Small Cap Value Report (Wed 4 September 2019) - SOM, AFX, QUIZ, CAMB, FDEV

4th Sep '19 by Graham Neary

53 comments 10381 reads

Good morning,

Today we have news from:

Somero Enterprises Inc (LON:SOM) - interim results
Alpha FX (LON:AFX) - interim report
QUIZ (LON:QUIZ) - AGM trading update
Cambria Automobiles (LON:CAMB) - trading update
Frontier Developments (LON:FDEV)

Somero Enterprises Inc (LON:SOM)

Share price: 232p (-17%)
No. of shares: 56 million
Market cap: £131 million

These are difficult times for investors, and it's unfortunate to see another private investor favourite which has started to struggle.

Somero makes concrete-levelling equipement and sells it worldwide. We already knew that it had a disappointing H1, after a major profit warning in June.

Unfortunately, the negative trends in trading appears to have spread internationally.

In June, Somero reduced its full-year revenue forecast to $87 million.

Today, it reduces this forecast further, to $83 million - $87 million. The broker Finncap is using $84 million as its central estimate. Revenues last year were $94 million.

What's gone wrong?

The profit warning in June was based on poor weather in the US, Somero's home market.

We now find that contracts have slipped in Europe and the Middle, and "wider macro pressures" internationally are mentioned:

Whilst towards the end of the period, trading in Europe and the Middle East fell below the prior year in part due to the timing of certain contracts, we remain confident to deliver improved H2 2019 results, broadly in line with guidance for the full year, notwithstanding the wider macro pressures in Europe, particularly Germany, the Middle East and Australia. Pleasingly, a number of our other markets delivered growth, alongside growth from new products.

In H1, European revenues are down by 26% to $5.5 million.

In China, "newly imposed tariffs and competition in the low-end productivity segment of the market are resulting in margin pressure."

I have repeatedly expressed scepticism that Chinese builders would be willing to pay a US company for technology of this sort. Somero's reference to competition - i.e. Chinese companies making very similar machines - helps to support this view.

In the Middle East, sales collapsed by $1 million to $0.2 million. The timing of projects is blamed -…

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FREng

4th Sep '19

A macro question.

Generally, if the pound falls against the dollar, then the FTSE 100 rises because dollar earnings become worth more. Today the pound rose and so did the FTSE 100.

Is this likely to be because the market traders (or their algorithms) assume from last night's vote that the pound is actually likely to fall in the longer term but that interest rates are more likely to rise in the short term?

Or am I just over analysing a random walk?

jombaston

There are many disrupters and competitors in financial services but there are also some big and inefficient legacy companies (banks) with enough business to lose to sustain lots of up and coming businesses!

andyfwwrench

£SOM is why everyone needs a global macro view in their process. My opinion is that it is likely to go down quite some more, though I'm not confident enough to short it, and besides it has net cash so it will survive. As a cyclical it is clearly way to early to buy as it looks cheap - the time to dive in is when it looks expensive. With a global slow down underway capital expenditure on plant is one of the first things to be deferred and then cut. Revenue is very likely to drop, but with foresight it is difficult to tell by how much.

Old ManFit

I follow a few FX traders on Telegram and Trading View, mainly to try and get a better understanding of the FX markets - last few days most have recommended staying away from GBP trades as the currency is just too volatile and difficult to predict using fundamentals and Technical analysis.

Last night whilst the vote (in Parliament at 2200) was on I had the GBP/USD up (out of interest) - spread on GBP jumped to 20bps (normally 0.5bps) for around 15mins, then trading was very light. I think ultimately, most traders recognise they can not predict the value of the GBP until the Brexit issue is resolved and some semblance of predictability returns.

So seeing GBP up and FTSE 100 up wasn't a surprise, nothing makes sense at the moment, trusted rules cannot be relied on.

jonesj

With agricultural buildings, it's not uncommon to do the steel frame, the roof and then the concrete slab afterwards. Having a level floor is often not critical here.

However, most of the photos for Somero, Ligchine and other concrete screeding machines show the slab being done before the roof.

Rusty2

I thought it was because a "no deal brexit" is now less likely and brexit maybe postponed or not happen. But it is difficult to call. Why will interest rates rise?

nicobos

Staffline (LON:STAF) release an afternoon RNS that HR Net have swept up some more shares and are now just below mandatory takeover level.

As a Corporate acquirer that has been acquisitive in the past, will be interesting to watch their next move.

GBP weakness has seen a fair few opportunist bids recently - will Staffline (LON:STAF) be next ?

I have a position and either way, will provide great support for the stock and underpin value whilst a recovery hopefully starts to take hold and means they can’t buy the business too cheaply.

elviron

On the contrary, in my opinion, the volatility can create some excellent trading opportunities in FX.

Velse

5th Sep '19

Just to offer my opinion/experience on this - it isn't an appealing area as such. Yes, many want to work in games, but the industry burns people out and the pay is a good deal less than one can earn in other areas of technology, and the hours are longer, etc. We work in games 'for the love' of it. Hiring at the moment is quite difficult, not least due to Brexit; there are not enough Brits capable of doing the work. I have worked as a game developer for nearly fifteen years.

Gromley

Whoops - wrong thread.

MarkLDN

9th Sep '19

My email to Somero:
"There is a lot of confusion and conflicting information on the forums about why bad weather would cause such a dramatic loss in revenue, and furthermore, scepticism about how the revenue drop in Europe/Middle East and lacklustre performance in China are unrelated. Is it possible to give some more reassurance here about the causes?"

Their response:
"Thanks for getting in touch. There is a retail investor presentation from Somero due to take place at 12:30 UK time this Thursday, 12 September. Would you perhaps like the dial in details so you can listen in to management’s presentation and the Q&A, as I’m sure they’ll cover off regional performance in this?"

Dial-in details:
UK (Local): +44 20 3655 9505
Guest Dial-in Code: 1390231#

JollyBiologist

12th Sep '19

Ha, that's exactly word for word the response I had when I sent in a similar e-mail. I'm guessing they're getting a lot of concerned messages from PIs and needed to have a standardised response. The presentation should be interesting...

20th Sep '19

Anyone watch it? I missed it.

Zipmanpeter

Yes I watched it. My notes on H1 2019 results (from memory, original lost and no time for fullfact check)

*CEO very confident about US mkt (>2/3rds) sales - H2 and next H1 recovery expected based on extensive direct customer contacts ie about their orders in hand and their confidence (but no seen such reluctance to buy given the above - blames Trump-led uncertainty)

* Other markets less confident - unpredictable/lumpy/depressed/cheap alternatives inc labour. Only really +ve about (tiny) India ; China likely to remain small (Only western co setting up factories will buy quality AND American)

* Skyscreed (for highrise) sold its first machine and very optimistic for the mid term on this

* Integration of LineDragon gone well and first new machine out in H2; no sign or plans for other acquisitions - will stick to its knitting

* CAPEX will be high for another 6months as i) factory extension and ii) training base expansion complete then back down to $1Mn pa

* Vs last recession: no debt/$15Mn cash pile vs $20Mn debt' 14 vs 3 product lines; much more geographical spread (I query this - US/UK are still nearly 80%); over 70% cost base claimed variable inc staff

* Divi policy secure at 50% of adjusted EPS and will distribute excess if cash >$15Mn; still generating some cash

* I saw enough to consider making a first opportunistic buy if price drops again, given it is a high quality business, has niche market leadership (laser screed) and LT structural drivers (floor quality and need to replace manual work with machines (in West)

doug2500

If it's the one piworld posted, I did and thought it was very good.

Can't help thinking at £2 they're really cheap now, but am reminding myself that investor presentations are at least partly sales pitches.

Here's the one I watched:
https://www.stockopedia.com/content/somero-enterprises-som-h1-19-results-presentation-514556/

I notice Somero Enterprises Inc (LON:SOM) is down another 5% today. That seems a total missmatch from what I saw and heard on the presentation.

It's not easy being brave when others are fearful, especially when it's already a fairly large holding. I decided it was too cheap to sell after the profit warning, but buying more is another thing entirely. It will be interesting to look back and see how this plays out in a couple of years time.

24th Sep '19

Does anyone know why Somero Enterprises Inc (LON:SOM) doesn't add a financing arm to its business? Curious to know whether there just isn't any demand for this or if they are just too conservatively run to do something like this. I would imagine if the latter then they would be great at doing it profitably!

shanklin100

In a cyclical downturn, I bet the last thing Somero Enterprises Inc (LON:SOM) would want is a load of financially questionable companies owing them lots of money. IMHO sounds like an invitation for the creation of B/S wrecking bad debt at a time when it would be difficult to achieve new sales.

Possibly too simplistic a way of looking at it—to write off the whole idea of adding financing assuming all their clients are poor creditors. It can be and is a profitable business that can make it through cycles if managed conservatively.

Secondly, just reading through the Annual report. It seems stock-based compensation is higher than cash bonuses. Which they remove from Adjusted EBITDA. Would like to look into this as there is no reason to reverse stock-based compensation out of EBITDA. It is remuneration clear as day. Not a fan of the growing share count. Will be voting against it at the next AGM. Just pay cash for good performance.

Small Cap Value Report (Wed 4 September 2019) - SOM, AFX, QUIZ, CAMB, FDEV

Somero Enterprises Inc (LON:SOM)

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Graham Neary

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