Small Cap Value Report (Wed 18 Sep 2019) - JDG, CNKS, KETL

18th Sep '19 by Graham Neary

37 comments 8011 reads

Hi folks,

Thank you for the useful suggestions and all the comments, as always.

Today I have covered:

Judges Scientific (LON:JDG)
Cenkos Securities (LON:CNKS)
Strix (LON:KETL)

Judges Scientific (LON:JDG)

Share price: 3679p (+7%)
No. of shares: 6.2 million
Market cap: £228 million

Interim Results

These are fine results and the outlook for the full year is ahead of expectations.

Financial Review

The company does what all companies should do, and states what the expectations were: adjusted PBT of £14.8 million to £15.1 million.

To find the new forecast, you have to look up a broker note. I have done this, and the new forecast is for FY 2019 adjusted PBT of £16.5 million.

What's really impressive to me about these results is that they are organic. In the company's words:

In the absence of any material acquisition since 1 January 2018, this statement shows no distinction between total and organic performance.

Revenue is up 9%, adjusted PBT is up 27%, and the performance looks even better on a statutory basis, i.e. without making any adjustments.

This is because the company's amortisation charge dropped significantly compared to the prior year (perhaps due to the lack of M&A activity?)

On a cash flow basis, the performance is great: £7.3 million of (after-tax) cash from operating activities, with only £300k spent on capex. Such a low capex number doesn't look sustainable, but it's still a fantastic cash flow performance for the six-month period.

The company acknowledges that it has enjoyed a benefit from exchange rates. Perhaps it could show revenue at constant FX in future, to help us see the underlying result?

Order intake

As many readers will know, Judges is an acquirer of scientific businesses, in a similar vein to Scientific Digital Imaging (LON:SDI).

It has a brilliant track record of buying small businesses at cheap multiples, using some debt, and then paying off the debt with internally generated cash flow, thereby building huge value for shareholders.

The order book is an important measure used by the company in shareholder communications. At the end of H1, it stood at 13.2 weeks of sales, which the company describes as "healthy" but which…

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cmpeckham

18th Sep '19

Management at H & T (LON:HAT) have said before that overall performance is positively correlated with the economy. The same is probably true for all pawnbrokers. They still need people to repay loans, exchange currency, buy jewelry etc.

Gerard88

There's an interview from the very impressive CEO on PI World too. (https://www.piworld.co.uk/category/company-videos-a-to-z/judges-scientific-jdg/)

Vsihv

Hi Graham,

I too would welcome your thoughts on Strix (LON:KETL) - ticks so many boxes and I think it is reasonable if not good value for a quality long term compounder.

Very cash generative - even after a big CAPEX spend and hideous working capital movements, they managed to generate free cash - I think this is more relevant that EBITDA personally especially given capitalised development costs and level of CAPEX (although I expect the latter will come down)
4.5% dividend and moving into lateral markets where I dare say they have revenue synergies which I consider preferable to cost synergies.
Have had this on the watchlist for some time and was waiting for Woodford fall out, but it seems like he has sold a fair chunk of his holding and the market has absorbed it.

Looking through the results, my main concerns are:
the level and increase in trade receivables (acquisition is very small amount of that increase), but they are forward purchasing materials and their cash generation supports that so why not use it to improve margins,
the inventory write down (with little explanation but not that material)
the fact that share based payment charges are some 30% of operating profits
Intangible heavy and negative NAV.

Also couple of questions:
Can a company with negative distributable reserves pay dividends (guessing the answer is yes)?
Is it correct that under IFRS, Trade receivables past due are current receivables - as in all within payment terms?

Many thanks,
V

doug2500

If you squint really hard and ignore the share based expense in Keywords Studios (LON:KWS) accounts, the results look much better.

Samsgrandad

One of the things I like is that the boss is contactable and open to criticism. He's never failed to act on an email from me. He has a lot of "skin in the game".

Andrew.Grant@jarvisim.co.uk

Brookeda

I noticed the same and assumed it’s a timing thing. I dropped them a mail to ask. Will respond if I get a timely response

bsharman

Hi Graham.

If you get a chance, could you have a look at KAPE from yesterday.

Thanks

wildshot

I note an RNS today from Air Partner (LON:AIR) announcing new joint brokers. Is this a precursor for deal/fund raising?

rmillaree

Cenkos Securities (LON:CNKS)
below TBV & NCAV, e.g. 'deep value'.

That's interesting - i have held WH Ireland before and that's massively put me off this sector - being the people type business were presumably bonuses end up going to staff rather than shareholders or important people can take client base elsewhere.
I like a good old below TBV play
The trend in reported profits has been very poor and interims show a loss - does anyone know expecting forecasts of profits this year and next (if anything) - i can't see owt on stockopedia.

My other slight issue would be that if the tnav is all tied up in necessary places regulations wise - they do have significant payables (matched by receivables). How far away from a rights issue might they be if they were to temporarily move into a loss and needed to ensure that they have specific reserves for regulatory reasons?

Finally is this a value trap where times have changed and the profits they used to be able to make are unlikely to return - i wouldn't exactly say we are in tough times with the stockmarket in general having performed ok over the last couple of years - perhaps aim has had its day? (are us aim followers to be pensioned off here ?)

mammyoko

Hi Graham - would welcome your opinion on Colefax (LON:CFX) AGM statment this morning. Slowdown in the US but this is a well-managed and cautious business with a bullet-proof balance sheet.

Graham Neary

Sorry mammyoko, I am out of time for today.

Graham

mortimer

What a brilliant idea to buy a token amount as a starter companies that you want to own but feel they are far too dear at the time. This way you are forever watching them for when they become out of favour to the Market. Thank you for this idea, the best in years, and I have acted on it today.

TamzinPiworld

If you're catching up on results, here is the Somero Enterprises Inc (LON:SOM) H1 19 results presentation given by CEO Jack Cooney and CFO John Yuncza, when they were in London last week.

A helpful perspective of what is going on for them. Also, some great footage of their machines, to bring their business to life.

stegga1000000

Mountfield (LON:MOGP)

Higher potential of a big bad debt to wipe off the profits if it isn’t a timing issue.

Cricketfan

I speculate that things must be somewhat in limbo with this company given the bid activity around their big (biggest?) customer Merlin.

Peter171

I have watched the progress of this coy (Strix) for some time and wish I had picked some up a few months ago, but now I am not so sure. China for me is the big question mark and a lot can happen before the new plant is operational. Big question mark?

Strix (LON:KETL)
I am guessing the ability to pay dividends whilst having negative distributable reserves is down to the company being based in the Isle of Man. There is specific mention on the net that this is the case however it does seem to say at the same time there is a solvency test and that mentions assets should be greater than liabilities as part of that test - this doesn’t appear to be the case for the company however I guess anything is possible - perhaps the market value of the goodwill the business has not shown on the balance sheet is enough to get around that problem.

jwebster

19th Sep '19

Strix (LON:KETL)

Nice earner Strix. But I wondered about their heating control patent and found this Patent Office reference, which shows their heating control patent expires Feb 2022

https://patents.google.com/patent/EP1233649A1/pt

I'm not an expert at all, but for this reason dropped Strix off my list, as they could lose their moat in two years.

Glorenfeld

That's only one of their patents. They have a large number of granted patents and pending applications. Some of their earlier patents have already expired, some are currently in force and they have a number of applications (which may or may not grant).

This search gives an idea of their current patent families (a family generally includes the application/rights in multiple countries).

E.g. one e of their more recently granted rights won't expire until 2031 (if they pay the renewal fees to keep it in force). If the most recent shown application grants, its rights won't expire until 2038.

Obviously that's just a quick tire kick. I haven't looked their actual patents in detail to determine which if any are likely to be fundamental.

You're welcome, mortimer!

Small Cap Value Report (Wed 18 Sep 2019) - JDG, CNKS, KETL

Judges Scientific (LON:JDG)

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Graham Neary

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