Quite a few bits of news this week, so we’ll jump straight into the company analysis:
Arcontech (ARC.L) - Interim Results
We’ll start with a lesson on why you should always read the RNS first. Here’s what popped into Mark’s inbox prior to him catching the Results Statement directly:
This is an extract from the finnCap note on Arcontech. To be clear, finnCap is one of the higher-quality research houses, and we rate their research. However, they are still representing a client, and will often want to accentuate the positive.
That summary sounded good, Mark thought, until... he went to the RNS:
Turnover decreased by 6.6% to £1,357,041 (H1 2021: £1,452,498) due to the effect of contract losses announced during the previous financial year
Profit before tax decreased by 13.2% to £372,414 (H1 2021: £428,924) reflecting the lower turnover
Our preferred measure of adjusted profit before tax, which excludes the release of accruals unrelated to the underlying business, declined by 13.3% to £367,914 (H1 2021: £424,425)
Significant declines there in an inflationary environment. However, they are still generating a lot of cash:
Net cash of £5,908,814 at 31 December 2022, up 5.13% (H1 2021: £5,620,352) after a record dividend payment of £434,616 paid on 24 October 2022
Which makes them potentially good value if they can use that cash. No sign of that, with no mention of any opportunities in these results. The quality of their existing products generated quite a bit of debate on discord.
Looking at their website, their products seem nothing special. Indeed, on some level, they look little more than some proprietary excel add-ins. But one that takes real-time market data from a number of sources and allows it to be combined and transformed. As anyone with any big-company IT experience knows, linking legacy systems is often a much bigger and more important job than it first appears. Their customers include Barclays, Santander, Bank of England, JPMorgan, Citi, Morgan Stanley, which are all very prestigious. Generating new sales seems to be a major issue, however. Quoting from their Annual Report:
2020 “sales to new customers in the year have not been what we had hoped due to extending sales cycles…”
2019 - “The length of the sales cycle continues to be longer than we would like”
- “sales to new customers have not been significant during the year”
- “[prospects] need to be tempered by the traditionally long and complex sales cycles”
2018 “The length of the sales cycle has been longer than we would like”
And, of course, if someone such as Bloomberg decided to implement a similar functionality directly, it would stop further sales dead.
Understandably, with little progress on new client sales or a good use for the cash balance, the share price initially sold off on these results. However, we believe the company was then tipped by Simon Thompson in the Investor’s Chronicle, causing it to rise. They look cheap if and only if they are not in permanent decline and have a good profitable use for that cash balance. We struggle to be convinced of either, even though, in principle, we like the idea of buying a software company on an 11% (cash-adjusted) earnings yield.
Trifast (TRI.L) - Trading Update, Holding in Company, Director Buys
Lost of newsflow on this one. We didn’t get time to comment in detail last week, but the thrust was that the share price sold off significantly last week on a profits warning:
As a consequence, the Group will be significantly below current market expectations for the year ending 31 March 2023*. For FY2023, the Company is expected to report, revenue of c.£243m and adjusted PBT of c.£9.0m.
This didn’t seem the worst warning of 2023, so a share price fall of over 40% at one point looked like an overreaction. However, the long-standing CEO falls on his sword for this. Elevated net debt may well have spooked some holders, however:
Gross inventory levels at CER (£103.6m) have reduced during the second half, and we remain on track for the targeted reduction by 31 March 2023. Consequently, whilst net debt is reducing, it currently stands at an elevated level of around £44m. This is within both facility headroom and covenant levels but is likely to result in the Group incurring higher net interest charges for the year than previously expected.
The debt is, of course, significant, but it is all long-term. They say they will meet all covenants, so this is unlikely to bite them in the short term. A big chunk of the balance sheet is the inventory. A stock turn of almost half a year isn't great for a company selling high-volume small-value parts. They say they have invested to ensure the security of supply, which suggests at least some of this is raw materials that may benefit from inflation. But it is unlikely to be the sort of product that faces significant obsolescence risk. Hence we don't see big write-downs coming, even if they have some inventory that is moving more slowly than they would like due to the de-stocking of an electronics customer in the far east.
Adjusted PBT estimates drop from £14.1m to £9m, with £5.2m delivered in H1. So not a great H2, but still profitable. It doesn't look particularly cheap on earnings following this profit warning. However, even after this week’s bounce, it trades at around Tangible Book Value and has historically traded at a significant premium.
Cue the usual director buys from the CFO, Interim CEO and a NED. However, this one caught our eye:
The Company announces that on Monday 27 February 2023, Mr Christopher Morgan, Company Secretary, purchased a total of 1,447 ordinary shares
That’s only about £1k spent. We would never belittle an individual investor for the size of their investment portfolio; we all started with a few hundred pounds to invest at one point. However, from a well-paid company director, this isn’t exactly a ringing endorsement. We are thinking of starting a gofundme so he can at least manage to go on holiday this year, or perhaps buy a few more!
Someone who did have cash available to buy a significant amount is DBAY. For those who don’t know, DBAY has a habit of making an offer for companies they hold notifiable stakes in. They bought Caretech in 2022 and Telit & Proactis in 2021. They don’t always bid quickly, however. They haven't (yet) bit for Finsbury Foods or Alliance Pharma, where they are increasing stakes. If they do bid, we expect them to stake build for a while yet in order to strengthen their hand. If they do, then we should see continued share price strengh.
AO World (AO.L) - Trading Statement
Accordingly, the Board now expects Adjusted EBITDA1 to be in a range of £37.5m to £45m for the full year, an increase to the previous guidance that we gave in January 2023.
The central forecast for EBITDA is well ahead of previous guidance, and the range tightened, albeit the new forecast overlaps the old:
In our trading update announcement on 10 January 2023 we guided to a range of £30m to £40m.
The main driver for this appears to be improved gross margins, in line with their strategy but beyond what they previously hoped for. Costs have also been lower, and they have gained a higher inflationary benefit than expected on those mobile phone contracts. There is no mention of revenues, but these were forecast to be 10% lower than the relatively new-new-normal H2 2022+H1 2023 period, but still higher than pre-covid, albeit only approximately enough to keep up with inflation. Again this is in line with their strategy.
Their main competitor is Currys which operates a bricks-and-clicks model offering lower customer satisfaction. But in common with AO, Currys focus on the financially unsophisticated via poor value warranties and mobile phone contracts that rely on people forgetting to cancel. Currys had low but more sustainable margins than AO in the past, but while AO are now focusing on margin, Currys continue to focus on volumes, at least in public statements. So today's statement suggests to me that Currys may have rowed back on their dash for volume.
With no track record of sustainable profits and a reliance on areas with inherently high regulatory and customer behavioural risks, AO is difficult to value. The PE looks too high on 2024 forecasts, but the end of that period is only 13 months away, and there is no individual investor access to broker coverage that might project further improvement in 2025. On price/sales, they are one-quarter the valuation of a much better-run Mark’s Electrical, reflecting that it is much harder to rationalise the costs of a bloated infrastructure to fit static sales, than to build from an efficient base on growing ones. But surely the star from a value perspective is Currys on a quarter the price/sales valuation again, much lower PE and a decent dividend.
Hunting (HTG.L) - Results for the year ended 31 December 2022
Forget those SaaS software companies growing revenue a mere 20% pa. What you need for revenue growth is oil field services:
This appears to be a revenue beat against consensus too:
And a small beat on EPS (on an adjusted basis, at least):
However, 4.7c = 3.9p, so a mere 83x P/E, very SaaS. This is very much the start of an expected recovery, and the 2023 consensus has started to tick upwards:
Even so, a 20x P/E for 2023 is on the high side. Buyers need to be pretty sure that 2024 is going to be even better. In light of this, the outlook is positive but not exactly barnstorming:
For Hunting, all the Group's businesses are seeing improving demand as onshore and offshore projects increase…
In summary, Hunting remains in a good position to invest in the market upturn to grow revenue and profitability in the year ahead. Management is targeting further EBITDA margin expansion as price increases, improved facility utilisation and production efficiencies continue to be pursued.
However, it still trades at a discount to TBV, although cash makes up a smaller proportion of that as working capital builds to support the recovery in trading. As usual, the big bull/bear debate is about how productive these assets can be over the long term.
GetBusy (GETB.L) - 2022 Audited Results
This looks like reasonable revenue growth at 19% constant currency from this supplier of productivity software. Although it is still loss-making. When they appointed finnCap as joint broker recently, we thought this was a precursor to a raise. However, we may have been wrong about this, as this week they say:
Increased cash of £3.0m (2021: £2.7m) validates self-funding model, underpinned by new committed £2.0m facility, which remains entirely undrawn
Which should give them a lot of headroom. However, this is driven by working capital:
Excluding cash, working capital has gone from negative £7.2m to negative £8.9m! Part of this is simply the software business model, where they get paid upfront for a license fee. To their credit, their adjusted loss includes capitalised development costs, so this is pretty clean.
Seeing this, we immediately suspected that capitalisation was less than amortisation, but no, and not even before a recent accounting change. Operating costs are up around 9%, so not that bad, but equally something to watch.
Things start to go wrong when we look at the revenue forecasts, though:
A 5% revenue growth forecast is nowhere near good enough, given that it means losses continue indefinitely. Finncap initiate coverage this week, which may be why the company added them as joint broker. These new forecasts are better but not exactly great:
So c.10% revenue growth for 2023, but still loss-making. Then 2024 has 8.5% revenue growth but a bigger loss due to increased costs. They really need to get busy and improve their productivity. If this was a bigger, more liquid company, then we'd be saying this looked like a short on these figures.
On top of this, they unveiled a plan in the results where the CEO & CFO share up to £22.875m or 15.25% of the business if taken over. Clive Rabie is also on a nice little earner of 75% of the 6% over base rate on the undrawn loan as an availability fee.
Beeks Financial Cloud (BKS.L) - Interim Results
On the surface, these figures look good:
· Revenues increased by 35% to £10.40m (H1 2022: £7.72m)
· Annualised Committed Monthly Recurring Revenue (ACMRR) up 35% to £21.30m (H1 2022: £15.80m)
· Gross profit up by 47% to £4.35m (H1 2022: £2.97m)
· Underlying EBITDA* increased by 48% to £3.59m (H1 2022: £2.43m)
Except they did £10.57m revenue in H2 last year. So revenue is down half-on-half. Is this really the sort of business that should have high seasonality?
And they've capitalised another £1.4m of intangibles and £1.5m on PP&E in order to generate this non-growth. So clearly, their preferred adjusted figure is not to be used for making investment judgements. The share-based payment charge also looks high, coming in at a whopping £1.2m, making it £2.4m over the last year.
It appears that they stretched payment terms to suppliers when they were running out of money prior to their equity raise in the previous period, so that is now normalised, giving them £3.5m cash burn in six months to generate this non-half-on-half growth. With that sort of performance, they deserve all those share options.
That level of cash burn looks scary compare to the cash balance. However, the balance sheet does look stronger post-raise. And debt is only 0.5x EBITDA and has been 1.0x in the past. Recurring revenues mean that 1.5x EBITDA should be possible. They can start delaying paying suppliers if they get tight and the debt is secured on actual IT equipment that can be repossessed and sold to someone who is able to use it productively. So the bank is likely to be pretty relaxed, even if the Beeks business model of raising loads of cash from shareholders to buy IT equipment that is used unproductively (in the economic sense of the word) is poor.
And there are signs that some of the growth in admin costs might be slowing, allowing the business to scale, with capitalised development costs in the period only just up on H1 last year. The risk is that development costs for a single client get capitalised under admin costs. I'm not sure there is anything stopping this from an accounting perspective, and the economic argument/hope would be that the feature might be used by others in future and thus scale. So what you want to see is clear evidence that components of admin costs are starting to increase less quickly than sales, which is what we have here.
The bad news is that non-capitalised staff costs under admin grew far faster than sales growth, at a rate of 53%. The suspicion will be that much of this is economically cost of sales. So unfortunately, we must continue to conclude that Beeks still has not demonstrated that they have a business that could scale into something that could provide a reasonable rate of rate return on capital for shareholders.
CentralNic (CNIC.L) - Unaudited Preliminary Accounts for Full Year 2022
Some phenomenal growth figures are reported here:
· Revenue increased by 77% to USD 728.2m (FY2021: USD 410.5m)
· Organic revenue growth* of 60% (FY2021: 39%)
· Net revenue (gross profit) increased by 50% to USD 177.7m (FY2021: USD 118.5m)
· Adjusted EBITDA** increased by 86% to USD 86.0m (FY2021: USD 46.3m)
· Operating profit increased by 172% to USD 33.6m (FY2021: USD 12.4m)
· Profit before tax increased dramatically to USD 14.8m (FY2021: USD 1.6m)
This is a company that has transformed itself from a nice steady domain name business into one that creates auto-generated websites. You know, the ones that you click on thinking you are actually getting useful information, shortly before realising there is nothing of value in their auto-generated summary, eliciting a curse word from your lips.
However, tax, plus exchange translation, means they actually report a large loss pretty similar to last year:
Total comprehensive loss for the financial year (9,581) (8,388)
Their reconciliation points you towards note 8 in the accounts:
So it looks like they want you to ignore Amortisation and impairment of intangible assets, despite being a company that is highly acquisitive and generates wholly intangible assets as a product. There the usually high costs they claim are non-core, like acquisition costs, part of their core business model. And the usual massive chunk of share-based payments.
Nelson Mandela, sorry, Michael Riedl, seems as confused as we are about this since he seems to claim they made a profit:
I am absolutely delighted with CentralNic's performance in 2022, achieving record revenue and profit, despite the challenging macro-economic environment. This remarkable achievement stands as a testament to the exceptional business portfolio our team has successfully built.
The balance sheet remains weak, with a current ratio still below 1. This has every indication that it’s going to end in tears at some point. The most likely trigger would be google changing its algorithm to downgrade auto-generated websites that, in our opinion, add little value to users.
Vertu Motors (VTU.L) - Trading Update
The bad news is that there was no last-minute beat as Leo had hoped for. The good news is on the cash:
Year-end net debt now expected to be £80-85m (versus previous guidance of £100-110m) on strong operating cashflow and working capital management
This is a £4bn+ revenue company, so this beat represents less than two days of sales and around four days of used. So, for example, it could have been achieved just by continuing to sell but stopping buying of used cars for that time. Indeed, we suspect part of the explanation is a conscious reduction in used car stocks at a time when sales volumes are at a seasonal low and prices usually fall with a heightened risk during this period. Additionally, in normal conditions, they would (on average) replace a sold used car with one that was the same age as when they bought it, but as the gap in new car production moves through the used market, their used stock is getting progressively older, creating a downward pressure on inventory values. That said, AutoTrader used car prices were remarkably strong in January.
Further good news is that Zeus have upgraded next year's (FY2024) EPS by 8.6% to 9.6p, representing a more immediate post-covid return to growth. Notably, we are now getting brokers upgrading forecasts due to falls in energy prices. Cash improvement is forecast to continue indefinitely rather than being a one-off timing issue.
This must then raise the question of whether buybacks could restart. However, the previous programme ended on Tuesday with no purchases recently having been made. Although the CEO was keen to point out that it was still in place at the last presentation, buying back shares until they'd got a handle on Helston was always unlikely, and when they realised there was "spare" cash, they may have considered they needed to disclose the fact before buying in the market. But the more fundamental problem was that the Helston acquisition, while earnings enhancing, was highly destructive of net tangible assets, the metric by which buyback levels were judged. There is no mention of buybacks today.
Liberum have also upgraded FY 2024 EPS, in their case, by a more headline-friendly 10%, reflecting the slight difference in their service offering from Zeus. Vertu are now on a forward PE of 6.2x, which is clearly cheap for a company back on a forecast growth path. However, reduced net tangible asset value coverage and more debt, increases risk compared to pre-Helston.
Additionally, current forecasts don't consider the possibility of significant used car price falls. Judging by the wording, the company appears to remain in denial about the benefit this gave them on the way up. There also remains a question mark over the pension where they were in denial about the true value of the accounting surplus and the problems with LDI exposure. Although "stick your head in the sand and hope it goes away" may well have turned out to be the best policy given where they were with LDI, we still don't know what the damage is.
DX (Group) (DX.L) - Interim Results
Thes figures look reasonable:
But does going from 1.3p EPS in H1 to 3.3p for FY looks a bit of a stretch? Not according to the company, who say:
Trading to date in the second half, traditionally our stronger period, is in line with expectations, and we believe that despite economic headwinds, the Group is well-placed to meet its targets for the financial year.
It seems the Christmas shutdown leads them to be loss-making in December. We are surprised they don’t see more volume in the run up to Christmas to offset this but this shows they are still largely a specialist delivery company.
The balance sheet looks better than it has in the past, with net current assets and liabilities roughly matched. This wouldn’t be strong in a lot of businesses but here, management point out that their debtor days below 20, their main creditor exposure is sub-contractors on the express side of the business where they pay on 14-28 days terms. Current lease liabilities are obviously high , but they pay these over 12 months. Overall, they should be neutral working capital as they grow. And they seem confident enough to return to paying a dividend though:
In line with its commitment to establishing regular returns to shareholders, the Board is recommencing the payment of dividends in the current financial year and is pleased to confirm today an interim dividend of 0.5p per ordinary share for the current financial year.
The interim dividend will be paid on 31 March 2023 to shareholders on the register at 10 March 2023. The ex-dividend date is 9 March 2023. As previously disclosed, it is the Board's intention to pay a total dividend for the full year of 1.5p.
This looks a big number:
Cash flow from operating activities £27.7m
However, this is due to IFRS16. £11m of lease payments are counted as "capital" and £2.4m as "interest", which pretty much equals the "depreciation" added back in. So when they say "Net Cash Profit", this isn’t cash that is available to shareholders.
Provisions now stand at £12.0m up by £3.8m over the past year. These tend to be property and vehicle dilapidations. But they’ve made no comment on specific provision on Tuffnells legal claim against them.
Overall , they don’t look expensive on an earnings basis, but given recent history, and the unsettled litigation, they probably shouldn’t be given a high-rating.
Inland Homes (INL.L) - Board Changes
More saga here with pretty much the entire board resigning. Chairman stays on for 2 weeks as a NED in order to prevent suspension. This is the reason:
The Company has become aware of certain related party issues (which may or may not fall to be treated as related party transactions under the AIM Rules) of which the Board was not informed at the relevant times. The Company is collating relevant details, following which a further announcement will be made.
If they don't appoint in 2 weeks it is suspension, but they say:
The Company considers this to be an unlikely scenario. The Board is pleased to confirm its intention to re-appoint one of the original founders and former CEO, Stephen Wicks to the Board as soon as possible following due diligence checks, as to which a further announcement will be made in due course. Further appointments will be made to the Board in due course.
Didn’t Wicks have a hand in the current disaster in trading?
The discount to NAV here, even after write-downs is massive. However, who would have any confidence tat this point that shareholders are ever going to see that NAV recognised in a listed vehicle. Shares open at around 6p on the news before bouncing to 8p+, down around 15% on the previous day’s trading, but in line with where they were trading prior to them announcing bank covenant waivers. (where they almost doubled on this news before selling off again.) Sadly, this has become a gambling chip not an investment.
That’s it for this week. Have a great weekend!