Small Caps Live Weekly Summary
Election CAM SHOE TPT
After a busy week last week, this week has been deathly quiet for news from the type of UK small caps we follow. Understandably, the focus has been on the General Election. It has been no surprise, with a large Labour majority government incoming. UK businesses are crying out for stability and good governance, so let’s hope they finally get it.
The biggest risk for individual investors is that the new government decide to remove inheritance tax exemption for AIM shares. Of course, this would have no impact on the fundamental value of a business. However, it would cause a sell-off in the type of boring, well-run family businesses on AIM that such funds like to hold. After all, the investors in AIM inheritance tax vehicles are more interested in the tax advantage than taking equity risk. While painful in the short term, this may well represent a once-in-a-generation opportunity to own high-quality businesses at bargain prices. This is in no way guaranteed to happen, as the new government may want to avoid headlines that they crashed the market. Especially as this accusation cost Lettuce Liz her seat this morning.
Camelia (CAM.L) - Update on BF&M
To facilitate the timely completion of the Sale and the Amalgamation, Camellia and Argus have agreed that up to $50 million of the agreed $100 million consideration payable to Camellia for the BF&M shares may be deferred in the form of interest-bearing loan notes with a maximum one year term.
Camelia has agreed to defer half their payment in order to facilitate the transaction. On the surface, this is bad news. However, many of us had this down as "may never happen", and in this context, anything that accelerates completion is good news. After all, the proceeds are earmarked for share buybacks, and the difference between a $50m buyback and a $100m buyback is surely negligible to a £120m market cap company.
Shoezone (SHOE.L) - Trading Update
Another profit warning here:
…it has continued to experience cost pressures associated with container prices due to a reduction in the supply of shipping vessels and the continuation of a reroute away from the Suez Canal. As a result, container prices have risen significantly over the last six months.
Alongside an increase in shipping costs, the Company has experienced weaker than expected Spring Summer sales from April to June, due to unseasonal weather conditions.
Those who were cautious are proven right. And it’s a much bigger warning this time. Last time, it was £15.2 to £13.8m, now down to £10m. This is a classic example of a reasonable business but with little pricing power.
When things are going well, and they keep beating expectations, investors become convinced it’s a brilliant business. After a few profit warnings it will be viewed as a terrible business that no one should ever invest in. The share price was only down around 10% this week despite the large EPS cut, so it doesn’t appear to be in despair mode yet. The already low rating might have prevented such a big fall, but apart from during 2023, this has never been highly rated.
Topps Tiles (TPT.L) - Q3 Trading Update
The trading environment in the period was broadly unchanged from that described in the Group's Interim Results on 21 May 2024. Total Group sales in the third quarter were 6.9% lower year-on-year, and in the 39-week period, Group sales were 6.2% lower than the prior year. As stated in the Interim Results, we believe that the UK tile market is down 10-15% year-on-year, with the Group continuing to take market share.
Broadly unchanged appears to mean terrible, although they claim they are taking market share. As in previous updates, they seem to refuse to actually tell shareholders if they are trading in line with expectations or not. This leaves shareholders fumbling in the dark until the brokers’ notes arrived and hey presto!
Zeus revise forecasts for FY24E – FY26E following the Q3-24 update to reflect the lower YTD revenue vs. Zeus expectations. Group revenue for FY24E reduces 2.2% to £246.9m, resulting in a 6.0% decline yoy. Given the higher gross margin reported in H1-24 (53.9%), Zeus marginally increase FY24E gross margin by 20bps to 53.5%, however, with the inherent operational gearing in the business adj. EBIT falls 12.4% to £10.0m (prev. £11.4m) resulting in a margin of 4.1% (prev. 4.5%). Net cash (excl. leases) reduces by £1.3m to £18.0m (prior: £19.3m) and we reduce dividend to 2.3p (prev. 2.8p) which is 100% of FY24E EPS, in line with company policy.
Zeus haven’t covered this for long, but Edison have halved their EPS forecasts this year, and it’s certainly possible these get slashed further in the near term. As such, it seems too early to buy in for a recovery here. Especially as the market seems to have under-reacted this year to these disappointments.
That’s it for this week. Have a great weekend!