Small Cap Value Report (Weds 22 Feb 2023) - SDG, GHH, AVG, SIS, ANG, SNX, TRT

22nd Feb '23 by Paul Scott

26 comments 7419 reads

Good morning from Paul & Graham.

Today's report is now finished.

I (Paul) recorded an interview with Paul Hill of Vox Markets yesterday afternoon, which should be published later today. So I'll insert a link to it here, when available. We run through the main shares that I've bought using my windfall from the takeover bid at Seraphine (BUMP), all previously mentioned here. It was a good back & forth discussion, with lots of interesting topics, although we ran over time at about 1hr 10m, so people might want to watch it in two sections instead of all the way through!

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Paul’s Section

Sanderson Design (LON:SDG)

119p (pre market open)

Market cap £85m

Major licensing agreement with NEXT

There has already been licensing of designs from SDG to NEXT, but the relationship is now deepened to include SDG’s Clarke & Clarke brand -

… NEXT will hold a master agreement giving exclusive rights to produce a very broad range of Clarke & Clarke homeware products including bedding, towelling, tableware, furniture and lighting.

An initial £2.6m accelerated licensing income will be recognised this year, FY 1/2024. As licensing income is almost pure profit (but can be lumpy), this looks a material deal in the context of existing forecast from Singers being £12.0m PBT for FY 1/2024.…

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TamzinPiworld

22nd Feb '23

Pebble (LON:PEBB) announced they'll publish their FY22 results on 21.3.23 with a FY22 results presentation & Q&A on 23.3.23, 1.30pm. Similar to 4imprint (LON:FOUR) & Altitude (LON:ALT) providing products to the promotional products industry. Facilisgroup with recurring revenues is particularly interesting. Register here where you'll also find details of webinars for:

Made Tech (LON:MTEC) H1 Friday 24.2.23, 12.30pm and

Somero Enterprises (LON:SOM) FY22 Wednesday 15.3.23, 4.30pm (SOM is so unloved PE8.7, Dividend 7.3%!)

Snazzytime

hi Paul

re Sanderson Design (LON:SDG)

I like the business model, of SDG specialising in designs, and its huge
back catalogue as well, then licensing these to retailers &
wholesalers, who can look after the product sourcing, and selling of the
product.

Forgive my ignorance but could you please clarify how the licensing deal works in practice. Do Next source the product from Sanderson? If not, and they have the freedom to source product from elsewhere, then where are the quality checks to ensure there is no brand damage to Sanderson in the event of poor product quality?

Snazzy

mammyoko

Hi Paul - will you take a look at Transense Technologies (LON:TRT) as I know you are a holder, albeit a small position? Their interims today seem to leave them a quite a bit to do in H2 but, on the other hand, they also seem to have a good pipeline of opportunities and management speak states that there has been 'accelerated growth in revenue and profitability since period end'. Harwood have a 5% holding - as they do in many similar companies. They have £23m of tax losses brought forward (the flip side of previous, consistently poor performance!)

I hold

bensummers

Nice update from Angling Direct (ANG) Expansion and nice cash balance buttressing the balance sheet makes it a defensive stock.

jonno

Hi rmillaree,

I like Sanderson Design (LON:SDG) as a company and am an admirer of Lisa Montague. I recently sold my holding in the company for a handsome return being fortunate to have added significantly during the pandemic. This was to fund what I think are more promising opportunities. I may well buy back at some point, should the share price and available funds align.

However I cannot fault the logic of your narrative. As you say the agreement with Next (LON:NXT) would have been sometime in the making, so it is logical to conclude that the outcome will have been included in the recent trading update.

All the best

Paul Scott

Hi mammyoko,

I wasn't planning on looking at Transense Technologies (LON:TRT) (and it's not one I hold, not sure where you got that idea from!)

I recall doing some digging on it a couple of years ago, and came away with the view that it might make a bit of money from a licensing agreement with a finite life, but that the upside looked too limited to make the shares worth bothering with.

So unless something has changed for the better to give more upside, it's probably not worth us spending any time on it.

Sorry about that.

Regards, Paul.

Yes you could be right actually. A note has just come through from Progressive, which implies that a deal like this one with Next was already expected. That would also tie in with Singers not raising forecasts either. But getting the deal signed is clearly a positive, and helps underpin existing forecasts, which I think is the phrase Singers used.

Hi Paul - you held on 23 July 2021 but assume you must have sold since then. You conclusion then when the price was around 60p was as follows:

Is it a good investment? No idea! The market cap is about £15m at the moment, and that doesn’t strike me as excessive. It could do well, if royalty incomes rise (there seems to be a decent opportunity there, in large mining trucks, so still a bit niche). Plus a few other projects. The downside seems to be that new tech in the automotive sector seems to take forever to actually start selling. Look at Seeing Machines (LON:SEE) for example. Although TRT is not interested in mass market products.

Overall, I enjoyed talking to management, and can see there’s some speculative upside here, probably with quite limited downside (in a bull market) due to the reduced overheads, and flow of royalties - although note the Bridgestone deal ends in 2030.

I get the feeling they want to extract some shareholder value here in one way or another, so I think it’s worth holding onto my small, speculative personal holding. But don’t feel motivated to buy any more at this stage, let’s see what happens. There’s interesting potential here though, so I wouldn’t write it off.

The change for the better is possibly the number of SA projects that are in the pipeline - 40 compares to 24 at September 2022. Also the comment in the Financial Highlights

Accelerated growth in revenue and profitability since period end

The thing that has also changed since you held previously is that Transense Technologies (LON:TRT) is now profitable and that sales and PBT are forecast to increase significantly in FY23 and FY24. Plus, of course, that £23m of brought forward tax losses means that PAT = PBT for some time into the future.

The question is whether those forecasts are accurate. Evidence from these interims suggests that they have quite a lot to do to make this year's forecast but they have re-affirmed that they are in line to meet full-year expectations putting them on a prospective p/e of 11.6 according to Stockopedia, falling to just under 8 in 2024 if they maintain current momentum. This seems to be too low to me. January has started well with both Translogik and SAW delivering 'strong revenues' The slowdown in the growth of iTrack royalties from 46% in FY22 to 11% in H1 FY23 is anticipated to return to higher growth in H2 FY23. There is a large - but speculative - pipeline of SAW opportunities which remains loss-making but which Neil Rogers believes it is worth continuing to invest in. They seem to have enough cash - £1.28m at 17th Feb - to not need to raise fresh funds and they are re-iterating their intention to start paying a dividend. There are interesting talks on SAW going on with Parker Meggitt which they expect to conclude in H1 FY24.

To me, this looks as though it has turned a corner into sustainable profitability and that there are sufficient signs of interesting new business - including torque-measurement in electrical vehicles to improve range - to be positive about both FY23 and FY24. I suppose there's always the possibility of Bridgestone or Parker Meggitt acquiring them. To me that's enough to be of sufficient interest and I've bought more today at the lows

Zipmanpeter

Re Sanderson Design (LON:SDG) - I agree with Rmillaree that the licencing news probably just secures the current forecast....but I think a bit of time for the CEO's focus on the US market to mature and world/western economy to improve is all that is needed. She seems to be doing a lot of things right.

On £NEXT being an outright buyer, I also think it unlikely ....but perhaps more possible than you might imagine since NEXT have moved to clever strategy of buying stakes in brands they see working for their customer base whilst leaving the Mgt to run the day to day. But speculation about a takeover is not my investing cup of tea (actually hemlock recently?)

I do, however, like the SDG business and see it as better than a few years ago when the share price was much higher on the same share count - I loved the core sku simplification strategy in businesses like Sanderson Design (LON:SDG) ! I hold and am tempted to add more.

Thanks for the additional info on Transense Technologies (LON:TRT) - which made me look a bit closer, so I've added a quick comment into the summary section above.

Bottom line - if it achieves the challenging forecast from Allenby, then this share could have nice speculative upside. Trouble is, it's difficult to know if those numbers can be achieved or not, so a bit too much guesswork for my liking.

Also the main revenue stream has a finite life to 2030.

Generally it takes so long to commercialise technology like this. Transense has been around for almost the whole 25 years I've been investing, always promising jam tomorrow, but never getting anywhere. Although now it's stopped burning cash, and there are signs of life with the very small new projects, you could get lucky. Look at what happened with Surface Transforms (LON:SCE) - that's another one with ground-breaking tech, that soldiered on for years, and then seemed to hit the jackpot more recently.

rmillaree

Thanks for that update paul - either way the news today has to be taken positively even if already fcatored in.

Thanks, Paul. I agree that there is some risk around the forecast here from Allenby. However, at a market cap of £15m and profitable compared to Surface Transforms (LON:SCE) with a market cap of £95m, I think this is a much higher quality proposition and one with much less risk given the value of the brought forward tax losses per share.

I don't have the benefit/baggage of having seen this be a serial disappointer over an extended period so would be interested to hear if it has had similar false dawns. The presence of £23m of tax losses suggests that it probably hasn't and that that deal with Bridgestone was genuinely transformational (in relation to the profitability of an admittedly miniscule company). I agree that there is some risk around the deal expiring in 2030 but that is some way off and, if the product is still used then by Bridgestone's customers, then a new deal would have to be negotiated. Alternatively, Bridgestone might just buy the company before the expiry of the deal if they continue to gain new customers. I don't know the strength of the IP or the competition but assume there must be plenty.

I'm not getting carried away with this one. I've got a decent chunk bought back in September and added to this morning. Mark Watson-Mitchell is a fan and, as I mentioned Harwood are there. But the other holders look quite a rum bunch, including someone who could be a World Poker Series player!

Forgot to mention to anyone interested, Nigel Rogers who is Executive Chairman at Transense Technologies (LON:TRT) is also Chairman at Solid State (LON:SOLI) and Surgical Innovations (LON:SUN) - the former somewhat more profitable for investors than the latter

More (possibly irrelevant) information about Nigel Rogers - he was CEO of Stadium Group for ten years some years before it was taken over by TT electronics (LON:TTG) at a 44% premium. His Linkedin bio references his turnaround skills at both Stadium and 600 (LON:SIXH) where he was also CEO for three years. He looks to have been less successful there but that, in Buffet's famous words, may well have been a case of 'When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.'

Fegger

I spoke to the CEO at a Mello about whether Next could produce their own fabric and clothes and she said yes they could. (in context of not being constrained by Sanderson capacity)She did talk about either working on designs with them or giving feedback on designs to them but I cant remember if it was voluntary.

Thanks Fegger.

Sounds like Sanderson Design (LON:SDG) will also earn some profit from collaborating / sourcing Next in addition to the licensing income. Would be handy to know the anticipated breakdown.

planetx

Paul

Wasn’t actually referring to your comments but a previous discussion on here where it kept getting mr ruined

William Morris archive I believe is a much better long term proposition than it was a few years ago and I think the big players such as next know this too.

If I owned a company that owned an archive like that I’d be pretty happy to the point I would consider it a Buffet “most”

. And I guess shareholders actually do own that so it’s a very strong hold / buy with limited downside and a long term asset that I think is not fully appreciated .

BnB

I can remember times in the not distant past when patterned wallpaper wasn't popular at all. Classic though the Morris designs undoubtedly are, and of enduring quality and appeal, they do not have the same moat as say Hermes or Louis Vuitton, because the latter can evolve its designs over the years, while the Morris archive is frozen in time and subject to the whim of fashion trends.

Sanderson Design (LON:SDG) shareholders are one successful episode of "Changing Rooms" from ruin!

Okay, that's overstating it, but would you accept my note of caution?

The Boon Fund

1st Apr '23

Also - I note that only with NEXT, are their licensing deals including accelerated licensing fees.

If Sanderson Design (LON:SDG) was already on firm financial footing (as it looks like based on net cash position), why are Next happy to throw in accelerated licensing payments?

Wouldn't this be only used if Sanderson was stressed for cashflow and pressed Next to give them upfront payments (in exchange for say, a discount on the licensing fees)?

I note that they did this accelerated licensing fee thing too in their original/first contract with Morris & Co back in 2021. So maybe this is BAU and I'm worrying too much that this is a red flag?

Small Cap Value Report (Weds 22 Feb 2023) - SDG, GHH, AVG, SIS, ANG, SNX, TRT

Paul’s Section

Sanderson Design (LON:SDG)

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Paul Scott

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