Small Cap Value Report (Wed 22 April 2020) - ABDP, MOSB, XLM, BOO

22nd Apr '20 by Paul Scott

50 comments 11484 reads

Good morning, I'm back, it's Paul here with the SCVR for Weds.

It's quiet for news today - please see the header for the running order today.

Estimated timings - I'm running a bit late today, and have also just managed to hit the wrong key and delete everything written so far, so am having to re-do it. I should be finished c. 5pm. (extended, because it's going to take me a while to read through the BOO results & broker note)

Edit at 23:41 - OK that didn't work out as planned, but today's report is now finished.

Ab Dynamics (LON:ABDP)

Share price: 1487p (down 2% today)
No. shares: 22.5m
Market cap: £334.6m

Half year report

AB Dynamics plc (AIM: ABDP, "ABD", "the Group"), the designer, manufacturer and supplier of advanced testing systems and measurement products to the global automotive market, is pleased to announce its Interim Results for the six-month period to 29 February 2020.

The announcement has been given one of those little titles that PR companies seem to like to insert, to steer us towards the conclusion they want, namely;

"Strong first half financial and operational performance across the Group"

Given that the half year end was 29 Feb 2020, then Covid-19 would not have had much, if any impact on these numbers. Hence they're not terribly significant. Outlook comments matter more at the moment.

Here are my notes on the H1 results-

Revenue up 34% to £34.7m
Underlying revenue growth is lower, at +11% (still good though). The difference is due to 2 acquisitions, rFpro, and DRI which added more revenues into these figures
Adjusted operating profit of £8.6m, up 34% (same % increase as revenues). This is a strikingly high op profit margin of nearly 25% - which means this business has considerable pricing power - it must have good products, with little direct competition, to be able to generate a 25% profit margin
Statutory op profit is much lower, at £3.6m. Adjustments look OK, apart from £1.86m inventory impairment, and £0.54m share based payment, both of which strike me as normal costs of doing business
Net cash very high, at £35.1m - hence this business looks financially secure, even if Covid-19 hurts its performance in H2 and beyond. No need for a fundraising from shareholders, in my view
Adj diluted EPS up 10% to 31.2p - this reflects the increased share…

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WhaleHQ

22nd Apr '20

I just heard confirmation on the conference call that it was positive (from Catto).

Also extremely interesting to hear that some Karen Millen coats are retailing at £1k.

shanklin100

How is Paul meant to comment on (potentially) pie in the sky pharmas involved in developing Covid-19 tests and vaccines, with high hope-based Momentum ranks and minimal Value ranks ? Their eventual success or failure has little or no connection to any historic results and depends entirely on the quality of what they produce either individually or in partnership with other companies. For that you need sector expertise not a forensic ability to interpret TSs and past results.

timarr

Surely if we all want to be in a place to test, on site, pretty much instantly then Avacta (LON:AVCT) are on to a winner. The market is huge...

There are at least 10 rapid antigen tests for COVID-19 already on the market. There are probably more. A lot of them haven't passed testing, there are issues with supply chains, etc, etc.

Basically - every company in this area in the world is working on this. Maybe this will be the best one, maybe Avacta (LON:AVCT) will make a ton of money out of it. Maybe.

Camtab

Grout I am not sure this is Paul's sort of stock. For what it is worth, my opinion is it looks very promising on two levels. First with regard to Coronovirus it has potential, and it seems to be progressing well. There are plenty of competitors claiming also to be in the mix, and Oxford Uni claim to be making quick progress on a vaccine. Second the testing on Doxorubicen this year which have huge potential to change cancer treatment. They also are doing work in stem cell areas. It really comes down to affimers and the benefits of an affimer over a antibody, smaller, quicker to produce and more consistent. The main issue I have with them is the way they allowed Kumani and his mate to buy shares at 18p two days before announcing they had something on Covid. But if deals come off their existing mkt cap is well short of possibilities.

MichaelFBS

I am looking forward to Paul’s take on £BOO. I held from November 2015 until selling in Feb and March 9th and 19th (the latter was a huge mistake - at the moment but hindsight is a wonderful thing) for a CARG of 44.2%.

I will almost certainly be buying back in at some point but I struggle with a PE of 46 and Price to FCF of 57 in the current climate (I hasten to add that it was an appropriate rating in a pre-Covid world).

Effortless Cool

I feel that Paul is unduly negative on Ab Dynamics (LON:ABDP). In particular, I think it is worth focusing on this extract from the interims:

The Group has sufficient inventory and work in progress to maintain production schedules for the foreseeable future and to date there are limited impacts from supplier constraints. The Group is constantly monitoring supplier performance and through proactive dialogue we will attempt to mitigate any risks to production. In many cases, for critical components, the Group has a dual sourcing strategy to ensure any impact relating to individual suppliers are minimised.

rFpro continues to operate effectively as the provision of software can easily be produced from a home environment. The DRI business in California is currently operating both manufacturing and track testing under an exemption to the Californian State shutdown.

The Group has implemented mitigating actions to ensure cash conservation for the duration of the crisis and has approximately £35m of cash available to support any potential emergent issues. It is critical that we maintain our new product development activities during this period to ensure new products and services are delivered on time to meet market demand. R&D activities are continuing as planned with engineering being completed remotely using collaborative online tools. The Group has also determined that it should continue to invest in the Company wide ERP system and has approved the contract to deliver the system in FY21. These actions should ensure AB Dynamics remains well-positioned post-COVID-19.

Discretionary spend has been tightly controlled and the nature of the pandemic is naturally reducing certain operating costs. If required, the Group will make use of government assistance programmes to furlough staff if deemed appropriate, but there are no current plans to utilise these schemes.

I believe that Ab Dynamics (LON:ABDP) are well-placed to weather this storm. I'm not remotely concerned about them suspending the dividend (Paul feels this is "surprising, and worrying"). Pretty much every company is doing this and I am sure that there is strong pressure to do so from non-execs worried about their own personal liability should something go wrong down the line.

I also don't think that a prolonged cut-back in R&D expenses is a feasible option for any motor manufacturer, given how competitive that industry is. That is especially true at present, in my view, due to the ongoing transition from ICE to EV. Those manufacturers that don't invest in new models and technology risk being permanently left behind.

Whilst I'm not necessarily a buyer of Ab Dynamics (LON:ABDP) at this price, given current uncertainties, I remain a reasonably comfortable holder.

greenhat2

He knows more than most of us Shanks... his opinion, if he had one, would certainly be valued but I take your point.

grout123

Well at least it on everyones radar now. Good luck all.

barnetpeter

I was a seller of some AVCT at 75p this morning. I like the company and the news today....but it is up from just 20p since the start of the month and I took my cash back from buying these a couple of weeks ago. Still very positive about a move above £1 but some of these testing stocks are up a lot and the danger is many of them are now well overbought and the competition is not standing still. NCYT has a great test and even WHO approval but is up from 6p late last year. It hit over 500p last week before falling back to below 300p yesterday. That is still a 50 fold increase in six months. Many novices admit they are underwater on this and similar stocks now. I hold NCYT from 64p and 75p and it is exciting to watch as it races up and down.

I have a long list of Covid stocks....mainly involved in testing.....and many of them are now very volatile and very highly rated. So buyer beware is my strong advice. I would not put anyone off buying a testing stock at all....I am all over them....but this is punting not investment in my opinion. If you pick the right one it might make you a fortune.

If you want something a bit more solid in this area then BYOT is one worth looking into (I hold). This is a disinfectant / hand sanitiser company and they have already said that business is very good.

Wimbledonsprinter

The Moss Bros (LON:MOSB) situation reminds me of the bid for Imperial Oil in 2008. When the bidder also seemed to want to walk away (as the deal price made no sense post Lehman Brothers). The Takeover Panel then stood up and refused to let the bidder walk which it was attempting to do on the basis that the deal had not received approval from the Indian Government (as the bidder was an Indian state owned enterprise). In the end the Imperial Oil bid was completed at the original price. But that was back in 2008....

https://www.theguardian.com/bu...

There was also a requirement for 90% acceptances - so there was a big attempt to make sure that all holders had tendered their shares. The Guardian article above refers more to this latter stage of the Imperial Oil saga.

potter12

I agree with your comments about the major auto manufacturers and their Capex. AB are working with the major quality auto companies and, for example, German manufacturers plan to start production again in Germany in the next week or two. And, VW, re-started manufacturing in virtually all of their many Chinese plants a few weeks ago.

No premium brand is going to want to fall back on developing the next EV models and they are re-building sales in China now.

Obviously we'll have to wait to see what European and US customers do, but the Chinese consumer is buying again.

peterthegreat

Just to echo timarr's sentiments, it really is impossible to predict which of the many diagnostic tests, drugs and vaccines being developed in connection with the SARS-CoV-2 pandemic will be successful but believe me, this is a hugely competitive area and an area which I, as a biotech specialist, am generally avoiding apart from the exceptions below. Most companies working in this area are of course in the US and if you want to buy a lottery ticket then you could have a look at Regeneron Pharmaceuticals as they have a track record of getting things done quickly and sufficient cash which suggests that their drug has a decent chance of being successful, although they may offer it on a non-profit basis. Within the UK I would favour those companies, such as Tristel or Byotrol, with existing products likely to see longer term increased sales without needing any breakthroughs.

rmillaree

Fevertree Drinks (LON:FEVR)

I assume that the numbers next quarter and beyond will be dire - restaurants and bars will account for a huge amount of sales although its easy to argue people will drink them at home. When we return to a more normal world though there is no reason why they wont penetrate more markets

I would agree - its a bit of a double whammy as well as they were doing reasonably well with overseas expansion - i am guessing the covid issue will completely stop that expansion of customer base in its tracks this year. Trade sales make up approx 50% of sales - so i am defaulting to profits probably being half 2019 at very best. Basically a complete writeoff year as far as the business plan is concerned. The only good news relatively speaking is that they have the balance sheet amd slimline buisness model to tough it out without that really being a problem.

I don't disagree with you all re Covid but as I said in my earlier reply the product is affimers and covid, is a bit of a side story.

Mark L.

I think a fair analysis of Ab Dynamics (LON:ABDP) - a high ROCE, stellar historical performer but on an pacy rating.

I feel pretty conflicted with shares like this . Terry Smith of Fundsmith has seemingly been riding out the current crisis well, by targeting high return, robust companies and not over worrying about the PER. Yet if things go wrong, it is a long way down for a highly rated stock. Keith Ashworth Lord's UK focused, mid and small cap Buffetology fund uses the same principles and seems to have been battered.

Anyway, back to AB Dynamics. I agree with Paul in that any temptation to buy is negated by passing the tiny dividend. It signals that management aren't entirely confident -so why pay a high price for this share?

hayashi22

Paul has often said the he doesn't do Pharma and Mining..both require specialist background knowledge. Therefore no point in raising that here..If you want the main BBs will provide almost 24/7 comment ..most of it worthless though there are some very knowledgeable posters. I hold Avacta and Synergain. Made some good profits on Genedrive and took them.
Where I live in London my daily cycle takes me past literally hundreds of folk running/jogging.
Guess where Boohoo (LON:BOO) are reporting strong sales! The other area doing well for them is smart tops for ZOOM office interaction. Sometimes things are hiding in plain sight.

Cuddlesticks

For me the oversized gap between statutory and adjusted profit is a red flag.

It would be good to understand why £1.8m is being written off the value of acquisitions - especially if this relates to the two recent acquisitions and even more so given the additional £0.6m related retention costs. If they can't justify the value on the balance sheet it suggests they've overpaid.

Share based payments and inventory are core costs of doing business. At best the inventory write off suggests over statement of prior year profits.

The ERP roll out will take up time and resources and the admin issues that drove the inventory and receivables problems suggest to me some internal challenges that need to be addressed, alongside the integration of two important acquisitions.

I've sold my holding as a result of these disappointing results.

Cuddlesticks,

£1.8m is not being written off the value of the acquisitions, it is being amortised according to normal accounting practice. There will be similar amounts amortised each half year for some time to come.

Ab Dynamics (LON:ABDP) may or may not have overpaid for the acquisitions; that will become apparent in due course through their impact on the P&L and operating profits and, particularly, should they ever write off any of the associated goodwill. However, you should be clear that the amortisation expense gives you no indication at all as to whether Ab Dynamics (LON:ABDP) have overpaid or underpaid.

I agree that the inventory write-off effectively means that prior years' profits were overstated. Had the inventory been valued properly previously, the write-off would not have been exceptional, so it is questionable to call it exceptional now, except to the extent that it not expected to be repeated in future.

I disagree that the share-based payment charge should not be added back for adjusting earnings. It is quite clear to me that it should be. It is not a cash cost but a fair value accounting adjustment of the cost to shareholders of the employee options. Because it is a fictional expense, you will see that it is subtracted from the income statement but added back in the retained earnings so it has no balance sheet impact at all. The proper way to account for the cost of employee options in valuing a share is to dilute the earnings calculation to reflect in-the-money options and increase the cash adjustment to reflect any money received by the business as and when those options are exercised. That approach reflects the economic reality of the transaction.

brianm

23rd Apr '20

As someone who has an interest in molecular farming, I'd have a look at the lottery ticket that is BAT's Kentucky Bioprocessing facility. They could be producing 3m doses of vaccine a week inside 4 months. https://www.bat.com/group/sites/UK__9D9KCY.nsf/vwPagesWebLive/DOBN8QNL# Medicago in Montreal can do similar.

Gilead's Remdesivir is also indicating well as a potent potential cure.

1] https://clinicaltrials.gov/ct2/show/NCT04292899
This trial has just been expanded to 6000 patients, from an initial 2400. If there weren't positive initial results, I don't think this would happen.
2] https://www.statnews.com/2020/04/16/early-peek-at-data-on-gilead-coronavirus-drug-suggests-patients-are-responding-to-treatment/ A Chicago hospital treating severe Covid-19 patients with Gilead Sciences’ antiviral medicine remdesivir in a closely watched clinical trial is seeing rapid recoveries in fever and respiratory symptoms, with nearly all patients discharged in less than a week.

3] There is also earlier positive evidence from "compassionate use" in very severe cases. https://www.nejm.org/doi/full/10.1056/NEJMoa2007016

Howitt5

24th Apr '20

yes easy to miss this boat.

Small Cap Value Report (Wed 22 April 2020) - ABDP, MOSB, XLM, BOO

Ab Dynamics (LON:ABDP)

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Paul Scott

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