Small Cap Value Report (Wed 27 Feb 2019) - NICL, TED , BKS, AVG, ARC, IGE, SIS | Graham Neary

27th Feb '19 by Graham Neary

51 comments 17162 reads

Good morning!

Plenty of companies to report on today. I may need to work through the afternoon to cover them all:

Nichols (LON:NICL)
Ted Baker (LON:TED)
Beeks Financial Cloud (LON:BKS)
Avingtrans (LON:AVG)
Arcontech (LON:ARC)
Image Scan Holdings (LON:IGE)
Science in Sport (LON:SIS)

Nichols (LON:NICL)

Share price: £15.80p (+3%)
No. of shares: 37 million
Market cap: £585 million

Preliminary Results

The secret is out that this soft drinks company is rather high-quality. Let's see how recent performance stacks up:

sales +7%

Geographically: led by UK sales. Held back by weakness in the Middle East (Yemen).

Product-wise: led by fizzy drinks, particularly by its core brand Vimto.

operating profit +10%, although only +3.6% on an underlying basis (2018 benefited from a lack of exceptional items).
final dividend +14.5%.

Operationally:

Vimto still outperforming the wider soft drinks market
Has been buying regional distributors, "consolidating route to market".
Fine weather in 2018 was offset by Co2 shortage.
Achieved distribution to 100 US stores (Walmart).

Outlook: "well-positioned".

My view: in some ways, this company's financial characteristics are dream-like. I'm not in the least bit surprised that it enjoys a Quality Rank of 98.

Is it worth accumulating at the current valuation? I would guess that it probably is. The StockRank of 88 agrees. Nichols is a "High Flyer", one of Stockopedia's winning styles:

One of my personal ambitions is to own more high-quality drinks companies in my portfolio. So far, I only have Britvic (LON:BVIC) and the rather speculative Distil (LON:DIS).

Nichols (LON:NICL) will be near the top of the list when it is time for me to increase my position size in this industry. The key risk from my perspective is that Vimto is still being enjoyed in another 110 years, but I never got to participate in it!

Ted Baker (LON:TED)

Share price: £17.84 (-11%)
No. of shares: 44.6 million
Market cap: £796 million

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apa apa

27th Feb '19

Could you look at International Personal Finance (LON:IPF) please?

ezlifeme

A second for Arcontech (LON:ARC) please Graham, sound progress (I Hold)

Fred Perry

I would also be grateful if you could look at International Personal Finance (LON:IPF) Graham

FREng

In my opinion, requests to Paul and Graham for their views on a company RNS are ideally accompanied by some analysis of the RNS by the person making the request. SCVR is most valuable as a two-way (or more) exchange of insight wherever possible.

EDIT: Yes, I've done it too :-( But I promise to try harder.

Gromley

Too small to be of direct interest to this column (Mcap c. £4m) but I'll mention in passing for the theme, today's AGM statement from Image Scan Holdings (LON:IGE)

Government procurement processes are lengthy and not always predictable in their timing and sales intake is running behind management expectations for the half year. However, with customer decisions due on several significant projects, the level of activity is expected to increase in the second half and the Company expects to achieve market expectations for the full year.

I have lost count of how many "H2 weighting" views we have had from companies over the course of the last year and I cannot remember a single one (even when the justification amounts to more than just 'hope') that has played out well.

I totally agree FREng and people don't need to be afraid their analysis isn't good enough, just a simple 'this might be interesting because ... ' would start the ball rolling.

shipoffrogs

A lesson I've learnt, typified by Image Scan Holdings (LON:IGE), is not to buy into small caps selling to overseas governments. If sales ever do materialise they inevitably do so after long delays.

Effortless Cool

Good point, SRT Marine Systems (LON:SRT) being another example.

davidjhill

Beeks Financial Cloud (LON:BKS)
The miss is related to investment in new exchanges/data centres due to demand. Absolutely nothing wrong with that in my book. I prefer that short term hit to p&l than too much capitalising of costs.

The key for me of this is the stickiness of the client base. If the offering is good enough for Tier 1 banks and it becomes the go to provider for this type of exchange infrastructure service I can see good growth for many years. The strong subscription based model should keep multiples high.

Next year brokers are looking for 3.8p EPS and that doesn't look like a stretch to me. Brazil is a big exchange so plenty of brand new opportunity here.

I think 120p is roughly a fair price at present. The stock is obviously illiquid so small changes in sentiment move it more than it really should.

rhomboid1

Agreed re H2 weighting’s rarely come to pass ...the exception that proves the rule is Billington Holdings (LON:BILN)

https://www.investegate.co.uk/billington-holdings--biln-/rns/interim-results/201809180700040243B/

‘A strong forward order book and contract visibility into early 2019 indicates a positive performance in the second half of the year and Billington expects to meet market expectations for the full year.’

..and so it did;

‘Billington Holdings Plc (AIM: BILN), one of the UK's leading structural steel and construction safety solutions specialists, is pleased to report that it anticipates the results for the year ended 31 December 2018 will be in line with market expectations’

I’m generally sceptical but D4T4 also was a huge H1 miss followed by an H2 catch-up too...I guess if a Q business tells me H2 is gonna be ok with some evidence I’m prepared to believe it

Glorenfeld

Beeks Financial Cloud (LON:BKS)

This mirrors my view. I would also add that while growth has slowed, I am happy (for now) to accept their point that the larger institutions they're now engaging have longer on-boarding processes which will increase the time from investment to return (at least, I think that's the point they were making!)

Graham Neary

Hi, yes - I will be covering Beeks Financial Cloud (LON:BKS). Cheers. G

danielbird193

Hardly a small cap (although it might be soon!), but Metro Bank (LON:MTRO) announced a £350 million fundraising at 16.24 yesterday, then rushed out their 2018 results along with an 17.30 call for analysts. The announcement does its best to put a positive spin on things, but the fact that the shares were trading at a peak of £40ish less than 12 months ago and today sit at barely more than £10 shows the extent of value destruction that has taken place here. They also c*cked up their risk-weighted assets calculations so quietly announce that the PRA and FCA have launched an investigation. Hardly a surprise but a bit sneaky to hide it in a single bullet point in the middle of a results announcement.

It's a company I follow with interest as the business I work for is a significant customer so I deal with them on a weekly basis. I don't hold the shares and have felt they looked overvalued for ages. Would welcome thoughts from anyone more knowledgeable than me about the likely way forward from here.

I meant to add, Metro Bank (LON:MTRO) shares now sit at a 10% discount to book value which is well below other lenders such as Morses Club (LON:MCL) and PCF (LON:PCF) which have been mentioned in the SCVR before. Could this be the right entry point for a contrarian play on the potential success of a challenger banks?

Exhibitions specialist FT money (2 Feb) Tarsus (LON:TRS) published its final results today. They look good (up 9% good outlook, dividend increased, share price up 11% as I write).

TRS is a favourite of Lord Lee. In he wrote that he had bought TRS 37 times since 2015 and it was "now probably second only to Treatt (LON:TET) " in his portfolio.
I'd welcome Graham's view. TRS earns its revenue around the world, a 4% dividend, 4 brokers rate it a strong buy, yet it has negative NTAV, net debt, and a bad Altman Z1 score. Stockopedia ranks it as Balanced Neutral - somewhat remarkably, in my view.

Zac Hunter

I know its just out the small cap range but I'd really appreciate International Personal Finance (LON:IPF) too. Very strong results out today imho

Mark Tughan

Redde (LON:REDD) coming off a bit today on unspectacular results. Good quality metrics and a good but unchanged dividend.

Potentially of interest to value hunters. Had an alert on it, hence having another look...

LeoInvestorUK

davidjhill re Beeks Financial Cloud (LON:BKS),

The miss is related to investment in new exchanges/data centres due to demand.

As far as I can see the forecast EPS miss is caused mainly by higher cost of sales due to the startup costs of new data centres which are not expect to be profitable in the first year.

It appears they have decided the most appropriate accounting treatment was to spread the data centre costs among the sales to customers using them rather than counting them as fixed (admin) costs or even capitalising the startup costs. Maybe this accounting treatment is overly conservative and it would be appropriate to adjust the gross profit higher, maybe not.

But the real issue here is that these costs were not foreseen 6 months ago. And these are not investments additional to those planned which have resulted in turnover additional to that planned, because the turnover forecasts have also been missed (for the second consecutive time). Nor is it apparently the case that the investments were made in the first part of the period and the revenue only started coming online near the end - monthly revenue is only up 25% (annually, not even sequentially).

The FY2018 and H1 2019 figures show a company failing to achieve compound growth and needing to cut margins to maintain a £0.5m sequential 6 monthly increases in turnover.

Next year brokers are looking for 3.8p EPS and that doesn't look like a stretch to me.

I strongly agree, it looks very easy to achieve with another £0.5m sequential revenue growth and operational gearing. Actually it is disconcertingly low. Most importantly though, 3.8p for FY2020 is very much worse than the previously forecast 3.6p for FY2019 that was the basis of the shares changing hands below 110p last week.

My other caveats (in no particular order): Backup as a service seems to be taking a long time to come online (they are capitalising part of this cost), H2 weighting, momentum broken / large private investor following, historical lease costs not abating as quickly as I hoped.

Valuation really depends on what PE multiple you are willing to apply. I think it is safe to say that Paul's previously suggested PE of 50 is no longer appropriate because of the missed forecasts. So I would say somewhere between 20 and 30. The 12m rolling forecast is probably around 3.4p so that gives a valuation between 68p and 102p.

Disclaimer: Despite the missed forecasts, this is a great company and I do suspect that they are laying foundations for future compound growth that are not fully reflected in the figures. I didn't sell all my shares and if they fall unfairly or reported figures improve I will buy back.

DJCP

@danielbird193 (#24 & #25) re Metro Bank (LON:MTRO)

I bought in just under 3 years ago at just under £22, based upon being a satisfied customer, and their vision for banking. Saw them rise to near £40 but eventually sold out last Sept. for just over £30, and have seen them drifting down since.

Even after yesterday's drop (it seems that many sold on the not-yet-announced information !), I presumed they'd fall this morning. Initially I had trouble getting an online quote, and was waiting for a sub £10 entry, but in error I clicked on the button when at 'Buy' instead of 'Requote' ! Doh !
So, I did buy, but for slightly more than I'd hoped for.

As bank accounts are too complicated for me, I don't intend holding for that long, but will sell on any reasonable bounce, or keep a tight manual stop-loss in place.

On 'the other site', there's rumours of nationalization, forced selling to Lloyds, going bust etc. ! lol With the Market Cap now just over £1b, I can't see Vernon Hill, the billionaire founder, having any problem funding or raising funds if/when required.

Mark Carter

I seems to recall that I bought Nichols (LON:NICL) in late 90's. It was on a PE of 5. Some time later I decided that NICL wasn't going anywhere, and sold. You can probably guess the rest.

Hey ho.

Small Cap Value Report (Wed 27 Feb 2019) - NICL, TED , BKS, AVG, ARC, IGE, SIS

Nichols (LON:NICL)

Ted Baker (LON:TED)

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Graham Neary

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