Small Caps Live Weekly Summary

BBB BOKU CAM DX. FA. GTC HUM JSE LOOP SHOE

A return to more normal news flow this week, helped by a full trading week. Do we sense a bit more positivity returning to small caps? In many cases, valuations remain compelling despite a weak economic backdrop. So while no one knows the short-term direction of the markets, the opportunity set looks good for the long-term investor who can avoid the usual story stocks and badly-financed dross out there.

BigBlu Broadband (BBB.L) - Trading Update

The valuation has come off significantly here but still does not look cheap on current market metrics, with little sign of growth:

· Total revenue was £14.9m (1H22: £14.9m).

· Like for like revenue growth¹ on a constant currency basis was 3.1% (1H22: growth 15.1%).

· Adjusted EBITDA² increased 3.2% to £2.1m (1H22: £2.0m).Broker revises future revenue downwards, but profitability metrics are steady or even slightly raised based on "efficiencies". Net debt forecast to recover from £0.3m to cash of £2.7m at FY November 2023. Forecasts are well supported by an acquisition.

The broker quotes EV/EBITDA as their main valuation metric, but once again, we'll point out that EBITDA is a run-off metric for lenders to see if they can get their money back if the company is forced to destroy its business by ceasing all investment. Yes, an EV/EBITDA of 3 or so can provide a backstop valuation for equity investors, but only a bank with covenants can force the company to liquidate itself, and this is only a guideline. Yes, EBITDA can be a proxy for cash flow, but only in capex-light businesses. This is not one of those.

In FY2024, EBITDA is forecast at £6.1m, whereas free cashflow is £2.6m. So, using some grown-up metrics, the cash flow yield is 9%, and PE is 8.3x. Not bad then, and once they've finished buying bolt-ons and optimising the business, you might expect a 6% dividend yield. The problem is that this little better than BT and far worse than Vodafone, which are larger and better-regulated businesses. However, BigBlu is cleaner and lower risk than either of the other two, which suffer from large legacy issues, such as pension deficits.

Boku (BOKU.L) - Extension to Share Buyback

up to an additional maximum aggregate consideration of £10.5 million and up to an additional maximum of 5.25 million Common Stock

Shareholders tend to like buybacks as they support the price in the short term. However, as Boku shares continue to look overvalued, this is a negative for long-term holders. Buying back shares significantly above fair value is value destructive. This is not one of those shares that continuously look expensive yet keeps compounding returns either. Revenue may have increased at 21% CAGR over the last 5 years, but shares in issue have risen 16% CAGR. A small buyback at an expensive valuation will make little difference to these metrics.

Camelia (CAM.L) - Sale of Holding in BF&M & Trading Update

These announcements didn’t arrive on the same day this week. They led with the good news:

Camellia is pleased to announce it has entered into an agreement for the sale of its entire holding of 3,394,403 shares (approximately 36.9%) in BF&M, one of its associate companies, to Bermuda Life Insurance Company Limited, a subsidiary of Argus Group Holdings Limited for a cash consideration totalling US$100.0 million

They point out that this is:

…a premium of 34% to the closing price of a BF&M share on 5 June 2023 and a premium of 31% to the book value of Camellia's holding as at 31 December 2022.

Some costs may be payable, but:

Camellia's net assets attributable to the BF&M holding as at 31 December 2022 was £61.5 million and the value of the shares using the closing price for BF&M shares on 5 June 2023 was £59.9 million.

So a gain of £20m, which is 15% of the previous day’s closing market cap. Perhaps equally importantly:

The Board considers Camellia's shares to be significantly undervalued and, in the event of any surplus funds arising, will also therefore consider the merit of returning these to shareholders by means of a share buy-back. The Company may, in the meantime, undertake a modest buyback exercise in accordance with the authority given at the Annual General Meeting.

Unsurprisingly, the shares responded well to this news, rising over 20%. However, later in the week, they drop the following news:

Although we still expect revenue to be ahead of that of 2022, taking account of the significant continuing pressure on macadamia prices (discussed below), we now expect that the adjusted profit before tax for 2023 will be below that of 2022.

So yet another profits warning. The Lord giveth, the Lord taketh away.

DX Group (DX.L) - Settlement of Claim

…is pleased to announce that it has reached a full and final settlement with Tuffnells Parcels Express Limited in relation to its claim against the Company, as previously announced on 13 February 2023.

No numbers are given, but they indicate a lack of materiality:

This confidential settlement, which is without any admission of liability, brings the claim to a satisfactory conclusion for all parties.It has no impact on the Company's expectations for its financial year ending 1 July 2023 or thereafter.

This could mean, of course, that they were trading ahead until this settlement and are now in line. Still, inline puts them on a forward P/E of 6.5 and a yield of 6.5%:

Now the legacy issues are largely put to bed, this seems too cheap, even for a company operating in a highly competitive industry.

FireAngel Safety Technology (FA.L) - Director Change, Final Results and Placing

As expected, these results were only ever going to be signed off when accompanied by a placing. Not only that, John Conoley, who was brought in by institutions to try to turn this company around, has:

resigned with immediate effect as a director

Presumably, this was required by those same institutions in order to support this latest fundraise.

In light of this, a discount of 25% on the placing at 5p doesn’t look too bad. However, reading the details, we see that the placing is at 5p plus one warrant with an exercise price of 3p for every two shares. If you value the warrants at 2p (in theory, they are worth more due to the option value), the placing is actually at 4p. So a 40% discount.

Accounts say banking covenants were missed for Q4 of 2022 and Q1 of 2023. The main reason for the placing is said to be:

to reduce net debt to £2.8 million

The accounts say that after costs, they will raise £5.4m. So the net debt is presumably currently £8.2m. This compares to £4.8m at year-end. Which is another very significant deterioration in financial position.

There is also a strategic review with the aim of selling the business. But we now have 340m fully diluted shares, a 5p share offer = £17m market cap, and a £20m EV. Will a trade buyer really think it’s worth that much? It seems unlikely, given the recent performance of the business.

Getech (GTC.L) - Final Results

The traditional part of the business here has always been a decent cash-generative, although very cyclical business, as these results show:

·      Double-digit revenue growth, ahead of market expectations: £5.1 million (FY2021: £4.3 million) with a 66%/23% split between transitional petroleum and critical minerals

·      Record orderbook: £4.6 million, a 39% increase (31 December 2021: £3.3 million)

And the move into using their database for mining makes sense, even with the marketing spin of calling it “critical minerals.”

It’s just a shame they are spending all this cash, and far more, making drawings of petrol stations for vehicles that don’t exist yet. Hence, shareholders are unlikely to see any returns from the profitable parts of the business.

Hummingbird Resources (HUM.L) - First Gold Pour at Kouroussa

Further good news here:

…first gold pour at the Kouroussa Gold Mine…ahead of the end of Q2-2023 schedule and on budget.

Given the debt they took on to build this, they really needed this to be on time and on budget. Although there is still plenty of work to do:

…the mine is now expected to ramp up to commercial production during H2-2023.

This is the aim:

It is expected to produce an average of 120,000 to 140,000 ounces ("oz") of gold for the first three years of commercial production, and average 100,000 oz per annum over the current life of mine at an AISC profile of c.US$1,000 per oz.

120-140koz at an AISC of $1000 is $116-135m profit, at current gold prices vs a $133m market cap. There’s about the same net debt in the capital structure as the equity, and they have a habit of missing production & AISC targets, but next year could be an interesting one for the company. A P/E of less than one (assuming Yanfolila remains profitable, too) would certainly stand out, even amongst a cheaply-valued sector.

Jadestone Energy (JSE.L) - Proposed Financing

This is another company that didn’t get its accounts signed off without raising equity.

The Proposed Financing consists of a US$50 million equity fundraise (the " Equity Fundraise "), underwritten by a US$50 million equity underwrite facility (the " Equity Underwrite Facility "), and a US$35 million standby working capital facility (the " Standby Working Capital Facility "), each provided by the Company's largest shareholder, Tyrus Capital S.A.M.Tyrus ").

The bookbuild was at 45p. Management have badly messed up here. 5 months ago, they were buying back shares at 78p in the market. This week they are issuing $50m worth at 45p. Yes, they have had some unexpected issues that weren’t their fault, and they are suggesting this raise is precautionary - they believe they have sufficient funds without it, but the optics are highly embarrassing.

There is an $8.3m open offer available to shareholders to partially avoid dilution. But with the shares now 37p in the market, anyone who isn’t a large institution who didn’t get their allocation in the placing would be daft not to simply buy in the market.

LoopUp (LOOP.L) - Final Results

The run-at rate doesn’t look too bad here:

Post Period Highlights

· Preliminary Q1-23 Group revenue of c.£6.5 million

· Booked Cloud Telephony ARR has increased to c.£2.50 million, an increase of 51% from £1.65 million at the end of FY22, and a year-on-year increase of 215% from £0.8 million at the end of May 2022

However:

Scheduled repayment of £0.85 million in June 2023 reduces outstanding debt with Bank of Ireland to £6.0 million (31 Dec 2022: £6.8m)

And:

The Group's outstanding debt with Bank of Ireland is due for repayment, extension or refinancing in September 2023.

There’s no way they can repay, and the market cap is £5m, so even an equity raise doesn’t get them there. And payables + deferred income is £2m more than receivables. So they are in a pretty precarious position.

But this can be in their favour. The bank has the choice of extending facilities or getting nothing in admin, so our prediction is they will extend while trying to extract some extra fees.

Shoezone (SHOE.L) - Trading Update

The currently available Zeus forecast is for £8.5m adj PBT versus £11.2m last year. This update says:

…the Company now expects adjusted1 profit before tax for the financial year ending 2 October 2023 to be not less than £10.5m.

So, as we suspected from the H1 numbers, forecasts were conservative, but they were waiting for a more significant beat before updating. They imply some sales have been brought forward, though, so don't get too excited:

strong early demand for summer products

But there is a clear read-across of tailwinds for other China importers:

lower container rates

That’s it for this week, have a great weekend!