Small Caps Live Weekly Summary
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This week has been overshadowed by continued investor worries about possible upcoming tax changes in the UK budget at the end of the month. Three major changes could have an impact. The first is any changes to Capital Gains Tax Rates. The fear that these could be immediate means investors are taking gains now. The second is reduced pension lump sums, which means investors are selling equities now in order to get the cash out of SIPPs as soon as possible. Thirdly, any removal of the inheritance tax exemption on long-held AIM shares would be devastating for this market, as some estimate that over 30% of the capital invested here is for this reason. Of course, none of these change the fundamental value of these businesses, and any major drop would probably represent a phenomenal opportunity for those with spare capital. We are not in a rush to sell up, though. If these changes don’t happen, expect the reverse to happen and small caps to go up significantly. As always, the political situation remains hard to call.
Centaur Media (CAU.L) - Trading Update
Another big profits warning:
The Board now expects the Company to achieve revenue of at least £34m in 2024, at an adjusted EBITDA margin of approximately 15%, which is significantly below the current analyst consensus range. This revised expectation will also impact our revenue and profit expectations in 2025.
Basically, the stuff we understand and like is doing well, and the other stuff is going badly:
These headwinds are having a significant impact on Xeim's Econsultancy and Oystercatchers brands, and Xeim's non-strategic advertising revenue. More positively, revenue from our future growth drivers, The Lawyer, MW Mini MBA, Festival of Marketing's October event and Marketing Week's subscriptions, has continued to improve in the second half.
This should hopefully limit how bad things can get before they just shut down Xeim. Whatever that is. However, last year, they had £7.5m in adjusted operating profit for Xeim and £3m for the Lawyer. So without this, the business would be worth much less despite Xiem’s cyclicality. The multi-year part of the warning makes this potentially something that reduces the value of the business not just an issue of timing. Ultimately, they appear to be investing for future growth but we don’t yet have sight of what the payback of that investment is.
Getech (GTC.L) - Directorate Change
Investors often fear a CFO resignation, but I doubt there were many tears when this was announced:
…announces that Andrew Darbyshire has notified the Board of his decision to step down as Group CFO and Director on 31st October 2024.
He was thanked, though:
The Board and I are immensely grateful for Andrew's unstinting service and contribution to Getech over the past ten years and we wish him every success in his next chapter.
And appears to be happy with his achievements over the last decade:
In my ten years at Getech, I am proud of how the business has been transformed
Here is that transformation that Andrew is so proud of:
A 95% drop in value. Although perhaps only 90% if you include a few dividends in his early years.
In his memory, we reminisce about the time he got namechecked in the editing notes that were accidentally left in the 2023 Interim Results:
And our purely imagined scenario of exactly what was going on at the time: "Andrew, has it been done? Andrew, were those cash flow projections or just your fantasy football scores? Andrew, will you please respond to my email? Andrew, why won't you take my calls? Andrew, please talk to me, I can't believe I took this job....Andrew, Andrew..."
On a more serious note, this does appear to be the last of the old guard gone who oversaw the incredibly value-destroying attempt to be part of the “hydrogen economy”. With costs cut and the business refocussed on selling its core data platform to an expanded range of customers, the business is incredibly geared to any new contract wins. Broker forecasts in far years are always to be taken with a pinch of salt, but Cavendish are brave enough to put their name to a 0.9p 2026 EPS forecast on a more than doubling of EBITDA. It wouldn’t take much success to make this look very cheap versus a current share price of around 2.5p. Although at this market cap level and given the history, it remains a risky one.
Oxford Metrics (OMG.L) - Acquisition of Sempre
We’ve been critical of this company in the past. A new CEO seems to have made a hash of it. In June, a broker note stated more than 90% visibility on FY revenue, then they appointed CFO from Fire Angel, and didn't coordinate with Progressive to get a note out quickly with a huge unquantified profit warning in September. It is no wonder the shares have been weak.
A lot of the value in the business is to do with what they will do with their large cash pile. And in light of this, this weeks news is a step in the right direction:
The total consideration for the Sempre business of up to £5.5m is subject to customary adjustments for working capital, cash and debt-like items. The consideration is to be funded through a cash consideration of £5.0m from existing resources and up to £0.5m through an earnout contingent on Sempre meeting business performance targets. The acquisition is expected to be immediately earnings enhancing for the Group.
This seems a decent acquisition. Just under 1x sales and 7xEBIT for something that has grown revenue 8% for the last few years. However, there isn’t a lot of obvious synergy with their current business:
Sempre is a measurement specialist with deep industry knowledge and an established sales and services organisation. Through Sempre's expert in-house consultants and partnerships, it provides high precision metrology solutions to improve its clients' productivity and efficiencies in the area of quality and inspection.
Buying something so different from their core business suggests a lack of confidence in the core, or at least that there are very few immediately complementary businesses, and they are not for sale/expensive. We really have a clue whether the new CEO is going to have the skills to put together an entirely new mini conglomerate by acquisition in smart manufacturing.
The other news about a good use for the cash is the announcement of a buyback. It has the feel of another Nexteq - a rudderless struggling business but with net cash and a buyback in response to a big fall on a profit warning. That has shown that aggressive buybacks can cause a 25% or so rise following a profit warning, even within MAR rules. So, there is a short-term play here, even if the longer-term strategy seems still up in the air.
Ramsdens (RFX.L) - Pre-close Trading Update
It is a short statement that effectively confirms that they are in line with the upgraded forecasts:
As highlighted in the trading update published on 6 August, FY24 has been another year of record performance and the Group expects to report profit before tax of at least £11m (FY23: £10.1m).
This time last year, they said PBT "of more than £10m" and did £10.1m. So "at least £11m" looks consistent with Liberum's £11.2m forecast but could still be a beat or a tiny miss. (The prior year, they said PBT was ahead without quoting a number, giving revenue instead)
More importantly, they see long-term growth, which is what makes this too cheap on forward P/E of less than 8:
We have optimism for further progress in FY25
This could be considered an upgrade, given that the only metric included in the update is PBT, and Liberum was previously forecasting it to be flat on marginally higher revenue.
Liberum make no change to forecasts, but they go through each part of the business in detail, and they all seem to have momentum:
Forex is ahead YoY, but peak summer was apparently affected by football, which won't be repeated next year.
Precious metals are stronger in H2 than H1, with gold now higher than at year-end.
Pawnbroking will be stronger in H2 than H1 due to recognition timing
Retail Jewellery is strong in H2, in particular in watches, which were weak in H1.
If GBP gold prices stay at current levels, which are above where Ramsdens was last upgraded, then some kind of a beat next year is pretty much guaranteed.
The biggest short-term risk appears to be that Downing has to dump their 10% holding in the company if inheritance tax relief is removed from AIM shares. The shares were weak on this update, presumably for tax-fear-related reasons, as someone was using the liquidity of the trading update to get out. This selling appears to have abated, and the shares look due a bounce.
That's it for this week. Have a great weekend!