Small Cap Value Report (Thu 7 Mar 2024) - KIE, TYMN, TTG, RTO, DARK

7th Mar by Paul Scott

107 comments 8483 reads

Good morning from Paul & Graham!

A fairly uneventful budget yesterday, with all the main points already leaked to the media, as usual. Here's my brief summary -

Main measure, as expected another 2% cut in employee NI.
OBR forecast growth increased & expect inflation to fall to 2% target soon.
Plan for productivity gains in NHS & other public services.
Fuel & alcohol duties frozen again, as expected.
New British ISA - extra £5k allowance for investing in UK companies.
Non-dom being abolished, new regime for 4 years not 15.

I also typed up notes in real time as the speech was being delivered - googledoc link here.

As mentioned frequently in my podcasts, I think the macro outlook for the UK economy is now looking favourable, which I think should be bullish for equities. In particular, with inflation heading for 2%, and many households receiving 8-10% pay rises from April, plus another 2% NI cut, we could go from famine to feast. So I'm expecting the consumer to come roaring back this year, hence lots of opportunities for us to make money I think. Let's hope I'm right!

EDIT: I should have mentioned that others have commented the freezing of personal allowances for years means that the Govt is giving with one hand, and taking away with the other - a valid criticism. Increasing numbers of people are getting sucked into the 40% tax band for income tax. I feel the jump from 20% to 40% is far too great. Surely it would be more sensible to protect incentives to earn more if we had a 30% intermediate band? Some other countries have many more income tax bands, so that increases are much more gradual as salaries rise. There are also wild anomalies around £100k gross income, which deter people earning above that level, due to tapering of the personal allowance creating a c.60% marginal income tax rate. If you were to design a taxation system from scratch, you definitely wouldn't come up with anything like the system we currently have!

Keelan's thread on the budget is here, if you haven't already seen it.

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…

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Brookeda

7th Mar

A good article on it is here https://www.airbase.com/blog/a...

A lot of US SAAS companies already do this, can understand the argument though

MichaelFBS

Gimmers

Cant imagine any audit firm signing off on capitalising commissions. As a "long in the tooth" accountant I have never seen this, and have worked in several SAAS businesses. Reminds me of a former CEO arguing with me several years ago why we couldn't capitalise recruitment costs!!!

Thats a good article and basically covers IFRS 15 for those interested. Again a huge issue for rev rec in SAAS businesses.

rmillaree

cheers - interesting stuff (for me)

Note there is a practical expedient get out clause here.

If having to capitalise these sales commissions will cause excessive time and effort to account for short-term contracts, the standard allows for a practical expedient. If the practical expedient is taken, then these costs can be expensed in full when incurred so long as the amortisation period would be one year or less.

Being frank i am not 100% convinced this is anything other than a prepayment if i had been choosing the rules- not sure what the underlying logic is that dicates sales commission payable is ever capital . I get it with customer acquisition costs that are advertising - clearly something of value that could be sold on. Hey ho stupid i is and rules is rules.

Snazzytime

hi Markds28

GlobalData (LON:DATA)

It's not easy to pin down what this company is worth pre and post the partial sale to Inflexion. Judgement is clouded due to there being no historic breakdowns for Healthcare / Consumer / Technology divisions as this is a new Group set up from FY'24.

However there are two ways of looking at it, calculated on either share of revenue or share of EBITDA for TTM to 6/23, which was the period used for the Inflexion offer. Inflexion are buying 40% of the new Healthcare division for £446m, valuing the Healthcare division at £1115m.

The £1115m valuation was based on 22 x EBITDA which comes to £50.7m EBITDA for Healthcare. Group EBITDA for TTM to 6/23 was £100.9m hence combined EBITDA for the new Consumer and Technology divisions was £50.2m. Turnover for Healthcare was 36% (increased in FY'23 actuals to 38%) and 64% for the combined Consumer and Tecnology divisions.

A valuation based on the Healthcare sale at £1115m representing 36% turnover would suggest a valuation of £1982m for Consumer and Technology, assuming similar margins giving a total EV of £3097m less (say) £200m debt = M/Cap of £2897 and a share price of 340p.

However, margins were not the same in TTM to 6/23. Healthcare margin was 52.8% (36% turnover = £96m, EBITDA £50.7m) whilst Consumer and Technology was 29.4% (64% turnover = £171m, EBITDA £50.2m).

A valuation based on share of EBITDA x 22 values the Consumer and Technology divisions at £1104m plus Healthcare sale valued at £1115m giving a total EV of £2219m less £200m debt = M/Cap of 2019m and a share price of 239p.

This strongly suggests that DATA are selling 40% of the 'crown jewels' and to what extent higher margins can be achieved in Consumer and Technology is unclear. On the plus side is that overall margins have improved from 37.8% in TTM to 41% in FY'23 actuals recently released.

The exciting bit here is the growth story and previous successes of the founder / CEO so the bull case rests strongly on faith in the CEO.

Company brokers, Singer, produced a broker note in December at the time of the RNS announcing the partial sale. They increased their target price to 231p (from 178p) based on a reduced 20 x EBITDA multiple. If you use the sale multiple of 22 x then you would get a target price of 254p.

Clearly Singer are valuing the Group close to the lower 'share of EBITDA' valuation I outlined above. They will issue an updated valuation once the partial sale completes.

Guess it all comes down to success of the new Growth Transformation Plan 2024-26.

Good luck to holders (I hold).

Snazzy

BenHazz

Seplat Energy (LON:SEPL) "President Bola Tinubu on Wednesday signed executive orders introducing tax credits for some onshore and shallow-water locations and streamlining contract approvals, the government said in a statement."

The stock has jumped 10% on this news today. This further strengthens the chances of the transformational Exxon Mobil (NYQ:XOM) deal getting signed off. Tax credits a potential added bonus too.

Mark B

hagon

That's true. It's very up and down so if you can time it right there is money to make. I've held it since before it was above 1000p so has been a bumpy ride!

I'm long Zscaler since 2018 after a friend in cybersecurity said their product was superior. It's been a bit more bumpy than other cybersecurity stocks lately though, so which I had sold off a bit and diversified into others in the sector.

What about you?

BnB

Cybersecurity is about 6% of my portfolio with holdings in the usual suspects. I have very diversified portfolio so these are all outsized relative to the mean.

Crowdstrike
Cloudflare
Zscaler
Palo Alto Networks
Fortinet
Cyberark

The last is the highest rated by analysts. None are cheap and it’s been a roller coaster these last three years. And will be again, no doubt!

hi BnB

Sounds like you have a lot of stocks in your portfolio?

How do you manage to keep on top of them all?

I tend to hold 20-25 stocks (presently 21).

I'd find any more too difficult to manage. I guess I'm much older and slower so nowhere near as productive nowadays.

zipstuck

Kier

Back in the day my broker, along with many more at the time recommended Carillion based on the yield. Got badly burned. Your comments on low margin contracts with potential for SNAFU's ring very true. It's a sector I now avoid.

About 200. It’s easier than you’d expect as they’re mostly highly profitable international firms and well covered by the analyst community. I’m not trying to find something the market has missed. Outside UK cyclicals I just own the highest quality within each theme that I play. That makes for a coffee can type experience. Within the UK I had 4 this morning give updates, Robert Walters (LON:RWA) TT electronics (LON:TTG) Spirax-Sarco Engineering (LON:SPX) Rentokil Initial (LON:RTO) and it took about half an hour between 7 and 7:30 to satisfy myself that the results were either as expected, or better. It’s a little harder when there’s a PW and I have to get my thinking cap on.

All that said, I do devote a lot of time to monitoring my companies’ progress because I find it intellectually very satisfying. And it replaces the experience of running a conglomerate of companies which was once my day job. But without the firefighting!

rhomboid1

Kier (LON:KIE) Galliford Try Holdings (LON:GFRD) It's always useful to look back & check that things have really altered…I suspect these businesses are far better but I don’t know for sure

jam first

Found this very interesting on plexus website !

Committed to our ESG responsibilities, Plexus delivers the best possible engineering solutions for its customers and strives to be a champion for sustainability in the oil and gas sector.

With the impending Methane Emissions Reduction Act in the United States, which may mandate independent monitoring and seeks to introduce financial penalties for methane emissions, companies are being increasingly pressed into developing and using technologies to detect and reduce these harmful emissions.

That's very interesting BnB. You have a very wide spread of risk with minimal exposure to individual stocks. More like a quality tracker I guess.

I'm a bit of a micro manager so 200 stocks would be impossible for me to feel I was on top of things. Many ways to skin a cat.

I can now see why you were so relaxed about Headlam (LON:HEAD) the other day, given your exposure to Headlam (LON:HEAD) was likely less than 1%, whereas mine was almost 4%.

More like a quality tracker I guess.

Exactly that. Except I get to choose the industries and representative companies..

yiannos1

That must have been a very good broker suggesting a company Carillion as a buy to a client-it’s debt was increasing at a pace faster than Usain Bolt from £250m in 2012 to over a Billion+ in 6 years!

Kier (LON:KIE) is a totally different company with an experienced management and in a totally transformed sector that is not engaged anymore in many fixed costs contracts. I don’t understand the comparisons and an extensive research will do no harm to anyone. The low margin comments is something that needs to be addressed here as well. Many FTSE100 companies are a low margin businesses with great success.

I hold , added today and will add tomorrow for a minimum of a 3 year horizon.

After all Labour governments love the well much needed infrastructure!

Brian Duncan

8th Mar

Indeed. Having been involved with finance in Aim listed tech businesses the pressure was always to frame agreements in such a way as to recognise as much revenue as possible up front and capitalise anything and everything. I'd draw the line at commission though.

Burnt Onions

9th Mar

Excellent work Snazzy, thank you

Small Cap Value Report (Thu 7 Mar 2024) - KIE, TYMN, TTG, RTO, DARK

Explanatory notes -

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Paul Scott

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