A short one this week, as most contributors attended and are now recovering from Mello! For those who don’t know, this two-day investing conference in London focuses on exactly the type of UK small cap companies where individual investors can gain an advantage over the market.
A couple of highlights for us were: a) catching up with Sanderson Design (SDG.L), whose high-margin licensing strategy continues to strengthen, even in difficult consumer markets, and b) meeting Tribe Technology (TRYB.L), who have redesigned mineral drilling rigs from the ground up to enable full automation. As a new IPO, this is probably a little early stage for us to consider as an investment, but it remains an interesting story and one we will continue to follow.
Here’s some of the non-Mello news that we looked at this week:
Celebrus Technologies (CLBS.L) - Interim Results
This used to be called D4T4. The headlines here are distinctly unimpressive given the £73m market cap:
· Annual recurring revenue ("ARR") increased to £17.4m (H1 FY23: £15.8m, FY23: £16.7m)…
· Adjusted profit before tax** of £0.2m (H1 FY23: loss of £1.3m, FY23: profit of £3.8 million), and statutory profit before tax of £0.3m (H1 FY23: loss of £1.1m, FY23: profit of £2.4m)
· Cash position of £14.7m (H1 FY23: £26.2m: FY23: £17.1m) with no debt
However, broker Cavendish points out:
The £13m sales delivered in 1H make up c.40% of our full year FY24 forecast, which is well ahead of the c.30% historic average. With the small PBT generated in the half also above the typical modest loss in the period, these results somewhat de-risk the back-half weighted 2H seasonality this year
So it sounds like we might be in line for a beat. But we are less optimistic - it seems a lot of revenue was in the last month:
Trade receivables at the period end were £13.9 million (H1 FY23: £1.8 million); the majority of these result from contract wins and invoicing towards the end of the period.
Also a lot of revenue was low-margin hardware. And the traditional pattern of having more than all of the profit in H2 is only part of the story - last year, they also had more than all of the cash flow in H1, whereas this year, cash flow is negative even at the operating level. So, these figures are nowhere near as good as the 60% revenue growth might look. To the company's credit, this is their chosen headline:
Annual recurring revenue ("ARR") increased to £17.4m (H1 FY23: £15.8m, FY23: £16.7m)
This is a disappointing level of growth in the metric that really matters. Particularly as they have been saying that this is a SaaS growth story for the last 5 years.
Creighton’s (CRL.L) - Directorate Change
…announces that Bernard Johnson's employment has terminated and he is no longer a board member.
This is incredibly harsh language for an MD who has been with the business for over 20 years and holds 7.7% of the shares. There must have been a very major boardroom bust-up over the strategy or something even worse. When something similar happened at Argentex recently, they finally fessed up a week later and issued a profits warning. No such news here yet, and no broker consensus in the market for them to warn against, but it does feel like bad news is on the way. Results to 30th September are due any day now.
Shareholders are also losing their primary board contact, as up until this year, Bernard would deliver management presentations, with CEO William McIlroy nowhere to be seen.
There may be some support at the current price as the Tangible Book Value is around 21p, but it would seem daft to rely on that. Similarly struggling small caps such as Tandem, Titon and Zytronic are trading on 0.4-0.7x TBV, so it could be a long way down from here.
Frontier Development (FDEV.L) - Business Update
Frontier’s recent attempt to support their share price with a rather vague strategy review has been shortlived as this week we get news of a big revenue guidance cut and a small profits cut:
Following the lower than expected sales performance of Realms of Ruin, the Board no longer believes that the current market expectation for FY24 revenue of around £108 million is likely to be achieved. Updated guidance is for FY24 revenue in the range of £80-95 million
Despite the reduction in revenue guidance, the Board believes that the current market expectation for an Adjusted EBITDA* loss of around £9 million in FY24 remains achievable towards the upper-end of revenue guidance, as a result of the cost savings achieved through the Organisational Review and an improved gross profit margin percentage driven by revenue mix.
They’ve achieved this by cost-cutting via retrenchment:
Frontier's move to diversify its game portfolio during the last five years, including through third-party publishing and new games in 'adjacent genres', has not delivered the anticipated success. As a result, the Company has refocussed on CMS games.
Liberum say:
We place our target price, recommendation and forecasts under review. Previous forecasts of £105m FY’24e revenues contained £27m for Realms of Ruin sales, although LBITDA of £15m held lower than the guided 20% of opex savings from Organisational Review.
But it seems they missed a trick by titling their note “Warhammer: soft trading during key period” when “Frontier: Realms of Ruin” was the obvious choice.
ME Group (MEGP.L) - Trading Update
The share price had been dropping here and was starting to look reasonably priced, so many watched this trading update keenly. Here's the key line:
For the 12 months to 31 October 2023, the Group expects revenue to be marginally below the lower end of the previous guidance range1 but to be no less than £298 million. Nevertheless, given the Group's focus on profitability, EBITDA remains in line with the previously stated guidance range1 and the Group expects it to be significantly above £100 million. Profit Before Tax is expected to be towards the top end of the previous guided range1 and no less than £67 million.
So probably neutral overall. Revenue is below, but EBITDA is in line, suggesting cost cutting, probably from SG&A. The question is whether this is the start of a trend for weaker trading. They obviously acted quickly to cut costs, but such actions are rarely long-term sustainable.
EBITDA in line, but PAT at the upper end means lower ITDA somewhere. It would be nice to know where. It could be anything from higher cash balances (good) to a change in depreciation policy (bad). They give us no clue, so we’d really like to see the accounts before deciding if this is worth investing in. One thing is clear: it is the end of their market expectations upgrade cycle, at least at the top line, so it may cause those who like to ride ahead statements to exit in the short term.
Zoo Digital (ZOO.L) - Interim Results
These are terrible, as expected, with a $9m cash outflow for the HY:
· Revenues decreased by 58% to $21.4 million (H1 FY23: $51.4 million) primarily as a result of the Hollywood writers' and actors' strikes
· Gross profit decreased by 87% to $2.1 million (H1 FY23: $16.5 million)
· Adjusted LBITDA1 of $7.1 million (H1 FY23: EBITDA of $7.3 million)
· Operating loss of $10.9 million (H1 FY23: $3.8 million operating profit)
The main issue has been no work due to Hollywood actor & writer strikes. In light of this, this looks a bit better than we were expecting:
The Board remains focused to achieve at least break-even at EBITDA level in Q4 and to return to profitability in FY25
Remaining focused is perhaps not the same as being confident, though. Given that they are largely involved in post-production work, it seems a little optimistic to think they will get lots of work as soon as the strikes have ended. Content still needs to be written and recorded first.
There is no current cash balance or net cash that we can see. So, presumably, this is terrible, or they would have included these to reassure us. Thankfully, they raised a lot of money for an acquisition prior to these issues occurring. On the deal, they say:
we have continued to have regular positive dialogue with the vendor.
We’re sure they can discuss all they want, but if they don’t have the cash left, then surely there’s no deal. It has kept them alive to return to the regular business, though. Sometimes it is better to be lucky than good.
That’s it for this week. Have a great weekend!