Since we’ve had a few new subscribers this year, it is worth a reminder that these summaries are generated from the general consensus of discussions on our SCL Discord Server and will not reflect the views of every contributor. The point of this summary is to stimulate debate amongst knowledgeable investors on the Discord Server. So, if you disagree, agree, or have better information - great! Join the server and have your say. The server is set up with threads for each company, where news is automatically posted. If you struggle to find anything, post in the Help thread, and moderators will be able to guide you.
Belvoir (BLV.L) & Property Franchise Group (TPFG.L) - All Share Merger
Thse who spotted that these listed franchise groups would be better off combining were spot on it seems, as this week we get an all share merger.
Under the terms of the Merger, each Scheme Shareholder will be entitled to receive:
for each Belvoir Share : 0.806377 New TPFG Shares
● Based on the Exchange Ratio and the Closing Price of 344.0 pence per TPFG Share on the Latest Practicable Date, the Merger values each Belvoir Share at approximately 277.4 pence, comprising an equity value of Belvoir's entire issued ordinary share capital as at the Latest Practicable Date of approximately £103.5 million and TPFG's entire issued ordinary share capital as at the Latest Practicable Date of approximately £111.0 million.
TPFG shareholders get a 2p Special Dividend, but it is Belvoir shareholders that get a 5% premium to the pre-announcment price. However, the price drops this week more than wipe that out. It seems some shareholders don’t like the deal.
The merger seems to have been led by TPFG with that being the largest part of the combined business, their management leading the combined company. The Belvoir CEO, Dorian Gonsalves, and CFO, Louise George, don’t appear to have a permanent role, which is a shame given that they were passionate about engaging individual investors. However:
Dorian and Louise have also, conditional on the Merger becoming Effective, agreed to remain with the Combined Group for 12 months following completion to assist with, amongst other things, the integration of the TPFG and Belvoir groups
So they may be active behind the scenes.
MPAC (MPAC.L) - Full Year Trading Update
Given the problems that FREYR have faced, we were expecting a warning here. However:
The Board is pleased with the Group's FY23 performance and expects that it will report underlying profit before tax in line with market expectations.
In this context, in line makes this a positive update. They are still talking about order intake for "clean energy", which makes it sound like more than low level consultancy as FREYR run off their remaining cash, but we can't imagine what.
The YoY percentage increase in order intake is slightly lower than forecast increase in revenues, so we don't see a lot of comfort there, and perhaps there is a risk of an H2 weighting again?
the Group ended FY23 with an increased value of the closing order book at c.£75.0m (FY22: £67.2m) providing good coverage of 2024 forecast revenue.
And closing net cash is behind what Liberum forecast on Monday - £2.0m versus £2.8m.
Still, they have restarted FY 2025 forecasts, which based on Shore’s numbers is an EV/EBITDA of 3.7 despite an almost 50% rise in share price into this trading statement. If you believe they will hit these figures two years out and you are willing to accept the adjusted figures, they look cheap. The problem is that the brokers are paid to drink the cool-aid that the company provides, which suggests they forget about the pension scheme and don't amortise intangibles. The pension scheme is taking real cash for both recovery payments and to administer the scheme, so this is particularly unreasonable. Still, we may be returning to the type of market where many small cap investors don’t understand such things and hence they get ignored by those who only focus on the headlines.
Procook (PROC.L) - Third Quarter Trading Update
The strong retail, weak e-tail trend continues, though the former has been helped by store openings and the weakness in the latter is moderating. Some history:
September - new website goes live according to Q2 update
20th October - Q2 trading update issued - doesn't mention any website issues
24th November - Black Friday
13th December - H1 results: “Having solved the majority of the new website teething issues by the beginning of the Black Friday period, we delivered a robust Black Friday campaign with revenue growth of 3.5% YoY.”
10th January - Q3 trading update: “Ecommerce LFL revenue was -5.1% in Q3, reflecting disruption during the first 6 weeks of the quarter following the launch of the new website at the end of Summer, which was largely resolved in time for Black Friday campaigns”
So, it appears they were late in acknowledging and/or disclosing website issues. This week is the first time they are used as an excuse for poor trading. Were they hiding serious problems before, or are they now trying to mislead investors that a minor problem had a major one-off impact rather than the issue being elsewhere?
There is no new profits warning today, but it sounds like inventory levels are on the high side of maximum financial efficiency:
[Suez:] we are well placed in the short term due to strong levels of inventory availability across the product range.
This company should be very cheap right now. Is it?
Traded around 150p after float in 2021, off lows of 18.25p, now trading around 26p. Rolling forward PE of 11x includes some of the weak FY3/2024, then assumes 5% revenue growth and a recovery to something like 2019 trading metrics. No tangible book cover. Significant leasehold liabilities mitigated by relatively strong retail. Some net debt and evidence of expanded payables.
There was a relatively detailed covenant test disclosure at H1. However, the “downside scenario” didn’t leave a lot of room for actual downside in our opinion:
a downside scenario has been prepared which assumes 4% sales underperformance compared to the Base Case in the remainder of FY24, and a 6% lower sales performance throughout FY25 compared to the Base Case.
Anything below the “downside scenario” would leave them in dire straits. At this point, we can see only two ways forward:
1) Selling the business while it is still more or less solvent, to someone who can add scale, strip costs out and is much better at running it; or
2) Replace management team and raise more cash.
Robert Walters (RWA.L) - Q4 Trading Update
Robert Walters avoids the Partridge-esque headline this time and goes for the more normal title of “Q4 2023 Trading Update.” One presumes that they no longer consider these figures a “RESILIANT PERFROEMANCE”:
There is no breakdown of profits apart from to say:
FY23 profit before tax will be in-line with market expectations
Which is given as:
Company-compiled consensus FY23 profit before tax, the mean average of five analyst estimates, stands at £20.5m.
At the Half-Year, £8.2m PBT was 7.8p basic EPS, meaning they did £12.3m PBT in H2. With a standard tax charge, this would be 21.2p EPS, below what Stockopedia has as consensus. This is also an almost 20x P/E. Not cheap, even when you consider that around a quarter of the Market Cap is net cash. However, this has been going down:
Balance sheet remains strong with net cash of £79.8m as at 31 December 2023 (31 December 2022: £97.1m).
Some of this is dividends and buybacks, but it does highlight that the mainly permanent recruitment here doesn’t have the nice features of more balanced recruiters where any downturn generates cash from the reduced need to finance temporary position receivables.
This is a highly cyclical stock, though, and sooner or later it really will bounce back rather than trying to convince us that it already has. If the next year EPS forecast of 38.2p EPS in Stockopedia is achievable, then this is looking much better value, once you take into account the cash balance.
The trend in forecasts, including a very recent downgrade to 2024 estimates, doesn't fill us with a lot of confidence that these numbers will be achieved though:
XP Power (XPP.L) - Trading Update
A positive update here:
Q4 revenue of £81.2m was slightly ahead of expectations
They've brought forward some revenue, but at least are honest about it, with the first line of narrative saying:
…due largely to the decision to reschedule the relocation of our facility in California, from December 2023 to January 2024. This had the effect of bringing forward £5.0m of revenues from orders shipped earlier than expected in Q4 2023 rather than Q1 2024.
The risk then is that FY 2024 forecasts are now be cut by £5m. The outlook statement makes it sound like forecasts are suspended, but in fact Edison had £307.5m revenue, 94.1p EPS for FY12/2024 prior to this update.
Whilst it is too soon to be definitive about prospects for 2024, we continue to expect that market conditions will improve as the year progresses, with our results being weighted towards the second half. Our performance will be supported by the actions taken to reduce our cost base and we will continue to respond decisively to market conditions as they evolve.
The good news is that Edison keep their 2024 forecasts. The bad news is that means they are on a P/E of 14 even on adjusted EPS figures. Far too high for a company with such a poor recent record, especially when they still have a third of their market cap in debt.
Zytronic (ZYT.L) - Final Results
We were disappointed by this update. We knew this year would be poor:
§ Decrease in revenues to £8.6m (2022: £12.3m)
§ Headwinds arise in Gaming and Vending markets over the year impacting revenue to both. Reduction of Gaming sales of £2.3m and Vending of £1.0m
§ Gross margin excluding exceptional costs of 24.5% (2022: 30.5%) and including exceptional costs of 17.4% (2022: 30.5%)
§ LBITDA excluding exceptional costs at £0.4m (2022: EBITDA of £1.5m) and including exceptional costs at £1.4m (2022: EBITDA of £1.5m) with loss before tax of £2.0m (2022: profit before tax of £0.7m)
As well as one-off losses related to the insolvency of AGA, they have taken £0.3m (presumably cash) restructuring costs and £0.2m of goodwill impairment, the latter more related to technological obsolescence than a downturn in markets.
But the disappointing part is that gloomy conditions continue:
With a continuation of the trends exhibited in the second half of FY23 into the first quarter of FY24, revenues in the current year to date are lower than the same period last year.
The company is very well-capitilised to ride out periods of weak trading. Indeed, interest income has increased and had current interest rates prevailed thoughout the year it looks like adjusted EBTDA would have been breakeven or even positive. However, with exceptionals cash is down from £6.4m to £4.7m despite some working capital unwind. And relying on interest income to break even is not what most investors are looking for in a company
They say:
we think it is reasonable to envisage broadly stable YoY sales trends in FY24e overall (2H weighted) and good progress being made in returning the business to an EBITDA break-even position
But forecasts remain suspended, but it is little wonder the market didn’t like these results and outlook. However, the sell off is now such that the company is a net net. With freehold property on top it seems that this may not be the disaster story it first appears (at least for new investors). So what would it be worth in reaslisable value on closure of the business.
Our usual policy of writing off intangibles entirely seems justified here. Indeed, to be prudent let’s put intangibles at negative £250k, guesstimating 2023 ERP spend and assuming it will repeat in FY2024.
PP&E is around £5m and there may be disposal value upside here. There is some concern over YoY inventory build, especially considering they have already written some off on the gaming side. Commentary:
The increase in inventories was all in raw materials as a result of having to purchase ahead for orders that did not arise (the reduction in sales to the Gaming market is one of the biggest drivers of the increase and also the increase in controllers stock for which the order lead time was increased as the suppliers were previously struggling to satisfy demand). The Group was also issued with a last-time buy from one of its optical adhesive suppliers, which was at a preferred price, but had to be received in the year.
Apart from that adhesive (which presumbly has a limited shelf-life and so its own risk), it is highly likely these materials have fallen in price. For raw materials it is not usual accounting practice to record right-downs each time a supplier cuts prices, and Zytronic's gross margins are high enough to absorb the falls, but we don't think the usual 50% inventory write down is sufficient given the weakness of their markets, so we will use 60% down (40% of carried) here. Still, more inventory is better than less, all things being equal.
Given recent history and the general "dirtiness" of the gaming (gambling) markets we’ll reduce the normal 75% receivables weighting of these assets to 70%. Commentary:
The FY22 closing position was inflated by £0.4m due to a late paying debtor, who subsequently settled its debt in early FY23. The reduction in sales during FY23 also means there is less debt to be collected at the year end. The £0.3m of cash uncollected from the Gaming customers was offset by a provision for the same amount in the year.
Cash was previously given and makes up the bulk of the liquid assets, giving an 87p a share value, overall. This situation will only really attract depp value investors, but does show that the market may have over-reacted to these results.
That’s it for this week. Have a great weekend!