Large Caps Live Monday 14th June
House Prices
How long can the current house price boom continue? That is an interesting question - I think that there will be a degree of stabilisation and oscillations between City living and country living. I think the really scary thing is looking at affordability vs interest rates - I would argue we have been on a 3-decade trend re falling rates and hence pushing prices up for the same monthly cost.
I think that house prices have a degree of seller anchoring on prices. They tend to not go down but when demand falls transaction volumes collapse. So I think we will have a period of wage pressure which will gradually allow house prices to 'catchup'.
Vaccinations
I would suggest that looking at that chart below the US rate of increase of fully vaccinated population seems to be flattening off. And the rate of increase of vaccinations in the major European countries is more constant.
I would also suggest that the above graph suggests the rate of vaccinating in the UK is also coming to a ‘limit’. Whether this is a natural limit or a lack of focus to continue expansion in the vaccination program is hard to judge.
Clearly, the obvious impact is nightclubs, airlines, hotels, pubs, restaurants. I have put it in that order as I wonder how many times restaurants have bookings for more than 6 people to a table? Whilst nightclubs, by their nature, are packed. Indeed I wonder if the logical thing for the govt to do would be to change the limit for restaurants to 6 people, or 10 if they are all vaccinated? (Of course, this would depend on having a means of verification – which is a can of worms of its own).
I must admit it does occur to me that the supermarkets could have a great summer. A lot of foreign travel cancelled; only so many places you can go to, and not everywhere is airconned.
Small Caps Live Wednesday 16th June
Triad (TRD.L) – Final Results
Triad is an IT contractor that is trying to move increasingly towards higher-margin consultancy work, not least to mitigate some of the effects of IR35. Unfortunately, as part of this shift, they hired more consultants into a downturn of work which led to losses. Still, they had a large cash pile that saw them through the worst. However, there wasn’t much sign that the septuagenarian executive chairman who controlled the company was going to release any of that cash back to shareholders.
When we first looked at Triad, we expected that trading would normalise, the company would return to profitability and would perhaps generate around £1m a year of FCF and be worth 50-80p. The speed of the turnaround often tested our patience, not least due to Brexit, COVID etc.
Yesterday’s results show signs of that turnaround gaining traction:
· Revenue for the year ended 31 March 2021: £17.8m (2020: £19.4m)
· Gross profit: £3.8m (2020: £2.9m)
· Gross profit as a percentage of revenue: 21.4% (2020: 14.7%)
· Profit before tax: £0.6m (2020 Loss: £0.6m)
· Profit after tax: £0.7m (2020 Loss: £0.8m)
· Cash reserves: £4.9m (2020: £3.8m)```
A 2p dividend is restored, and the outlook is positive:
The Group is looking to build on the momentum created during the previous year. Several of the recently won contracts are still ramping up and significant further recruitment is planned to service demand on these and the new work we hope to win.
The contract wins giving good visibility of the future but offset but the loss of the “Business as Usual” part of their Ministry of Justice contract, which is one of their largest currently. So perhaps, as the market is forward-looking, you would expect them to be on their way to our fair value estimate of 50-80p.
The share price today however is £1.16, having actually been higher following these results before dropping back a bit. This gives a market cap of £19m or 32x Operating Profit and significantly above our long-term fair value estimate. So why the shareholder enthusiasm?
Well, tangentially, the company also announced their desire to get into the blockchain space. We have been highly sceptical of this move and, knowing the company reasonably well, we suspect that they have simply hired a consultant who has previously done a limited amount of blockchain work. There is no evidence that this blockchain work has generated any external revenue in the period.
Yet in the clamour for crypto-related investments, this has soared. It’s not the daftest thing in the market at the moment but equally the risk-reward looks poor at the current levels based on the real business performance of the last 20 years or so.
SCS (SCS.L) – Trading Update
I have often mentioned the importance of not just reading RNS statements from companies that you follow, but also their competitors and others working in the same supply/distribution chain. For example, I follow IG Group and Plus 500 closely even though my pick is CMC Markets in this space. Competitors are never exactly the same businesses, but where they are similar you can be sure that they will perform similarly in the short term, and in the long term it is important to know if your pick is being outcompeted.
So as an SCS holder it was very silly of me not to have DFS on my RNS watch list when last week they reported 10 weeks to 6th June up 92.1% on FY 2019 and FY 2022 profits materially ahead of consensus. Furthermore, I somehow missed it in my pre-open RNS scan.
Despite the clear read-across, SCS didn’t immediately move, giving an opportunity to buy in size at 257p. In the past, I would have compounded the error by refusing to pay up for my mistake, but on this occasion, I added further at 279p. That hurt!
Today it was SCS’s turn for the trading update. Starting with the comparison to DFS, they gave order intake up 79.0% for the 10 weeks to 12th June 2021. This is worse than DFS in two ways:
79.0% is lower than 92.1%
DFS’s period included an extra week of lockdown.
So why is SCS up another 13% and is now 324p to buy? The primary reason is that, as I said before, competitors are never exactly the same and so while DFS’s update ensured SCS’s would be strong, the degree of strength was very much in doubt until today.
Another thing that jumped out at me from ScS’s statement was, in contrast with DFS, there was no mention of any supply chain disruption. Differing manufacturers and suppliers could be a major reason why ScS’s delivery times could vary from DFS’s which in turn will affect both their sales proposition and the speed with which they turn orders into revenue. While ScS also have a later year-end (31st July vs 27th June), the fact they have upgraded FY 2021 forecasts while the revenue consensus for DFS very slightly fell, adds to the evidence that ScS is performing at least as well in DFS in this respect.
The real story here however is the outlook for FY 2022:
given the strength of the current order book, the Board's outlook for FY22 is substantially better than current market forecasts.
And what an order book! £116.6m is £39.0m ahead of the prior year, but in 2020 that followed a complete shutdown of manufacturing and delivery operations followed by a very busy three weeks of reopening for sales. I estimate the current order book is approximately three times that at the same point in 2019. With coronavirus restrictions continuing consumers are still limited on how they spend their money and so there is no reason to believe order intake will suddenly fall off a cliff and my model indicates order backlog could actually increase from here.
40p EPS for FY 2022 now looks more than possible, with significant special dividends and a rerating. The main risk is that the market will look forward to FY 2023 and not like the probable profits decline.
The cash level is £101m but a big chunk of that will be customer deposits. At the last accounting period, they had about £40m of what I call shareholders cash. i.e. netting off negative working capital and provisions. This is still 40% of the market cap.
In this context, an interim dividend of 3p seems very stingy, but I think they are trying to tread the line between paying a dividend and not being criticised for not repaying all government support, including rates.
FireAngel (FA.L) – Trading Statement
FireAngel released a rare inline trading statement this morning:
I am pleased to say that we anticipate that our first half performance to 30 June 2021 will be in line with the Board's expectations.
However, tragedy seems never far away from FireAngel, and there are signs of challenges and extra costs coming through:
There are however ongoing reverberations from the COVID-19 pandemic still being felt, with some of our markets not yet fully open, alongside global component shortages and occasional international shipping disruptions. So far, we have dealt with the challenges and absorbed consequent extra costs without harming the Group's overall performance. However, we expect these challenges to continue through the current year and we are working continually to address and mitigate wherever possible.
They end with:
Despite the aforementioned challenges, demand for our products and services continues.
Which seems a bit of a non-statement to me. It would be strange if a cost increase in a £10-50 alarm caused all demand for the product to disappear completely. Again, the sceptic might think that this has been carefully worded to sound positive without actually giving any real information.
Pressure Technologies (PRES.L) – Interim Results
Yesterday also brought interim results from industrial cylinder manufacturer Pressure Technologies. Pleasingly, they show a return to profitability:
Group revenue of £14.5 million (2020: £13.9 million)
Gross profit of £4.7 million (2020: £4.0 million)
Adjusted operating profit1 of £1.1 million (2020: loss £0.1 million)
Driven by the defence part of the business:
Strong defence order book underpinned a 79% increase in revenue for CSC and an increase in adjusted EBITDA1 to £3.3 million (2020: £0.7 million)
The Oil & Gas part still remains weak, although the signs of increasing order book are positive, this is still a long way below the previous levels:
Oil and gas trading conditions resulted in a 58% reduction in revenue for PMC and a negative adjusted EBITDA1 of £0.6 million (2020: positive EBITDA £0.7 million)
PMC order book at May 2021 reached the highest level since October 2020 and OEM customers are reporting an improving outlook for the second half of 2021 and a steady recovery in 2022
The Hydrogen energy part looks promising but has yet to generate any significant revenue:
Momentum gathering in the fast-developing hydrogen energy market, with over £1.4 million of refuelling station contract wins since December 2020 and improving visibility of future demand
Overall, there was further cash outflow as inventories were rebuilt and receivables increase:
Adjusted operating cash outflow3 of £1.4 million (2020: inflow £1.4 million)
And the move to net cash is mainly due to £7m of fresh equity raised in the year.
The EPS consensus forecast in Stockopedia of 1.75p looks too low given these results. However, there is a sting in the tail:
The backdrop of Covid-19 related challenges continues to impact the outlook in the second half. In Chesterfield Special Cylinders, project delays have affected the outlook for Integrity Management deployments, while defence contract phasing, late steel deliveries and several delayed customer orders are also expected to push significant revenue and margin from the second half of FY21 into FY22.
N+1 Singer now estimates -3.9p EPS for FY 2021. That's down from 1.8p. So a serious downgrade and they must be expecting a 6.8p EPS loss in H2. For FY 2022 N+1 have 2.9p and at more than 30x 2022 EPS this looks expensive. The FY22 forecast hasn’t changed with these results so N+1 are either modelling no catch-up from the delayed FY21 revenue or assumed FY22 revenue has slipped into FY23. The reality may simply be that they haven’t reviewed it, so this may be light.
One of the things putting me off here is the history of mishaps, include a Health and Safety violation that led to the death of an employee. So the variable results don't come as a surprise. I think there is scope for the FY22 numbers from N+1 to be very significantly beaten though. Perhaps one to re-examine when things may be clearer in about a year's time?
Time (TIME.L) – Final Results
A year-end trading update from Time this morning. This is the old 1PM and these results will be the first since Rimmer has taken over as CEO. That is Ed Rimmer, not Arnold Judas Rimmer.
Results are as you would expect from a company lending in the current market:
· New business origination for the financial year of approximately £103m (FY20: £147m). Approximately £47m (46%) was written on 'own-book' and £56m (54%.) was brokered on for commission income (FY20; £54m (37%) and £93m (63%) respectively).
· Revenue for the year expected to be approximately £24.1m (FY20: £29.2m) of which approximately 85% is from lending activities and 15% from broking activities (FY20: 80% and 20% respectively).
I.e. revenue is down. However, profits are maintained:
Profit Before Tax, Exceptional Items and Share-Based Payments ("PBTE") for the year expected to be approximately £3.0m (FY20: £3.0m).
Net tangible assets have increased despite an increasing credit provision, that management often have described as conservatively calculated in their calls:
· Net Tangible Assets at 31 May 21 of approximately £28.3m (31 May 20: £26.5m)…
· Deal arrears at 31 May 21 now standing at below pre-pandemic levels seen at February 2020 having reduced by approximately 40 per cent from 31 May 2020.
· Credit Risk Provisions marginally increased to approximately £5.3m or 5.3% of the net lending book (31 May 20: £5.1m or 4.6%).```
This compares to a £25.7m market cap.
These sort of companies often trade at a premium to book value in the good times when they generate higher profits. But I struggle to see where the catalyst for this will be in the near term here.
In perhaps a worrying sign, the already declared dividend is cancelled:
The Board therefore confirms that, due to the impact of the COVID-19 pandemic, the deferred interim dividend of 0.36 pence per share previously declared for the half year period ended 30 November 2019, and originally due be paid on 12 May 2020 to shareholders on the register at 17 April 2020, will not be paid.
Although here it may just be the strategic direction of the new CEO, this is embarrassing and usually a sign of a company in serious trouble.
With little margin of safety vs the tangible book value, why take the risk that it is the former, not the latter?
Small Caps Live Friday 18th June
Novacyt (NCYT.L) - Notice of Results
Paris, France and Camberley, UK - 18 June 2021 - Novacyt S.A. (EURONEXT GROWTH: ALNOV; AIM: NCYT), an international specialist in clinical diagnostics, announces that it will report its audited financial results for the year ended 31 December 2020 on Tuesday 22 June 2021.
The Company has changed its reporting currency from Euro to Great British Pounds (GBP) for these results, and will report in GBP going forward, as the cost base of the business is now mainly located in the UK and GBP is the largest invoicing currency for sales.
This reflects the reality that they only really succeeded in the UK, apparently due to a desperate rush by the government here to buy test materials at any cost. As a result, their main customer is DHSC. Remember this is a company that a year ago was emphasising the strong international pipeline and in particular developments that allowed it to supply tests in France.
The DHSC contracts here have been in trouble for a while as we have been consistently reporting and they are currently in a major dispute, which means they don't yet apparently know their revenue for CY 2020. In this light, the company continues to look overpriced.
I mention this not just because it is a slow news day, but because the share price is up 12% today, apparently on this news. It would seem strange that a change of reporting currency would lead to a 12% rise so perhaps the rise is because they will actually get their results out before being suspended? But all this does is highlight that this is almost impossible to value and has just become a gambling tool.
Loungers (LGRS.L) - Trading Update
Loungers, the operator of 173 neighbourhood café / bar / restaurants across England and Wales under the Lounge and Cosy Club brands, announces the following update.
Note their market positioning: cafe first, bar second.
Loungers finished the financial year ended 18 April 2021 with 168 sites, having opened three new sites during the year.
Unlike Revolution Bars who have been desperately closing sites.
With the further relaxation of restrictions on 17 May 2021 allowing indoors trading, Loungers re-opened all of its sites. Like for like sales over the four-week period from 17 May through to 13 June 2021 were +26.6%, using the period 20 May to 16 June 2019 as the comparator.
Remember this is at reduced capacity. So where's the money coming from for these sales? Perhaps this BBC headline gives a clue: Retail sales fall in May as shoppers dine out
Whilst these are still early days, and trading has benefitted from significant pent-up demand and the VAT reduction, we are encouraged by the initial strength of our trading performance and remain confident the Company will emerge strongly from this period.
Note that the VAT reduction does not apply to alcohol! I doubt Loungers have passed on the VAT cut and so the revenue benefit is limited to the fact revenue is measured excluding VAT, but profitability should benefit by much the same amount.
There is some concern about debt at Loungers plus lease liabilities but I do think the brand / operating know-how has value and so this can be offset against the fact lease liabilities will be ahead of right-of-use values. Unlike Revoltion Bars, of course.
Also, Loungers can get new sites cheaply because they mostly actually pay their rent.
SCS (SCS.L) - Update to Broker Forecasts
Following our discussion on Wednesday, I've been looking into the broker forecasts, hoping for an upgrade. We did get one yesterday, indirectly visible via Koyfin, but nothing from Shore, which is on Research Tree. The averages imply that the broker that did upgrade, has gone for just 23p-ish for FY 2022 which looks far too low to me.
So I had a more detailed look at the Shore note and found two very strange things. Firstly, the revenue forecast they quote is actually gross sales. (The difference between the two is the cost of interest-free credit). That partly explains why their EPS forecasts are so low relative to revenue. The other strange thing is that their forecasts are still on an IAS 17, not an IFRS16, basis. This particular affects EBITDA, but since they jump off from that it makes the whole thing very hard to understand. I think this may explain why it is taking them so long to update their forecasts. They also seem to have some non-cash charges too high.
So, my model is still showing 40p for FY 2022 and I can't find anything wrong with it, and the harder I look, the more I find issues with other people's models! So with 100p cash to return/enhance earnings with, I see potential significant further upside from the current 323-336p.
Westminster Group (WSG.L) - Contract Wins & Placing
Another one missed from earlier in the week is Westminster Group who recently appeared in a list of companies that were near 52w lows.
New Minimum 20 Year Multi-Million USD Managed Services Contract covering 5 Airports in the Democratic Republic of the Congo
OK, who thinks this contract will last 20 years?
From Wikipedia:
Following the 2018 general election, in the country's first peaceful transition of power since independence, Kabila was succeeded as president by Félix Tshisekedi, who has served as president since.
Anyway, Westminster are no longer at 52-week lows:
So, a jumbo contract in a barely-stable country to run airports during covid.
Apparently, the contract was actually a little too large because, the very next day:
Proposed Placing to raise approximately £2.5m
The Placing will serve to put the Company in a stronger position for the next stage of its development by providing additional working capital to support the growth and delivery of the recently secured contracts, which require upfront capital investment from the Company.
Well-timed that one!
Listed Brokers (ARDN.L & FCAP.L)
It is worth noting that the Westminster placing…
… will be conducted by way of an accelerated bookbuild process (the "Bookbuild ") by Arden Partners plc ("Arden"), as sole Broker,
We've highlighted Arden before as a cheap, but subscale broker and, in this light, £200-300k of placing fees is significant for them.
Also this week Open Orphan, who have Arden as NOMAD, are spinning out the weirdly named Poolbeg Pharma.
Although interestingly finnCap who are joint broker to Open Orphan are NOMAD to Poolbeg. No idea what the size of the raise will be on this one but Open Orphan does seem to be the gift that keeps on giving, for both finnCap & Arden. Of course, this spin-off is likely to be far more material to Arden than finnCap given the relative size, despite not being NOMAD on Poolbeg.
What was material to finnCap recently is this £52m raise for Access Intelligence. The 10.8% discount seems reasonable given that it is 30%+ of the market cap placed. There has been commentary recently about the market for fundraisings potentially looking weaker. While the market for rescue placings for deeply indebted companies has clearly soured, placings for strategic acquisitions and growth seem to be still well supported.
SmartSpace (SMRT.L) - Customer Win
We've looked at SmartSpace before but weren't impressed with their market position or growth rates, but the theory is that they will raise ARPU after they win contracts. Today they announce a customer win:
Key highlights to the Contract
● SwipedOn will initially provide its solutions to 150 sites with a potential to expand to 200 of Gategroup's locations globally
● Deployment will commence immediately in UK, Europe, USA and Australasia
● 100% of revenues earned from the Contract are expected to be recurring 'SaaS' revenues
Lots of investors live for the day that they see a "major contract" announcement in RNS. But I think it is a bad sign. The best types of business have lots of small customers and the products sell themselves.
We have been working closely with the Gategroup team over the last few months. One of the key criteria for Gategroup was to create a covid-safe environment for their employees, contractors and customers.
This kind of long contract lead time tends to happen with larger customers and is exactly what you don't want - in particular, it tends to lead to last-minute revenue misses due to things slipping from one period into the next.
The Contract reinforces current Group forecasts and in the Board's view, provides a platform for further important wins of this nature in the future.
Suggests this was already in forecasts. Hence the lack of share price reaction. On this sort of rating, you need to be regularly beating forecasts not just meeting them.
Right, that’s it for this week. Have a great weekend!