It was another quiet week for the UK small caps we follow, so just a few companies covered.
A reader requested we discuss more good news. It may not seem that way, but we don’t just summarise the bad stuff. We just pick what’s been discussed in a substantive way on Discord. It is true that we do like to call out bad behaviour from companies when we see it, but we are open to all discussions, particularly from viewpoints we may not have considered. We also want to be considered and balanced, since one of the worst mistakes investors can make is to become a cheerleader for a stock, as they will never sell it if they do.
So, if readers want to see more positive commentary, the more conversations you start on Discord, sharing your own research on undervalued companies with positive news, the more likely these will get picked up in the weekly summary. After all, these summaries are intended to encourage greater discussions from a wider number of viewpoints on Discord, not be the be-all and end-all.
Centaur Media (CAU.L) - Possible Offer
Last week, we looked at the situation around the wind-down of the Downing Strategic Micro-cap Trust and the potential overhangs it is causing. However, it looks like Downing might get their cash exit here;
…notes the recent media speculation in the Centaur Media Plc share price and confirms it has received a highly preliminary expression of interest from Waterland Private Equity Investments B.V. ("Waterland") in relation to the proposed acquisition of the entire issued, and to be issued, share capital of the Company.
Although it is “highly preliminary”, and no price is mentioned in the RNS.
At 50p, you have a market cap of £73m and £9.5m of cash, but a lot of that is due to upfront payments. Adjusting for deferred income, etc., we get an adjusted EV of £76m. Edison is forecasting £9.8m EBITDA, up from £9.7m last year. So, currently, it is 7.8x EV/EBITDA. So the big question is how rich is this Private Equity house willing to go? They normally like to pay less than 7x, and we are already above that.
Downing are presumably rather keen to sell. They have been happily selling at around 40p in March. And they only had 3.6% left at the end of March, so they won't be kingmakers. That role goes to Harwood Capital with close to 30%. Downing may well sell into this spike, which may depress the price down to pre-bid levels, and lead to an opportunity for those willing to provide them with liquidity.
Jadestone (JSE.L) - Restoration of Trading
You have to feel sorry for the market makers sometimes. Jadestone had been suspended since February due to bidding for some assets that would have been so large that it would have been classified as a reverse takeover. Then on Thursday, they announce:
…it has been advised by Woodside Energy Group Ltd. ("Woodside") that Woodside is cancelling the sale of its participating interests in the Macedon and Greater Pyrenees Projects offshore Western Australia.
As a result, trading in the Company's ordinary shares is expected to be restored to trading with effect from 10:30 a.m. today.
So, the market makers got little notice and no pre-auction to help them price the shares. When you get a company restored to trading, there are often sellers who want liquidity, so it opened effectively flat. However, what they appear to have missed in this case is that since the suspension, there have been no further cockups, and Brent oil price is up 10%. Given the high cost of some of the oil-producing assets, this is pretty geared to the oil price. On top of this, the CWHA 2 transaction closed during the suspension, which looks like a good deal. Over the next couple of days, the price rose around 20%.
It would seem that barring any further Montara issues, there is plenty more to come here when any sellers who need liquidity following the suspended period finish selling. Particularly as the RBL negotiations should be complete by the end of the month, and first gas from Akatara by the end of the quarter.
As for the Woodside discussions, unless it was an absolute bargain, it doesn’t seem any great loss not to buy the assets. There are likely to be better opportunities in SE Asia, with Majors and NOCs divesting mature assets which are no longer material and where Governments are increasingly offering material fiscal benefits to maximise recovery in mature fields.
Speedy Hire (SDY.L) - Trading Update
From the first six paragraphs, you'd think everything was going well here, but then, carefully hidden in paragraph 7:
...the Group expects to report results for the year towards the lower end of the Board's expectations...
To be fair, the whole sector has been suffering recently due to both short and long-term demand issues but SpeedyHire has long been on a lower valuation than the rest, especially versus assets. We believe there is some justification for a lower valuation, for example:
Poor return on capital
Lack of confidence that the assets exist
Lack of confidence in strategy
Lack of confidence in Chair, as indicated by AGM voting
Lack of confidence in CEO, who was COO during a long period of poor operational performance and a major failure of internal systems and controls
Broker Liberum say:
Post close trading update indicates results at the lower end of the board’s expectations. We reduce our FY 24 and FY 25 FD EPS by 18% and 14% respectively.
So the EPS "range of expectations" was apparently 50% wide (25% upside, 25% downside, given the -18% outturn was not "at the bottom", or "near the bottom", but "towards the bottom"). I'm not sure investors will have been previously aware of this, and you would expect the reaction to be quite negative to yet another disappointment.
Yet, the shares have barely traded down in response to this. We see two reasons for this: the Tangible Book Value and Director buys. However, the directors appear to have shown themselves to have poor recent judgement & the Book Value on a shaky foundation. Which blows a hole in these.
Treatt (TET.L) - HY Trading Update
We are not sure why the market has liked this update. They have the dreaded H2-weighting to come in order to meet their in-line guidance.
· Profit before tax and exceptional items (PBTE) expected to be marginally ahead of prior year at c.£7.5m (H1 2023: £7.3m).
· H1 revenue of £72.1m (H1 2023: £76.0m), reflecting a subdued Q1 from the impact of destocking as expected and previously indicated; and an acceleration in Q2, with sales growing by 5.1% (7.7% in constant currency) compared to the same quarter in FY 2023.
There are some signs that they may be able to do this:
Momentum in the second quarter was strong, and we recorded our highest ever monthly revenue in March.
But they need this to be in line by the looks of it, and the chance of a beat is remote. In terms of product mix, ultra-processed beats highly-processed for now:
Heritage sales declined by 6.0% (constant currency) as citrus customers elected for cheaper alternatives because of sustained high orange oil prices.
They are pinning their hopes on China, which has often been a tricky market for UK companies. There is also no sign of the unmet European demand that led them to expand their UK facilities massively.
The valuation had started to look a bit more reasonable, but this week's rise takes them to a 19x forward P/E that seems expensive again. Particularly as this broker trend may well continue:
Ultimate Products (ULTP.L) - Interim Results
Apart from the cash generation, these look decidedly pedestrian:
· Total revenue down 4% to £84.2m (H1 2023: £87.6m)
· Gross profit rose 3% to £22.4m (H1 2023: £21.6m), with gross margin increasing to 26.6% (H1 2023: 24.7%), driven by sales mix and the fall in global shipping rates
· Adjusted profit before tax** up 2% to £9.6m (H1 2023: £9.4m)
· Interim dividend per share up 1% to 2.45p (H1 2023: 2.43p)
On the positive side, this was already known, and revenue is £200k above prior guidance. They have introduced a share buyback but need shareholder approval, and the buyback guidance is for just 3% pa. Three of the brokers have increased future EPS as a result of the share buybacks.
There are A shares outstanding that are exercisable if the share price rises above a 193.02p hurdle. This would give Andrew Gossage and Simon Showman another 4.5% of the company. You can see why they are so keen on the share buyback!
They don't usually comment on current trading at this point (despite having a section for it in the report), but today's outlook section is even more sparse than usual:
The Group continues to trade in line with market expectations for FY24.
However, there is some detail in the notes:
The Group has historically had a seasonal weighting towards H1, with retail demand being higher in the peak Christmas trading period. However, over the past few years, this pattern has become less pronounced, with sales growth weighted towards the less seasonal online channels and sales to supermarkets being focused more on ranges than seasonal promotions. As a result, it is anticipated that the operating profits for the second half of the year to 31 July 2024 will be only marginally lower than for the six months ended 31 January 2024.
So, for example, normalising supermarket ordering following recent destocking might allow them to meet the forecasts. This is good because, given the usual seasonality, doing similar EPS in H2 as H1 looks a bit of a stretch. They must be really confident in pulling something out of the bag to say these will only be marginally lower this year. Management here are not the type to overpromise. Let’s just hope they deliver.
That’s it for this week. Have a great weekend!