Small Caps Live Weekly Summary

AFRN GDP HTG MEGP PAY SAL ZAMZ

Another quiet week for UK small cap news. We are in the fallow period, where all well-run companies with a December year-end have reported results, but we are not yet receiving pre-close trading statements for the half-year. A few companies report on different timelines or are providing AGM trading updates, but these are invariably in line or a vaguely positive narrative intended to try to stop the share price from falling in weak markets without actually having to provide any details.

Aferian (AFRN.L) - Additional funding secured and trading update

As a reminder, this is a company where things look to be going ok, but they are at risk of breaching banking covenants. So this is good news:

…announces that it has secured additional cash funding by way of a shareholder loan facility of up to £3.25 million from its largest shareholder, Kestrel Partners LLP. The securing of this shareholder loan provides additional headroom in respect of the covenants in the Group's existing bank facility.

While the absolute amounts are small, the fact that probably puts them safe from the banks pulling the plug…for the moment. Although at the cost of a 5% dilution due to the warrants going to Kestrel Partners. It could be a 13% dilution if they need to draw down more of the shareholder loan, although with a strike price similar to where the shares trade today.

On trading, they say:

Trading remains broadly in line with the trading and outlook communicated in our full year results announcement on 16 May 2023.

And this was what they said in the results:

Therefore, device sales in H1 FY23 have been materially lower than initially anticipated. While Amino continues to have a strong medium-term sales pipeline, we expect Amino's full year revenue for FY23 to be significantly lower than delivered in FY22.

And:

…we expect Group revenue and adjusted EBITDA for FY23 to be significantly below FY22, albeit that the Group is expected to generate a material positive EBITDA.

This isn’t truly terrible, but the upside needs this reduction to be a blip in trading rather than the new normal, and no significant dilution at these levels.

Goldplat (GDP.L) - Update on senior management team, licensing and electricity

This is the most important information:

In Ghana, the renewal of GRG's gold license has been finalised and the export of product has started

They had to pause exports waiting for this license, so although they were doing the work, they couldn’t book revenue. However, it seems a month too late to recover all the lost sales in FY23:

but we expect that most of this material will only arrive at customers in July 2023. As a result, the sales will only be recognised in the next financial period.

Shareholders shouldn’t really care when sales are recognised, just that they are made, although the market often has other ideas. In this case, it would seem to be a genuine delay, not lost revenue. They don't appear to comment on whether this will mean they hit or miss current forecasts. They may not know at this stage because it will depend on how much gets exported in June vs July.

They are also doing something about the SA electricity problems, which were getting worse:

The electricity shortages in South Africa continue and we have lost 28% of hours available during the first 2 months of Q4, compared to 20% in Q3, as a result.

These are the details:

…we have made a decision to invest in diesel generators which will be able to sustain operations in South Africa during electricity cuts. The capital cost of these investments will be GBP750,000 and will be financed over 36 months with one of our local banks. We estimate that it will take 12 - 14 weeks to receive and install these generators. Based on 25% of available hours expected to be lost during the next 24 months, we expect that the capital cost will be recovered within 24 months.

While this is annoying that government corruption and mismanagement mean additional capex, the ROIC is 50%, so doing this is a no-brainer. They didn’t have the space for solar, and battery storage would be prohibitively expensive to keep a plant of their size running without grid electricity.

The benefits of all this are likely to come through in 24Q2, by which point they should be back to £1m op profit/quarter from Ghana, and at least that much from South Africa.

The third bit of news is the appointment of an experienced COO. This should allow the CEO to focus on the financial and strategic side more, something that has perhaps been lacking amongst the need for firefighting recently.

House broker WH Ireland says:

The appointment of Douglas Davidson to the Group management team is a positive move, his operational experience should bolster efforts to deliver operational consistency. The decision to invest £750k in diesel generators is a further positive – the generators should smooth operational performance, boost the bottom line, and improve the reliability of forecasts. The generators should be installed within 14 weeks, and the payback period should be less than 24 months. The confirmation of gold exports from Ghana will boost revenues in the next financial period. We maintain our fair value at 18.7p

However, they also don’t mention any effect on current forecasts. Overall, Mark has perhaps less confidence that they will hit this year’s 1.2p EPS estimate, but more confident than at any point recently that they will hit their FY24 broker forecast of 2.5p. If they hit that, then the current price would make them one of the cheapest stocks on the market.

Hunting (HTG.L) - Major OCTG order and revised 2023 full year guidance

…has won a new, significant Oil Country Tubular Goods ("OCTG") contract that management estimates to be worth up to $91 million with Cairn Oil and Gas, Vedanta Limited, for its operations in Rajasthan, India. The contract is for an estimated 100 wells and is to extend up to three years. The OCTG will be supplied with Hunting's proprietary SEAL-LOCK XD TM premium connection.

$30m/year revenue versus an $800m forecast revenue perhaps stretches the definition of significant. Perhaps this revenue is higher margin or strategic in some way. The real good news is:

2023 full year EBITDA revised up to $92-$94 million

This is up from the $88m guidance in the Q1 Trading Update, so a c5% beat. Trading momentum now with them, however, in contrast to the share price that had been very weak. The share price responded by rising 15%, perhaps reflecting the mismatch between these rather than a 5% move in guidance. However, as with many shares, it has drifted back on no news. Not helped by exiting the FTSE250 in this week’s reshuffle.

They have recommitted to ending at net cash by the end of the financial year, too and have a growing order book. However, the US rig count continues to fall. The international rig count rises are more than offset this, though. The company still trades at a 30% discount to TBV, the majority of which is working capital.

ME Group (MEGP.L) - Trading Update

This was previously known as PhotoMe. They branched out into other "instant-service equipment" rather than just shutting themselves down when their core business apparently became obsolete. You have to wonder whether this is the best basis to effectively start a new business.

Photo.ME - is growing again, up 25% YoY:

continued to increase across all territories, particularly in Europe and Asia...Our anti-spoofing patents are enabling us to make rapid progress on the new ICAO and ISO biometric standards, which should be the norm by 2025.

Wash.ME - this was their main push a few years ago. up 36% YoY

Print.ME - Kiosks mainly in France

Feed.ME - reading between the lines, this is failing, but they are going to continue flogging it a little longer.

Anyway, where disclosed, these are great growth figures, but it would be nice to see some LFLs. There is the potential for the company to be undervalued because "everybody knows" that photobooths and print shops are dead and that laundry shops are low-margin. Anyway, they conclude:

As a consequence of this strong trading performance in H1 2023, the Board is pleased to increase its outlook for the current financial year, ahead of previous expectations, with revenue between £300 million and £320 million, EBITDA between £100 million and £110 million and profit before tax between £64 million and £67 million.

Revenue forecasts raised 9%, with similar increases for 2024 and 2025 also. EPS forecasts raised 12%. Strong cash and cash flow forecast. Given this, the forward P/E of 12 isn’t crazy.

Paypoint (PAY.L) - Positive Trading Update

Paypint lead with a promotional headline. Presumably, in an attempt to contrast trading to a YTD share price chart that looks like this:

Here is the key bit:

…profit before tax for the financial year ended 31 March 2023 will be at the top end of the range of market expectations, excluding exceptional items and Appreciate Group impacts since completion of the acquisition, driven by the strong momentum across the business.

We never like it when a company excludes large exceptionals, but then they are not relying on the acquired subsidiary to drive the performance:

accelerated revenue growth across all three business divisions.

There are vague positive noises from the Appreciate acquisition, too:

opening up further revenue opportunities...these opportunities have accelerated since completion.

Looks like they may be hinting at the chance of a beat going forward too:

Trading has been positive early in the first quarter of FY24, and we look forward to updating the market further at our preliminary results for the year ended 31 March 2023 on 6 July 2023.

It feels like they needed to get this message to the market, or they will be Private Equity owned by the end of the year.

SpaceandPeople (SAL.L) - Final Results

Still loss-making here, despite a big jump in revenue:

· Revenue of £5.5 million (2021: £4.0 million and 2020: £2.8 million)

· Operating loss of £9k (2021: profit of £0.15 million and 2020: loss of £3.57 million)

There is £1.5m of debt here, so this figure is not net cash:

Cash at the year-end of £1.9 million (2021: £1.4 million). Cash available (including undrawn facilities) at the year-end of £2.6 million (2021: £2.1 million)

And NTAV is negative. Including a big ramp-up in payables:

Payables is now approaching 1x sales!!

The outlook is "confident":

We have started 2023 in a strong position with the staffing, venue opportunity and business structure in place to continue our drive to dominate the UK market and to continue to grow across Europe with our new business concepts.

SpaceandPeople throughout its 23-year history has been a strong and resilient business and we are able, in 2023, to continue this growth trajectory without adding significantly to our cost base. We look to 2023 and beyond with confidence.

But very light on specifics! Especially given that we are 5 months into the year that they should be reporting trading for.

Zamaz (ZAMZ.L) - HY Results

Leo chatted to these guys on their stand at the Mello Investing Conference in November. As you can tell from the name, the company was set up to market through Amazon, a strategy that turned out to be even more flawed than it seemed:

the headwinds that our Ecomoist business experienced, particularly in the run-up to Christmas, when Amazon raised its already high logistics costs even further.

Hence what sounds like an emergency refinancing:

On the financing front, shortly after the period under review, we proposed to our bondholders that the Company's listed 6% Bond's maturity date be extended 30 from April 2023 to 30 April 2026, with an increased coupon to 7.5% and with warrants attached.

Management seems to think they are still at school/university somewhere in the US:

As we move forward during this second semester

Anyway, the company's primary business now appears to be operating two luxury food stores in Milan. Accordingly, it makes sense management have changed. It is not clear whether this was planned back in November:

At the Annual General Meeting, held on 31 January 2023, Chris Hill stood down as director and CEO. The role of CEO was taken over by Daniele Besnati.

They emphasise how they are on the main market (presumably rather than AIM), but are a great example of how this doesn't provide any assurances over stability or liquidity, as you can see from the share price chart:

That dip was presumably around bond renegotiations, but as you can see, only 20k shares = £1000 could possibly have been bought at the bottom. In our opinion, the non-premium segment of the main market is, in practical terms, significantly less well-regulated than AIM, where at least you have a NOMAD involved.

Anyway, we see no possible reason why this company should trade above book value, making it around 4x overvalued.

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