Small Cap Value Report (Wed 25 Oct 2017) - LRM, DFX, NEXS

25th Oct '17 by Paul Scott

26 comments 10445 reads

Good morning! It's Paul here.

Drat, I've just realised that I forgot to put up a placeholder article last night - apologies. There's no way I'll remember reliably in future, so I've just set up a reminder system on my phone.

Today is a very quiet day for small cap results & trading updates. We have 2 profit warnings though, so I'll start with those.

Here is the link to yesterday's report. I updated it in the evening, adding sections on Bloomsbury Publishing (LON:BMY) , Shoe Zone (LON:SHOE) , and Gear4Music results.

Lombard Risk Management (LON:LRM)

Share price: 7p (down 34.9% today)
No. shares: 400.6m
Market cap: £28.0m

Half year report -

Lombard Risk Management plc (AIM: LRM), the leading dedicated global provider of collateral management and regulatory reporting solutions, announces its interim results for the six months ended 30 September 2017.

I'm impressed with the prompt reporting (just 25 days after the half year end). The figures themselves though, can only be described as diabolical. I won't spend much time on this, as I've long been a bear on this share. Looking at the figures today, I'm seriously wondering whether the company might go bust.

A few key numbers;

First-half revenue of 12.7m (H1 2016: 15.2m), down 16.4% largely due to a temporary fall in services revenues and some delays in contract signings.

Negative EBITDA of £3.5m. Bear in mind that the company capitalises a ton of internal costs onto the balance sheet, so the cash loss is much worse than EBITDA.

Capitalised development spend of £2.7m.

Loss before tax of -£5.9m - remember this is just for H1 trading. This is a massive deterioration, from a loss of -£0.1m in H1 2016.

Cash - amazingly, the company has burned through pretty much all the c.£8m in fresh equity raised last summer. There's only £0.4m left. Although it also has (currently undrawn) borrowing facilities of £4.5m. Although if it continues burning cash so quickly, will the lender allow them to draw on those facilities? I'd be rather surprised if they do.

Outlook comments sound upbeat, but they always do. This company is a perennial jam tomorrow - always optimistic, but…

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FREng

25th Oct '17

Defenx (LON:DFX) look rather light in directors with technology backgrounds, so their software development problems come as no surprise. You may be able to sell cybersecurity with marketing skills, but you need strong software and project management skills to actually deliver it. I'm not buying.

Steves cups

Anyone any thoughts on the drop over last days in Best Of The Best (LON:BOTB). No RNS.
Is there a read across from somewhere?

gus 1065

Hi Andrea34l,

Prompted by Matylda's earlier note, I had a closer look at Nexus Infrastructure (LON:NEXS) following this morning's results announcement. It's a recent IPO from July this year - the shares have barely moved since then. I'm usually shy of IPOs (especially out of private equity firms) until they have at least a couple of years' decent trading behind them but in this case it's a partial exit by the founders (from 1976) who have retained a 43% stake in the firm which makes me more comfortable. Reasonable spread of institutions bought in to the IPO.

http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=5&vw=own&SecurityToken=0P0001B9HQ%5D3%5D0%5DE0WWE%24%24ALL&Id=0P0001B9HQ&ClientFund=0&CurrencyId=BAS

The company provides utility infrastructure to new build estates, predominantly in the South UK, and counts 9 of the 10 largest builders among its clients. Makes it a derivative of a cyclical industry but my initial thinking is they appear to have a decent moat and as an essential but relatively small part of any development they're likely to have decent control over margins etc.. Financials look pretty good and the Stocko rankings are excellent. Debt profile looks a bit odd as they carry a lot of cash but also have a fair bit of debt (also very high payables/receivables) - may be a function of front end developer deposit payments; need to look further into this. Due to pay a decent dividend too.

On the whole I quite like it. Seems pretty illiquid (EMS of only 1,000 shares/£1,900) but spread this morning was a reasonable 2.5%. I've had a nibble and taken an opening position.

Gus.

andrea34

Thanks Gus

Paul Scott

Hi Andrea,

Thanks for the prompt on Nexus Infrastructure (LON:NEXS) - I've not come across this company before, with it being a recent (Jul 2017) float. It looks potentially interesting, so I'll add a section on it to today's report.

Regards, Paul.

Distil (LON:DIS) reported interims yesterday, with a muted "in line" outlook and what seem to be slightly lower growth rates. Graham was cautiously positive about DIS on 7 July, so it may be worth an update.

Ramridge

Julianh - Re. Zoo Digital (LON:ZOO) Firstly well done for spotting this opportunity in time.
I had a look at this share a few months back and was put off by the balance sheet debt and the fact that broker forecasts for 2017 eps growth was ( and still is?) -44.5%.
I think the balance sheet is now a lot healthier after the placing which raised net £2.6m and further converted 1.1m of debt into equity.
By my calculations, the net effect is to make the old net debt of $5.6m come down to $1.2m. That reduces the multiple of EBITDA from 3.1 (red flag) to 0.6. A lot healthier.

However I am still puzzled by the forecast negative eps growth. Maybe someone else can enlighten me.

Zarathustra

Re Nexus Infrastructure, I notice that after several years of operating cash flow outstripping operating profit, operating cash flow has suddenly dropped to half of operating profit over the last 12 months.

Can anyone shed any light on why that might be?

ricky65

I agree that Zoo Digital (LON:ZOO) has characteristics of a Minervini supserstock. However, as Paul mentioned before on here, one client provides 44% of total revenue. Having been burned by high revenue concentration stocks in the past, that alone puts me off. Well done and good luck with it though!

VegPatch

BOTB
Highly rated but illiquid share. I'm afraid it doesn't take much to move it in either direction.
It could well be as simple as someone taking profits.

Pretty huge spread of c10% as well between the bid and the offer.
If you want to see how illiquid a share is put in varying amounts to buy or sell.
Often your broking platform e.g. Hargreaves Lansdown will offer to fill say £10k of shares but if you go to say £15k they say there is no liquidity. You have to be careful with these types of shares, they can be roller coasters! Having said that, illiquid shares are epic on the way up - they gap up if a buyer is around. You are a hero and make loadsamoney. Unfortunately the reverse occurs if there is a seller around.
I first tried to buy these at 30p about 6 years ago...I was working as a fund manager and had my in house dealer hunt a few out. This guy was seriously good at finding shares, but even he couldn't find me a single share to buy. Well done those who did manage to find some to buy, you have done well!

Julianh

Hi Ricky
Thanks for that. I have had a second look at the AGM statement and it says "The increasing proportion of subtitling work has reduced seasonality, reduced client concentration and improved visibility". What isn't clear is how much client concentration has been reduced. And of course you are right, 44% with one client puts the business severely at risk.
All the best to you.
Julian

daveinthelakes

Paul,

With regard to Bloomsbury Publishing (LON:BMY) which you covered yesterday I think we should give serious consideration to the digital platform they are developing. This did not grow in H1 but as the platform is mainly targeted at academia we should not expect an upswing until H2, which covers the start of the academic year.

I have never invested in a publisher before Bloomsbury Publishing (LON:BMY) which I took a position in a couple of weeks ago. Although their main avenue to profit over recent years has no doubt been Harry Potter I believe they are well regarded for the quality of their publications and the digital platform will grow not only organically but also with the addition of more "themes" such as the latest on China. This will be a digital offer in the English language on Chinese literature, with input from Chinese and non Chinese authors.

I think their current slate of authors will enable them to continue around the current profit levels whilst subsidising the development of the digital offer. They are conservative by nature and I feel their estimate of £5M profits from digital in 3-4 years time may well be exceeded.

Dave

26th Oct '17

Hi FREng,

I gave this some thought, but decided against writing a section on Distil (LON:DIS) - it's been a listed company for about 18 years now, and has still only managed to get to about £2m p.a. revenues, flogging Blavod Black Vodka (which has never taken off), and various other drinks.

It beats me why such a tiny company has wasted so much money by maintaining a stock market listing for so long?

If some stellar growth started to come through, then it might be worth a fresh look.

Regards, Paul.

Chrisfarrell21

Hi Paul/Andrea,

I've had a bit of a look into the Nexus Infrastructure (LON:NEXS) IPO document and the business.

First things first, it's not quite the typical construction contracting company. As Paul points out, it does operate (although not entirely) in a niche part of the construction industry. It has two operating companies, Tamdown and TriConnex. In the 2016 financial year, Tamdown accounted for c.83% of group revenue and 77% of adjusted operating profit. TriConnex accounted for 17% and 23%. Adjusted operating margin seems to be c.6-12% across the business, which is quite a bit higher than a run-of-the-mill construction company.

Tamdown does infrastructure groundworks, civil engineering, and concrete frame construction, but acts as a sub-contractor to either a housebuilder or a main contractor. This is pretty dull stuff but it appears to have good relationships with major housebuilders nationwide, and doesn't take on main contractor risk.

TriConnex is the potentially more exciting part of the business, and provides the material growth prospects. It is part of a small number of companies providing planning/design/installation services for utilities (gas, water, electricity and fibre) to residential developments. This is a niche part of the industry and has a much, much smaller pool of competitors than your average construction contractor; the main ones being GTC, SSE (listed), and Fulcrum. There don't appear to be many others.

They credibly explain how they intend to leverage the relationships they have established with housebuilders through Tamdown since 1976, in order to win more of the available market share for TriConnex. This type of work generally attracts a premium price and much more lenient contracting terms than normal construction (I have negotiated terms with a rival company and they generally get much more favourable terms than a typical contractor).

TriConnex is generally paid in advance, so working capital is much less of a problem. The difference between TriConnex and GTC, SSE (not sure about Fulcrum) is that GTC/SSE own and manage the utilities on a development post-installation. That has some degree of risk in it and you are responsible for maintenance etc. It appears that TriConnex does not do this, and before commencing work on a development, enters into an asset purchase agreement with the company who will own and manage it (could be a competitor) which pays a lump sum to TriConnex on or before installation is complete.

So generally, I feel this is all positive stuff, and is against the background of a demand for housebuilding. I think there is enough here to distinguish it as an investment from other construction companies. However, I feel there are some bear points worth mentioning:

1. Despite strong growth in the last 5-10 years, H1 2017 revenues are slightly down on H1 2016 (£60.6m vs £63.7m). Mgt say this was caused by the EU referendum. They also say that activity has since increased, and the order book is up 25%, which could mitigate the reduction.

2. If growth is likely to be so good, and they don't need cash to fund it particularly, then why list now? Is it because (in tandem with 1 above) they foresee a market downturn coming, or at least a slowdown of previous growth rates? Maybe, but it could be that the founders and friends just want some cash in their pockets, which is fair enough. The list of selling shareholders doesn't have any evil private equity, and it seems as though the founders would still have plenty of equity.

3. As Tamdown is a more 'normal' contracting business, one or more problem contracts could have a serious impact on financial results, regardless of TriConnex growth. Not much investors can do to prepare for this, but Tamdown doesn't have main contractor risk, and there doesn't appear to be any abnormally high value contracts, although it's all relative to the size of the business.

Overall, it looks good actually. There's not enough excitement to get involved right now. I think I will do as Paul suggested, and wait for the full year results.

Ta

Chris

Hi Chris.

Thanks for the review of the Nexus Infrastructure (LON:NEXS) IPO document. I had a long train journey yesterday which gave me a chance to go through it. As you say, an interesting business which although quite closely linked to the fortunes of the house building sector is quite different in some important aspects.

On your "bear 2" point about the motives for the listing, I agree cashing out by the original shareholders is the most likely (notwithstanding the fact they are retaining about 43%) although they also state that a listing gives them a useful mechanism to provide LTIP and other share incentives to management and employees (I noted everyone received a 100 share "thank you" in the IPO which was a nice touch.). Longer term, it could also be used as currency for a possible future acquisition/merger. They seem to be quite regionally focused and in an industry where there are presumably some decent economies of scale there may well be ambition to grow through acquisition at some point down the road.

Gus.

Thanks for that Gus. Yes, they certainly intimate that acquisitions may be sought, quite right - I also liked the 100 share thank you! Nice to see.

I'm slightly concerned that an LTIP is towards the front of their thoughts, so I'll watch for news of that.

In terms of regions, they're currently only really operating in the South East. They say they have a small operation for TriConnex in the South West, but only about 3% of that available market, and are considering branching out to the Midlands. As TriConnex seems to be quite a capital light business, partly due to up front payments and relatively long lead-in times for a project, it could prove fruitful.

Thanks

Chris

underscored

27th Oct '17

Zoo Digital (LON:ZOO) still going

Hi Ramridge
Re: Zoo Digital EPS growth, I have no answers but a few guesses:
1. ZOO doesn't get much analyst cover. I have only found one analysts report since the AGM statement (FinnCap) which shows EPS for year ended March 2018 unchanged (not a 44% drop). This seems to be more in line with the AGM statement which suggested higher revenues but lower margins on the new services
2. The Stockopedia forecast fall in EPS may be out of date. The Stock report broker consensus trend shows no change in forecast for the whole year. So it looks as if the Thompsons databases are out of date or don't include the FinnCap analysts report.
For now I am going to trust the market (as demonstrated by the share price) rather than the analysts forecasts. We will see.

TheArb

29th Oct '17

Borrow in Lombard Risk Management (LON:LRM) getting tight, and now being rationed, one major provider was only able to offer me 50k shares on Thursday due to the number of existing clients already short and of course that could be recalled at any time.

11th Jan '18

Lombard Risk Management (LON:LRM) cash bid at 13p offered by Vermeer N.V. this morning. 90%+ premium to last night’s close. Decent result for anyone still holding a recent long position. One of the perils of shorting for anyone on the other side .....

https://www.stockopedia.com/share-prices/lombard-risk-management-LON:LRM/news/vermeg-group-nv-lombard-risk-mngment-offer-by-vermeg-group-nv-urn:newsml:reuters.com:20180111:nRSK5515Ba/

Gus.

Small Cap Value Report (Wed 25 Oct 2017) - LRM, DFX, NEXS

Lombard Risk Management (LON:LRM)

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Paul Scott

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