Small Cap Value Report (Weds 6 July 2022) - AO., ZOO, CER, AGFX, RWA, NUM, PROC, TEG

6th Jul '22 by Paul Scott

64 comments 7745 reads

Good morning from Paul & Graham.

Sorry we didn't get round to looking at Equals (LON:EQLS) or Quiz (LON:QUIZ) (I hold) yesterday, as both look interesting. We'll try to cover those later this week.

Agenda -

Paul's Section:

AO World (LON:AO.) (£225m) - Fundraise - a £40m placing is announced, at 43p. This should shore up the finances, and I like the simplified strategy, intending to strip out £25m of excess costs. Looks investable again, now that solvency risk has been addressed. Although I still don't think it's a good business.

Zoo Digital (LON:ZOO) (£92m) - [No section below] Results for FY 3/2022 were scheduled for release today, but instead there's an RNS saying the "auditors have been unable to meet the pre-agreed timetable...", and that "the company has been informed by its auditors that it should be in a position to sign its results for the year ended 31 March 2022 shortly". A webinar scheduled for today is being rescheduled for next week. This doesn't sound serious to me, based on what the company says, but it does introduce a little doubt.

Cerillion (LON:CER) (£289m) - [No section below] - "Major contract win worth £15m" - more good news from this excellent little company, which offers billing software for the telecoms sector. It's the increased size, and stickiness of contracts that really impresses. This one is for 10 years and "... helps to underpin existing market forecasts...", so not earth-shattering in itself, but still good news. This share looks expensive, but I think the superb track record, high margins, growth, and quality of contract wins, do justify the high price. Well done to holders, I think you're onto a winner here.

Robert Walters (LON:RWA) (£401m) - a positive Q2 update. Staffing companies are doing well, due to skills shortages. RWA is mainly international. Looks modestly priced, but it depends on your view of the economic outlook. If there's a deep & prolonged recession on the way, then staffing companies' profits could wilt.

Ten Entertainment (LON:TEG) - a fantastic trading update. Ahead of market expectations. Shares look cheap. Although I question whether this outstanding level of performance is sustainable, or benefiting from pent-up demand? Consumers still seem happy to spend on discretionary, leisure activities.

Graham's Section:

Argentex (LON:AGFX) (£90m)…

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Monty Carlo

6th Jul '22

Hi Paul

Regarding your comment:

"It seems crazy to me that the shares continue trading, in what is essentially a false market. The system needs to be reformed, so that shares are immediately suspended when a placing is decided upon"...

Whilst I appreciate the sentiment, how would this work in practice? If you have listed shares constantly being suspended for days or weeks I'm afraid you "break" the equity market. Open ended funds such as OEICS would be unable to deal in the shares, and would struggle to manage inflows & outflows. Tracker funds would be unable to match the market. Fund managers would be forced to create umpteen "sidepockets" which would be a logistical nightmare, and what price do you put on a share while it is suspended?

What it would do in practice is make open-ended funds run a mile from any share where a suspension was likely, because they simply can't afford to take the liquidity risk. I suspect the consequences for small/mid caps would be very unpleasant indeed.

We already "pretend" that company management are not in possession of price sensitive inside information most of the time (otherwise they could never deal), and I suspect this is another of those areas where we may need to tolerate the lesser of two evils? I'm sure things could be improved, but markets can never be made entirely "fair".

Paul Scott

Hi rmillaree,

Yes you're right, unfortunately the data provider includes IFRS 16 leases as debt. So multi-site businesses like Ten Entertainment (LON:TEG) and retailers, etc, all seem to have huge debt, but as you correctly point out, this is "fake" debt relating to future rent payments.

So I've nothing to add to your excellent explanation!

Regards, Paul. (I'm being super-polite today, please note! ;-D

truegent

In Stockpedia, the 'net debt' bit now includes lease liabilities. But my understanding is this should be offset by the 'right of use assets' in the assets part of the balance sheet, as this is the property/machines being leased which gets amortised every year...for example, for Ten Entertainment (LON:TEG), 'lease liabilities' comes to £195,662, but the 'right of use assets' come to £167,324, leaving net lease liabilities (if there is such a term) at £28,338.

Stockopedia doesn't take this into account so I do not use Stockopedia's net debt figure, I go work it out myself...

I'm not an accountant though !

rmillaree

No worries in that regard - i 100% appreciate all your opinions/comments even if disagree 100% with what is being said.

Wimbledonsprinter

Monte Carlo, you make some very good points. I think the UK market works quite well with very limited suspensions (apart from reverse takeovers). A possible half-way house would be to require companies to make an RNS announcement that the company is thinking of doing a placing, when say 10 people have been taken "over the wall." To be fair to AO.com this is similar to what AO.com did yesterday - they said that they were thinking of "strengthening the balance sheet", which obviously caused the price to decline. But I come from the old school, that thinks management's job is not to massage the share price.

planetx

Just been to Crestchic factory tour / new building opening .

Crestchic sell manufacture and rent loadbanks .

- very good sector

- very established clients such as US navy , they were just finishing two loadbanks for US submarines destined for San Diego

- Uk mod a big customer for a long time with ongoing support and maintenance

- massive sales to data centres

- importantly going forward I noted the previous facility / offices were borderline not fit fit purpose and had clearly been a big factor in both limiting sales and inefficient

- very good most and hard to see a competitor entering this category easy

- very strong rental side that is unique to them

- the new 40,000 sq ft facility build on time and for a remarkable 2 million budget (seemed very good price )

- a major online retailer buying loadbanks from them for cooling their data centres (Amazon for sure )

- their rental loadbanks are typically written off after 10 years but have a 20-30 year life so big understatement on asset value .

Anyway to sum up production and sales bound to improve as the company can now make stuff without falling over each other , in a great category , with a unique understated rental fleet .

And finally management and employees all grounded and hard working .

Michael C

Paul, thanks for the compliment. I wondered about the spike. I certainly wasn't interested in Supreme (LON:SUP) at £2+

There is no such thing as predictable repeating FMCG revenues in the long run. In the brief part of my life when I had "proper" jobs I worked for FMCG companies, Victoria Wine, Forbuoys/NSS newsagents, then the largest privately owned CTN (Confectionery/Tobacco/News) retailer in the country, where I was on the board. Consumer behaviour can turn on a sixpence. You can have a product which has sold steadily for years and suddenly you find demand has dropped by 20% in the space of a single quarter, you have excess stock in the warehouse, and everyone is sitting round the boardroom table wondering what on earth just happened. This is what happened to the Supreme (LON:SUP) lighting business. They now think that (a) the sales in 2020/21 were exceptional because of COVID-induced behaviour, and (b) they think current sales are reduced below normal because people are literally turning lights off and not always replacing burned-out bulbs. They think that as soon as the excess stock (which is LED bulbs with no sell-by date) has gone through the system they will be back to predictability, albeit at a slightly lower sales volume.

Meanwhile the Vaping side of the business is "growing its share of a growing market", batteries are OK, there's a good future for the vitamins and protein powders, and they have excellent prospects for adding on new business. If the shares go much lower I will average down for the first time in my life. These guys are not going to go bust.

I already have collective investments/funds/real estate/precious metals at Bullionvault.... no bonds though, not a single one at present. I have in the past bought short duration Gilts if I needed a temporary home for largish sums.

But I like buying individual company shares as well & I have a 6 figure sum looking for a home. As I said I think there is an interest rate shock coming and I wanted a screen which identifies companies which will survive that. Your suggestions are good and I'll try to set up a screen like that.

Epsilon

Morning ridavies

You can create a chart of any financial instrument you wish in google sheets. If you are familiar with Microsoft Excel, you will find google sheets easy to use.

Additionally, you can use google sheets to model real-time portfolios - I have included a dummy portfolio at the top by way of illustration:

https://docs.google.com/spread...

PS I took the weekly platinum price data from investing.com :

https://www.investing.com/comm...

I hope this helps.

Harry Hindsight

Crestchic (LON:LOAD)

I've read your note on Appreciate - it's very good. Definitely tempted.

Snazzytime

Supreme (LON:SUP)

These guys are not going to go bust

I seem to recall when I did a bit of research (when the shares were being ramped) that the CEO went bust with a previous venture.

Just saying.......

sharw

The Supreme (LON:SUP) presentation was very good in that they knew shareholders wanted to know about lighting so concentrated on that in detail as ably summarised by Michael C

I have just received the follow-up questionnaire which included:

3. Are you confident that the customer overstocking issues in Lighting are an isolated one-off issue?

yiannos1

I wanted to write something similar but I was worried it was going to be deleted ( yet again ) , just because I offer a different but honest opinion based on figures and facts.

I would not go that far saying that this company will go bust , but the current CEO has a previous bad record.

Also , I was very sceptical about this stock from the early days of its listing , as I counted 7 ( yes , Seven ) different newspapers or monthly tip sheets promoting this.

Westway001

I’m going to have to guess that you are referring to Supreme (LON:SUP) since you didn’t mention the ticker?

Ternheim

7th Jul '22

Regarding PROC. Interesting to see Fackelmann of Germany take a 4.633% stake . An acquisitive company that does exactly what ProCook does in the UK.https://www.fackelmann.co.in/

Hi truegent,

Yes, that's correct.

I've asked Stockopedia to remove the lease liabilities from debt, or give us both numbers (net debt with and without leases), but apparently the data provider takes the view that IFRS 16 is an accounting standard, which they have to follow.

Hence as things stand, we have to manually adjust net debt, or just refer to the most recent results statement and do CTRL+F for "net debt", which quickly highlights the relevant figures.

Annoying. I loath & despise IFRS 16. As a canny reader commented here recently, if everyone adjusts the accounting standard out, then it's not fit for purpose. I couldn't agree more.

Still I suppose you could argue it gives us an advantage, since other investors might overlook good, cheap companies, mistakenly thinking they are swamped in debt!

Regards, Paul.

rmillaree,

Jolly good, thank you!

We really value your contributions here, which are excellent. So I didn't want to upset you.

Graham spotted your comments, and is taking a look at Redde Northgate (LON:REDD) as we speak, for Thursday's SCVR. I also think it's an interesting value share, and have held before.

I watched the Appreciate (LON:APP) recent webinar, and have mixed feelings on it.

Negatives -

Management sound awkward & wooden, but does their poor presentational style really matter? Maybe not.

I don't like the business model, having tried out the product (ONS gave me a £10 Love2Shop card for participating in a survey) - to redeem it, you have to give intrusive personal details, such as date of birth, address, etc. I'm not keen on that at all. Also, I forgot about the voucher, and when I came to redeem it, it had expired, so was worthless! I think that's dreadful, and it has permanently tarnished the brand name in my mind.

Adjustments to the accounts mean that underlying EBITDA (slide 8) was actually down.

Management said business was seriously under-invested, with manual or old IT systems, so a lot of changes were needed. That worries me, given that it's handling millions of transactions, as top notch IT is surely vital?

There are competitors - e.g. ONS came to see me again this week, and my £10 reward this time will not be Love2Shop, they have switched to a competitor. So margins are likely to be thin.

Positives -

Good growth initiatives explained well in the webinar.

Interest income on big (>£100m) cash balances in trust could be a nice driver for profit growth.

Strong current trading & good new business.

Financially sound, and not used RCF. Although NTAV is quite small.

Improving divis.

Sticky clients, with over 90% retention.

Cost of living crisis is an opportunity - e.g. employers giving vouchers to buy food, would be appreciated more by struggling employees.

Overall - I'm neutral on APP currently, but have it on my watch list. I can see the bull case, and am tempted, so probably leaning more towards a positive view, but with reservations.

Small Cap Value Report (Weds 6 July 2022) - AO., ZOO, CER, AGFX, RWA, NUM, PROC, TEG

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About the Author

Paul Scott

64 comments

3. Are you confident that the customer overstocking issues in Lighting are an isolated one-off issue?

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