A shorter week due to bank holidays, and hence not too much news. The worrying trend for companies to issue profits warnings via stealth broker downgrades rather than explicitly via RNS continues. While this may give opportunity to those who read the notes, not every broker makes their research publically available. This leads to the conclusion that we should certainly be blacklisting companies that play these sorts of games, and maybe even blacklisting those that choose brokers that hide their research from individual investors. Something to consider.
Calnex (CLX.L) - Trading Update
In-line statement. This means that profit warnings don’t always come in threes. They appear to have grasped the nettle on the second one. However, the prize for the most uninspiring brokers’ note title goes to Cavendish writing in response to this update:
FY24 trading update - marking time
So it is clear that forecasts here are not going to be particularly impressive:
Break even at best, and no light at the end of the tunnel. However, given the cash balance, which they have wisely kept from what they raised at IPO, there was never an oncoming train to worry about, just that the tunnel appears to be much longer than expected.
However, this isn't a story of strong revenue growth but cost inflation destroying the bottom line that we have seen so often in recent years. Instead the topline has suffered as well.
For this to recover any reasonable profitability, it needs to be able to return to FY23 sales levels, some 70% above where they are forecast to be this year. So, this is one for those who understand the industry dynamics at play. For the rest of us, there is little obvious value here.
Crater (CRTA.L) - Final Results
Crater, or Cirata to use the company’s preferred spelling, is best known in its former guise as WANDisco for losing shareholders 97% of their money after a suspension due to sales irregularities.
The good news is that they got their results out nearly 3 months earlier than last year, so that's progress. The bad news is that material uncertainty in respect of going concern is traditional for this company and one they have maintained despite the name change:
If however the downside scenario were to occur and (a) the Company were unable to anticipate and cut costs sufficiently to preserve the cash runway to a cash break-even position and (b) the Company were unable to raise funds from shareholders or other sources, this would indicate the existence of a material uncertainty which would cast significant doubt over the Group's ability to continue as a going concern.
However, this is what they said in July:
The Board believes that the Fundraise of $30 million will allow WANdisco to begin to take advantage of the opportunities ahead and give sufficient capital to continue as a going concern.
This week, they try to distract from this deterioration by quoting from A Tale of Two Cities:
It was the worst of times, it could be the best of times, it was the season of light after the season of darkness, it had been the winter of despair, it could be the spring of hope.
It is a pity they didn't read David Copperfield instead:
Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.
We expect further misery to come for shareholders.
Downing Strategic Microcap Trust (DSM.L) - Result of Meeting & Dividend
We wouldn’t normally discuss a dividend announcement, but this one is as a result of a bit of a hoo-ha:
At the General Meeting of the Company held today, 56.65 per cent. of the votes cast (including discretionary) were in favour of Resolution 1. As Resolution 1 was proposed as a special resolution (75 per cent.) it was not carried. The Company cannot, therefore, implement its proposed B Share Scheme in order to return cash to Shareholders in accordance with its investment objective and policy.
Milkwood Capital have built a stake here and say:
We believe that the UK equity market is materially undervalued. The undervaluation is even more pronounced in smaller-sized companies, listed in the UK, which is where DSM's portfolio is invested.
We believe DSM provides an excellent vehicle to explore this opportunity.
So they oppose the wind-down and want to keep the vehicle going, under their management. In order to meet what they believe is the wider shareholder mandate, Downing has declared a special dividend instead of a return of capital.
Given the tax implications, and the proximity to the end of the tax year, this could see some big moves in the share price. Milkwood could make an offer for the company, but this seems unlikely to be at a significant premium. Here’s the last asset breakdown at the close on the 28th of March:
This is after Fireangel’s latest bad news and downward share price correction, but to be safe, we'd want to take that 2.44% off NAV. That leaves a NAV of 62.0p vs the share price of 58.0p. As a minimum, 1% fees and incentives need to be removed, leaving 61.4p of NAV. So, it's not really worth investing in the trust directly at the current discount. What may be more interesting is that any takeover would remove overhangs (perceived or real) from many of these small cap companies.
Topps Tiles (TPT.L) - Trading Update
We get the revenue figures, but they don’t say whether they are actually trading in line or not on any other metrics:
Total Group sales in the first half were £122.6 million1, down 5.9% year-on-year, against a record revenue performance in 2023.
This sounds a lot like a profits warning, though:
Group profitability in the first half of the year will be impacted by a number of factors including the weaker market, the timing of the holiday pay accrual and seasonally higher energy usage in the period. We continue to expect the Group's profits in 2024 to be weighted towards the second half as indicated in our Q1 trading update.
They had already guided the H2 weighting, but the confidence in delivering it is waning. We have seen a worrying trend of companies not reporting the miss against expectations in the RNS but via stealth broker downgrades. We had thought of Topps as a quality operator who were above such sleight of hand. It seems not, as when the Edison note did arrive, it said:
We reduce our FY24 and FY25 PBT forecasts, the former by 40%, with the broad assumption that H224 revenue declines by c 4% helped by a more supportive macro environment (eg real wage growth and lower interest rates), as well as an easier comparative.
Ouch. So this was, in fact, a huge hidden profits warning. The magnitude of a 40% reduction is far more than we expected. The games with using the broker to communicate the bad news seem to have worked, however, as the price fell nowhere near 40%. This may be because the reduction in EPS for FY25 is a more modest low double figures, but also because Edison expects a 3.6p dividend to be paid each year, and £4.4m FCF in FY24, £8.4m in FY25. So that’s a 5% and then 10% FCF yield. That’s not too bad; if you believe the marketing communication, that is an Edison note. But at this stage, how much faith would you put in these?
Given this is a small cap, it is certainly possible that investors simply haven’t noticed the big downgrade yet. The more companies that see this sort of thing doesn’t lead to the normal profits warning sell-off, the more may try to emulate this behaviour.
That’s it for this week. Have a great weekend!