Small Cap Value Report (Wed 27 Oct 2021) - Preamble On Markets, WIX, ACSO, BMY, OTB, RPS

27th Oct '21 by Paul Scott

69 comments 9214 reads

Good morning, it's Paul & Jack here, with the SCVR for Wednesday.

Agenda:

Paul's Section -

Preamble on the markets generally - just some random thoughts that I woke up thinking about, that I thought would make an interesting discussion starter.

Accesso Technology (LON:ACSO) - a positive-sounding update, albeit very confusingly worded in places. Bulls in the share will probably be encouraged by talk of strong trading (undefined), and improved margins. I look forward to reviewing the FY 12/2021 numbers in due course, when we'll see the full picture. Personally, I've never been convinced by this share - it hasn't grown much in the last 5-6 years, and has not produced reliable profits or cashflows. So it doesn't seem to be a value or GARP share at the moment.

On The Beach (LON:OTB) - this beach holidays company has only just resumed trading. The valuation is about 20 times peak pre-covid earnings. So where's the upside for me, if I pay up in full. now, for a recovery that has only just started? There could be a couple of years bonanza trading from pent-up demand though.

Rps (LON:RPS) - a solid Q3 update, in line with expectations. Looks a decent company, probably priced about right.

Jack's section -

Wickes (LON:WIX) - recent listing that has been reporting positive updates on the back of increasing demand for home renovation. Today's Q3 is slightly less good, but total revenue is still up by 16.3% over two years and the company reiterates it is on track to meet the upper end of analyst expectations. The valuation appears modest.

Bloomsbury Publishing (LON:BMY) - confirms it is on course to meet FY expectations but I wonder if another 'trading ahead' might be in store. That depends on how much business has been pulled forward from customers stockpiling ahead of Christmas. Trades on a fairly high PER, but its IP is top class and digital is growing strongly, so still worth considering.

Preamble from Paul

Whilst the UK small caps market seems bearish about temporary supply chain issues, and inflation, the US markets continue to romp ahead to record highs, seemingly ignoring any worries about the future. It's a strange mismatch of investor sentiment. They can't both be right.

I'm still digesting the ugly profit warning from Ig Design

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john2

27th Oct '21

I assume it's Do It For Me.

Boon

The big elephant that is missing in the Vianet (LON:VNET) update is whether the decline in their Smart Zones division, which was a big problem pre-COVID, has now resumed, accelerated, or decelerated since re-opening.

One would assume many pubs have closed and/or are in financial difficulty and about to close. Especially with rising labour costs, supply chain issues, etc.

Pre-COVID, the growth of the Smart Machines were not big enough to offset the Smart Zones declining business. Still unknown if that's still the same situation now.

Chrisfarrell21

Do It For Money?

Rambo

Thanks for the article Dicktrade on Calnex Solutions (LON:CLX), an interesting read.(I hold) This is a very interesting company and appears to be in the right sector at the right time. Michael Taylor also did a chart analysis in Investor Chronical last week. He reakoned there may be a breakout at 130p which based on the recent rise looks like he may be correct.

Paul Scott

The main Budget item which should help some of my investments, is the additional year of 50% business rates relief, for retail, hospitality & leisure, up to £110k per site I think. That will be a big number for lots of smaller retail chains, and pubcos. I see J D Wetherspoon (LON:JDW) and Revolution Bars (LON:RBG) (I hold) went up about 5% when the measures were announced, plus reform of alcohol duties. 3p cut in the price of a pint, whoopydo!

6.6% rise in Living Wage to £9.50 is going to be a tough one for many businesses in those sectors though (plus increases in NICs) and reduction in other pandemic measures such as lower VAT for hospitality.

How it all combines, nobody seems to have worked out the net effect yet.

Regards, Paul.

Hi turbo,

Thanks for posting your article about Taylor Maritime Investments (LON:TMIP)

It's not the sort of thing we would cover in the SCVRs, as it looks an investment company, and quite specialised. There are lots of these things around, and they take too long to analyse for us to cover them here. Sorry about that. We can't cover everything.

I'd be curious to know who was behind the flotation, and what their track record is? Also what are the administrative costs, and are they reasonable?

Owning ships does sound like a potentially lucrative area at the moment, although for how long shipping costs remain elevated, who knows?

jonno

Jack, thank you for a sound and balanced write up on £BMY. The company and share price went through the doldrums after the end of the Harry Potter film series, the share price coming back from £3 + to just over a £1 from memory. So being a long term holder it has been somewhat of a journey, hence I admit to a little bias.

I see the company as having a good runway for growth and the financial capacity to fund it. Hopefully Nigel Newton and his team will continue to skilfully manage the process. As Richard Leonard remarked in his PI World interview last year, the Harry Potter books are not dissimilar to an annuity. They have become a children's classic and will be read by future generations, much as is Thomas the Tank Engine to name but one is.

Phil117

Personally I think Cerillion (LON:CER) is more a symptom of just how bonkers parts of the market are right now (i.e. an outlier) rather than something which necessarily disproves the rule. Call me an embittered value investor but 50x (historic) plus P/E. Really!? Operating Profit was £2.1m in 2017 and £2.8m in 2020. The SP has multi-bagged in the interim; tens of millions of pounds of market cap have been added on the back of a £0.7m nominal delta in Op profit. I know, I know - it's going to grow to the moon like Tesla. Let's see; let's re-discuss Cerillion (LON:CER) in 2025 and see where the SP is then. The fact this has been achieved DESPITE the clear signal from management says more about the current market euphoria than it does about management. Another one that comes to mind is £FEVR. Don't get me wrong it's a great business and may still one day exceed it's former high. But whenever the 'inside' (aka smart) money leaves the room en masse (and it's outside of a specific corporate event e.g. takeover) just ask yourself why they are doing so if it's such an astonishing investment. I would say this is the case at whatever the market cap but triply so in the small cap space given the (normally) shorter corporate histories, and the small nominal tolerances at play. I refer you back to that £0.7m delta

Rusty2

I think a lot of it is because of the forecasts for 2021 and 2022, eps forecast for 2021 is +151%. Profit is forecast to be £4.4m. Latest update was "ADJUSTED PROFIT BEFORE TAX IS EXPECTED TO BE SIGNIFICANTLY HIGHER THAN CURRENT CONSENSUS MARKET FORECASTS"

They are picking up new contracts. So I think there is some justification for the share price.

The director selling I think Paul refers to was back in 2020, the more recent ones seems to mostly share options. A lot depends on growth and meeting or exceeding forecasts.

Re Fevertree Drinks (LON:FEVR) the big director selling was @ 635p and 1945p, shares went on up to 3190p.

Sorry I got the ticker wrong above, I was referring to Portmeirion (LON:PMP) which I've (temporarily) sold due to worrying about import costs & gas prices.

Zoiberg

I once printed off a report on all the "extras" RyanAir could charge you for. It ran to three pages!

Granted. I am being a bit facetious re. £CER. And I appreciate that there is a lot of good news at present. But it's still a current Enterprise Value of £235m playing £4.4m of forward EBIT i.e. a multiple of EV/EBIT of 53x. That's an eye-watering multiple in my book. My point is only that you only need that EBIT to undershoot by a nominal £0.5m or so (which is nothing in the business world) and you are sunk. So perhaps management are just being prudent to cash out after such a re-rating.

Re. £FEVR. It's true that the share price made further progress all the way up to the £30s but then it retraced all the way back down to £9 in subsequent years and after some recovery has been (justifiably) becalmed. Again no surprise given the valuation multiple. The market just got way ahead of itself. So perhaps management in both cases were vindicated but just early. Even they could not predict how far the market would overshoot.

Anyways. I still think any significant management selling is a major red flag, particularly if 1. the business is in any way low margin i.e. Ig Design (LON:IGR) or another example that comes to mind, Accrol Group (LON:ACRL) and hence particularly vulnerable to exogenous shocks. Or 2. has recently multi-bagged e.g. Best Of The Best (LON:BOTB)

illiswilgig

dahokolomoki,

Vianet (LON:VNET)

'The big elephant that is missing in the Vianet (LON:VNET)
update is whether the decline in their Smart Zones division, which was a
big problem pre-COVID, has now resumed, accelerated, or decelerated
since re-opening.'

- good point. Well made. I did say it was waffly didn't I?

Details of smart zone sites, active, inactive, disconnected, new connections and upgrades were given in the last annual report.

Net result 10,500 down from 11,600 with 660 net disconnections and 440 inactive (but paying reduced rates). My estimate based upon the 6.3m revenue is that this has not changed a large amount.

'One would assume many pubs have closed and/or are in financial
difficulty and about to close. Especially with rising labour costs,
supply chain issues, etc.'

One would assume so. I certainly think so. Though I am not sure that all pubs will shut - I imagine that we are going to end up with a smaller more sustainable estate. Far fewer boozers (wet led pubs in the terminology) and a lot more venue or destinations. For some time Vianets estate has been reducing in numbers - but as the remaining connections upgrade to the new systems and services they seem to be much more valuable. New connections are also being made and these are unlikely to be boozers. More like the AMC theatre installations in the US I imagine. I have consistently over-estimated the impact of old connections being lost.

Pre-COVID, the growth of the Smart Machines were not big enough to
offset the Smart Zones declining business. Still unknown if that's still
the same situation now.

Well I thought so to. But here's the thing.

Over the 5 years pre-pandemic from 2016 to 2020 revenue rose from 14.3 to 16.3m and net profit more than doubled from 1m to 2.4m. That doesn't quite stack up with the closing down pubs narrative? It seems that Vianet have confounded both of us?

In addition during this period the vending connections have been changing over from a capex - sell them a telemetry box model - to a sell them a service model. That's now based upon a super swanky new cloud based real time data monitoring, and analytics with new services such as contactless payment launched at the start of the pandemic. During this transition revenue growth has been suppressed as capex sales have fallen but initial recurring revenue is lower. But with more services coming on stream - particularly the contactless payment - the recurring revenue stream appears to be building faster than I had expected. Some useful data on revenue per connection in smart machines in the last report.

Adding 12.9% new connections to smart machines in the first half seems to be on target for significant growth - at an annualised rate of 25% - which would be above what I had been expecting. Seems the new sales team is earning their keep so far, but of course it may just be a flash in the pan - but I think the comment on restoring the dividend is intended to convey confidence on the recovery continuing. Personally I'd prefer that they invest in the business pay down the debt and go for growth, but I wouldn't be too upset at a nominal dividend if they insist.

As always there is plenty of execution risk, and Vianet have seemed on the cusp of achieving great things for years now, but I sense that this time it may be different .......... as increasing labour costs and the pandemic drive demand for both smart zones and smart machines and align with the technology that Vianet have now launched.

cheers

Mark

Tommy H

Hi Jonno

It is one of those things I remember reading HP books to my nephews years and years ago.

We borrowed the first three last year to read to our oldest daughter (now 8) and both her and the younger daughter (now 6) love them. We bought the remaining 4 books, and are on something like the 3rd or 4th reading as bedtime stories - sometimes we even manage to sneak another book in as a change.

We took the plunge in the summer holidays and bought book 1 on Audio Book (not cheap at £31) but amazing for long car journeys and has not left the car CD player in 3 months. My wife has just taken the kids down to see family in London and Surrey and we got book 2 (Audio) again last month, so doing our bit for Bloomsbury Publishing (LON:BMY)

I wonder if Harry Potter is going to become something like Lord of the Rings, Peter Pan or Narnia so last for a long long time and then enter the world of IP challenges?

Tommy

ps. I do not currently hold (having sold)

Dear Paul

I would like to thank you for your thoughts

I look after 4 members of the family money and my own, as well as being a full time dad and full time day job - this is the first night I have not had one of the girls since summer school holidays. So the last 7 weeks have felt :( but the reality is, the house is secure, bills are paid, food is on the table and the girls get to school in clean ironed presentable uniform with a good breakfast (assuming they eat it obviously), packed lunch made and there on time, so really this is about a level of luxury rather than a basic need.

It is always hard to see your Net Worth of whatever metric you use go down, I do a spot price on the 5th of each month for each portfolio with sub analysis on growth/dividend/buy/sell, but whilst it is OUCH that is more than my salary this month, it is also get a grip, look in the mirror, if you told most of the kids parents at the school gate after a lot of hard years work you had £XYZ invested in the stock market and the mortgage paid off they would be in the seriously jealous mode if not can you lend me £1000.

Cheers

Hi Tommy

My introduction to Bloomsbury Publishing (LON:BMY) was over 20 years ago when I met Nigel Newton, the CEO at a book fair. At that time Harry Potter and the Chamber of Secrets, the second book in the series had just been published. He asked me if my children read. My son was about 9 at the time and an avid reader, his sister 6. Nigel Newton very kindly gave me a copy of Chamber of Secrets on the back of which I bought 600 shares. it was all I could afford at the time. The rest as they say is history.

My son is now 33 and his sister 30, as an annual outing I would take them see the Harry Potter films as they were released. Memories!

All the best

Was just going through On The Beach (LON:OTB) results, and also reading Paul's commentary above.

On the topic of airlines - like Jet2 (LON:JET2) £EZY Wizz Air Holdings (LON:WIZZ) and the rest. With oil prices high as it is and potentially if they keep increasing, will we see huge losses next year? Presume many airlines hadn't forward hedged big amounts of fuel next year given COVID uncertainty and already stretched financial situation. So therefore, more spot buying to come at high prices?

Pent up demand will help to balance out as there'll be demand willing to pay whatever price increases for flight seats. But how will it all play out? Pent up demand vs high oil prices.

abtan

Hi Jack (and the other Bloomsbury Publishing (LON:BMY) contributors today)

Thanks for the write-up. It is one of my largest holdings and I remain a fan.

I thought I would offer some thoughts on your last paragraph:

"The PER multiple is on the high side for a book publisher and I do wonder about that, but I can also see the argument for why it might be deserved in Bloomsbury’s case."

I prefer to split the business in 3 and value each part separately to explain why I think Bloomsbury Publishing (LON:BMY) deserves its current valuation:

1 - Harry Potter Revenues

By my calculations Harry Potter (HP) revenues made up 20% of Total revenues in the last financial year @£37m.

Very crudely applying an historical 14% Operating Profit margin achieved by the Children Segment (it was 18% in H1 this year) = £5m operating profit.

It's a powerful brand, with 2 more Harry Potter films being released in 2022, and whilst I can see revenues fluctuating, I can't see them going away.

I personally apply a x20 operating profit multiple here

= £100m HP Valuation

2 - The BDR (Bloomsbury Digital Resources)

Operating Profit this year is forecast to be £5.0m this year.

I can't help thinking that the company is holding something back here as:

H1 Operating Profit alone was £2.8m;
H2 YOY revenue growth would therefore only be +3%, which seems very low;
perpetual (i.e. one-off) revenue would drop in H2, which seems odd given the recent start of the academic year and re-opening (if it was going to drop I would expect it to do so in H1, in the middle of the academic year.)

In any case:

customer retention rates are consistently >90%;
contribution margins have been c80% since 2017/18;
capex for the year is on track to be c.£1.0m again, which seems very low relative to growth and profit margins;
a material portion of revenues are recurring (and continue to grow.)

Given the growth here I personally apply a minimum x20 operating profit multiple based on this year only:

= £100m valuation today

I actually think I'm still undervaluing the BDR, though I'm happy to leave my assumptions as they are to account for the slowdown in growth announced from March 2023 until February 2028.

How the company can forecast this revenue stream so many years in advance I don't know - I hope they are simply being overly-cautious and I look forward to more clarity in due course.

I should add that even modelling growth into next year before 5 years of slower +10% CAGR growth, gives me an operating profit close to £10m in about 3 years, so there's much room for my valuation above to increase very quickly.

3 - EVERYTHING ELSE

In H1 the non-BDR segments generated £8.4m of operating profit.

For prudence I am assuming that OP for the full year will be £16m, £5m of which will be Harry Potter related leaving £11m of non-HP and non-BDR revenues.

I only apply a x10 multiple here due to revenues being less reliable = £110m valuation

---

1 + 2 +3 = £310m

The current market cap is £300m and the company has £40m of cash, so there's at least 20% upside from today's price to reach what I would see as a Fair Value.

So, whilst Bloomsbury Publishing (LON:BMY) might look expensive as a publishing company, I'm hoping the recurring Harry Potter profits and the hidden value from the BDR segment justifies its seemingly high premium.

In the meantime, the company is highly cash generative allowing it to grow by acquisition if necessary.

davidjhill

It's an interesting thought. Usually airlines will always hedge forward but given the levels of uncertainty around travel they may well have done much less hedging to avoid additional large derivative liability losses if their flight schedule was disrupted.

So agree some spot buying appears more likely and corresponding increases in seat prices. It may be quite a muted effect though as some futures hedging will inevitably have been performed and I suspect a number will also have used call options at a reasonable out of the money strike. Premiums would be small enough not to hit p&l much given the out of money nature but if they were quick enough oil may have even been priced in the $40-50 region.

unwise2

28th Oct '21

I think a lot of it is because of the forecasts for 2021 and 2022, eps forecast for 2021 is +151%

Using Stocko EPS forecasts vs previous is a very bad idea. Historic EPS numbers are normalised (by Thomson) and forecasts are nearly always adjusted if the company reports adjusted EPS. Stocko has 2020 EPS at 8.75p but if you read the results RNS adjusted EPS was reported as 12.4p. I have seen companies appear to have triple digit earnings growth forecast but if you check previous results the real number is much lower.

Small Cap Value Report (Wed 27 Oct 2021) - preamble on markets, WIX, ACSO, BMY, OTB, RPS

Preamble from Paul

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