Small Caps Live Weekly Summary

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As expected, a relatively quiet week of discussions, with many companies and contributors winding down for the Christmas break. Here’s what we did find interesting this week:

Avation (AVAP.L) - AGM Update

Along with leasing the planes rather than selling future ATR deliveries, this is not the behaviour of management about to throw in the towel and sell out to the highest bidder:

With all returning aircraft and new aircraft placed for 2025, the Company will consider opportunistically acquiring additional aircraft in the secondary market to further expand the fleet in 2025.

They comment on the recent buyback after earlier noting that 5% had also been issued within 12 months for share options and that they have a lot of debt expiring in October 2026. However, the most important news was announced the day before:

The Company repurchased on the 17th of December 2024 a total of 7,800,000 shares representing 10.45% of the outstanding shares for 150p each. These repurchased shares will be held in treasury. The Company had a view that the most undervalued security was the ordinary shares and that this repurchase was the most value accretive.

Not sure why more companies don’t take big blocks out of the market when they become available. The seller is presumably Rangely Capital, as the only holder with that many shares, assuming it is one seller. The problem is they may have about 15% left to sell if they want to be out completely. Buying large stakes at a discount to TBV is still a great move. We make the P/TBV 0.46x after the effect of this buyback, and we see that recent sales largely back that TBV. It is still highly sensitive to asset value, though, with TBV being the difference between two large numbers. Overall, it seems this is just too cheap.

Character (CCT.L) - Annual Results to 31st August

Revenue was a miss - £123.4m versus £130.0m from both Panmure and Allenby. PBT looks to be dead on (and this is what will be flat for the current year), and EPS is a material beat at 29.7p versus 25.5p and 26.1p, although there is more scope for this being on a different basis than earlier forecasts.

We have to scroll a long way to get the outlook, where they say:

Accordingly, the Board expect sales and profit before tax and highlighted items for the full year ending 31 August 2025 to remain at similar levels to those reported in the year under review.

So, it is not disastrous, but also another year where they don’t return to previous glories. Perhaps it is understandable in the current consumer environment. The current improvement in bottom-line performance is all cost-cutting with a flat gross profit. It is hard to continuously take the fat out of an organisation by eventually cutting the meat, so flat profit, offsetting wage inflation, and NI increases with cost-cutting seems a reasonable aim. EPS for next year is expected to fall to 28.8p, but given that this is still far ahead of earlier FY8/2024 forecasts, that may actually be good news.

We are in two minds about the adjustments, which are about marking hedging to market. Companies obviously exclude hedging losses or other impacts of FX as non-cash, but they are reflected in the underlying trading. If the hedges go against them, it’s because they have had favourable moves in FX or commodity pricing that have benefited and, therefore, inflated their reported profits without those losses.

A couple of other things:

Inventories stood at £20.1m at the end of the financial period (FY 2023: £18.0m). Although the actual inventory held at the warehouses was down, the goods-in-transit were substantially higher due to the longer shipping times from the Far East.

This makes the cash performance all the more impressive. Plus, given various disruptions in recent years, we suspect this includes more stock for peak season than in the past.

It is the Board's intention at the 2025 AGM, to seek a new authority to buyback up to 2,815,000 ordinary shares (representing approximately 15% of the total voting rights in the Company)

This is more than the customary 10% seen elsewhere, and although they haven't come close to using last year's authority, it underlines how determined they are that the buyback doesn't have to stop at an inopportune moment. They also imply they consider the shares to be undervalued due to a liquidity imbalance:

The Board believes that it is in the Company's and shareholders' interests to provide an opportunity to access liquidity that is not otherwise available in the market...

This is a more sophisticated way of expressing frustration at the share price than most management teams. The reasonable multiple and commitment to dividends and large buyback will support the price. Anything more will require them to not just maintain EPS but start to grow it again.

Gulf Marine Services (GMS.L) - Update to guidance

Further good news:

The company now anticipates its 2024 adjusted EBITDA guidance to be at the upper end of previous guidance of USD 98-100 million for 2024.

For 2025, GMS expects adjusted EBITDA to reach USD 100-108 million, an increase from the previously forecasted 2025 EBITDA guidance of USD 92-100 million.

However, doing the maths, a 1-2% guidance increase for FY24 and an 8% increase for FY25 at the mid-point of the ranges. This is hardly material enough for a separate RNS, and it seems unlikely their broker would have forced them to issue this update. This gives the impression that management are desperate to stop their share price from falling. It may simply be options exercise driving the behaviour, although you have to wonder if they may have other reasons. For example, wanting to start growing the fleet again, which may require equity issuance.

Goldplat (GDP.L) - Final Results

Better late than never (or into the new year, which would get the shares suspended!) Perhaps good things come to those who wait, though:

· Revenue increased by 73.6% to £72.7m (2023: £41.9m)

· Operating profit increased by 127.0% to £9.8m (2023: £4.3m)

· Profit for the year increased by 40.9% to £4.3m (2023: £3.1m)

· Robust cash generation with net cash flows from operating activities of £3.9m (2023: £3.3m)

· Cash and cash equivalents increased to £3.9m (2023: £2.8m)

· EPS increased by 50.3% to 2.51p (2023:1.67p)

EPS is bang in line with what Mark was expecting following the recent ahead statement. They don’t report EBITDA, but their broker, Zeus, calculates that this puts them on 1.2xEV/EBITDA. However, Zeus are not forecasting the year ahead to be as good, making them on a forward EV/EBITDA of 1.5, which is still very cheap. This aligns with what they reported for Q1, so if each subsequent quarter is similar, the 2.2p EPS looks like a reasonable estimate.

Quarterly operational reporting means that there is little surprise here, but we do get a bit of detail on the working capital requirements in Ghana:

Looking forward, we expect inventory, trade and other payables and trade and other receivables to increase in the first two quarters, specifically in Ghana, as the Ghanaian operation is going through a business model change with the requirement to beneficiate all concentrates to doré gold bars in‑country.

Assuming they are talking about their fiscal year, then this should be peaking around now, perhaps opening the way for buybacks or dividends with the HY results.

Headlam (HEAD.L) - Property Disposals

Headlam are selling significant amounts of property at a 64% premium to book value:

…sold properties for a total of £53.9 million (excluding VAT).

These sales represent a premium of 64% to book value and 14% to the last market valuation¹ of £47.1 million. Collectively these properties had a book value of £32.9 million and, as a result, a substantial profit³ will be generated on the sales; this will be recognised as non-underlying income.

However, of the three major ones they are selling, they are renting back two of them so the valuation on those is presumably based on the rental they themselves have agreed to pay. The one that they aren’t leasing back is being replaced by a new site that they are leasing. So this seems to be more about turning bank debt into lease liabilities. Proceeds are used to pay down that debt, and they will be debt-free:

Following exchange and simultaneous completion of the sales, the aggregate proceeds have been received in cash and the Group is now in a net cash position.

However, the fact they have to say this means that the trading losses are still significant. None of the cash received is making its way back to shareholders via dividends or buybacks, so presumably, it is needed to fund further ongoing losses. So an initially positive announcement gets less and less impressive as you read the details.

National World (NWOR.L) - Recommended Cash Offer

Montgomery finally folds and accepts the mooted 23p offer. It seems he wasn’t holding strong enough cards. Shareholders are perhaps a little relieved as the possibility of a failed bid and an acrimonious relationship between the companies would have been sure to hit the short-term share price, despite the offer looking a bit cheap. Media Concierge quotes historical share prices without mentioning that it may well have been their actions that caused management to be so guarded in shareholder communication, and hence, the shares trade so low. Likewise, they quote historical EBITDA but miss the fact that this is growing in terrible UK advertising markets.

As always, the large spread doesn’t help matters. If we assume 2.5 months to get the cash, anyone buying at 22.6p makes less than 9% annualised. Anyone selling at 22p is giving away 24%, annualised. The probability of a higher offer is minimal, and there is a very high chance of this going through. Hence, sitting tight and waiting for the cash seems like the best option.

Oxford Metrics (OMG.L) - Company presentation

Oxford Metrics finally get round to presenting to individual shareholders via the InvestorMeetCompany platform a week after releasing their results. Of the 10 or so questions that SCLers reported asking on the call, only one was answered and that only partially. What little confidence remained in the new management team isn’t so much ebbing away as flooding out. Unsurprisingly, the share price joined the receding tide.

Shoezone (SHOE.L) - Trading Update

Ouch:

As a result, the Company now expects adjusted profit before tax for the financial year ending 27 September 2025 to be not less than £5.0m, down from previous expectations of £10.0m.

Double ouch:

In addition, and in light of the above, the Company is not proposing to pay a final dividend for the financial year ended 28 September 2024

Zeus halve EPS from 16.3p to 8.2p. Despite a bit of recent weakness, there was no indication that the market has priced this in. Hence the 40% drop on the day. Indeed, after the last warning, the shares fell but then rallied to a bonkers 180p due to what appeared to be short-term momentum traders.

Their response is to close stores:

Consumer confidence has weakened further following the Government's budget in October 2024, and as a result of this budget, the Company will also incur significant additional costs due to the increases in National Insurance and the National Living Wage. These additional costs have resulted in the planned closure of a number of stores that have now become unviable. The combination of the above will have a significant impact on our full year figures.

The good news is that they have short leases, so they should be able to exit those stores without huge costs. However, those costs will not be zero as there will be redundancy costs and stock write-downs/relocations.

Net cash is forecast to be flat despite forecast trading to be profitable and no dividend paid. So all the forecast £5m PBT is presumably going into restructuring costs and taxes, and inventories will surely come down with store closures. We can see why they can’t afford the dividend at the moment.

The shares have settled around 90p, but even this looks optimistic at 11x earnings for a company that should be very cheaply rated, and is looking like being a permanently smaller operation following today’s news.

Zotefoams (ZTF.L) - Update on ReZorce

Zotefoams is a capital-intensive foam manufacturer that has taken on debt in an attempt to diversify its business. A lot of hope was placed on the blue-sky potential of its ReZorce packaging solution. A new management team has come in, and perhaps unsurprisingly, this week they say:

Having concluded that it will not be possible to identify a strategic partner at this time, the Board has decided to pause its investment in ReZorce and focus all of the Group's resources on the near-term opportunities in the core supercritical foams businesses.

That diversification has failed, and they are shutting down their loss-making MuCell business and writing down the company's assets. We can’t help thinking that the Vox article reporting this news shows the wrong picture:

It should have been the same packaging in the bin!

The last HY results said:

This includes intangible assets of £10.6m (31 December 2023: £8.9m; 30 June 2023: £7.5m), including £3.2m of goodwill and technology that arose on the acquisition of MEL (31 December 2023: £3.3m; 30 June 2023: £3.4m).

So, that gives the scale of the money they spent on acquiring MuCell and then investing in it. This reinforces how terrible a capital allocator the company was under the previous tenure. The better news is that trading is still in line:

Further to the announcement of 4 November, Zotefoams has continued to deliver a strong financial performance in a volatile market and the Board is confident that the Group will deliver a full year adjusted profit performance comfortably in line with the guidance provided at that time.

Which they helpfully quantify:

Current Zotefoams-compiled consensus expectations for revenue is £145.5m and adjusted profit before income tax and separately disclosed items, for the year ending 31 December 2024, is £14.9m.

However, if you think through the logic of this, if these are only in line after cutting ReZorce with £0.6m revenue and £2.2m of costs in the last half year, then this could easily mean the core business has missed expectations. You can be sure that they will exclude the £10.6m of intangible write-down and £1.2m of costs required to close the business from these figures.

Perhaps the biggest loser in all this is James Cropper!

That’s it for this week. Have a Merry Christmas! We’ll see if there is enough news for a summary email next week, but if not, have a Happy New Year.