A much quieter week this week for material news amongst the UK small caps we follow. It comes as some relief! Leo found the time to attend the ICE gaming show in London. His research will be interesting to those who hold Nexteq or Zytronic. Interested investors can join in the discussions on this on the relevant board on the SCL discord server.
Beeks Financial Cloud (BKS.L) - Trading Statement
There are three elements to today's trading statement:
Contract wins. The only quantified win is for quite a bit less than 10% of forecast 2025 revenues but spread over 4 years, so it simply isn't material. This is more about the effect on profits and the success of their land and expand strategy.
Strong H1 trading. In particular, cash flow and cash are strong.
FY 12/2024 in line so far. For most companies, this would not be news, but Beeks is a serial disappointer.
News of this appeared to leak a couple of days before the announcement. This isn’t a great look for a company that handles customer’s confidential information. Combined with the move on the day, the shares have risen 50% on this update.
Reading the Canaccord broker's note, we learn that the unquantified contract could work 10%+ of current revenues annually, but the regulatory delay could be 6 months (or, presumably, block it entirely). Forecast 2025 EPS is 8.3p without anything from the publically unquantified contract. This is an adjusted PBT upgrade of 13%, going from £5.3m to £6.0m. But as far as we know, they have never hit an EPS forecast, but there is evidence here of forecasting that is both more underpinned and more conservative in the past.
Paid-for-research broker Progressive are less bullish on 2025 EPS, with 7.4p:
Part of the rise may be expectations of further upgrades for FY25, but a 50% rise to a P/E of close to 20 looks excessive for a low double-digit upgrade. Especially for a company that has almost never met expectations and has spent £50m in capex since 2019 in order to grow profits by a mere £3.3m.
Goldplat (GDP.L) - Q2 Operating Results
This microcap gold-from-waste recovery expert has struggled recently with a lack of power in South Africa. However, their Ghana operation had a record quarter:
Ghana experienced an exceptional Q2, achieving an operating profit of GBP1,820,000 (GBP1,026,000 Q2 2023), driven by strong supplies during the first half of the current financial year and the sale of inventory that built up as a result of our inability to export whilst our export license was finalised during the 2nd half of the previous financial period.
particularly good news because Ghana has a much lower tax rate and no minority interest. In South Africa, the power issues have reduced:
The South African operation lost a total of 7 operating days, 7% of the total days available in the quarter, compared with the circa 23% lost in the previous 3 quarters, due to electricity cuts and infrastructure related issues.
However, the company has faced other issues:
As a result of delays experienced at the smelter in Europe in the previous financial year, South Africa's Q2 results were further materially impacted as an unusually large quantity of material for processing through gravity circuits was held in stock at the end of June 2023; this material contained a lower percentage of gold than estimated.
Leading to their first loss-making quarter in South Africa:
This resulted in an operating loss of GBP315,000 for the quarter (GBP356,000 operating profit Q2 2023).
This doesn’t help their reputation for managing to snatch defeat from the jaws of victory. Broker WH Ireland say:
…we reduce our FY expectations from a Gross Profit of £9.5m to £7.5m reducing our eps from 2.0p/sh to 1.0p/sh, which still leaves £1.5m in cash by year end…We see current fair value in Goldplat at 14.3p/sh based on a 3.5x FY2025 EV/EBITDA multiplier.
This remains one of the cheapest shares on the UK market, but the company need to finally sort out their reputation for calamity, or progress their tailings retreatment project, before the price gets close the that fair value estimate.
Sanderson Design Group (SDG.L) - FY Trading Update
The trend for UK to be weak, and the US and licensing to be strong continues:
Underlying profits for the financial year ended 31 January 2024 are expected to be approximately £12m (FY2023: £12.6m), reflecting the strong contribution from licensing along with the impact of trading conditions in the UK, the Group's largest market.
While licensing in this case is not 100% GM in reality, it is interesting that it makes up the majority of the profit now. The all important outlook is:
Certain cost pressures are expected, including the increase in the Real Living Wage and property-related costs, such that profitability in the current financial year is expected to be similar to that of the year ended 31 January 2024.
Progressive now have 13.6p so this may be considered a very slight downgrade. Singer say:
What may disappoint is FY25 guidance being tempered 7%, due to cost inflation (mainly wages).
This should probably represent a cyclical low for trading though, unless the UK economy never grows from here. The cash balance is up but not by much. This probably just reflects the way the licenses have to be accounted for with minimum licensing revenue recognised immediately but first cash received a year or so later. When licensing is growing cash will lag revenue by 1-2years.
Offsetting the cash is the pension deficit, and unlike the fantasists elsewhere, management have been very open in saying that a buyout would cost them the majority of the current cash balance if they pursued that route.
You can see why the market was less than excited by these small downgrades. But given that the P/E is now around 7, the c.16% fall on the day looks to be an over-reaction if you consider it close trough trading for the UK and the high-quality licensing revenue continues to grow.
That’s it for this week. Have a great weekend!