Small Caps Live Weekly Summary

ANN AGFX CAR CAPD PEB SOM SYS1

Here’s a selection of what we looked at this week:

Anexo (ANX.L) - Potential offer

This seems like good news:

DBAY notes the recent press speculation regarding a possible offer for Anexo and confirms that DBAY, Alan Sellers and Samantha Moss are considering a possible offer for the entire issued and to be issued ordinary shares of the Company (save for those already owned by DBAY, Alan Sellers and Samantha Moss ) (the "Proposal").

Until you read the fine print:

they currently expect any offer for the Company to comprise entirely loan notes issued by a newly incorporated entity jointly controlled by funds managed or advised by DBAY, and Alan Sellers and Samantha Moss, or ordinary shares with an underlying economic interest in the newly incorporated entity making the Proposal

We’ll make you an offer if you lend us the money to buy you out! This sounds more like a forced delisting than a takeover.

Argentex (AGFX.L) - Financial Position, Suspension & Offer

This is a shocker of an update:

As a result, the Company has experienced a rapid and significant impact on its near term liquidity position, driven by, inter alia, margin calls linked to its FX forward and options books. The Company has taken a number of steps to preserve cash and increase the collateral received from its counterparties. In addition, the Company is considering a number of options for the business. The Company also has the support of its principal liquidity provider and is in discussions with them regarding ways to further strengthen its liquidity position given the ongoing macro uncertainty, noting the likelihood of continued volatility in the currency markets and the associated exposure presented within the Company's FX forward and options books. In the event that the volatility in currency markets worsens materially then the Company's financial liquidity position, if not strengthened in the near term, would be significantly stretched.

Ouch. Less than three weeks ago, they were giving it the whoops about being ahead of expectations and benefiting from FX vol. The absolute basics of this sort of company is that you hedge all your risk and make the margin, and they appear to have royally cocked that up. Cable to 1.34 can’t be out of the realms of possibility for their models, nor the speed of movement. Lettuce Liz Truss and Kamikwaze managed to move cable from about 1.20 to close to 1 overnight.

The update makes clear that they are still a global leader in currency risk management, though! lol.

This was followed up by the announcement of three potential offers, but the situation was getting much worse:

This liquidity position further deteriorated yesterday and the Company remains in regular discussions with its Liquidity Providers.

This further reduction in liquidity necessitates an immediate cash injection to ensure the Company's continued solvency, without which the Board would have to take immediate steps to secure the Company's future and protect value in the business for the Company's creditors and other stakeholders.

So they begged the offeror that they were continuing discussions with for cash:

In addition to the Possible Offer and in order to provide the necessary immediate financing for the Company, the Board is seeking to reach an agreement with IFX Payments on the terms of an initial bridging loan (the "Bridging Loan") in addition to further ongoing liquidity support over the near term. The purpose of the Bridging Loan will be to provide the Company with immediate working capital flexibility to assist with its near-term liquidity needs.

The recommended offer arrived on Friday:

Under the terms of the Acquisition, Argentex Shareholders will be entitled to receive: for each Argentex Share: 2.49 pence in cash (the "Consideration")

The Consideration values the entire issued and to be issued ordinary share capital of Argentex at approximately £ 3 million.

So that is an almost complete wipeout of the equity, which no one really saw coming prior to the suspension. This outcome reinforces the fact that any business can go to zero, even if they have net cash, and it can happen before anyone can react and get out. Position sizing is always key to risk management.

As for Argentex, one of the scl regulars said it best: muppets.

Carclo (CAR.L) - Refinancing & Pension Revaluation

When a heavily indebted company has to refinance, beggars can’t be choosers. So it is no surprise that it is with a lender we’ve never heard of and an increased interest rate:

The new facilities with BZ comprise a Term Loan of £27m and a Revolving Credit Facility of £9m, replacing the existing facility. This represents an increase in margin of circa 1.75% over the comparable previous facilities.

This is another £630k of annual interest if the RCF is fully drawn. Although they were already paying around £6m in finance costs, which works out to be around 17% (assuming the year-end debt figures aren’t subject to significant window dressing). So it is possible they are now paying close to 20% interest on the debt. It shows how the lenders view the company, if this was the best deal on offer. They say:

This is an important step for the Group enabling it to continue to invest in the business and allow the Group to deliver on its strategy.

While important in the sense of being better than default and insolvency proceedings, this doesn’t seem an important step to shareholders sharing in the returns of the business anytime soon. Indeed, the higher interest rate pushes this further out.

They also trumpet the actuarial deficit reduction in the pension deficit:

In parallel, the Group has reached agreement with the Trustees of the Pension Scheme in respect of both the actuarial deficit and the resultant deficit repair contributions to be made in accordance with a recovery plan that details the contributions due over the term of the new financing arrangement with BZ and for a period beyond, to meet the statutory funding objective.

But the actual details involve them putting in a big chunk of cash now (financed by the new debt facility) on top of previous agreed recovery payments:

A sum of £5.1m has been paid to the Pension Scheme on completion of the refinancing, with an additional £3.5m (in line with previous years) gross annual contribution to be paid in each of the three subsequent years. The Technical Provisions actuarial deficit, as at 31 March 2024 was £64.5m (31 March 2021 £82.8m).

While actuarial deficit reduction is essential, at the end of the day, it is the recovery payments that represent the cash leaving the business. Pension deficits are debt, but non-recourse debt, as the pension trustee will never kill the golden goose that is the trading business. In this case, by making an additional contribution as part of the refinancing, they are taking a non-recourse, non-interest-bearing debt and turning £5.1m of it into recourse debt that they are paying perhaps close to 20% interest on.

So basically, this is bad news on multiple fronts. However, shareholders appear to be excited by the prospect of more of the company’s cash going to the pension trustee and lenders, as they bid the shares up. There is an argument that reducing the risk of insolvency improves the risk-reward. Their broker Panmure Liberum say:

We re-iterate our BUY recommendation with the new facilities allowing Carclo to invest in the business and the ability to look forward with confidence for the first time in several years as the material uncertainty over liquidity is removed.

However, this risk-reward argument only really works if the shares are dirt cheap, and with an EV/EBITDA of around 10, once you include the still significant pension deficit, it isn’t. Additionally, the interest rate on the refinanced debt suggests that the lender still believes there is a material risk of default. Their broker adds:

This is the news we have been waiting for.

Perhaps they were owed money by the company, too!

Capital (CAPD.L) - Q1 Trading Update

The main story is revenue up year-on-year but down on Q4. Utilisation is down slightly, as is ARPOR from the previous quarter. So if we consider Q4 a miss, then this is also. However, Q4 was quite strong, just not strong enough to make up the FY expectations.

Mining revenue is starting now in Reko Diq, and MSALABS finally seems to be ramping up in Nevada. These might be signs that things are actually turning positive on many fronts, with some decent contract wins on the drilling side too. It is difficult to know whether the quarterly mining trajectory is really on track at this stage, but they seem quite positive. Nevada complicates drilling, but perhaps that should be easier to form a view on? Noises seem less positive, though.

The investment portfolio is doing very well:

· The total value of investments (listed and unlisted) was $36.7 million as at 31 March 2025 up from $30.3 million as at 31 December 2024, with the portfolio recording investment gains (realised and unrealised) of $7.3 million in Q1 2025; and

· The portfolio continues to be focused on a select few key holdings namely WIA Gold, Sanu Gold and Asara Resources.

A mixed update, but probably in line overall, we’d say. Something broker Tamesis confirm, saying:

We didn’t have quarterly forecasts but the company looks well set to meet our H1 and FY forecasts with the latter in the middle of the company’s guidance range of $300-320m

The problem is that in line isn’t particularly cheap on earnings on any near-term forecasts.

Pebble Beach Systems (PEB.L) - Final Results

Big write-downs make a statutory loss, but the rest is in line after the recent profits warning:

They are still cash generating, though, which means net debt is down by another £1m:

This sounds positive for shareholders in the medium term:

strategic changes made in Q1 2025, which is estimated to deliver annualised cost savings of c£2.0 million, is expected to accelerate a reduction in net debt.

But you have to wonder how many redundancies they are making. To make savings of this level, they must be willing to fire 20-30% of their workforce, and that can demotivate the rest.

The cash is said to be spent on M&A:

This will put us in an excellent position to consider M&A investment, adding technology product offerings, and potentially paving the way for improving shareholder returns.

Which is a sort of admission that their core business is subscale. As small software companies that already have plentiful cash but are struggling to deploy it, such as Ingenta, show, there isn’t necessarily a load of cheap unlisted bargains available in the software sector.

Somero (SOM.L) - Trading Update

This is a “However" update:

Q1 was weaker than expected

· Revenues of approximately US$ 105.0m (previous market consensus estimate: US$ 113.6m)

· EBITDA of approximately US$ 24.0m (previous market consensus estimate: US$ 28.6m)

· Year-end cash of approximately US$ 28.0m (previous market consensus estimate: US$ 31.2m)

They limit their commentary to the known issues in the US with nothing about export markets, so perhaps these are less affected than I expected, or this is just a reflection of how dominant the US is in their business and their thinking.

We are impressed by how quickly they have cut costs:

In response to the softer trading environment and consistent with Somero's agile operating model, the Company has initiated a targeted operational workforce reduction of approximately 15%. This restructuring, effective immediately, is limited to areas directly affected by lower sales volumes and does not currently impact customer-facing teams, future growth functions or administrative support. Together with a reduction in variable expenses and tighter cost controls, these actions are expected to partly offset the profitability impact of lower revenues in 2025. Management will continue to monitor commercial activities and will reassess its cost structure as required.

They have always said they expect a downturn at some point and have a flexible cost base, so it is good to see this being implemented. If demand really is now falling significantly in the US, then there is no quick fix here. We have previously commented that our on-the-ground research suggests that their competitive position in Europe has weakened significantly, so it seems unlikely this will pick up the slack.

System1 (SYS1.L) - Trading Statement

The yearly results look good, but Q4 is a bit disappointing. They comment:

The relatively modest overall revenue growth in Q4 reflected recent global disruption, volatility and uncertainty in global markets. In spite of this, March was the highest revenue month of the financial year.

Which is understandable, but given the rating, there was little leeway for short-term fluctuations. And this is the outlook:

While it is too early for us to gauge the effect that the current volatility in global markets will have on our clients' budgets, inevitably at this stage there is more downside than upside risk and we will provide a further update in our full year results.

These are Mark’s estimates prior to this week’s update:

And here is the actual:

The rating no longer looks as high, partly due to share price falls, but then neither do the near-term growth rates. The gross margin remains very high at 88%, but the continued march upwards of admin expenses suggests this is more of an accounting decision than a sign of exceptional operational gearing. Still, there should be some operational gearing going forward, and if this really is just a blip, they may look cheap at some point in the future. The only worry is that they have gone through several of these cycles of rapid growth, only to see the in-demand product fall by the wayside. At the time, it is very hard to differentiate between temporarily weaker market conditions and a permanent change in the competitive position.

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