Small Cap Value Report (Wed 29 August 2018) - GYM, BKS, IQE, JPR, RIC | Graham Neary

29th Aug '18 by Graham Neary

51 comments 14959 reads

Good morning!

Thanks for getting all your requests in.

Today I'm planning to look at:

GYM (LON:GYM)
Beeks Financial Cloud (LON:BKS)
IQE (LON:IQE)
Johnston Press (LON:JPR)
Richoux (LON:RIC)

GYM (LON:GYM)

Share price: 325p (unch.)
No. of shares: 138 million
Market cap: £448 million

2018 Interim Results

This is the innovative low-cost gym chain which is currently experiencing rapid growth.

It's one that got away from me, as I was dabbling in the shares below 200p last year. I couldn't quite convince myself to hold on to them, however. I'd be up by nearly 80% if I had.

There could still be a fine opportunity from current levels. So let's take a look at these results.

The company says it is on track to meet market expectations.

Headlines:

Revenue +36%. An important figure but the group is expanding its estate and has grown by acquisition. So it's not a "like-for-like" number.
EBITDA margin falls to 30%, "reflecting immature estate profile" and the effect of converting gyms from an acquisition it made last year.
Adjusted PBT of £7 million.

The adjusted PBT is calculated after adding back in amortisation of acquired intangibles plus exceptional items.

Having looked into it, I think the adjustments aren't terribly out of the ordinary. Note however that exceptional items were pretty big last year (£1.7 million) and are already £1 million in H1 of this year. They are likely to drag on results for as long as The Gym is making acquisitions and lots of changes to its estate. But hopefully these expenses will lead to a lot more profits in the future.

Small interim dividend. The company has been raising new equity for growth, so the dividend doesn't really matter. It's all about getting bigger for now, rather than producing an income stream.
6 new gyms and 13 gyms acquired (total: 147). Still targeting 15 to 20 organic openings for 2018 (will need to do better than 6 in H2!)
CFO becoming CEO.

There's no reason for the shares to move anywhere today as things are motoring along as expected.

It's a fine pace of growth. As the CEO points out, the number of sites has increased…

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fwyburd

29th Aug '18

Good morning Graham, a request for Beeks Financial Cloud (LON:BKS) and IQE (LON:IQE) please.

Beeks Financial Cloud (LON:BKS) results look great, possibly a small miss on revenue but EPS above forecast and the announcement of a maiden dividend of 0.3p per share is positive. I hold.

IQE (LON:IQE) looks underwhelming but I'm sure someone else will disagree. I don't hold.
Cheers
Francis

Reacher

Hi Graham, Beeks Financial Cloud (LON:BKS) have released their results for Y/E 30/6/18 having recently IPO'd. Underlying ENITDA was £1.95m which grew by 258% and resulted in a margin of 35%.

My understanding of their service is they house their trading platform at exchanges. Clients then buy space to house their trading algorithms at BKS thereby resulting in lower latency i.e. Minimising the speed of where they reside to instructions being sent to the exchange.

It's not aimed at the large institutional traders but perhaps the smaller and medium sized businesses.

BKS have expanded their geographies and product offerings. It also has recurring revenues as it offers a subscription service.

I would appreciate your, and others, views on BKS.

Thanks

runthejoules

Morning!

Seeing Machines (LON:SEE) 's driver monitoring systems have covered 1million km, not material but for the AI data it's all good stuff, dear. I hold.

Richoux (LON:RIC) MIGHT be selling a London lease for £1.3odd million, are definitely doing a keep the lights on placing at 6p. Troubles in the dining sector are not over.

IQE (LON:IQE) HY results - on the face of it disastrous with profits halved yoy but read further, and it's not AS bad - they now have 90% of the VCSEL market, 'Currency headwind [of 10%], accelerated customer qualification programs and Newport Foundry pre-production costs results in drag on H1 2018 profits of approximately £3.5m. Excluding these factors, Profit Before Tax would have increased by 14.4% to £11.1m (H1 2017: £9.7m).. But perhaps I'm looking on the bright side because I hold. Paul will be tutting and very glad he sold near peaks... your views would be appreciated! Cheers joules

MrContrarian

My morning smallcap tweet: Toople topple turning point?

Toople (LON:TOOP), Richoux (LON:RIC), Johnston Press (LON:JPR), Integumen (LON:SKIN)

Toople (TOOP) A 'major' new wholesale telephony and superfast broadband contract with a well-known wholesaler worth at least £3.5m over 3 years. That should reverse a little of the 98% loss since listing 2 years ago.
Richoux Group (RIC) Tiny restaurant chain suffering: "continued pressure on trading during the period, with further impact from temporary restaurant closures due to conversion or refurbishment." Guides rev flat YoY. Fundraise at 6p, a 14% discount.
Johnston Press (JPR) The i paper is the only bright spot in H1 with adjusted EBITDA from that paper £6m up 61%. Adj ad rev(cont) down 15.0%. Group rev down 10%, EPS 3.6 (-5.4). Still trying to refinance or restructure the huge debt but no decisions have been made nor agreements reached.
Integumen (SKIN) H1 rev £149k (£124k). Pretax -£1.5m (-£1.4m). Sales and marketing efforts of Visible Youth failed to meet expectations. TSPro sales forecasts [eh?] did not meet the expectations of the Board. Rejected offer from director for the skin care businesses. He has resigned to avoid the conflict of interest. Talks on other potential offers for one or more of the skin care assets.

danielbird193

Also saw today's RNS announcing the intention of Aston Martin (luxury car maker) to float, as well as reporting 8% YoY increase in revenues and 14% increase in EBITDA. Sounds like an interesting growth opportunity, would be interested in your thoughts Graham.

LeoInvestorUK

Here's my take on Beeks Financial Cloud (LON:BKS) . Obviously this is somewhat rushed!

Some truly impressive growth figures - +41% revenue and +90% gross profit with a strong outlook. Margins are high, have risen and should rise further e.g. as finance costs are eliminated.

I'm not happy with the prominence given to EBITDA given the heavy depreciation of IT Hardware [1] and am ignoring those figures. I'm fine with the underlying figures which show EPS of 2.27p (2.20p diluted), a historic PE of 35.

I don't have access to brokers' forecasts, but Stockopedia is currently showing a 12 month rolling PE of 23.3 which implies 66% profit growth for next year. That seems achievable.

The concentration of customers is higher than I would like and continues to worsen. If they set their margins too high it would be economic for top customers to set up hosting / connectivity themselves. One of the key economic moats and hidden value of Beek's is the time to set up such arrangements, but it can be done.

Since there is very little valuation support from net assets and the latent value of the connectivity arrangements with exchanges are key.

Cashflow looks poor mostly due to a decrease in payables. Probably they were on extended payment terms with some suppliers prior to raising cash at the float. Hopefully this is a one cash-flow hit that will also facilitate better purchase pricing and still higher margins in future. Receivables have increased, but this is mostly in proportion to turnover.

I suspect the small dividend has been declared mostly for benefit of the founder - and he certainly deserves it!

No mention of China - I thought they were expanding there?

Focus will now start shifting to FY2010 where, at current growth rates, Beeks will start to look cheap for a growth share on an P/E basis.

I hold and have a small buy order in.

---

[1] Although hardware innovation / cost reductions and therefore depreciation had slowed over the last few years, arguably due to a lack of competition, there are strong indications that this has changed in the last 6 months with the release of new AMD server chips. I don't think the long tail in the value you often see with equipment exists (any longer) in IT as it is cheaper to replace with new energy efficient designs than to run old hardware.

CliveBorg

Re: IQE (LON:IQE): Even 14.4% doesn't sound that impressive. Are IQE going to end up perpetually getting squeezed on their margins, to the extent that they never deliver really decent growth? I would be interested in the bull view, as I know that IQE (LON:IQE) are not a one trick pony and that Apple and phones are by no means their only customer and potential application area.

Seeing Machines (LON:SEE) - Not a proper RNS, but interesting to see again the focus on the value of data. Unlike intellectual property created by workers of the company, this data is created by its customers. It is similar to the argument I was making the other day about Wey Education (LON:WEY) having (or at least, should have) data on every question asked by every student as well as the answers given by the teacher and of course ownership of the delivered lesson.

Unless traded, these types of asset are never likely to appear on a balance sheet, but they have real value to shareholders.

Brick Counter 8

Good morning Graham, this is another request for Beeks Financial Cloud (LON:BKS) if you would be so kind.

DJCP

GYM (LON:GYM) if you would please Graham. One that's been covered before on the SCVR.

As a taster (as I'm still going through statement):
Revenue of £58.3 million, an increase of 36.1%
Group Adjusted EBITDA of £17.5 million, an increase of 28.0%
Adjusted profit before tax of £7.0 million, up 8.4%
Interim dividend of 0.35 pence per share declared, up 16.7%
Group Operating Cash Flow £16,421m (+26.5%)
Total number of gyms 134 (+41.1%)

But:
Statutory profit before tax decreased by 14.4% to £5.1 million (H1 2017: £5.9 million), due to increase in exceptional costs to £1.0 million
(Even adding back the exceptionals would have only put the profit (£6.1m) slightly up on the prior HY.)

Another But:
Proforma members (including easyGym sites) of 720,000 (June 2017: 508,000) +41.7%
(Quite a rise in members, although don't like the 'Proforma' part until I find out what it means in this context - Average members have increased 34.1%)

Positive forward statement, although seems to be alluding to the dreaded 'H2 will be better' speak.

I've held for nearly a year, from 209p, so the current 318p is a reasonable success, and GYM (LON:GYM) is now my 3rd largest holding.

IQE (LON:IQE) - Cash down £5m to £40m. No growth in photonics due to Apple supply chain overstuffing. H2 weighting.

On the plus side: Potential currency upside in FY / next year, technology adopted by Android as well as Apple, restates 40-60% CAGR over 3-5 years in photonics. PE of 22 OK if it grows and ever starts making cash.

I have a small speculative holding. I suspect I should be selling and buying back in a couple of months.

Small Cap Value Report (Wed 29 August 2018) - GYM, BKS, IQE, JPR, RIC

GYM (LON:GYM)

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Graham Neary

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