Small Cap Value Report (Fri 30 Oct 2020) - KAPE, RNO, MMX, TGP, ALT

29th Oct '20 by Paul Scott

88 comments 10900 reads

Good morning, it's Paul & Jack here, with the SCVR for Friday.

Timings - it's Friday, so I'm taking things at a leisurely pace. Finish time estimated at 3pm.
Update at 14:50 - today's report is now finished.

Agenda -

Kape Technologies (LON:KAPE) - interesting, large fundraising at no discount

Renold (LON:RNO) - overlooked trading update from 16 Oct

Minds Machines (LON:MMX) - Jack's contribution, re accounting investigation

Tekmar (LON:TGP) - (I hold) - savage market reaction to a profit warning

Altitude (LON:ALT) - Full year results

I dropped Dp Poland (LON:DPP) from the running order, once I realised its shares are suspended (and it's a complete crock anyway!)

In case you missed it, here is the link to yesterday’s completed SCVR, which included a reader request section on Redde Northgate (LON:REDD) - which I (Paul) think might be potentially very interesting, so it’s worth a look, and a debate. I very much want to hear your informed opinions, if you’ve done proper research and have some insights. Hunches, or that you happened to have bought or sold at this or that price, is not of interest!

Good podcast - I really enjoyed this podcast from PIWorld, with Andy Brough and Richard Leonard, hosted superbly by the unflappable, charming, and highly knowledgeable/experienced Tamzin. It felt like sitting in the pub with a couple of experienced old hands, who’ve been in the market for decades, and full of insights. A reminder that mere striplings like myself, who’ve only been doing small caps for 20 years or so, still have much to learn!

Firstly let’s start with a couple of stragglers from previous days;

Kape Technologies (LON:KAPE)

Share price: 160p
No. shares: 158.5m (before placing) +59.2m new shares = 217.7m after fundraise
Market cap: £348.3m (after fundraising)

Fundraising

I’ve not looked at this company before, and don’t have a view on it, but a large fundraising caught my eye, so just thought I’d flag it up, as this could be interesting maybe?

Proposed placing to raise $100m - c. £77m, a big fundraising of about 30% of the existing market cap. Use of proceeds is unusual, mainly $72m to buy out the shareholdings of the founders of…

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The skier

30th Oct '20

Strix (LON:KETL) did a webinar at 3.30 on 23 September

MiserableJacktPotato

Doesn’t seem much of a “guarantee” :/

abtan

Minds Machines (LON:MMX)

Hi FREng and others kind enough to share their opinions on this company,

Following my morning decision to hold, I have done a complete 180 and sold out his afternoon.

I was trying to update my own tables from H1 2019, but then realised that I couldn't.
I can't even work out revenue after partner payments, which is sort of crucial - it looks like partners take a 15% cut, but is that still strictly correct? I imagine it is, but until updated accounts are published, it's impossible to know.

I was also a little thrown by the updated figures today. Why has Investing Cash Flow changed? What does that have to do with revenue recognition? If there were any changes they should surely only happen under Operating Cash Flow.

There may well be an explanation, but as mentioned above, I think we're all flying blind until updated, accurate figures are released, which will be a while away.

I imagine the cash generation will be as good as previously "implied", but I don't think the share price will move for quite some time now, even on positive covid news.
I have a large buy list and whilst I don't usually like chopping and changing, this seems like a good time to make a minor change.

Cheers

Gromley

I know virtually nothing of Minds Machines (LON:MMX) and haven't looked at the announcement - but might the difference on investing cashflow be to do with IFRS16 leases?

doug2500

And now Jarvis Securities (LON:JIM) finishes the day down 11%

I sometimes wonder just what is going on that isn't obvious to me? Bonkers.

Silver Moon

Doug, try putting a '1' in after several or less zeros, Stocko will then recognise the price but the total won't be changed.

Silver

shanklin100

Good job it cost less than £6k, albeit I agree it’s completely pointless.

Harry Hindsight

Altitude (LON:ALT) "a busted flush" - or maybe

"has hit some turbulence"

"run out of air"

"fasten seatbelts and form crash position"

Minds Machines (LON:MMX) not an ESG then. Apparently all the thing.

Hi Gromley

Today's announcement stated that the issue was with revenue recognition only.

If there was a lease recognition correction as well that they just threw in there, but chose not to mention, then my confidence in the company would lower significantly.

In any case, leases cash flow would be included within Financing Cash Flow, which hasn't been adjusted for H1FY20.

As I mentioned, until completely new accounts are published, it is really hard to understand how profitable/cash generative the company really is.

Yes, sorry my thoughts were just a case of "drive by commenting" - hadn't read anything and just picked up on a couple of key words and shot from the hip (let's pass on the fact that simile doesn't work if you are driving by!)

From a further (very quick) look I can see that what has happened is that as a result of derecognising/not yet recognising some "cash" transactions have been reclassified from being "operational" to "financing" or "investing" (ie transactions that may (or not) impact the P&L in the future.

Still very superficial but it looks as though they might have reclassified some (net) receipts from customers as either financing or investment. Without further detail I don't fully understand it, but I suspect it is less of an issue than why they had to derecognise (or defer) revenues.

Potentially it does not look like a major issue from a cursory view. However, from a personal experience of a business on a different scale, undue pressures to accelerate revenue (or profit) recognition can be a red flag.

The "resignation" of the CEO & CFO suggest that it may have been a deliberate mis-statement, rather than accidental, but with a will to avoid any repetition I would say it i probably okay.

Michael Taylor

31st Oct '20

" It’s a big stock market, with lots of companies to invest in - so why go near one that can’t keep on top of its revenue recognition?"

I think Jack hammers home a good point here.

There is no excuse to be investing in stocks that you believe to be bang average.

timarr

Hi abtan

I don't think that matters. If you can't trust the company to deliver clean figures then you can't trust them to do anything. In the end the numbers are a reflection of the business, not the other way around - they're the validation of the business model, the management vision and the company culture. People who invest solely on the numbers are, in general, missing the point (although not as much as people who invest solely on the story).

None of which means this won't come good and make tons of money for shareholders - but that's fine, there are thousands of other businesses out there without governance issues.

Hi Timarr

I appreciate your comments as always.

My opinion on mistakes in published figures probably differs to most here, because I actually used to be one of the finance bods who put those numbers together.

Mistakes happen.

I certainly made mistakes in my career. An individual learns from them and (hopefully) management learn from them too.

I've seen contracts misinterpreted, revenue missed and costs/rebates not billed for in probably every company/public institution I've worked for, including one that is now FTSE100-listed. Things get missed and slip through the gaps and sometimes someone notices - it's not necessarily a reflection on management that someone somewhere cocks up or information is lost as roles change.

For reference, I do invest solely on the numbers and a set of quantitative rules - I never meet management and sometimes when I have spoken with them, it's hard to think subjectively given the very nature of someone wanting to sell you a positive message. If management or a company are good, it will show through in the numbers.

Well, that's my thinking anyway

As for Minds Machines (LON:MMX) , if updated numbers are good, then I would have no problem buying back in - until then, it's hard for me to quantitatively continue to hold.

Cheers
A

For reference, I do invest solely on the numbers and a set of quantitative rules

I re-analysed and then sold Airtel Africa (LON:AAF) earlier this month after your considered thoughts on their numbers, so I'm not complaining, far from it ...

I also see our esteemed PM, a details man if there ever was one, is going to pronounce to the nation once more at 16.00. I sense another "investment opportunity" looming. Hopefully investors here are appropriately positioned, it's not as though it hasn't been heavily flagged in advance.

At some point, as spring approaches, there'll be real value in whatever is left in the beaten up and beaten down sectors suffering the brunt of successive restrictions, but not yet, not yet.

timarr

Airtel Africa (LON:AAF) - I hope I haven't made you miss an opportunity there! By a very strange coincidence one of the directors is actually an old university friend, one of the smartest guys I've probably ever known (and certainly much smarter than me).
Given my (negative) diagnosis of the accounts I was quite surprised to see his name and it made me question whether I made a mistake somewhere, so apologies in advance if I've made you miss something too.

I've actually assumed a 2nd national lockdown is already baked into the markets (wasn't is obvious when France and Germany shut down?), but if good news ie a vaccine, is on it's way in the next 60 days I'm happy to hold my majority non-Stay-at-Home-focussed portfolio. I'm hoping quite a few will materially re-rate when that news comes through.

Fingers crossed

Airtel Africa (LON:AAF) - I hope I haven't made you miss an opportunity there

Err, no. I make my own mistakes. It's my capital, if I lose it I have no one to blame but myself. Of course, if stuff goes up I give full credit where it's due - e.g. Purplebricks (LON:PURP) - but it's still my capital! :-)

With Airtel the investment case is a bit hit and miss - the ownership structure is a bit of a governance issue, it's never going to be straightforward. I'm not complaining, I made 65% or so on it - although I lost half of that on MMX and the other half on Tp Icap (LON:TCAP) ...

A vaccine won't tigger a reopening although it will give the markets a few happy pills for a few days. A reasonable guess is that we'll have a relaxation at Christmas and then a further tightening in January (other guesses are available). If working vaccines can be delivered then by spring we'll see a proper loosening of measures, but it's unlikely the initial vaccines will work perfectly and delivering them where they're needed will be a challenge. The aim must be to make sure we don't have the same problems next winter. I'd note that Chris Whitty has so far been the best forecaster of markets during the pandemic.

As regards markets anticipating a lockdown - well, you'd have thought so, wouldn't you? But if you look at the sort of companies that could be made to close again - stuff like Hollywood Bowl (LON:BOWL) or Ten Entertainment (LON:TEG) or Gym (LON:GYM) or Restaurant (LON:RTN) - then the price has barely flickered in the last week. Although On The Beach (LON:OTB), which I do hold, has fallen quite sharply. Maybe this was already priced in, I don't know, but there does seem to be a lot of wishful thinking about.

But perhaps the announcement won't be a full lockdown. We shall see.

psin

Regret come Monday it will be deja vu.

For those in cash it will be an outing to the sales. (eventually)

Watch for shares that hold their value. (as best as poss)

Invest in shares connected to covid-19???

Phuntt

I’m trying to play this forward in my head. Markets will react on Monday (but they were likely to do that anyway before BJs announcement - we will hear increasingly shrill reports from the US next week). The UK needs to come forward with another package of fiscal and monetary support (it was always planned for November). They can’t afford to do so until the US does (or risk devaluing the currency to such a level that is unsustainable). We are in a bit of a stand-off right now until end of next week. Shares likely to fall next week (especially miners who have been retreating this week as support package risk of delay). But they represent a brilliant buying opportunity as they will be massive beneficiaries once next round of spending comes. We need this US election sorted.

The more I think about it there is a huge opportunity next week for good traders - it is going to be intense...

Small Cap Value Report (Fri 30 Oct 2020) - KAPE, RNO, MMX, TGP, ALT

Kape Technologies (LON:KAPE)

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Paul Scott

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