Small Caps Live Weekly Summary

AUTG BBSN CAU CTA HTG LTHM ULTP

Here’s a selection of what we looked at this week on Discord:

Autins (AUTG.L) - Final Results

This is interesting:

We understand that an important part of our strategy will be to re-invigorate interest in the Group with existing and potential investors which is a key part of our strategy, working with our broker to do so. We are also committed to engaging with retail investors, alongside our institutional investor base, which we intend to do throughout the year, via our website and other investor communications.

When your results look like this…

· Loss before tax was £1.7m (FY23: £1.0m)

· Loss per share was 3.05p (FY23: 1.67p)

…surely, “re-invigorating investor interest in the group” is code for promoting the shares ahead of an equity raise?! A small manufacturing company with a current ratio below one and net debt in the automotive industry is normally dead. They appear to have kept the lights on by limiting capex and stretching their working capital.

Strangely, the market liked these results, with the shares rising 60%+ on the week. They've looked like they needed a raise for a long time, and this week’s rise may give them the lifeline they so desperately need, looking at the balance sheet:

Days Sales Payables is 84, so they at least seem to be paying their suppliers within the normal 90-day terms for automotive. However, they are getting paid in 48 days, which is far sooner than OEMs normally would, suggesting that they are receiving preferential payment terms to avoid them going bust and causing a headache for the OEMs, or they are factoring their invoices off balance sheet. £240k on £2.5m of debt is actually quite a reasonable rate for a company in this financial state, so it does suggest some level of OEM support. The OEMs may continue to be supportive with the aim of keeping continuity or diversity of supply. However, this support cannot be guaranteed to continue, especially as they supply a low-margin and relatively commoditised product.

Brave Bison (BBSN.L) / Centaur (CAU.L) - Sale of MiniMBA

This deal goes through, as expected, at the previously quoted price. We were pretty sure that Brave Bison needed an equity raise to finance it. However, the scale of the raise (£13.5m) was larger than our expectations and the price lower (2.45p). While the deal makes sense, issuing almost 30% of the enlarged share capital at a P/E of less than 8 shows the cost of issuing large amounts of cheaply rated shares, as they say their EBITDA will go up by 80% but EPS is only forecast to rise by 10%. Despite liking the deal here, we were surprised that the shares remained as high as they are following this dilution news.

On the Centaur side, they say that this is:

the first step in the Board's stated strategy to maximise shareholder value

And:

Following Completion, it is the Board's intention to use the net proceeds from the Transaction to return capital to shareholders and will consult with shareholders before deciding how the proceeds will be returned. The quantum, timing and form of any such return of capital shall be at the discretion of the Board.

In his last IMC, Richard Staveley essentially stated that he/Harwood would be voting his 29% in favour of a return via a special dividend.

£19m compares with Centaur's market cap of £53m and existing cash of £9m. The implied operating profit of miniMBA is £2.8m, leaving £0.8m for Xeim's other activities:

There is a revenue breakdown for what is left on Xeim:

Clearly, central costs are now a problem. CEO (exec chair) and CFO's 2023 earnings were £1.4m, albeit lower in 2024, perhaps due to underperformance. On the balance of probabilities, it looks like there is still upside here. The big unknowns are whether The Lawyer is really worth the high multiple Harwood thinks it is, and how quickly those central costs can be cut.

CT Automotive (CTA.L) - AGM Statement

Despite ongoing disruptions in the automotive industry exacerbated by the introduction of tariffs, we are on track to meet FY25 market expectations for profitability. Anticipated sales growth will be slightly softer than expected but this has been offset by further improvements in our gross margin position.

So lower revenue but higher margins. Contract wins giving greater visibility is good news:

A good run of customer wins in the last six months means we have increasing visibility over the remainder of FY25 and into FY26. Our longer-term growth pipeline remains strong and our sustained investment in AI, automation and digitization continues to be a key part of our strategy to enhance gross profit margins.

Overall, we’re not sure we learned anything new from this statement, but it shows how bonkers it is that this company with high medium-term growth potential was on a P/E of 3. With the price having risen recently, the P/E is now around 5. While cheap compared to the wider market, it isn’t that far away from bigger and more diversified auto-parts businesses (although these often have higher gearing). Larger businesses in the sector have much greater diversification but much less room to grow. Hence, the rating of CT is still much too low if you consider it a growth business, but perhaps about right if you consider it a small player that rises and falls in its fortunes along with the bigger, more diversified companies.

Hunting (HTG.L) - Acquisition & Capital Allocation Policy Update

Hunting acquires FES, a leading provider of fluid transfer solutions to the offshore oil and gas and renewable energy industries, for £50 million

7.5x Adj. EBITDA isn’t cheap, but not crazy either:

For the year ended 31 December 2024, under UK GAAP, FES generated revenue of £31.3m and EBITDA of £6.2m. Adjusting EBITDA to include the impact of IFRS 16 'Leases' and other management adjustments, FES recorded EBITDA of £6.7m in 2024.

At 31 December 2024, under UK GAAP, FES's balance sheet recorded net assets of £33.1m and gross assets of £36.2m. All of FES's 2024 results are subject to audit.

Paid for in cash, this is probably earnings-enhancing. They say it’s margin-enhancing, which really just means it is a better business than the rest of the existing company! Zeus say:

Overall, we think this looks like a solid acquisition for Hunting. It represents a bolt-on to the company’s existing business, in a technically advanced and higher margin segment, with existing profits and a clear path to growth via Hunting’s distribution and customer networks. Deepwater is also a good place to be, in our view, given the significant developments going ahead in Guyana, potential upcoming developments in Namibia, and potential of a refocus by majors on new projects in the coming years as companies look to refill their development hoppers.

And then add a relatively modest 6% to 2026 EPS. A Capital Allocation Policy update after giving us a cash balance surely means buybacks are on their way. The price action was strange here. It opened up on the news, immediately got sold into, perhaps as the oil price was weak on the day and then bounced strongly. Presumably, investors took their time to realise that buybacks are likely on their way.

Latham (LTHM.L) - Preliminary Results

The financial year to 31 March 2025 was a year that started off with challenging market conditions, but one where we were expecting market conditions to improve during the second half of this financial year. However, we did not see the expected improvement until the final quarter.

90p EPS looks a miss on a c.95p forecast in Stockopedia. However, the market didn’t react negatively to this news. Perhaps because they expect a significant benefit from this:

During the second half of the year we saw a significant competitor go into administration which caused some short term pressure on margins in some products groups as they quickly turned their stock into cash.

It all depends on whether this "significant competitor" was a price leader that was gnawing away at their margins and volumes. Alternatively, it may be because they don’t adjust out a one-off pension hit, which would make the EPS look better.

Movements in the value of inventory have been a major driver of P&L here in the past. Commentary:

The cost price of our products is on average 3.5% higher (2024: 3.4% lower) than at the start of the financial year.

However, these are small movements compared to those caused by COVID, the aftermath, and the energy crisis, and not enough to compensate for:

Due to the market conditions, we did see a continuing trend of a shift in product mix to some lower value products as customers looked to purchase cheaper and more cost effective products.

This, combined with the liquidation sale of a competitor, drove gross margins slightly down, while selling and distribution costs were significantly higher.

The outlook seems better in several dimensions:

1) Volumes

2) Mix

The gradual trend to improved market conditions that we have seen in the final quarter of this financial year has continued into the new financial year, with a slight improvement in the trading margin and also our trading volumes

3) Inflation

We are not seeing any price weakness in our product portfolio, and our manufacturers have significant cost pressures on raw materials and wages which should lead to some price inflation over the coming financial year.

2) Mix again

Demand for our solid timber products, which has been more challenging during this financial year, are showing signs of improvement which we believe will continue.

They note a recent jump in container rates:

Container rates have been fluctuating due to uncertainties with tariffs. The 90 day tariff reprieve has created an increase in short term freight causing prices to increase, but this could change quite quickly.

This could inflate the value of their inventory, providing a temporary P&L boost that has confused investors before. It also puts pressure on cash flow, which plays to their strengths.cHowever, a massive business risk is incoming:

Following our complete end to end review of our supply chain, the outcome was that we should consider investing in a National Distribution Centre.

Part of the risk is software, but at least they have had some success here:

During this financial year we implemented a warehouse management system ("WMS") into our Thurrock depot which has been a huge success. We are currently working on rolling this out through the business over the next few years.

Other risks are non-software execution, getting the size right and surely increased inventory levels which will suck in cash and increase P&L sensitivity to commodity pricing.

Trading at a small premium to net assets. There are minimal intangibles, but there is a pension surplus which may not exist or be recoverable. They tend to hold excess cash, but may now have a use for that. PE is nominally 10x, and lower if you cash-adjust. However, adjusting out the one-off pension cost, EPS is forecast to fall for a 4th year running.

Ultimate Products (ULTP.L) - Trading Update

One last(?) profits warning!

As a result, H2 revenues are now expected to be broadly flat vs H2 FY24, with FY25 revenue expected to be approximately 4% lower than last year. Accordingly, the Board expects adjusted EBITDA for FY25 to be around £12.5m (versus current consensus of £14.3m). Looking ahead to FY26, the current order book indicates a slow start to the year (currently down 7.5% vs this time last year). Given the current trading environment, the Board therefore believes it is prudent to expect FY26 revenue to be lower than FY25, at a level broadly in line with the current order book position.

This is driven by poor sales, sales mix and order book, and there seems to be some acknowledgement that they could do better:

In recent years the Group has delivered substantial improvements to its branding, product development and operational performance, including the deployment of robotic automation, AI and process change. The Group's focus now is on replicating those improvements within the sales function, with a number of initiatives underway which the Board is confident have the potential to deliver a significant improvement in the Group's financial performance.

They have a slightly bonkers four brokers providing research coverage, but the outcome is pretty similar - only 15% miss on FY25, but a whopping 55% cut to FY26. This may be undue caution from the company, but it's now on a 10x 2026 P/E, which is high by historical norms, even after this week’s fall. With the share price falling less than 55% this week, this may be an underreaction to this news.

All four brokers expect no buybacks in 2026, but that is not mentioned in the RNS. The reason is that they target 1.0x EV/EBITDA debt, and debt is forecast to be 1.8x EBITDA in 2026. This is consistent with their policy of buying more when the share price is higher. A capital allocation policy of buying back shares up to a target debt EBITDA level is a disaster when trading is also deteriorating. For a cyclical business, it will typically mean there is more money free for buybacks when the share price is high and none when it collapses.

The bull case from here is that in a few years’ time we could be looking at a FY8/2028 forecast of around 12p, with a multiple of 8x, which is 96p. Discounted back at 15% pa, that's worth 69p today. Then you'd expect FY 2029 to overshoot the "normal" earnings, and the share price could be 14p x 10x = 140p, or indeed, based on history and with money pumped in from buybacks, pretty much anything. However, as a SCLer has wisely said, "every company appears like a buy on brokers’ forecasts 2 years out", except here we need 4 years, and those broker forecasts don't even exist yet.

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