Small Cap Value Report (Thu 3 March 2022) - PCIP, ESYS, KITW, DLAR, UBG, DOTD, BWNG

3rd Mar '22 by Paul Scott

66 comments 11147 reads

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

Agenda -

Paul's Section:

Pci- Pal (LON:PCIP) - strong progress in H1, but patent infringement allegations hang over the company, so risky until that's resolved.

Essensys (LON:ESYS) - share price has crashed this week, on disappointing growth. This software company is engaged in a risky strategy with high cash burn, but so far growth has disappointed.

Kitwave (LON:KITW) - a low margin distributor, which seems to be trading OK. 4% dividend yield appeals.

De La Rue (LON:DLAR) - good news on reduced pension scheme funding requirements. This should boost the share price.

Unbound (LON:UBG) - results to 31 Jan 2022 are the closing figures for Electra Private Equity, so are of little relevance to the new version of this company. However, the commentary provides a lot of background information on the new strategy for Unbound.

Dotdigital (LON:DOTD) - shares plunge further, on wobbly outlook comments accompanying interim results. Very strong balance sheet. I crunch the numbers, and based on earnings growth now having stalled, it's difficult to justify the current price, let alone any upside.

N Brown (LON:BWNG) - down 20% on a not-too-bad update. Although cost pressures mean it expects profits to dip about 18% in FY 2/2023. After the recent collapse of Studio Retail, I now see this business model an uninvestable. There's also a big legal case, which is not mentioned today.

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,…

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jwebster

3rd Mar '22

Not necessarily the same.

Next is selling retail at retail prices, people pay cash, credit cards, or their pay-later options.

N Brown leads on credit, using their own brands, so the retail prices of their goods could, in theory, be raised to increase margin, cross-subsidising a lower headline APR rate.

I've not checked their margins for this, but if you thought to invest in their shares, you would have to figure this out.

illiswilgig

Zytronic (LON:ZYT) (I Hold)

SP 152p (this afternoon) Mcap 17.2m with today’s 11.311m shares in issue

Newcastle based maker of bespoke heavy-duty multi-user, multi-touch touch screen overlays and controllers for a variety of indoor/outdoor applications including gaming, finance, industrial, vending, education, public information etc.

Turnaround situation. Used to be primarily a supplier of ATM touchscreens – which market is in terminal decline – with reducing margins. They have exited the ATM market and R&D over recent years has resulted in new and award winning products recently launched - gaining sales in other growing markets especially gaming – meaning high end Las Vegas style casino ‘gaming’ not games consoles.

Short and sweet AGM trading update this morning.

Revenue up +25% yoy in first 5 months of current year with orders up +45% on same time last year thanks to advance orders which helps plan semiconductor supply and gives a firm foundation to H2.

Confirmation that the improved operating margins from last year are maintained (I calculate last years H2 operating margin as 11%)

My estimates for FY23 (to end of march 23)

Based upon the 13.8m FY revenue figure floating around I am estimating full year eps to be around 11p – putting it on around 13.8x based upon today’s update.

The revenue figure is likely from management and they are normally very conservative, so it seems reasonable base to work from.

Looks fair value on that basis and trading at around NTAV. However the cash-pile at year end was 9.2m and growing at around 1m per 6 month. At current shareprice it’s a full year EV of 6m and falling.

EV/EBITDA of around 5x on last years figures falling to around 2.8x based upon my FY estimates for this year. Which seems bafflingly low for an established touchscreen maker launching new products into growing markets. Of course they do have to deliver the growth in sales, H2 of last year +33% and this H1, +25% so far, look like that risk is growing smaller.

Broker comment

Here are some excerpts from today’s singer update - courtesy of rivaldo on the advfn board (one thats well worth a look if you are minded to)

“Zytronic has issued a positive AGM update, confirming a continuation of the more positive trends reported at December’s prelims. Revenues for the first five months are c.25% ahead year-on-year and operating margins have been maintained at the improved levels of last year.

The order book is 45% ahead, providing visibility for the coming months. We make no changes to forecasts this morning and continue to see further recovery potential beyond the forecast period. We reiterate our 250p TP and Buy recommendation.”

and

“Impact on earnings & valuation

The trends reported in today’s statement continue the key themes of December’s prelims and are supportive of our full year forecasts, to which we make no changes this morning. In terms of valuation, we set our TP based on a blend of the Group’s 10 year median average P/E (14.2x) and EV/EBITDA (7.7x) multiples, applied to a prudent, partial profit recovery scenario (£2.0m PBT). This results in our 250p TP and Buy recommendation. A full recovery to FY19 (£3.1m) or FY18 (£4.5m) PBT would clearly imply further potentially meaningful upside.”

PBT , tender offer and cost base reset

The broker PBT estimate seems to tally with my estimates. NB: a quick return to FY19 or FY18 PBT levels is not likely imho– but also not necessary as the recent Tender offer significantly reduced the shares in issue by around 30%. Shares are still being bought back as the full tender was not taken up, at a modest rate due to the lack of liquidity. In addition the company significantly reduced its cost base during the lockdowns as its markets closed temporarily - whilst maintaining its sales and R&D effort. Hence the company should achieve previous levels of PBT at significantly lower revenue – and with continued growth in its new markets should in the long term exceed previous levels of revenue.

All the usual warnings and DYOR apply – very small caps like ZYT are highly illiquid and building a sizeable holding takes time. Selling one - even longer.

Cheers

Mark

timarr

"Analysts believe Itv (LON:ITV) has misjudged its budget"

It looks like consensus forecasts for operating profit dropping from £800 milion to £550 million due to the additional content spend and reduced advertising revenue next year is the main reason for the share price fall.

It's a perennial takeover target, of course. It's very easy to come up with a much higher valuation, just looking at the content library. But that's been said many times before and with John Malone's Liberty Global sitting on a near 10% stake there doesn't appear to be much market enthusiasm for any kind of activism.

Still the fall looks a bit overdone, although I would think that because I'm a holder.

rmillaree

Itv (LON:ITV)

I think with the power grab between Disney/netflix/Discover-Warner (watch this space !)/Apple and Amazon - seems almost more likely than not someone will come sniffing if shareprice remains depressed - the bonus is that you get the content and the future cashflow to pay for the acquisition - seems much more appealing than paying for somewhat dubious content of your own - that may not come with decent future payback. I am on the sidelines though at present.

I think with the power grab between Disney/netflix/Discover-Warner (watch this space !)/Apple and Amazon - seems almost more likely than not someone will come sniffing if shareprice remains depressed

I obviously agree but I've been wrong so far.

Possible blockers to a deal would be the Public Service Broadcasting requirement (currently under review), the impossibility of dropping the terrestrial programming service (the government would no doubt make it a condition to retain universal access) and that Liberty Global stake.

But none of that looks insuperable. The issue here is that the market is crowded - but ITV Studios and the back catalogue alone must be worth a sizeable proportion of the current market cap.

One day the market will stop voting and start weighing. Although at the current rate of progress I may not be around to see it :-/

timarr

Boon

Wow - 27% drop in a share price without a profit warning or some financial hit.

I guess the markets are deciding that the investment in digital (ITVX, etc) and content is like a write-off.

But one thing I will say is that Itv (LON:ITV) totally misjudged the market appetite for big investments in streaming. They only had to look at the share price of Netflix and read Bloomberg to know that there's huge pessimism on streaming at the moment. So why announce huge plans now? They could have done it in a paragraph buried somewhere, or just delay announcement to later this year, when the market mood is better.

Anyways, I will be topping up if it drops any further. As a company with a valuable production studio, back catalogue, and a share of a monopoly (in free TV channel space) the intrinsic value is there. Ripe for a takeover from a strategic acquirer.

(I hold).

I agree here with Zytronic (LON:ZYT) I think there are many stale bulls that that have kept the SP depressed with selling, and also those who automatically dismiss due to their knowledge of the car crash that was in the past.

But for me, they have pivoted and now face growing revenues from the gaming sector, which has come roaring back and with money to invest in new machines.

Coupled with a few new innovative product launches this year, and we could see some decent sustained growth. Which, when the market finally wakes up to, not only will result in increased EPS forecasts but also PE multiple expansion.

The icing on the cake is the strong balance sheet, and the proposed share buyback (up to 10% of outstanding from now for next 12 months).

Lots to like. Trading below 1x revenues for a company that could easily do 15%+ operating margins and likely to grow top-line over the next year or two? Hard to find

(I hold)

Paul Scott

Hi cmpeckham,

It's not my area but isn't this exactly the same business model as used by Next (LON:NXT) ? Isn't the issue less to do with the business model and more to do with the ability of the management team to execute?

That's a great point, well made. Thanks.

Paul.

Hi Neville,

I don't know, sorry.

Boohoo (LON:BOO) said today it will update us on 10 March.

Sorry it's been such a disaster. I never imagined the whole sector would de-rate so rapidly & extensively. Incredible really.

https://www.investegate.co.uk/...

Best wishes, Paul.

4th Mar '22

It's not a "blizzard" - an emotional term. The share count at De La Rue (LON:DLAR) has roughly doubled in recent years. That was because previous poor management ran into a pandemic, poorly managed the group, and had to do an emergency refinancing in the early stages of the pandemic. That was sorted. It doesn't make DLAR a permanently bad business, particularly when you see how it's moved back into profit.

New management refinanced, and stripped out tons of cost. So DLAR is a turnaround. How good that turnaround is, remains to be seen.

The recent profit warning (Jack covered it) put a question mark over the turnaround.

So let's see what happens.

Regards, Paul.

Hi BSV,

Thanks, useful contribution re De La Rue (LON:DLAR)

I'll keep it on my watch list. Just checking the most recent balance sheet, it looks stabilised after the refinancing, but not strong.

A reduction in cash outflows into the pension scheme is a big positive - like you, I'm amazed the share price didn't react at all today. In normal conditions, that would have boosted the price by at least 10%.

Hi chris2021,

Fair points re De La Rue (LON:DLAR) (no position) pension scheme.

I think we need to draw a massive distinction between "accounting" pension deficits, which often understate the real world position, and "actuarial" deficits - which dictate cash payments.

What's so positive about DLAR is that the trustees have agreed a material reduction in the cash payments. That is very positive.

We aim to please! :-)

Hi Roger,

You know far more than I do about software companies. But I reckon the big issue with Dotdigital (LON:DOTD) is contained in the Finncap note today - when they say well-funded private equity backed competitors are doing a land-grab. Under-cutting on prices, and bankrupting competition (like DOTD?)

I recall being at a meeting with LOOP in its heyday, and in the Q&A I asked mgt how they would cope with a well-funded competitor prepared to undercut them. I used the words "on the Amazon model". Shortly afterwards some arrogant city fool analyst mocked me (to my face, to be fair) for using that term, and told me how naive I was. Guess what? LOOP business model has almost completely unravelled. I'd like to see him again actually, and rub his nose in it.

Business models seem to grow, then expire, so fast now.

I've totally gone off that idea of buying a share and putting it in a coffee can. That was a terrible idea, with hindsight!

Quite. I'm sure we're all watching the news with absolute horror.

Hi JASVFS,

Zytronic (I hold) looks an interesting TS Paul, I don't mind buybacks when below NTAV, I'd appreciate a comment if you have time to look at it.

Sorry I didn't get round to looking at ZYT. It's so tiny now, and illiquid, so I focused on larger stuff.

There are some excellent reader comments today on ZYT. Historically we've quite liked the cash backing, etc. Seems quite a decent niche business. Not sure why it's listed though?

Hi Steve,

Yes, I too was surprised at today's fall in the Dotdigital (LON:DOTD) share price when there was nothing on Investegate apart from a board change. Thanks to Paul we now know why, but odd that it isn't on Investegate.

Yes indeed, Jack and I have to battle with this problem every morning. We're trying to identify the most important trading updates & results, then a second wave of them seem to come through on the RNS.

Got to be honest, I frequently get totally overwhelmed in the mornings.

MrC's early morning updates are invaluable, what would we do without him?! Thanks Alun :-)

stpalm

RE:ZYT Hi, you mentioned the tender offer which in around 20 years of owning this share on and off is about the only thing that has angered me. it felt more to the directors advantage than serving shareholders interests. Does anyone know when John Kennair left/retired/died? I don't think it would have happened in his day.

Hi, Ive really got a thing about buybacks and tender offers. They are a way for directors to increase bonuses as a result of the eps increase. If they can't invest the money efficiently then pay it out as a special div. I haven't noticed any great effect on the share price because I guess the company lost its cash buffer at the time. Views anyone?

Never mind Paul, we still love you. You are the reason I subscribed. I thought I would try it for a year but my friends are not investors and ADVFN is hard work. I want a reasoned argument and share ideas otherwise I am in a vacuum with no input. You provide that and a lot more, so I have renewed since the paywall on SCVR was put in place, also this is the only subscription I have. You were on boohoo at 30p. Tide will turn, its just the when. Regards. Simon

Small Cap Value Report (Thu 3 March 2022) - PCIP, ESYS, KITW, DLAR, UBG, DOTD, BWNG

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