Small Cap Value Report (Tue 11 June 2024) - BPM, OMG. Brief: RPI, OXIG, NCYT, GBG, IDOX, IOM, ECK, CBOX, VNET

11th Jun by Paul Scott

85 comments 8258 reads

Good morning from Paul & Graham!

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.

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, if they are using unthreaded viewing of comments.

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. And/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…

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About the Author

Paul Scott

Premium Member

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

85 comments

yiannos1

11th Jun

I would suggest to follow the investors financial calendar of each company individually and on their own website in order to have a better and more precise view on particular events that may be of interest to you.

All the best

davidjhill

11th Jun

That’s actually not really fair. To lump the entire PE industry together as one unscrupulous player is not a valid or scientific comparison.

There are definitely some unscrupulous firms out there who do exactly that but there are also a number of very responsible ones. You probably don’t hear about them because they are not the ones stripping assets and loading with debt.

You’d be surprised at how many PE sales as well as purchases are actually done privately. I know a number of PE firms who manage their portfolios very well and conscientiously and add long term value creation. And not to forget that they also offer a very valuable (and sometimes only) source of capital to market participants that would otherwise likely not exist, the absence of which would impact economic growth in the countries they operate in.

Right now PE firms will pay more for assets than the public market because they have a more sophisticated and long term view of value creation. They can ride out short term volatility that our public markets have proved incapable of doing.

Alistair Lindsay

11th Jun

Paul, can I gently push back against your statement that “many of the problems in the London market have actually been caused by brokers floating overpriced junk, especially in 2021, killing off investor appetite for new issues”. I agree that plenty of overpriced junk was floated, but largely blame investors rather than brokers.

I’ll use a hypothetical to avoid upsetting anyone! Imagine I have a business with a concession to sell soft toys with Paris Olympics 2024 branding. Can I float that business? Yes. Certainly, it’s not illegal. I should flag in the risk section that demand for Olympics soft toys will almost certainly decline precipitously after the closing ceremony, that I have no other lines of business, and that I may well not be able to diversify into other lines of business. You might value my business at c. 1 x 2024 free cash flow to equity. But if investors want to pay 15 x 2024 earnings, that’s a matter for them. As long as the business is accurately described in the Prospectus, I don’t blame the broker for getting the best price for their client. Put another way, I don’t think a broker has a duty to calculate intrinsic value of a float and to pitch only on condition that the float price is at or not too much more than intrinsic value.

I’m delighted that Raspberry PI Holdings (LON:RPI) has floated successfully. I’m a customer and think the product is very good value, robust and reliable. I didn’t apply because trailing earnings seem to have been boosted by delays caused by component shortages and I’m cautious about the large increase in capitalised development spend (well ahead of amortisation) for what is a relatively mature platform. More fool me in the short term but if the SP subsequently falls for the reasons that put me off, that’s not the brokers’ fault because those points were obvious on the documents.

Bouden54

11th Jun

Impax Asset Management (LON:IPX) surprised this has fallen so much. Not sure it's all about interest rates though - enthusiasm for sustainable investments seems to have gone off the boil and they've seen weakening performance and large outflows recently.

Paul Scott

11th Jun

Hi markmac,

I have a fairly low opinion of Vianet (LON:VNET) - it's a small group that I've followed for many years. It promises growth, and exciting-sounding tech, but in reality it's a rag-tag of ordinary businesses that they've given fancy names to, involving the internet of things, etc.

The main cash cow is Brulines, which has been in slow decline for years, as more pubs close.

The other businesses have never really got anywhere, despite upbeat commentary every year.

As regards valuation, it's too expensive I think. Why? Because the adjusted, and EBITDA numbers are nonsense. If you scrutinise the figures, you'll see that the large amortisation charge is not related to goodwill. It's actually amortisation of capitalised internal development spending. Hence we need to look at the PBT figures to include all cash costs, and this is only £929k. Hence the market cap of £32m is much too high for a very ordinary collection of lowish quality businesses.

The balance sheet has improved, and is OK now, with a little debt. Also note VNET used to pay generous divis every year, but these stopped in covid, and have only returned at little more than 10% of the old level. So the once attractive yield has now gone. I don't rate management at all, having met them a few years ago (assuming it's the same team now?)

So I'm being generous marking it AMBER!

Regards, Paul.

Samsgrandad

11th Jun

Vianet (LON:VNET) What I have recently seen described as a word salad. Sums it up perfectly.

StrawberryDreams

11th Jun

KKR & Co (NYQ:KKR) has just joined the S&P 500 Index (SP:SPX) the other day and is on a tear.Apparently they're planning on running a part of their funds basically trying to copy Buffett's style niw, making use of their large insurance business float too, and running the better metric companies for longer trying to compound winners and even receiving regular dividends.Private credit's the hot market right now though and Apollo Global Management (NYQ:APO) is a big player there i think. stepping in with a large balance sheet where the banks only compete to do so when rates are low and money is cheap.Their ceo Marc Rowan turns up everywhere on financial media nowadays.

martinck1

11th Jun

Oxford Instruments (LON:OXIG) ( I hold). My initial reaction was the same as Paul's - results looked slightly disappointing to me. But having watched the results presentation, I was impressed by the new CEO, 20% strategy and 80% operational, which is my favoured split. He presented well and was ok too on the analyst questions. Already quite alot of change within the business.

I agree with BnB on the growth but it does tend to be somewhat uneven over the last few years and they did have to solve the China quantum computing export license problem. The inventory increases look ugly to me and could contain some future surprises, £27m increase on FY23, which in turn was an increase of £16m on FY22, which in turn was an increase of £7m on FY21. So inventory up 85% over 3 years while turnover is up just 48%. Each year the reason is presented as a one-off and turns out not to be a one-off. Of course with adjusted operating profit up by 41% over those 3 years, the return on capital is worsening dramatically, but still good.

That said, it's been a great investment for me, it is a very interesting area for the future, potential takeover target and with most of their earning overseas, it looks less exposed to a new government than some other businesses. So I will continue to hold and increase if the market falls.

MGinvestor

11th Jun

David,

it would be interesting to hear about which PE firms you consider to be 'very responsible ones' I don't have a good opinion on PE too but am willing to research the ones you mention.

Many thanks

Harry Hindsight

11th Jun

History rhymes.
Plus this is not the only player in this space.

Jeremy Rea

11th Jun

Brilliant, thanks!

Tamos

11th Jun

i thought the saying was sell in may and go away

maybe it needs amending to June :(

Harry Hindsight

11th Jun

One relies on the real wind blowing, the other in a sentimental wind. With our British weather of late would not relay on either.

JSLDUK

11th Jun

Novacyt SA (LON:NCYT) agree with Paul’s point re their statement regarding the legal case contradicting outcome, however think this is an issue for all plc’s on one hand you should report accrualty to the city but on the other you don’t want to show the people you are in a dispute with knowing the game plan of your court case./ action it must Be a bit of a conflict

Harry Hindsight

11th Jun

Tiny position in Centrus Energy (ASQ:LEU) pushing the realms of nuclear fission/fusion (don't even know the difference).

Guilty as charged your honour.

mgschainey

11th Jun

Yes after I posted I found that date in their previous results. Was confused as Stockopedia had the results as listed being published today.

littledavesab

11th Jun

I have my eye on Literacy Capital (LON:BOOK) BO

Its really an investment trust taking a PE approach.

With PE I feel there is a general distinction between "financial engineers" and those providing capital to small companies.

littledavesab

11th Jun

Prune in June!

Robert W

12th Jun

BP Marsh is a good example and topical example.

illiswilgig

17th Jun

Vianet (LON:VNET) Prelims – Been out of digital reach in a meadow in Somerset (entirely by choice). Now catching up – and to be honest it takes me quite a while to ponder. So late to the party again! Not that there seems to have been much celebrating for Vianet (LON:VNET) recently?

The view in this place seems very downbeat? On that basis I’d see an amber rating as quite an achievement? Never mind, as a contrarian I’m entirely used to it. Indeed I’m continually searching for growth companies hiding in plain sight – and for that to happen there has to be a downbeat narrative?

I shan’t be arguing with Pauls excellent short summary. It sets out the history very well. I’m not so sure it sets out the future though, and there we are all entitled to our opinions, as none of us know what the future holds.

There are a few things in the results and the past year that point to there being quite a turnaround underway?

Revenue: £15.2m is still £1.1m below the FY20 (year to march pre-pandemic) £16.3

Profit: barely off the ground at £0.8m compared with £2.43m in FY20

So far, so nothing special, however

Gross margin: is high and at 69% in FY24 is 1% above FY20 at 68%

Operating cashflow (pre wc) at £3.929m is also above FY20 £3.722m

Higher gross margin and higher operating cashflow on lower revenue can be an indicator of a more profitable company with operating leverage will occur as revenues rise. If they do!

Recurring Revenue: 85% in FY24 is below both FY23 88% and FY20 92%

Is there a reason for this? I think so – the non-recurring sales relate to the installation of new connections to sites and machines after which they become recurring revenue. Provided that absolute recurring revenue is still rising – which it did marginally to £12.94m in FY24 – then the reduction in % recurring revenue indicates an increase in new connections feeding growth in FY25.

As well as increasing connections the profit per site and device grew in FY24 as customers make more use of the connections - particularly for contactless payment services.

The elephant in the room is the capitalisation of R&D costs. With FY24 amortisation at £2.164m it’s highly significant. Close to wiping out the statutory profit. The obvious concern is that the capitalised costs may be operational rather than capital costs. A way of propping up apparent performance at EBITDA level. The question does not arise if development costs are expensed as they arise. Though its not clear to me why this is a concern in this case and VNET may not have much choice in the matter. My understanding is that significant tax rebates and reliefs are available but only for R&D that is eligible. And only if capitalised. In FY24 HMRC paid a rebate of >900k and the company claimed R&D tax relief of >800k. The high level of rebates and reliefs indicate that HMRC is satisfied that the R&D is real and eligible – though thats not an indicator of future success unfortunately.

Recent products and trials underway include:

Hardware module with uploadable modular software (outsourced manufacture)
Software as a Service platform migrated to the cloud (resulting in VNET becoming a software and service company)
Customer portal for real time analytics, management and data insight (insight allows sector wide access to data on what customers are drinking/buying on a near real time basis)
Contactless payment services
Mobile payment services (in trial)
Forecourt services (two large contracts rolling out with automated car wash providers)
Beverage stock management module (including automated ERP integration – in trial in UK, in operation in US)

Management has stated that R&D spend has peaked – FY24 capitalisation of development is £1.24m significantly below the FY24 amortisation charge. Management indicates a likely eventual reduction to £1.5m (though to be frank with the recent acquisition of the inventory management platform - I see more development is likely in the short term)

Debt reduction: Despite development spend, cost of changing finance facility, costs of BMI acquisition and integrating the US teams, limited share buy-backs and paying a dividend there was enough cash to pay down net debt by around 50% or £1.78m (partly due to the HMRC rebated cash).

Valuation and FY25 outlook:

I agree that the shares are not cheap at 115p. They were a lot cheaper when I last bought, but arguably now they are backed by improving numbers there is less downside risk? The prelims are vague (as ever) on FY25 numbers, forecasts are for 13% increase in revenue to £17.1m and profit rising by 230% to 6.2p which puts the shares on 18.5x current year profits.

Not expensive if you view it as a software and service company with strong growth – but very expensive if you regard it as a cashcow in decline with the new products unlikely to generate real growth. Only the future will determine which it turns out to be?

Worth noting that the FY24 in-line results were softly upgraded by brokers Cavendish after the April24 update. Historically management have been too quick to promise growth and then underdelivered. Though in recent years they are hardly alone! Nevertheless we may have entered a soft-upgrade cycle in which management remains upbeat whilst brokers quietly raise forecasts on new contract announcement or after the interims?

According to management (on the recent IMC presentation) there is enough growth within existing customers (land and expand) to satisfy the FY25 forecasts – without new large contracts. The company aims to demonstrate that the Vianet platform recovers the cost of installation for customers within 3 – 6 months – through reducing wastage, stock leakage, increasing quality, improved service levels and stock availability across estates - and thereafter customers save more by adding further sites or machines to the system. Which means that large new contracts, specifically the forecourt car-wash rollout, and the US BMI platform are not included in current forecasts.

Management. Management is a big issue for me. I have to agree that I find it hard to warm to the longtime executive chairman/CEO (and largest shareholder) and the CFO. On the other hand I don’t have to like them but competence at managing their team with integrity is important. They appear to be straight talking – but not smooth or friendly. Maybe its a County Durham thing? They do appear to have recently put in place a complete senior management team (see https://vianetplc.com/about/ ), a good step in preparation for significant growth. In the past I have fallen for too many smooth-talking CEO’s – so I’m cautious and sceptical, don’t see any red flags and willing to give them a little rope.

Management Sharedealing: I like founder and owner managed businesses as long term investments. In addition to longterm buying by James Dickson (17.9%) the largest shareholder, Stella Panu, recently appointed NED with extensive tech experience, bought 310k shares at a cost of £216k over 18 months.

My opinion? After the recent strong shareprice performance I’m somewhat surprised to find Vianet (LON:VNET) is my second largest holding. The shareprice is up with current events – but at the moment I have no intention of selling. It seems to me that the company now has the right products in the right sectors with considerable market opportunities. Will they capture the growth? On current performance I think it’s very likely that they will meet forecasts for FY25 – but it’s the potential upside that I am after - more rapid expansion - now that the company is operating as an increasing SaaS business. In which case the current price will start to look cheap in 1 to 2 years. Nothing is guaranteed, but I do prefer a growth opportunity hiding in plain-sight, profitable, cashflow generative with operational leverage to those that have to come back to the market for more funds?

Analyst notes: Both Cavendish (house broker) and Capital Access have new notes out and freely available on Research Tree. The Cavendish note is particular thorough on the products, opportunities and new senior management team. Well worth a read if you are interested, or already invested.

Cheers

Mark

Small Cap Value Report (Tue 11 June 2024) - BPM, OMG. Brief: RPI, OXIG, NCYT, GBG, IDOX, IOM, ECK, CBOX, VNET

Explanatory notes -

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Paul Scott

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