Small Cap Value Report (Weds 7 July 2021) - TLY, KINO, ACSO, SOM, WIN, QTX, REDD

7th Jul '21 by Paul Scott

33 comments 9985 reads

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

Timing - today's report is now finished

Disclaimer -

A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates & results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!

It's helpful if you include the company name or ticker within reader comments, otherwise some readers may not be aware of what company you are commenting on.

Agenda -

Paul's Section:

Totally (LON:TLY) - results from yesterday. Only trading around breakeven at PBT (I see EBITDA as a red herring, due to high depreciation & amortisation charges). Growth potential, but for me the £77m market cap looks high enough, or too high for where things currently are.

Somero Enterprises Inc (LON:SOM) (I hold) - what a lovely company! High quality, cash generative, and we're treated to another strong trading update today. Broker forecasts go up c.14%. Still looks good value to me.

Quartix Technologies (LON:QTX) - an in line with expectations update for H1, and confirms full year guidance. Impressive growth in fleet numbers, and overseas expansion going well. Valuation is too rich for me personally, but I like the business and management.

Redde Northgate (LON:REDD) - as it's not a small cap any more, I've commented on its results today in the comments section below this article, so please see that area if you're interested in this company.

Jack's Section:

Kinovo (LON:KINO) - notes from a follow up Q&A session with company management following yesterday's results, which saw the share price fall c7%.

Accesso Technology (LON:ACSO) - revenue expectations for FY21 have been upgraded again, this time to more than $100m. Trading sounds encouraging but not much to go on yet in terms of concrete figures.

Wincanton…

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JohnEustace

7th Jul '21

It looks to me that many and perhaps all of the other directorships for Lisa Barter-Ng are TLY subsidiaries. She is Group FD.

OldSchool05

Hi Paul, many thanks for your coverage of Redde Northgate (LON:REDD) over recent months. Having seen Richard Leonard talk about this company on Tamzin's PI World show and your subsequent coverage, I bought in at around 180 p.

It has done extremely well and benefits from a very experienced management team, who are experts in business transformations and based on their track record, are building a larger business with a view to selling on in the future.

I intend to keep my shares and potentially add on dips. It would be a shame for you to drop coverage of this now, so perhaps you could reconsider or post elsewhere - if you are doing a more detailed review personally??

Regards, James

doug2500

I like the aquisition from K3 Capital (LON:K3C) but I'm not sure I understand why they've gone to the expence of a raise to pay for it? Any ideas?

Pat on the back for Somero Enterprises Inc (LON:SOM)

Martin VT

Thanks Paul for commenting on Redde Northgate (LON:REDD) - I found the results statement today measured, coherent and indicative of lots of work aimed at really improving the businesses and developing opportunities. You have rightly commented on how the whole market has been rising, but I do think that a lot of this has been underscored by so many companies, such as Redde Northgate (LON:REDD) , accepting the challenges of Covid and fully utilising the opportunities to reorganise, refocus, and speed reform and development of their businesses. Most impressive.

I do hope you can continue to comment on this company in future.

KevinS1

Hi Doug,

£K3C I suspect additional shares were needed to partly fund the acquisitions and also to issue to the selling directors as part of their buy-ins and there was a lack of shares held in treasury. As it is a small dilution and at above last nights closing price as a holder I am fine with this - hopefully some additional strong acquisitions and with the owners tied in for a number of years it looks like a good deal.

rmillaree

Busy morning with regard top companies i hold.
Somero Enterprises Inc (LON:SOM) - excellent news here , i do slightly worry whether for a company like Somero any quick spike as we are seeing in sales due to economic conditionals can be maintained long term. I guess long term they need further product expansion - in that regard it will be fun to see what their new product is later this year. I accidentally sold day of last update (news then was also ahead and my sell order was not fully cnacelled) - i did manage to buy back in and see no reason to sell now.

Redde Northgate (LON:REDD) again nothing not to like ref the update here - they seem to have a cunning plan they are execucting well - similar to Somero i bought edd as a bit of a bottom fishing exercise - must admit i have been mightily impressed by the newsflow and the plans in the short time i have held - again no plans to sell up here.
Ten Entertainment (LON:TEG) - again a very positive update sincve reopening lfl sales upo 22% compared to 2019 - i was initialy worried post fisrt lockdown wearing facemasks and other restrictions would stop bods going bowling - seems my worries were completely unfounded - £23 million of spare headroom. Hopefully presuming no more full lockdowns they are now back in buisness again - yay.

J D Wetherspoon (LON:JDW) - they have put the press to te sword ref their continual lies - apologies from all and sundry in the press for creating ficticious news about whetherspoons that always creates a jackanory story about something that isn't reality. Trading update hard to tell if good or bad - didn't exactly seem positive or negative in tone - it is what it is for now. They have some covenant negotiation work to do - i doubt they will need to raise any more emergency finance having already had the begging bowl out. Impressive noises about investing £750 mill for growth so in all likelyhood there will be a new wheterspoons coming to your local area sometime in the next 5 years i guess.
Ref net debt - there have been aspersions cast here that whetherspoons debt has balloned over covid period - they have blown funds raised to a certain degree but net debt at 26/1/2020 was £804 mill and is expected to be £833 mill at this financial year end - so there has been no material change as far as i can see. Note JDW have been buying up freeholds at a lick last few years so the debt compared historical levels is not being compared on a LFL basis as they have the extra freehold backing now that didn't previously exist at such a high level. They had £175 mil spend on freehold purchasases in 2020 and 2019 financial years. So other than the extra shares in issue JDW is in a strong position IMHO particularly if there may be town centre properties coming up for sale due to the new world realities. Anything but a cheap share at present but certainly a coffee can type holding for me even if it may have the whiff of stale beer (and worse?) from time to time.

Boilermaker

£ACSO

It’s worth noting that the company appeared to run into problems before the outbreak though. Accesso also has a net debt position, whereas most other high quality software companies tend to be net cash, in order to bolster their often light balance sheets.

They are in a net cash position. The full year results from 31 December 2020 showed a net cash position of £29.7m. They also repaid all of their outstanding facilities with Lloyds in March 2021 so are debt free.

tony axon

Morning Paul, RWA :- see you covered june 11th, Significant Q2 trading statement out this morning. One of those LOVELY'ahead of expectation' statements,with some expectation figs. thrown in,and continued growth expected,and increase of staff nos. to cover expectations. Wondered if you'd seen ? Tony

Brookeda

I think quite a few of us bought in around the same time (I got in at 180p.) Just shows the value of this board both Paul and Jack but all the readers and people who comment on here. I don't agree quite a bit on here but that's the beauty of stock picking and the ability to see other people's perspectives.

I see no reason to sell this one, having bought in at a good price this will become a real nice dividend yield on the original price.

Probably more for a Friday conversation but thought I'd put it out there. Are we getting to the top of the bull run now there's literally dozens of companies planning on floating out there?

I'm not a big fan of buying newly floated companies but acknowledge there's sometimes a gem or two, is there anything that's caught anyone's eye in the current /future floatation's?

Paul Scott

Mornjing tony,

Yes I've got Robert Walters (LON:RWA) down on my pad, as something to look at, given a positive update. Always good to flag up out-perform updates which we might have missed, so thanks for that. We try to prioritise positive updates, as they're so much more useful to investors than in line updates.

Regards, Paul.

TamzinPiworld

Headlam (LON:HEAD) Capital Markets Day was impressive as is their new Ipswich distribution centre. Here is the complete event, with presentations and the tour. Paul wrote about them last week on the day of the CMD & TU here. The day was introduced by Steve Wilson, CEO, and features presentations from the managers responsible for projects under the Company's Operational Improvement Programme. (They are Europe's leading floorcoverings distributor.) An excellent event. Video & podcast.

Panoply Holdings (LON:TPX) full-year 2021 investor presentation, given on Monday. An excellent year. 19% organic revenue growth, +62% including acquisitions. The momentum has accelerated into the current year, leading FY22 to be significantly ahead of current market expectations, expecting to deliver analysts' expectations for FY23 a full year early. Video & podcast.

Forthcoming PIWORLD events:

Vertu Motors (LON:VTU) Investor Presentation. We're delighted Robert Forrester, CEO and Karen Anderson, CFO will present to investors followed by a Q&A. Tuesday 13th July, 4.30pm. Register here. This has taken a long time to come to fruition, so I hope there will be lots of interest. Paul discussed VTU on his recent PIWORLD interview, 9m50s and the share price hasn't moved much since. They look to be motoring on all cylinders - pun, pun! So I'm really interested to hear this one. (BTW this interview with Paul has now had 6,000 views - which makes the time spent by Paul and ourselves producing these really worthwhile. Many thanks to Paul and to everyone who's viewed.)

Exploring the listed private capital opportunity - Part 2. Listed private capital gives all investors access to high-performing private equity and credit instruments. Presenting will be BMO Global Asset Management, CVC Credit Partners & £OCI. We had Part 1 yesterday, and the funds are impressive, all achieved an annual IRR of over 15%, sometimes much more (video/podcast to follow). Not a class I was familiar with and it was rather interesting. Monday 12th July, 2pm. Register here.

Accrol Group (LON:ACRL) full-year results webinar. Thursday 15th July, 1.15pm. We'll catch up with management following the recent acquisition of a state-of-the-art tissue converter. Register here.

Sosandar (LON:SOS) full-year results webinar. Wednesday 21st July, 11.30am. Another company Paul knows very well. They seem to have navigated CV19 very well. It will be interesting to get an update on trading once lockdown is relieved, and the advertising world returns to normal pricing. Register here.

Tekmar (LON:TGP) (virtual) Capital Markets Day. Thursday 22nd July, 4.30pm. Tekmar a leading provider of technology and services for the global offshore energy markets, is hosting a virtual Capital Markets Day events for investors. The events will provide further information on the Company’s strategic plan, and how, by building on the strong foundations of the business today combined with a robust growth strategy and attractive market fundamentals, the Company intends to deliver on its ambition to double organic revenue within 5 years and improve the financial characteristics of the business more broadly. Register here.

For those who registered for the Creightons (LON:CRL) results today, sorry for the disappointment. When a new date has been announced you'll be able to register on the PIWORLD events page.

Ages away in September, we have the next highly popular Stockopedia / PIWORLD StockSlam with Damian Cannon. Wednesday 8th September, 6pm. Register here.

Beyond that, after popular demand, we have a new PIWORLD interview with Richard Leonard to be recorded later this week, published on Friday 9th July.

Re Redde Northgate (LON:REDD) (please remember to put in the ticker everyone, it just makes things clearer for everyone) an update note has just come through from Zeus, via Research Tree (which is worth its weight in gold), as follows:

Current year forecast FY 04/2022: 34.6p

Next year forecast FY 04/2023: 43.4p

Note the substantial 25% rise year-on-year. I think the FY 04/22 forecast looks beatable.

At 400p per share, with a strong balance sheet (remember net debt is comfortably covered by the assets of vehicles owned), and that debt should move off balance sheet as they are planning on leasing a lot of vehicles on bulk leases, rather than owning, in future.

I like Zeus forecasts, as they tend to be more realistic, rather than the ultra-cautious (ridiculous, in a booming economy) approach taken by many analysts at other firms.

All of which means that REDD probably should be priced at about 500-700p at some point in the future. Maybe the shares need to digest recent rises, and consolidate, which I'm fine with, given my longer term investing approach. As long as the fundamentals justify a much higher price, then I'm happy to buy more on the dips.

For balance the main risks with REDD? Loss of a major insurance contract at the Redde side of the business has happened before, and there is client concentration. Also on the Northgate side of the business, it could be getting a one-off benefit from rise in value of secondhand vans maybe?

Surrey Steve

Very helpful comments on Redde Northgate (LON:REDD) which I bought at 201p and will continue to hold given the excellent upside potential. Good to see the downside risks explored.

I second the comments about continuing the coverage despite it being outside the normal market size.

Harry Hindsight

Bought I3E today through downloading the Primary Bid app on iphone. Oil Gas bad boys in Canada, so no need to follow that but the app was very good - quick set up and off you go. Should notify of new listings via email. Did it just to test the app on a co I was looking at but High Risk DYOR etc in capital letters, bold and underlined with emoji ref flags flying.

Don't know about the company but the app worked very well. Fake links and good password would be sensible methinks.

On the new float theme, took a position in Trustpilot (LON:TRST) - if you can't trust this share then maybe 'killer' sharks have just entered the pool.

abtan

8th Jul '21

Redde Northgate (LON:REDD) (no position)

I've been trying to articulate some thoughts on Redde Northgate (LON:REDD) but I find myself confused by all the moving parts.

For example, I don't follow the movements in # of UK vehicle numbers:
#FY20 Closing vehicles (51.4k)
- vehicle disposals (15.8k)
+ new vehicle purchases (12.5k + 1.6k)
= 49.7k

But FY21 UK closing vehicles = 54k...why is there such a material difference?

It's also worth noting that 11,500 vehicles were de-fleeted in the UK, but 15,800 were sold. How can a company sell more vehicles than it removes from its rental fleet?

I'm also a bit flummoxed by the cash flow statement, but I'll leave that to one side for now as it's the query below that I'm hoping someone here might be able to assist me with.

Fleet Age
How has the average age of the UK fleet gone up by 3 months, when 15,800 vans were sold and12,500 (or +1,600 = 14,100) new vans were purchased?

"The average age of the fleet at the end of the year was three months higher than at the same time last year"

Is the company selling it's newer vans rather than it's oldest ones first (which might explain why revenue/sale has gone up by £800, but profit per sale has gone up by £1.4k, i.e. less depreciation has been booked on the newer vans, so profit is relatively higher, perhaps? - see table below.)

Does this mean that the company is actually booking "future" profits now.
Why is not selling it's oldest vans first?

Also will this stymie future rental profits, as presumably an older fleet will attract lower rental income?

How to Value

If there is some merit to my thoughts/concerns above and profits can be moved around, doesn't it make it quite hard to value this business?

Any thoughts would be appreciated!

RBStock

19th Jul '21

On the average age of the fleet going up:

The quote says "The average age of the fleet at the end of the year was three months higher than at the same time last year".

If no vehicles are added or removed from the fleet each year (e.g. through buying and selling) then the average age of vehicles in the fleet would go up by one year.

If the average age has only gone up 3 months then it looks like they have sold old vehicles and bought new ones.

Redde Northgate (LON:REDD)

Hi RBStock

Thanks for continuing the discussion.

The company is adding and removing vehicles each year from its fleet.
In fact it removed far more vehicles than it bought last year. The exact numbers are in my earlier post.

I find things hard to explain without visualising them, so please see my table below.

---

I have assumed the company has 10 vehicles, bought 1 year apart from each.

After Year 1, the company sells 3 of its oldest vehicles and buys 1 new one.

The average age of the fleet goes from 5.5. years to 4.5 years i.e. a decrease.
This makes sense to me.

So why has the average age of the Redde Northgate (LON:REDD) fleet increased - it's 3 months older - even though they sold more vehicles than they bought? It doesn't make sense to me. It implies to me that they have simply sold younger vehicles, not the older ones i.e. they've pushed forward future profits.

I could of course be misunderstanding something somewhere, but I'm not sure where.

Hope my thinking is clearer.

Cheers

Sorry, I should probably have added the below, whereby middle-aged vehicles have been sold off before the older vehicles.

Note the average age of the fleet has now increased from 5.5 to 6.0 years old.

martinck1

20th Jul '21

Hi Abtan

I think the answer to your question lies in inventory. It is my reading that the cars are de-fleeted (for Northgate UK&I: c. 11,500 in 2021) and then moved to inventory for re-sale. Inventory for the Group has moved from £49m to £22m, which at £7.8k per vehicle and assuming the parts element is unchanged, is about 3,400 vehicles reduction in inventory, which have been sold. This doesn't explain all the movement, but could be most. I haven't taken account of movements in Spain and Redde.

Like you, my conclusion is that the average age (at the start of the year) of the disposed vehicles must be less than the average age (at start of the year) of the retained vehicles. That isn't what I would have expected either.

Small Cap Value Report (Weds 7 July 2021) - TLY, KINO, ACSO, SOM, WIN, QTX, REDD

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