Small Cap Value Report (Wed 30 Mar 2022) - BMY, SHEP, KETL

Good morning! It's Paul and Jack here, with Wednesday's SCVR.

Agenda -

Jack's section:

Bloomsbury Publishing (LON:BMY) - another material profit upgrade here, with frontlist consumer titles performing well in February. BDR remains small but has beaten its 2016 targets and improves the group’s growth potential in future. Probably worth spending more time on.

Shepherd Neame (OFEX:SHEP) - the UK’s oldest brewer is listed on Aquis and I’m not convinced of the growth prospects, but there is some useful readacross for other businesses with exposure to London footfall. As we move away from lockdowns inflation becomes more of a concern, but at least these businesses can now trade normally again.

Strix (LON:KETL) - mixed results. Adjusted profit is up, but margins are down due to cost headwinds. The company is pushing through price increases, so we will see how Strix fares in an inflationary environment. The FY25 target of doubling revenue remains intact and the valuation is becoming more attractive but, given the shorter term risks and challenges, I’m staying neutral for now.

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Explanatory notes -

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Jack's section

Bloomsbury Publishing (LON:BMY)

Share price: 392p (+7.4%)

Shares in issue: 81,608,672

Market cap: £319.9m

Trading update for the 12 months ending 28 February 2022

Revenue is expected to be comfortably ahead and profit materially ahead of upgraded market expectations for the year ended 28 February 2022. This follows a similar update made on the 26 January, so two ‘materially ahead’ updates in quick succession.

The board considers current consensus market expectations for the year to be revenue of £212.5m and profit before taxation and highlighted items of £22.3m.

In February Bloomsbury delivered ‘exceptional’ sales, while print supply chain challenges have been successfully mitigated.

Consumer

This seems to be the main driver of the upgrade today, thanks in part to Sarah J. Maas' new novel, Crescent City: A House of Sky and Breath. Other frontlist bestsellers included What I Wish People Knew About Dementia by Wendy Mitchell, Violeta by Isabel Allende and The Leviathan by Rosie Andrews.

Strong backlist sales continued, in particular of Harry Potter, Sarah J. Maas and the ‘TikTok sensation’, Madeline Miller's Song of Achilles.

Non-Consumer

Bloomsbury Digital Resources division (‘BDR’) was created six years ago, with the intention of building a high margin, high quality revenue digital academic content and platform business. This has been a success, and Bloomsbury has beaten the target announced in May 2016 of generating £15m of sales and £5m of profit by the year ending 28 February 2022.

Board appointment

John Bason will join as a non-exec on 1 April 2022 (currently the finance director of Associated British Foods and chairman of the charity FareShare) and will help replace Steven Hall.

Conclusion

Well done to the company and its shareholders. Bloomsbury is trading very strongly at the moment, with both divisions doing well. What it has managed to achieve with BDR is particularly interesting in terms of future prospects.

There is still some dependence on writers creating books that sell well, which somewhat limits revenue visibility. But the group does have a strong backlist, which partially mitigates this.

Assuming a 10% increase in PBT to £24.53m and applying last year’s 21% tax charge to that figure suggests something like net income of £19.4m and earnings per share (before ‘highlighted items’) of 23.7p, which would put the shares on a current year PER of about 16.5x. That’s a stab in the dark from me, perhaps the numbers could be higher? It depends on how outdated the market consensus is.

It’s worth spending more time on Bloomsbury I feel, but I’d want to know whether the current rate of growth is sustainable. There could well have been a boost in reading levels over the past couple of lockdown-impacted years, for example. And, while the BDR growth is impressive, it is still a smaller part of the enterprise.

Still, great results - particularly so soon after the January statement.

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Shepherd Neame (OFEX:SHEP)

Share price: 835p (-3.19%)

Shares in issue: 14,857,500

Market cap:

Interim results for the 26 weeks to 25 December 2021

This is Britain’s oldest brewer, starting out in 1698 and today owning and operating 302 pubs in Kent and the South East. It’s listed on the Aquis exchange, which might reduce liquidity and rule it out for some, so I won’t spend much time on it, but I’m curious to see if there’s any readacross for others in the sector.

The group says revenue has recovered to the same level as the first half of financial year 2020, with £78.7m of sales (up 54.5% on H1 2021’s restated £50.9m).

Underlying EBITDA rose substantially to £11.3m (H1 2021 restated: £3.4m) and statutory profit before tax was £5.4m (H1 2021 restated: loss of (£7.2m)). Underlying basic earnings per share was 15.9p, up from a loss per share of (28.6p). Shep is also declaring its first interim dividend since October 2019.

Net assets per share rose from £11.40 at 26 June 2021 to £11.76, excluding the revaluation of licensed premises which indicates a surplus over book value of £35.9m, or +13% there. The share price is 835p so they trade at 0.73x tangible book value, which could be of interest to value hunters.

Good cash generation has allowed the group to normalise its debt and leverage. Net debt excluding lease liabilities as at 26 March 2022 was £78.5m, down from £82.4m in December 2021 and £92.5m in December 2020. All remaining VAT liabilities have been paid to HMRC.

Trading

Like for like performance in the period:

• Retail Pubs and Hotels (64 pubs) LfL retail sales were 89% of 2020 but over 100% in restriction free periods. Most central London pubs near normal as back to work footfall increases.
• Tenanted Pubs (232 pubs) LfL income was 94% of 2020, but again traded at or above 2020 levels when restriction free.
• Brewing and Brands total beer volumes +5.7% vs 2020.

LfLs for the 13 weeks to March 2022 further confirm a return to normal, with retail LfLs +110% on the same period in 2020.

Conclusion

I’m not tempted here, as I’m looking for better long-term growth prospects and Shepherd Neame isn’t particularly cheap by pub standards. There are still issues to contend with such as rising inflation. But it’s good to note the recovering figures, particularly in central London, which had been struggling.

Group CEO Jonathon Neame says:

We are looking to the future with cautious optimism and are excited about delivering an uninterrupted Easter and summer for the first time in 3 years."

What a tough time it’s been for pubs and restaurants. As equity investments go, it can be a tough sector, but these areas are important to the health of the wider economy and so it’s heartening to see old names survive and get back on their feet.

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Strix (LON:KETL)

Share price: 230p (-4.17%)

Shares in issue: 206,671,946

Market cap: £475.3m

Preliminary results for the twelve months to 31 December 2021

I’m using FY19 figures as the comparative period.

• Revenue +23.2% to £119.4m,
• Adjusted gross profit +19.7% to £47.4m, reported gross profit +11.2% to £43.8m,
• Adjusted operating profit +7% to £33.7m, reported OP -2.1% to £23.7m,
• Adjusted diluted EPS +5.7% to 14.9p, reported diluted EPS -6.7% to 9.8p,
• Net cash from operations -35.2% to £22.3m,
• Total dividend +8.4% to 8.35p,
• Net debt +94.7% to £51.2m.

The shares are down this morning - that could be due to the increase in net debt, reduced cash generation, and the fact that reported profits remain down on both FY19 and FY20 levels. If the adjustments are sensible though, then the company is making progress.

Strix notes £9.9m of exceptional items, including £4.4m of costs from relocating a factory and £2.7m of M&A related costs.

Revenue growth of more than 20% was driven both organically and via the acquisition of LAICA, which has performed well over the period.

Adjusted EBITDA and gross profit margins are down due increases in commodity prices, freight cost inflation, supply chain and adverse foreign exchange rates though.

Net cash generated from operating activities has also decreased to £22.3m (FY 2020: £31.2m) mainly due to investment in net working capital - a cash outflow of £11.4m compared to prior year (FY 2020: £1.7m outflow).

Net debt (excluding IFRS 16) increased to £51.2m (2020: £37.2m) to fund the LAICA acquisition, continued investment in growth opportunities, and new manufacturing operations in China. Net debt/adjusted EBITDA ratio of 1.3x.

Kettle Control

Growth in revenue of 6.6% to £85.1m. Strix has grown its market leading position further to 56% of the global kettle controls market by value and is continuing to expand both geographically and in the number of specifications using its latest platform ranges.

However, the second half of 2021 had significant headwinds impacting demand for the full year with the total market showing a decline in value but still good growth in volume in line with the market forecast of 3%.

Appliance - growth in revenue of 244.2% to £12.9m.

Water - growth in revenue of 82.3% to £21.4m with the combined contribution of LAICA and HaloPure.

Inflation and price increases

Strix has successfully implemented price increases on some of its legacy products in both kettle controls and water categories and will also be implementing further increases across the wider range with effect from 1 May 2022, which alongside a range of other efficiency measures and foreign exchange rate and commodity hedging arrangements will help to minimise the impact of any cost inflation.

Notwithstanding the positive demand backdrop, there are a number of headwinds which continue to persist including increases in commodity prices, freight cost inflation, supply chain and adverse foreign exchange rates which implies the Group will continue to face a challenging operating environment.

Conclusion

Solid rather than spectacular, and there’s always an element of uncertainty after a substantial acquisition with the related integration risk and adjusted results. Management says it remains on track to deliver medium-term targets (FY25) to double revenues primarily through growth in its water and appliances categories.

The acquisition of LAICA is an important step in increasing the scale of those two, smaller segments. The FY25 goal shows some ambition, but it does not address concerns around inflation and margins. I’m waiting to see how well the company can react to this. It is pushing through price increases and I'm intrigued to see how this affects demand.

I think the picture continues to be mixed here: good growth ambitions and progress on an adjusted basis, but margins and cash generation down, while net debt has gone up. The group also notes a challenging operating environment.

The dividend yield of 3.6% is useful and should provide some kind of floor to the share price. But in order for the shares to meaningfully rerate, I think we need to see more concrete proof that Strix can translate its heritage, intellectual property, and acquisitions into durable long term profit growth. It has spent quite a lot of money recently, so I would expect to see meaningful progress here.