Another holiday week was ironically packed with lots of news, so we will keep it brief again this week.
Capital Limited (CAPD.L) - 2nd Quarter Trading
Although the company has delivered significant progress year-on-year, what we really look at is the comparison to Q1, and this is a little disappointing:
Not a particularly great quarter due to the temporary shutdown in Sudan. Although not bad overall, just perhaps not where we wanted them to be on the drilling side, given the strength of the overall market.
However, lots of new contracts are due to start in Q3:
Three high-quality contracts are set to commence in Q3 2023:
- The business is geared for a strong second half driven by the ramp up of three high quality contracts, namely drilling at the Ivindo Iron Ore Project ("Ivindo"), Gabon, and the Reko Diq copper-gold project, Pakistan, and our recently announced mining services and crushing contract at Ivindo Iron ore.
And Sudan is due to restart in Q3 too. We note that Persus appear to be more confident about this than Capital as their latest statement on the Meyas mine in Sudan says that preliminary works and drilling are to recommence by the end of June.
Ultimately, they are trading in line with the overall guidance for the year:
Revenue guidance for 2023 remains $320 to $340 million
This means they remain on a forward P/E of 6. Which simply looks too cheap for a company with a positive outlook, long-term contracts and a significant growth engine in MSALABS:
DFS (DFS.L) - Trading Update
Given that the incredibly weak balance sheet makes this uninvestable, we largely follow this for read-across to the much better financed SCS. Here is what DFS have to say:
Consumer demand continues to be impacted by the macroeconomic environment; market volumes down by c.15%-20% across FY23
This level of decline absolutely not reflected in revenue forecasts for either DFS or SCS. However, they can, of course, both outperform the market, and there is a lag between orders and recognised revenue of around 6-8 weeks.
Expect to continue to outperform a declining market in FY24 and grow market share delivering low single digit £m profit growth
Despite a forecast of further falls in the market, this seems very bullish. With their vastly superior balance sheet, we see no reason why ScS can't hope to do the same. Profit is supported by well-rehearsed factors:
Gross margin rate continuing to improve, supported by freight costs returning to pre-pandemic levels and effective cost control
DFS traded slightly lower on this news. The muted share price fall surely reflects that the previous forecast was stale and believed by nobody. Jefferies cuts price target to 185p from 210p.
Jadestone Energy (JSE.L) - Half-Year Trading Update
This is another in-line statement, although production in H1 was down on last year:
However, this is good news:
…production between April and June 2023 averaged c.14,800 boe/d. Group production has averaged c.16,000 boe/d in recent weeks, with Montara averaging c.6,000 bbls/d.
This is now a run-rate above H1 last year, with, presumably, a bit more to come from Montara. This doesn’t exactly seem a stretch target, given they had a recent placing:
the potential to return to a net cash position as early as end-2024.
Once the current capex cycle is out of the way, net cash is forecast to be c.£130m (using the current oil price) vs the current market cap of c.£190m, which makes it look very cheap, assuming no further issues with Montara. Perhaps this has finally turned the corner after a disastrous year so far.
Personal Group (PGH.L) - Trading Statement
These figures certainly sound strong:
Total revenue for the six months to 30 June 2023 increased 34% to £46.4m (HY22: £34.7m)
However, much of this is pass-through revenue:
driven primarily by voucher resales through the benefits platform of £24.6m (HY22: £13.8m)
Far more important is profitability:
Adjusted EBITDA increased 75% to £2.7m (HY22: £1.5m);
This metric, however, includes the costs of their sales force, so could be down to poorer returns on spend, there causing them to cut back. Even a dramatic reduction in sales would have pretty very little negative effect on insurance premiums received in the short term, as 2020 showed.
So here's the key figure about the health of their underlying business:
Insurance Annualised Premium Income ("API") increased by c.6% to £29.6m (31 Dec 2022: £28.0m)
That's a real-term fall, including as a percentage of income in their target market which has been growing above the average of the economy (as has expenditure).
The main reason for this is that policies are sold at a fixed monthly price, giving a fixed benefit. Personal’s priority is that customers keep the policy in place, and there is no automatic review or nagging to suggest they increase payments.
There is less excuse for poor growth at the benefits platform in particular. Here's the most important figure, though:
Strong balance sheet and liquidity with a cash position of £22.6m as at 30 June 2023 (31 Dec 2022: £18.7m) and no debt;
This is far in excess of regulatory requirements, but essentially is customer money held without payment of interest until the customer is admitted to a hospital. So high interest rates and high float means high finance income. Clearly, this is in addition to EBITDA.
Later on, we get the good news is that "strong retention levels, which remain above pre-pandemic averages", which will reduce lifetime sales costs, important when premiums are struggling to keep up with salaries in the sales force.
There's also good news in the form of a rare success for the NHS:
claims levels for the first half remained higher than historic norms on Hospital Cashplans, as [NHS] activity continued at an increased rate
Unfortunately, that's bad news for Personal, and we haven't seen any evidence that NHS backlogs are doing anything but increasing less quickly than before. We really need some broker guidance to make sense of it all. And here, Cenkos make no change to forecasts, not even finance income which now seems out of date given rate rises.
Portmeirion (PMP.L) - Trading Update
The update starts off with their allegedly well-flagged concerns over US destocking before explaining how well everywhere else is doing:
Across our other markets, we have made pleasing progress and are ahead of last year, in line with our expectations.
But, then the reveal - this is a big profit warning:
In terms of the full year outlook, it is challenging to assess how long the North America caution amongst our retailer customers will endure and whilst we note the encouraging end customer sell through data and our strong Christmas order book, the Board believes that it is prudent to assume that this caution will continue through the second half resulting in the Group's sales being below and profits for FY23 being significantly below current market consensus.
We are not sure we totally believe the destocking story, though. Broker Shore have been guided to reduce revenue forecasts by much the same amount in FY2023, 2024 and 2025. This points to a mini-reset of US consumer demand. Brokers are also still catching up with higher interest costs, and the operational gearing of the lower revenues has a big effect on debt levels. That 10% EBIT margin target nobody ever believed is also pushed out another year.
The bottom line is FY 2024 EPS falls from 62.8p to 33.4p! FY 2025 falls from 69.7p to 53.1p. For context, in January 2020, EPS was forecast to be 65.4p for FY 2020. Despite the biggest boom in purchasing goods for the home in a generation and a massive one-off catch-up year for the rest of the world, it has never got close. Now it is only forecast to reach 53.1p in 2025. And those are adjusted figures assuming the annually recurring redundancy and pension costs and recovery payments are a one-off.
The share price reacted by dropping 32% before a slight recovery, so may be getting cheap if you believe those 2024 estimates and are willing to ignore the recurring non-recurring items. There is perhaps still a lot of hope in those broker numbers.
There is some tangible book support, however. The company is probably now trading below TBV, even if one includes an estimate of the real level of the pension deficit. The problem is that trading below TBV doesn’t appear to be unusual in UK small caps at the moment.
Shanta Gold (SHG.L) - Q2 Trading Update
After a weak Q1, the company comes roaring back with strong figures:
Record gold production:
o Group: 29,403 ounces ("oz"), up 92% from Q1
o NLGM: 19,338 oz, up 26% from Q1
o Singida: 10,065 oz, first gold pour on 30 March 2023
This means EBITDA has almost trebled:
Adjusted EBITDA3 of US$23.2 m, up 209% from US$7.5 m in Q1;
We’ve never really liked this company. The situation with VAT receivables and paltry dividends often make it look less attractive than other similar gold miners. However, these results show that the recent dip appears to have been entirely due to Odey being a forced seller (or rumours that he might be):
The shares have not yet completely bounced back, so may still be attractively priced compared to where they were trading at the start of June.
Thruvision (THRU.L) - Final Results
This was meant to be at breakeven by now, so despite being flagged in the trading statement, this level of loss is disappointing:
Operating loss was £1.0 million (2022: loss £1.9 million)
A lot of cash has gone into receivables from orders just completed close to year-end, but continued cash burn post the balance sheet date suggests cash collection hasn't been great.
Cash balance as at 31 March 2023 was £2.8 million (31 March 2022: £5.4 million), with cash at 20 July 2023 of £2.4 million.
They now have debt facilities:
The Group has recently agreed an overdraft facility of £1.0 million which reduces to £0.25 million for the period from 30 September 2023 to 31 May 2024 and nil thereafter, in order to support working capital requirements as the business expands.
The share price had been strong in the run-up to these results as news of the loan had been spotted by investors who saw HSBC lodge a charge against the company’s assets. Although we see little reason that needing to take on debt should be a big plus point. The overdraft profile may actually suggest a fundraise in the next few months.
The problem is that despite saying Retail Distribution is their growth opportunity, it only delivered revenue of £2.4 million. That's down from £2.8m in 2022H2 to £1.4m in 2023H2.
The outlook is positive:
The past year, combined with current activity levels, have reinforced our confidence that Thruvision will continue to grow well and become the solution of choice for walk-through security.
But ultimately, vague enough to mean any outcome is possible this year. So we turn to the brokers, Progressive:
We introduce our FY2024 which show continuing turnover growth and a positive EBITDA of £0.1m.
Our FY2024 estimates assume that despite the pressure on household incomes, retailers increase investment to deter theft at their distribution centres
The forecast is for less than 10% revenue growth and another go at EBITDA breakeven to reach last year's forecast. In fact, 2024's profit forecasts are now the same as those given for 2023 after H1 results, except with £0.9m higher revenue, suggesting a small but structural decline in profitability or increase in the cost structure.
Until the growth engine from retail distribution has been fixed, we see little value here. Customs newsflow may provide trading opportunities. Although bizarrely, in initial trading, the market has actually liked these poor results.
That’s it for this week. Have a great weekend!