Small Caps Live Weekly Summary
ANX RAI PAF
Discussions on Discord this week were fairly muted. Many contributors were attending the Mello investment event in London. Kudos to David Stredder & team for putting on another great event. It is not just the quality of companies & speakers that marks this event out as the one to attend, but the depth of knowledge and experience of fellow small cap investors. We enjoyed catching up with many old friends and making new ones. Thankfully, this was also a pretty quiet week for the type of companies we follow.
Anexo (ANX.L) - Final Results
As is often the case, the real meat is not in the results themselves but in the annual report that follows. From the audit report:
We identified a number of misstatements through our work which individually and in aggregate were not material. These items were reported to those charged with governance.
In concluding our audit, we identified misstatements in excess of the trivial threshold relating to trade receivable impairment. Where misstatements were identified, we reported these to those charged with governance.
While management recorded certain adjustments, the remaining unadjusted misstatement relating to trade receivable impairment represented a high proportion of our overall materiality and would serve to reduce reported profit.
While we can never know what actually went on, this sounds a bit like management corrected just enough to take the known errors within the level of materiality!
But what is materiality? The good news is that it is on PBT, not revenue, as is often the case:
5.5% (2021: 5.9%) of profit before tax adjusted for the add back of VW and Mercedes marketing costs.
So the true PBT can be assumed to be circa 4.5% lower than stated, assuming the auditors caught all the misstatements. How was this audit presented in the FY results?
The auditors have reported on those financial statements; their reports were (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
Leo doesn’t own shares in Anexo, nor is he considering buying shares, so of course, the reason he is looking at it is that he expected trouble, but he really didn't expect this much trouble! The moral of the story is: Always read the Audit Report!
RA International - Final Results
These results were well flagged in advance, but still, seeing the numbers in black and white, these look very poor:
Revenue increases, but there is a collapse in Gross Margin and an increase in net debt. This seems that a failure to contract properly for inflation is the problem, and this doesn’t solve itself quickly. Hence there is no sign of any real turnaround:
We remain cautious on the financial performance of the business for the current financial year and expect the business to remain broadly breakeven at the underlying EBITDA level.
However, net debt has reduced slightly since year-end:
We have strengthened the liquidity position of the Group in the current financial year and this is highlighted by an improvement in net debt to USD 3.0m at 31 March 2023 from USD 6.5m as at 31 December 2022.
The balance sheet still isn’t particularly strong, though. The problem is that their type of contract requires upfront funding. So they can’t really win a lot of new contracts without the cash to invest. Hence their order book has fallen:
Closing year-end order book of USD 83m has been broadly maintained in 2023
There are signs that things may be improving on this front:
…we are in the process of finalising the value of a major contract award which would result in a current order book in excess of USD 100m. In addition, the Company holds high value framework agreements which are currently not included in the order book.
But these are tending to be more construction projects, which are lower margin:
New contract awards over recent years have been weighted to construction projects and we are now seeing more longer term contracts in the pipeline being converted to order book.
Often they win follow-on higher-margin IFM projects, but these will be some years away. This means that there is likely to be little recovery in trading (or the share price) anytime soon.
Pan African Resources - Production guidance update
Production guidance for the current financial year reduced to approximately 175,000oz (previously 195,000oz to 205,000oz), primarily as a result of:
· Challenges related to Eskom generated electricity supply, resulting in a production loss of approximately 10,000oz of gold
· Slower than anticipated ramp-up of continuous operations at Barberton Mines, largely addressed as highlighted below
· Lower than expected production from Evander Mines' underground operations.
So a 12.5% drop in production guidance. You have to wonder if investors should not have predicted this given the state of South African electricity generation. Pan African have several solar projects in build, but these will not be in operation soon enough to save this year.
Gold miners are often highly geared to production rates, so this is bad news. However, they also say:
· The impact of the lower than expected gold production for the current financial year has been partially mitigated by the increased year to date rand gold price received of ZAR1,003,374/kg (2022: ZAR892,431/kg), relative to the prevailing gold price of approximately ZAR1,220,000/kg.
With manageable group debt levels and the Mintails project's funding secured, the group is well positioned to continue making cash distributions to shareholders in the future.
In light of this, a 20% fall in share price may be an overreaction.
That’s all for this week. Enjoy the sunny bank holiday weekend!