Small Caps Live Weekly Summary
CCT IGR MACF NXQ THS THRU
Here’s some of what we discussed this week:
Character (CCT.L) - AGM Trading Update
This initially reads like a profits warning:
As reported in the announcement of our annual results on 18 December 2024, trading conditions have continued to be challenging. Whilst sales in the four months leading up to Christmas 2024 on a like for like basis have been very similar to that of the prior year level
But then they say:
The business continues to trade satisfactorily, and the Board expects profitability (before highlighted items) for the current financial year ending 31 August 2025 to be in line with current market expectations.
So we were a bit confused as to exactly what they were saying and why they needed the word “whilst” in the first paragraph. Broker Allenby say
sales slightly below comparative
So the brokers note saying slightly below, it could mean that "whilst" sales missed their expectations, profitability hasn't. Or that the first four months were comparatively weak, but they expect to make it up. After all, their seasonality is backwards to what one may expect, with H2 March to August typically 53% of sales. Around half of the sales are FOB, which in the current environment includes some peak by the end of August. So it is possible to be behind in the first four months but expect to make it up later with well-received ranges. Here they say:
The customer previews of our 2025 ranges have been very successful to date, and we are confident that the ranges will perform well for the Group in the coming year.
Which seems positive. We dispatched our roving reporter, Leo, to the AGM to get to the bottom of this, and the answer is that they are negligibly down on sales for the first four months but with a strong pipeline going into the rest of the year. A couple of other snippets he came away with:
Succession planning. The answer is that at the annual pre-AGM board meeting (held yesterday this year), they discussed exactly this and that they are actively working to rejuvenate the board as NEDs etc, retire, but also that there is a layer below with a mixture of ages.
They accept the website is weak, although they do sell a lot of Dr Who stuff through it. They will be investing to make it scale to handle more traffic and putting on more products, including where they are distributors, later this year.
IG Design (IGR.L) - Trading Update
Oh dear, this is a huge profits warning here.
Correspondingly, FY25 adjusted profit is now expected to be significantly impacted, with profit delivery for the full year around break-even, and well below last year, as well as being significantly below current market expectations (believed to be $32.0m)
DG Americas is again doing the damage with their 4th largest customer entering Chapter 11. Something management specifically said they didn’t expect this year. There’s still net cash, but also below expectations:
A strong net cash position is still expected to remain at the year-end, albeit being lower than previous expectations given the reduced profit delivery and expected lower receivables recovery due to customer in protective arrangements or bankruptcy procedures. The Company also continues to expect cash proceeds from property disposals.
Progressive has this at $63.4m at the year end. And, of course, the huge discount to net current assets remains. But the timeframe for these becoming productive is now kicked into the unknown:
Under these challenging circumstances, at this stage, and until the recent events are more fully assessed, the Board is no longer able to provide guidance for the years beyond FY25.
Management credibility has taken a huge hit here. After all, less than a month ago, they gave a number of very specific reasons why they expected DG Americas profitability to recover in H2. The reality has been far from that and means they’ve pretty much gone from hero to zero in one step.
However, the 60%+ fall this week also looks overdone. Even with write-downs from one of their customers entering Chapter 11, the discount to Tangible Book Value is huge. Indeed, the expected cash balance at year-end covers almost 90% of the current market cap. The market is pricing this as if their receivables and inventory are largely worthless. This may be the case, but it seems far from the central outcome we should be using. The shares are trading not far off the level when the company was facing the real risk of insolvency, something that is no longer the case today. It will be a long wait for any recovery, though. With management credibility shot, the market will no longer value this on forecasts but will want to see profitability over an extended period before believing that DG Americas has actually been turned around.
Macfarlane (MACF.L) - Acquisition
Macfarlane are paying between 11-14xadj. PTP depending on earnouts for an acquisition:
Macfarlane Group PLC announces the acquisition of The Pitreavie Group Limited ("Pitreavie") for a maximum cash consideration of £18.0 million, including an earn-out of up to £4.0 million over two years….
· For the year ended 31 December 2024, Pitreavie generated sales of £24.8 million, with adjusted EBITDA of £2.5 million and adjusted pre-tax profits of £1.3 million.
Which begs the question why, when their own shares are on 7-8x PTP?
Shore says it’s £10.6m initial cash consideration, so about 8 x PBT, but the only sensible way to look at this is on an EV basis and if Shore have to massage the message, then it just highlights that the deal probably isn’t great.
The read-through is that a) private markets remain more expensive than public, b) sellers are not necessarily accepting low offers despite the weak economy and c) if listed companies can get a multiple cheaper than debt they can still make it earnings enhancing, just not as earnings enhancing as if they used that same debt to buy their own shares.
There are surely synergies and strategic reasons for the acquisition that will make it a better deal than simply buying back shares; plus, banks often seem willing to lend for acquisitions, whereas they wouldn't for buybacks. Still, it shows that the idea of listed companies growing by acquiring cheaply-rated private companies appears to be dead in the current markets.
Nexteq (NXQ.L) - Trading Update
Given the rather torrid time shareholders have had recently, this will come as a relief:
The Board confirms that trading for 2024 was in line with expectations, as set out in the 31st October 2024 update.
No further downturn was seen in Q4, but no recovery is likely until FY 2026, and that will be dependent on new product development. Margins are forecast to lower in FY25 so the profits won’t repeat. It also seems unlikely that the strong cash flow will not repeat in the face of this investment in the stock building and product development.
The Board expects revenues in 2025 to be broadly in line with 2024, and with a reduced margin due to short-term pricing pressure and investment in market strategy for key opportunities in the Gaming sector. Following a business restructuring in Q4 2024, operating costs have been reduced by $1.6m
Regarding capitalisation, from the last annual results:
... Group expenditure on research and development reduced to $4.6m (2022: $4.8m) ... Of these costs, $1.8m were capitalised (2022: $1.8m)
So if genuine investment is indeed going up (and I have previously highlighted how their product range is now obsolete from the perspective of some new projects) then the cash hit would be greater than the P&L hit.
Broker Cavendish, reiterated 4.5p EPS for FY 2025, down from 7.0p for the year just ended. Forecasts for net cash have been moderated, though, $29.8→29.1m for 31st Dec 2024, $31.0→29.8m for 31st Dec 2025.
This is partly the buyback, and investors need to adjust both the share count and the cash balance for this. Having such a large cash balance is both a blessing and a curse. It buys them time to invest in product development. However, in terms of valuation, excluding the cash means they look cheap at 60p (5x fwd earnings ex-cash), fairly valued at 70p (8x fwd earnings ex-cash) and overvalued at 80p (11x fwd earnings ex-cash). They trade at a discount to TBV, but not one that is out of line for a struggling UK-listed small cap at the moment.
The risk is that the obsolescence issues they are dealing with are irrecoverable, and competitors are now too far ahead and winning the long-term contracts for this upgrade cycle. They would end up as another Zytronic - cash-rich but never able to transform their business when the market moved on. As Zytronic has shown, investors are unlikely to even receive TBV in such a scenario. It is probably too early to write them off in this way, but until products are updated and selling well, it will remain a risk.
Tharisa Mining (THS.L) - Q1 Production Report
It looks like a very poor quarter, they mined the same amount of reef, but the lack of drilling means that the grade was lower.:
Undoubtedly a tough start to the new year impacted by drilling equipment availability, as a consequence thereof we mined sub optimal oxidised reef horizons. This yielded lower ROM grades and therefore lower recoveries. We have subsequently improved the drilling rates and equipment availability. The focus this quarter will be on optimising the feed grade and improving our recoveries to previous levels.
This appears to be a massive own goal, which has led to a 19% drop in PGMs and 12% in Chrome production:
The chrome concentrate prices are down 14%, too. The overall impact is probably sales down 20-25%. Their Gross Margin is only just over 25%. So this could completely wipe out their profit for the Quarter.
According to broker Tamesis, chrome prices have fallen down to $200/t:
Likewise Chrome which has now fallen harder and further down to c$200/t. We understand a trader in the market had been anticipating a slowdown in the market. The company noted “Physical demand remains at normal levels with port stocks approximating one month supply to ferrochrome demand. Disruptions at the Mozambique border with lockdowns impacted road transport to the port of Maputo, impacting the delivery of cargoes to end use customers”. The Chrome industry will move to a negative margin at these prices so we expect some bounce after the Chinese New Year.
They mark this as temporary, but such situations can persist for longer than many expect. Tamesis don’t appear to have materially altered their forecasts, so must be expecting them to make up the production shortfall and for prices to recover strongly. Both of these look more like hope than substance at this stage. The mere 7% fall in share price seems to completely miss the downside risk here. There is net cash, but this is largely allocated to developing their Karo project, something that is looking less wise by the day.
Thruvision (THRU.L) - Strategic Review
Here is the crux of the matter:
If none of the Material Opportunities are converted to orders, the Board expects the cash resources of the Group to last until approximately the end of May 2025.
Hence why they are considering:
The Strategic Review will cover a range of options with a number of potential outcomes, including but not limited to:
· raising additional equity capital from the Group's existing shareholders, new investors and/or strategic partners;
· seeking a strategic partner to support the Group's growth and provide additional financial resources;
· the sale of the Company which would be conducted under the framework of a "Formal Sale Process" in accordance with Note 2 of Rule 2.6 of the Takeover Code;
· the licensing of the Group's technology and intellectual property to a third party for use in applications or territories not currently covered by the Group; and
· the continued review of the Group's strategy, cost base and allocation of cash resources.
Delisting is not mentioned, except via the way of a takeover, and the ordering suggests management's preference is for some combination of the first two options. Yet this would result in massive dilution. Previous management was very focused on a narrow set of opportunities, which suggests that, in retrospect, they were undercapitalised throughout:
further resources are required to advance the adoption of the Group's technology by customers and operate at greater scale
However, there's no guarantee those further resources would lead to greater scale. On average, it seems investing in a company with an interesting product and a track record of losses loses money. The strategic review doesn’t really change anything. However, it seems to have focussed minds on how badly things have gone wrong here. Hence the share price falls. It is tempting to think that these are now overdone, but with a short cash runway, it would be brave to bet that the market is wrong at this stage.
That’s it for this week. Have a great weekend!