Small Cap Value Report (Fri 29 Dec 2023) - SND, SED, DUKE

Good morning from Paul. 

Today's report is now finished.

Half-day today - market closes at 12:30. So if you're still staring at your watchlist at 13:00, amazed at how illiquid the market is, that's because it's shut! ;-)  [we've all done it!]

It's the last SCVR of this calendar year! What a year it's been too, with greatly widened coverage of the market - at the latest count, Graham, me, and Roland covered 607 unique UK listed companies here. That's all in the archive now, for reference under the "Discussion" tab of each company on the StockReport. 

It's been a pleasure, and sometimes a challenge, to produce all these reports. I have to say that working with both Graham and Roland is an absolute dream, I don't think we've ever had crossed words.

Graham's top 10 share ideas for 2023 delivered a fantastic return, make sure you check out his new article here, with an astonishing +25% profit for the year. Well done Graham!

** STOP PRESS! ** - Megan's just published this very interesting review of how the StockRanks performed this year.  I think it nicely reinforces how the StockRanks are not infallible for individual stocks, but for a portfolio they skew the odds in our favour.

I must also mention the fantastic quality of reader comments this year, with some wonderful contributions from many subscribers, thank you to everyone who has contributed in a positive, courteous way.

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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 (usually) between £10m and £1bn. We usually 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. OR it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

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Sondrel (Holdings) (LON:SND)

Down 54% to 3.75p y’day (£3m) - Trading Update (profit warning) - Paul - BLACK (profit warning) & RED (fundamentals)

Sondrel (AIM: SND), the fabless semiconductor business providing turnkey services in the design and delivery of 'application specific integrated circuits' ("ASICs") and 'system on chips' ("SoCs") for leading global technology brands, provides the following trading update.

We’ve only covered this disastrous Oct 2022 IPO once, here on 31 Aug 2023. My summary comments form then were -

A hideous update from this chip designer, which has seen expected revenues all but dry up for H2, due to project delays. I think that leaves it in a precarious financial position, as there are some nasties on the balance sheet. The company reckons it has enough cash, but I disagree - expect a distressed placing at a discount. Looks like the fund managers were sold a pup, in this Oct 2022 IPO. [SCVR 31/8/2023, shares 21p]

Yesterday’s update was worse still. Actually, this is one of the worst trading updates I’ve ever seen, because it basically tells us the company is insolvent - unable to pay its liabilities as they fall due is surely wrongful trading under UK insolvency law?

The issue is that project delay/problems means £1.7m of expected milestone payments have not been received from a customer. This has left SND with inadequate funds to meet its Dec payroll! Management and most staff have agreed to deferral of salaries until the milestone payments are (hoped to be) received in Jan - Feb 2024. Although it says additional costs will be incurred to solve the project issues.

Funding - it says additional funds will be required before end March 2024, or earlier if the delayed milestone payments have not been received. So brace for probable substantial dilution in an emergency fundraise.

Paul’s opinion - I’m glad we steered clear of this one when it warned back in Aug 2023, and the company’s assurances that it had enough cash did indeed prove incorrect, as I indicated was likely at the time.

Although the market cap of only £3m is well below our usual £10m cut-off, I’m intrigued to see how this one will pan out. It’s either going into administration, or major shareholders might prop it up with an emergency placing. Note the CEO owns 45%. Small shareholders are now completely at the mercy of what big shareholders decide to do.

Super high-risk now, and insolvency could come any day, if the lawyers tell them they’re trading whilst insolvent (which triggers senior management becoming potentially personally liable for the company’s debts).

I wish shareholders well, but with c.95% of the original share price already gone, I suppose most people will have mentally written it off by now. Hopefully people will avoid the temptation to throw good money after bad - averaging down on an investment that has gone completely fundamentally wrong, is best avoided in my experience.

Delisting risk must be high, with a 45% founder CEO, and not enough cash to make payroll. So listing costs would be the obvious thing to slash next.

Any upside? I could imagine shares bouncing, if the company announces it has received delayed milestone cash from customers. But ask yourself if it's worth risking a 100% loss, for that uncertain upside?

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Saietta (LON:SED)

Down 3% to 17.5p (£25m) - Interim Results - Paul - RED

Saietta Group Plc (AIM: SED), the multi-national business which designs, engineers and manufactures complete eDrive systems for electric vehicles, today announces its unaudited interim results, covering the six-month period ended 30 September 2023 (the "Period").

We’ve covered this share negatively (RED) 4 times this year, most recently on 20 Oct 2023, where I summarised it like this -

Saietta - down 29% to 27p (£28m) - unsuspended now late FY 3/2023 accounts published. Cash burn so bad, I reckon it's out of cash again. Could be a zero. Just awful.

We don’t need to spend much time on this. The interim numbers are terrible, with tiny revenues, and a £7.9m loss in H1. It had run out of cash by the period end.

However, it raised £7.1m in a Dec 2023 fundraise, which it says will only be enough until March 2024, due to the continuing very heavy cash burn. So expect another fundraise, and more dilution in early 2024. Let’s hope shareholders are feeling flush, and still believe the story.

Going concern statement includes a material uncertainty line, but I challenge whether this statement here below is true, as it doesn’t align with the facts. Actually, this bit below is obviously untrue, since the company only has enough cash to last until Mar 2024 -

The condensed interim set of financial statements included in this half-yearly financial report have been prepared on a going concern basis as the directors consider that the Group has adequate resources to continue operating for the foreseeable future.

Paul’s opinion - I remain extremely negative, because the company is a big cash-burner, but seems to limp along from one fundraise to the next, with no discernible commercial progress apparent in the figures yet, other than talk about orders, etc.

Small shareholders are very vulnerable here, to further ramping from paid-for commentators, sucking in the unwary before yet another discounted placing.

I have no idea whether the product is any good or not. That’s largely irrelevant to me, since the company’s finances currently make it uninvestable.

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Duke Royalty (LON:DUKE)

Up 2% to 33.25p (£140m) - Trading Update & Investment - Paul - GREEN

Graham normally covers this share, and he’s been consistently positive, green, on it for a while. Several shrewdies have flagged this share to me too, so I’m pleased to have the opportunity to take a quick look today.

Duke Royalty, a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and North America, is pleased to provide guidance on its trading for its third financial quarter ending 31 December 2023 ("Q3 FY24") and to announce a follow-on investment of CA$8.6 million (approximately £5.1 million) into its existing royalty partner Creō-Tech Industrial Group Inc. ("Creō-Tech").

Trading update sounds positive -

"We are pleased to report that despite the ongoing macroeconomic uncertainties, we continue to deliver revenue growth, with Q3 FY24 on course to maintain this upward trend, underpinning our stable dividend which at the current share price, represents an approximate 9% yield.

"We believe the Company's rebrand, alongside our expanded investment team, will position Duke to take advantage of the abundance of new opportunities in the Private Credit market, which has become increasingly mainstream in the SME lending space."

A dividend yield of c.9% has certainly caught my eye.

Also the growing quarterly recurring revenues of £6.2m look good.

The StockReport shows shares trading below NTAV, at 0.84x

Paul’s opinion - it’s dawned on me that this is a more complicated situation than I realised, and I’ve run out of time as family have just popped in for a late breakfast. So I’ll have to park this one until 2024.

It’s essentially an investment company, that has invested money in other companies in order to generate recurring royalty income. This is mainly financed by equity, but also some debt.

At first glance, it looks quite interesting, so would be worth readers taking a closer look I think. Since Graham knows it much better than me, and is green, I'm happy to maintain that view myself.