Small Caps Live Weekly Summary
AFRN ING NWOR
A very quiet week for UK small cap news due to the Bank Holiday Monday with just three companies attracting substantive discussion:
Aferian (AFRN.L) - Final Results
Things are bad here:
And about to get worse:
Although we have taken management actions to further reduce the Group's cost base in the first half of FY2024, we expect Group adjusted EBITDA for FY2024 to be lower than the FY2023 adjusted EBITDA of $1.6m (though still positive), and for this to be weighted into the second half of the financial year.
So, FY24 EBITDA is now going to be somewhere between $0-1.6m. Net debt was $12.1m on 31st March and expected to be worse on 31st May:
Net debt at 31 March 2024 was $12.3m and is expected to be higher at 31 May 2024 reflecting the seasonal billing cycle of the Group and the costs of management actions taken in the first half to reduce the cost base and renegotiate the Group's loan facilities.
Banking facilities have been renewed for another year or so, but at a much higher cost, especially the shareholder loan. The warrants that accompanied this have also been rebased from 17p to 5p as part of the deal. Although these are no longer in the money following the share price reaction to these results.
On top of this, their trade payables still exceed inventories plus receivables, meaning any further deterioration in trading will put further pressure on the balance sheet.
The evenbigger problem seems to be that their devices are simply not wanted anymore, and they allude to by the move to a bundled product with their software:
…delivering higher quality, higher margin Pay TV streaming devices which can also be bundled with the Group's Software-as-a-Service ("SaaS") device management platform.
The software business is a decent one:
Higher margin software and services revenue grew by 10% to $26.6m.
But the ARR has dropped:
Regrettably, two significant customer contracts ending at the back end of FY2023 resulted in lower exit ARR revenue for 24i at 30 November 2023…
However, exit ARR decreased by 21% and as a result we expect the software and services revenue to decrease in FY24. ARR is projected to grow from this lower base as new contract deployments continue.
The software business is probably worth more than the current market cap. However, it may well not be worth more than the current enterprise value. Things could get a lot worse before they get better here.
Ingenta (ING.L) - Final Results
It is the first time we’ve looked at Ingenta. Perhaps Mark usually has an aversion to software companies, as they often look precariously financed and on daft multiples compared to their organic growth rates. Indeed, I am not sure Mark had even heard of the company before it was presented as one of the BASH picks at the Mello investing conference.
All the panel liked this company on the BASH on Thursday, but it was an avoid for the audience. One of the concerns was these results were delayed. Having now arrived, it seems the delay may have been caused by the previous year restatement. Shareholders should rightly worry about accounting restatements. However, in this case they appear to have been overly cautious and overbooked costs!
Looking at the latest figures, the company has a strengthened balance sheet with current assets, including cash up and current liabilities down:
While this is not an asset play, it is worth noting how conservative the accounting is here compared to many similar companies, both in how solid the balance sheet is and that they don't seem to capitalise any development costs.
Adjusted EPS is up to 12.8p. However, this seems to be a miss on the 14.2p forecast in Stockopedia. However, their broker Cavendish explains this is due to how they treat the tax charge:
….lower D&A charge, minimal interest costs and a reduced share count due to the buyback scheme led to Adj EPS increasing 12% to 12.6p (14.4p if the tax credit is included), in-line with our expectations.
It does mean the forecasts are now for flat EPS, not a decline, but obviously increases the historical multiple versus what may have been expected by some.
There is little in the way of top line growth forecast in the near term, but then the 11x multiple for a software company with loads of net cash and a far better working capital position than most reflects that. There are signs that they may start to grow the top line again:
Current Trading
· Ongoing implementations on track, with two further Ingenta Content go lives in Q1 2024.
· Strong pipeline of project work being built for later in the year.
· Trading in line with expectations with our focus on delivering sales growth.
They have struggled to hire suitable salespeople, though, which may be holding things back. As Mark said at Mello, this looks like a company where it will be hard to lose money, yet if they can grow sales, then there could be a significant upside.
Cavendish notes that the sector trades on 26x earnings versus less than 10 here if you adjust for the cash. Their 320p Price Target on this basis looks a little aggressive but isn’t beyond the realms of possibility.
For example, Celebrus has delivered just a 3% CAGR in sales in the last five years and negative EPS growth, yet is on a historical P/E of 34. Fintel has delivered 5% CAGR sales growth mainly via acquisition and is on a 29x historical P/E. Ingenta mentions that acquisitions are a possibility. So, there are a few possibilities that may drive a re-rating, but ultimately they will need to show top-line growth for any significant uplift. However, at the current rating, the only real cost of holding is likely to be an opportunity one.
National World (NWOR.L) - Trading Update
This trading update was released to coincide with their AGM. Unusually, they didn’t hold a physical AGM but one via zoom. Given attending AGMs can often be a pain travel-wise, this should have been a benefit. However, the company made it quite diffiuclt to attend. The Zoom link was not RNSed but had to be located on a different, but identically titled, announcement on their website. It claimed an entry code would be required from the proxy form, but it wasn’t needed in the end. The company already holds no presentations for investors, so making the only form of shareholder engagement difficult is really poor form.
It doesn’t just seem to be individual investors who are not convinced by the company’s attitude to all of its owners. Prior to the AGM, one of the resolutions was withdrawn, which is usually what happens when they know it won’t pass. Several institutions voted against or witheld their votes for the re-election of key board members, including Executive Chairman, David Montgomery. You’d think in this situation, they would be keen to get on the road and engage with all stakeholders.
In terms of trading, the update was very good:
Total revenue was up 19% in Q1, followed by 16% growth across April and May.
Given their ideological aversion to shareholder events, this is interesting and potentially useful diversification:
Events revenue growth of 120% includes Insider Media events revenue, which the Group acquired in April 2023.
In terms of trading, not all of this is organic. Here is how we calculate the like-for-like. To last year's revenue, we add:
13 weeks of Newry Reporter (20th Jan), Banbridge Chronicle/Bann Media (7th Feb) with a runrate of £1.4m pa (they later indicated £5.6m for other 23H1 acquisitions in FY 2023, £7m total, implying £1.4m from these two)
A further 4 weeks of all 23H1 acquisitions at a runrate of £10m (they indicated an H1 contribution of £2m, FY of £7m, implying £5m H2, £10m following FY)
21 weeks of 23H2 acquisitions at a runrate of £11m (they indicated FY2024 contribution from all FY2023 contributions of £21m, implying £11m for H2 acquisitions)
One acquisition is missing from the above, possibly Farm Week, but the error is limited to a minor timing one. So we get £39.2m versus £39.5m reported today, so LFLs look to be slightly ahead. For us, flat is a win in these advertising markets. Extending these forward leads to revenue slightly below the £101m Dowgate forecast. However, in practice, we expect them to make at least one acquisition and beat forecasts.
Adjusting out the net cash, these forecasts leave the company on a P/E of just 4, even after a small share price rise this week. This seems far too cheap for a cash-generative company delivering flat like-for-like revenues in trough advertising markets. We can’t help feeling that if they could be bothered to do some proper IR, the share price would be at least double the current level. Let’s hope the institutions voting against key board members gives them the kick they need.
That’s it for this week. Have a great weekend!