Small Cap Value Report (Wed 10 Mar 2021) - KCT, FOXT, SOM, BKS

10th Mar '21 by Paul Scott

94 comments 12103 reads

Good morning, it's Paul & Jack here with the SCVR for Wednesday.

Timing - I'm working at a glacial pace today sadly. Sometimes it flows, other days it has to be forcibly extracted! Still, there's nothing else to do, and it's tipping down with rain, so I'll keep writing until about 4:30pm. Today's report is now finished. I'll start off tomorrow's report with the 2 backlog items left over from today.

We're hoping to look at the following results/trading updates today:

Paul:

Foxtons (LON:FOXT) (I hold) - done
Somero Enterprises Inc (LON:SOM) - done
Beeks Financial Cloud (LON:BKS) (from yesterday) - done
Photo-me International (LON:PHTM) - see tomorrow's report
Restaurant (LON:RTN) - placing - see tomorrow's report

Jack:

Kin And Carta (LON:KCT) - done

Fingers crossed we can get through that lot, we've started work on it now!

Paul's Section

My thoughts on re-opening & inflation

I tend to be too optimistic, but am still firmly in the roaring twenties camp, where I think enough people could be eager to get out and spend, to boost the economy nicely as this year sees re-opening of the locked down parts of the economy.

However, I’ve also been listening to opposing views, and wonder if I’m possibly too optimistic, based on my personal circumstances (my portfolio has done very well, so I’ve got plenty of money, unlike maybe some other people in more regular jobs).

Listening to the utterly brilliant Grant Williams podcasts (thank you to several readers here who recommended them, they’re terrific. I’ve even paid a subscription to listen to them, something I’ve never done before), last night I listened to one about inflation. Why hasn’t the huge amount of money-printing triggered inflation? One economist that Grant interviewed, called David Rosenberg, was saying that stimulus money funded by QE has generally been used to pay off debt, and saved. He’s referring to USA here, but it’s probably similar here. Meanwhile, he’s sceptical about the re-opening trade because consumers have just shifted spending from holidays, eating out, etc, to buying exercise equipment, revamping their homes, and online shopping. So when re-opening happens, consumers could just shift their spending back again in the other direction - netting off. That’s an interesting idea. It’s not a given that overall consumer spending…

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simoan

10th Mar '21

For what it is worth P/E on it's own can be a poor measure of value btw. What one might determine a top PE may not be - watch for tangibles vs intangible investment as it skews the numbers dramatically.

FCF at least is an absolute so I try and look at this before determining whether a PE is a good/bad measure of a stocks value.

Me too. Someone much cleverer than me once said "Earnings are a matter of opinion, cash is a matter of fact". Obviously, the latter assumes you're not looking at the numbers for the next Patisserie Valerie where the cash doesn't exist at all!

All the best, Si

Roger Baron

I should have added, "and thanks for bringing this to our attention in October, Paul". Have just sold the shares I bought after reading the Oct update for 96% profit!

mojomogoz

Re Tremor International (LON:TRMR) and surprise all I meant is that the staircase up requires continued achievement or 'surprise'. IMO expectations for fy21 are really quite undercooked. I think upgrade being held back. Managed newsflow. I was curious whether you had angles on what that upside/surprise might be. I see fy21 EV/EBITDA perhaps as low as 7x (inc net cash)...and very very likely under 9.5x. I think that means sp double....obvs ARK and Nasdaq woes could derail things (ARK big in Tradedesk I think).

On Bidstack (LON:BIDS) I hated it....but I now love it and bought some after recent falls. Sadly I'm >10% down on that now (depending what its doing today). I'd own quite a bit more if I knew what was going to happen re financing. They look like they need cash c.3-6 mths time max...unless there's quite a commercial lift off. Even then they need to be at at least £30m revenue to avoid needing cash, and probably a good bit higher. If i could see through this I would own a full position but as i can't I'm much less as they may do another dilutive raise.

I was going to write the stock up but too lazy so far! IMO they know where their financing is coming from. They have been hiring senior commercial talent at pace and recency that means there isn't a doubt on money. I've taken a position ahead of resolution as I think it may come from partnering or something commercial (perhaps Dentsu who have been long time partner).

IMO they are way ahead of Anzu and Adverty the only real competition I think (maybe I'm missing someone). Anzu looks like a catch up reaction from WPP, Sony and some others to BIDS (backed by other players) whereas Adverty is an independent but struck commercialisation and development woes.

Whereas, I think that the most significant thing re BIDS is not their revenue but the work they have done to commercialise and sanitise (safety, revenue recognition, etc) for users of their service. And this is where the hiring in 2020 and early 2021 has been really focused including sales and relationship people rather than the tech....as the tech is not the gamechanger. IMO that's what James Draper et al realised late 2019, early 2020 with profit warning....and rather than sink they seem as if they may have risen to the challenge and reorientated themselves.

There should be news in next 6ish weeks I guess that will give more clarity...tick tock...as money is a significant short term issue

Super speculative stock. Does not look good on visible fundamentals and if I'm wrong its a potential washout.

timarr

I think about my first job and there is no way I would have been able to do it if everyone was at home 3 days a week.

One of my customers has onboarded 250 new staff in the last six months while everyone is working remotely. Broadly that's worked out very well - some people have whole teams working for them that they've never met.

In future there'll be mentoring and training programs. Staff will meet centrally when needed but there won't be enough office space for everyone to work onsite. In fact, when people have to work they've found it's more productive for them to do it from home (this is a progressive employer that judges employees on output not presenteeism).

In fact the hardest issue they've found with new, young staff is that their homes aren't suitable for home working. Two people in a one bedroom flat is a tough working environment, for instance. What they're already seeing is people moving out of central city locations to find bigger properties.

Not everything will change for everyone, but many changes have already occurred. Offices and high streets will look very different when we finally get to return to them.

Watchdog

I entirely agree with you about EKF Diagnostics Holdings (LON:EKF). It's no different from the directors putting their hand in the till...or MPs voting themselves a pay rise. I hope the larger shareholders express their disapproval.

davidjhill

on Tremor International (LON:TRMR) The broker note today alluded to the fact they've left 2021 forecasts alone basically all covid related but recognise that if Tremor International (LON:TRMR) is performing at the same growth rates as peers then there is a big EBITDA jump coming. I hesitate to say it but I can see 2021 EBITDA coming in at close to $120m and net cash at $140-150m+. As you point out that's an EV/EBITDA of 7.75 and at current market prices a takeover appears to be 18-20* so 1000p could prove very conservative. I love the model they've put together and I try not to get too excited. It would only take the NASDAQ to really tank or another unexpected smack to the economy to hurt the price. My takeaway is that compared to its peers it's a pretty deep value play so has a decent amount of margin for error built in to the share price already and on 8-10* EV/EBITDA should recover if there is a nasty economic hit.

I'm delighted to find another sensible investor who considers Bidstack (LON:BIDS) as a potential star in the making. Everything you say is pretty much spot on and mirrors my own thinking. I want to own more - I did sell some at 20p+ ages ago to be fair when they were very frothy and even more speculative (from a 6p purchase price) so my holding is currently free though still relatively small for me. But I can't quite get past my own fear of a dilutive raise either. As you say has the potential to be a complete washout with other lesser visionaries picking over the carcass but frankly if they get it half right could also be 10 or 20 times the price in my view. It's an uncomfortable feeling of fear and greed at the same time :)

Anyway I may see if I can pick up a few more below 6p and then wait for signals that the model is working before adding more. Any write ups you can be bothered to do I will be a keen reader.

Anyone on here own Eqtec (LON:EQT) ? I watched an interesting article by the guy that runs the Amati fund a while back and they bought a load. I then watched the price soar from 0.5p to 3.5p so I left it alone but picked up some finally today at 1.5p. This is a super interesting space and where a number have promised much and failed on the tech it appears Eqtec (LON:EQT) may be the real deal. Seems like plenty of execution risk here still : £8m to find for the property within 12 months, a deal to be confirmed with a European owner/operator subject to credit review but assuming those not insignificant hurdles are overcome then brokers forecasting some very big revenue and profit jumps : 2021 €48m revenue and PBT of €7.4m and in 2022 €16m of profit.

I've seen enough of these ventures going wrong to take it all with a pinch of salt so I'm interested if others have better insight than me on this.

KevinS1

I find there are a number of key measures that I look at when considering any stock. StockoP makes it very simple to do this and normally within 2-mins you can get a feel for if the stock is of interest. I appreciate there is a lot more analysis needed to really get to grips with a company, but a few key measures normally sorts the wheat from the chaff to start with.

I agree with Si & David regards PE and in my PF I have some very high PE stocks and some very low - all of them have other factors I consider to be more important eg. Boohoo (LON:BOO) vs Sylvania Platinum (LON:SLP) both of which I am delighted to own.

Gromley

Yes there are opportunities presented to individuals who no longer need to live near work.

I moved out of London over 20 years ago, but only after I had got approval to be "full time" homeworker. As we were somewhat ahead of the curve, the downside was that if I wanted to change company I would have needed to accept the long commute - so it is not without risks until it becomes clear how many companies continue to embrace homeworking.

It has some very strong pros and cons (I could probably write a book on the subject)!

As far as the issue of people whose homes are unsuitable for working from home this could perhaps present opportunities for companies such as IWG (LON:IWG) (Regus) although it will be interesting to see who fund their services.

We I first home-worked, I got a capital sum to kit out my office a paltry allowance towards utilities and got paid expenses whenever I went into the office, but that wouldn't come close to funding a serviced office space.

Getting back to investment matters, I do think it is true that there will be reduced demand for permanent office properties and therefore reduced demand for city centre sandwich shops etc.

But I do feel brave enough to take a stab at this stage as to how significant that will be.

Frankly I would be more comfortable forecasting next years inflation number to two decimal places!

Harry Hindsight

Kin And Carta (LON:KCT) - is ‘digital transformation’ company that drives value for customers across four key digital elements: data, technology, experience, and organisational change. The group is headquartered in London and Chicago and its platform is made up of three distinct areas:

Apologies to SR readers for repeating a 'nothing going on here'. Time is money.

samanddee

Paul, probably off topic this but your note had me thinking M&A small UK stocks what’s the thoughts on specific stocks or sectors that may achieve a quick multiple due to possible take over targets? Pci-Pal had me thinking that could be a takeover target given its scalability and larger players in the financial transaction business maybe wanting to grow into this part of the market to increase margins. Presumably the travel sector another area where consolidation is very likely?

I have an IKBR account for dealing US shares in dollar once converted and IG for UK in sterling. Would not use a UK account for dealing US shares - did that and got£35 hit per transaction = nil profit for anytime soon.

CabinPressure

How can the Cap be >100 times Turnover? Are they about to do a reverse takeover of a larger company?

ambrosia

Eqtec (LON:EQT) specialise is biofuels which is a nonsense concept that releases more carbon into the atmosphere than burning coal, but apparently thats okay because trees are renewable.

Biofuel will have to be abandoned at some time and has a limited future.

Efecx1888

11th Mar '21

almost everybody I speak to in the city is keen to return to the office. Only one person I spoke to would be happy not to have to go back in.

I am a city worker. Myself and all my friends who work city jobs are all in 100 percent agreement we never want to return or see an office again.

PLS1nve5t

Nice thought, but what happens when the bosses say they want you in :-)

Thats the problem really. The desire to go back seems to be from the top of the food chain so my view is a return to how it was is more likely

dmcarver

A small word of apology. Transparency requires that I mention I have invested a moderately significant portion of my portfolio in this name. So anything I say requires DIY analysis.

Star8

Thanks.

dealtn

12th Mar '21

That really isn't how it works. I have been a market maker. "Low on merchandise", the price goes up, I need to make it more attractive to sellers to give me stock, not the other way round.

Small Cap Value Report (Wed 10 Mar 2021) - KCT, FOXT, SOM, BKS

Paul's Section

My thoughts on re-opening & inflation

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Paul Scott

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