Small Cap Value Report (Wed 17 May 2023) - AFRN, SMRT, ANG, RBGP, PURP, ATG, KLR

Good morning from Paul and Graham!

We're off to a flying start this morning, with some comments I prepared last night on less important micro caps, nothing madly exciting, but there wasn't much on tele so thought I'd use some time productively!

Thanks very much for the excellent reader comments yesterday too. I was a bit worried that it had all gone rather quiet out there, but it's great to see some very interesting comments from subscribers.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

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

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

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Agenda

This all looks pretty boring today, so I'm focusing on backlog items mostly -

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Summaries of main sections 

Aferian (LON:AFRN) - down 23% y'day to 28p (£24m) - FY 10/2022 Results - Paul - RED

 A series of profit warnings has crashed this share. Finances are also looking wobbly, with a "material uncertainty" going concern statement, and says it might need to raise fresh equity. In negotiations with bank over covenants. All looks rather risky at present, hence why the shares are at a near-20 year low.

Auction Technology (LON:ATG) - +5% to 708p (£853m) - Interims - Graham - AMBER

This collection of auction websites is on track for EBITDA/EPS this year. But statutory H1 profit is very low after high finance costs. An interesting “marketplace” type of stock.

Angling Direct (LON:ANG) - up 15% to 30p y'day (£23m) - FY 1/2023 Results - Paul - AMBER

Poor results, not much above breakeven, but as expected. The balance sheet however is very strong, with £31m NTAV (mostly inventories & cash). Can they develop it into a worthwhile business, or is it just inefficiently tying up a lot of capital?

RBG Holdings (LON:RBGP) - down 13% to 33p y'day (£32m) - no news - Paul - AMBER/RED

The plummeting share price - is it a concern, or a buying opportunity? Paul reckons there's not enough information to decide.

Smartspace Software (LON:SMRT) - down 14% to 45.5p y'day (£13m) - FY 1/2023 Results - Paul - AMBER

Very small software company. Good growth in recurring revenues, but still making (reduced) losses, and cash position getting tight-ish. Tiny revenues per site, so I question whether it will be economic to scale up this business?

Keller (LON:KLR) - 

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Paul's Section

Aferian (LON:AFRN)

Down 23% to 28p y’day 

Market cap £24m

Final Results - Paul - RED

I last looked at this set-top TV box company here on 10 March, when it dropped 36% to 38p, on a profit warning, saying FY 10/2023 trading was “substantially below” expectations. Also problems with bank covenants was delaying publication of FY 10/2022 results.

Yesterday, Aferian published those rather late FY 10/2022 results, strangely to no initial market reaction, but then yesterday afternoon the share price fell sharply, down 23% to 28p.

Going concern note is worrying, saying there is a material uncertainty over its ability to remain trading within its bank covenants, so it's negotiating a relaxation of these. An equity fundraise could be required. It is not in breach of bank covenants at this stage.

An adjusted operating profit of $7.5m becomes a statutory operating loss of $(16.6)m, after hefty goodwill write-off, and exceptional costs, for FY 10/2022.

Balance sheet looks a bit weak, with NTAV negative at about $(2)m at Oct 2022, and that’s probably worse by now, in the new financial year.

Outlook comments sound like a fresh profit warning, but it’s difficult to know, without any broker updates being available to us -

Following the investment made in inventory within the Amino business, the Group currently has a net debt position, and expects this to continue throughout the current financial year. As previously announced on 10 March 2023, we expect Group revenue and adjusted EBITDA for FY23 to be significantly below FY22, albeit that the Group is expected to generate a material positive EBITDA.

There’s a problem with that - EBITDA is not reality here, because Amino capitalises $7-8m pa in development spending, spending which of course is ignored by EBITDA.

Paul’s opinion - this looks worse than I expected when I last reviewed it about 2 months ago. I’m surprised at how quickly trading, and the financial position, have deteriorated at Amino (the old name for Aferian). It had a long, and good track record of decent profitability, and paying divis. The wheels seem to have come off in the last year, leaving it financially distressed now, with a high risk of dilution or insolvency.

Kestrel, Premier Miton, and Investec, together own over 50%, so they (and the bank) are calling the shots now, over a possible fundraise, and maybe even de-listing it, to remove an embarrassing mistake from public scrutiny, possibly?

The risk is therefore high to small investors here, who are along for the ride, and could get badly diluted if the big holders decide to refinance Amino with a discounted placing. It could all turn out to be fine though, I’m just flagging the risks, for you to make your own decision over what course of action to take, armed with the facts.

If it gets back on track, with no dilution, then the shares could be a multibagger.

I don’t have any firm view either way, as it’s not a sector I have any insights on. But for me, the high risk of dilution/insolvency means it’s just a punt at this stage, so not something I would want to get involved in. Hence I have to give a RED opinion on it, whilst there remains significant financial uncertainty.

We can revisit it once it’s lower risk, with bank facilities amended hopefully, and more clarity on the outlook.

This share listed 19 years ago, and is pretty much back down to its all-time low again - is it a bargain, or has the company had its day? We don't know yet.

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Angling Direct (LON:ANG)

Up 15% to 30p y’day (£23m) - Paul - AMBER

A Board re-jig is happening, which looks planned, with the CFO stepping up to CEO, and the CEO becoming Chairman.

ANG calls itself -

…the leading omni-channel specialist fishing tackle and equipment retailer..

Operating from shops, and online, mostly in the UK, but also with a European operation.

It’s not a very good business, and bumps along just around breakeven, but the main attraction is the net cash pile, which management has carefully preserved. This was 80% of the market cap at end 2022, hence why I added this share to my top 20 value/GARP shares watchlist, which is doing quite well so far this year (with the portfolio up 12% YTD, not bad in a depressed small caps market).

Final Results - FY 1/2023

Profit fell from £4.0m last year, to only £0.7m this year. This is mainly as a result of the pandemic boom unwinding, but also impact from higher costs, supply chain, and a drought impacting fishing in 2022. Also, expectations were lowered previously with profit warnings, so the disappointing trading performance was already factored into the bombed out share price. So that’s all OK.

Balance sheet is the main attraction. NAV is £37.3m, containing £6.1m of intangible assets, which becomes £31.2m of NTAV. This is mostly working capital, containing £17.8m inventories, and £14.1m cash. These dwarf trade payables of only £6.8m. Other creditors are small, or can safely be ignored (lease liabilities). Therefore this is a remarkably strong, over-capitalised balance sheet - which makes this share very safe, but does raise the question as to why the company is tying up so much capital for little to no return?

What’s the point in expanding the business, when all it means is tying up more capital in unproductive assets? Hoping that competitors will fall by the wayside seems to be the main strategy, so a last man standing type of strategy - which strikes me as somewhat lacking in excitement.

Paul’s opinion - there doesn’t seem much appeal here, other than the superb asset backing.

Let’s see what the new CEO comes up with, in terms of strategy. The main risk is that a more aggressive expansion strategy ends up squandering the cash pile.

Not the most inspiring chart below, but plenty of eCommerce shares are down a larger % than this!

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RBG Holdings (LON:RBGP)

Down 13% to 33p on big volume (£32m) - Paul - AMBER/RED

Something funny seems to be going on here, at this legal services group (Rosenblat and Memery Crystal). I’m not keen on listed lawyers, or accountants, and tend to avoid them due to the inherent conflict of interest between fee earners, and outside shareholders.

The former CEO Nicola Foulston was sacked after she made a mess of the Lionfish litigation finance startup, and press reports suggested that she used unacceptable language at some industry dinner. Since then, the senior partners of Rosenblat and Memery Crystal have taken back control of the group.

Are the shares a bargain now? It’s impossible to tell. There hasn’t been any more news since the FY 12/2022 accounts were published on 22 April 2023. The figures show a healthy performance from the ongoing business, with nice profits more than offsetting losses at discontinued Lionfish.

Although the balance sheet does concern me, as it’s weak - with £61m NAV mainly comprising £55m of intangible assets. Also we don’t know how the assets & liabilities of Lionfish will unwind. Bank debt is significant, with a £20m non-current loan.

Paul’s opinion - not enough information to make an informed judgement on this share, so I’ll watch from the sidelines. I’m wary, given what the share price is doing, so AMBER at this stage, but with some signs of distress, so maybe I should be RED until the facts become clearer?

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Smartspace Software (LON:SMRT)

Down 14% to 45.5p (£13m) - 

FY 1/2023 Results - Paul - AMBER

I’ve had a quick look through the numbers, and watched a recording of a previous IMC webinar (there’s a new one due today). This is a very small software company, with nicely growing recurring revenues, which helps manage access & control over buildings. The main product seems to be SwipedOn, which looks low value, starting at £29 per month for a single site with up to 50 staff. Customer churn is low, which implies the product works well, in the simplistic way I look at things!

It’s trying to sell a small hardware subsidiary called A+K, which makes sense, since it’s lumpy sales (and no profits) were obscuring the growth in the software business.

SMRT is still loss-making, and burning cash, although performance is improving, and I think it might be able to manage without another fundraise, although it could get tight.

Paul’s opinion - it’s just too small, in my view. Also generating only £5.0m revenues from over 8k locations, means this product is only generating peanuts per location. So is the sales & marketing cost to generate new sites actually worth it? Are the listing costs/hassle worth it? I have my doubts. For this reason, I’m struggling to see how this could scale up into a significant business, making big profits. That said, a £13m market cap isn’t bad, if you think it could accelerate growth, and keep building that recurring revenue stream to a tipping point where it starts to generate cash instead of burning through it.

I can see some attractions, so I’m happy to view it as AMBER (neutral).

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Purplebricks (LON:PURP)

** Breaking News at 08:55 **

Announces it has agreed to sell “substantially all” of its trading business, assets and liabilities, to Strike. The price agreed is … drum roll please … £1

PURP seems to be retaining the cash pile “up to a maximum of £5.5m”, some of which will be needed to pay costs, and “excluded liabilities” that Strike is not taking on.

The remaining cash is to be returned to shareholders, and the cash shell liquidated. This is described as a “small return” to shareholders.

The AIM listing will be cancelled.

That’s that then.

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Keller (LON:KLR)

Up 2% to 653p

Market cap £472m

AGM Trading Update

This is a large, low margin specialist contractor, calling itself -

the world's largest geotechnical specialist contractor

I last looked at it here on 16 Jan 2023 and concluded (on a quick review only) that the shares looked good value. It was knocked about 10% on that day by revealing a fraud at its Australian operations, but the size didn’t look too serious relative to the whole group.

What’s the latest news?

Today it updates us for the 4 months so far of FY 12/2023. This sounds promising -

AGM Trading Update - Strong start to the year, confident in achieving full year expectations

First 4 months “strong and better than expected” - for both profit and cash.

Various operational details are given, which I won’t repeat here.

Outlook -

The increased momentum across our business cited at our full year results in March 2023 has continued in the period. This, combined with a strong order book and recent contract wins, gives us good visibility and confidence through the remainder of the year and we continue to anticipate a full year performance at least in line with the Board's expectations.

It’s hard to fault any of that!

Balance sheet - I’ve checked the end 2022 figures, and it’s a large balance sheet, carrying a fair bit of bank debt. With debt now costing a lot more, this would probably be the area to focus on when doing your research.

Paul’s opinion - KLR shares tend to oscillate sideways over the long-term, so not a very exciting share. The main benefit is the decent dividend yield of over 6%, which would have interested me in a 0% interest rate environment, but a lot less so, now that we can earn 4-5% on cash deposits. So why take on all the risk of an equity position, to chase a 6% dividend yield here? That’s a much broader question.

The value metrics do look nice at KLR though -

Given that it has also issued an upbeat-sounding trading update today, I can’t see any other option than to view this share positively, as GREEN.

Another point is that if you expect interest rates to go down again in 2024 and onwards, then locking in some big yields now on shares and fixed interest stuff, could be a good idea.

The StockRank system likes it too - as you can below the StockRank score is in the green area (near the top actually) most of the time - 

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Graham's Section:

Auction Technology (LON:ATG)

Share price: 708p (+5%)

Market cap: £853m

This share has never been previously discussed on Stockopedia, but I’m happy to kick off the coverage this morning!

One of the first things I’ve noticed about it is that it’s an IPO from 2021. This is already a red flag of sorts, since we were treated to so many overpriced, poor-quality IPOs that year! Hopefully this was one of the exceptions.

The share price began its journey on the stock market strongly, but it has drifted lower since the beginning of 2022 and is now within reach of the 600p IPO price again:

It describes itself as an “operator of world-leading marketplaces for curated online auctions”.

These marketplaces include:

• https://www.the-saleroom.com/ (European marketplace for art, antiques, collectables).

• https://www.liveauctioneers.com/ (North American auctions)

• https://www.lot-tissimo.com/ (German art and antiques)

• https://www.bidspotter.com/ (industrial auctions)

They have eight websites in total. The majority of revenues are generated in North America, with the largest product categories being “art and antiques” and “industrial and commercial”.

With that brief overview behind us, here are the interim results for the period to March 2023:

5% organic revenue growth is shown on a constant currency basis, so I believe that is the best indicator of real underlying growth.

It’s not a bad figure by any means but I have noticed that “good” companies are frequently generating revenue growth of 8%+ purely from the effects of inflation, so that’s the context in which I’d interpret it.

Revenue here is largely a function of “Gross Merchandise Value” (the value of the products sold on the company’s websites) and the “Take Rate” (the percentage commission earned). GMV is up by 5% organically to £1.9 billion, and the Take Rate commission is flat at 3.2%. The company sells a variety of “valued-added” services in addition to its core services.

Leverage: thanks to ATG’s acquisitions, its net debt / adjusted EBITDA multiple is 2.3x over the last twelve months. This is typically considered to be on the higher end of the spectrum.

CEO comment excerpt:

We have made great progress against each of our six strategic growth drivers…

As expected, organic revenue growth accelerated across the half and this rate of growth has continued into the start of the second half. This momentum, combined with strong traction against our key strategic initiatives, leaves us confident that we will deliver a higher rate of organic revenue growth in the second half of the year and into FY 24.

The outlook is in line with expectations for EBITDA and EPS. However, despite what the CEO says regarding higher organic growth in H2, this growth will be at “the lower to mid end of the range”.

Finance costs: I’m drawn to one particular entry in the income statement. Finance costs have moved from £5.5m in H1 last year to £9.1m in H1 this year, and they wipe out most of the company’s operating profits.

I’ve found the explanation. The key points are that the company is paying a floating rate on a loan and it is denominated in US dollars. This caused the interest charge over the six-month period to increase by £2m to £5m. There was also a nearly £4m non-cash loss relating to the translation of loan values.

Graham’s view

I think that investors generally are wise to the value of successful marketplaces. People understand the value of network effects in these types of business - think of the likes of Rightmove (LON:RMV) (in which I have a long position).

However, one of the key elements of a successful marketplace investment is that it should have or develop a high market share. Remember that Peter Lynch said “in business, competition is never as healthy as total domination”!

However, the markets in which ATG operates are by their nature highly fragmented and it’s not obvious to me that high market share is possible for them. But maybe they can do it?

Here is how they explain the value of what they do:

For auctioneers and sellers of secondary items, we massively extend their reach by giving access to our diverse and highly fragmented global bidder base, specialised technology, and operational efficiencies that arise from working with us. Critically, we help ensure they achieve the highest asset sale price possible for their consignors.

For bidders, we provide access to millions of unique, specialised, and curated second-hand items through our eight online marketplaces and listing sites.

The combination of the widest array of inventory and the largest bidder base has enabled us to create a virtuous circle that benefits both buyers and sellers, with more buyers participating in online auctions and estate sales resulting in higher realised prices for second-hand items, which in turn attracts more secondary assets to be listed and sold online, and thus more bidders.

They say they are on “the well-trodden path of online marketplace development”.

I must admit that I’m intrigued. Could this be the next successful marketplace stock, to be mentioned in the same breath as Auto Trader (LON:AUTO) and Rightmove (LON:RMV) ? I wouldn’t rule it out yet.

The balance sheet is a slight concern, as borrowing at floating rates in US dollars is not ideal right now. The leverage multiple needs to come down. And I do not view the H1 performance as being particularly profitable, since the company’s operating profit got eaten up by those finance costs.

For now, therefore, I’ll stay neutral. But I think this could be a nice stock to own someday, at the right price, depending on how they develop over time. With a current ValueRank of only 27, there is a good chance that this one is still in that period of post-IPO overvaluation.