Investing headlines this week have been rather dominated by falls in the S&P500 with the predictable spillover to UK markets. It is worth bearing in mind that this week’s fall takes the US index back merely to the levels of June 2023. Even if it heads below 4000, it was at that level less than five months ago. As always, context is everything.
Concurrent Technologies (CNC.L) - Acquisition & Placing
Something strange is going on at Concurrent Technologies. They are raising £6.5m after costs in a placing to fund an acquisition. The issue is that the company already had £4.5m of cash on their balance sheet at 31st December. And in their last trading update, they say:
It is expected that this position will begin to reduce across the second half of the year, with potentially stronger revenues, and the unwinding of the inventory holdings that have been established to date.
So you’d expect that if inventory was unwinding, cash would be higher than £4.5m today. Their broker Cenkos was forecasting net cash to have been £9.3m at the end of this year. Cenkos are never going to turn down the opportunity to take their 5% of any equity raise, but the acquisition itself is tiny, with just £1.5m cash required:
initial cash consideration of approximately US$1.875 million (approx. £1.47 million) and US$1.5 million (approx. £1.17 million) by the issue of 1,807,686 new Ordinary Shares at the Issue Price
The dilution is even more significant then, given they are partially paying in shares.
So where is the remaining £5m minus costs going? The kindest interpretation is that they have another acquisition lined up, and it is easier to raise money now into the exuberance that they managed to generate after their ahead statement and the announcement of a couple of new products, but before the market sees the actual results. If that is the case, they will have to have something a lot better than paying 2x sales for a subscale loss-making business that this week’s announcement represents.
The placing discount is surprisingly narrow (at 11%) for a company raising so much more than the acquisition costs. Particularly when you consider that their last audit was qualified because the management were “unable to provide sufficient appropriate audit evidence”. This is perhaps positive for UK small caps and small cap brokers if high-risk raises are being done at minimal discounts again.
Capital Limited (CAPD.L) - H1 Results
We noted early in the week that a company that announced broker consensus in their announcement of results was unlikely to miss them, and so it proved to be:
Although it was a very slight beat on NPAT forecasts, Leo was unimpressed, given that it was an absolute fall, despite increased revenue. Mark was more sanguine because cash flow from operations was up 14%, and this was another period of investment into new contracts that have increased debt and admin costs prior to revenue growth occurring. [It is worth pointing out that this is a good example of why there is no “house view” on SCL. These summaries are an attempt to fairly capture a diverse set of viewpoints from Mark, Leo and others. As usual, if you disagree, then join us on Discord and have your say.]
The shares have been weak in the run-up to these results. Not so much on concerns with the trade-off between short-term profitability and long-term growth, but because of the situation in Sudan causing a pause in drilling there. The feeling is that operating in Africa has got a lot more risky over the last few months. However, on the results call, the company pointed out that the places where their largest contracts are, such as Egypt and Tanzania, have seen no change in political risk lately, and only the Sudanese contract has been an issue. Africa has always been a difficult place to operate, and being able to do so successfully has allowed the company to deliver sector-leading margins and ROCE.
Management also seemed comfortable with FY expectations, which means a P/E of under six, a material discount to other listed peers. And it could be argued that their move to long-term contracts and the rapid growth of 81%-owned MSALABS should see them trade on a premium. Ultimately, each of us has to make our own decision about whether the valuation anomaly is enough to overcome the risk of operating in Africa.
UP Global Sourcing (UPGS.L) - Pre-close trading update
Trading here is in line with expectations on decent revenue growth:
Unaudited Group revenues increased 8% to a record £166.3m (FY22: £154.2m), driven by exceptional growth at the Group's online division, where revenues were up 64% year-on-year, together with an improved sales mix.
Online also grew strongly during covid, in common with many other companies. Coming out the other side, the company had to prioritise their business relationships and direct-to-consumer supply suffered, so these aren't the strongest comparables, but they still achieved +25% last year. Many other companies are reporting online sales well below the covid peak, so to be massively ahead is quite an achievement.
On the flip side, you have to think trading elsewhere has been weaker than hoped. They say:
Revenue growth in the period was achieved with no overall price inflation
This means they will have given up significant margin. Consumers clearly like this because they have been getting the same priced product as last year, when presumably, everything else in store has gone up, including competitors’ products. It also meant they retained customer relationships, the consumer reputation for value and the discipline of tight cost control. Their margins will likely return to market levels over time, and this may offer an upside from here. Although, this may be at the expense of further revenue growth. Still, they are an experienced team and surely know how to best optimise profits vs growth.
The company has rarely been ascribed a high earning multiple, and its current P/E is in line with where it often trades. However, broker Shore are forecasting double-digit free cash flow yield going forward, which should enable debt reduction and perhaps allow increased shareholder returns. As such, this looks good value for a well-run business.
Robinson (RBN.L) - Company Update & Interim Results
Some good news here:
The Company is pleased to announce that it has now reached agreement with the Trustees of the Robinson & Sons' Limited Pension Fund (the "Scheme") in relation to the Pension Fund Escrow Account (the "Escrow"), which reduces Group net debt by c.£3.3m.
Very few companies actually get cash out of a pension scheme even when they claim to be in surplus, so this is the best possible outcome. In addition, they have more cash coming in:
On 11 August 2023, the Company exchanged contracts for the sale of c.1.3 acres of the Walton Works surplus property in Chesterfield (the "Property"). Completion is subject to conditions, notably including satisfactory planning approval, and is expected to take around 12-18 months.
They’ve had problems with planning before, so perhaps they shouldn’t count their chickens. However, this is another £1.5m (minus costs) off net debt. They claim they could get another £7.4m over the next few years too. Although clearly, the state of the UK property market in provincial Northern towns is material to them.
The problem is that the results show £9.0m of debt, flat on the previous balance sheet date, despite another property sale in the period. So if everything goes well, they will just about eliminate the net debt in a few years. Their bankers will certainly be happy even if shareholders are unlikely to see much of the cash apart from the regular dividend payments.
The results also announced this week show that current trading is poor:
The exceptional items are largely redundancies, and they say:
As a result of these inflationary pressures, we implemented a restructuring program in June, which resulted in exceptional costs of c.£0.4m and annual savings of c.£0.7m, of which £0.4m will benefit 2023.
Based on this cost-cutting, broker finnCap keeps their 8p EPS forecast for the full year based on an adjusted PBT of £1.3m, which must include the benefits of the restructuring and ignore amortisation of intangibles. And the company say they are trading in line with this. This puts them on an 11.8x P/E. Even if you ignore the debt and assume they do finally manage to sell enough property to eliminate this, then this sort of multiple isn’t cheap for a plastic packaging business which may well be in a permanent decline given environmental concerns with single-use plastics.
Victoria Carpets (VCP.L) - Unaudited Results Summary
Victoria have been struggling to get their accounts signed off:
…advises that its auditors have requested further time to complete their final audit procedures.
However, they have released unaudited figures to aid investors:
We think we may have spotted the problem they have been having. Geoff’s calculator appears to have failed just before calculating the percentage change in net debt. Thankfully ours is working, and we’ve calculated it for him: +61.9%. That’s 3.36x Adj EBITDA, up from 2.50x the year before.
He's going to need a bigger boat to carry all that.
Still, they have managed to go full Partridge with the headline:
Record underlying revenue and EBITDA
Confident FY2024 outlook with a sharp increase in earnings and free cash flow expected due to completion of major integration projects
Alan: To the untrained eye, this could look rubbish and that I haven't bounced back.
Lynn: But you have.
Alan: I know.
Tremor (TRMR.L) - Q2 Results
Despite all the use of multiple Partridge-esque headlines here, trading is down significantly on last year:
The Company generated Adjusted EBITDA of $29.9 million in H1 2023, which compared to $77.8 million in H1 2022.
This is despite a very costly acquisition. After scrolling through a lot of detail, we get to the crux of the matter:
· Full year 2023 Contribution ex-TAC in a range of approximately $320 - $330 million compared to previous expectations for approximately $400 million
· Full year 2023 Adjusted EBITDA in a range of approximately $85 - $90 million compared to previous expectations for a range of approximately $140 - $145 million
So this is a massive profits warning. And, of course, a 40% drop in EBITDA has an even bigger impact on EPS. After Q1 results finnCap had 45.4c EPS forecast. This week these are cut to 18.9c. so a 58% reduction.
finnCap also cut 2024E from 63.4c to 38.4c, but at this point, investors should have little to no confidence in these not being cut further in the future. Given all this, the initial 30% fall on the day looked far too light. Although further falls at the end of the week mean that the new reality may finally start being priced.
That’s all for this week. Have a great weekend!