Small Cap Value Report (Mon 15 July 2024) - RWA, CAV, MEGP, BRBY Movers: DEST, SBDS

15th Jul by Paul Scott

69 comments 8414 reads

Good morning from Paul & Graham!

We've run out of time today, so that has to be it.

"Profitable growth" survey

A bugbear of mine, we're seeing this arguably meaningless phrase appearing in many results & trading updates. I wanted to survey your opinions on this, so we can give some feedback to the PRs and brokers I talk to. Unfortunately, my survey last week went wrong, as I didn't realise Survey Monkey start charging extortionate fees once 25 people have replied, so I had to bin that.

This weekend I set up a new survey through google forms. So I invite you to give your views on the increasing use of the vague phrase "profitable growth". Even if you replied to the old survey, please do reply again, as this is a new survey. It doesn't capture any of your personal information, or have any commercial angle on it at all. I'm just interested to hear your views. Thanks in advance.

Click here to reply to my survey

Explanatory notes -

A quick reminder that we don’t recommend any shares. 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, investment cos). Although if something is newsworthy and interesting, we'll try to comment on it. Please bear in mind the "list of companies reporting" is precisely that - it's not a to do list. We typically cover c.5 companies per day, with a particular emphasis on under/over expectations updates, and we follow the "most viewed" list of readers, so if you're collectively interested in a company, we'll try to cover it. Obviously with the resources available, we can't cover everything! Add you own comments if you see something interesting, and feel free to discuss anything shares-related in the comments.

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laurie

15th Jul

Cavendish Financial (LON:CAV)

Tortoise,

The FY24 numbers include 7 months of Cenko’s contribution and 12 months from FCAP. You may need to adjust your figures to get an accurate comparison.

Cenkos didn’t command a high PE at the top of the cycle. I recall something around a PE of 5 or 7. Perhaps others have a better memory or some real data.

My valuation has to include the Share Incentive Plan and Co-investment Plan which gives 15% of the company to management/employees over the next three years. (RNS 19.ii.24) The same RNS states that there was an intention to extend the plan in March. It is complicated.

I still own some.

simoan

Re: Burberry (LON:BRBY)

A note on solvency: the company reported net debt of £1.1 billion as of March 2024, but this included nearly £1.2 billion of leases. Excluding leases, the company still had a small net cash position. Cancelling the dividend will be a big help in maintaining solvency.

Graham,

I think you’ll find they announced a £300m bond issue with a 5.75% coupon last month. So the solvency situation is worse than stated above currently, with a further £19m in coupon payments going out the door per annum.

All the best, Si

Tortoise investor

Very helpful post Boon - I've set out what their staff comp was in previous years in a separate post below too. Looking forward to your detailed article. I agree on the bull case; this is the only share in my portfolio where I think there is a short-term (12-24m) chance the shares could multibag.

rmillaree

Burberry (LON:BRBY)

Huh - if they raise £300 mill will that not mostly be neutral ref net debt - ignoring fees as they benefit from the cash inflow ref bond issue.

Not sure why solvency is even being questioned here if ignoring leases they have NO net debt (ie net cash) and they are still expected to make well over £100 mill of profits this year presumably even after todays downgrades? - ok if trends continue to worsen could be a worry if they have large payables perhaps but cant see how company with no real net debt making £100 mill plus profit should have any worries as things stand. Cancelling dividend is obviously sensible if there is worse to come perhaps so fair play to them being proactive in that regard.

In the very short term, yes, of course, but they stated the purpose as “general corporate purposes” i.e. keeping the lights on. You also need to be careful using the free cash flow figure shown by Stockopedia because it does not include lease payments. I expect the free cash flow will be strongly negative for FY25 as things stand and it remains to be seen how necessary the bond issue was.

The Ox 2906

I need albatross smugglers

JonBeddell

Totally agree, why catch falling knives? Tops are spikey and bottoms are usually rounded so there’s usually plenty of time to accumulate later. I much prefer to pay a little more (although probably less in this case!) later on when evidence of a turnaround is manifesting. Buying too early while stocks are tanking is something I can’t personally make a successful strategy of because I can’t handle watching holdings decline by 50% plus hoping for an eventual recovery.

jonno

VP (LON:VP.)

Further to my recent posts on Van Elle Holdings (LON:VANL), VP (LON:VP.) is another share that in my view is too cheap based on the fundamentals and Government's positive narrative on infrastructure and house building. I have posted on VP (LON:VP.) previously. It is in my opinion that it is the pick of the equipment hire companies by some distance.

My investment thesis in no particular order:

The company operates in a wide range of activities, which provides some downside resilience. From the Stockopedia company profile: "Vp plc is a United Kingdom-based company that is engaged in the specialist equipment rental business providing equipment, people, services and support for specialist projects. Its businesses include Groundforce, Brandon Hire Station, ESS, MEP Hire, Torrent Trackside, TPA, UK Forks, Airpac Rentals"

It is likely that the housing/construction sectors are close to the bottom.

The investment metrics are attractive on a forward PE of 8.5 falling to 7.9 and a handsome dividend yield of 6.2% increasing to 6.4%.

The founder Jeremy Pilkington holds over 50% of the shares and put the company up for sale a few years ago, but no acceptable offers were received, indicating that he will not sell the company on the cheap.

A new CEO and CFO were appointed in August and November 2023 respectively.

5 June "Current Trading and Outlook

Whilst some economic uncertainty remains, the Group has made a solid start to the new financial year, which we expect to be in line with the Board's expectations: Infrastructure market remains supportive with a clear pipeline of projects. Prospects in Energy market provide confidence.

General Construction market remains challenging. Brandon Hire Station action plan underway with confidence in medium-term prospects

Headwinds remain in Housebuilding market, with a slight drop in activity levels.

Commenting on the Final Results, Anna Bielby, Chief Executive of Vp plc, said:

"The Group has again delivered sector-leading returns, led by a strong performance in Infrastructure. Whilst some economic uncertainty remains, particularly in Construction and Housebuilding, we remain confident in our ability to react to changes in end markets and take advantage of economic improvements.

"We have made considerable progress in FY24 with new leadership and a refreshed strategy. We are excited about the future and have confidence in our ability to both grow the business and drive value through simplifying the way we work."

The husband of the company secretary has just spent over £251,000 of his own money buying shares

"The Company has been notified that, on 3 July 2024, Jonathan James Jones, a Person Closely Associated with Sarah (Sally) Jones, Company Secretary of the Company and a Person Discharging Managerial Responsibilities, purchased a total of 35,565 ordinary shares in the Company at a price of 708.54p per share"

I could ramble on but would recommend that anyone interested visits the company website where the diverse range of the company's activities is explained. The recent investor meet company webinar is also worth a watch. For what its worth I have added a few today at 689p. My average in price is around 600p.

The bug bear is that the spread on the shares is an absolute pain, but when the housing construction market awakens I am of opinion that one will be paying significantly more for the shares.

Boon

Multi-bag in 6-12 months would be amazing for Cavendish Financial (LON:CAV) !

Personally, my target valuation for within 12 months is around 25-30p, so just over a double-bag potential. However, I think if the IPO market comes back strongly and the UK markets are seen positively again, it really could multi-bag I think...

The great thing is this option (IPO + market positivity) is essentially given as a free option at the current SP. Even if the markets stay in the doldrums, and revenue growth is meagre (single 5-10% yearly), I can still see close to 3p EPS in 12 months time.

(I hold in the Boon Fund)

Silver Moon

"It is likely that the housing/construction sectors are close to the bottom", I agree but it will take a helluva lot of money to reignite it don't you think jonno? I hold Barratt Developments (LON:BDEV) , Taylor Wimpey (LON:TW.) and Persimmon (LON:PSN) so am a patient hopeful.

Journeo (LON:JNEO)

Sell or add?

Unloved and unwanted. Is the market right in terms of the falling share price that suggests something is awry or have investors just got bored at the absence of news? Trading update expected at the beginning of August?

Unsure whether Downing Strategic Micro-Cap Investment Trust (LON:DSM) retains a holding.

I have a modest holding.

All views welcome.

Hi Silver Moon,

I have taken more of a picks and shovels approach and hold Van Elle Holdings (LON:VANL) Brickability (LON:BRCK) Michelmersh Brick Holdings (LON:MBH) Sigmaroc (LON:SRC) and VP (LON:VP.) and more tenuously but directly related to the health of the housing market Property Franchise (LON:TPFG)

Good luck with your house builders.

cheeky_minnows

Was watching the Synetics IMC video today, interesting response to the question of Downing Micro-cap - I thought there was a EGM in August raised by Milkwood on this topic.. ? (question @ 42:00)

(link : https://www.youtube.com/watch?...)

davidjhill

I was wondering myself why Journeo (LON:JNEO) had been battered last few days - a 20% fall on news that I can see. I guess maybe it is a Downing overhang but need to check that out. Any insights would be useful.

Like this medium term a lot and can see it considerably higher so maybe another opportunity to top up if this continues any further

BenHazz

I think time is on your side with this one Jonno. Personally with a month until the update I'd be holding on a little longer to see what happens to the share price. A chartist would probably sell, although in this case Journeo (LON:JNEO) thats maybe a bit rash. Personally I wouldn't be buying right now, nobody want to catch a knife. But with any luck the sp will settle in the coming weeks and if it starts to move up as we move to results then maybe that's the time to add. I don't hold but am keeping a close eye.

Hi Paul

Silver Bullet Data Services (LON:SBDS) - not sure why you’re quite so certain they need any particular size of raise.

1) since that going concern statement they raised cash

2) they have clearly had no problem getting a £1m RCF which means lenders appear quite willing

3) management have shown no particular desire to dilute. minimal dilution since IPO

4) cashflow positive this year

So whilst balance sheet is by no means flush with cash I’d say any equity raise they might do is likely to be minimal.and as such any discount likely to be small to zero. The last raise was taken by 1 investor (who I believe is pretty smart).

This is a company with a superb client list where they very clearly have strong repeat relationships and are “landing and expanding”. They have a product that in the cookie free world (hopefully digital only or I’m screwed :-) ) should do extremely well.

So I get an Amber status or an Amber/Green but Amber/Red feels pretty harsh. This is not a serial dissapointer or a jam tomorrow. It hasn’t had a regular begging bowl out and has grown its revenues and invested in product very well. Now on the cusp of cash profits.

Funnymoney

Journeo (LON:JNEO) I remember picking up from a Ricard Staveley interview recently that one of his stocks was held by a fund that was selling down a number of positions. Journeo was owned by that fund (sorry but can't remember which one). I, following my rules, have since sold down to the sleeping level (ie it won't kill me if this is something more substantial). I'm fully expecting to be proven wrong in this, but safety first.

The problem for Cavendish Financial (LON:CAV) and other financial services is that bonuses are part of comp. Whilst they are technically variable they aren’t really. Pay someone a zero bonus is managing them out - anyone getting that will leave. So if you want to protect your business you have to pay semi competitively.

So bonuses should Not be viewed as variable at all. They should be viewed as having some variability. Ie in a bad year you can reduce the pool 20% and in a good year you’ll increase it a bit but don’t be fooled by the rhetoric. To pay nothing is to effectively kill your business.

Paul Scott

Good points well made, thanks David! Re Silver Bullet Data Services (LON:SBDS)

AMBER/RED is just flagging risk remember, not predicting the future. It definitely needs an equity raise, in my view. That would be a good thing, as big clients want to see solid balance sheets from suppliers.

Previous tiny equity raise, and tiny invoice discounting facility just reinforce the need for proper funding. I'll happily go AMBER if it raises say £5-10m equity so it can operate properly, not hand to mouth.

Agree there are interesting speculative aspects to the share, I thought my piece was quite well balanced.

Good luck with it!

Regards, Paul.

illiswilgig

16th Jul

Silver Bullet Data Services (LON:SBDS)

I'm interested in this company, and have been watching but I don't think that I have a good enough understanding of the business model/related parties/finances to invest.

Who was it said 'Don't invest in companies where you don't understand what they do'?

Going Concern - The last raise I can see is the RNS November 29th - placing to raise £1m. The placing is accounted for in the AR - and the Material Uncertainty statement in the same accounts is after accounting for that raise? Still applies unless I've missed something?

Working Capital Facility - if it was an RCF it would be stated as such? The wording makes me think it's an factoring/invoice discounting facility. Little or no risk taken by the bank on these facilities as they take ownership of the invoice for collection?

I'm not surprised to see the working capital facility. In the AR one thing I don't understand is the relatively low gross margin of the 4D platform - with revenue rising an impressive 170% the gross margin is 38%. Before all staff/overhead/central/finance costs. It doesn't smell like SaaS? To be fair I don't think that they say it is? Makes me suspect its a video adtech platform running marketing campaign for clients - with some clever proprietary software including machine learning in the backend. Which would basically be a video playout platform, potentially costly content to host and it's not clear to me what the monthly billing basis is? It's not licence, or the software? It's billing against the advertising campaign in some way? Is there a success/performance element based upon improved campaign performance?

I can see potential risks here that I don't understand? I may have completely misunderstood?

Not detracting in any way from the impressive growth figures that are very attractive. I just don't think I understand the business model? And how the revenue converts to a high level of profitability? Perhaps someone with a lot more knowledge of Martech and Adtech can help me understand what is being provided to customers and what they are likely to be paying for?

Given the - current - relatively low gross margin in the 4D platform I can see that rapid increases in winning revenue can lead to rapid increases in working capital - a typical problem of success. I can see that they will try to avoid another raise, but they already have quite a lot of small loans and an expensive convertible loan - so I guess it will all depend upon the relationship between rate of growth or revenue and working capital?

cheers

Mark

Small Cap Value Report (Mon 15 July 2024) - RWA, CAV, MEGP, BRBY Movers: DEST, SBDS

"Profitable growth" survey

Click here to reply to my survey

Explanatory notes -

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Paul Scott

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