Small Caps Live Weekly Summary

CAPD ESP SUS ULTP

A fairly quiet week again this week. This is some of what we looked at:

Capital Limited (CAPD.L) - Interim Results

Earlier this week, Capital announced the sale of their predictive discovery stake (and Jamie Boynton in his own personal holding). It went to Perseus at 21c Aussie. So, a premium to the current price, but not to the 52-week high at PDI. If Perseus take over PDI before the end of next year, Capital get the takeover price. If a third party do, then they share the proceeds 50/50.

Perseus clearly want the option to take this over, even if they aren’t currently in discussions. And it is clear that Capital still expect the takeover soon. However, Perseus now have an incentive to do so in 2026! So a bit of a strange deal. The market liked it, as it often discounts these stakes so getting a premium is good news. However, on Thursday, the Results reveal why they may be so keen to sell now:

There are also signs of window dressing which they admitted on the conference call:

No one holds $40m of cash when they also have debt costing 11%. They also admit to some delays, which seemed likey, but they hadn’t explicitly said until now:

…ramp-ups of some of our key growth areas, namely Nevada Gold Mines , USA (Barrick-Newmont JV) , Belinga, Gabon (majority owned by Fortescue Metals Group) and MSALABS, behind what we would have liked to see, impacting our results today.

We shouldn’t be surprised that the ramp-up of costs on new projects that have yet to generate meaningful revenue will lead to reduced profits, but still seeing them in black & white is a disappointment when similar companies are not suffering from these growing pains and are making hay in the strong gold price environment. They maintain their revenue guidance, their increasing suite of long-term contracts gives them a good medium-term future, and they still look materially undervalued. However, they have blotted their copy book on execution, and this needs to not become a bad habit.

Empiric Student Property (ESP.L) - Interim Results

Student property has been a terrible place to invest if the anecdotal evidence that many of us see in our local cities is anything to go by, yet Empiric say:

• Portfolio valuation increased to £1,134.9m reflecting a 1.3% net like-for-like increase, inclusive of the removal of Multiple Dwellings Relief

• Net initial yield of 5.4% (31 December 2023: 5.5%)

That’s pretty close to what you get risk-free in a bank these days, so either the lettings performance is terrible, or the properties aren’t worth what they claim. Given the 10.5% LFL rental growth and 92-97% occupancy, we are going for the latter. Which blows a hole in the 0.8xTBV.

S&U (SUS.L) - Trading Update

It’s not exactly clear, but this reads like another profits warning:

These figures are particularly bad for a lender:

Although the value of monthly collections is marginally up on last year, the above restrictions on managing customer arrears and on repossessions have seen a year to date level of 87% repayments to due, from 94% last year. Up-to-date live receivables have fallen to 69% of the total, from 79% last year, although a release from current restrictions should see a bounce back in the second half of this year.

Only 69% of customers paying on time seems really poor. If the FCA is getting involved with the process of repossessions, that must make it quite difficult to operate a car loan business. It seems daft to invest in S&U on a P/E of around 10 when consumer credit businesses where the lender takes possession of the collateral before making the loan, such as Ramsdens, are on a much lower multiple.

Ultimate Products (ULTP.L) - Pre-close Trading Statement

Not a great update here, although they say in line with expectations after the previous profits warning:

Unaudited Group revenues decreased 6.5% to £155.5m (FY23: £166.3m) with supermarket ordering held back by overstocking, weakened consumer demand for general merchandise, and strong prior year comparatives having been bolstered by the exceptionally strong demand for energy efficient air fryers in H1 2023.

In line with market expectations, unaudited adjusted EBITDA* decreased by 11% to £18.0m (FY23: £20.2m) and unaudited adjusted PBT* decreased by 14% to £14.4m (FY23: £16.8m).

You've almost got to forgive them for the small sales miss when the include a nice table like this:

So this update is a very small sales miss, a very small EBITDA beat, a tiny PBT miss and within rounding for EPS.

On outlook, these statements seem slightly at odds with each other:

The significant increase in shipping rates, arising from disruption in the Red Sea, has seen some recent stabilisation and is leading supply chains to adapt to a new normal. While this process takes place, the Group's commercial teams are working hard, as they did in the previous shipping crisis, to mitigate the short-term impact on gross margin….

Our FY24 performance was not without its challenges but I am pleased to report that many of the temporary headwinds are now easing, as reflected in a healthy FY25 order book.

We guess they can still increase sales from a stronger order book but will see a reduced gross profit if margins are impacted by freight costs. That's what the forecast updates imply, but the changes are extremely small because they were already conservative after earlier cuts. With all the broker updates in, revenue forecasts have converged for FY 2025, but Shore still looks a little hot on profitability and dividend which is forecast to be cut by the others.

Investors may be relieved today that there hasn't been a meaningful second profits warning, but they could take the view that the contingency against a further deterioration they doubtless put into FY 2025 guidance at the May profits warning has now been absorbed. Remember that in May, the CEO said:

if analysts are right [about this being a temporary downturn] then that's an upside

All the evidence so far is that the analysts were wrong, and what they saw in the April management accounts has broadly continued. So this is a further souring of outlook but not the share price this week. In light of this, the shares are particularly cheap now. This is partly due to the open way they communicate with shareholders, which gives them a strong fan base. The current weak trading has been unexpected but hasn’t betrayed that trust.

That’s it for this week. Have a great weekend!