Small Cap Value Report (Weds 21 Oct 2020) - D4T4, ZYT

21st Oct '20 by Paul Scott

126 comments 10383 reads

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

It's a fairly quiet day for news today, here's what has caught my eye so far;

D4t4 Solutions (LON:D4T4) - Trading update & Capital Markets Day (CMD)

Zytronic (LON:ZYT) - Trading update

Timings - I'm hoping to get most of it done by the 1pm official finish time.

I'm having technical problems, and all my work just got erased. So am having to re-write it from scratch.

D4t4 Solutions (LON:D4T4)

Share price: 192p (down 12% at 09:49)
No. shares: 40.2m
Market cap: £77.2m

Trading Update & CMD

I follow this company regularly, having written about it 5 times in the last year. Here is our archive of comments, which you can find for any company under the “Discussions” tab on the StockReport of every company;

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In August the company put out an in line with expectations update.

Today’s update - is for H1 from April- Sept 2020, in FY 03/2021. This also says trading has been in line with expectations, which doesn’t make sense to me, because the figures are poor.

H1 revenues are only £5.09m (down 42% on H1 LY) - this is blamed on delays to new contracts, which have now slipped into H2. This has happened before with D4T4. The good news is that once before, I recall the company had a very weak H1, but it recouped the shortfall with contract signings in H2. Therefore management assurances here do have credibility, because of the good track record of delivery on previous assurances.

Despite gradually moving towards a SaaS model, D4T4 does still seem to heavily rely on large, lumpy contract wins. Recurring revenues are now up to 55%, but that is likely to be flattered in a low revenues half year.

Strong interim net cash position of £12.08m

I’ve checked the last balance sheet, and it’s very good, with plenty of net cash. This business is securely funded, and there are no worries about solvency.

This is confirmed by a healthy Z-score;

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Operational details, and contract wins, etc, are explained in the RNS, I won’t regurgitate all of that here.

Outlook

Ongoing focus on existing and new strategic partnerships continues to grow our…

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kgb1953

21st Oct '20

Arent individual investors? It has often been a signal.

Nebraska1977

Creating a billion pound biz is easy isn’t it. Just need a few young graduates and some very sensible, suit-wearing mentors.

Gromley

The article suggests the Oxford Nanopore [LAMP] tests have 99.1% accuracy for positive specimens and 99.6% for negative specimens. Not quite as good as the 100% accuracy claimed by Novacyt for its PCR tests, but it's pretty close.

That is an interesting clarification pka.

Just to put it into terms perhaps more commonly bandied about recently.

0.4% false positives. IE of 1,000 positives reported 4 of them won't be. From the best guesstimate I can arrive at that is possibly about the same or a little higher than PCR, although as they used PCR to validate I'm not totally sure of the conclusion.

0.9% false negatives - IE of 1,000 negatives reported 9 might actually have the disease. This is probably the more pertinent one for any agency wanting to use the test result to grant access to someone proven to be Covid free. However the article indicates that the positive samples they used were all from symptomatic cases, the asymptomatic or pre-symtomatic ones are the harder to detect, so I would personally be cautious about the effectiveness of the test without further studies.

I have somewhat lost the context in which this was been discussed today, but I was thinking in the context of yesterday's discussion about whether the tests being rolled out at Heathrow bode well for cruises (eg Saga (LON:SAGA) ). In that context it will come down predominantly - Hong Kong and Italy do already and some other countries do not require a test at all at this stage, so perhaps the omens are good? Although probably it is too early to call!

MiserableJacktPotato

From my understanding that's not how false positives work.

It's not for every 1000 positives 4 of them will be false, it's for every 1000 tests, 4 of them will be positive whether or not the person has CV.

If you're doing 100,000 tests per day, that's 400 people misdiagnosed. Given the infection rate is something like 250 per 100,0000 population in some parts of the country, the test is next to useless for mass sampling.

Please, I have this wrong, correct me, I'm not hear to spread disinformation, this is my understanding of the false positive rate.

Who said it was easy?

Loads of IT Companies have "garages" where people are sent to explore ideas and create new products, services and revenue streams. Plenty of them generate significant amounts of revenue. I can relate to one idea that started life as a health check to generate billable revenue, then became a way to automate health checks, then expanded to multiple products, and is now baked into a major cloud provider's backend.

Boo and Sosandar both started in a similar way.

Every billion dollar business started with an idea. It's easy to do nothing, it's even easier to do nothing and sit behind a keyboard and moan at others about how hard things are.

Price is not the only thing to compete on :)

If you look at what SOS are doing, you have to wonder why the likes of M and S, Next etc aren't doing this. The banks have tried to set up their own versions of challenger banks to break out of the static groupthink ways of working :)

You have it the wrong way around. Barbers can charge high wages because there are high earners to pay for the good quality personal service that someone is prepared to pay for.

That requires a high skill, high productivity workforce.

You can't force high wages and expect prosperity. You just end up with a lack of productivity and the removal of work to somewhere cheaper. Eventually the world will run out of places that are cheaper and everyone across the planet will have moved up a level. There is no shortcutting that.

I've not used Google Docs, but yeah, anything that saves each character as you type will save lots of heartache :)

pka

Hi Gromley,

The tests being rolled out at Heathrow are the LAMP-based tests from Oxford Nanopore, which the report I referred to say are over 99% accurate. I now have a big holding in Novacyt, so I wonder whether sales of their PCR-based tests, which are supposed to be 100% accurate, are likely to be adversely affected by competition from Oxford Nanopore. I suspect that they are selling to different types of customers and that there is room for both companies to be extremely successful.

I tried to hedge my bets on these testing technologies a few days ago by buying a holding in the IP Group investment trust, which has about 15% of its portfolio in Oxford Nanopore. However, I sold that holding the next day after reading comments on ADVFN that IP Group had a track record of selling some of its investments shortly before they became enormously successful.

Snowbum

A bit of calm is needed I might suggest! On closer reading of the most recent RNS, it is implied I think...

”The acquisition of IT-IS reinforces Novacyt's strategy, as announced on 17 September 2020, by strengthening the Company's IP portfolio to enhance and secure future value, as well as further expanding its core capabilities, whilst maintaining attractive margins. It also means the Company is well placed to expand its near-patient product offering through the existing IT-IS instruments and also through new product developments.”

“....With the acquisition of IT-IS, the Company is well positioned to address this drive towards rapid, decentralised testing and deliver additional growth opportunities.

Phuntt

Couldn’t agree more David.

It is very easy to dismiss or start to filter out the noise that disagrees with your point of view in a situation like £BOO. I said before I think the question of S has now been answered (at least as far as it should be) - Boohoo (LON:BOO) employed businesses that were paying below the minimum wage - they are sorting it - it’s done. More importantly, their last set of results seemed to indicate that the negative publicity is not affecting their customers or sales in any meaningful way.

The PWC RNS is a fascinating new twist however. While in one way, it could be nothing - just PWC removing themselves from low margin reputation risk business, it also could be the first warning that there are actually serious issues below the surface with Boohoo (LON:BOO) - honestly as observers we just can’t know. We can’t afford to simply dismiss this though either. G is even for a fashion business like BOO, by far the most important of ESG for investors. We have to have confidence our money is being protected.

I’ve decided that I’m willing to roll the dice and have bought in 4 times this week at an average price of £2.52 (this is a big position for me). My guess is this is all just noise - amplified by the short sellers who really have it in for this company. My original valuation of £3.60 went up to £3.85 after the last RNS. However, I will probably start to unwind this position somewhat at £3.30+ - we’ll see at the time. I need confidence in both the company and the market and I’m finding both hard to find right now...

Hi IGPJ,

From my understanding that's not how false positives work.
It's not for every 1000 positives 4 of them will be false, it's for every 1000 tests, 4 of them will be positive whether or not the person has CV.

Yes of course you are correct, I "mis-wrote" (if that is a thing?)

The rest of what I said still stands though (as I was thinking the correct thing even if I wrote the wrong one!)

On the subject though of whether the false positives render the results useless I have to disagree - when cases were very low in the summer it was potentially an issue (there were some wild claims from apparent experts.) Essentially though now with test positivity rates pushing 10% the fact that 0.4% of them might be false is not really a huge problem.

I would agree that as prevalence of illness goes up, the validity of the test increases, both on the false +ve and false -ve. If 10,000 people have it, missing 900 isn't likely to make much difference, especially as the tracing service only contacts about 70% of those who need to isolate if I remember that statistic properly.

Thank you for your considered and polite response, some of my posts come across a bit more antagonistic than I mean them to be at time of writing when I later read them back.

Nick Ray

False positives and false negatives are all part of something call the table of confusion. That's a great name in itself, and there are many derived ratios as you can see.

There is a related plot called the ROC plot which can be used to tune the "cutoff" point of your test to get the best possible classification quality. (Yes - no test is born with a fixed false positive ratio. It's chosen by its designers.)

For stock pickers, it is worth pointing out that Bayesian classification is not just for diseases. You can apply it to stock picking, where the PPV (positive predictive value) is often the important ratio. You don't mind missing good stocks (false negatives) but for the set you do pick you don't want too many false positives.

(I'm rather amused that Wikipedia describe these concepts as part of "machine learning" (and hence AI) when they've been around since before computers were even a "thing". It's just bog-standard statistics really.)

RMundy

22nd Oct '20

Hi OldSchool05

I was notified of your comment/question by Mr Stredder of Mello so I thought I would answer.

Yes you absolutely can change your 3 companies. Each selection must be held for a minimum of 1 month, after which you are able to swap in other companies by visiting your profile page.

Obviously if you have any issues with it, you make an incorrect selection, or we don't have any research on any of your selections then let us know using the webchat feature and we will change the selection for you without needing to wait a month.

Hope that answers your question. Happy Thursday everyone!

Cheers

Rob

mojomogoz

Dear Thornabian. Welcome back!

I'm sorry you don't like my posts as they are too long. At least my inanity tends to be concentrated in one spot and so very easy to ignore. But don't you think it is far better than be inflicted with rat-tat-tat of serial bitesize inanity polluting the stream?

Global 'free markets' don't exist which is why I had in quotes and concepts of Ricardian equivalence across variable jurisdictional governance standards are intellectualised nonsense. GATT was an attempt to make fairer markets and reduce unfair terms of trade so as we would jaw-jaw not war-war and then some countries went further with varying degrees of free trade agreements.

Since industrialisation no country has risen to 'first world' economic breadth and sophistication without gouging those already at that level to some degree (and I'm not claiming the 'first world' played fairly the other way in terms of exploitation). China is the example par excellence...so much so that it has risen to global dominance and displaced a huge amount of western capability. We've been very tardy in recognising the cost. Trump is awful...but he is creation foretold by (the equally as awful at times) Jimmy Goldsmith (look up some of his interviews (https://www.youtube.com/watch?...)on trade, politics, social conditions, etc on GATT. Super foresightful...probably as he was a businessman rather than economist, politician or policy wonk so saw things as they are rather than how he hoped. Farage, Trump, European reactionary right-wing all come from ignoring the obvious message he gave.

You are victim to hackneyed concepts of free markets and perfect competition in the argument you present that 'if people don't like the standards of a company they can shop elsewhere'. Companies/countries don't present their ugly underbellies and consumers don't go looking for them (nor do the press mostly as real journalism doesn't pay). And it remains nonsensical logic to compare a British wage for just about anything to an emerging market one where people really can live on much much less. You haven't even attempted to make faux free-market Ricardian equivalence type adjustments to your argument....extension of your logic means that a country like UK should give up seeking to provide high levels of education and healthcare as a public good and leave it to free market competition with, say, Bangladesh. A reversal of several hundred years of enlightenment progress and the 're-serfing' of the British work force. I assume you don't really mean that....even if that is less positive for Boohoo (LON:BOO) ;)

I put it to you Thornabian that you have an ultra siloed spreadsheet like view of global competition and pricing....

(I would explain more but I think I am over my permitted verbosity quota so I'll leave it there...)

PS In everything the USA is a special case....that may be becoming a more normal case in the coming decade and in that lies a lot of global change and disruption.

IGPJ -> entirely wrong

UK barbers earn better than Dhaka barbers as they have a broad population of ordinary people that have adequate disposable income. Its quite chicken and egg but it certainly isn't the trickle down of high pay uber productives.

Domestically focused activities particularly services in highly developed nations are notoriously unproductive. Japan is example par excellence as their aggregate economy is astoundingly persistently good in productivity and innovation gains. But that comes from their industrial capability open to international competition. Its true everywhere.

Unfortunately some people believe we are all made more competitive by cheapening services labour....the evidence is fairly unequivocal that we create domestic deflationary forces, increase indebtedness to maintain consumption, reduce security and mobility for non uber productives (PS I don't view most professional services as productive...just highly waged).

Of course high wages doesn't force prosperity but that is a ridiculous axis to judge a society on, and ridiculous basis of argument. And it obviously more clear that forcing lower wages on many viewed as less productive does not create prosperity either. There have been many errors made in US, UK, Europe since the 1930s but it is hard to argue that spreading the wealth has not had a role to play in creating massively advanced and prosperous societies with living standards of poor relative to rich unimaginable 150 years ago.

shipoffrogs

Time spent on bulletin boards during working hours must be v detrimental to productivity.

OldSchool05

Thank you very much indeed Rob. Best wishes

Alex Meals

Can you share your list with your picks in these fields? Thank you.

Small Cap Value Report (Weds 21 Oct 2020) - D4T4, ZYT

D4t4 Solutions (LON:D4T4)

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Paul Scott

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