Small Cap Value Report (Fri 28 July 2023) - TMG, PODP, FRAN, WHI, FOXT, CHRT

28th Jul '23 by Paul Scott

65 comments 7557 reads

Good morning from Paul. We have Graham here today too, despite it being a Friday, to help cover some of the backlog items from yesterday, thanks Graham!

Cohort (LON:CHRT) - CEO interview

This niche defence group impressed me with its recent results - record profits and order book, strong balance sheet with net cash, and a reasonable valuation. So I reached out to invite the CEO to let me interview him over the phone. As usual, I select only companies that I think are interesting, and GREEN on our traffic lights here, and it's completely independent, as I don't charge any fees.

Anyway, here it is - Paul Scott interviews Cohort CEO Andy Thomis, 28 July 2023.

Let me know what you think in the reader comments here, as quite a bit of work goes into preparing these, so it's good to know whether people find them worthwhile (or not).

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 £1bn. 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.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't…

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Boon

28th Jul '23

Glad to see a similar bull on PayPoint (LON:PAY) like me! And for similar reasons too.

The other thing I haven't mentioned is that I think entrenched tech players are going to have a field day for the next 5 years. As VC funding has dried up, they can now have a clear road to growth and dominance, without pesky new VC-funded startups trying to muscle in, with subsidized solutions and products. Since PAY already have the largest convenience store network by far, there really isn't any external obstacles to high margin dominance here. That for me is the key investment point - that isn't picked up by investors yet, who still look at it at a glance and assume they are just a commoditized player in a fragmented market - hence the low current PE rating.

(I hold in the Boon Fund)

Paul Scott

Oh I see you're doubling down. Doubly boring.

29th Jul '23

Thanks steven! Much appreciated. These interviews are a lot of work, for no money, so it's nice when people find them useful, and let me know. Thank you! :-)

I hope Paul's boots are being filled daily...!

They are! Funny how things turn out. I've top-sliced some of my WAND profits today. c.114m shares in issue, so maybe the IP could be valued at £100m+? Hence why it was an interesting trade at 50p. I've sold about 40% at c.100p. Let's see what happens with the rest. It's fully funded, and the IP is worth something. Hence why it's an interesting punt I think.

Doubling down on XLMedia (LON:XLM) is definitely NOT "doing a Paul".

I've never touched XLMedia (LON:XLM) - check our archive for why. It's a pile of crap, and always has been.

"Thank you for that bsharman. we hold Angling Direct and I'd seen it nudging upwards. We might buy a few more."

So what?! Imagine if thousands of subscribers posted the same type of pointless remarks? We'd be wading through thousands of pointless messages. Please ADD VALUE.

Thank you Wolfie.

When we see something really, really, bad - we shout from the rooftops here.

Like I did with Pod Point group (LON:PODP)

Any PR company taking fees to promote this type of shite should be ashamed of themselves.

I'm too tired to do Mobico. Exhausted actually.

Norfolk'n'Good

Hi Paul

I listened to the podcast with Cohort (LON:CHRT) and I thought it was very interesting. I particularly liked how reassured and knowledgeable Andy Thomis is. I also liked the fact that both he and his CFO have been with the group since it's inception.

Your questions drew out some interesting information - not least that the largest shareholder, despite retiring, still hasn't sold his holding and maintains a keen interest in the business.

I also agree with Steven below. It is so important, having asked a question, to shut up and listen to the answer. Sometimes, if you leave a long enough pause the interviewee feels the need to say something and so you could even draw out more info than you bargained for.

Please keep these up as it helps us to make a better judgement about the company in question and who is running it.

Ps Did Cohort supply the gun that you fired to start the new bull market?

Pat W

Hi Paul, I really enjoyed your interview with Cohort (LON:CHRT) I have held a small position for two weeks and on the strength of your podcast I have bought more. I was impressed with Andy's ability to provide in-depth, clear, jargon free and concise information. I was also given the impression that if you are a talented engineer Cohort would be a great place to work and build a career. Looking forward to the next one - Thanks

Bristolian

Reiterating others comments, but a great podcast switch Cohort (LON:CHRT) Paul. It really gave me confidence in the company as an investment. CEOs knowledge was in-depth and it's amazing that he and CFO have been around for so long as a steady ship. Also like the flexible approach of the various companies in the group. Overall it's got the Thumbs Up from me. PS LOL at the Keele Uni mixup. All the best.

illiswilgig

Paul thank you for the Cohort (LON:CHRT) Inteview. An excellent complement to the Equity Development presentation. Andy Thomis strikes me as a very competent CEO. He's also a good presenter and speaker for the company - I would definitely buy a used submarine or two from him!

I like the longterm ownership of the largest holder. Thank you for bringing that out, I'd not spotted it. I knew the Alvis connection. Alway was a fan of Alvis, but I'm getting distracted.....

I used to hold Cohort (LON:CHRT) but sold a couple of years ago. They are on my watchlist but I remain concerned that with the UK MoD (perennially short of funds) as their primary customer (over 50%?), the long term order book is great - but the pace of organic growth is probably constrained by MoD funding, and the very long time - many years - and expense it can take to win (or lose) long term defence contracts.

It is a slightly eclectic group of companies. Not necessarily a bad thing. It gives them opportunities but probably limits their ability to act in concert with scale. And why they retain the individual company structures? MASS is probably the crown jewel in the business. Very high margin software service business with repeating long term MoD contracts over decades. But its small and its not clear how it can scale up? If it could - it would probably transform their prospects. SEA (in a former life I have background in the defence/aerospace sector and worked with them occasionally) is doing well, probably also a crown jewel, not to the same margins, but with more opportunity to scale up through exports? It's been disappointing that Chess seems to have been unable to capture the rapidly expanding anti-drone market so far? Something seems to have not quite been going right there with talk of 'legacy issues' and 'margin improvement'. But winning long term defence contracts against tough competition can sometime turn out to be a poison chalice, locking you into low margin business that you under-bid to avoid losing it? Been there. Tried hard not to do that.

The ROCE/ROE and operating margin are towards the bottom end of where I'd want to see them? Which probably fits with the modest forecast growth in organic revenue and profits? Which you tried to tease out in the interview.

If they can make another good acquisition or two, perhaps building scale in their Sonar or anti-drone businesses, or driving up exports then I could see them stepping up a gear. They don't currently have access to the US market which is the gorilla in the playground and would be very interesting. But the price of defence businesses is probably rising now as defence spending increases. And countries that were happy to buy abroad to save a buck are suddenly getting concerned about their domestic defence capabilities. It may be harder to acquire at the right price now - but Cohort have a good track record here.

I sold my small cohort holding to build my holding in MS International (LON:MSI) who have quite a transformational opportunity in the anti-drone market, primarily through the US and international markets. Also I hold and am buying - when funds allow - Science (LON:SAG) whose recent acquisition of TPGroup has transformed them into a defence contractor with potential access to the US market. I'll be watching progress atCohort (LON:CHRT) closely - they are high on my watchlist - and if it looks like they'll step up a grear they'll be on my buy list. At the right price. I wish them well! In my view the UK needs more really good steady firms like Cohort,

and thanks once again for the excellent interview,

cheers

Mark

MetalMaid

30th Jul '23

Many thanks Paul for another superb podcast. Always entertaining and very informative.

I do just want to comment about Somero Enterprises (LON:SOM. I don't think they have ever claimed to not have competition. In fact to the contrary, I think they have acknowledged they are in a very competitive space - I believe management have been very upfront about this.

It has been discussed in the last 2 management interviews on PI world. approx. 32mins in to the first link (interview from 5 months ago), and approx. 19m 45sec in the 2nd link (interview from about 10 months ago)

Somero Enterprises (SOM) Full Year 2022 results presentation - March 2023 - YouTube

Somero Enterprises (SOM) Interim Results 2022 presentation - September 2022 - YouTube

Anyway as I said, great podcast, just thought I would mention this for some further context / clarification. And many thanks also to Tamzin and PI world, I find these interviews really useful.

ps. apologies for the post at graveyard hours, needed some time to kill while waiting for the UFC :)

SGTA

Not sure if it’s fair to say “it’s a pile of crap”. Over the past two years they’ve gone through a significant restructure and focus on positioning for the high growth US market. The recent update is a product of their restructuring plus some delays to state openings. Yes, they do get spikes on state openings but much of that is due to existing commerical deals with operators where they historically go paid one off CPA (cost per acquisition). This is a typical deal structure in early gambling markets, however as they mature the deal structures move to revenue share which means XL will receive up to 40% net revenue of customers it sends to operators. This is trailing commission sometimes up to lifetime of the customers activity. XL have recently signed a rev share deal with the largest global operator Bet365. With H2 weighted due to NFL and rev share deals starting to kick in with a more efficient op model I believe next few years, especially at this price, could be very positive.

Hi MetalMaid,

Many thanks for those interesting points on Somero Enterprises (LON:SOM)

I'll follow the links you provided - sounds like I might be a little out-of-date on Somero's position re competition. It's probably going back a few years now, when I recall Jack Cooney saying there wasn't really any competition, sounds like that might have changed - which could put pressure on SOM's high margins & cashflows perhaps?

Regards, Paul.

Thakns Mark, that's very interesting, and it sounds like you know a lot more than I do about Cohort (LON:CHRT) and its sector! I also like MS International (LON:MSI) (I hold) due to the big recent defence order intake. CHRT looks in a similar position - big order intake, although it's a good point you make about its dependence on the MoD.

Science (LON:SAG) is another one I also like, so we're perfectly aligned here - I like being in such good company, as I know from your track record here that you're shrewd!

My weekend tasks are now sorted!

Spreadsheet is updated, so you can quickly see what companies we cover, and search for anything very quickly.

Podcasts recorded & distributed on podcast platforms, or you prefer the web versions, they're here:

Part 1 (small cap companies reporting), and

Part 2 - markets/ macro news & views.

I did a bit of more general ranting about various topics too. It's free, and not moderated, so I can say what I like in the podcasts, so sometimes let rip where I've otherwise had to hold back.

Podcast Mystery Share - my best idea for the week, held back for Stockopedia readers, which is Gaming Realms (LON:GMR) - see my section in Thursday's report here. I think this one is worth a fresh look - I've previously been quite sceptical about it, but fair do's, the company has delivered on its promises and is now nicely profitable & cash generative, and showing strong organic growth. The valuation still looks reasonable, so I think this could be poised to re-rate once investors become more bullish, and focus on the 2024 forecasts. Providing, as always, that nothing goes wrong, always a risk with all small caps.

Best wishes, Paul.

Thank you to everyone who has left feedback on my Cohort (LON:CHRT) interview, much appreciated. I tried not to duplicate the results presentation published by Equity Development, so did my own thing, focusing on a few key areas.

I agree the CEO comes across really well, and being very long-serving, he feels a safe pair of hands, particularly when it comes to acquisitions, not rushing in to buy anything, but waiting for the right opportunities.

richardho

Brilliant stuff this week Paul and Graham much appreciated. as an aside Zotefoams (LON:ZTF) with whom you had an equally-interesting interview recently has shown signs of recovery on no particular news up 16% this week . Let’s hope this is a sign we have reached the bottom and recoveries await.

pmillar7

14th Aug '23

Hi Paul - did you manage to complete the review on Mobico - or have I missed something?

Thx Paul

Small Cap Value Report (Fri 28 July 2023) - TMG, PODP, FRAN, WHI, FOXT, CHRT

Cohort (LON:CHRT) - CEO interview

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Paul Scott

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