Small Cap Value Report (Weds 13 Jan 2021) - QTX, CHH, CARR, MNZS, ASC, SOS, WEY

13th Jan '21 by Paul Scott

125 comments 15460 reads

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

Timings - I have to be finished by c.1pm today. Today's report is now finished.

Agenda -

I wrote the first 3 sections last night, to clear up some of the backlog.

Quartix Holdings (LON:QTX) - Trading statement for 2020

Churchill China (LON:CHH) - Full year (2020) trading update

Carr's (LON:CARR) - Trading update (19 weeks to 9 Jan 2021)

John Menzies (LON:MNZS) - Trading update for 2020

Asos (LON:ASC) - Trading update - I've reviewed this because of read-across for BOO (I hold) update due out tomorrow.

Sosandar (LON:SOS) - Q3 (Oct-Dec 2020) trading update

Wey Education (LON:WEY) - Trading update for first 4 months (Sept-Dec 2020) of FY 08/2021

Quartix Holdings (LON:QTX)

403p - mkt cap £193m

Trading Statement

Quartix Holdings plc, a leading supplier of subscription-based vehicle tracking systems, software and services, is pleased to provide an update on trading for the year ended 31 December 2020 (the "Period").

The Board is pleased to report that it expects revenue, profit and free cash flow to be in line with current market forecasts1

[1] The Board believes that consensus market expectations for 2020, prior to this announcement, were as follows: revenue: £25.9m; adjusted EBITDA £7.9m; free cash flow: £5.3m.

Actual results (pre audit) are very similar, at £0.1m below expectations for revenue & adj EBITDA, close enough to be a rounding error, so that’s fine.

Many thanks for the footnote, providing us with market expectations figures, but it would have been useful to also provide the EPS result in this RNS.

I’ve got a consensus forecast of 12.3p EPS for 2020, whereas Finncap’s latest note says 13.1p adj EPS for 2020. Using the latter, that gives a PER of 30.8 times FY 12/2020 earnings - quite pricey, given the lack of profit growth in recent years - this share is on a growth company rating, but isn’t really growing overall (decline in insurance business offsetting growth in fleet business) as you can see from the graphs below.

Dhr0GOTA_9opO2342JtOQsZVzD1twXEtCksM1cPrdTh4qCsuMb9g6E6vuh6mhGKbtVAtkv4tn9BiYfvNR8ComBxrUnXyKBHifpqqagy6zY_dPf3s-TJrKgqnmDHSCu_dcxbouySE

Quartix repaid the furlough monies to the Govt, and is up-to-date with VAT. Good stuff, that’s the right thing…

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fwyburd

13th Jan '21

Excellent reports for you this week Paul. I'm amazed how much ground you manage to cover in a day (and night) with your usual thoroughness and humour along with the occasional macro musings.

Thank you (and it's only Wednesday). Here's looking forward to what Boohoo (LON:BOO) has to say tomorrow. It looks like Lansdowne reduced their short yesterday so I'm hoping that's a good sign as I hold a shed load.

cheers

Francis

Alistair Lindsay

The sponsored WHI note on Wey Education (LON:WEY) says about the VAT issue "Price elasticity appears high, so we do not anticipate any significant issues around this". I think they mean that price elasticity appears "low" (i.e. that there would be a limited demand response to an increase in price). They don't refer to any evidence. And is that right? If customers would pay 20% more with limited loss of volume, WEY would presumably have charged 20% more even when it thought VAT was not payable. I suspect VAT has just eaten a significant chunk of the gross margin (as the biggest cost must be teachers who are either employed or, if providing services, under the VAT threshold).

Gromley

I think the VAT situation re Wey Education (LON:WEY) is not as complex as it seems.

If you refer to HMRC guidance on Education and VAT

Section 4

4.3 A non-profit making organisation
An organisation is likely to be an eligible body [to be exempt from VAT], where it’s a charity, professional body or company:
that cannot and does not distribute any profit it makes
with any profit that might arise from its supplies of education, research or vocational training is used solely for the continuation or improvement of such supplies

So long as Interhigh was ploughing all profits back into enhancing and expanding its offering, then its services were not subject to VAT.

However, if they are now making sufficient profit that Wey want to use in the rest of the group, or pay in dividends to shareholders, then they have to change the tax status.

This is a sign of the maturity of the business and must be a planned move not some shock revelation.

As such they will have considered what they will do with their pricing - whether they will pass on the impact to the customers or reduce their prices. For a business with little marginal incremental cost per student I would have thought it more likely they would take a margin hit, but I don't know.

I'm not a tax expert, but I don't see how this could create any historic tax liability. At the time of past sales, their services were exempt from tax and besides providers of goods and services do not pay VAT , they collect it from the customer.

Wey Education (LON:WEY) is another company of which I have been short in the past as it was significantly over-hyped on hope and expectation.

Some of that hope is seemingly becoming reality so I might have another look, although the valuation looks overly full to me even now it appears to have a profitable business.

No position currently.

MiserableJacktPotato

Maybe this is a Buffet "be greedy when others are fearful" moment. But Open Orphan (LON:ORPH) , PE(f) of less than 6 and a PEG of 0,1 according to the Stockreport, based on broker forecasts, and net cash around 5% of market cap just looks too good to be true!

If that is the case, how has the market got this one so wrong? One assume there must be a massive amount of execution risk or just straight up failure to meet expectations in the past that's carrying forward?

I might just throw £1k at this to keep an eye on it in the "punts" portfolio, feels like I should back up the truck though!

rmillaree

Wey Education (LON:WEY)
I'm not a tax expert, but I don't see how this could create any historic tax liability. At the time of past sales, their services were exempt from tax and besides providers of goods and services do not pay VAT , they collect it from the customer.

Excellent spot gromley - Notice 701/30 is a bit of a quagmire for anyone at the best of times.

The bit you highlighted seems to tally exactly with the wording of the news today , i originally though wth (heck) has distributable profits got to do with vat treatment - there you go.

Note if we carry onto section 4.5 we get the following "warning"

4.5 The meaning of the term ‘does not distribute any profit’

Distributing profits does not just include paying a dividend to shareholders. It also includes making a payment or donation to another body, even where the recipient is a charity. Management charges or other fees paid to an associated company or individual may also be viewed as a distribution of profits.

It will be necessary to provide reasonable evidence that the profits cannot be distributed and that if the organisation’s activities do generate a profit that they will be recycled back into its education or training activities. For example, the Memorandum and Articles of Association, or some other constitutional document, containing a suitable reference or clause, may be acceptable as evidence of how profits are to be treated, although it’s what takes place in practice which will determine whether the exemption applies.

If we then jump straight to page 22 of the last set of accounts filed (always work backwards if you are looking for hidden info) the company confirmed that they have paid management fees to Wey education. Note i should probably highlight the use of the term MAY here so that doesn't mean there is necessarily any issue. I would suspect that not many shareholders would know that this entity was previously being run on a non profit making basis!

AnonymousUser465323

Open Orphan (LON:ORPH) I agree with you IGotPoesJacket, it does look too good to be true,

The potential having watched most of the CEO presentations is what swung it for me, as he brought the companies together, he slashed costs by shedding the top tier of executives, identified the opportunities, is divesting non-core assets.

Cathal Friel the CEO is the largest shareholder and it is in his interests to make as much as he can, not only for him but fellow shareholders

I have tried to find something not to like, because I really believe if it is too good to be true it usually is, but this (at least for me) is a gem of an opportunity, as always I stand to be corrected and listen to those that know more than me

I like his honesty, earning £150K per year, looking to move to London to be closer to the business and to reduce the travel from Ireland, to me this sounds like some committed CEO and he is also locked in for another couple of years.

Other things I really like which has been driven by Covid is for the last 20 years, massive investment has been made in other medical areas including gene therapy but little with Vaccines, which is now changing and plays right into Open Orphan (LON:ORPH) I also like the fact they have the worlds largest genome database and are talking to the main players regarding wearable tech and how they can monetise this, we have all seen fitness trackers on smart devices

Interview with Cathal here for those that are interested and any feedback would be welcomed

Good luck if you do, and it goes without saying DYOR

Great further find rmillaree.

I did start to respond on the two possible outcomes this might imply - but it was going to be too long and convoluted.

I'll just leave it that there is a potentially materially significant uncertainty over the impact until the company clarifies this.

My gut feel is that it is benign , but I would not want to stake any money on it at this time.

john2

That was a very good spot, Gromley. I can't agree, however, that the result is entirely benign - either they will have to increase the price to their clients or they will have to take a hit to their profit margin. Neither is a good long-term result, surely? I have now sold, but I will continue to monitor their results with interest.

Stocks123456

Re Wey Education (LON:WEY) , if their intention was not to make profit, why were they listed? Sounds very strange. Another company in the same online learning space, Malvern International (LON:MLVN) , is on a much lower valuation and is beginning to move in the right direction.

Paul Scott

Hi Howard,

To be fair, I was only asking 3 questions about the VAT issue for Wey Education (LON:WEY) - I don't know the answers, so am not making a judgement on the company, we just need clarification from the company to those questions.

Regards, Paul.

Hi Gerryb,

Sorry I didn't get round to writing about Renold (LON:RNO) (I hold) but had a quick look at the update, and it seemed alright. I'll try to do something in tomorrow's report.

Best wishes, Paul.

Ben1,

I'm not sure about that. Probably better to put up a link to anything I've said previously, rather than putting words into my mouth, which may not be fully accurate.

Thanks, Paul.

Boon

If Sosandar (LON:SOS) has done badly over x-mas, I can't imagine how Quiz (LON:QUIZ) has done. Even more partywear, much worse eCommerce. And running on fumes in terms of cash and probably can't spend millions on digital marketing to drum up sales.

Carnival declined to give any visibility when they will start cruising again.

Royal Caribbean have pushed back first sailings to April 30.

If the two biggest cruise companies can't find a way to even have one cruise, before May, amongst all the ports/countries in the world at their disposal, that says something about viability of cruises. IMO we're looking at the first cruises only in H2 this year.

I would voice a counter-point to your argument that private schools have low margins. That is true, but the private schools you're talking about are bricks & mortar schools.

Just like Online Retail is eating the lunch of Bricks & Mortar Retail, would the same logic not apply to Online Private Schools vs Offline Private Schools?

After all you strip out the physical costs - and then there's operational gearing of one teacher able to teach larger classes, as well as potentially cheaper teachers as you can source across the UK or even across the world.

However, I am also sceptical of the prospects of Wey Education (LON:WEY) as I think their market is too niche. Their strength is not better academics, better grades, Oxbridge entry, etc. They are often the last resort for parents who would prefer to send their kids to normal state/private schools, but have to send to an online school due to their child not being able to attend a normal school. The market for this is niche, and parents are stretching their budgets to pay for this - they're not the typical families that can afford private schooling.

I was a little surprised by the super positive performance by Touchstar (LON:TST)

Their last update / results were a bit worrying with a low order book, and warnings that the lead time from enquiry/prospect to order and delivery was long.

Clearly it seems there's been lots of demand for their products in the last 6 months. Maybe their products are really good - if companies are willing to shell out for new multi-month / multi-year license commitments, even during a time like this.

Just had a skim through of the Nightcap (LON:NGHT) admissions document.

- Lots of related party transactions

- CEO with over 30% of the overall shares at admission? For creating a shell company and coming up with the idea of acquiring London Cocktail Club?

- Very low free float at listing. Concert Parties holding 74%. Will make it difficult to buy/sell without a wide spread.

- £5.7m valuation for 10 bars...!

- No reduction in rents negotiated prior to acquisition. 3 sites have agreed to waive/reduce accumulated rent up until now. Another 3 sites negotiating waiving/reduction. 4 sites not playing ball at all.

- 9 million options granted to CEO and CFO already. Up to another 15m share options for management performance to be granted. That's a lot of options.

- Positive is that existing shareholders of London Cocktail Club getting their consideration entirely in shares of Nightcap, so they need it to work as well. But maybe LCC was worth almost nothing so shares in a new IPO is still better than nothing...

Gerryb

Thank you Paul for responding. Your previous reports on Renold have been very helpful and informative.

Dojosan

£ORPH - quite possibly the broker's forecasts could be out of date. As a holder only from 23p onwards (I was converted late after trading it at 13-14p), the news flow is unbelievable - new contracts, renewed contracts but once again as Phil Dunphy stated - existing shareholders are itching for the release of the news on the "wearables" incorporating Open Orphan (LON:ORPH) proprietary database , the disposal or Nasdaq listing of Immutex , a subsidiary ; significant re-rating due to increased facilities to carry out more challenge trials (= more venues = more rev) ; and John Eustace, below alluded to - peptide based univeral flu vaccine candidate in their portfolio in phase 3 (i believe) trials. It's no secret as well, CF being an entrepreneur, he would be very open to a big boy buying the company out in 12-18 months time. GL

14th Jan '21

Open Orphan (LON:ORPH) nice one maxistaxis nothing I can add to this, you clearly know all the known potential of this company.

I got in originally at £0.14 added on the way building my position and my average in one account is £0.20 now, but got caught in the other with a top up of £0.32, but I am certain it will well exceed that, just a timing issue with me I think.

I am looking forward to an update from their attendance at the J.P. Morgan Healthcare Conference this week.

Good luck

Cheers

Steve

Small Cap Value Report (Weds 13 Jan 2021) - QTX, CHH, CARR, MNZS, ASC, SOS, WEY

Quartix Holdings (LON:QTX)

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Paul Scott

125 comments

4.5 The meaning of the term ‘does not distribute any profit’

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