UK small markets continue to look weak, but we have not much to add to previous commentary, so we’ll dive straight in with the updates from companies:
Capital Limited (CAPD.L) - MSALABS Trading Update
We are not sure we would call this a trading update given that there are no revenue or EBITDA figures given, more of an operational update. However, the update confirms that their significant growth trajectory is on track:
We look forward to many strong years ahead of us as we further grow and develop our global footprint, including the deployment of 21 Chrysos PhotonAssay™ units by 2025.
This is perhaps the key bit they really wanted to announce to the market:
Capital agreed to fund any shareholder not willing to participate and as a result Capital's shareholding in MSALABS has increased from 77.76% to 81.79%.
This is the result of an equity raise at the subsidiary level, with minority holders (mainly MSALABS management) not being able to put in their full share in, meaning Capital increases their stake in this significant growth business. Which is good news.
Reporting these separately also is perhaps continuing the precedent that may lead to MSALABS being distributed in specie or otherwise separately listed when it reaches sufficient scale.
Creightons (CRL.L) - Final Results
These were not flagged in advance, so their arrival on Friday caught us somewhat by surprise. This has been a tough year for the company:
· Overall branded sales have increased by 11.7% to £22.8m.
· Sales of retailer own label products decreased by 11.7% to £22.0m.
· Contract manufacturing sales decreased by 13.1% to £13.8m.
· Total overseas sales have increased by 5.6% to £10.6m
When you include the effect of inflation, these are significant drops in product volume sold.
But H1 did most of the damage and was loss-making with -0.48p EPS, So, 0.65p EPS for the Full Year is a decent turnaround in H2 with -0.48p EPS. However, this is also behind were we expected them to be, given how positive they were in the H1 results presentation. If we annualise the H2 performance, we get around 2.6p EPS ging forward, so about a 13x P/E.
In November, expected to be so going forward that they would have no short-term borrowings by year-end. But this week we get:
At 31 March 2023 the invoicing financing is in a utilised position of £1,557,000 as this facility has been utilised to fund the activities during the year (2022: £1,267,000). At 31 March 2023 the Group had utilised £26,000 (2022: £495,000) of its overdraft facility.
While this is a massive improvement on 30th September (not given above), that's clearly a cash miss against management expectations in December. They did have some excess cash on the balance sheet on 31st March, but not enough to pay off the short-term debt and still operate the business.
The outlook seems to be very much about managing challenges rather than any green shoots of growth:
In summary the Board believes that good management, strong customer relationships and financial position will continue to enable the Group to manage the current economic situation and that the Group is well placed to proactively manage new challenges and take advantage of any new opportunities that may arise.
They are being proactive with challenges but only reactive with new opportunities. Perhaps because they have maxed out a single shift, having sacked the staff for the second one. And it sounds like any acquisitions are off the cards for the moment unless something falls in their lap/administration.
The market liked this update, with a small rise (although the spread is high and liquidity tight here.) However, the 13x P/E doesn’t look particularly attractive compared to other UK small caps. But in truth, there is little in this update to change anyone’s mind. The bulls will point to a well-run company with temporarily depressed EPS that may return to growth in better market conditions. The bears will argue that a lot of other companies have similar characteristics and risks, but are much cheaper in the current market.
Hunting (HTG.L) - H1 Trading Update
As expected, trading momentum continues here, with what looks like another beat/upgrade on all fronts:
· Group performance for H2 2023 is likely to be similar to H1, therefore management is increasing EBITDA guidance for the 2023 full-year to $96m-$100m.
· Management anticipates total cash and bank at 31 December 2023 to be between $nil and $25m as larger projects are completed in H2 2023.
· The outlook for 2024 is improving as sales order books increase. Management now anticipates EBITDA to be in the range of $125m-$135m for the year ended 31 December 2024.
EBITDA is up 5% mid-point to mid-point on the previous range, which was:
2023 full year EBITDA revised up to $92-$94 million
So, like the last update, not a massive increase. But given that the share price had dropped back below both these upgrades, this is looking like a bigger mismatch between market pricing and the business performance. Last time, the share price rose 15% because it had been weak prior to the beat, before dropping back below £2. Presumably, just due to weak Uk markets in general. This update caused the price to rise 20%. On the surface, this looks to be an over-reaction to a 5% beat, but again context is everything:
We also wonder if management have left something in the tank for 2023. Half Year EBITDA being $49m, $49m, $65m, $65m would look a bit odd. $49m, $55m, $60m, $70m would perhaps be a bit more normal, leaving maybe 5% more EBITDA to come for 2023?
Despite this positive trading, the performance is someway off previous highs in this cyclical business and, therefore, not obviously cheap on earnings (although still very cheap on assets). To invest, you have to believe that this oil cycle is slower than usual due to credit conditions and ESG concerns and that this is near the start of the cycle for Hunting, not near the end.
Quiz Clothing (QUIZ.L) - Final Results
These are really good results. EPS is given as 1.64p vs 1.65p last year. In the full annual report for last year, they said there were no exceptionals for 2022, after losses from putting their property-lease-holding subsidiary in administration in 2021 in order to renegotiate leases. Stockopedia agrees with the company supplied adjusted EPS for previous years on this occasion. Therefore, assuming no more exceptionals (and 2021 was as exceptional as it gets), the outurn of 1.64p EPS compares with forecasts of 1.3p.
On the outlook, they said in their April update:
Group revenues in the final three months of FY23 were broadly consistent with those generated in the comparable period in FY2019, that being the last period unaffected by coronavirus related factors.
And this is this week’s:
Revenues in the first three months of the current financial year have been broadly consistent on a like-for-like basis with those generated in the comparable period in FY 2019, that being the last period unaffected by coronavirus-related factors.
So we have six months of continuous trading slightly below 2019. Our best bet must be that this will continue. But this is on a like-for-like basis. Today they report 68 stores GB+Ireland plus 67 concessions. In the 2019 annual report, they claimed 78 GB+Ireland stores plus 188 concessions, including 50 in Debenhams. So we understand revenues to be materially lower than in 2019. But, the cost side has been transformed due to the "renegotiated" leases.
The market didn’t like this update. Presumably, this did the damage:
The Group generated revenue of £23.2 million in the three months to 30 June 2023, representing a 15% decrease on the prior year in part reflecting the strong prior year comparatives in the first half as well as the impact of the macroeconomic uncertainty and inflationary pressures on consumer demand.
We had expected the good weather to have helped them more during this period. But then H1 last year was indeed very strong, with EPS of 1.19p.
The other thing that may be worrying investors is the post-period cash movement:
Total liquidity headroom at 4 July 2023 of £7.1 million, being a cash balance of £3.7 million and £3.7 million of undrawn banking facilities less £0.3 million of bank loans
On that, they say:
The cash utilisation since 31 March partially reflects investment in three new stores and the commencement of works to expand our distribution centre.
Note, however, "partially". We must suspect most of the rest has gone into working capital rather than to losses, given the unchanged headroom in the downside scenario in the going-concern statement.
This was confirmed in the IMC presentation, where they said there was £1.5-1.6 capex in the last three months, including £1.3m investment in the distribution centre, but also some build-up of working capital.
The other key learning from the presentation was that, despite the weaker Q1, they expect to match, if not beat, last year's number. With brokers forecasting 1.7p EPS for this year and 2.5p next, this simply looks too cheap, anywhere near the current price, and the market appears to have been wrong to react negatively to these results.
Restore (RST.L) - Trading Update & Board Change
the Board anticipates that the adjusted profit before tax will be lower than previously expected and will be £31 million for the full year.
Stockopedia had a consensus of £31.6m for PAT, so this is a miss of around 25% (assuming a normalised tax rate). However, this is a company that has grown by leveraging itself up and acquiring unlisted businesses. So with a £300m market cap and £200m+ of debt, the share price today should fall around 40%, not 25%, to fully reflect the change in earnings.
With the recent changes in the UK base rate and in anticipation of further increases in Q3 and Q4, we have assumed higher interest cost for the year notwithstanding lower net debt. Total interest cost, excluding the impact of IFRS16, is now assumed to be c£9.6million for 2023 (2022: £5.9m, 2021: £2.9m).
So with rates up further, interest cover could be down to 3 or 4x, making this look more risky, and perhaps means a greater fall than 40% should be the real fair value adjustment.
In light of this, the c.25% drop this week looks too light, as it barely reflects the weakening of trading on the unleveraged business. Although, holders may have already been ahead of brokers on this one and already assumed they would warn given the trend:
Or be looking much further ahead and assuming this is a blip. However, the CEO falling on his sword suggest there is no quick fix. And the ROCE has been below their cost of capital for the last few years:
It's probably now below their cost of debt. So the company has been destroying shareholder value for the last few years. This is a tanker that has been heading towards the rocks of higher interest rates for many years now, and it will take more than a change of CEO to turn the ship around.
The drop in broker EPS consensus in Stockopedia is relatively light, perhaps reflecting stale forecasts in there. Given this roster, we can’t see the details of any notes to confirm:
They appear to know as much as we do, though, since three brokers have a Buy rating, and four went with a Strong Buy! We are guessing that these notes contain warnings of being marketing communications. Perhaps marketing themselves to the company for a slice of the next equity/debt raise fees!
Wynnstay (WYN.L) - Interim Results
Last year's H1 revenue was 47% of the outturn. Today they report 60% of the forecast. Assuming commodity price inflation fully reverses in H2, then by their figure, this is still 53%. As they flagged at the time, profits in 2022 were exceptional due to stock gains, mostly on fertilizer. And this is now reversing:
H1 2022 results benefitted from the significant one-off fertiliser stock price gains. In this reporting period, the fertiliser blending activities at Glasson contended with a reversal of the abnormal spike in fertiliser raw material prices, which created one-off adverse stock realisations
Underlying PBT is currently running behind FY forecasts of £12.2m:
Underlying pre-tax profit* (including an estimated £1.5m of one-off adverse Glasson fertiliser stock realisations) of £5.25m (2022: £10.21m)
The first line of the statement seems to give a false impression. They say:
Good overall result in softer trading conditions; underlying performance in line with management expectations
However, later they reveal:
The overall outlook for the Group's performance in the second half is encouraging, with the arable sector looking strong. However, taking a cautious view, at this stage we do not expect to make up the full impact of the Glasson shortfall.
So to be clear, this is the profits warning. As is conformed by brokers who say:
we reduce our FY23F adj. PBT by c.12% to £10.7m and adj. dil EPS by c.13% to 36.6p. We leave FY24F profit estimates unchanged.
We would caution that there could be a further downgrade should fertilizer prices continue to fall rapidly.
Looking at the cash flow, we notice:
(6m to 30/4/23, 6m to 30/4/22 and 12m to 31/10/22 respectively)
As expected, significant cash has been released from inventories due to lower replacement costs. However, this has not freed up the cash we expected because it appears the higher inventory (at cost) last year had been funded by higher payables which has now reversed.
Historical H1 payables:
2021: £64.6m
2022: £96.8m (peaked £105.0m 31/10/2022)
2023: £76.5m
Due to the larger size of the business and residual accumulated inflation, we suspect this represents a pretty much full normalisation.
Looking at the balance sheet, the current ratio is fine, but we are struck by the reduction in cash, down from £31.2m on 31/10/22 and £6.1m last year to £1.4m on 30/4/2023. Some of this movement is due to acquisitions, and they also say:
Net debt on a pre IFRS 16 basis (excluding property leases) increased to £10.68m at 30 April 2023 (2022: £7.62m). The rise reflected both acquisition funding and continued high working capital requirements, which resulted from the ongoing commodity price inflation. Working capital in any given year typically peaks around April, and reduces over the second half, and the Group is expected to close the financial year with net cash.
We think citing "ongoing commodity price inflation" is a bit misleading, given they have just issued a profits warning due to fertilizer price deflation, but as we have been pointing out, feed costs remained high during the period.
The company's valuation has been often supported by net tangible assets. We see these have risen from £109.6m to £111.4m over the six months. We make that 494p per share. However, in current markets, trading at a discount to TBV is no longer a rare occurrence.
That’s it for this week. Have a great weekend!