Small Caps Live Weekly Summary
Welcome to your weekly summary of what we discussed on small caps live this week. To see the full debate you will need to be a ‘member’ of the server. This is free and easy to access, so if you don’t already have it then here is an invite.
Links will usually go to the browser version. So if you are a member with the app installed putting the company ticker into the search bar to find the section may be the easiest option for you.
Large Caps Live Monday 8th March
On large Caps live this week, Wayne looked at ETFs and in particular, the issues the ARK funds may have if the tide turns in the future.
I think it is about to become the biggest TURKEY SHOOT in the market.
…when it unwinds there is a massive impact. As we saw above a 30% shareholding might represent a massive amount of the tradeable third party free-float. And each of those APs are going to act independently rationally - which means that as investors dump ARK ETFs the APs will short the underlying stock. I think the key difference between ARK and other fund houses is:(1) the concentration of the bets
(2) the speed of AUM growth - which has meant that it has bought rapidly
(3) the use of the ETF structure so the cost to exit for investors is low (in comparison many US mutual funds etc still charge initial fees etc)
Over the week Wayne & others have also been taking a detailed look at Hammerson (HMSO.L). Wayne also shared some concerns with the impact that the scrip dividend may have on investors who hold the shares with Hargreaves Landsdowne. Put “HMSO” into the excellent search function on the SCL discord server to see the full debate over the week.
The Hammerson results also gave Leo the opportunity to continue his bid to be the next Banksy with another piece of modern art from his ‘Annual Reports Re-imagined’ collection:
Small Caps Live Wednesday 10th March
Shoe Zone (SHOE.L) - Final Results
Leo found that on an initial look these seemed pretty strong in the current climate. However, the lack of dividend indicates that the anticipated recovery will be very slow here:
“Until the business is debt free, has tackled the pension deficit, repaired the balance sheet and restored capital expenditure, the business will not be in a position to make dividend payments. We anticipate this will not be before 2025.”
Mark’s view is that they would be better off rebuilding their balance sheet with equity at the current prices.
And raising equity tends to make the share price go up in current markets. Any company with any debt and a strong share price that isn't tapping capital markets at the moment is daft IMO.
Tremor (TRMR.L) - Full Year Results
Mark took a look at these results, which on the surface, showed an impressive recovery in H2. However, he found multiple reasons to be cautious:
1) They are an Israeli company that was initially listed on AIM. Although this doesn't seem to be an issue for shareholders at the moment, the shares have often traded at a discount to the market. I see little sign of that discount at the moment, but it could easily return.
2) Their merger with what used to be Blinxx, at what appeared to be a full valuation for that business, raises questions of how effective their M&A strategy is or how valuable their core business actually was.
3) I must admit to not really understanding precisely the service they provide to customers. This also appears to be rapidly changing – so particular business areas grow rapidly for a few years and then collapse, while another bit takes over. You could applaud management for their flexibility, but given the number of times it has been through this short cycle, I'm not sure it makes sense to buy when everything is doing well!
4) Speaking of which, since the middle of last year, the share price has done 4x. Partially this reflects the bounce back in trading. But with 30c of adjusted EPS, this is now on 27x P/E. To be fair it would be slightly lower if you adjust for net cash on the balance sheet.
5) Maybe it's just me, but I can't see what adjustments are applied to get to the adjusted EPS figure of 30.46c. However, you can drive a bus between that and the reported EPS of 1.6c.
6) The company highlight their cash generation. In the last six months, they generated $27m of FCF. If we annualise that to $54m, then they are currently on 20xFCF. Not bad if you believe they can grow in the future. However, they are paying $15m of non-cash share-based payment each year, and if you take that off, you are closer to 30x real economic benefit accruing to shareholders.
Concluding:
I've owned them in the past, but when they were on an EV/EBITDA of c.3 and had better growth prospects. There was always a bit of a smell but I held my nose for 3x EV/EBITDA - I wouldn't for 20xEBITDA.
Beeks Financial (BKS.L) - Interim Results
Leo took a look at these results and noted that slowing revenue growth and falling profits implied that investors would be unwise to pay a high multiple for this company. A P/E of 32.7x, according to stockopedia, therefore looks very hard to justify.
Mark found that the balance sheet looked particularly poor with a current ratio barely above 0.4, concluding that, in his opinion:
They need to raise a lot of equity IMO and sharpish.
Somero (SOM.L) - Final Results
We considered these strong overall, slightly beating market expectations. However, the share price reaction was muted. Perhaps by the following statement:
“With this comprehensive view, the Board expects 2021 will be a profitable year with healthy cash generation, with revenues growing in the mid-single digit percentage range and with EBITDA growing modestly compared to 2020 due to the decision to invest to add sales and support staff to benefit future growth.”
Which we calculated as a revenue drop for 2021 vs 20H2.
Say 7% revenue growth on $89m for 2020 = c$95m = $47.5m per half which is less than the $53m 20H2 revenue.
This seemed at odds with the scope for considerable bounce-back demand for warehousing in Europe and the general tone of their outlook statements:
“The Board is confident in the outlook for 2021 supported by solid momentum in the US carrying forward from the strong finish to 2020 and reinforced by customers reporting project backlogs that span well into 2021. Outside of the US, market conditions and activity levels remain generally positive, and while our international markets have been subject to more strict COVID-19 restrictions that those put in place in the US, we expect to see solid opportunities for growth in these regions in 2021.”
Somero have a results presentation followed by Q&A at 1pm on Monday and we will follow up to try to get some more colour on this.
Small Caps Live Friday 12th March
Getech (GTC.L) - Placing & Acquistion
We have been sceptical of this company’s pivot to green energy, noting that:
Getech’s core business is managing a database of seismic data and providing software that accesses or analyses this data.
As far as we are aware, no company has used GTC's seismic analysis software to choose where to locate petrol stations in the past.
H2 Green Ltd is focused on establishing a network of large-scale hydrogen generation, storage and refuelling hubs.
Therefore, the idea that “Getech will leverage its expertise through the application of complex geospatial analytics to help H2 Green locate and build a network of hydrogen hubs” could seem somewhat far-fetched to some people.
We are not aware of any significant number of commercial Hydrogen vehicles are available that need refuelling at the moment.
It is not clear that H2 Green Limited has the required capital to build any of these. A Companies House search reveals that this was formed 9 months ago with little capital.
We also found the timeline of events to be noteworthy:
27 April 2011: Getech Chairman, Dr Stuart Paton, is awarded 900k share options that expire on 27 April 2021 at 17.5p.
9 June 2020: H2 Green Ltd is incorporated with 1p of share capital.
20 November 2020: Dr Stuart Paton is appointed as a director of H2 Green Ltd. The GTC share price is 11.25p. At this point and options exercisable at 17.p have negligible value.
26 January 2021: Getech’s exclusive strategic partnership with H2 Green is announced. The GTC share price rises 85% to 25.2p.
28 January 2021: Getech announces that after a handover period Dr Stuart Paton will leave the Getech Board. The GTC share price is 33p making Dr Paton’s options worth around £140k on this date.
Today we get the announcement that:
“The Company has, on 11 March 2021, exercised its option to acquire the entire issued share capital of H2 Green, with such acquisition conditional only on the approval of the Resolution by Shareholders at the General Meeting and the Placing Agreement not being terminated prior to that date.”
At least they don’t appear to be massively overpaying for this business, although there are deferred consideration payments. But this does highlight the madness that, at its peak, the Getech market cap had risen by £11.4m on news of an agreement with a newly formed company valued initially at £125k.
We also questioned the size of the placing here:
“· Placing and Subscription with new and existing institutional investors to raise £6.0 million (before expenses) to facilitate diversified growth in areas important to the delivery of a global Energy Transition.
· Open Offer to Qualifying Shareholders to raise up to £0.25 million (before expenses)
· The Issue Price of 22 pence represents a 12% discount to the closing mid-market price on AIM of 25 pence per Ordinary Share on 11 March 2021, being the last dealing day prior to the date of this announcement.”
So quite a large dilution there with 27.3m shares placed vs 37.6m currently in issue. So why such a large a placing? Well, when you think about it, why not? When shareholders are willing to add £11.4m to your market cap on an agreement with a £125k company, management here would be daft not to raise as much as possible.
Bagholders….I mean shareholders seem non-plussed by the dilution with the share price up slightly on the news.
Before concluding that the real winner was their broker Cenkos, along with Dr Paton, of course.
Gem Diamonds (GEMD.L) - Full Year Results
Mark was impressed with the strength of H2 here:
This is clearly a strong performance, with H2 delivering more than 3 times H1’s Profit Before Tax driven by greater production of diamonds and stronger pricing. The Letseng 12-month rolling $ per carat is up 17% in the last 6 months.
Cost control in H2 has been good too and in many areas came in slightly lower than my estimates.
However, he questioned how much investors should rely on the headline numbers because the company has a large minority interest, ongoing costs from discontinued operations and capitalises waste stripping at their mine. Concluding:
[With my adjustments] this would give c7p EPS, giving the company a P/E of c9 at current prices. Again, not bad – but this is a diamond mine in Africa here – and I see plenty of Africa-focussed businesses that are cheaper and less risky than GEMD. If diamond prices really do take off then this may indeed look great value, but I think you need to take a commodity view to make this a buy at the current price. Something I'm not willing to do for the diamond market.
IG Index (IGG.L) - 3rd Quarter Results
Finally for this week, Leo briefly jumped out of the small cap world to look at IG Index’s 3rd quarter results, noting that:
On the back of this there appears to have been one or more broker upgrades of IG Index.
He was particularly interested in the read-through to CMC Markets (CMCX.L) saying:
Clearly there is read-across for all similar companies here.
They also say that the tastytrade acquisition has gone well. Notably they said absolutely nothing about increased capital requirements or stopping trading in 1000 instruments at short notice. It was clear from the last Mello that they have lost significant customer goodwill over this issue from some respected high-profile customers as well as the horde.
As an investor I have long preferred CMC Markets in this space, initially on valuation grounds, but latterly on what appears to be a superior business model and now more competent management. IG are a bit of a jack of all trades, covering both indices, large caps and many small caps. Whereas CMC are more focused on larger caps and Spreadex have a speciality in small caps. So I see some customer migration away from IG towards the latter two.
On CMCX:
My model has been showing a forecast above this top end for nearly two months now. And the outlook has been continually improving during that time.
Although the price rises of this week mean that the price may have now caught up with the improved outlook.
That’s all for this week, look out for our second company deep-dive next week. Have a great weekend all.