Small Cap Value Report (Tue 25 Jan 2022) - AMGO, WATR, SUP, SAAS, THG, ERGO, SPE, SUR, EKF

25th Jan '22 by Paul Scott

130 comments 13071 reads

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

Agenda -

Paul's section:

Quick reviews of the largest fallers yesterday.

Sopheon (LON:SPE) - a positive update for FY 12/2021 - it's beaten the (low) expectations set in Dec 2021. I quite like the company, but it's difficult to justify the valuation on the poor performance over the last 4 years. It needs to step up a gear to maintain this valuation, in my opinion.

Sureserve (LON:SUR) - a reader request, and I form a positive view of the FY 9/2021 results. This looks a decent value/GARP company, performing well, and priced reasonably. The problems from its past (when it was called Lakehouse) look to have been fixed. It gets a thumbs up from me.

Jack's section

Ergomed (LON:ERGO) - adjusted EBITDA to be ahead of expectations, which appear to be for around £24m. The group has a very positive operational track record in recent times, including expansion overseas and notably in the US. Good organic growth continues, with firepower for acquisitions. The valuation remains ‘expensive’ and this is a risk depending on wider market sentiment, but the company's prospects are positive.

Ekf Diagnostics Holdings (LON:EKF) - continued strong trading and adjusted EBITDA will again be ahead of upgraded expectations. There’s a longer term growth strategy in place, which is positive as presently results are boosted by Covid testing. It’s an interesting company, but one I struggle to value.

Paul's market thoughts

We're seeing a remarkably rapid & steep decline in US markets, which very much sets the tone for sentiment in the UK. Take your pick from any of the reasons given (although most of these were already known, so don't strike me as particular catalysts for a big fall) -

Higher inflation (due to supply chain problems and excess demand)
Fed expected to raise interest rates 3-4 times in 2022 (but only by 0.25% each time, hardly a big deal)
10-year US Govt bond rate rising (but still insanely low, given where inflation is)
Tapering of QE and the idea that the Fed might actually unwind some of the QE (which I don't think is ever likely to happen)
Buying the dip stopped working
Higher oil price & energy supply problems
Risk of war in Ukraine

I think that's most of them. I'm not blase about these…

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Doug2b

25th Jan '22

Yea, 2 years worth of turnover, but why should that worry you, it will arrive in the end, course it will guv, course it will!

This is not a joke, Anexo is no laughing matter.

What about Bogdan do you wonder exactly?

GN100

Initially I wondered if he was real. Then after the DT article I assumed he is real. Then I became curious about his investment style. ISTR from the article that he is a retiree who holds a concentrated portfolio and has done very well. His comments seemed very rational to me and I began to look forward to knowing more about him. Maybe you can help me here??

JohnEustace

There’s a full page Private Eye Covid Investigation on Novacyt Sa (LON:NCYT) and their company Primerdesign in the current edition which holders may want to read.

pka

Here is a link to the Private Eye article on Novacyt:

https://www.private-eye.co.uk/...

55555

The trouble is their ads will put of those from their biggest prospect / age group ... in my view.

1James1n1

Sureserve (LON:SUR) has also spend many weeks in the Jim Slater Zulu Principle screen, which I have studiously observed, but then done nothing in response whilst the SP has appreciated!

Gostevie

I think the person you are referring to regarding Lloyds Banking (LON:LLOY) on TMF used the name Jimsusan. I understand he also had some buy to let properties so he wasn't completely exposed to Lloyds. I have no idea where he is now I'm afraid.

Roger Lawson

I just switched my car insurance to Saga - low price and very efficient quote system. I did have a look at the Saga financials as a result but they seem to have low return on capital. Cruise ships must be expensive and it's a very tough market at present. I won't be going cruising while the epidemic is still around.

mojomogoz

Errr no! But whatevs dude...slammed you 2021 being really dumb ;)

Doug2b, Bogdan Branislov and Vladimir Pokrov on the LSE BB are one and the same, I have said that before obviously.

Why am I here on Stocko? Ideas, things that I might have overlooked, you can only cover so much ground yourself, so I sift for ideas, Stocko has had a few good ones of late - ScS, Plus500. Watkin Jones today was not quite there but was a sensible business to assess.

Also, I don't know any other active investors in real life if you know what I mean. I know people who put money in stocks but not active investors. It is good to talk to other investors, even if I don't agree with them.

rogerh

Well, the CEO doesn't hold any shares at all. I queried that during today's presentation. He replied that as he is living in the US, he finds it very difficult to get hold of any stock but the shares are a steal...Make of that what you will. Is it difficult to buy AIM shares if you are living in the States? Maybe it is.

adamdominikneill

Thank you Paul, that opening section really spoke to me as a new investor. This is my first time commenting, despite reading this report daily, along with the excellent comments others contribute. It's cheered me up to be honest, what a great community!

abtan

Hi Jack

Thanks for the write-up on Ergomed (LON:ERGO) . I don't hold this one, but I do hold Medpace , which I was fortunate to buy in early 2020.

I would ordinarily have sold Medpace by now given its rich rating, however, I have held due to the valuation implied by x2 CRO M&A's in 2021:

Icon paid x25 Adj EBITDA multiple for PR Health Sciences ($12b)
Thermo Fisher paid x25 Adj EBITDA multiple for PPD ($17.4b)

---

Medpace announced $220m Adj EBITDA for 2021 and is forecasting $270m for 2022. Taking the middle of these values and applying the same x25 multiple gives me a valuation of $6.25b.

Applying a x20 multiple for prudence implies a valuation of $5b.

The current EV is $5.8b so the downside at this moment looks limited, and should hopefully reduce over the next 12 months as the company continues to transform its large order book into revenue growth.

I'm also a fan of the rising Returns on Capital here, as well as the share buybacks.

Ergomed (LON:ERGO) I believe achieved £12m EBITDA in H1, so crudely I would expect them to achieve £25m for the full year.

x25 = a £625m valuation

Even applying a x20 multiple to account for the relatively small size of the organisation vs PR Health and PPD implies a valuation of £500m.

Today's EV is £535m.

So again the downside from here looks relatively limited, but I haven't really looked at Ergomed too much, or know what its order book looks like.

I would like to emphasise again that CRO's are not my area of expertise, but based on the numbers alone, there seems to be minimal downside for both Ergomed and Medpace at their current price levels, assuming of course that growth rates continue as they have done over the last couple of years. With Medpace thus far, there's little to imply that the growth won't continue for at least another year.

Cheers

Thornabian

26th Jan '22

You mean got lucky that a false libellous story was run? A FALSE story.

It isn't over yet as it has been proven to be false, so let's see which is ahead in the next 6-12 months because none your other criticisms of the business actually make any sense.

Your darling Lloyd's is hardly doing well. I have plenty of stocks in my portfolio which completely outstripped its returns in 2021 and I'm sure THG will also bounce back and outperform it before long.

Ooooo....you had many stocks that did better than Lloyds Banking (LON:LLOY) ...I applaud your brilliance. I bought Lloyds and other banks at the bottom of the market. Not as they great or have been great in the past but as risks were very clearly mis-priced. Plus imo banks are in a position to be secular winners once a new credit cycle starts...I sold out of them (for a tidy profit over Thg (LON:THG) ;) ) once I realised the cycle was likely delayed.

TBC dumb in the phrase "slammed you 2021 being really dumb" was referencing me being such a dullard for saying Lloyds (deliberately chosen as so dull) would beat Hut

You are incapable of not going totally batsh1t if people don't agree with you. We are discussing a stock Thg (LON:THG) that has fallen over 80% peak to trough and you are calling me out as wrong. If a story is demonstrably false then why is the stock still down so much? Maybe there are other reasons? Selling some beauty products well or having a few prestige clubs for northern celebs/footballers doesn't place you as the next Amazon (a stock you referenced in the context of Hut back in the day and got really upset with me when I pushed back on that). (Answer: the stock didn't deliver to its high expectations and ridiculous valuation).

Hut may prove itself out over time. You offer nothing but faith as an argument.

You are being very silly. I no longer want to play with you on Hut and I will take away my ball. I scored a goal and you make up any old nonsense to cancel it.

But it is fun to have a pop at your hysterical banalysis...so I'll be back....

peterg

Jimsusan - there's a blast from the past. I think he went radio silent before TMF closed down didn't he. He was always good for stirring up a controversy.

MichaelFBS

”If things really get too much for you, emotionally, then just turn off the computer! I sometimes do that, and have a nap, to de-stress.”

Good advice. Basically what I’ve done since the end of October!!! So quite a long nap has been required.

Regards

Michael.

BnB

1st Feb '22

Re Ergomed (LON:ERGO)

Paul, you asked for comment on this company from holders or watchers of the name. I'm a fan of the CRO/CDMO "picks and shovels in Biotech" investment approach and I'm told by my bank's pharma analyst that we are still at the outset of a multi-year upcycle for such companies, bringing double digit revenue growth to all participants. Today's results for Catalent are a healthy read across and I was also encouraged by Lonza's results last week. I am a long term holder already but would be a buyer at today's levels.

Small Cap Value Report (Tue 25 Jan 2022) - AMGO, WATR, SUP, SAAS, THG, ERGO, SPE, SUR, EKF

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Paul Scott

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