Small Caps Live Weekly Summary

ING PRES RAI STAF TND ULTP VTU VLG W7L

Lots of profit warnings this week. However, the markets haven’t really punished the offenders. Partly these are companies that are happy to use buybacks to support the price, but it may well mean some animal spirits returning to certain sections of UK small caps.

Ingenta (ING.L) - Trading Update

Trading is given as in line for 2024, which must certainly provide some relief for holders given the recent share price direction. Although, these were downgraded earlier in the year due to delays in implementing new projects. New business wins appear to be accelerating, and FY25 revenues are expected to return to growth. However, it’s a sort of warning for FY25 (there were no previous forecasts in the market) as increasing sales headcount costs will not deliver sufficient revenue in the current year to offset their costs.

This makes sense. We’ve seen for 2024 that projects take time to implement before they generate meaningful revenue, but when they do, they deliver for many years. Some concerns are that legacy businesses are seeing attrition, but this is offset by newer product growth. They have repeatedly referenced a reduction in legacy revenues but don’t give guidance on how much of their revenue these still represent. It would be nice to know how much scope this has to hurt them.

Their broker, Cavendish, quantifies the effect as £10.5m revenue and 8.2p EPS. This is below what many of us would have expected. However, Cavendish maintains their 260p target price. They say:

The S&M investment along with the strong start to the year means we believe FY25E revenues will increase 3% YoY to £10.5m, driven by growth across both divisions, but particularly by Content. We believe gross margins will reduce slightly by 1pp to 48% given legacy revenues rolling off are typically higher margin. The added S&M investment results in our Adj EBITDA reducing YoY to £1.3m and Adj PAT reducing to £1.2m.

However, up until 2024 the company have been very conservative in their forecasting and accounting, so this may yet be beaten. The better news is that cash continues to build, and at £3.6m, it represents around a third of their market cap. They maintain their dividend, but apart from this, there is little sign of what they want to do with this cash.

Barring better news or a use for that cash, this is not currently a growth stock, so it should be cheaply rated until they can show that newer products can grow sustainably quicker than legacy revenues decline. Balancing this, although the products do have a shelf-life, as the rolling off of legacy contracts attest, these are still sticky revenues, and they are on a modest multiple of what is probably trough earnings. A company like Arcontech, for example, has almost exactly the same growth characteristics and was languishing until investors became enthusiastic about it again and bid the price up into a high teens multiple. This probably shouldn’t be the central case here, but it’s not impossible, either.

Pressure Technologies (PRES.L) - Change of Name & FY Results

The name change here seems strange as Pressure Technologies was a reasonable name:

The Board of Pressure Technologies plc announces it intends to change the Company's name to Chesterfield Special Cylinders Holdings plc with the associated ticker of 'CSC'.

We guess they’ve failed so badly that they are forced to change a reasonable name to one that is boring and unambitiously specific by soiling the good name! Just to underline how much excrement has stuck to the original name, they also release the following results from continuing operations:

● Group revenue decreased 28% to £14.8 million (2023: £20.7 million)

● Gross profit down 47% to £3.7 million at 25% margin (2023: £7.0 million at 34% margin)

● Adjusted EBITDA1 loss of £0.9 million (2023: Adjusted EBITDA profit of £2.0 million)

● Adjusted operating loss2 of £1.7 million (2023: Adjusted profit of £1.2 million)

● Reported loss before tax of £2.7 million (2023: loss of £0.3 million)

They couldn’t even adjust their way to a positive EBITDA. As we have previously noted, they appear to have sold the only part of the business that is actually doing ok at the moment to keep the lights on at the failing one!

RA International (RAI.L) - Delisting

This is bad form. They are cancelling the listing, and despite management holding 80% of the equity and always talking about doing the right thing, there is no tender offer or similar.

The reality may be that management can’t afford to offer anything or don’t think the business is worth anything. After all, they also announced an EBITDA loss forecast, and so:

Negotiations are currently ongoing with a third party purchaser in respect of the potential disposal of a loss making subsidiary of the Company and the Company has had some initial discussions in respect of the disposal of certain other subsidiaries. Should these proceed on the currently envisaged terms the maximum cash inflow to the Company is estimated to be in the region of US$5 million. It is emphasised that there can be no certainty that these disposals will be concluded in the near term or at all.

Even if this happens:

However, any positive impact the potential divestments may have on the Company's cashflow and profitability is expected to be offset by the reduction in revenues and resulting margins from ongoing delays in mobilisation and decreased scope of a number of key contracts.

Staffline (STAF.L) - Trading Update

We really did not expect trading to be ahead here, let alone by 10% at the operating profit level:

Strong performance with underlying operating profit exceeding market expectations

Outlook doesn't look so good, but they leave it to the broker. And here’s the bad news from Zeus:

We have rebased FY25 and FY26 estimates, which were at the top of market consensus, for lower expected PeoplePlus contribution and for higher interest charges, reducing FY25 underlying PBT by 28% to £5.6m.

The net result is a 28% reduction in underlying PBT in FY25 to £5.6m and a 38% reduction in FY26 to £6.7m. So, despite all the bluster of a FY24 beat, this is actually a huge profits warning. We don’t like that they’ve left it up to the broker to communicate very material downgrades in what is now the current financial year. Surely they should have explicitly said FY25 is materially below expectations in the RNS, otherwise they risk creating a false market?

We don’t know why companies do this, as it catches up with them in the end and makes them seem desperate, and hence, we infer that what is going on behind the scenes is far worse than we thought initially. Early indications are that the sleight of hand may have worked as the shares actually rose on this announcement. While the P/E is still in single digits, this doesn’t look too expensive. However, there is little growth forecast and many further risks to trading that could slip them up further.

Tandem (TND.L) - Trading Update

In line, and a return to profitability:

A stronger second half of the financial year drove an improvement, resulting in unaudited FY24 revenue of £24.6 million, representing an 11% increase year-on-year.

2025 looks to have started ok, too. So perhaps the bottom is in here for trading performance. Their assets are still not particularly productive, though. This means they are still expensive on any near-term earnings, and a lot of hope is pinned on a further recovery far into the future. No mention of any attempts to better utilise their excess warehouse space, which seems to have been quietly abandoned.

Instead, they have a new plan:

To improve operational efficiency and profitability, we have undertaken strategic optimisation initiatives in Hong Kong. This includes relocating the Group's offices, modernising our showroom, and achieving an annual cost reduction in this location, positively impacting profitability as well as the customer experience.

Sadly, their broker Cavendish doesn’t see this as the light at the end of the tunnel, as their forecasts have a P/E of 19.5, falling to 18.8 the following year. Free cash flow is negative again this year and only mildly positive next year. They confirm that these forecasts include all of Tandem’s initiatives to turn things around and drive sales!

Strangely, the market liked this update enough to bid the shares up to a mighty 22x forward earnings. It seems a bit high for a shitco to us.

Ultimate Products (ULTP.L) - Trading Update

This trading update arrived earlier than expected...why?

Therefore, the Board believes that the Group's full year revenues will now be broadly flat compared with the prior year.

Oh dear. Equity Development say:

The profit margin impact of these weaker than expected sales and high shipping costs prompt us to cut our full year FY2025 EBITDA forecasts from £21m to £15m.

EPS is cut by a third. This probably explains why they didn't warn before:

However, since the start of January 2025, the current challenging trading conditions faced by some of the Group's retail customers have impacted short-term sentiment and has led to a moderating in the pace of new orders.

Basically, they hoped it would get better but had to stop waiting/hoping. Still, they now have a couple of issues to answer about failing to keep the market informed about a material deviation from market expectations. It’s the later years cut and the lateness of reporting this year’s weakness that makes this a stinker of an update.

They have announced an increased buyback, and this is perhaps the reason why the shares did not fall by the same amount as the EP downgrade. This is a surprise, given the massive dividend cut, although this conforms with their policy of paying out 50% of earnings. They say the buyback is about returning excess capital when leverage is below 1xEBITDA. However, given the average price paid, they appear to have destroyed shareholder value with this buyback policy so far.

The buyback will support the price in the short term, which is perhaps the real aim here. However, long-term management will need to rebuild trust and show that they can deliver to justify the current price, let alone anything higher.

Venture Life Group (VLG.L) - Trading Update

Venture Life describe themselves as:

…a leader in developing, manufacturing and commercialising products for the self-care market

We would characterise them more as leaders in buying brands and running them into the ground. They are probably best known as a provider of the world's most expensive olive oil (Earol) and the world's most expensive sweets (Lift). Anyway, the cycle of new acquisitions replacing neglected (or otherwise failing) old brands continues:

Following the acquisition of Health and Her Limited (the "Acquisition") on 8 November 2024 the Group delivered FY24 revenues of c.£51.8m (2023: £51.4m)

To be fair, they are running an experiment to see whether it is worth investing in brands rather than letting them wither:

As previously noted, the Group has increased its investment in marketing activities and is pleased with the returns achieved to date. Excluding the new Acquisition, sales of VLG's Brands within the UK delivered growth of 12% to £20.3m (2023: £18.1m) in FY24.

The net effect so far is an EBITDA miss:

I am pleased to see the Group finish 2024 with Adjusted EBITDA broadly in line with our expectations, with the increased spending on the marketing of our VLG Brands

Vertu (VTU.L) - Trading Update

This is a nasty profit warning to throw out in the middle of the day:

The Board anticipates that the Group's adjusted profit before tax for the year ending 28 February 2025 (FY25) will be significantly below current market expectations , primarily due to dislocation in the new car market:

The update appears to have caught out the brokers too. We had to wait until the next day to see how this worked out in reality. Progressive have Only 4% taken out of FY25 EPS but a 30% reduction in FY26. Net debt is slightly worse for FY25 but not for FY26.

The good news is that actions have been delivered to fully offset the £10m cost of NI changes, which will incur an exceptional restructuring cost of up to £4.0m in FY25. EPS forecast is now for 5.5p, so this no longer looks obviously cheap in the current market from an earnings perspective. And that is the adjusted figure. Further, we are not sure what the scope for a recovery is in 2027 with the ZEV mandate tightening further. The rating looks even less cheap when the net debt is included.

The share price has barely budged on this large FY26 downgrade. This may be the property assets providing support, but perhaps more likely is the company’s willingness to be aggressive with share buybacks. However, accelerating the buyback appears to be a vanity project of maintaining the share price rather than a rational allocation into productive assets that will enhance EPS.

Warpaint London (W7L.L) - Trading Update

On the surface, this is a strong trading update, although there is no reference to market expectations. However, when we look at the latest figures from Shore (currently suspended due to Warpaint’s takeover of Brand Architekts, this is actually a small revenue and PBT miss. They also say that January has seen 15% revenue growth year-on-year.

However, the company needs faster growth than 15% to hit forecasts in 2025. Balancing this, the FY25 EPS does look beatable if the margin enhancement they are seeing is sustainable.

The shares have taken a bath this week. Presumably, as momentum investors are reacting to the reversing of that momentum. This means the rating is starting to look more reasonable, especially if you believe 2025 EPS can actually be beaten. However, it would be a brave person to stand in the way of the momentum herd selling out.

That’s it for this week. Have a great weekend!