Small Cap Value Report (Wed 20 March 2019) - IQE, SIS, TAST, AFX

Wednesday, Jun 05 2019 by

Good morning,

I am back from a brief trip to Hamburg.

I had a look at the Tesla (TSLA) store in Hamburg's most prestigious shopping district, surrounded by jewellery stores. I'm not surprised that it's still open - walking away from that lease at short notice might be tricky! (I am short Tesla.)

Companies reporting today:




  • Share price: 83.4p (-4%)
  • No. of shares: 778 million
  • Market cap: £649 million

2018 Full Year Results

I still don't feel like I understand what "VCSEL" wafers are all about.

Where I do feel confident is in my ability to read financial results from companies. Today's results are consistent with my previous impression of IQE.

Revenue improves marginally to £156 million. This is still a weak number in terms of asset turnover - compare it with average assets being carried during the year of c. £350 million.

Stockopedia includes three of the major efficiency ratios on the StockReport. These are good to check, especially Asset Turnover, for a quick overview of balance sheet efficiency. See the "Other Ratios" section:


Poor asset turnover like IQE's is not a fatal flaw, but it heightens the need for it to make a very good operating margin. As we are about to see, IQE hasn't been particularly strong when it comes to margins, either.

Bulls will say that the prospects for revenue growth from new applications of IQE's technology are so strong that we should look past the company's inability to generate much cash in the short-term.

For someone who is confident in their understanding of the semiconductor industry, that may be a fine approach. Investing isn't just about reading accounts, after all. But for a simple financial analyst like me, who isn't an industry expert, all I can do in a limited review time is provide a "check-up" on its historic financial performance and its near-term outlook.

IQE's historical performance, in my opinion, has been pretty average. Operating margin has never been consistently high enough to compensate for the company's weak asset…

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All my own views. I am not regulated by the FSA. No advice.

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Alpha FX Group PLC is a corporate foreign exchange (FX) broker with a focus on helping its clients to control the impact currency volatility has on their business. The Company operates Alpha FX. Alpha FX develop tailored hedging programmes that help businesses balance when, how much and how far forward to buy currency. Its Approaches include Passive Hedging, Active Hedging, Hedge Accounting, Dispute Resolution and Key Features. Passive Hedging Strategies are focused on protecting businesses from the unpredictable nature of currency markets in order to provide a predetermined level of financial stability. Active Hedging Strategies provide the protection and stability of a passive strategy. Hedge Accounting helps businesses, who are susceptible to volatility in their Profit and Loss over their reporting period. Dispute Resolution provides a resolution to mis-sold FX options. Key Features include technical analysis, hedging facilities, settlement, reporting and pricing. more »

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Tasty Plc is a United Kingdom-based company engaged in the operation of restaurants. The Company operates through operating restaurants segment. The Company operates in the United Kingdom. The Company operates approximately 50 restaurants, including over seven DimTs and over 40 Wildwoods and Wildwood Kitchens. The Company's restaurants are located at Plymouth, Hereford, Telford, Chichester, Taunton, Yard, Worcester, Port Solent, Brentwood, Whiteley, Kingston and Liverpool. The Company's trading subsidiary, Took Us a Long Time Limited, is engaged in the operation of restaurants. more »

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Science in Sport plc is engaged in developing, manufacturing and marketing sports nutrition products for professional athletes and sports enthusiasts. The Company's product lines include SiS GO isotonic powders and gels, which are digestible carbohydrates for use during exercise; SiS hydration products, which include SiS GO Hydro tablets and SiS GO Electrolyte powders; SiS GO Bars, which include cereal-based food bars; SiS REGO range, which includes drinks and protein bars for recovery after training, and SiS Protein, which is a whey protein range for lean muscle development. The Company offers products in sport categories, including cycling, running, gym, team sports, triathlon and rowing. The Company's products include SiS GO Energy, SiS REGO Rapid Recovery, SiS WHEY20, SiS Whey Protein, SiS GO Isotonic Energy Gel, SiS Elite Team SKY and GO Energy Bar. The Company's subsidiaries include SiS (Science in Sport) Limited, SiS APAC Pty Limited and Science in Sport Inc. more »

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47 Comments on this Article show/hide all

Graham Neary 20th Mar 29 of 47

In reply to post #460003

Hi Ram,

Thanks for feedback. You don't look at asset turnover in isolation, you combine it with margins to get ROA.

In your example, the capital intensive business should enjoy higher margins from producing its own stuff. A bit like the way Card Factory (LON:CARD) makes its own cards. Higher margins from the more extensive use of capital.



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Graham Neary 20th Mar 30 of 47

In reply to post #459788

Thanks for the comment on Science in Sport (LON:SIS), snoo. I also continue to treat SIS shares with caution. By the way, do you disagree with my calculation of PhD profitability? Did you annualise £0.1m/month to get your yearly estimate? G

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tic_tac_toe 20th Mar 31 of 47

awesome report today, very enjoyable read, esp. IQE and TSTY

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mammyoko 20th Mar 32 of 47

Yes, absolutely great review of IQE (LON:IQE) today Graham. You are rightly cautious about 90% of AIM stocks!

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Snoo 20th Mar 33 of 47

In reply to post #460018

Hi Graham

Yes, I annualised it after having a quick skim through, so I could be wrong. I don't disagree with your assessment, the line from the RNS was:

For the year ended 31 August 2018, PhD generated revenue of £20.8 million and adjusted EBITDA of £2.8 million (unsure if they are capitalising development costs). 

But they do mention another c.£3m in synergies across 3 years so your estimate could be spot on.

 In some ways the acquisition makes sense. SiS are heavy on energy supplements, with a smaller exposure to protein, for PhD it is the other way around, they are mainly protein.

I just don't see a position where anyone can become a leader. Ask 10 personal trainers which protein brand and you may get 6 or 7 different answers. If you go on Amazon it is hard to distinguish what is best. There are quite a few companies that I see as about equal, all have a good range of products and good customer service. In my view it is almost a commodity.

The plans seem highly ambitious, and I agree that more money might be needed again to keep up the level of promotional activity. Pairing up with sports clubs, players and federations is effective, but is not competitive advantage on its own. The USA must be the biggest, and most mature market for sports supplements, so I think it is quite unlikely that a tiny company from the UK is bringing anything revolutionary. China could be even bigger, but with IP as weak as it is there, I don't fancy their chances much.

Back before the days of newer entrants I seem to remember Maximuscle having a great position in the market, but they could not grow past Europe, even with the might of GSK behind them.

It looks like a bad day tomorrow. It is almost as if the market knows the IG Group (LON:IGG) update is going to be bad.

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Graham Ford 20th Mar 34 of 47

As a holder of IQE (LON:IQE) I am in a quandary. I cannot argue with the facts of the numbers. They are pretty ghastly. It seems that they had to invest substantially in stock and capacity for VCSEL wafers that were destined (via component OEMs) for the iPhone X. Then the iPhone X turns out to be something of a disappointment to say the least and they are left with excessive stock and little in the way of orders to fill the additional capacity they have added. Some additional tax issues in the US and it’s all turned into a bit of a perfect storm.

The question is I suppose, is all that temporary?

The bull case is that the other outlets for VCSELs are coming through now, but also to focus on VCSELs is to miss the elephant coming down the track. That elephant is 5G. We have probably all noticed that 5G is getting increasingly covered in the media as both the infrastructure starts to be installed and the devices (phones, tablets, IOT devices start to include 5G). 5G requires compound semiconductor wafers and IQE are one of the few companies that can make them.  (Note that it is necessary to distinguish between companies making compound semiconductor wafers, those just doing silicon wafers and those making the chips rather than the wafers.  These are separate markets and many pundits try to analyse them as one market, which in my view is an error)

The bear case is the poor track record that this company has turning its tech and IP into profits and cash means that there is substantial doubt whether it will be any different in the future.

I expect the share price to be highly volatile until there is more visibility of the future growth rate. I’m hanging on as to get out now would crystallise some losses and I believe that the price is likely to be higher in longer term. But I have to admit that if I could not afford the risk of losing more on this one I would be seriously considering bailing out now.

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Graham Neary 20th Mar 35 of 47

In reply to post #460068

Thank you for the honest assessment and the insights, Graham. Much appreciated. All the best.

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rmillaree 20th Mar 36 of 47

IG Group (LON:IGG)

It looks like a bad day tomorrow. It is almost as if the market knows the IG Group (LON:IGG) update is going to be bad.

looking at the trend of figures showing on stockopedia it looks like its not even a secret that things are going in the wrong direction.

Last update by the company was back in january and it looks like the expected profits have been downgraded by £7 mill for 2019 and for also 2020 in the last month alone. This may simply be  delayed updates perhaps? - but thats a decrease of £11 mill on expected profits this year in just 3 months!

None of which should really be a surprise to any of us really as it seems to all be doom and gloom in the sector at present. Hey ho ignoring the peaks at least the shareprice hasn't actually gone down if we look at where the price was mid December(very selective low point there :) )

I guess the last update in january said it all  - not exactly brimming with confidence on how minimally bad it could be - it will simply be bad :(

The Company continues to expect that its revenue in FY19 will be lower than in FY18

The Company continues to expect that its total operating costs (operating expenses plus variable remuneration) in FY19 will be at a similar level to the £290 million total operating costs in FY18.

come on boys and girls at least give us some sort of range to play with.

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Graham Neary 20th Mar 37 of 47

In reply to post #460063

Thanks snoo. Tend to agree with you that Science in Sport (LON:SIS) will have a tough time. Maximuscle is the right comparison. Certainly I will not be investing in SIS today or any time soon. I've been watching it for so long though, I feel invested in it anyway - and I want to know what happens!



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Graham Neary 20th Mar 38 of 47

In reply to post #460038

Thanks mammyoko (and tic_tac_toe). Sometimes I feel this should be called the Small Cap Bear Report when it's my turn! G

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Howard Marx 20th Mar 39 of 47

In reply to post #460078

Re IG Group (LON:IGG) , their competitor CMC Markets (LON:CMCX) lowered their revenue guidance from minus 20% to minus 30% (mid-range).

Given the fixed cost nature of stockbroking, virtually all of a revenue change drops to the bottom line.

So if IG Group (LON:IGG) have had a similar trading experience to their competitor, then July 2019 forecasts still need to fall by £40-50 million.

This is all known to a large degree. So if they profit warn in a much more minor way, their share price may well rally.

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sharmvr 20th Mar 40 of 47

Hi Graham,
Will defer to your superior expertise, but I am concerned about the finance tech disruptors or those FX agents that are cheaper, specifically with the size of the opportunity available to them.
IThere is a big market opportunity, but 80% of FX flow is institutional/corporate/or central bank originated.
A Unilever (LON:ULVR) or Diageo (LON:DGE) are unlikely to go to Alpha FX (LON:AFX) because they can't get an interest rate swap to go with their FX hedge.

Call me an establishment dinosaur, but the installed base is (should be) part of the competitive advantage thesis and I think the valuation suggested by Alpha FX (LON:AFX) and other disruptors (lot are private) completely disregard the value of an installed base.

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JohnEustace 20th Mar 41 of 47

In reply to post #460098

Alpha FX (LON:AFX) have some household names such as ASOS and Halfords among their client testimonials.

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JonBirdy 20th Mar 42 of 47

Thanks for a great report Graham. I don’t hold any of the shares covered, but found your analysis very useful.

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john652 20th Mar 43 of 47

In reply to post #460098

Hi sharmvr,

Re Alpha FX (LON:AFX)

Why do you say a client can't 'interest rate swap to go with their FX hedge' ?

What did you mean by your comment on installed base, I don't understand what you mean?

The market for AlphaFX is huge ignoring the giants such as Unilever & Diageo. (Record seem to go after investors who want to hedge currency expose on a portfolio, whereas Alpha is helping manage the business FX requirements. )

Small businesses get hugely ripped off by the big banks on their FX, the large clients a little less, but having worked with corp FX teams in banks the offering is woeful.

I hold and think Alpha have an open goal and seem to be scoring, the team is made up of ex FX bank staff who obviously saw the same opportunity.

As such I'd be interested on the negative views?


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V4Value 20th Mar 44 of 47

In reply to post #460088

I think you’re right to be bearish. It’s difficult to find quality at the moment without paying high multiples. AlphaFX is a case in point. Impressive numbers but I can’t bring myself to pay up for it at these levels!

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Graham Neary 22nd Mar 44 of 47

In reply to post #459858

Hi Francis, just writing up my piece on Volvere (LON:VLE) today, thanks for this comment. One small thing: I get NAV per share of £12.92, dividing £40.3 million by 3.118 million shares. Could you let me know if you think I'm mistaken? G

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Damian Cannon 23rd Mar 45 of 47

In reply to post #461008

You're not wrong Graham - I also calculate the NAV ps to be £12.92 at their latest share count and yet the company quote £12.48 in their trading update. This is definitely a peculiarity and I wonder if they've just made a typo?

Still with the bid-offer spread meaning that you can currently only sell your shares at roughly the cash per share value (£10.94) there doesn't seem much point bailing out of the company just yet!

Blog: Ambling Randomly
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Graham Neary 23rd Mar 46 of 47

In reply to post #461308

Cheers Damian, glad I haven't gone mad - unless we both have! G

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Monty9 25th Mar 47 of 47

Re IQE (LON:IQE) I have been a holder since 2009 (at 9p) and have watched the price fluctuate freely since. Sold some at 80p then bought them back again at about 90p (LOL). They have suffered from the inevitable pipeline adjustments as the companies on the front line miss-estimate sales. 2018's headwinds are a concern because they have affected exactly the part of the business they have been investing in. It seems likely the 1st half 2019 will also be poor and it might be management are hoping to have positive actual news for 2H19 in the VCSEL division. They are betting the farm on its recovery.
So why do I still hold? The same reason I bought (and I suspect that others hold). They seem to have clear USPs in the manufacturing process. The application of what they do seems likely to enjoy an increasing demand as time passes and success in any one development could be huge (5G? I don't know if the VCSEL capacity might be applicable here?). At some point they may well finally make the much anticipated, or at least hoped for, breakthrough. Or go bust. It's not for widows and orphans.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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