Small Cap Value Report (Wed 11 Dec 2019) - SPE, KMK, GPH, ECEL, DWF

11th Dec '19 by Paul Scott

26 comments 7808 reads

Good morning, it's Paul here.

I added a few more sections to yesterday's report (on PhotoMe and Nexus Infrastructure (LON:NEXS) ) late yesterday afternoon. So if you missed that, here's the link.

Please see the header above for the 5 companies whose results/trading updates have caught my eye this morning.

Estimated timings - should mostly be done by 1pm today, although I'll probably add some more sections mid to late afternoon, as yesterday.Update at 17:40 - sorry, I nodded off after lunch, so am running late. I'll keep going until it's finished, so estimated completion now 21:30.

Update at 21:30 - today's report is now finished.

Sopheon (LON:SPE)

Share price: 605p (down 12% at 08:18)
No. shares: 10.17m
Market cap: £61.5m

Trading update (profit warning)

Sopheon plc, the international provider of software and services for Enterprise Innovation Management and Strategy Execution Management, provides an update on the Group's performance for the year ended 31 December 2019.

Here we are, less than 3 weeks from its financial year end, and Sopheon's profit for the year could still be anywhere in a very wide range of possible outcomes. This is the inherent problem with small software companies - they have hardly any visibility, because the outcome for the year hinges on closing deals in the busy Q4. If things slip into the following year, then it can have a large impact on profits. I imagine most Sopheon shareholders are already aware of this lumpiness, it just goes with the territory for small cap, software sector.

This is part of what it says today;

Today, overall revenue visibility2 for the year stands at $28m with $9.9m in remaining opportunities with 2019 target close dates...

The figure for potential deal closures by 31 Dec 2019 is so large, that it makes this share pretty much impossible to value. Revised broker forecasts are out today, but these numbers could materially change in the next 3 weeks, if the company does manage to close some more deals.

The split is given of the $9.9m potential deals;

...Of this, up to $2.7m represents perpetual license fees which, if signed, would contribute to recognized revenue in the current financial year. An additional $4.8m represents potential orders for multi-year SaaS or other recurring commitments,…

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john652

11th Dec '19

Hi another for Hipgnosis Songs Fund (LON:SONG) they look a good diversified income option and having just read the report, wow what a collection of songs, management & advisors. Similarities to ETO and their film song business and a little like Future owning in the content & leveraging it , interesting

Gostevie

I also hold Hipgnosis Songs Fund (LON:SONG) because it strikes me as something that won't be too affected by general market trends or macro events and provides a nice quarterly dividend along the way, even though the share price rarely moves. I quite like the idea that every time somebody streams Sweet Dreams Are Made Of This they are, in a very small way, helping my SIPP.

Albertos

Sopheon (LON:SPE)

I'm no good at trying to translate directorspeak but the analysts have slashed their forecasts. Progressive have cut their EPS forecasts by 47% for 2019 and 61% for 2020 - the latter equating to 16.3p and giving a forward PER of 38 at the current 620p. (finnCap similar)

That looks pretty unattractive to me and presumably involves a lot of faith in the management to beat the revised forecast for 2020.

Phil

(Never held - first look at this morning)

jacquesd

Hi Paul. f you have time please could you have a look at the update for Kromek (Kromek (LON:KMK)). Thanks

Paul Scott

Yes, KMK is on my list of things to look at. Just FYI, I update the header with the tickers of the companies I'm going to be looking at, so that people don't need to request things that are already on the list.

Regards, Paul.

sheeza

Kromek (LON:KMK). Very bullish for a sucker stock! Sales and production capacity sharply up - seems confident in moving to positive EBITDA this year

davidjhill

I like £KMK. Revenue for the full year is 90% covered so it will meet expectations and it has 100m of sales with potential for much more. Plenty of cash on balance sheet raised at much higher prices.

It is undoubtedly world leading technology with a blue chip customer base buying increasing amounts and a decent size market opportunity.

on this years numbers it should have an EV/EBITDA of around 17* falling to 13* next year so feels like there could be plenty of upside as contracts continue to come in.

It wouldn't surprise me at all if it gets bought out before it fulfils its potential though, which does concern me slightly about ownership as I have no idea what would constitute a knock out bid. I have a very small relative long position on it and am mulling buying more at these levels so interested to see what others think.

Martin Verlaine

I am holding this is my SIPP. Have to say the list of recordings looks impressive ( not my sort of music) given their chart rankings, if this is how you measure value. Slight concern that this a MM project and what if he decided not to participate- very key man to me. Not seen if the recent ‘C ‘ share monies have now been invested. Yes I agree this one looks like up for more funding rounds. I share the view it can be seen as having little correlation to equity markets .

Paul - on Kromek (LON:KMK) I'd be more concerned about the receivables if (a) the proportion of receivables was growing, which it hasn't since April 2019 and (b) if the balance sheet wasn't so strong, with net cash at £13m but one to keep a close eye on.

The US Government seem to think the product is world class based on their order history over time in the portable dirty bomb detection market. There is talk about it being rolled out across the US and that being worth about £100m. They don't say who is ordering on the medical side but given the contract sizes involved the tech must be pretty good.

SundayTrader

re Kromek (LON:KMK), presumably the risk in the large outstanding receivables is performance risk, not credit risk. I.e. they have signed a contract to deliver product meeting a demanding specification, and the customer will probably refuse due payments until satisfied that the specification will be met. As a naive non-accountant, the treatment of amounts due under long-term contracts always seems unnecessarily vexed. There is surely an important difference between amounts due where the product or service has been delivered, but not yet paid for, and amounts due where delivery is in progress.

FREng

Re KMK (I'm not an accountant, but ...) I thought that IFRS 15 required that long contracts were divided into sections that matched billable deliverables and that revenue should only be logged per deliverable at the time each individual deliverable is accepted. If that's the case, then either the payment terms are unusually beneficial to the client or it would seem that there's a problem.

sharw

Regarding Sopheon (LON:SPE) Paul says:

"The recent selling, before the profit warning, looks a bit suspicious - insider dealing possibly?"

Checking the trades it looks like it:
Friday 6th 5 trades
Monday 9th 5 trades
Yesterday before 14 00 2 trades after 14 00 36 trades

Hmmm

jombaston

£sSONG

There are several comments about Hipgnosis Songs Fund (LON:SONG) but what about the financials?

In particular, what is the sustainable income? It is very difficult to say given that this fund has been in build mode.

Over the period, the average assets were £324m and income generated was £22.6m, which is a healthy 7%. However, profit was somewhat less at £10.7m so only 3.3%. You would hope that the cost ratios will fall with scale.

Looking at the cash flow there is an adverse movement in working capital which means that net cash generated in the period was -£36.9m (yes, negative). So maybe they get paid the income/royalties with a lag? I'd want to understand this. Effectively the dividends have been paid from bank loans and share issues; not entirely unexpected from a new fund.

I like the idea of buying songs and getting a royalty income so this fund could be an effective way of doing this...but I'm not sure it is possible to tell yet...

hayashi22

I'm afraid that the 'research' from the likes of Equity Development and Edison is somewhat biased as it is paid for by the company. They will attempt to put a positive gloss on anything and ignore the bad stuff. A good case in point is IQE (LON:IQE) where the Edison analyst has had to steadily reduce the forecasts whilst trying to deliver a positive sounding report. Can't be easy. It would seem to indicate that the market developments IQE (LON:IQE) expected in 2019 have simply not happened and that the optimism at the start of the year was illusory.

Paul - regarding Global Ports Holding (LON:GPH) you say:

"Q3 results - I'm not sure why the company issues quarterly results? Maybe its debt providers require that, or it could have a dual listing, I'm not sure".

It would appear to be a requirement for Turkish companies. I have not looked at this before but page 58 of the 2018 annual report shows a complex structure. The London listed company is intermediate between its ultimate parent Global Yatırım Holdings A.Ş. which is listed on Borsa Istanbul under the ticker ‘GLYHO’ and its 100% owned Global Liman İşletmeleri A.Ş. , the Group’s Turkish holding company.

Source https://www.globalportsholding...

This strange sandwich is enough to put me off looking at this any further.

STOCKWATCH UK

Of help..... Your correct on the lag...

The royalty revenue is collected by Kobalt, a UK founded private company based in NY, using digital technology and handed over 6 months after the end of the collection period. So Jan to June royalties are paid on the 31/12, July to December payments captured for the March YE, the AGM audience was told. This 6 month lag in the royalty cheque receipt is important to note for revenue recognition/accounts. Perhaps a future 1H and FY income guidance statement RNS is needed? I add that Kobalt also owns songs (some top notch ones) so an interesting business partner to be using and they share The Chainsmokers as talent. Future take out target?

Hi sharw,

Many thanks for providing additional colour on the structure of Global Ports Holding (LON:GPH) - I agree that does sound a bit of a turn-off.

jwebster

12th Dec '19

£GPH 

Not seen this one before, share price chart peaked around 550p September last year then straight down to 240p. Reporting in USD.

The nine month results just reported show commercial revenue down sharply from 53m to 45.4m, presumably with the international trade slowdown, but travel income up from 41.4m to 46.1m. Net result is a reduction in operating profit from 21m to 10.3m which tips them into a reported loss of 14.8m for the period, although underlying is a profit of 10.4m. Note there was “amortisation of port operating rights of 23.6m” which is the main difference between the two.

Positive on the travel business, opening two new ports Bahamas and Antigua, which is talked up as “The addition of these ports to our portfolio, marks a truly transformational moment for the company, GPH's Caribbean operations will soon be delivering as much EBITDA as its Mediterranean operations did in 2018”

Later they state “Cruise passenger volumes for 2020 will increase by close to 100% and we expect to deliver in excess of $85m of EBITDA from our Cruise business by 2022”

They mention selling “travel retail” through an RFP process. Note sure what that’s worth.

Note under Commercial Review their ports are Akdeniz (Turkey) and Adria (Montenegro). These are not great places to be in right now with USA sanctions on Turkey plus China trade slowdown.

Looking at the balance sheet, this is an important piece:

“Gross Debt was $351.6m at 20 September 2019 (FY 2018: $347.1m). The leverage ratio as per GPH's Eurobond rose to 4.4x (FY 2018: 4.0x) against a restrictive covenant requirement of 5.0x, primarily driven by the reduced profitability at our commercial ports and interest accruals related to our Eurobond.”

They are probably not really in a position to pay out dividends until they ease the debt covenant. There is a huge debt repayment due in 2021 so they need to get sorted before then.

They also mention a Strategic Review, to be completed by Q1 2020 and leave us with this “The process is currently expected to conclude in Q1 2020, however there can be no certainty as to the final outcome. A further announcement will be made when it is appropriate to do so.”

Bit of wait and see then.

Ownership 59.3% is owned by a company listed on the Turkish stock exchange.

Looking at their travel business, the ports look ok and in the right places to benefit from a renaissance in cruise holidays. Demographic wave of retired people in Europe wanting affordable holidays. Recent port expansion could drive good EBITDA growth. The down side is the commercial division is doing badly. Debt covenants are tight plus a big redemption due 2021 look concerning. The Strategic review is vague. Majority ownership in Turkey so you’re in their hands.

I would wait for the strategic review myself. Ideally, they would sell the commercial ports, reduce debt, focus on travel sector which is in long term growth mode. Commercial will blow with the winds of politics and trade.

Hipgnosis Songs Fund (LON:SONG)

thanks for the comment stockwatch. I suspect it could be a year or so before we get a clear picture given the scaling up of the fund. What we really need to know is the run-rate of income and the associated cost base. It certainly has the potential to create good income if it is well-run

aflash

GPH Global Port holdings.

Paul I saw your request for info late last night but do not know where you look for answers. I have no in-depth or inside knowledge.

Bought just before the ex-dividend date in May last year when the Stock Rank was 65.

It is a relatively new issue so there was not much information around. However, it had and still has a high Relative Value in another data base I use. This is a proprietary calculation based on the earnings yield compared with long bond yields. There I set up a ‘Logistics’ screen which includes companies such as

SUH (Sutton Harbour) not far from you,

FIH (FIH group) Portsmouth ferry and Falklands,

MPL (Mercantile Ports) down off India,

OCN (Ocean Wilsons holdings) over near Brazil,

BMS (Braemar Shipping services),

GMS (Gulf Marine Services),

FSJ (James Fisher),

CKN (Clarkson)

and on land

STOB (Stobart),

MNZS (John Menzies),

CLG (Clipper logistics),

XPD (Xpediator),

DX and so on.

Some of these I hold, have held or trade regularly.

GPH Global Port holdings is down 40% off my purchase price and I have done nothing about my small holding. They said they were looking for a buyer in a previous announcement. Graham Neary noted this but it does not show up in the archives. A copy of this will go somewhere so it shows up next time if you dig up any more information.

A few years ago, I invested in a company developing a resort and selling plots of land on the Turkish coast. Returns of capital were spectacular. The local accountant had to be taken to court and I sold up. Despite different capital structures such large pay-outs often lead to declining share prices. No other connection except for the exotic flavour of Turkish delight.

I may double down, especially if it bounces at all, the cruise side interests me and there was some container traffic through to Russian ports. DYOR

Small Cap Value Report (Wed 11 Dec 2019) - SPE, KMK, GPH, ECEL, DWF

Sopheon (LON:SPE)

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Paul Scott

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