Small Caps Live Weekly Summary
AGFX CRL EQLS KINO MPAC TON VANL
Argentex (AGFX.L) - Trading Update
In line with expectations, although they don’t say what they are:
The Board expects to report H1 2024 revenues of approximately £23.9m* (H1 2023: £25.0m*). The Group continues to trade in line with expectations and the Board remains confident in its full year expectations.
House broker, Singer has a small loss forecast, and they say:
We leave our forecasts unchanged at this stage.
But also note:
55% of our FY24e revenue forecast is covered by the H1’24 revenue outturn…
…We take comfort from a buffer in the H1 outturn vs our FY expectations, leaving room for the unexpected in H2 or conversely potential for upgrades later in the year
Part of this loss is due to an increased cost base as they try to develop more of a platform approach to their offerings to customers. So it looks like technology hires rather than salespeople, which gives a much longer route to revenue generation. Momentum does appear to be with them, too:
Although adverse market conditions experienced during 2023 in the core FX business continued into the first quarter of 2024, trading momentum in the second quarter has been encouraging.
In addition, several new international licenses have been granted or are expected to be. The shares are down about 75% this year, helped by the surprise dividend cut and placing. However, with the placing occurring at 45p versus a share price now in the low 30s, barring further surprises, there are reasons to expect some further recovery here, even if previous highs look long gone.
Creightons (CRL.L) - Update on Asset Impairment
This didn’t appear on our feed initially, as the RNS coding was "UPD":
Statement regarding strategy, company or operations update, which is not a trading statement (TST)
However, they gave an update on "underlying profit and cash generation", so this was clearly a trading update, and they messed up a highly material regulatory news release. It was the share price move that revealed that it was bad news:
The Emma Hardie business was acquired on 28 July 2021 for a total consideration of £6.2m. The annual review of the value-in-use of the Emma Hardie brand, in accordance with the requirements of IAS36, will result in an exceptional impairment charge of £4.45m. While non-cash in the current year, this charge will materially adversely impact the reported pre-tax profit. The remaining associated intangible asset value of £0.66m reflects an accounting assessment of discounted future cash flows from Emma Hardie, based upon current performance and an estimate of future sales and costs.
So, it seems a DCF shows Emma Hardie to be worth 10% of what they paid for it. You can see now why Bernard was given the chop
However, this is the good news:
Similar impairment exercises on the other acquired brands resulted in value-in-use exceeding their carrying value, so no impairments will be required.
The operational performance of the Group in the year to 31 March 2024, will show improved underlying profit and cash generation in the second half of the year in comparison to the first half.
The probe is that “improved” but not “significantly improved” means this may well be below what many of us were expecting for a recovery here. Especially as Emma Hardie is clearly underperforming
The market may have been hoping for more in H2, but Leo was only expecting a modest improvement, so this is a helpful confirmation of line for him. Of course, the tangible book value unaffected by goodwill write-downs is perhaps providing some support too. We will find out the reality soon:
Creightons plc intends to announce its audited preliminary results for the year ended 31 March 2024 on Thursday 18 July 2024.
Assuming H2 is slightly better than H1, this looks expensive on near-term earnings. So, the big question is when/if a recovery can occur. Thankfully, with the management change, shareholder presentations have been resurrected. So we will be able to put this question to them, then.
Equals (EQLS.L) - Strategic Review Update
After all this time we have:
a possible all-cash offer for the entire issued and to be issued share capital of Equals at a price of 135 pence per Equals Share
That’s way below where many were expecting it to be priced, and it is not even a firm offer yet. This has been going on for well over eight months now, still without the consortium managing to complete due diligence or get financing in place. We can see why some of the more savvy investors are taking profits at the current level. The short-term upside is now limited, and the downside is significant if no bid arrives.
Kinovo (KINO.L) - Final Results
The narrative contains lots of the word “ahead”, but these look in line with the last couple of trading statements, so they are really highlighting that they had upgraded expectations during the year. Last time, this confused the market, and the shares rose in response, and it seems to have done the same trick this week. Here are the final figures:
· Revenue increased by 2% to £64.1 million (FY23: £62.7 million)
· Adjusted EBITDA1 increased by 23% to £6.7 million (FY23: £5.5 million)
· Adjusted Operating Profit2 increased by 22% to £6.5 million (FY23: £5.3 million)
· Adjusted profit before tax2 increased by 25% to £6.1 million (FY23: £4.9 million)
Of course, they are ignoring the DCB costs and slip into a loss when these are included:
However, at 68p, 8.2p earnings mean that the underlying business looks cheap. Net cash reduces tho:
Net cash3 of £0.4 million (FY23: £1.1 million)
The amounts they have to pay out for DCB are the main cause, but they have a resolution on the last contract:
· Post-period end, have agreed, in principle, resolution of the final of the nine projects in relation to DCB Kent ("DCB"), the former construction subsidiary
o Full and final settlement agreed in principle at £2.2 million payable over an 18 month period
£2.2m settlement is a not insignificant price to pay, but we expect the market liked the certainty here. After the period end, they paid £1.7m cash, and the £2.2m will be to come, so that means they are effectively net debt minus any internally generated cash flow in Q1.
They still owe HMRC as well:
By arrangement with HMRC, VAT liabilities of £1.3 million were deferred at 31 March 2024. A monthly repayment plan has been agreed with HMRC with full repayment of deferred VAT by 30 September 2024. The arrangement was necessary, in response to the unexpected calling of the performance bond on a DCB project at the end of February 2024.
This is the first time shareholders have heard about this deferment, which has not been mentioned in any of the trading statements since it was implemented at the end of February. It is also not included in the net cash figure. So, the real pro-forma figure is £4.8m net debt. This is around 10% of the market cap, so it is not insignificant, but it doesn’t move the valuation needle massively.
However, current liabilities significantly exceed current assets, and not just because they are paying out for DCB and owe HMRC. It is not entirely clear how they are managing to be paid by customers more quickly than they pay their suppliers and employees.
So, although this is cheaply rated and has some momentum behind it, it is the sort of business that should be cheaply rated and is not without significant risk, as the HMRC VAT deferment and low current ratio shows.
Mpac (MPAC.L) - Trading Update
They guide for an H1 cash outflow and H2 profits weighting.
As anticipated, the timing of order intake and the phasing of projects resulted in an expansion of working capital which is expected to unwind during the course of H2 2024, with net debt at the half year at £4.9m.
Although they say it was strong, order intake and closing the order book significantly down YoY will prove a headwind, but the top line probably isn’t risk here - adjusting for growth, they have a fairly even historical H1/H2 revenue split, but they've already done £61+m of the £120m forecasts.
Equity Development's May update was entitled "Momentum Maintained", but we are not sure the same can be said this week. For a momentum stock, this could be a problem. This is a company that likes to heavily adjust its figures so, to some extent, they will always be able to adjust their way to hit the desired number. However, they are on an adjusted forward P/E of at least 15 when you include the debt and a reasonable estimate of the true pension deficit. As such, there is little room for any misstep.
Titon (TON.L) - Trading Update & Board Change
Another profit warning here.
As a result, trading in the UK and Europe through to the end of the FY23/24 period is expected to be below the Group's prior expectations, leading to an increased expected loss for the period.
There are claims that green shoots are visible:
Encouragingly, we have seen strong growth in our order book, which has increased by 18% since the start of the calendar year but market delays have meant these orders are yet to convert into sales. Had they converted, revenues would have returned to the levels we saw during the first half of FY23.
However, we are not sure this is an order book in quite the same way as elsewhere if market delays can prevent these from being converted to sales. Perhaps more akin to a “sales pipeline”.
Cash is £2.1m vs £2.2m at the end of March, so not a significant drop. In addition, we get:
Board Change
The Group also announces that Tyson Anderson will step down from the Board and leave the business with effect from today as a result of a wider restructuring to reduce the cost base of the business.
Tyson Anderson is the son of founder John Anderson. John Anderson went from Executive Chair to Deputy Chair and was then replaced by his son, who is now out, leaving no Andersons (or, indeed, Richies, another family with a major stake) left on the board. So, there is arguably more than just cost-cutting going on here. This may well be the further hand of Rockwood Strategic, but given that this is starting to an immaterial position it is surely not worth the time they must be having to commit to it.
As another Tyson famously said:
Everyone has a plan until they get punched in the face.
It seems like Titon has plenty more chances to punch shareholders in the face before their turnaround plan can take shape.
Van Elle (VANL.L) - Housing Sector Update
This week, they announce a contract win:
The Group has been awarded a scheme by Keepmoat at the former Boots site in Nottingham, reflecting its balanced exposure to partnership housing alongside open-market housebuilding. The scheme is worth up to £3m across several phases and is the largest single scheme awarded to its Housing division in the last 12 months. This will be the 15th project over the last three years that Van Elle has delivered for Keepmoat.
But this is an RNS Reach, which means that it is immediately earnings enhancing or is already in forecasts. However, it looks like a strong recovery is underway in what has been their weakest segment recently:
Although we anticipate housebuilding volumes to remain subdued in the immediate future, orders in Housing for the year to date are up 20% compared to last year.
Making their assets more productive has been a key focus for management here, and the UK housing construction cycle turning would be a major boost to this initiative. Particularly as groundwork is one of the first areas to see the turn. If management can succeed in increasing the ROCE of their fleet, the shares appear too cheap as they are trading on a 0.75x tangible book and a single-digit P/E. However, there is a short-term headwind in that Otus Capital Management has been selling down. Given that they still hold over 17% of the shares, the overhang could persist for quite some time.
That’s it for this week. Have a great weekend!