Small Cap Value Report (Weds 28 Dec 2022) - POLX, ROL, ARB, DPEU

28th Dec '22 by Paul Scott

85 comments 7620 reads

Good morning from Paul and Graham.

We will cover whatever small caps news there is this week, and if it's too quiet for news, then I'll look back at one or two interesting companies I've been meaning to report on over the previous weeks/months. So I'm sure we'll come up with something interesting each day. Plus we might get some bombshell profit warnings of course this week, for companies that fail to close those year-end deals, or otherwise don't manage to catch up with their shortfalls against budget.

Your ideas - there's hardly any news today, so Graham came up with the idea that we could invite suggestions from you (in the reader comments) for interesting companies for us to write about this week. We'll do say 4 of them (2 each), based on which get the most reader votes (hit the thumbs up button for the one you like the most), and also please give a (at least) one line pitch for why you think the share looks interesting.

Agenda

Paul's Section:

Polarean Imaging (LON:POLX) - FDA approval is announced, after a disappointment & delay in Oct 2021. I'm told this is very significant news, so the share price could be in for a big increase possibly. EDIT at 08:12 - share price up 43% to 71p, well done to holders!

Rotala (LON:ROL) - a detailed update. The key thing is a major property disposal, which wipes out most of the debt. Remaining debt is asset-backed, HP on buses. So there's now ample liquidity for more acquisitions, or maybe divis/buybacks? Looks an interesting, and undervalued special situation. Worth a look, thumbs up from me. Very small and illiquid though.

Graham's Section:

Argo Blockchain (LON:ARB) (£38m) - the Argo share price has more than doubled this morning thanks to the announcement of a new financing agreement that secures the company’s future in the short-term. It should now have plenty of liquidity to work with and will have a reduced debt load moving forwards. The downside of the agreement is that it’s no longer going to own its major facility in Texas, and will have to pay hosting fees to the new owner from now on. Furthermore, the agreement achieves only a partial deleveraging. Given that prior to this agreement the company repeatedly warned it was going to become cash flow negative…

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JohnDoe2378

28th Dec '22

Hello Colin,

iEnergizer (LON:IBPO)

ME International (LON:MEGP)

MS International (LON:MSI)

Just a few there!

colin1862

Thank you! I have Greencore (LON:GNC) and Speedy Hire (LON:SDY)

Yes a takeover doesn't guarantee a profit unless paired with immaculate timing

I don't like Somero duev to hassle with foreign dividend but a good company nevertheless

Metatron

I am also a bull on music publishing and apart from Hipgnosis there is One Media but my preferred way of playing the theme is Warner Bros.Universal are another alternative.

AstonGirl

This is £RM’s second asset sale, the first being “RM Integris and RM Finance Business and related assets of its principal trading subsidiary, RM Education Limited” for $19.3m in late November

The 2 combined are worth $26.2m, which will chip away at the £61.6m debt but certainly not remove it

It’s a high risk recovery play imo so let’s see

Deegee Eff

It seems to be cobcerning a bond. They have to go through hoops to pay the coupons, and I imdgine this annoucement is about how thwy have achieved this. Suggest you look at or join the Evraz group on Telegram if you you want further comment.

Harry Hindsight

Somero Enterprises (LON:SOM)

Its a quick way of levelling wet concrete screed - fantastic and does a great job in tight timescales over large areas for clients that want billiard table floors as why would you not want one . Good buckets and shovels but no mission to mars. Apologies in advance.

Brakes get very hot when over worked. Less an issue with 'normal' driving i.e. not racing conditions. EV's don't have engine braking or maybe with electronic gizmo control. So brakes work hard. The brakes in EV's also charge the battery so the bit of kit is doing lots of critical stuff. Carbon specialist materials probably essential for other than race cars.

Have no idea about moat or competitors. Open for more tech discussion other than youtube lol.

Sailorboy

29th Dec '22

Looks very undervalued. Way below its net asset value and a good takeover prospect

Rusty2

Somero Enterprises (LON:SOM) No hassle if held in a SIPP, you get all the dividend.

Paul Scott

Morning joshwood976,

No, what with Christmas and everything, I've not pursued EQLS. Will look at it fresh in January.

Regards, Paul.

Interesting, thanks GarryC,

I like Smiths News (LON:SNWS) and have been writing positive things about it here for quite a long time, since the turnaround gained traction. It's played out exactly as management said it would - not something you can say about many attempted turnarounds!

Shares in SNWS have bounced strongly since the 20 Sep 2022 low of 27.5p, up to 47.8p yesterday, but it still looks cheap on fundamentals: fwd PER of 4.7, fwd divi yield of 8.7%, and balance sheet is OK-ish - with debt greatly reduced, and pension scheme jettisoned completely.

Downside risks surround the slowly shrinking business - mgt have said before that they can't keep shutting depots, and are close to the minimum number needed for the necessary geographic coverage. So it could prove more difficult to maintain margins in the future.

Upside potential is if they can come up with some new, and sustainable utilisation for their rapid overnight distribution network, other than just newspapers/magazines, which are in gradual decline.

So the share remains interesting, I would definitely hold them for the divis, if I owned any.

Paul Hill

Hi Josh & Scotty - FYI, I'm hoping to interview both Equals and Argentex again in January at the time of their y/e trading updates. As you may know, I own shares in both stocks

Thanks Paul! I'm not sure whether to do an audio interview with mgt, or just do a private Q&A and write up my notes from it. Will give it some thought, and obviously I don't want to duplicate what you're doing.

Caduceus

Thank you.

abtan

Spotify Technology SA (NYQ:SPOT)

Hello again Si

"there are so many strong profitable companies going cheap on a longer term view"

I sort of agree and I sort of don't.

For example, I look at the 2022 decline of semiconductor and cybersecurity companies (eg ASML Holding NV (AMS:ASML) and Crowdstrike Holdings (NSQ:CRWD) respectively) and whilst many say that growth will return, I'm frazzled by the complexities of these industries.

I have no idea which companies have the greatest competitive strengths, or which future technologies might displace them. It's hard for me to evaluate if they are indeed "cheap" right now.

Something more basic, like the audio market, is a far simpler industry for me to understand. And I'm a regular customer too.

I don't usually like looking more than 2-3 years out as there are always too many unknowns.

But I don't mind making exceptions. And when I put the numbers together I see a relatively safe, understandable, cash-generative, long-term hold.

If my (hopefully conservative) estimates are correct then the share price CAGR from here could be >20% to 2030.

Let's see.

Samsgrandad

Sorry GarryC, you are wrong about EV braking. The motor will act as a generator when going faster than desired ie down hill or normal slowing down and this returns energy to the battery. Ask a wheelchair user. If driven properly no extra braking performance should be required. Mind you a lot of EV drivers drive like wallys.

Hipgnosis Songs Fund (LON:SONG)

Thank you for sending this my way.

It's certainly an interesting company.

I've had a flick through the interims (Sept 2022) and noted the following:

Only c40% of their revenues currently derived from streaming.
Presumably this will go up, especially following the CRB ruling this year.
Not all other revenue streams increased.
$607m debt, fixed at c5.8% for the next few years, commencing January 2023.
Interest costs per annum will therefore = $35m
Cash generation (pre-interest costs) looks to be c$60m pa
Cash generation (post-interest costs) looks to be c$25m pa
Post CRB ruling (additional +$6m revenue expected in FY23):
- Cash generation (pre-interest costs) looks to be c$66m pa
- Cash generation (post-interest costs) looks to be c$31m pa
Dividend per annum that will be funded from cash flows = $31m = 2.6% yield ($1.2b market cap)

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I think the company will struggle to reduce debt and pay a dividend without doing a fundraise in the near future.

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I must admit to being confused by the valuation.

The EV is currently $1.8b & annual (unlevered) cash generation is $66m...so a yield of 3.7%.

If cash generation increased to say $100m (which I think would be some way in the future, even with the CRB ruling) then that gives me a yield of 5.5%.

I'd certainly be interested to have more granular detail of revenue generation from older songs to understand the risks of an ageing catalogue. I'm sure people still listen to 50 cent, but presumably he'll earn much less for the fund in 10 years time?

I was just wondering whether there might be other avenues for growth and then saw the outlook statement, which stated that "the Company expects to benefit from increasing revenues from social media, gaming and lifestyle channels."

I'm still hesitant here and it will be interesting to see how the story develops.

timarr

30th Dec '22

RE: Hipgnosis Songs Fund (LON:SONG)

There was an interesting article on Hipgnosis in the FT back in September: https://www.ft.com/content/66b...

That's probably behind a paywall for most.

The gist of the article is that they've run out of money to buy new songs and are annoying artists who were expecting to sell but can't. There's also now a complicated holding structure involving Blackstone (see below). Mark Mecuriadis, the CEO of HSF, sold HSM to Blackstone while retaining a stake, and Blackstone's money has now funded the purchase of a portfolio of songs (Leonard Cohen, Nile Rodgers, etc) held by HSC outside of the quoted fund.

The dividend is discussed in the article - to be honest I'm not sure I fully understand what the article is saying but it's something like:

To remain interesting to income investors the yield needs to rise as interest rates rise - this pushes the fund to a discount to NAV and means they can't raise more capital, and therefore can't buy more songs;
Operating costs will fall because of a lack of deals;
Revenues will grow due to growth in streaming, more interest generated due to live events and the windfall from the new royalty rates (the company itself says they're still suffering a lag in revenues due to the pandemic, which should start to unwind);
Revenue decline is partly due to the "decay effect" where songs generate most revenues in the first six years after they're released (Hipgnosis has over 40% of its portfolio in new songs).

The article ends by discussing whether the NAV calculation is valid - the discount rate used to calculate the portfolio value has not changed in the last year, despite the rise in interest rates.

In summary - the dividend seems to be at some risk and if it is cut then the share price will suffer. Blackstone are the most likely beneficiaries.

I think it's fair to say: it's complicated.

Small Cap Value Report (Weds 28 Dec 2022) - POLX, ROL, ARB, DPEU

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Paul Scott

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