Small Cap Value Report (Wed 25 Jan 2023) - STAF, SUR, PEB, CMCX, XPF, PDG, VANL, HVO, FNX

25th Jan '23 by Paul Scott

56 comments 9379 reads

Good morning from Paul & Graham!

Today's report is now finished.

Sorry we didn't get round to doing everything, it's just too busy at the moment, so we have to prioritise.

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.

Paul's Section:

Firstly, 3 stragglers from yesterday:

Staffline (LON:STAF)

33p - market cap £55m

Trading Update

Summary: FY12/2022 slightly ahead, cashflow lots ahead, 2023 outlook cautious. Broker slashes 2023 profit forecast by half.

FY 12/2022 underlying operating profit guided at £11.6m (up 13% on 2021), which becomes adj PBT of £9.0m, or 4.7p adj EPS.

Net cash £5.0m (but large working capital, so this could swing about a lot, I reckon - average daily net debt/cash would be more meaningful to report the true picture).

Claims balance sheet is strong, which it isn’t (so how can I trust anything else they say?) - last reported NTAV was negative at £(2)m. Zeus appointed to join Liberum as joint broker - why? Fundraising maybe? Altman agrees with me, not STAF management, with a Z-score that is alerting us to a weak balance sheet -

All was looking reasonably good, until I read broker update today - FY 12/2023 forecast slashed by almost half! (from 5.8p adj EPS to 3.1p) - a tiny sliver of profit, PBT margin is under…

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davidjhill

25th Jan '23

Polarean Imaging (LON:POLX)

Buy the news sell the fact seems to be the order of the day here. They were hyped up as revolutionary before the FDA declined the approval of their original submission. Fell heavily as you'd expect and then climbed again as investors anticipated it would ultimately get through. There were a lot of retail shareholders glued avidly to the FDA website ahead of approval at Christmas, so whilst there was a big initial jump that also tells you it was a crowded trade betting on approval. Once the excitement wanes those with profits start banking them. That inevitably leads to declines unless you've got natural buyers and the question is why would you buy them right now?

Revenue is negligible and cash burn is $12m p/a. Cash will be about $18m so doesn't look like they are in any danger but equally that cash appears as though it will get spent whilst orders come in so will be discounted to zero.

So a $125m market cap with great tech but negligible revenue and a little over a years worth of runway. Frankly I'd need to see some significant orders with revenue attached before I'd be inclined to even dip a toe in here. This market is fairly unforgiving - there is lots of great tech out there and not all of it will reach good commercialisation. All long duration assets have declined significantly so for these guys to still have a $125m market cap given the negligible revenue I find surprising.

All that said if it does start bringing in strong orders then I can see it doing well but to be in it now you need to be a firm believer in the product, marketplace and management ability to execute. There is little margin for error. I am watching it for signs of commercialisation but have no interest in taking a stake here.

JLF18

Hi Graham, in regard to the spreadbetting fees if to treat like a regular stock portfolio. I am guessing your analysis may be due to the no tax free investing accounts in Ireland like the UK ISA. Having recently moved back, this is something I am finding quite frustrating. It seems the only tax free way to invest is to create a self driven pension account but nothing in regard to an account where able to access money instantly if needed (unless dealing with tax returns and capital gains tax). Have you found the best way to invest located here or does spreadbetting seem the only way to avoid the tax system. Cheers

joshwood976

Thank you David

WarrantStar

hVIVO (LON:HVO) have expanded their capacity. So now they can conduct a trial / study on more volunteer patients at once, as their customers (like drug companies or biotechnology companies) are requesting. Alternatively they can run more than one trial at a time. From what I can see, they have little competition and are the world leaders in conducting human challenge trials in which the volunteers are deliberately infected with a disease such as caronavirus, or other diseases. The progress of the disease is very closely monitored with the patients on site. Lots of complicated blood tests or other tests are conducted in their labs. The effect of giving the patients various trial treatments can be evaluated. I am a holder and very pleased with today's announcement.

FlereImsaho

Anybody else puzzled by the >10% rise in SDI (LON:SDI) today on the back of precisely no news? I (happily) hold but would appreciate any views/thoughts on this jump. Ta

Helvellyn

SDI (LON:SDI) Tipped as a buy in the Daily Telegraph Questor Column

ww.telegraph.co.uk/investing/shares/hidden-feature-stock-allows-us-predict-100pc-rise-share-price/

Caduceus

You're not alone, I'm 42 and my mind-tank overflows and disappears down the drain every day! I don't know how he does it all (and that early in the morning to boot!!!)

James Kerr1

Forgive me if my memory is patchy but I think hVIVO (LON:HVO) was flotsam from the Woodford debacle and was merged with Venn Life Sciences into Cathal Friel's Open Orphan back in 2019. Since then it has been working to establish its presence in running human challenge trials, alongside spinning off satellite assets - the first of which was Poolbeg Pharma. A new CEO came in relatively recently which has strengthened management . They've increased the size of their facilities, and said in a previous presentation that one of the keys to generating real profit would be through maximising productivity, both in terms of facilities and staff resources. They do seem to have a nice niche, and point to significant structural growth in their markets. I've held since 2020 and was badly underwater at one point, but have held on and will continue to hold, as they do seem to be over the cash burn. They are doing an Investor Meet Company presentation tonight.

Diversification 99

In this evening's presentation the question was asked about the upfront payments and whether the cash was the company's to use and the answer was yes as it's a pre-payment (my recollection) and any cancellations would lead to a retention as no refunds are given.

Boon

Stocks & Shares ISA. Tax-free. But only £20k a year into them.

SIPPs also have a limit to the amount you can put in a year, £40k. But the benefit is that if you're paying income tax, you can contribute to SIPPs from your gross income, avoiding income tax.

Paul Scott

hVIVO (LON:HVO) came across well on the InvestorMeetCompany webinar tonight I thought. Made it clear that 2023 forecasts are set low, and with 95% (?) revenues already contracted, hoping to beat forecasts. Did anyone else watch it, if so what did you think?

KevinS1

Hi Tiswas,

Yes - I feel very similar. There is so much to read and ponder that I almost feel paralysed by over analysis.

I have decided that the best thing for me at the moment is to stick with what I have got, monitor it closely and add/cut as necessary.

I am beggining to make a list of Investment Trusts to slowly buy into and potentially move back to having more of an IT heavy PF - whilst I love small-caps I've recently got a new job and find I am having to focus on that a lot more and therefore have far less time to research.

I will still keep a decent sized/spread of small co's in my PF but am going to leave a lot of the heavy lifting to others, leaving myself with a much smaller PF which I hope to be able to focus in on.

26th Jan '23

yes Paul - great company. Cathal was too promotional initially so sent the share up and then down again but that's noise. The reality is it is now being run by a high quality veteran of CRO's and is the world leader in what it does. ie in excess of 90% of the worlds challenge studies. Revenue visibility 1-2 years out is very high and margins are now coming up to a good standard - ie 20% (currently 17%). I can see them doing £70m at 18% margins or £12.5m PBT with in excess of £35m cash. in next 12 -18 months. So a base valuation for me of £225m market cap which is around 32p I think. There is hidden value too that I suspect will ultimately be spun off when market conditions are right for another 5-10p.

I don't understand why they trade as lowly as they do (aside from the scepticism associated with Cathals over enthusiasm!). I think with Mo you can expect several beats over the next 18 months as I believe the forecasts have been positioned that way. They have a decent moat too and are now starting to win high value consultancy through Venn as a cross sell to their client base. I hold and intend to stay that way.

Deegee Eff

Rotala (LON:ROL) Fabulous announcement for those who hold these. Tender offer at 55p for 35% of your holding, financed by a £10m loan.

ridavies

Hello mcav82. Re Hargreaves Services (LON:HSP) not sure I agree. The profit from Germany has been very substantial and they are now downplaying that and the trading side. Not sure that the nice free profit from those sources are going to come so easily from the HS2 project, nor the renewables land opportunities.

Someone once said that this share was not great before the German JV and they were right if you go back. So.....we will see.

Good solid company but.........

Hello DavidJHill. Shades of Angle (LON:AGL) do you agree?

almost identical I'd say. Brilliant tech but do they have enough runway to commercialise it as it always takes far longer than investors anticipate

Thanks david,

The EBITDA margin was really 15%, because it was one-off canx fee that took it to 17%.

The order visibility impresses me very much. As does the obviously too low forecasts, so it's now highly likely that they beat forecasts, so we're nicely set up for ahead of expectations updates peppering 2023.

I'm worried about competitors setting up. He said there are large barriers to entry, but it doesn't sound like it to me (a non-expert).

Overall, I think this could double in value (similar to your figures), which is my rough criteria for taking an opening starter position, which I did this morning, using some of my BUMP loot!!

Regards, Paul.

ha - very nice :)

Re barriers to entry - it is pretty hard to jump into this space and expect success. First you have to throw a lot of money at it to set up, then you need to be able to gain regulator approvals- neither easy. Once you've done that you have to persuade pharma and bio-tech to use you and thats the really hard part. They aren't price sensitive (to a large degree) - they want guaranteed quality and results. They get that with hVIVO (LON:HVO) and clearly trust them - someone new would have an almighty uphill battle to displace them. The most likely way a competitor gets in and gets traction in my view is if hVIVO (LON:HVO) screw up their capacity management and were full for say 2 years. At that point pharma may be tempted to switch away purely from a timeliness perspective and clearly if they did a good job then credibility might follow.

Their capacity right now is £70m revenue p/a : forecasts are £55m (but virtually full already) so I expect between £60-65m with 10%+ growth the following year. I think they need to be increasing capacity in the next 12 months.

BnB

28th Jan '23

Shades of Angle (LON:AGL) do you agree?

No, I don’t see it that way. Angle (LON:AGL) , as I understand it, offers a platform for disease detection. And is in competition with competitive liquid biopsies, for example. The winner might take all and the losers fall. hVIVO (LON:HVO) is a picks and shovels play on drug development in general with a strong presence in its specialist niche of human challenge studies. The risk/reward is fundamentally different IMO. One could make you quite wealthy or lose your stake. The other will more likely accumulate.

Small Cap Value Report (Wed 25 Jan 2023) - STAF, SUR, PEB, CMCX, XPF, PDG, VANL, HVO, FNX

Paul's Section:

Staffline (LON:STAF)

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