It was a quiet week this week with no Large Caps Live due to the markets being closed for Easter Monday.
In the short term, the only thing that matters to stock prices is fund flows. We have seen this at the macro level over the last year, with markets rising strongly as people have found themselves with extra cash they would have spent on holidays etc. and in need of excitement.
We’ve seen it on the micro-level in the UK over the last two weeks. Before Easter, small cap markets were weak as people sold to crystalise taxable gains or losses. This week everyone has been deploying their newly allocated ISA funds, pushing quite a few small caps to all-time highs. In this environment, we have found it hard to find value.
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Small Caps Live Wednesday 7th April
Universe Group (UNG.L) - Results Update and Contract Win
Mark looked at the supplier of payment systems:
“Subject to completion of audit, the Company expects to report revenue for the year ended 31 December 2020 in line with expectations at the time of its trading update announcement on 21 December 2020, with revenue for the second half of the year expected to be in line with that of the first half.”
H1 Revenues were £9.77 million, so we can expect about £20m for the FY. Given that they also announced a contract win in this trading statement:
The Company is pleased to announce a five-year extension of an existing contract with a major international oil and gas group for the provision of loyalty services Europe-wide. This material extension provides further visibility for the Group over future revenues.”
…then I was bracing myself for a warning, so was pleasantly surprised when they went on to say:
“However, adjusted EBITDA and adjusted profit before tax are now anticipated to be ahead of previous expectations.”
The last trading update said:
“…the Company still expects to report a modest level of adjusted EBITDA profitability for the full year.”
H1 EBITDA was £0.37m. So overall we can now maybe expect similar H2 EBITDA and around break-even for the year. This doesn’t sound too impressive, however again the previous trading statement contains the detail:
“As stated at the time of the interim results in September, key to the second half was the roll-out of a material project for an existing customer where work is ongoing. Revenues from this project are now expected to be recognised in the first half of 2021 but the investment made in the project must be recognised in the current financial year.”
There are no broker forecasts but I think 2021 could be a good year since they have the material project revenue landing in this year, but with the bulk of the costs booked in 2020 and today they announce a 5-year extension to an existing petrol station contract.
How sustainable this performance is may be questionable given their rather lacklustre performance in the last few years but if 2021 does shape up to be an exceptional year, the shares will look cheap on most metrics even after recent rises.
Beeks Financial (BKS.L) - Placing
The last time we looked at Beeks, following the recent results, we were shocked at how bad the balance sheet appeared. We commented that we thought:
They need to raise a lot of equity IMO and sharpish.
This week we got the expected placing, which they did well to get away at a discount of less than 4%. Leo questioned if they had raised enough:
The CEO, who up until yesterday owned 53%, also said he was interested in selling £2m worth. In the event he only sold £0.5m. However clearly the size was a function of the price he was willing to accept, and this was 115p, a discount of just 3.8%.
Back to the primary placing, this was the purpose:
approximately £3m for investment to support the launch of the Beeks Private Cloud offering;
approximately £1m for the repayment of the Group's RCF facility; and
up to approximately £1m for additional working capital, including for the evaluation of M&A opportunities.
Capital intensiveness: Although I would point out that in an investor presentation about 2 years ago they said that clients were willing to pay upfront if required. Putting the investment aside for a moment, there's £2m which basically comes down to fixing the balance sheet. So the question is: is this enough? Mark commented last time on their poor current ratio, although this is balanced by the recurring nature of their revenues.
The balance sheet still looks weak to us, despite this capital raise.
The revolving credit facility that they're using £1m of the funds to pay down is actually categorised as non-current! So I'd guess the adjusted current ratio [see Mark’s book for details] will still only be around 0.5.
finnCap (FCAP.L) - Trading Update
This is the second time that finnCap has stolen our thunder. Having brought out an unscheduled trading statement the day before we released our first small caps life long-form write-up, this week they issued the following trading update the morning that Mark was presenting the has his Stockopedia StockSlam pick! The video is now available from PI World.
“Unaudited total income for the year ended 31 March 2021 is expected to be approximately £47.3m, an increase of 83% over the prior year. Performance in March has been stronger than expected across all parts of the Group with the successful completion of further equity fundraisings, private M&A transactions and the Group's fourth IPO of FY21.”
Whereas it took Progressive a couple of days to release a note after the previous trading update, this time they had one available.
They now have 4.4p EPS forecast & £14.4m net cash. Progressive mention their conservative approach to variable costs:
“We have again increased our estimates of deal fees and bonuses associated with the additional revenues at the period end and repeat our conservative approach to variable costs in coming to an adjusted EBITDA estimate for the year of £11.7m, up 11% from our previous estimate of £10.5m.”
So there is scope for FCAP to beat this, as long as they haven’t simply paid out all the additional fees as staff bonuses.
Leo said:
I plugged these figures into my model and got basic EPS of 4.5p and their adjusted EPS for 5.1p. So clearly I am being "less conservative" on variable costs.
Mark highlighted the scope to exceed expectations with the dividend:
One thing I think Progressive are too conservative on is the dividend - the policy is 30/70 payout, so with 0.5p paid for the interim dividend I am expecting around 1p for the final, which would give a dividend yield closer to 5%.
And Leo looked forward to seeing more detail in the results:
We have a break down for the first time, and M&A advisory came out higher than I had expected. We are more reliant on what they declare on their website here and also perhaps I hadn't kept my model up to date. The detail for March will be useful in checking my revenue recognition assumptions for deals near the end of the period.
Marston’s (MARS.L) - Re-opening Update
Leo took a look at this pub group.
The first thing that is interesting here is that it is no longer a small cap after 3-4 bagging within a year. So the question arises: Is there life on MARS and if so, is it just the investors on another planet?
“Further to the statement issued on 26 March 2021, the Group can now confirm that it has secured waivers and amendments to its Bank, Private Placement and Securitised facilities for the financial periods up to and including 1 January 2022.”
So it sounds like they're not expecting to recover until spring 2022?
“The Group expects to reopen around 70% (c.700) of its managed and franchised pubs in England with outdoor spaces on or around 12 April and, subject to final regulatory confirmation, the majority of our Scottish and Welsh pubs on 26 April.”
But does 70% of space equate to 70% of capacity? I'd guess it is more like 30% of capacity, and with higher staff costs due to table service.
“On the basis that the stated reopening roadmap set out by the Government is adhered to, the remaining managed estate in England should open on or around 17 May with restricted indoor trading, and we are assuming a return to normal trading conditions from 21 June.”
The danger is that they'll make an ass out of u and me, here. Well, not me, since I'm not a shareholder.
Small Caps Live Friday 9th April
Loungers (LGRS.L) - Re-opening update
Leo kicked us off with a look at the Loungers update, comparing it to the update from Marston’s. They start with an extension to the RCF:
“…12 month extension to the incremental £15.0m revolving credit facility ("RCF") that was put in place in April 2020. This additional facility now runs to October 2022 and provides the Company with total RCF facilities of £25.0m.”
As background, when Loungers came to the market they were criticised by many private investors for being overleveraged, and they had to do a fundraise fairly early on back in April 2020. That wasn't the best time, but fortunately, the dilution was only 10%.
Since then they have raced back all the way to almost their previous highs, despite being closed for much of the period. Like Marston's, investors seem to be expecting the mother of all catchups in terms of trading, but:
“We intend to take a phased approach to reopening and will initially open 47 sites in England on 12 April for takeaway and external trading, and five sites in Wales on 26 April on the same basis, in line with the respective governments' suggested roadmaps.”
That's out of 170-odd locations. And again, they will not be running at full capacity since insides will be closed. And unlike Marston's they mostly don't have carparks they can repurpose as extra space.
“Assuming no changes to the roadmap, we plan to re-open all of our English sites by 17 May and our sites in Wales later in May subject to confirmation from the Welsh government.”
There's that "assuming" word again, although they don't predicate not going bust on a further opening.
Concluding:
While I think they are probably right that they will trade well once full reopened, "enthusiasm and optimism" will not be sufficient to save them if reopening is delayed further or trading is not as strong.
Motorpoint (MOTR.L), Lookers (LOOK.L) - Trading Updates
Leo liked these updates, with Lookers, in particular, reporting "Materially ahead". Perhaps spotting an opportunity in similar companies that have not yet provided guidance:
Nonetheless, I think current Vertu forecasts are too low and they look even better after this update.
Ramsdens (RFX.L) - Trading Update
Mark thought that today’s trading statement might not be what recent keen buyers were looking for:
“As a result of these dynamics, the Board anticipates reporting a small loss for the Period but still traded cash positively.”
This really shouldn’t have been a surprise with all the lockdowns etc. Looking forward, they are understandably unable to provide summer guidance on the FX side:
“We are encouraged by the vaccine roll out, the expected re-opening of non-essential retail in England next week and the most recent UK Government announcements on international leisure travel as 'sticking to the road map'. Whilst the lack of current detail regarding certain country restrictions and quarantine conditions means we are unable to provide guidance for this summer's FX trading, we do believe there is significant underlying consumer demand for international summer travel which is encouraging.”
Although they are positive overall:
“Subject to no changes to the expected easing of social restrictions, we believe that our next financial year should see more normal trading patterns return and therefore anticipate opening new stores over the next six months as part of our long-term growth strategy.”
They also state:
“The Group's balance sheet and liquidity remains strong with cash of approximately £15m at the Period end and an undrawn revolving credit facility of £10m.”
They have fared surprisingly well, but with ongoing restrictions possible on international travel. With today's JET2 news perhaps pertinent too. I expect they are more likely to be providing holiday spending cash for a cheap week in Spain and I expect this to be disproportionately affected by testing costs.
The current price seems fair value, in that it is probably already pricing a return to pre-covid trading in the next year or so.
Winkworth (WINK.L) - Final Results
Mark thought these results were resilient:
“• Revenues of £6.41 million (2019: £6.42 million)
• Profit before taxation £1.53 million (2019: £1.63 million)
• Year-end cash balance of £4.66 million (2019: £3.57 million)”
But again, the price appears to have caught up with events:
They are a well-run cash-generative business that has always appealed due to its high dividend yield and high stockrank.
A slight dividend cut leaves them on a 4% historical yield. Although, this is forecast to rise to 5% next year. This isn’t exceptional in today’s markets though with some FTSE large caps yielding similar income.
If you weren’t a buyer at £1.20 at the end of 2019, why would you be a buyer at £1.65 now?
I think their London focus could be a risk factor here, with WFH and city living less desirable at the margin. The end of stamp duty holiday may also act as a headwind.
In summary, like most of the small cap market at the moment, it is hard to argue that this isn’t fully priced given the outlook.
Enteq Upstream (NTQ.L) - Trading Statement
Mark thought there were better opportunities in this sector at the moment:
“Enteq's trading results for the year ended 31 March 2021 are expected to be in-line with the Board's expectations, with revenues in the region of $5m and a breakeven adjusted EBITDA”
Obviously, this is severely affected by the downturn in oil markets last year. They don’t exactly give any forward guidance, but the rig count still being below March 2020 isn’t that promising:
“The markets in which Enteq operate have also been affected by both the dramatic swings in the oil price (from a 10-year low of around $16 in April 2020 to around $60 at the end of March 2021) and the fluctuations in the number of active drilling rigs in North America, dropping from 1,025 in March 2019 to 664 in March 2020 and then down to a low of 251 in July 2020; since recovering to the current position of 430.”
Although they are now getting new orders.
This has been the definition of a value trap over the years. As it has consistently traded at a large discount to Tangible Book Value, but the Tangible Book Value has consistently been eroded by losses taking the share price down with it.
With recent strength, and at 17.25p, they are now likely to be trading at a premium to Tangible Book Value. So the question becomes - why buy this though when you can buy Hunting (HTG.L) in the same sector at a discount to Tangible Book Value?
Hunting is larger, more liquid, better diversified, profitable, and dividend-paying.
So, personally, I much prefer Hunting at current prices.
That’s it for this week. Next week could feature some trading statements for companies, such as Capital Limited and Driver Group that haven't bounced with the market despite strong tailwinds in their businesses. More on those when they arrive.
Have a great weekend all!