Small Cap Value Report (Tue 2 Aug 2022) - NWOR, RBG, DVO, GYG, BAG, FTC, REVB

2nd Aug '22 by Paul Scott

49 comments 7647 reads

Good morning from Paul & Graham! Today's report is now finished.

Agenda -

Paul's Section:

National World (LON:NWOR) (£53m) - I run through the bull and bear points for this newpaper/digital publisher. It looks cheap, and has almost half its market cap sitting in cash on the balance sheet, earmarked for acquisitions. Despite a strong H1 profit performance, macro storm clouds are gathering, with a deteriorating trend in revenues so far this year. Profits need further cost-cutting to be sustained, which can't carry on forever. It doesn't have any of the historic baggage of RCH (no pension deficit, or debt), but I'm lukewarm on the longer term prospects for NWOR.

Revolution Bars (LON:RBG) (£34m) (I hold) - a surprisingly upbeat year end (FY 6/2022) update. It's trading in line with expectations. House broker forecasts 1.6p EPS (£4.2m adj PBT). Extensive site refurbs (19 done, 18 more in new year). Successful trials of 2 new formats. Has solid balance sheet with net cash. Market still not convinced, due to historic, extensive problems, but the business looks in good shape now, and cheap. Really good mgt I think. Shrugging off macro conditions.

Gyg (LON:GYG) (£10m) - 20.5p (down 35%) [No section below] - H1 trading sounds fine, in line with mgt forecasts. H2 outlook is good, with strong order book & pipeline. In line with FY 12/2022 mkt exps of E5.0m EBITDA. Cashflow problems assisted by loan from major shareholder Harwood Capital.

Separate bombshell announcement that it plans to de-list (hence shares down 35%) - this is a big, and growing danger for holders of micro caps - beware! Particularly where there are a small number of controlling (over 50%) shareholders, as is the case here. Much though I admire Harwood Capital’s stock-picking skills generally, they also have form for persuading investee companies to de-list, thereby squeezing out private shareholders (at a bad time/price in this case). Although to be fair, GYG never should have floated, it’s unsuitable for public markets, and has had a disappointing & erratic performance. So there's little point in retaining the listing. It snatches the potential upside away from PIs though, which is a pity given that the trading update is good.

Revolution Beauty (LON:REVB) (£84m) - profit warning - shares have collapsed since the CFO left in May. Auditors need another month to check the FY 2/2022…

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nettle

2nd Aug '22

Dear Paul and Graham

In Stockopedia's Stock Reports (on individual shares ) do you think it would be a good idea for Gross Margin to be included along with Operating Margin (which of course is already included).

I am no analyst, but it seems to me that the Gross Margin figure can be revealing. . And , for instance, if the Gross Margin is excellent, while the Operating Margin is poor, then there is sometimes hope for improvement.

But you would know better than me!

i now see that foolishly i've chosen a rather busy day, so i won't expect an instant answer.

abtan

National World (LON:NWOR) (no position)

Interesting thoughts on the potential future google/FB revenues.

Do you know if these will be in addition to or in replacement of the money that National World (LON:NWOR) already receives from social media companies? I believe some of this revenue (£0.7m in H1) is already included within Other Revenue.

Thanks

Paul Scott

Mills hasn't got anywhere near enough leverage at 5% of Seraphine (LON:BUMP) (I hold). I'd be more worried about Mayfair Equity Partners at 42.7% who probably could take BUMP private if they wanted. Although that would trash its own reputation, as nobody would touch any future floats from them possibly?

Just shows, it's vital to check the shareholder register at under-performing micro caps, as the upside could be whipped away any time by major shareholders forcing it to de-list.

This is the type of shareholder list that worries me - at Gyg (LON:GYG) - i.e. 2 or 3 major shareholders, one of which (Harwood) is a known, aggressive activist, that likes to take over companies on the cheap by persuading management to de-list!

I remember a few years ago, I was livid at Harwood taking a bowling alley company called Essenden private, at a woefully low valuation. Then re-floating it at multiples of the price a few years later! Sharp practice I would say, but perfectly legal of course.

Graham Neary

Hi Nettle, I would be all in favour for gross margin to be included in the StockReports. It's a great metric for many sectors, although (as with all metrics) needs to be handled with care, especially when using it in many different industries and sectors.

Maybe suggest it using the green blob?

Graham

yiannos1

Yes they are correct all these and shareholders have not been treated fairly ( not for the first time though ) , but you can still make a 26% return if you buy Thinksmart shares now and go short on Block shares.

planetx

My understanding is that currently NWOR receive circa 1.5 to 2 million from google / Facebook.

Under legislation proposed like in Australia this will be a regulated requirement and will increase significantly and I am remembering seeing an estimate of 7-8 million. (DYOR ! here or wait for developments )

The legislation hopefully will hit next year so the Silicon Valley robber Barrons that are Google and Facebook who will have to pay their dues for content.

Boon

For me, I'm not at all confident that the Revolution Bars (LON:RBG) target market (young working professionals, 23-30?) will not be squeezed from inflation.

If they were targeting 18-22 uni students, then yes - I would agree. Easy to just keep borrowing more money on student loans or tap the bank of mum and dad.

Of course, its a DYOR type view on who will get squeezed in the next 12 months, as we've not had an inflationary environment like this for a long time in the UK.

Purplebricks (LON:PURP) is going off my watchlist now. I've been tracking as I saw it as a deep value situation; the equity value of their Homeday stake, as well as their cash pile.

But cash continues to dwindle, and will do so in 2023, as they indicate only profitable in 2024.

Homeday - it looks like it is now suffering very badly in Germany, plus high-flying, loss-making tech valuations have come crashing down in the last few months.

Chairman has bought a sizeable 6-figure stake today. So maybe there's some value I'm not seeing.

Best of luck with this one, Ned.

TheFloatingInvestor

I very much like the look of CentralNic (LON:CNIC) and have taken the plunge on a pull back today. I think you hold P.S. ?

Bullish trading update on the 18 July with H1 rev up 92% to $335m and EBITDA up 85% to $38m. Debt coming down ($65m) and plenty of cash ($94m).

Bullish on the outlook they say top end of guidance which is $570m to $603m and EBITDA $66m to $70m.

Forward P/E below 10, a lot to like here, and must rerate at some point if they can produce or perhaps beat those figures. Its been a long time coming but it looks finally like it could deliver.

BnB

I very much like the look of CentralNic (LON:CNIC) and have taken the plunge on a pull back today

I have held for a while and like the progress. I would just raise the concern that much of the recent growth has been derived from advertising-type activities and that will likely slow down in the current climate even if the company is not vulnerable to the decline of third party cookies. On a more positive note, the rest of the business is an amalgam of Verisign and GoDaddy, growing faster at less than half the price.

girases

Fulcrum Utility Services (LON:FCRM) seems to tick a few the boxes Paul mentioned for de-listing risk, with Bayford Group also holding a few other private companies.

Finals for FY22 were out yesterday, turnaround underway but it's early days with the new management team, revenue usefully higher at +31% but various challenges to profitability, net cash at ~50% of mkt cap following big placing of ~21m at 12p in Dec 2021, and certain asset sales are planned as part of the refocus on the core strategy of utility infrastructure and asset ownership growth.

The company touts the long-term structural tailwind from the UK's transition to a low carbon economy and a net-zero future, but I wonder it might be de-listed long before shareholders see any of that benefit play out..

Paul I think this is a holding for you and you were planning on taking a look based on yesterday's SCVR but I understand there are lots of updates at the moment. If you do get the time, I'd be interested to get your view on yesterday's update and the de-listing risk, thanks !

JCPr

I'm setting that view off against a much higher rate of employment that has benefitted this age group. Not so sure about the uni students though, when I was a uni student I was quite heavily influenced by differences in the price of beer between establishments.

Snowbum

As a former £DVO employee albeit some time ago now…. I agree it’s a solid business but the historical final salary pension schemes (closed 2004) were a concern and look like they are a significant drag for investors. I’m certainly not an expert in this field but it does seem to consume a decent part of the profits made by the company.

From year end report - 2nd March 2022.

Discodave4

Paul, the article below will hopefully assist you , it gives some estimates on additional income from a media bill. It also mentions: ”National World is the only publisher on this list that has disclosed how much it receives – £1.2m a year – from Google and Facebook under current licensing deals. Our research suggests that, under an Australian framework, it would receive £5m to £8m a year.”

https://pressgazette.co.uk/goo...

ACounsell

Keller (LON:KLR) H1 results announcement today looked pretty good to me yet share price fell 6%. Not a a high PE growth stock and has a strong Stockopedia Stock Report so can anyone enlighten why the negative reaction. The main negative I can see is the impact on operating margin of the cost inflation they are seeing. Main points:

Record 1H performance with revenue up 31% across all 3 divisions
Record 1H operating profit of £49.6m up a 19% in constant currency terms
Record Order Book going g into the 2H at £1.6bn up 22% in constant currency terms.
Winning new contracts (inc. major one in Saudi Arabia)

Management were very positive and maintained guidance for full year results - which according to Stocko has seen a number of broker upgrades. I know Paul had a look at Keller (LON:KLR) back in June and it is a particularly busy week for results but any chance of a retrospective look later in the week?

Hi planetx, have posted the link (above) which I think may be the article you may have been quoting from.

Well found thank you , that’s the one .

davidjhill

At the risk of being antagonistic Paul your comments on newspapers are well off the mark and actually don't really take account of the industry statistics - they might be your perception but based on a flawed underlying assumption that really needs correcting.

If you look at the print industry newspaper buying is habitual. The average age of a newspaper buyer is early 50's but the average mortality is around 80. It is currently likely that print newspaper buying will continue to exist for decades to come. Now whilst that isn't a growth industry there are many businesses currently on high multiples that won't be around in decades to come either so pricing these shares as dying businesses is a false perception. ie their earnings are significantly underpriced whereas sexier companies with ultimately lower longevity are often overpriced. The reality is that newspaper companies have the ability to be cash cows and pay above average income for a long time to come.

Now that doesn't mean these businesses can't be screwed up by management, face cost inflation issues they can't pass on or many other business risks but no more so than any other business. Like any business they need to adjust with consumer behaviour and since more content is being read online it makes absolute sense that these businesses continue to invest in journalism and content creation whilst operating both print and digital and monetising both. That's not a slowly dying business model. In fact content will likely increase in value over time from trusted sources given the relative simplicity of creating false or misleading news by anyone with a laptop and internet connection.

What we shouldn't do is take todays perfect storm of increased print inflation, freight issues, consumer income squeeze and ukraine news hurting advertising and argue that these businesses are somehow dying and worth less than other consumer based stocks. That is simply wrong and in actual fact given the relative price inelasticity they are probably more resilient than many over time.

National World (LON:NWOR)

Thank you Discodave4 and Planetx for sharing your research here, it's much appreciated.

I clicked through to the link you shared (https://pressgazette.co.uk/goo...) and then went down a rabbit hole.

The article seems to imply that it's easy to estimate future digital content payments from Google/Meta. However, I didn't feel this would be an easy task after coming across the Australian legislation.

https://www.legislation.gov.au...

Some thoughts having skimmed through it:

It looks like only original content will be paid for.
How original content will be classified I have no idea.
If multiple news outlets report the same story, does only the first one get paid?
There was nothing in the Australian legislation implying how the payment is to be determined, only that it could be decided by an arbitration panel.
In addition I came across this article, also from pressgazette.co.uk. implying that Google has started paying many digitial content providers around the world.
https://pressgazette.co.uk/goo...
If this is correct, then surely there's a possibility that NWOR are already receiving contributions from Google/Meta and there will be no material increase down the line (this revenue is already classified as "Other Revenue" in the accounts.)
The same article - https://pressgazette.co.uk/goo... - implies that Google has strict NDA clauses. How pressgazette.co.uk are therefore able to make future content payment estimates I have no idea.

Apologies for the scepticism. I actually think National World (LON:NWOR) looks decent value when looking out a few years, but for now I can't see how Google/Meta will meaningfully contribute to that outlook.

Small Cap Value Report (Tue 2 Aug 2022) - NWOR, RBG, DVO, GYG, BAG, FTC, REVB

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Paul Scott

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