Small Cap Value Report (Fri 24 Feb 2023) - KCT, CINE, ZOO, MTEC

24th Feb '23 by Paul Scott

50 comments 7345 reads

Good morning! It's just Paul here today, with it being Friday.

I'm fizzling out into the weekend now, so will leave it there for today.

My SCVR summary podcast will be back tomorrow, after a break last weekend when I didn't have any inspiration, which happens occasionally.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Made Tech (LON:MTEC)

33.5p - market cap £50m

I originally posted this as a reply to a reader query below, but am copying it here.

I did have a look at Made Tech (LON:MTEC) last night, and found it difficult to form a conclusion. H1 figures are poor as you know, but it reckons it can deliver a much better H2 performance. So there's a quite a lot of guesswork, and having to trust what management says, which is probably why the share price is volatile, and attracting traders as you say.

So there's not much value I can add by guessing as to whether it will achieve the FY outcome, or whether there's a risk of another profit warning. Big H2 weightings quite often do result in another profit warning.

What I can do to help is review the balance sheet. This looks fine. With £8.7m net cash, and NTAV of £11.9m, this strikes me as a solid balance sheet, with little to no risk of dilution or insolvency.

Share based expense looks excessive, at £1.5m in H1, and £2.4m last full year. That's…

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Rusty2

24th Feb '23

ME International (LON:MEGP) From 14th November trading update: "The Group will publish its results for the financial year ended 31 October 2022 towards the end of February 2023."

Spender71

MEGP seems to have a solid Stockopedia rating. Perhaps there has been some profit taking after a long upturn and before a possible fall after results published in line with expectations. I may buy after results.

SouthernHighlander

Appreciate your thoughts, thanks

BnB

25th Feb '23

Kin and Carta (LON:KCT)

Very helpful comments on the treatment of deferred consideration, thanks. I think what the market is concerned about, however, is the steep reverse in organic growth. I hold a number of DX names, here and abroad, and nearly spat my morning cuppa out when I read the following:

For the current financial year ending 31 July 2023, the Company now expects net revenue growth of 8-12%, with organic net revenue at constant currency showing a low single digit percentage decline from the prior year

coming on top of:

Like-for-like (organic, constant currency) net revenue (in H1) was down 6% in total with a 1% decline in Americas and a 16% decline in Europe

Netcompany a Danish DX consultancy, which competes head to head with KCT in Europe and the UK, grew organic revenues 19% over the same period, though encumbered by its greater scale at GBP1.5bn mkt cap. A further 10% growth is expected this year. At the other end of the scale, local counterpart Made Tech (LON:MTEC) fell 20% (and recovered half the fall a day later) after forecasting organic growth of nearly 50%.

All of which begs the question: what has gone wrong at KCT that revenues are collapsing? One clue is the mention that the UK is the laggard and perhaps that is a cyclical factor which will reverse in due course.

Taking a step back and studying the charts, it’s clear that most DX names are trading at or below 50% of their post-pandemic highs. That list includes EPAM, Globant, Endava, Netcompany and now KCT. Perhaps the bad profit (or rather revenue!) warning, and it is a bad one, was the opportunity for the market to cut the previously rather resilient SP down to a commensurate size?

Longer term, I think the tailwinds for DX are such that KCT will be fine, and this could represent a rather profitable entry point. But the picture is cloudy today and I do not see any points of positive differentiation in a business that relies so heavily on M&A for growth. The lower rating seems justified to me in much the same way that the market is sceptical of MTEC’s potential to deliver GAAP profits. If concerns are addressed, both will prove winners for investors at today’s level.

Caduceus

Kin and Carta (LON:KCT) TU sentiment analysis from ChatGPT AI:

The sentiment of this trading update from Kin + Carta plc is mixed. The company reported a 15% net revenue growth in H1 FY23 compared to the previous year, but like-for-like organic net revenue was down by 6% with a decline in both the Americas and Europe. The company also lowered its expectations for the year due to cautionary client spending and elongated sales cycles. However, the company is optimistic about future growth, citing new contract wins and a strong sales pipeline. The CEO emphasized the company's focus on enterprise clients with higher margin nearshore delivery and a record backlog demonstrating ongoing demand for their services. Overall, the sentiment is cautious but optimistic for future growth.

davidjhill

Good global context so thanks for that. The thing I would say is that Kin and Carta (LON:KCT) is now at almost a third of post pandemic highs so seems like the falls are somewhat excessive. I'd expect this type of business to trade around 14 to 15* normalised earnings so more like 200p which would still be 40% off the high.

Going back to last trading update revenue expectations were still for strong growth so I agree the decline is concerning. I think that the mini budget had the effect of pressing pause on capital projects on a lot of businesses in the UK though as they felt it prudent to wait a few months and see what transpired. I would expect that with the situation stabilising many of those projects will now go ahead so one would expect Kin and Carta (LON:KCT) to make up some ground.

I struggle a bit with the ack of organic growth. These businesses shouldn't be overly reliant on acquisitions so I hope there is some focus on the sales / bus development process there.

Nonetheless looking forward 12 months I'd expect to see revenues of £230-250m and op margins of circa 13-14%. So at the upper end of my expectations circa £35m of operating profit. Lets say £25m after tax at 14* earnings is £350m market cap or about 200p. If their stated medium term 15% growth at mid to high teen margins is achieved then 300p looks achievable so I'm currently thinking at these levels upside looks attractive over a 12-24 month view. There should be no shortage of available business in the DX space for several years to grow into so really it is about the competence of the new CEO (or old US head). So far I'd say her report card is a C minus but there is an argument that the UK situation wasn't a problem of her making. She needs to prove herself now though - has the marginal benefit of the doubt but no more mis-steps should be tolerated.

abtan

Avation (LON:AVAP)

There's some good commentary here on the latest update for any interested:

https://www.lemonfool.co.uk/vi...

Not really Lord Gnome - the dividend policy has moved to 50% of pre performance earnings

That means given the improving fund flows picture I think we should expect circa 6 - 7p dividends next year which is around 4.5 to 5% yield as a base case. However, as the asset mgmt cycle turns that could go up considerably.

Shares are up because they massively outperformed expectations on earnings and the funds flow picture has stabilised and reversed with a base case of 5% yield and likely to move up over the cycle.

I think that the mini budget had the effect of pressing pause on capital projects on a lot of businesses in the UK though as they felt it prudent to wait a few months and see what transpired

I tend to agree. It may be that the stronger proportion of (possibly more resilient) UK government work enjoyed by competitors accounts for the contrasting trajectories in revenue growth. The company is not forecasting a quick reversal in fortune, however - only a slow grind back to growth in H2.

Dojosan

26th Feb '23

Kin and Carta (LON:KCT) - obvious that some peeps were selling with advanced knowledge of the TU. Have been watching the sp action in detail. It hit 230p and from there it crumbled to c173p with heaps of selling, where an II made a big buy of £200k+ which sent the sp back to 180s just prior to the TU. There I was thinking that I got myself a nice entry prior to a TU at 183p. Lesson learnt: TU for growth companies in this environment can be very volatile. Very blessed that I made it back with a trade on CentralNic (LON:CNIC)

Markets are a bit scary at the mo. Not sure whether they are coming or going. E.g. Zotefoams (LON:ZTF) - high quality but has shed some of its gains from its high. Yu (LON:YU.) was at 620 but got bought up. Bloomsbury Publishing (LON:BMY) without the release of a early spring TU - peeps getting a little nervous, Braemar (LON:BMS) could have been bought at 275p and the list goes on. Not sure if we are amidst a major step down (thus, do not want to get caught in transition (as I have many times before)) or will the sp's recover? IMO, given the news out on Friday in the US, it's a major step change for risk assets, which guides the market at least for the next few weeks until the Fed's March meeting (oh, almost forgot, we've got US non-farm payroll coming up - if they are hotter than expected - get your tin hats out).

Sounds something like Simply Wall Street will publish.

obvious that some peeps were selling with advanced knowledge of the TU

Maybe they just saw the disappointing reports from competitors in the previous week. The signs were there.

Indeed. Can we leave the interpretation of TUs to Paul, Graham and those PIs happy to put heads above the parapet? Quoting ChatGPT summaries simply regurgitates management’s doublespeak! It clutters up the forum.

I noticed the FTSE250 and AIM peaked around 3 weeks ago, since then both have been in decline. There has been some big moves on no news. The FTSE has has held up until last week. Not sure which it will go, markets often do the opposite from what I expect.

Well...it remains novel and interesting so far. I look forward to another instalment of ChatCGP where I will rush off to buy if it's a thumbs up!

However, Elixirr International (LON:ELIX) did not dive in the last few weeks like KCT prior to the KCT's TU. Perhaps, one may argue, ELIX's shareholders are less insightful or something else is at work...

27th Feb '23

This morning’s TU from Elixirr International (LON:ELIX) is quite reassuring so you may see a bounce. It certainly underlines the weakness in Kin and Carta (LON:KCT)

TamzinPiworld

10th Mar '23

Made Tech (LON:MTEC) H123 results presentation from the webinar given by CEO & CFO with results video & podcast.
Rev £20.6m +76%
GP% 33%
aEBITDA £0.5m
Cash £9m
Sales bookings +23%; contracted backlog +53%
3 contract wins £27m since period end incl DVLA
Outlook: in line with expectations with very strong visibility, healthy demand environment and a very strong pipeline of opportunities.

Tombholliday

19th May

Paul you seem to have conveniently forgotten your reporting on Zoo in your weekly podcast

Can’t think why

Small Cap Value Report (Fri 24 Feb 2023) - KCT, CINE, ZOO, MTEC

Made Tech (LON:MTEC)

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Paul Scott

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