net cash declining precipitously. In terms of current trading and outlook, the group says that ‘it is possible that new business wins in H2 2020 may be impacted by any further negative Covid-19 impacts on the global economy and potential knock on impact for our customers and our supply chain’.
Is this a benign acknowledgement of uncertain conditions, or is this management paving the way for a full year profit miss? I’m not sure about this one.
Conclusion
On the whole I’m happy to let this company get on with its transformation. There could well be teething pains as it shifts towards a more software and recurring revenue-based model. In the meantime, AMO’s net cash position has reduced dramatically.
Could a fundraise ultimately be on the cards? The group has been reasonably cash generative in the past, but there are also appear to be instances of shareholder dilution.
Perhaps shareholders will be fine. There are some positives. AMO qualifies for the R&D Breakthroughs screen and the share price does not appear expensive on a forecast earnings basis. Increasing recurring revenues and higher-quality earnings are fine things to aim for.
I'm not yet comfortable with the business model though - I need to understand it better. This transformation may be a big opportunity, but for now the signals are decidedly mixed. I don’t see any reason to get involved until there are concrete signs of the strategy bearing fruit.
Solid State (LON:SOLI)
Share price: 610.00p (+0.33%)
No. shares: 8.6m
Market cap: £52.03m
Solid State (LON:SOLI) is a high value-add manufacturer of technology for use in harsh environments. It specialises in hard-wearing computing, battery power solutions, communications systems, electronic components, and displays.
The group says it is a recognised industry leader in providing these complex, performance-critical products. Alongside these products, it gives a high level of service and technical support. You can see more on its individual products here.
It sounds interesting. The group is modestly valued at 13.7x forecast earnings, it generates double-digit returns on capital, and its operating margin is consistently between 5% and 8.5%.
It also looks quite financially safe, with solid liquidity ratios, cash generation, and net cash on the balance sheet.
The group’s shares are more or less unchanged on today’s update but there could be potential with this small cap Super Stock so I’m keen to take a look.
Highlights:
- trading since the last update on 8 June 2020 has continued to be ahead of management's expectations.
- Group revenues were down 4% year on year.
- Order intake in Q1 was down just under 15% year on year, although this appears to be improving - by the end of July 2020, order intake for the four month period had improved to down 7% like-for-like.
- The open order book at 31 July 2020 was 4% below the year end at £38.3m.
- As at the reporting date, SOLI had cash level at £3.2m alongside an unutilised revolving credit facility of £7.5m.
COVID-19 update
- All of the Group's four manufacturing sites remain open and fully operational.
- SOLI's supply chain is intact albeit with some interruption. Lead times on new orders are lengthening and freight costs from the Far East remain elevated. Could be something to keep an eye on.
- Some customers are operating at reduced levels. The group notes a ‘significant slow down’ in the oil & gas and civil aerospace sectors but the medical, food retail, security and defence sectors have been resilient.
So there has been some disruption here, although shares have recovered strongly.
Is this because of strong growth prospects going forwards, I wonder? The group says its pipeline of new product designs continues to increase.
Meanwhile it is keeping an eye out for potential acquisitions - so it possibly fits into that camp of survivors who can take advantage of market disruption.
Conclusion
I’m taking the strong relative strength as a signal that it could be worth digging deeper into this company and its trading prospects.
I’d like to know why the operating margin has come down in recent years. If SOLI can pull off revenue growth while bringing margins back up to previous levels, that could lead to an encouraging increase in profitability.
It’s a speculative Super Stock that qualifies for the Tiny Titans screen, which is one I do like to keep an eye on due to its strong performance over the years. SOLI’s trade has been reasonably resilient through the lockdown, which suggests that its products are important to customers.
There could be further disruption ahead but the group is looking to take advantage of this by possibly making selective acquisitions later in the year.
All in all, there could be something here but I want to learn more about its existing products and this pipeline of new product designs it talks about. It ticks a lot of boxes at first glance.
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59 comments
Just listened to the £AMO presentation on 'Meet the Company' website. The company as far as I can tell is operating in a growth area, helped to a degree by the pandemic. However I do have some niggling misgivings, such as:
The small shareholdings of directors. As far as I can tell, Donald McGarva, Group CEO holds around 550,000 shares, that apart the only other Board shareholder appears to be Mark Carlisle, CFO who is shown on the Halifax website as holding just shy of 9000 shares. Please correct me if other Stocko members have other information.
The gap between adjusted and statutory basic earnings and operating profit. This was the topic of one of the questions posted at the end of the presentation and I admit that I found Mark Carlisle's answer somewhat woolly. In short he said that the gap is anticipated to 'be better' at the prelims.
Finally there have been a few recent RNS announcements which although have no financial implications for the company do not inspire confidence. One relating to a technical breach of the Companies Act 2006 which has required the company to convene a General meeting on 4th September and the other relating to the premature release of details of the proposed General meeting.
My misgivings may off course be wrong, but I have decided to watch from the side lines for the time being and have recently sold my holding at a small profit.
Others may disagree with the above and all constructive thoughts and observations are welcome.
Thanks Jack, a really informative report as always!
No position in Plus500 (LON:PLUS) but I like to keep an eye out.
The below are revenue gains/losses from Customer Trading positions published at various occasions in and at the end of H1:
Those are some ridiculously wide swings in such a short period of time.
And to be honest, I don't quite believe the company when they say the period ended with only 1% of revenues derived from customer trading.
Happy to remain on the sidelines.
A
and what would be the problem if some revenue comes from costumer trading? most of the costumers are pure gamblers and £Plus is the best casino for them in the UK, Germany and Spain. Room to grow in other countries.
What do competitors do regarding Costumer gain/losses? They are insured i believe, against losses. But do they keep gains?
Plus500 (LON:PLUS)
Hi R--G
Revenues swinging by a magnitude of +$70m in 3 weeks, or -$150m in 2 months means that there is no trend to follow or analysis that one could do to determine how the company will perform in the future.
An extended period where Customers are Trading positively (and therefore Plus is losing money) would clearly not be good for the company. Sure they could cut off their customers (they have done in the past) but that would piss them off and make things worse. When I was doing more detailed work on the company a few years back it already had a very high churn rate and I have no doubt that this hasn't changed.
As an aside the company has lied so much in the past I don't, and will never, trust them whilst management essentially remain unchanged. And not mistakes, blatant lying - such as how much money they made or lost from customer trading.
Competitors:
I believe £CMC have started adopting the same policy as Plus but to a much lower extent. Ig Group (LON:IGG) do not gain or lose on Customer Trading.
Feel free to check out their respective reports in case you feel I have misunderstood anything.
A
thanks abtan
too bad that analysts cannot forecast the company, shareprice will therefore be driven by trading statements and interim/annual reports and if these show good results then i cannot complain (I hold).
Churn rate has reduced a lot, it was mentioned in the H1 report issued today.
I was not aware of the blatant lying, i will look into that, thanks. i hope the lying is confined to Customer trading performance and not to other metrics. they said today their cash balance is now more than half a billion dollar! ($587.8m) imagine if that is a lie!
Jack was disappointed in your Open Orphan comments yesterday as they were so far off the mark. You seem to base your comments on historic Stockopedia figures and have failed to research the transformation that has taken place since the start of the year with the acquisition of Hvivo. Open Orphan is now profitable and has cash of at least £15m. It is benefitting from COVID but it is not dependent on it. In current times it is probably one of the safer stocks on Aim . Add in the wide card of its phase 3 universal flu vaccine, there seems to be plenty of upside as well. As you can see you seemed to have missed the positives and done an injustice to Open Orphan
why is this voted down, new start is absolutely right
I know nothing about Open Orphan (LON:ORPH) and to be honest I had skipped over that section of Jack's Monday report. I have read it now, and I don't think it was overly negative. In fact to be fair Jack said :
My personal rider to that sentence would be "but the odds are against you".
newstart makes a decent stab at explaining why the future is different from the past, but the fact is that most "story stocks", which is what ORPH looks like to me, have very compelling stories about the golden future that lies in front of them.
However the vast majority of them crash and burn or wither into obscurity.
Some of the very biggest winners on the market come from this stable of story stocks, but if you invest in all of them you will lose substantially. I think to win in this space you have to be lucky, or have some MASSIVE insight into what the winners will be (and probably have more than your fair share of luck).
To be honest I think Jack's conclusion was significantly more balanced than mine would have been.
I think the down-votes predominantly are caused by the tone of newstart's perhaps influenced by the similar reactions that occur whenever Paul mentions OptiBiotix Health (LON:OPTI)
With a different tone and a little more detail on why (s)he takes a different view of Open Orphan (LON:ORPH) newstart's post would have been well received. In most cases I think the community here welcomes contrary views and vigorous discussions. So I hope newstart won't be discouraged from continuing to offer up views.
Talking about quality of services offered by a company.....I give you the banks. Barclay card wrote to me yesterday to reduce my credit card limit from £6,500 to just £300. No warning. Already reduced before they wrote to me. Ignored their own terms and conditions so far as I can see. Nothing on the card; I cleared the balance in June when a zero interest balance transfer ended. Apparently in making this decision they "carefully checked how many missed payments I have" (not once on any account) and my credit score (excellent).
An article in the press from late last week suggests this is just the start. With furlough and support schemes ending in a few weeks time and unemployment expected to soar by the end of the year, the banks are looking to cut risk dramatically. Of course I can understand that but the "blunderbuss" approach and the suggestion that it is the individual customer that has caused this issue is very irritating. But of course being honest in a pandemic would result in a lot of criticism.
In reference to Barclaycard, if you've cleared your balance, had a zero rate deal, never missed a payment and have an excellent credit score you're probably not a very profitable customer for them! :)
Take it as a compliment and move your business elsewhere - there are some good reward and cashback credit cards out there.
Hello Jack, you asked for ways of detecting companies with good shareholder alignment. I use an indirect method by monitoring the purchases of fund managers who concentrate on quality and for whom shareholder alignment is very important. As it happens these fund managers also have a very long term outlook. I am sure you know who I mean but for those who don't, this includes Keith Ashworth-Lord, Nick Train and Terry Smith. For example, the monthly fact sheet I received from the Free Spririt Fund (jointly managed by Ashworth-Lord) last week mentioned that the fund had recently bought Codemaster, so I checked the company out using Stockopedia just to check that the company did indeed look good and purchased the shares. I should add that it does not always work quite so well, but it is certainly a method I have found useful, and it does not require too much effort.
You mention "fund managers who concentrate on quality and for whom shareholder alignment is very important" - any pointers how to identify these managers (with so many out there)?
....I use an indirect method by monitoring the purchases of fund managers who concentrate on quality and for whom shareholder alignment is very important. As it happens these fund managers also have a very long term outlook. I am sure you know who I mean but for those who don't, this includes Keith Ashworth-Lord, Nick Train and Terry Smith.
I use a very similar method to alert myself to quality companies. All 3 of these fund managers have one major advantage over us small investors - They all have ready access to company management that we small investors don't. In addition to getting more of an inside track on company progress, all 3 managers have a better than average track record of assessing/investing in capable senior management and disregarding the dross.
TheArb, check your inbox on stockopedia! :)
Thank you both maxistaxis, SaarfLondon for your kind words!
And thank you to all that gives the post a daily green thumb! It appreciate them!
Noticeable rotation from growth to value this week.
Ted Baker (LON:TED) up 10% and 17% in these past two days.
Royal Dutch Shell (LON:RDSB) , Itv (LON:ITV) , Frasers (LON:FRAS) and other retail/consumer driven shares are just looking too cheap given the positive jobs data and continued control of covid so far. All have seen a pick up from their CAPE 10 levels with expected earnings yield to rebound.
e.g. Itv (LON:ITV) Advertising already had a rebound from -42% to -20% between May and June. With earnings yield of 5% on the worst half from the crisis (1H 2020), a rebound in Q3 and 2H could see earnings yield increase to 10-12+% and P/E of 8 in 2020 with 2021 expected P/E of 6.4 - without a share price increase - that is just too cheap. It would mean a 16% earnings yield in 2021 from today's price and net profit to market cap of just 6 years and that is with the expectation business will under perform 2019 levels by ~15%.
No wonder Bill Miller has been saying solid value companies perform best for the first 6m-1 year out of a crisis before the growth companies take over again.
RE AMO I make the EPS ttm in cents 1.5 for 6 months to nov + 0.88 for 6 months to may so total ttm 2.38 cents.
It may be the result of writing off research on new software and generous offers to customers during lockdown but would make the current brokers eps estimates for Nov 2020 of of 13 cents look very bold . 13 cents is roughly 10p .
The estimates appear to have been unchanged since March so perhaps a review is due !
Perhaps you will be enlightened Thursday
Jack - re Amino Technologies (LON:AMO) the cash hasn't fallen precipitously, they bought another business in the period. The fall in cash reflects the purchase price.
W.r.t H & T (LON:HAT) (I'm long), genuinely surprised that the market reaction has been so mild.
BULLISH POINTS
1. In recession (particularly with increased unemployment, pawnbroking is likely to benefit).
2. My reading on the no.s is that if it had not been for the 2-3 months of lockdown, HAT would have performed admirably.
3. Gold prices likely to remain at high rates encouraging customers to sell gold (HAT buy and sell gold for trading) + some part of their inventories is gold (Accounts does not specify).
4. The full benefits of the 2 acquisitions from mid 2019 should come into full effect this year (i.e. the Money Shop acquisitions which have now been converted to H & T's and Albemarle & Bond.
5. Checking out HAT historically for the 2008 recession, they seemed to have prospered then, hence no reason not to perform likewise now, given the relative strong financials.
6. Potential rent reductions (given the social-demographic locations of HAT, I would imagine good scope for downward pressure on rents with landlords (TBH, I am not sure which % of shops are on freehold / leased)
7. Rates holiday up to end of march 2021. based on prelim research, as far as I am aware Rates holiday was extended to pawn shops. They have 160 shops now (if I remember rightly). So that's a nice little saving.
8. Growing performance of est1897.com website as CEO mentioned during proactiveinvestors videos (still a small part of the biz but encouraging developments)
9. Simon Thompson has previously tipped this. Hence you may benefit from the Simon Thompson coverage.
10. Recent RNS shows the recent appointment of ex-managing director for the Consumer Credit Division of Provident Financial. (Likely in view to develop personal loans side of the biz).
BEARISH
1. Susceptible to future Lockdowns. Even so, likely to be regional rather than national given the economic devastation the previous one caused.
2. Biggest negative is FCA review. As Simon Thompson pointed out in Nov 2019 (
https://www.investorschronicle.co.uk/comment/2019/11/18/fca-review-hits-h-t-share-price/), "affected" loans are a small portion of HAT's portfolio.
3. Reduced Foreign Currency biz because of C19. If I remember based on FY19 accounts, rightly Forex + "other" constituted around 8% of GP. As Simon Thompson wrote regarding Ramsdens Holdings (LON:RFX) (https://www.investorschronicle.co.uk/comment/2020/05/28/shopping-for-a-bargain-buy/ ), operators like Ramsdens Holdings (LON:RFX) as well as H & T (LON:HAT) are likely to benefit in long run given less competition on the high street.
Overall, very surprised in respect of the SP action in recent times. Appears that the market views HAT as a "retail operator", which technically it is and it is not. I am more inclined to believe that the demand for their pawnbroking services, trading gold and 2nd hand jewelry is a different type of demand compared to walking into Greggs to get a sausage roll whilst shopping at Primark. DYOR.
I'm late to my desk but Holland Smith, I think you've got it!!! By Jove you've got it! Great lay out and it works for me. Thanks for the hard work you put in to do it for our benefit.
Morning all,
There was an interesting RNS from Haydale Graphene Industries (LON:HAYD) fairly recently where they outlined a licensing & distribution deal for a coatings product that seems to be attracting significant interest from the water infrastructure industry both in the US and now in the U.K. Paint it on concrete pipes and it fixes them instead of having to replace. This seemed to me like it was more of an actual commercial opportunity for the companies involved. The SP has also started to pick up following it. As with all new technologies wrt to material sciences, it sometimes takes a while to realise and commercialise the potential applications. Will be interesting to see if the SP continues to gain traction.
Apologies for position of post, had intended as a reply to GrahamF at the bottom of the thread.
Parsley
As most retail customer complaints occur within two weeks of the transaction, this gives companies enough time to remove the complainants details from the upload to TP .
can you advise more specifically how this works - is it sorted by companies sorting the complaint the customer has so they are now a satisifed customer? (i see that a a positive and not really cheating the system if this is resulting in good prompt customer services when things go wrong)
or is it the fact companies can cheat with regard to the data they send to trustpilot by excluding problem customers? - that just wouldnt sit right with me unless its for genuine reasons - eg customer fully refunded so sale cancelled.
or something else like natural timing that make sit less likely customer would complain via tp even though they have the option to?
Cheers
Interesting comments on Codemasters Group (LON:CDM) Jack. I recently sold out of Frontier Developments (LON:FDEV) as the valuation was starting to get very toppy (forward PE of 50).
Frontier Developments (LON:FDEV) do look top at PE 50 & £cmd relatively cheap at 23 however what is driving these shares apart from the lockdown sales & move to online sales (cutting out the retailers) is the 'in games purchases'. These are where once you have purchased the game you can then pay a £ to get a better gun, tyre, engine, track, whatever. The detailed commentary in the reports is worth reading, the growth in this area is expected to be huge and this is all on top of the original sale so getting cash from the customer ongoing. It used to be a one off sale, tail revenue could be very large and an element of subscription like. £CMD also have about 2m subscribers to some form of driving channel for their games, which they mention they are looking at some form of monetisation, they also mention a subscription model for all the driving games.
Particularly for £cmd there is the takeover optionality, they own F1 & I think WRC, an anchor title for some big tech looking at a streaming service.
Codemasters Group (LON:CDM) is embracing the Games-as-a-Service (GaaS) business model, where downloads slash distribution costs. Their Gross Profit for the year was a juicy 86%, with £25M in cash. Not bad of a £76M turnover company!
My concern with Frontier at the moment is more on the execution risk of putting out these new games when all their staff will be working from home. Given the shares are so highly rated any delay on putting out games will knock the share price hard.
It's definitely a brilliant company (from personal experience its games are excellent) but its also in more of a niche market then many other bigger video companies in that its focus is on RPG/tycoon games - similar I guess to Codemasters in that its sole focus is on racing games. What will be interesting with Frontier is how successful Planet Coaster will be on PS4/Xbox when it launches later this year.
Trustpilot (TP) reviews are easy to manipulate if you are a TP paying customer - which H&T are.
TP rely on sales transnational details being sent to them by the paying company before they email out review requests to retail customers. As most retail customer complaints occur within two weeks of the transaction, this gives companies enough time to remove the complainants details from the upload to TP . This way the odd complaint that gets through is drowned out by the good ones. Their is certainly no audit and no real time feed-in of transactions. I say all this from the perspective of having used TP for years and knowledge within my industry that it is common practice. Don't get me wrong, if you are truly crap then this does not work but it does allow mediocre companies to look like stars. Also explains how a company can look great on Trustpilot but crap on another review site.
I am not suggesting H&T are poor at customer service but caution that Trustpilot scores need to be viewed with are fair degree of scepticism
Jack Thanks for your excellent write up on Zotefoams (LON:ZTF) I notice Zoatforms says it has repaid (post Q2) the £100,000 in furlough payments it has received from the Government. Not a large sum, but ZTF are by no means alone in repaying furlough assistance. Is this just being altruistic / being seen to do the right thing / signalling to the market financial strength? Or is there a hard financial logic to repaying furlough assistance?
Hi Jack,
My rules are quite simple when it comes to management and my trust/distrust of them. Have they done what they said they would.
If they haven't, then a big red mark, because they were either dishonest with their shareholders or they are incompetent in running/understanding their business/sector. The good thing with this approach is you can back-test it easily.
Black Swans aside it has worked for me so far.
Hi Jack, Interim results are out today for Plus500 (LON:PLUS) and seem to be outstanding (I hold).
Outstanding performance (financial and operational) in H1 2020 across all metrics, resulting in significant shareholder returns and market and technology leadership positions reinforced.
Revenue up 3.81x but profits (EBITDA) are up even more 5.5x so margin increase.
60% of net profit will be distributed to shareholders – divs & share buyback.
Interim dividend increased 3.5x
New share buyback programme of $67.3 million announced
Unprecedented levels of New Customers and Active Customers
But also new accreditation received meaning reduced corporate tax from 23% to 12% yielding $100m to shareholders in saved taxes.
Marketing ongoing – Plus500 remains the leading CFD provider in the UK, Germany and Spain and signs sponsorship deal with Poland’s Legia Warsaw (expected growth in Poland?)
I was very interested to see how the SP reacts. Unlike Ig Group (LON:IGG), it appears to be a more conventional reaction! Well done on holding (I have no position)
Yes i agree, i had Ig Group (LON:IGG) and my stop got hit. It was so frustrating as the statement i thought looked very good.
I had bought and sold and bought and sold Ig Group (LON:IGG)
I had been originally planning to buy back in at £7.50 but then read the @Micheal Taylor article and held off, so was then pat on the back and well done son when it was £7.35 and then obviously kicking myself and you are a numpty...
Anyway with reference to the @MT thing, it looked like an institution exiting in a large volume caused the spike down...commiserations
I continue to watch and will buy again as I agree with @ex Graham Neary they are the class act in the field it would seem?
Hi Tommy,
The biggest driver for growth is new customer acquisition. The current turmoil has driven lots of growth. I've model valuation based on the most recent report. (see graph below).
Still looks undervalued.
DYOR
BSV
Hi Jack
Thank you for the commentary on Zotefoams (LON:ZTF). This is a company I have long thought interesting, but never bought. The mediocre historic ROCE figures are part of the reason for this. Just possibly this could be about to change, if the recent capex pays off as hoped.
Morning Jack
Not sure whether you have a view on £AMO. Still working my way through this morning's interim and can't quite make mind up. Dividend re- introduced, which is a positive.
Seconding jonno - Jack - your thoughts on Amino Technologies (LON:AMO) would be appreciated.
The sp is down on these results but notes out today from finnCap and Progressive, both available to private investors, leave their forecasts unchanged except for a slight dilution to eps following share count. finnCap reiterates its 215p price target.
Paul would be pleased that for the first time the company will be presenting at investormeetcompany.com on 13th Aug 2020 at 4:30pm.
Correction jonno - the dividend is not being re-introduced but finnCap say "We maintain our expectation of the restoration of the dividend in 2H20 (announced with prelims in February 2021 if so), if forecasts are achieved to support it".
I would like to second this (£AMO) as well - I hold.
The directors haven't guided much on outlook. Currently the important 24i acquisition is going well, but there looks to be a risk of their customers (TV operators) suffering if COVID turns into recession, especially in North America. If that doesn't happen the shares look cheap. It looks as if the shares pulled back to day because of two accounting snafus - impact trivial, but does not reflect well on the finance function. Possibly they have been outgrowing themselves.
I've taken a look and also can't yet make up my mind re £AMO
Enough to keep me on the sidelines for now with the wide gap between adjusted and statutory figures, but the valuation is good if the company can execute its transformation relatively smoothly. I also just need to understand the business model a little better!
I think I'll watch the Thursday presentation to see if I can to get more of an insight on these points.
The racing car software games company Codemasters Group (LON:CDM) have issued a significantly ahead trading update this morning.
I also see that August fact sheet of the sister Buffettology Fund have initiated a holding, suggesting that Codemasters exhibit a Moat within the computer games sector. Still looks good value for a COVID resistant software company. (I hold).
https://www.sanford-deland.com/26/the-funds/the-free-spirit-fund/fund-performance
Jack, for me the frequency/speed of reporting is a good sign re corporate governance. Most companies will have results internally within a few weeks maximum, it’s not fair for smaller shareholders not to have the same data promptly. Also the longer management hold that information, the more time they have to think how to spin it.
mesb & Jack, re Jack's question in the preamble
Agreed, speed of reporting is IMHO normally a good sign, e.g. Jarvis Securities (LON:JIM) which gets results out in very quick time.
In terms of "Management commentary that is considered and distinctive", I much prefer updates and indeed broker estimates that are consistently very understated. Put simplistically, I would rather have both of these produced by Eyeore than Tigger.
At the very least this tends to mean that the downside is largely protected and the shares are somewhat underpriced given a company's prospects. On the upside one can get a string of broker consensus beats, with associated strong SP performance.
Cheers, Martin
Codemasters Group (LON:CDM) which i hold were up 10% yesterday before the anouncement, suspicious.
Hi Jack, companies that make it hard to contact them with no IR contacts other than a PR company general email and no name, any recent examples, Codemasters Group (LON:CDM) infact. Still waiting on a response from a week ago.
Jack, you should take a look at the Performance of PIE Funds NZ who invest in companies (including a UK fund) with those characteristics and inspect their main holdings. It's run by a friend of mine, Mike Taylor, its performance speaks for itself.
My morning smallcap tweet:
Appreciate (LON:APP) Walker Greenbank (LON:WGB) Codemasters Group (LON:CDM) Destiny Pharma (LON:DEST) Sareum Holdings (LON:SAR) Inspiration Healthcare (LON:IHC) S&U (LON:SUS) Solid State (LON:SOLI) OptiBiotix Health (LON:OPTI) Rua Life Sciences (LON:RUA) Versarien (LON:VRS)
Appreciate (APP) confirms sale of property for £3.2m. [SP=34.98 Cap=65m]
Walker Greenbank (WGB) guides H1(June) total brand sales, before licensing, discounts and rebates, down 28%. Core licensing income down 10%. Cautious. [SP=45.71 Cap=32m]
Codemasters (CDM) guides FY rev and adj EBITDA ignificantly ahead of market expectations. Cites its Formula One title and continued strength of back catalogue. [SP=377 Cap=571m]
Destiny Pharma (DEST) positive interim safety review completed of Phase 2b study of its lead asset XF-73 in the prevention of post-surgical bacterial infections. [SP=44 Cap=19m]
Sareum (SAR) long summary of drug dev progress but no overview. Dirs still deferring but not reducing pay. [SP=0.89 Cap=29m]
Inspiration Healthcare (IHC) continued to enjoy a very strong start to the year with U/L rev up 30%. What is underlying rev? C. 40 % of the value of ventilator contracts have been supplied. [SP=64 Cap=44m]
S & U (SUS) trading volumes in last 2 months return nearer normal but no FY guidance. Quotes Mark Twain "It ain't what you don't know that gets you into trouble, but what you know for certain that just ain't so." [SP=1605 Cap=195m]
Solid State (SOLI) rev continued to be ahead of management's expectations. Rev in last 4 months down 4%. All suppliers now shipping to schedule. However, lead times on new orders are lengthening. [SP=614.88 Cap=53m]
OptiBiotix Health (OPTI) outlook "extending the use of LPLDL into a wider range of applications. These include dairy, anti-aging products, and the development of a cardiovascular health portfolio including a blood pressure (CholBiomeBP) and vascular health product (CholBiomeVH). This will complete a suite of cardiovascular applications of different formulations which should meet the regulatory and market needs of most countries around the world." [SP=52.33 Cap=46m]
RUA Life Sciences (RUA) hospital orders now having recovered to 90% of pre-COVID levels in the US compared to around 67% in Europe. The increase in operating theatre activity has had a similar impact on the orders being placed on RUA Medical by its largest customer. [SP=96.6 Cap=15m]
Versarien (VRS) FY rev down 8%, pretax -£4.7m (£2.8m) after share based payments charge of £1.2m. Cash at hand down to £1.7m despite £5m gov't loan. "Our global expansion plans have changed direction slightly as we have decided that progressing into the Chinese market, whilst significant commercially, must be done on the basis that we are confident that our IP is protected." What about all those exciting China development deals? Have they turned to graphene dust? [SP=40.11 Cap=68m]
Versarien (LON:VRS) received the £5m after the period end being reported. Dreadful figures though. Numerous little grants for little R&D projects. Mind you none of the Graphene companies (Haydale Graphene Industries (LON:HAYD) Applied Graphene Materials (LON:AGM) etc) seem capable of making money. One wonders where the problem lies. Is it that it is hard to make products that benefit from graphene or is it that when you make such products it uses graphene in such small quantities it is hard to make any money from it?
Hi Chris
Regarding why graphene companies cannot make money, I think that the other possible explanation is that the cost of the material is too high to be able to incorporate it in significant quantity in products. So, it becomes at best a sprinkling of oofle dust (a Sooty reference there!) in a large quantity of other material so it becomes more of a marketing thing than anything else. And perhaps the end product producer may settle for a relatively poor quality graphene because it’s mainly for marketing purposes. I have Head skis that contain graphene and I like them a lot because of how stable they feel, but I don’t see other manufacturers rushing to copy that so I expect that the graphene in those skis is not there in enough quantity or quality to be doing anything significant.
The super high quality graphene that Versarien (LON:VRS) say they produce may only have a tiny market at present because the cost is so high. The community on ADVFN may talk about the huge potential but they are talking generally about what it may be able to do technically and seem to forget that potential only exists if the price can be low enough.
Graham F, thanks for that on Graphene. I have long been surprised at the enthusiasm for Versarien on the Graphene front. I think you must be right, ( I expect you are glad of my endorsement :-) but you know what I mean) I have been wondering why this super product has not really taken off and didn't realise the cost issue. I have recently done very well with Verditek and they talk about Graphene in their panels. I will now be a bit more circumspect when Graphene is mentioned, thanks. Charles
Charles
Just wanted to clarify that I don’t know for sure that cost is an issue for Versarien (LON:VRS) but it is a reason that many technically promising products don’t gain traction. What we do know is that producing graphene in quantity is not at all easy and Versarien only produce a small amount, so it is reasonable to suppose that it will be expensive.
Thanks for the follow up Graham and I think it is highly likely your supposition is correct.
Wow , it is hot today.
Walker Greenbank (LON:WGB) bit of a nothing update today with the numbers only slightly expanding upon the recent agm update - nil comment about what they expect for h2 other than they are cautious. Note with the agm update they did confirm they would update further in October so the lack on anything useful in today’s news should not be a surprise however the lack of any current year end figures update is not exactly useful. Management must have some idea of expectations but must simply want to say nowt. Back to sleep till October with this share.
I agree there is not much new in the Walker Greenbank (LON:WGB) statement today (in fact I wasn't expecting one given how late the AGM was).
There is however one thing that puzzles me.
I can't recall them using the words I have bolded previously.
licensing is easy to understand as they report this a separate line item anyway. But I cannot understand whether the reference to "discounts & rebates" means that this is a different measure than they have previously reported?
Last years H1 Brand revenue (excluding licensing was £43.1m so with the tiniest bit of rounding £31.3 is -28% vs that. So it does look like this is the same measure they have always given.
Which is then even more puzzling.
Over recent announcements they have given quite a lot of visibility of how revenues have progressed during the crisis, mostly recently in the AGM statement the same metric was -31% for 25 weeks (-15% for the last 4 weeks). Now we have -28% for 26 weeks,
It is overly simplistic to assume every week has the same weighting, but we do that it would imply that week 26 was +70% year on year. If that were they would surely say so?
Ahah - re-reading the paragraph on finishing the half year strongly I realise they said
I surmise then that contract must have been worth c. £1.5m
I was trying to divine whether we could determine anything about the underling demand and whether it was up from the most recent -15% YoY but lumpy contract like that means that we cannot tell.
I still take some encouragement from "the improving trend continuing month on month". The broker note that Paul referred to a few weeks ago (forecasting a small loss) implied revenues remaining @ -30% for the FY. I was more optimistic than that expecting around break-even to a small profit, I'm more inclined now to thing it will be a profit.
I still hold.
Walker Greenbank (LON:WGB)
But I cannot understand whether the reference to "discounts & rebates" means that this is a different measure than they have previously reported?
Its pretty unhelpful when the wording changes without any explanation for the change - compared to the exact same statement last year. i guess you would need to push the company on this matter to find the answer.
It seems plausible they may simply not know these totals yet so are using a different metric as that is all that is available. Ie without factoring in rebates and discounts. seems most liley explanation to me.
Perhaps its the same metric and they have not previously used the same wording (unlikley i would have thought)
There could be some change in accounting standards that would expalin why the metric is now not what it was.
i guess the worst option is that they are chosing a different metric solely due to the old metric being worse !
I would presume any lfl quoted totals are consistent though whetever the answer to the question.
I still take some encouragement from "the improving trend continuing month on month".
I think one would should expect the trend to continue to improve if there is a time lag in everything flowing through the system when they resume normal operations (i am presuming this is the case) - so it could be only improving due to the prior period not exactly being as up and running as this period. also the prior 4 weeks at 15% behind normal doesnt seem that brilliant a starting point but may be due to lag in opening. In summary its hard to get much of a handle whether the trend is good for the right reasons or its to be expected simply due to more stuff being good to ship than the prior month.
Just a shame they cant be a***d to give us a profit estimate now for year end - nearly 9 full months into year is pretty late to get anything from the horses mouth.
Simplistic, I know, but my worst investments have involved loss-making companies. Only investing in profitable companies works for me. Generally speaking, I would suggest that keeping a successful company ticking over is a far easier task than building a loss-maker into a successful company. And the stock market does not provide enough information on the management to judge what they may accomplish. In my view, what the management has done with the company is a better indicator of future performance than what they aspire to do.
Good morning! Below covers todays regulatory and potentially price-sensitive announcements.
You're a star HS with these reports -many thanks
top man Mr Smith!
HS this is an excellent daily addition. I have a couple of ideas to enhance this further, is there a way to DM me on stocko?