Limited discussion this week as many contributors were attending the Mello investing conference in London. Mark opened the conference with his talk about redefining income investing, while Leo presented investment ideas at both the Stockopedia StockSlam and the BASH in the evenings. Some interesting companies and some great speakers made for another excellent event. Leo did a run-down of all the companies presenting on his blog. This is well worth a read even for those who were unable to make the conference.
Large Caps Live
WayneJ continued his analysis of the topics-du-jour: Inflation, Interest Rates and Currencies. See the discord thread for the full rundown.
Small Caps
Joules (JOUL.L) - Intention to Appoint Administrators and Suspension
A not-wholly-unexpected outcome here, and we had repeatedly warned that those trading this company were likely to be picking up pennies in front of a steamroller.
Next looks like the most likely candidate to pick up the Joules brand and main clothing side of the business.
Tremor (TRMR.L)- Q3 2022 Results
The share fell 25% on this update, which showed revenue falling:
Generated Q3 Contribution ex-TAC of $64.9 million compared to $76.7 million in Q3 2021, and Contribution ex-TAC of $206.7 million for the nine months ended September 30, 2022, compared to $213.4 million for the nine months ended September 30, 2021.
And this is even after a small contribution from their acquisition:
…results for the three and nine months ended September 30, 2022 include contributions from Amobee for the period from when the acquisition of Amobee closed on September 12, 2022 through September 30, 2022.
They blame advertising weakness, which does make sense in the current macroeconomic environment:
Advertising demand during Q3 2022 remained impacted by challenging macroeconomic conditions, particularly as several direct-to-consumer brand customers experienced significant pressure on advertising budgets due to rising inflation.
This flows through to weaker EBITDA:
Achieved Q3 Adjusted EBITDA of $30.1 million compared to $42.3 million in Q3 2021 and Adjusted EBITDA of $102.9 million for the nine months ended September 30, 2022, compared to $107.2 million for the nine months ended September 30, 2021.
They still have significant net cash and have been buying back shares aggressively:
Strong $109.1 million net cash position as of September 30, 2022, following the completed acquisition of Amobee, investment in VIDAA, and completion of $75 million share repurchase program, provides ample liquidity for current business needs as well as future potential investments and initiatives. As of September 30, 2022, the Company has utilized $100 million from its secured $180 million credit facility relating to its acquisition of Amobee, including $90 million from a secured Term Loan A and $10 million from a Revolving Credit Facility. The Company had $80 million remaining on its revolving credit facility as of September 30, 2022.
But holding a lot of cash while also holding a lot of debt is certainly suboptimal. And with hindsight, the average price of their share buyback program also looks suboptimal:
For the entire program, the Company repurchased 13,792,485 Ordinary shares, representing approximately 9% of shares outstanding, at an average price of 437.54 pence, for a total investment of approximately £60.5 million, or $75.0 million, including fees.
The Q4 guidance is for a bounce back in performance:
· Q4 2022 Contribution ex-TAC of approximately $103 million
· Q4 2022 Adjusted EBITDA of approximately $37 million
Although this includes the full effect of the acquisition so is not organic. Their broker finnCap say:
Changes to forecasts and target price – As we explain in more depth on p11, we lower our forecasts to move in line with today’s updated guidance. Our FY22 and FY23 revenue are 4% and 2% below consensus, and our FY22 and FY23 adjusted EBITDA are 11% and 10% below consensus. We expect Tremor will generate strong EFCF of $95m in FY22 and $128m in FY23, which leads to net cash increasing to $138m at FY22 and $267m at FY23. Our target price moves to 1,500p or 14x FY23 EBITDA, which reflects the valuation of Tremor’s US peers, the finnCap Tech 40, and Tremor’s cyclically low forecasts in FY23.
Not sure we should be putting a lot of faith in the 2023 forecast (or their PT) given the highly variable outcomes this year. However, a 14% FCF yield, more like 19% after the 25% fall on Monday, makes them look very cheap:
Wynnstay (WYN.L) - Trading Update
Another ahead statement from this agricultural distributor:
Since the trading update provided on 6 September 2022, which reported a strong trading backdrop across many core activities, it is now clear that the Group's results for the financial year will be ahead of market forecasts issued after that announcement.
However, where a company holds inventories that are increasing in value, it is important to distinguish between genuine profits and those that are purely an artefact of FIFO accounting. One symptom of the latter is that the cash flow will not improve if inventory volumes are maintained. Unfortunately, inventory volumes are almost never given and rarely hinted at in trading statements. They do say:
This position reflects not only a favourable trading performance in the final months of the financial year, but also a higher than initially expected contribution from joint venture activities and an additional, non-cash profit from grain trading operations within the Group's Agriculture Division of approximately £0.5 million.
Here they have clearly flagged £0.5m of the profit as being due to inventory inflation. However, it turns out that this gain was only from inventory that had been revalued rather than sold. This is the tip of the iceberg of their gains from inflation in their markets.
Their broker, Shore, quantifies the P&L upgrade as 26%, but what matters here more than ever is cash flow. Unfortunately, the cash flow picture is confused by the recent placing, which was described as being for the development of a feed facility and possible acquisitions, but which we suspect was also to cover increasing inventory requirements caused by inflation. Shore gives net proceeds of the fundraising at £10.3m whereas net cash has only been upgraded by £8.6m.
We suggest that investors would be better off ignoring the forecasts for FY 2022 entirely and focussing on the following year. These are unchanged by this week’s update at 41.5p EPS according to Shore (figures on Stockopedia may include forecasts that do not consider the recent dilution). That puts them on a PE of 15x which is at the top end of the recent range. Be aware also that forecasts assume constant food prices, but any normalisation would hit reported profits hard, causing the shares to sell off, although again, this would purely be an accounting artefact which should be looked through.
Cake Box Holdings (CBOX.L) - Interim Results
This formerly growth company reports a significant real-term Y-o-Y fall in revenue and profits have halved. They comment:
Reduction in EBITDA and pre-tax profit, reflects the previously reported challenging trading environment in H1, cost pressures and increased investment in the business
As a reminder, this is a franchiser but they provide the ready-baked cakes to the stores. Notably gross margins are actually up despite increases in raw material costs. It is clear from the commentary that they have baked in significant extra fixed costs during the period and the run rate may be higher than these results suggest. But so may some of the benefits to gross margins.
The outlook is bullish though:
The appeal of the Group's franchise proposition is reflected in the continuing strength of our pipeline of new potential franchisees, with 44 deposits held at period end. Of these 44 deposits, 20 are from existing franchisees.
The improvement in trading towards the end of H1 has continued into H2 with October
But, this still corresponds to real-term falls in sales from existing stores:
like-for-like franchisee sales up 4.6%
And even including new stores growth is anaemic:
total franchisee sales in the six weeks to 6 November 2022 up 12.9%.
It seems that they may have expanded fixed costs in preparation for growth that is failing to come through. This could lead to retrenchment and writedowns. Given this, and the numerous red flags previously highlighted, cashflow and balance sheet are of vital importance.
Inventories are up 22% YoY versus revenue up just 2.1%. Inventory held covers around 5 weeks of sales which seems grossly excessive given a significant amount will be fresh ingredients. The other working capital items seem to be under control and there is plenty of cash. So overall, the cash flow looks ok, although the dividend was uncovered after capex. The 10x PE still doesn’t seem particularly attractive for an ex-growth company with some red flags.
finnCap (FCAP.L) - Extension of PUSU deadline
Unsurprisingly, the deadline for an offer has been extended. It does mean that serious discussions are ongoing. It is still interesting that the option is for partial shares in Panmure Gordon. We would have expected larger shareholders would have wanted all shares and Panmure Gordon would want to minimise cash payments. After all, finnCap management were buying at 31p not that long ago (although an age in market sentiment!)
Sky News ran with the headline:
Diamond's Panmure in talks about £37m takeover of finnCap
The former Barclays CEO Bob Diamond's Atlas Merchant Capital and finnCap are discussing an all-cash takeover proposal worth just over 20p-a-share, Sky News understands.
£37m = 20.4p per share. On 31st March, finnCap had £24.4m of cash. Some of this will have been paid out as employee bonuses since then. £2.1m was spent on an acquisition, and about £2m was paid out in dividends. There could still be £15m or so cash in the business, making the offer around £22m net. This year the earnings will be negligible, but in the good years, they generate £6-7m PAT. If we assume feast and famine occur in roughly equal measure, the average earnings are perhaps £3.5m. This makes the offer only around 6x average earnings. Given that finnCap has the cash to withstand the current weak markets and a history of growing revenue almost every year since being founded, this multiple looks much too low.
Shareholders may be much better off in the long term telling Bob Diamond where to go, as perhaps will other retail shareholders - finnCap were pioneers in providing quality research to all investors, whereas Panmure aren’t even on Research Tree. It would be a loss to us all if finnCap under Diamond took a retrograde approach to research access.
Normal service to resume next week. Have a great weekend!