Small Caps Live Weekly Summary

CRL CTG QUIZ SDI VTU

Straight into the companies this week:

Creightons (CRL.L) - Half-Year Report

Given that the company just parted ways with their long-serving MD in unusual circumstances, these results look much better than expected. Although we were expecting a loss so any profit is a positive:

Diluted EPS was positive 0.37p (2022: negative 0.48p).

There is good disclosure on acquisitions, given it is their second year. However, the performance of Branded is missing from the headline figures. Excluding Emma Hardie and Brodie & Stone these are down 10% yoy at a time of high inflation. Using FY3/2020 as a comparator, Branded ex. acquisitions has risen a little more than the fall in Contract, with acquisitions on top. The gross margin is similar. But distribution costs are up from 4.9% to 6.8% of sales, and admin costs are up 32%, resulting in an operating margin collapse from 7.7% to 1.8%. Distribution costs also rose year-on-year as a percentage of lower sales:

Progress has been slower than anticipated, however a phased approach was undertaken to ensure consistency of supply and service levels. Progress will continue to be made in the second half of the year which will have a positive impact on both costs and the efficiencies of the business going forward. Outward freight has increased by 14.3% to £0.8m (2022: £0.7m), due to increased cost of freight and the sales mix.

Admin costs fell (at the costs of earlier redundancy exceptionals), but no further gains are mooted:

A huge driver of the decrease in overheads was the decision made by the Group to move to a single shift.

Some of the cost increases in recent years have been on depreciation of their investment in the plant, which has supported the move to a single shift, but most of it is cash costs. It looks like the company has a fundamental fixed cost issue versus pre-covid. Any recovery will require top-line growth to return.

Sales and profits have been fairly evenly H1/H2 weighted in the past. Allowing £0.1m for cost savings in H2, they should do £0.7m after tax for the full year, or about 0.9p EPS diluted. This makes the company look overvalued at the current c.21p share price. At this level, there may be some Tangible Book Value support, but as many other small caps have shown, struggling microcaps can easily trade at half TBV or less. So it really needs to fall below 10p/share to be interesting at the moment.

One of the bull cases is that the gross margin across the board is some 3% below pre-COVID levels, and if they can reverse that, earnings may also mean-revert. This big question is if the drop is volume-related or a weakening of an already questionable moat for the non-branded part of their business. Something to quiz management on, if only they deigned to meet with shareholders.

Christie Group (CTG.L) - Trading Statement

Another profits warning from this accident-prone provider of professional services:

The resulting market uncertainty caused by transactional delays and moving deal timings, mean that the full year result, before exceptional costs is now likely to be below current full year market expectations

Further delays in closing deals are where the blame is put:

However, it now appears likely that a number of transactions previously expected to exchange in the last few weeks of this year will not now reach that stage until early 2024. Buyers and vendors actively working towards contractual exchange have indicated their intention to delay transactions into 2024 to avoid pre-Christmas operational disruption to their businesses. These deals would be expected to exchange early in the new year.

The EPS downgrade isn't huge, with broker Shore already expecting a loss for this year. However, if this is merely all about delays into next year, you'd expect 2024 to be upgraded, whereas Shore keeps the EPS forecast here the same. Shore forecasts further cash outflow and zero net cash for FY23 year end. Given that they have onerous lease liabilities and provisions on their balance sheet, this makes them look a bit shaky on financial strength metrics. The balance sheet probably isn’t bad enough for this to prove terminal in the short term, but when combined with a poor-performing business, why take the risk?

Quiz (QUIZ.L) - Interim Results

They picked the wrong year to expand their distribution centre.

● EBITDA decreased to £1.1 million (H1 2023: £3.7 million)

● Operating cash flows of £2.1 million (H1 2023: £6.5 million)

● Capital expenditure of £3.4 million (H1 2023: £0.7 million), which funded the expansion of distribution centre capacity and new store openings / relocations

We believe the distribution centre is owned by management outside the PLC structure. While many companies have this set-up for good reasons, it is not a great look to spend so much on improving something where the PLC doesn’t own the freehold into a consumer downturn.

Also, they incurred costs in store openings:

Capital expenditure in H1 2024 increased to £3.3 million (H1 2023: £0.7 million) further to £1.3 million of spend at our distribution centre and £1.2 million of spend on new and relocated stores.

A combination of this and poor trading has destroyed their cash buffer:

Cash net of bank borrowings at the period end was £3.6 million (H1 2023: £9.2 million) which represents a £2.6 million reduction since 31 March 2023. Net cash generated from operations was £2.1 million (H1 2023: £6.5 million).

And even worse:

As at 4 December 2023, the Group had total liquidity headroom of £4.9 million which includes a cash balance net of borrowings of £0.9 million.

This is likely to be close to a seasonal low, but with the borrowing facility exiting mid-2024, this looks too close for comfort. Management were saying they would be profitable less than six months ago, despite some pretty lowly sales comparatives being known, so they certainly haven’t covered themselves in glory here and seem largely to blame for ending up where they are.

Trading performance has been well below the omnichannel benchmark of Next:

the Board currently anticipates that full year revenues will be approximately 6-8% lower than current market expectations. As a Result, the Board anticipates reporting a loss before taxation for the year materially larger than previous expectations.

The only good news is that they have managed to control stock and gross margins. Unsalable inventory is the usual way such companies fail:

Gross margin maintained at 61.8% (H1 2023: 61.6%), reflecting continued focus on full-price sell-through...

We continue to carefully manage stock levels and dispose of excess stock held. This has contributed to the £1.0 million reduction in stock levels since March 2023.

The high gross margin here helps. At 60%+, they can have a half-price sale and still make money, although not enough to cover overheads.

The result of this is a “Strategic Review”. With founders holding a controlling stake, this is code for a takeover or delisting. Net tangible assets at the period end were around £16.9m, but that figure only makes sense as a going concern. Net Current Assets are about £7.2m, so above the current market cap. Even writing down PP&E, leases and inventories by half, we still get support at the current price. The problem is that shareholders need to trust the controlling management to treat them fairly, or they could end up on the wrong side of an uneven deal.

SDI (SDI.L) - Interim Results

Unimpressive figures here, with revenue flat and EPS almost halving:

Revenue increased by 1.6% to £32.2m (H1 FY23: £31.7m)

·      Adjusted operating profit* for the period decreased to £4.4m (H1 FY23: £6.9m)

·      Adjusted profit before tax* decreased to £3.7m (H1 FY23: £6.5m)

·      Adjusted diluted EPS* decreased to 2.68p (H1 FY23: 5.02p)

The chairman’s statement has the full-year guidance:

We now expect to report FY24 adjusted profit before tax of between £7.9m and £8.4m.

It is not immediately obvious, but this is a profits warning. Broker Cavendish makes it clear, though:

This leads us to downgrade our Adj PBT by 18% to £7.9m, with a reduction in adj EPS of 19%.

They also think SDI will just scrape the lower end of their guidance range. It shows how bonkers this market is, with SDI shares going up by 50% on no news recently and then giving it all back when actual results arrive.

The blame is put on the expiry of the very large profitable COVID contracts for cameras, destocking, and a slowdown in China and Germany. This suggests a rebasing of EPS and that future valuation should be off this reset level. So what are they worth? They are still not a bad business, so a forward P/E of around 12 is probably justifiable with an eye to long-term organic growth and a few acquisitions along the way. Buyers would want to be looking for a discount to this, so a fair value of around 70p and a potential buy below 50p. So, there is still some way to fall before it is worth considering.

Vertu (VTU.L) - Trading Update

Leo has been repeatedly warning those who’d listen that the used car dynamics had changed in the UK, and that it would have a negative effect on short-term profitability at motor dealers. This week, Vertu confirms this with a profits warning:

The current consumer environment remains volatile, and the Board remain cautious. In the light of the external negative market factors highlighted above, the Board anticipate that profits for the financial year ending 29 February 2024 will be below current market expectations.

On top of used car price falls, new vehicle inventory is having a negative impact:

increased pipeline of new vehicle inventory, which when combined with higher interest rates, has increased manufacturer stocking interest charges significantly above expected levels

Dealers are not exposed to this under the agency model, so potentially, this is something to look forward to. Anyway, the bottom line from Zeus is:

we have reduced forecast FY24 adjusted PBT by £8.0m (17%) to £39.3m and FY25 by £3.2m (6.2%) to £48.6m.

The Vertu year end is February, and activity is at a seasonal low, so we are a little surprised that so much of the damage falls within the current year rather than the next. The share price was understandably weak, falling 24% to around 65p. However, this seems to be a significant overreaction to public disclosure of something that everybody in the industry already knew about.

This potentially gives three recent buyers an opportunity. The company themselves paid 74p to buy back shares on 30th October when the falls had already started on the wholesale side. Their stated criteria for buybacks is relative to TNAV/"intrinsic value" which is much less affected by one year's movement in profits anyway. This is confirmed with the buyback starting again on Thursday with c.750k bought between 65-68p.

Secondly, we doubt market conditions in Ireland are much different from the UK, and Duffy paid 85.1p for shares just over a week ago. Finally, Constellation owns BCA (auctions), which would have seen the first signs of this two months back, and they paid 82.5p two weeks ago. It would seem bonkers if industry insiders who will be well aware of these trends and who were enthusiastically buying shares at 80p+ are now going “not interested mate.”

The risk in buying now is that the Zeus FY2/2025 forecasts still look on the high side to us. Liberum looks a bit more reasonable, having taken 12% out of their 2025 EPS forecast as well as 17% out of the current year. However, on the balance of probabilities, it seems likely that when the current selling amongst uninformed fund managers ceases, there will be at least three industry buyers remaining.

That’s it for this week. Have a great weekend!