Small Cap Value Report (Wed 23 May 2018) - AIEA, FST, SND, OPTI, BOTB

Tuesday, May 22 2018 by

Good morning, it's Paul here!

There's plenty of news to report on today. A reader has asked me to look at Marks and Spencer (LON:MKS) results. I'm just printing off the RNS, and will have a look at it later. EDIT: I've read the MKS results, but as it's late now, I'll type up my thoughts in tomorrow's report.

Airea (LON:AIEA)

Share price: 54p (down 10.7% today, at 10:10)
No. shares: 41.35m
Market cap: £22.3m

(at the time of writing, I hold a long position in this share)

Bid talks called off

The unsolicited takeover bid approach from James Halstead (LON:JHD) has fallen through, with no agreement reached. It's interesting to compare the nuances of the statement from JHD here, and Airea's response here.

As you can see from the candlestick chart below, there was a big initial spike down in price first thing this morning. This is because the market makers would always heavily mark down any share where bid talks have ended unsuccessfully. Then they wait to see what happens in terms of buyers/sellers, and subsequently move the price in line with demand & supply, trying to keep as near as they can to a neutral book.


There seemed to be plenty of buyers in the market, and the price seems to have settled at 54p has 

Fellow shareholders that I've been discussing this share with, on Twitter, seemed to be hoping that the bid talks would fail. Why? Well it's because the company announced very positive outlook for future profitability. I reported on that here on 21 Mar 2018. That's why I'm holding this stock, not for a takeover bid.

Therefore I think today is a transition day, when shares are passing from people who were hoping for a takeover bid, to people who are more interested in the company's organic growth potential.

Also, the liquidity that happens on a day like this means that people who wanted to buy shares, but couldn't get any, might be able to pick up a few. Anyway, I'm relaxed about the situation, as this is a long-term holding for me - I've…

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Airea PLC is a United Kingdom-based specialist flooring company. The Company’s primary activities are focused on manufacturing, marketing and distribution of floor coverings, through its brand burmatex. Its burmatex brand is a designer and manufacturer of contract carpets and carpet tiles. It offers a product range spanning fiber bonded, structure bonded, loop pile, cut pile and textured loop pile carpet in sheet, tile and planks, as well as specialist barrier and entrance matting products. It also focuses on the designing and manufacturing of products to meet needs of architects, specifiers and contractors for the education, leisure, commercial, retail, residential, healthcare and public sectors. The Company also exports its products to Europe, the Middle East countries and to Asia-Pacific regions. more »

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Frontier Smart Technologies Group Limited, formerly Toumaz Limited, is engaged in offering software and hardware technologies for Digital Audio devices. The Company through its division, Frontier Silicon, provides solutions for Digital Radio and Smart Audio devices. The Company is engaged in providing chips, modules and software for consumer audio devices. The Company offers fourth generation Kino 4 chip. The Company's smart audio module is Minuet, which offers hardware, software and services solution for the smart audio device. Its digital radio modules include Verona 2, Tuscany Bluetooth/digital radio and Verona HD Radio. Its digital radio platforms include Venus, Venus Colour, Neptune (Tuscany Platform), Venus H2 and Venus HD. Its digital radio software includes DAB and AUTODAB 2.0. The Company also offers Chorus 3 chips. Its Venice 6.5 FS2026-5 module is a hardware and software solution for Internet radio and network streaming. more »

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Best of the Best Plc runs car competitions. The Company displays luxury cars as competition prizes in rented retail space within airport terminals, at shopping centers and online. The Company is engaged in selling tickets to passing airport passengers, as well as from online customers through its Website. The Company operates from approximately eight United Kingdom and over two international airport sites, as well as approximately from three shopping centers. The Company operates from various airport sites located at Gatwick North, Gatwick South, Birmingham, Manchester Terminal 1, Edinburgh, Dublin's Terminal 2 and Westfield shopping center located in London's Shepherds Bush. The Company's Indian franchise trades under the BOTB brand from Hyderabad airport. The Company carries out its principal operations in the United Kingdom. The Company's subsidiary is Best of the Best ApS. more »

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  Is LON:AIEA fundamentally strong or weak? Find out More »

40 Comments on this Article show/hide all

Paul Scott 23rd May '18 21 of 40

In reply to post #366524

Hi abtan,

I think you've done your figures wrong on Airea (LON:AIEA)

By my calculations, it should be making £3-4m p.a. once the carpets division is gone.
Also, the core business is growing strongly, and introducing new products, and makes an operating profit margin of about 16%. So it's entirely feasible that Airea could be making maybe £5m+ annual profit in the not-too-distant future.

Point taken re the export sales growth being on a smallish percentage of total sales.

Regards, Paul.

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rhomboid1 23rd May '18 22 of 40

In reply to post #366524

Hi Abtan

The key thing you’ve missed is the rate of climb at Burmatex, they’ve been launching new products off the back of acquiring a mega capability 1.5m bit of kit from the US, it only got installed in the first part of the period and took c6 months for them to get fully to grips with first new products launched in November 2017 & the latest to complete the range launch next month, my guess is they’re at a run rate of c£4m per annum are my notes from the AGM

‘Neil Rylance CEO
Martin Toogood Chairman
Roger Salt FD/Co Sec
James Halstead sent a mute observer..who’d bought one share
NOMAD in attendance
c 20 shareholders..many ex employees

V warm welcome , great overview from Martin Toogood detailing Ryalux closure etc
Formal business passed on show of hands..nearly 100% proxy votes in favour

Then Q’s which for me boiled down to these key points in no particular order

They spent years getting ducks in a row to sort Pension scheme, now in surplus..could suspend contributions..up to the Board, been v creative to de risk it ..

Same re Ryalux closure ..shrinking it down to the point where it was possible to exit without risking the core business

Same re Surplus properties..5 leases down to 1 which ends soon leaving 10.5 acre freehold Ossett Mill site -Burmatex & £3.2m investment site in Bury leased for 10 yrs at £270k pa

Tenant is rock solid ..see attached

Most important point was rate of improvement in Burmatex post investment..took 1 yr for new loom to bed in, new launches only started end 2017 ..reception “amazing ‘

Now got full range covering all price points/market niches..2 more launches scheduled for next crossover with Halstead..other than they’re both flooring related

Burmatex now 70-80% capacity utilised..1.5m USD loom might well need a took a year to get to grips with it but new one would be quick, Ossett plenty big enough 4 growth

My take..18 mths report is concealing a classic business rate in terms of P&L is c£4m per annum (my guess)

Mgt are on top of the short I’m v happy to hold

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simoan 23rd May '18 23 of 40

In reply to post #366469

Would welcome Paul's, or others', comments on the update from Frontier Smart Technologies(LON:FST). The market took fright and the shares have about halved. I hold. The main negatives are the postponement of expected revenues from Smart Audio into 2019, and the dependence of a cash flow breakeven on a good H2. Some sensible cuts in R&D spend to conserve cash. The market's worries look a little overdone to me.

Hi ST,

All I would ask is, why do you own shares in Frontier? Are they exercised share options from employment with the company? Just 10 seconds looking at the StockReport is more than enough time to waste researching this company. Frontier has been around for ages, I have known people that worked there, and it is one of those crappy UK tech companies (CyanConnode etc.) for which the only reason for a stock market listing is to get funding to keep the lights on. Funds that they would not get from many other sources. They inevitably make very poor investments although I imagine the management have done OK along the way.

Obviously, I'm sorry to hear you have lost money on this crock today but sometimes we all need a bit of tough love. 

All the best, Si

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simonty 23rd May '18 24 of 40

Any chance of Graham covering PCF ?

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andrea34l 23rd May '18 25 of 40

Would be interested in any view on Hollywood Bowl (LON:BOWL) after interims today - revenue £63.6m+9.2% with lfl well up on last time at 4%, ptp $14.6m+17.4%, margins up, debt almost halved, positive outlook, forward PER around 16

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moonglum63 23rd May '18 26 of 40

Paul - With respect, you need to take more care. Increased losses c£460k are related to the transfer of IP to SBTX. Likewise, increased admin down to SBTX IPO. Your cash burn is double the £90k pm. SOH stated at the UKI that funding is not required ahead of 2018 break even.

You are a retail man, and not one that is familiar with low risk, low cash. OPTI only started its transition from an R&D to commercial May 2017, since then it has signed 12 commercial agreement, not only increasing in size, but well geographically spread, all with no increased spend. Partner pickup the tab for promo, marketing and any additional R&D. There is also growing evidence of pharma interest. Which brings me to the fact ALL OPTI's platforms are phase 3 ready, saving pharma millions in R&D and 6-8 years.

OptiBiotix commercial progress for LP-LDL & SlimBiome
Cholesterol, hypertension and weight management.
SlimBiome is a multi award winner

Small Companies – £300k + pa (EACH)
THWLC (GoFigure) SlimBiome (May 2017)
HLH BioPharma – LP-LDL (May 2017) Germany and EU
PharmaBiota – LP-LDL (September 2017) New Zealand & Australia

Medium Companies – £500k to £1m pa (EACH)
Nutrilinea – LP-LDL (May 2017) EU
Knightons – SlimBiome (November 2017) UK
Cambridge Commodities – SlimBiome (April 2018) UK & EU
Seed Health – LP-LDL (TBC)

Large Companies £1.5m + pa (EACH)
SACCO – LP-LDL (August 2017) Global
Galenicum – LP-LDL (October 2017) EU, Middle East, Japan, America's
Cereal Ingredients Inc – SlimBiome (December 2018) USA
TATA – SlimBiome (December 2016) ASIA
TATA – LP-LDL (September 2017) India & Asia
Tigren pharmaceuticals – LP-LDL (April 2018) Pakistan
FineFoods & Pharmaceuticals -LP-LDL (March 2018) EU
AKUMS – LP-LDL + LP-LDL pharmaceutical (May 2018) India & South Asia

Undisclosed US partner – SlimBiome (TBC)
3 large UK Retailers – (TBC) these could yield **£5m – £6m pa
2 global corps interested in using SweetBiotix
Bened MOU cross partnership IP Asia & EU, USA

PLC costs under £1m pa – DO THE MATH

Note: No additional cash injection required from OptiBiotix as commercial ramp up progresses.

The market is missing a significant NEW development with AKUMS announcement. As well as OTC products, AKUMS has the option to take OPTI LP-LDL IP down the pharma route. Given OPTI platform is pharma based and phase 3 ready, this save 6-8 years R&D saving millions in the process.

It's no coincidence these last 3 commercial agreements have been with pharma companies with a who's who client list within the pharma industry; Abbott, Novartis, P&G, Pfizer, Bayer, Sanofi and Sandoz.

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tony akram 23rd May '18 27 of 40

Re Sanderson Plc

Results look good but am I missing something based on today results working capital is minus 4 million and
NTAV is minus 11.7 million (as they have 43 million of intangibles which I believe most is goodwill) anybody any thoughts ?

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abtan 23rd May '18 28 of 40

In reply to post #366549

Re Airea (LON:AIEA)

Hi Paul

Thanks for the reply.

I took a look at the last Burmatex accounts filed with Companies House* and compared the figures with what was RNS'd a couple of months ago.

12 months to June 2016 (Companies House) = £18m
18 months July 2016-December 2017 (RNS) = £27m


12 month operating profit to June 2016 (Companies House) = £1.94m


12 months to June 2016 (Companies House) = 9%
18 months July 2016-December 2017 (RNS) = 16%

I must admit that I couldn't see any reason why operating profit would jump 50% from £2m to >£3-4m in the space of a couple of years, or where (if?) I am making a mistake with my numbers.

Comparing 2015 with 2016 accounts at Companies House, there appears to be an additional lease cost from 2016 (£600k per annum) and stable staff costs (c £4.5m in each year) so no big movements there - all seems pretty consistent. The only thing that I could think that would increase Operating Profit % so much was therefore hedging FX exposure.

It also doesn't help that there are intra-group sales between Ryalux and Burmatex that are not quantified - it really masks what the true picture is for me.

I continue to be confused!

Thanks again

*(link to Companies House file in a separate post as the window keeps crashing when I try to paste it in as a link)

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abtan 23rd May '18 29 of 40

Re Airea (LON:AIEA)
Sorry, I still can't get the text editor to link the Y/E 2016 accounts directly.

But for anyone interested you can access them here

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abtan 23rd May '18 30 of 40

In reply to post #366554

Re Airea (LON:AIEA)

Hi Rhomboid

Thanks for your notes from the AGM, they are very much appreciated for folk like me who don't have the chance to go.

I didn't notice the $1.5m CAPEX expenditure for a new loom. Presumably that is in reference to the following: 

"Capital expenditure of 1,280,000 (2016: 704,000) was made in renewing and enhancing manufacturing plant and equipment."

It's a shame that they don't explicitly state this if so.

I also had a thought on one of the comments.

Presumed run rate of c.£4m per annum@70-80% capacity. I'm assuming that this is additional revenue, implying maximum additional revenue@100% capacity of £5m per annum (on top of the c£18m booked on average over a 12 month period between July 2015 - December 2017) . 

This would imply, assuming all else being equal, maximum annual revenue of the new company would be c£23m.

If I have misunderstood anything, thoughts from anyone would be appreciated.

Many thanks


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rhomboid1 23rd May '18 31 of 40

Hi Abtan

The £4m run rate is my best guess of pre tax profit ..not revenue !

I posted elsewhere pre AGM my best guess;

It was taking a view on the rate of climb, the CAPEX to permit new ranges & product variations took place in the early part of the reporting period;

‘Broader product range of new products based on new technology investment in 2017 has opened up new markets & opportunities as planned


‘xport sales growth of 58 % over last six months following entry into new geographical markets, strengthening of international dealer network, and successful launch of new products’


‘ In the eighteen months to 31 December 2017 the commercial floorcoverings division generated an operating profit before exceptional items of £4.3m on sales of £26.9m. The investment in new technology made earlier in the period is now coming to fruition with the launch of a series of new products, which will open up new higher value markets. This adds to the successful launch of a competitively priced entry product, which has already established a significant market share in its own right as well as opening up new opportunities for the rest of the product range. Burmatex now has a range of products to profitably compete across the broad spectrum of price points. We are already seeing the benefit in sales growth both in the UK and internationally.’

So trying to model this I assumed the 4.3m was back loaded , so first 6 mths say 1m, 2nd 6 mths 1.5m , 3rd 6 mths 1.8 m.. so that gives me an annualised current run rate of £3.5-£4m less the central costs previously borne by Ryalux

The critical piece of information is the timing of the Capex & the launch of the new products which to me suggests I may even be being too conservative ‘

AGM confirmed my sense of the timeline but I’d over estimated how long the new products had been in maybe my guess is overly conservative ?


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tightfist 23rd May '18 32 of 40

In reply to post #366594

moonglum re:OPTI
Well reasoned but I understand Paul's hesitancy. In this instance OPTI are signing an impressive number of deals and are carving up the market, based on products, geography and where each partner sits in the supply chain.

I understand the market's and Paul's view on visibility of revenue and profits; OPTI have little control over such things, especially in the ramp-up phase. However, later on, the ability to drop incremental revenue largely to the bottom line whilst maintaining strict fixed cost control is very attractive - as are the four healthy spaces OPTI/SBTX are working in.

If they find they do need a little cash to tide them over then raising it or parting with 5-10% of SBTX should solve the shortfall.

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boothbym 23rd May '18 33 of 40

From SCW

Frontier has developed silicon solutions incorporating Google and Amazon’s software and voice algorithms, so that third parties can launch VPA products. Companies like Microsoft and IBM will also want to get in on the action and I suspect there will be deals with Frontier in 2018.

Potentially there is a market. how big?

JBL are to use FST for their integration with Alexa & Google assistant on their speakers

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moonglum63 23rd May '18 34 of 40

In reply to post #366689

Of course I understand Paul's hesitancy and that of the wider market. Frustrating as it is for me as an investor I have to trust the BOD on their strategy. Offering revenue guidance at such an early stage is fraught with dangers. For example; how do you guesstimate revenues for a new product, even though historically, there is a billion$ market? Also, OPTI would be at the mercy of partner product ETA, any slip in guidance in the order of 20% would result in a profit warning - potentially more damaging.

As much as it frustrates us, we have to be thankful the BOD are not the typical AIM BS ramp BOD. Sure they do a lot of interviews, they report a lot, but always understated and there is always a surprise partnership announcement. Never ever a sneaky rise ahead of the RNS. Very tight ship.

Ref SBTX; I don't think they will use any for funding purposes. Either way, we won't need to wait too long to find out if Paul is correct.

PS. Those figure I used, SOH thought they were good.
PPS. Except the small corps. He prefer I used £250k pa not £300k pa

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abtan 23rd May '18 35 of 40

In reply to post #366654

Re Airea (LON:AIEA)


Thanks very much for the detailed response and for going through your workings.

I can see why many might think 2018 will be a stellar year. Sadly I still have niggling doubts around why revenue has remained constant over the previous 2.5 years (it has not increased!), but operating margin has gone up significantly. IMHO there's a piece of the puzzle missing!

So I'll wait with interest for the next results, and no doubt kick myself when the price rockets up.



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SundayTrader 23rd May '18 36 of 40

In reply to post #366694

Many thanks to everyone, Paul of course included, for taking the trouble to comment on the update from Frontier Smart Technologies (LON:FST).

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Reacher 23rd May '18 37 of 40


In relation to IFRS 15, many companies have undertaken projects of how their business is impacted by IFRS and have been making summary disclosures in their accounting policy disclosures. Therefore, I am a little surprised by Sanderson (LON:SND) saying they are currently assessing the impact, although I don't think this is anything untoward.

Anyhow, here is a "quick" 5 step summary of the impacts:
1 Identify the contract with customer:
- who are the parties, what are the commitments/obligations, rights to goods/services and payment terms can be identified -> commercial substance.
2 Identify the performance obligation:
- this is the promise to deliver goods/services and can be distinct or part of larger contract (but distinct nonetheless) eg mobile phone contract which can be broken into the phone element and the data service plan. IFRS15 will apply to the data service plan and how it is recognised.
- Also raises questions of warranties and service plans, and application of discount vouchers
3 Determine the transaction price
- there could be a financing element involved eg mobile phone contract where the repayment of the phone is over 24 months.
4 Allocate the transaction price to performance obligations
- this may be an observable price if available. Or residual approach.
5 Recognise revenue:
- "transfer of control" principle. Recognise revenue as or when control of the good or service is transferred to a customer. Control may be transferred over time, or at a point in time. Assessed from customer's perspective and at the performance obligation level.

Previously revenue recognition was driven by risk/reward transfer.

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TQ12 23rd May '18 38 of 40

Good report from BOWL

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SundayTrader 24th May '18 39 of 40

In reply to post #366694

Thought I would just add the results of my own further look at the Frontier Smart Technologies (LON:FST) update.

The exact wording on Smart Audio is "the Board therefore expects growth in the Group's Smart Audio revenues in FY-2018 to be slower than previously anticipated". That is a significant warning, but it is well short of being a disaster. The missing growth relates to hoped for revenue from wireless speakers which are voice assistant enabled. The implication is that FST's existing revenues for chips for wireless speakers, i.e. without Google Assistant, etc, are continuing to grow.

As I interpret events - and there is an element of guesswork here - to date FST's Smart Audio solution has been tied to ChromeCast and Google Assistant. Currently, Alexa has a much larger share of the market than Google Assistant. FST has only introduced modules for Alexa and for AirPlay this year, and necessarily won't be seeing any revenues from them until 2019. On the face of it, the preferred option for FST's customers is a product which offers the option of any of them, and this FST is now offering.

I have been successful with companies with a similar business model in the past, e.g. CSR - however, it is a characteristic that a lot of time elapses between the design wins and the revenue, and you are at the mercy of events outside your control. Also, "true" margins are thin - FST's customers are outsourcing their design work. As against that, the adverse impact of sterling movements is currently being unwound. I appreciate the excellent advice from some of you to cut my losses - I am not actually that far under water - and I will continue to mull swapping them for Marks & Sparks, as per Paul's latest thoughts - but at the moment a market cap of 36 million odd doesn't look out of order, so am putting it on the watch list, rather than selling.

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simoan 24th May '18 40 of 40

In reply to post #366694

Frontier has developed silicon solutions incorporating Google and Amazon’s software and voice algorithms, so that third parties can launch VPA products. Companies like Microsoft and IBM will also want to get in on the action and I suspect there will be deals with Frontier in 2018.

Potentially there is a market. how big?

This is always the case with these companies - seemingly huge addressable market with huge revenue potential. It's a big hook with a big lump of bait for investors. And yet the SR contains an unremittingly grim amount of negative numbers over several years. And yet they are cutting R&D as the cash from the last fundraising dwindles away. I just looked at their website. Look at this lot for a top heavy management team for such a small company:

As an engineer, I find it very annoying that when costs are cut the R&D team takes the hit when you still have this lot in place. Surely there's a bit too much fat in the management team? It's enough to make you wonder who's benefit the company is being run for?

I feel sorry for people that buy into these small cap UK tech stories. How many of them ever work out?

All the best, Si

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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