Large Caps live was back this week, as was Mello Monday, where Mark gave a talk called “When to Sell”. You can catch the presentation here if you missed it live:
[A Discord server invite, to see all this week’s discussions, is here.]
Large Caps Live Monday 10th May
Barclays (BARC.L)
Last week we had the news that Sherborne (SIGC) had given up on their activist campaign to push changes in Barclays and had sold their shares…..at a loss compared to their original entry price. Let’s see what happened to Barclays and SIGC share price….
If you look at the way that the SIGC stock price acted over the last few weeks I wonder if there were people who were away that SIGC was preparing to through in the towel. I am sure people think that Ed Bramson leaving Barclays implies the pressure on Jes Staley has reduced. However I think that Barclays is still attractive. The big question, I think is who follows Jes Staley. For instance – this article.
Personally, I think that Staley has done a lot to turn around the investment banking arm of Barclays. But I think the real question is whether the momentum will continue or if the board will go through its ritual of hiring a ‘retail’ banker who is ‘safe’ and will immediately go about demotivating the investment banking team.
BT (BT.L)
I still like BT, but there are some suggestions of the unions looking to organise a strike…because after work from home and Covid that is exactly what the world needs!
Key points:
Indeed, earlier this month the Communications Workers Union (CWU) announced that they had “taken the decision to move to an official national industrial action ballot“.
The CWU have said their “members will not fall for what simply amounts to a bribe to not vote for strike action.”
We also of course have BT trying to sell off BT Sports. My concern with the sale of BT Sports is that it is likely to lead to the recognition of a write-down in value. No issue per se as frankly it was an ego trip of the previous management but will there be any knock-on covenants on debt etc? Remember this company has about £19bn of debt
An interesting side thought by the way: hypothesis - a lot of challenger telecom companies have probably got poorer quality clients - both commercial and retail - and so with Covid ending some of those companies will face more bad debts as a % of their sales than BT? could a few smaller players face the wall?
Incidentally, I think bad debts are going to hit a lot of service providers eg electricity, gas etc. On the other hand, I think there has also been a massive upgrade in broadband usage and bandwidth to consumers' homes - for business/school reasons. We have local friends who have paid £10k to have fibre to the home (though a govt business support grant has paid something like 75% of the cost).
Small Caps Live Wednesday 12th May
Vertu Motors (VTU.L) - Final Results
These results, which are ahead of expectations, are outstanding in the Covid interrupted circumstances. I am proud of the entire Vertu team for their adaptability and effort to deliver these remarkable results.
It is very unusual to explicitly say results are "ahead of expectations" - normally they let the market decide.
Adjusted profit before tax of £24.6m ahead of Analysts' forecasts (2020: £23.0m)
So that's a good beat, but what are these adjustments?
So, they are 1) much less than last year 2) small, and 3) generally reasonable. The impairment this year was for Vans Direct, which is pretty strange given that commercial vans have been selling like hotcakes. This does underline that there are lots of intangibles in the NAV here, so be careful of that.
Anyway, these broker estimates cited match those from Zeus and Liberum, available on Research Tree. Results were actually slightly behind my December expectations though...
18 sales outlets added to the Group since 1 March 2020, including the addition of 3 new franchise partners to the Group's portfolio - BMW, MINI and BMW Motorrad.
They previously warned these would take a while to become profitable, perhaps contributing to forecasts in falls in 2022 profits. I'll come back to that in a moment.
Strong, stable management, supported by scalable, sector-leading in-house developed technology and systems, provides assurance of tight control of operations and swift execution of strategies.
Substantial growth in online retailing using the Group's Click2Drive sales technology platform.
One of their threats is pure-play online competitors, but of the incumbents, they were one of the fastest off the block here.
Increased efficiency of transaction processing including use of robotic process automation.
Later they say:
Cost reductions exhibited delivering a £16.0m (7.2%) reduction in like-for-like operating expenses in the nine months from 1 June to 28 February
Clearly, this is very significant relative to profits. But here's the big news:
OUTLOOK HIGHLIGHTS · Strong start to new financial year with trading profits at a record level in the two months to April 2021. Adjusted profit before tax in the two months of £19.2m compared to £14.8m in the same months in 2019 · The Board expect the Group will deliver an adjusted profit before tax for the year ending 28 February 2022 in the range of £24.0m to £28.0m · The Board is confident that, dependent on the financial performance of the Group, dividends can recommence in January 2022
That's my emphasis. This is a massive beat compared to previous forecasts from Liberum of £17.8m. Zeus was a bit higher at £18.3m and I was higher still. These are all LFL comparisons - adjusted in the same way, before tax. There were two factors here - mean reversion after catch-up sales, and the time taken to turn around loss-making acquisitions. Anyway, Liberum now have £26.5m - i.e. they are going for the centre of the range.
Just one negative I'd like to point out before I get to valuation and market reaction:
Move to Agency Model.
The Board notes that it is likely that the next few years will see an evolution of the business model with regards to the sale of new cars in certain franchises. The Group undertakes sales in a number of franchises on an agency basis in the fleet market and anticipate that a number of Manufacturers will move new retail sales to an agency model in the next few years. It is envisaged that such a move would reduce reported revenues, increase reported operating margins and reduce working capital investment. The Board will keep shareholders updated on developments in this area.
Note that they do not say what the effect will be on profitability. IIRC the agency model is already common in Australia for far-eastern manufacturers. One of the big impacts in my opinion would be a write-down in the value of franchises. Profitability impact is less certain, but Robert Forrester, CEO of Vertu has previously indicated he is not keen.
Many companies have repaid their Furlough, but Vertu has not. For example, UP Global Sourcing repaid it in full, but then they didn't have shops of their own that were closed. Vertu certainly had staff with nothing to do. Plus they topped up the furlough payments quite generously, though they don't go into detail about how this worked for sales staff on commission.
There are lots of positive signs for car use (from Vertu's perspective) post-covid, including official travel data versus public transport and fuel sales.
As I said, more important than the modest beat to FY 2021 was the massive beat to FY 2022 figures and you might expect a strong share price reaction. However, the reaction this morning was muted.
Motor dealers are never particularly highly rated and tend to get nosebleeds around the 10x P/E level. But Liberum has an EPS forecast of 5.7p FY 2022, then 5.8p and 6.2p. A P/E of 10 on these figures would be higher than today’s price. And in the current market, it could potentially go higher than this. Freehold property assets give some downside protection, but as I have repeatedly said, the franchise intangibles shouldn't be taken at face value.
Zytronic (ZYT.L) - Half Year Results
We’ve discussed this stock a lot over the last year, simply because it has appeared so cheap at times. But perhaps for good reasons, since these results still show signs of significant disruption to their business from COVID-19:
Group revenue of £4.8m (2020: £7.4m), impacted by the Coronavirus pandemic
· EBITDA of £0.2m (2020: £1.0m)
· Loss before tax of £0.3m (2020: profit of £0.5m)
· Basic (loss)/earnings per share of (1.2)p (2020: 2.5p)
· Positive operating cashflow of £0.4m (2020: £1.9m)
· Net cash of £7.8m (30 September 2020: £14.0m), after payment of £6.7m in respect of the return of capital
When they did the tender offer in January they said:
The downturn in sales experienced in the second half of last year has now levelled out at approximately £2.0m for the quarter to 30 September 2020 and the first quarter of this financial year to 31 December 2020.
So, Q2 revenue had increased from £2m to £2.8m. Not at the level they have been in the past, but it is good to see the trend reversing.
At the tender offer they said:
…it is difficult to foresee a return to profits in this financial year, and a recovery to historic levels will depend on how quickly there is an effective vaccination programme enabling a return to normality.
Whereas now they say:
Whilst the drop in revenues of 35% is significant when compared with the same period last year, the comparison with a pre-COVID-19 period only provides an indicator of more normal historic trading levels. A better indicator of progress at this stage is the order intake, and from April last year we had continued to experience a consistently low order intake level. However, from January onwards we have seen an improving monthly average order intake, and it is particularly pleasing that the Gaming and Financial sectors have made a major contribution to the improvement.
The share price has risen from the 145p tender offer level to around 170p, however.
Free Cash Flow was around £400k, although helped by working capital & cutting capex. If trading continues at Q2 levels, then they should break even in H2. If we assume the Q1-Q2 trend then we should get a c£500k profit for H2 and a small profit for the year.
Net cash of £7.8m is around 68p per share. Without major moves in working capital, then I reckon they would make about £1.2m FCF in H2 which would mean that they will be on a forward FCF yield of 12%. So I am starting to think with seeing the green shoots of recovery this is now looking good value again.
However, if management really believed in the positive recovery story then they should be buying back shares with the spare cash...again I reckon we have a management team that is being far too conservative in their approach. Perhaps the time to buy/add is when you see the company doing so too?
Cenkos Securities (CNKS.L) - AGM Statement
Since the announcement of our 2020 final results issued on 22 March 2021, the Company has continued to trade well, in line with our expectations.
Unfortunately, with no broker forecasts, we have little idea what that means. Like competitors, though, they are reporting a strong pipeline:
We are currently working on several transactions for our clients and the pipeline for the rest of the year gives us grounds for optimism.
By my estimates, they have raised £317m for clients and will have generated around £7m of deal fees so far in H1. They generated £9.2m of deal fees in 20H1 and £13m in 20H2. So, this means they are more likely to be in line with 20H1 rather than 20H2 unless a large IPO or one of the big regular raisers such as Round Hill Music or US Solar Fund raise soon.
The issue I have with Cenkos remains, however: we have no idea how much of that revenue will become profits that end up in shareholders hands and how much will simply be paid to staff. In 20H2 Cenkos’s revenue went up by £7m vs 20H1 yet staff costs went up by £8m, given all the returns from positive trading, and more, to staff. Likewise, the cash balance of £32.7m at year-end was flattered by £10m being owed to staff in bonuses.
The outlook is as you would expect:
Whilst we remain mindful that the UK is emerging from the pandemic and continued favourable market conditions cannot be guaranteed, our leading market position means that we are well placed to perform strongly.
I think they doth protest too much with the ‘market-leading position’. I imagine they have to define this quite narrowly!
As previously announced, new management are taking over:
As previously announced, Jim Durkin, Chief Executive Officer will not be standing for re-election to the Board at today's Annual General Meeting of the Company and will be retiring from the Company. Immediately following the Annual General Meeting Julian Morse will take up the position of Chief Executive Officer and Jeremy Osler will also take up his role as an Executive Director of the Company.
Perhaps they will get some cost control in place and make this investible again, although I’m not sure I’d hold my breath for this.
Small Caps Live Friday 14th May
With a lack of small cap news, we had a brief sojourn into large & mid caps on Friday. The prompt for Leo to look at SAGE was not so much the stand-alone investment case but the read-through to another legacy software provider: Microfocus
SAGE (SGE.L) - Half Year Results
Taking Microfocus (MCRO.L) first, the reason for its fall this week is undoubtedly wider market weakness, but this is hardly an overpriced tech company given the forward P/E of 4.5x. However, the last trading update was in February with the full-year results and so there’s always a risk that trading could have turned down since then. Thus I read today’s update from SAGE with interest.
First, it should be said that Sage is much closer to the archetypal overpriced tech company, with a P/E of 26x despite lacklustre revenue and EPS growth. The story behind this valuation has long been that rapid rises in high-quality recurring but spread-out cloud-based revenues are being obscured by falls in lower quality but up-front revenues from legacy products, but in my view, this argument is wearing a bit thin:
Note that despite spinning earlier in the statement, total organic revenue is only up 1.4%, with recurring revenue already making up the vast majority and up only 4%. So, has revenue been hit by covid? And has covid given them cost savings? Here’s some indication:
Renewal by value of 97% (H1 20: 101%) is in line with the second half of last year, reflecting our focus on customer retention, with churn remaining stable and in line with pre-Covid levels.
So, no increase in churn.
New business was down but has since recovered.
Sage's ARR grew by 4.2% to £1,595m (H1 20: £1,530m). Encouragingly, growth strengthened during the period, with sequential ARR growth in the second quarter back to pre-Covid levels.
Provisions were increased earlier, but no worsening has been seen since:
It has been concluded that the additional expected credit loss provision as at 30 September 2020, revalued at current exchange rates, remains appropriate against the 31 March 2021 gross receivables amount.
On the costs side, no reference is made to covid-related savings and none are visible in the accounts, which seems quite bizarre. Pretty much every company I own shares in has found opportunities for cost savings in this period, or they have been forced on them in terms of less travel etc.
Before I conclude on SAGE, this is clearly what they want you to focus on:
It seems that the story has shifted from a “short term hit to revenues during the shift to recurring”, to a “massive cloud growth” one. And it seems that to tell this story they have in the past included non-cloud hosted revenues in the “cloud” category to make them look bigger, but are now splitting that into “really cloud” and “not really cloud” so that they can focus on the faster growth of “really cloud” aka “Cloud native”.
My view is that this is all nonsense. While SAGE are a high-quality company, they are essentially ex-growth. This lack of growth is not a one-off due to covid, it is a longstanding pattern, with Stockopedia showing revenue CAGR of just 5.8% and erratic EPS.
This is why I don't own SAGE, but am interested in Microfocus. Here SAGE's results bode well for Microfocus with industry renewals continuing to hold up, sales recovered and customers continuing to pay.
CMC Markets (CMCX.L) - General Market Conditions
Here I think the key factors are market conditions and the amount of disposable time/money their target market has. These factors are of course strongly interrelated and mostly driven by the level of lockdown. In terms of market conditions, it can be seen that things have already come off the boil significantly since the GameStop mania:
You can see that IB (= Interactive Brokers) didn't get quite the surge that CMC Markets did in March. We don't know whether they'll get the GameStop surge and subsequent normalisation, I'd guess it will be more muted. So, on CMCX, I would suggest that the main things that could cut client activity is other ways to spend money and other things to do, including returning to the offices. Although the UK government’s unlocking strategy is currently running to plan, the situation in the EU remains bad, delaying overseas holidays for most people. This means they have more money and more "free" time.
And over the last week or so cases have been growing in the UK. At best I think this will delay a return to work. So I think the covid situation is now looking worse now than would have been expected a couple of months back, and consequently the outlook for CMCX is better.
A lot of the more illiquid mid-caps tend to follow the general market but with exaggerated moves - which suggests that index & bot trading are responsible for a lot of the short-term moves. In CMCX's case, it seems illogical for it to be highly correlated with the FTSE - so I think these moves can represent an opportunity for those who consider the wider picture.
Alumasc (ALU.L) - Trading Update
Following a record first half year performance that saw double digit revenue growth and also a double digit return on sales, it is pleasing to report that this momentum has continued into Alumasc's last four months.
I've been far too cautious on the recovery here, which has been stronger and continued much more than I expected. The share price reaction has been muted to this but perhaps with the price trebling in the last 6 months, this had been expected by shareholders.
finnCap update their research, which forecasts revenue to increase further in 2022. So this looks like more than pent-up demand, but with building products, this is always hard to call.
A P/E of 9 looks very undemanding. I think the problem is that a P/E isn't a great metric when they have a £19m pension deficit and some debt. They have always had a high ROCE for the sector, but revenue & profits have been lumpy over the years. e.g. they had £105m of revenue in 2017 and they are some way off that with £97m forecast for 2022. They had net cash in 2017 too. The share price is higher now than then.
Supposedly they have refocused the business, so things may be better in future. But they have gone through this cycle many times of strong years and increasing focus on margins, followed by weak years. It is a decent company for the sector, but would I buy it at close to all-time highs? Probably not.
Amino Technologies (AMO.L) - Placing & (not) Acquisition
Amino Technologies didn’t win the bid for MobiTV, but went ahead with the placing. This, probably combined with general market weakness, caused a drop in the price close to the 140p placing price. This is about the only placing that hasn’t led shareholders to bid **up* the price.
They are reserve bidder, so they may end up with the assets, but it is looking unlikely. The cash will be used for further acquisitions when the opportunities arise.
finnCap have an updated note out with the following table:
So, 6.7x EV/EBITDA for FY2022 looks undemanding. Particularly if they deliver on their strategic targets:
Amino 2025 is the strategic ambition for transformation of the group to become software-led, with the consequent benefits of higher-margin recurring revenue and earnings visibility. The goal of $250m revenue by 2025, of which 70% is software, of which 70% in turn is expected to be recurring, implicitly involves M&A, to deliver either technology & functionality, a customer base, or both.
The problem is that that target isn't all from organic growth or internal product development. It requires them to pick up some good value acquisitions along the way. And, as this week's announcement has shown, this may be harder than they first thought.
The Works (WRKS.L) - Trading Update
They are about as far from a "destination store" as I can imagine and many are in shopping centres where footfall remains massively down on 2019. So, I was interested in hearing about recent trading in today's update:
The Works has delivered a resilient performance, with lower sales than in FY20 reflecting Government restrictions, partially offset by good growth online and strong customer demand when stores were allowed to trade. During the 53 week Period, there were 16 weeks when all stores were closed and a further 8 weeks when at least 75% of the stores were closed, as required by Government restrictions. This included our peak Christmas trading period and, as a result, total sales (1) declined by 19.0% to £206.2m (FY20: 254.6m).
Store LFL sales (2) during the period grew by 6.0% and online sales grew by 120.9% compared with FY20, demonstrating the value of The Works' multi-channel model, the appeal of the proposition and the loyalty of our customers.
Store sales up 6%!!! Ahh, but:
Store LFL sales for FY21 are for the 53 weeks ended 2 May 2021, excluding periods when stores were required to be closed to comply with COVID-19 restrictions on trading.
Outlook: Sales since the majority of stores reopened have been very encouraging (the Group's stores in the Republic of Ireland are due to reopen on Monday 17 May). It is probably too soon to judge the extent to which these encouraging sales reflect strong underlying performance as opposed to pent up demand. As expected, with the reopening of the stores, online sales have reduced but remain significantly ahead of pre COVID-19 levels.
I'm disappointed not to see any figures here. I think they omitted reopening LFLs because they thought they might be misleading. Perhaps it is more truthful just to say: "It is probably too soon to judge the extent to which these encouraging sales reflect strong underlying performance as opposed to pent up demand."
Titon Holdings (TON.L) - Interim Results
So they do well to scrape a profit and add to their cash balance. A return to a dividend, although a small one is also welcome.
Outlook has the usual vague short term concerns combined with long-term optimism.
H2 2021 has started positively, with April 2021 trading slightly ahead of management's expectations. However, procurement of certain raw materials and components may become more of a challenge in the second half, as is being widely reported.
So again a two-edged sword. I struggle to get excited by this company though, particularly when they say:
Trading conditions in South Korea remained challenging due to a weak housing market and the movement to mechanical ventilation products, which our colleagues in South Korea are addressing.
South Korea has historically been their most profitable arm, so trends here are not looking good. They are still at a slight discount to TBV, but compared to Alumasc who have been doing well out of the boom in construction, the lack of performance here should perhaps be doubly worrying.
That’s all folks. Have a great weekend!