Small Caps Live Weekly Summary

BILN DBOX IPX PMP VLX

On some level, it is another difficult week, with more profit warnings than beats. However, it also seems that many small caps are starting to bounce. Perhaps a Santa rally really is on the way. Here’s a selection of what we looked at this week:

Billington (BILN.L) - Trading Update

Good news here:

Continued strong delivery in the second half now results in Group profit before tax for the year ending 31 December 2024 ("FY24") is expected to be ahead of current market expectations.

Things were starting to get a little worrying after the recent news flow at Severfield and obvious weakness in UK construction markets. However, better execution and perhaps a little conservatism in forecasting mean that the outcome at Billington is the polar opposite to Severfield.

In addition, they say that the ISG impact should be limited to the excess on its credit insurance policy, and projects in the order book were largely complete. This trading update includes the impact of this.

Their broker Cavendish translates this into a 16% upgrade, which is a decent amount. However, they leave FY25 unchanged, citing higher investment. This is probably why the shares had a good week, but didn’t rise by as much as the upgrade. Also weighing on investors’ minds will be that, despite the upgrade, the YoY EPS is down 16.5%. We can now definitely say that FY23 was exceptional, caused by steel prices dropping on already priced and awarded contracts and won’t be exceeded for a couple of years. Interestingly, the beat is not about revenue recognition, as there's no upgrade there.

However, next year’s numbers almost certainly include the conservatism from the company that has led to multiple upgrades this year as well as that their end markets remain very difficult. One year, they may actually need what they keep in reserve. However, if the company performs as well as this in a bad year, a good year could see much higher EPS. The investment Cavendish talk about isn’t just to improve capacity but efficiency too. When you add in the potential for the construction of Gravity Smart Campus in Somerset to make the structural steel market tight in the medium term, there could be significant upside to these forecasts.

Even on the conservative FY25 numbers, this only trades on a P/E of 6, after adjusting out the net cash. Despite a rise on this beat, the shares remain below where they traded prior to the market selling off on fears of a read-across from Severfield’s woes. So, if anything, this looks better value now than it has in the recent past.

DigitalBox (DBOX.L) - Trading Update

We weren’t sure if DigitalBox would be able to issue a trading update while they remain in an offer period for the strategic review that appears to have been thrust upon them by Downing seeking an advantageous exit for their holding. However, here one is:

The Company expects revenue to be at least £3.5m for FY2024, with EBITDA ahead of management's expectations.

£3.5+ vs £3.38m forecast isn’t a huge beat, so there is likely a positive impact on margins, too. This is an impressive performance given the advertising market backdrop and that they have the costs and distraction of the strategic review going on at the moment. However, supposedly, the broker cannot issue updated forecasts during the offer period. If we assume just over 0.4p for FY24 and 0.6p for FY25 and net off the cash, this is something like a cash-adjusted P/E of 7 falling to 5. This is despite a recent strong share price. You can see why Downing want to force the market’s hand here.

Impax (IPX.L) - Loss of Mandate

Bad news here:

Impax Asset Management Group plc announces that it has received a notice from St. James's Place Unit Trust Group Limited ("SJP") of termination of Impax's mandate to manage the Sustainable & Responsible Equity Fund (the "SRE"), (the "Mandate"). The termination is expected to take effect in February 2025 subject to approval by the SRE unitholders at an Extraordinary General Meeting on 9 January 2025.

The Mandate is the only mandate that Impax has with SJP and totalled c.£5.2bn of assets under management ("AUM"), as at 30 November 2024. The impact on Impax's revenue is expected to be circa £12.7m on an annualized basis.

Shares are down about 25% on the news, but this may be an over-reaction. Berenberg say:

We have updated our forecasts for Impax, with a c7% reduction in our FY25 EPS estimate and a c6-7% EPS reduction in the outer years. This assumes that the SJP mandate ends in Q225. We reduce our FY25 revenue forecast by c5% partially offset by a c4% reduction in operating costs.

They assign a 50p loss of value to this week’s news, but the share price is down 82.5p. If you consider their price target to be inflated by a certain percent rather than an absolute amount, then this works out to be a 9% loss in value versus a 25% fall in the share price.

The trouble was that we underestimated how much of an indicator the first SJP mandate loss was that they'd lose the rest, and the market hardly registered it at all, at first. Clearly, the drivers behind today's news will be influencing decision-making for other mandates, and there could be more, albeit nobody else is as big as SJP.

Portmeirion (PMP.L) - Trading Update

Another profits warning here:

FY24 revenue now expected to be circa £90 million and accordingly profit before tax is expected to be £1.0 million. This is below market expectations…

Perhaps not unexpected, given the recent share price weakness. However, Mark was expecting recent gas prices to be the cause, not the supply chain issues and Korean destocking that were the actual reasons given.

As a result, the Group's South Korea sales are taking longer to recover than anticipated and in the second half of 2024 are now expected to be down 13% on last year (H1 2024 down 60%).

And

Excluding South Korea, Group sales are expected to be down in H2 by 6% and full year sales to be down circa 3% on the prior year at constant currency.

Some nice “things are just bad if we exclude the really bad” logic there! Which sounds a lot more lack of demand for expensive plates than simply shipping costs.

Shore reduce EPS from c25p to only 5p. So this is a huge warning. You know things must be bad because normally, Portmeirion would just increase their adjustments to mitigate the reduction in EPS!

However, FY25 forecasts are largely retained. Shore have 38.8p, so even making more sensible adjustments, this will look cheap, if we believe them. This, and the discount to TBV, appears to have moderated the fall to around 14%.

Volex (VLX.L) / TT Electronics (TTG.L) - No bid

Volex says it won’t bid for TT. This should perhaps be no surprise as TT had already said they had received and rejected a higher cash bid, and the Volex share price weakness had made their bid worth less. The risk was that Volex would come back with a higher offer. With that now excluded, it seems strange that Volex haven’t fully recovered from the drop and are still 10% below where they traded before the bid news. This could be a good entry point for those who like the company.

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