Here’s the highlights from news we discussed this week:
Capital Limited (CAPD.L) - Final Results
A revenue miss had been previously reported in January, so revenue here is not a surprise:
Things are complicated at the EPS level by adjustments for investments and because Tamesis and the company report on a different basis, but EBIT matches historically and now seems well ahead.
The biggest news is perhaps the forward guidance:
Revenue guidance for 2024 of $355 - $375 million
This seems to be usefully ahead of the $350.1 previously from Tamesis and is top line growth of 15% at the mid-point of the range. They have far greater revenue visibility than most companies, so that is strong guidance, given the Sukari earth-moving finishes during the year. The market didn’t like this update, so it presumably just doesn’t believe the company on this front.
Tamesis released a pre-results note and hasn’t yet updated for the new revenue range. If we take the midpoint of the range and Tamesis's assumption for EBITDA margins, we get $98.6m in EBITDA, and the shares are trading at a 2.4x EV/EBITDA, (including the value of the investments they hold). Seems miserly, but the onus now is on the company to deliver on that revenue guidance.
T Clarke (CTO.L) - Final Results
Thier headline is:
Group delivering on its growth strategy
Which appears to be vanity, as the 30% drop in EPS on +15% revenue shows:
They say:
Forward order book up 70% to £943m
But, given these results, there is little confidence that means EPS performance will be any higher than now. Insanity.
The big problem is that the board pay here is absolutely ridiculous. No doubt they argue that they run a big company on revenue, but with PBT just £7.6m they shouldn't be taking home multi-millions.
If pay was more reasonable, say half this amount, then the operating profit would be 30% higher.
As well as being unprofitable, their revenue growth also increases the opportunities for contracts to go bad. But there is one advantage of of being bigger: it gives you greater ability to pay your suppliers later:
To be fair, contract assets have gone up by a similar amount:
But trade payables are a definite figure, and contract assets an estimate.
Note the growth here is far in advance of revenue. 104 Days Payables vs 93 the previous year. So they have never been a prompt payer, as per the rest of the industry, but appear to have gone beyond normal commercial terms recently, at least at the point of balance sheet reporting.
There is some kingship, in the cash balance:
However, this suggests that the current net cash is not representative of the normal position:
Overall, the balance sheet looks weak even though they have increased net cash and net current assets:
So they are only one or two onerous contracts away form being in serious trouble.
Ebiquity (EBQ.L) - Trading Update
This reads well, initially:
For the year ended 31 December 2023 Group revenue is expected to have grown by 7% to £80.2 million (2022: £75.1 million).
Adjusted EBIT is expected to have increased by 31.0% to £12.0 million (2022: £9.2 million), reflecting the impact of cost management and a slightly higher margin business mix.
But looks like a miss on Revenue:
But potentially a beat on adjusted EBIT, although it is a little hard to tellwithout a detailed model. We’ve not liked the adjustments here in the past either. The source of the potential beat is cost cutting plus higher margin business:
…expected resulting adjusted EBIT margin, at 15.0%, is an improvement of 2.8 percentage points from 12.2% in 2022, reflecting the operating efficiencies we have delivered as part of our transformation programme, cost management, as well as a continuing growth in our higher margin Digital Media Solutions business.
However, the outlook isn’t what investors will want to hear:
2024 has started satisfactorily.
This sounds a bit confusing:
Net debt as at 31 December 2023 was £11.9 million (including cash balances of £10.0 million) with undrawn facilities of £7.1 million.
We assume that means £21.9m gross debt vs a £29m facility. It looks to be an improvement over the half year tho:
Net bank debt of £15.0 million with cash balances of £9.8 million and undrawn bank facilities of £4.7 million as at 30 June 2023.
Which means £24.8m gross debt vs a £29.5m facility. Still, gross debt double net debt suggests window dressing, or at least variable working capital during the year. The last Balance Sheet working capital position wasn’t terrible tho. We really need to see the results to be sure.
Loop Up (LOOP.L) - Trading update & cancellation
The revenue growth her is impressive:
FY-23 revenue is expected to be c.£21.2 million (now stated without Hybridium as a discontinued line of business), an increase of 34% over like-for-like revenue in FY-22
However, here is the elephant in the room:
· The Group's outstanding debt of approximately £6.0 million with Bank of Ireland matures and becomes due on 30 September 2024
· As at 31 December 2023, gross cash was £845,000 and net debt was £5.3m [4]
· The Group requires significant cash investment to refinance existing debt with Bank of Ireland, to provide necessary short-term working capital for the Group and to drive growth of the Multinational Cloud Telephony business
· The Group is in productive discussions with Bank of Ireland with a view to agreeing a new two year term facility conditional on the Cancellation, Re-registration and proposed fundraising being completed.
There is a £9 million short-term cash requirement. The elephant appears to have stampeded and trampled the listing. Why would banks demand a delisting?
Specifically, the Board does not believe that an equity fundraising for the £9 million short-term cash requirement would be possible through public markets, particularly in view of the Group's current market capitalisation. Based on the outcome of the Group's most recent fundraising in September 2022 and current indications from the major contributors to that fundraising (i.e. private investors rather than institutional investors), the Directors believe that the Group would only be able to raise the necessary £9 million investment as a private company.
We assume that the "proposed fundraising" is on such terms that they would not be allowed by listing rules. The issue appears to be the takeover code:
The Group intends, irrespective of any share price movement in the interim, to raise the funds at 1.75 pence per share, which would represent a discount of c.14.6 per cent. to the closing price on 7 March 2024, being the last practicable date prior to posting this Announcement, of 2.05 pence, although the Directors may adjust this price depending on the investment offers which are presented to the Group as part of the proposed fundraising. There is no guarantee that the proposed fundraising will be concluded on the terms indicated, or at all.
The rules are intended to protect investors, but it is clear here that some people can't be helped and trying to do so can often be counterproductive. The discount is very slight considering the scale of the required financing. However, the share price is down 70%, with the quoted bid at 0.5p. This shows that the majority of shareholders either can't hold the delisted stock and are forced sellers, or were really holding a gambling chip that they were hoping was going to pay out on some short term volatility, rather than a long term equity investment in a risky growth company. We have some sympathy for the former, but little for the latter.
MTI Wireless (MWE.L) - Final Results
Yet another year of no growth for this supposedly exciting growth stock:
· Revenue of US$ 45 . 6 m (2022: US$ 46 . 3m) on a constant currency basis, this represents an increase of 2% over last year
· Profit from operations increased 1% to US$4.65m (2022: US$4.59m), including US$0.2m impairment of goodwill related to the acquisition of PSK
EPS growth is better, although helped by interest on cash balances this time round. 4.5c EPS looks a small beat on the consensus, though. However, the share price more likely responded well because of this:
· Expansion of buyback programme effective from 12 March 2024 until March 2025 with increased funding from £200K to a maximum of £700K
An aggressive buyback in an illiquid stock often generates short term momentum. But over the long term, a P/E of 13 looks expensive for a company growing the top line single digits, even with the cash balance and decent dividend. Especially, when you consider this is an Israeli stock on AIM. The share buy back may well destroy long term shareholder value at these levels.
Nexteq (NXQ.L) - Final Results
The impressive YoY growth in PBT is not seen in adjusted EPS because of deferred tax movements the previous year, but perhaps a fairer comparison still is with operating profit as they have been accumulating cash and therefore interest income:
Operating profit was up 39%. There's also some currency movements which helped NAV and cash, but are not relevant to yoy comparisons.
The big contributor to growth was the massively improved operating margin in Densitron in H2:
Management say this is due to price increases that have been accepted by the market, so this should be sustainable going forward. However, it begs the question - why did they just come up with the idea of increasing prices in 23H2? Instead they sat with close to single digit OPMs for all the recent past.
Looking forward, they continue to warn of weaker order intake due to customer destocking and there is a long discussion of various opportunities and risks within their markets. They mention an H2 weighting, but perhaps don't make it as clear as they could that this is totally normal for the business and we wouldn't describe it as a warning at this stage. Still, the H2 weighting and the normalised order book does create some uncertainty over full year revenue at this stage in the year that you wouldn't see elsewhere.
Turning to the broker forecasts, the good news is that the positive momentum on gross margins continues, and not only due to absent low margin display sales to Aruze. An 8% profits upgrade at such an early stage exceeded our expectations.
There's also a forecast cash upgrade of $1.2m for 31st December 2024. Cash levels are now forecast to get to $44.3m at the end of 2025. They comment:
The strength of our balance sheet and accumulated cash balance also positions us well to undertake acquisitions to earnings growth.
Gaming in particular is a highly fragmented market.
The rating is still undemanding, despite recent tips in the Investors Chronicle being responsible for the bulk of the upward movement in share price this year. Last year they said that they would have a 2nd half weighting, with lower sales and higher margins. The market said we don’t believe you and the shares sold off heavily. It would be great if we get the same opportunity to buy low and sell high again this year.
RA International (RAI.L) - Trading Update
It has taken them 2.5 months to produce a year-end trading update which is a little worrying. Revenue down, but reaches breakeven for profits:
During the Period, the Group achieved revenue of approximately USD 58.3m (2022: USD 62.9m). Despite the reduction in revenue, the Group expects to report a profit before tax of approximately USD 0.2m (2022: loss of USD 13.0m)
Lots of depreciation, which means EBITDA is decent:
EBITDA is expected to be approximately USD 6.3m (2022: loss of USD 4.1m).
There is now no broker coverage, but the last update from May had $62.9m of sales and $0.6m EBITDA. So that's a big revenue miss, but a big EBITDA and EPS beat.
Cash is also much higher than brokers were previously expecting:
Cash at the end of the Period was USD 16.8m (2022: USD 7.5m), with loan notes of USD 15.8m (2022: USD 14.0m). This marks a return to net cash for the first year since 2020.
This is positive. To win contracts they need to put capital in upfront. Which means EBITDA is fine if they want to simply wind down the business, but they remain capital constrained for any new business. The cash balance may have been bolstered by asset sales:
Through the successful sale of assets, we have made significant advancements within the commercial mining and minerals sector, expanding our reach to new customers and territories.
Some strange wording there. Are they suggesting they sold someone a digger in Mozambique so now have their phone number? Still, better than the kit gathering dust in a warehouse.
Basically, no one knows how this is trading, or will trade in the future. Not us, the broker or even the company themselves. Hence why the outlook is pretty vague:
The core focus is to continue to build on the improvements made in 2023. To this effect, the Group is committed to increasing revenue and improving margins across all service sectors through an enhanced strategic focus on cost reduction and efficient overhead management.
The focus appears to be on cost-cutting rather than sales growth, but as I say they probably can't afford to win any large contracts. Despiet the big EPS & Cash beat, we are put off by the £17m market cap for a breakeven company and a huge spread. This is due to illiquidity of the shares. The founders still hold over 80% and really should be diluted by raising equity to fund new contracts. However, the share price is so low they won’t consider it, or the market won’t give them the money given the recent trading record. This leaves them stuck, muddling along, going nowhere particularly quickly.
That’s it for this week. Have a great weekend!