Small Cap Value Report (Tue 4 July 2023) - HARL, CBOX, KOO, DUKE, KITW, KETL, RST, WINE

4th Jul '23 by Paul Scott

64 comments 8357 reads

Good morning from Paul & Graham!

Today's report is now finished.

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 £1bn. 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, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

We're concentrating on the price-sensitive announcements first, as usual -

Summaries of main sections

Duke Royalty (LON:DUKE) - up 2% to 33.25p (£139m) - Final Results - Graham - GREEN

I remain positive on this one as I think the discount to book value offers investors some protection against a mishap in the portfolio. The company has performed well despite the economic difficulties of recent years and is worth a fresh look, in my view.

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planetx

4th Jul '23

No one really makes money by leaving it in the bank except the bank of course .

Inflation definitely wipes out any interest earned .

Wynnstay has done some good acquisitions that will pull through and also has the extra strength to its balance sheet both of the covid retained profits plus they did a fundraise (10% I think at circa 580p from memory) .

So that balance sheet is bulletproof and way stronger than pre coviId

My personal preference is to own part of a business as opposed to put money in a bank and earn interest that is below inflation .

First choice is of course invest in yourself .

whatmore1951

I invested in this a few years ago as a tuck away based on meeting the management at an investor event. It is hard to put a value on private businesses so it is all down to can the management sell on at a decent price. The management have science qualifications from memory so that has to help.

WDWombat

Mercia MERC - there is an Investormeet at 3pm today. I can't tune in so if anyone.....? I thought all looked pretty good here though much of the underlying increase in AUM was from the Birmingham acquisition which added >£400mn. Similarly with Foresight FSG there will be a results briefing posted on their website today and a follow up for analysts and later (11am) PIs on July 10th. Really super figures for last year - which had been clearly signalled in a recent trading update - but a little pressure on cash inflows in Q1 as PIs (I assume) removed some funds from OEICs. This is a much tougher year to raise money for equity investments and unquoted companies as we are all aware.

Caper4

You are being polite. The wines are absolutely rubbish value for money . I am in the wine business and fail to understand why anyone would invest in this business .

Pimlico on Thames

Bought early 2022 after placing (for purchase) following them walking away from Restore (LON:RST) bid in Aug 2021, showing restraint on price. Next thing they do is get a larger debt facility and promptly spend it on another 5 acquisitions.

Positives are
Approximately 85% of revenue was recurring (either SaaS, consultancy subscription or service contracts) and is underpinned by regulatory compliance
- compliance requirements make their services sticky
- director share purchases
- revenue generation above management targets
- forecast £45m profit for 2024
- recent comment on possible sale of division

Negatives include
- debt
- negative NTAV
- integration risk
- no dividend (or plan to pay)

For now, I'm holding on to see if they can successfully deliver on the integrations, with the possibility of debt reduction if the sale of the division happens.

yiannos1

And that’s where is heading (at least).

Hedgecutter

Thanks for responding Paul,

One of the strengths that SOLI has is ruggedized computing and communications, just as government's are increasing their defense spending due to the Russian invasion. This has already won them contracts through NATO. I can't see that market shrinking any time soon. This also ties in with their move into the US market. They are an expansive and carefully acquisitive company with in-house design and various other strings to their bow, including medical equipment.

JohnDoe2378

Director sales at 324p though. Though CEO hasn't sold any, that's the main thing.

M48

I've used this app/website too and it's been around a while. It may not be perfect, and it may be more accurate in some regions than others, but I think that people who worry about the last few pence (I'm one of them!) on the price of petrol will generally already know where the better prices can be found. So much of the stuff in the news is one massive blame game intended to create hysteria for the benefit mainly of the media and politicians rather than the consumer.

rogerh

CFO sold 500000…

stegga1000000

Kitwave (LON:KITW)

Directors share sales:

http://newsfile.refinitiv.com/...

Investingnewbie

Just saw this.... brought the price down significantly on today's gains. (I think trading below today's opening now!) I own.

Joshua Bull

Paul - regarding Naked Wines (LON:WINE) (i don't hold) you mention the concern around customer funds, but from my understanding the model of the business is that the customers self fund the wine producers to grow and produce wine solely on their behalf. So the company are right in using their customers cash to fund and purchase wine, the challenge for Naked has been that so much of that customer funds has been ploughed into funding so much wine that that their inventory growth hasn't kept up with demand.

From what i have read from their most recent statements and plans, they are significantly reducing their contracted wine with producers, but the impact of that has been slow as the company has tried to balance grower livelihoods with a desire to get inventory lower quickly. This has meant the inflow of cash from reduced inventory levels haven't come through and they have continued to burn cash as additional wine production still comes through from years past.

For me the key number to focus on would be cash flow over the next 2 years as inventory is expected to start coming down as supply will reduce dramatically. If they manage to get inventory levels back to 2021 levels then that's a cash inflow of £80+ million, which would dramatically improve the stability and balance sheet of the business (this is a very capital light business, so almost all of it will be cash flow positive), i think theres a good chance they could do this.

I think at its heart, Naked is a really interesting business, which particularly in the US benefits from clear and durable competitive advantage, capital light model and runway for growth and reinvestment, something which i think is under appreciated from a UK perspective.

Its a positive as well that Rowan Gormley will be joining the board again, and interesting to see a new board member who i believe is a stockopedia subscriber here.

Albm7

Not listed but: 'Le Pain Quotidien has closed all but one of its sites across London after the bakery chain collapsed into administration, in a move that has seen the loss of 250 jobs.' ( I believe they have 8 stores). 'According to administrator Kroll, the collapse comes as Le Pain Quotidien’s operator, Brunchco UK Limited, was impacted by reduced revenues amid lower footfall across London, as well as rising costs.'

I thought it was interesting as this is a higher end bakery/sandwich place, so maybe the higher end consumer is not immune to cost of living crisis either. Also Rolex and Patek Prices are falling to near two-year lows on the secondary market.

Paul Scott

Hi Joshua,

Thanks for your interesting comments on Naked Wines (LON:WINE)

You make a really good point, that the customer cash has been spent on wine, instead of sitting in the bank, so that has reduced my fears a bit about the balance sheet. Trouble is, that >£200m (at cost!) inventories figure could hide a multitude of sins, and the fact that they've already been slipping through write-offs (through adjustments) to inventories, makes me very nervous. What could the write-off be, if someone takes a fresh, and prudent look at inventories, and really takes an axe to them? £50m maybe? Who knows, it could be anything. Very excessive inventories or receivables usually contain lots of hidden problems. Even if they can recover cost, it might mean selling at negligible gross profit margins, thus pushing the P&L into a heavy loss. We just don't know, that's the trouble, there's so much guesswork here, hence why I want to be cautious.

Taking a step back, WINE's business model has never really worked. So it's not a growth story any more, it was always based on a rather creative way of claiming that existing customers were highly profitable & sticky, but then it had to spend all of that profit on new customers, just to stand still. It never made sense to me, the way they presented the numbers.

That said, Mr Gormley is outstanding at creating a buzz around his business, so who knows, he may be able to reflate the bubble in WINE shares? Stranger things have happened.

The big spike in the share price during the pandemic was obviously the lockdown boom in everyone ordering things on the internet with furlough money, and surplus cash from not being able to spend on leisure. Also I remember seeing some numpty US investor on CNBC talking about it as some kind of "platform" that could scale up into a vast market, and the shares spiked up massively the next morning, then dropped back down again within a day or two.

I think it was around 2018 when revenues dropped sharply, because they made the very surprising decision to sell off the Majestic Wine core business, and instead focus on Naked Wines.

Thanks for flagging the significant Director sales at Kitwave (LON:KITW) - I make that £3.3m banked by Directors (today presumably), including the CFO selling £1.6m-worth, just over half his holding.

That's definitely a dampener on things, so I'll put an edit in the main article.

A lot of private investors follow significant sized Director buying/selling, so I suspect the price might well be soft for a while after this announcement. If the people who know the company best are banking profits, then it's difficult not to follow suit.

Hooray, she passed the MoT, so good for another 12-months of road legal use, after my little bit of fettling over the weekend (gluing back on the rear light cluster, which had fallen off, and replacing the windscreen washer jets with generic ones off Ebay costing £2.49 LOL!) :-)

Here's a recent photo of her. Amazingly long, and low (and quite narrow) compared with modern cars, where even superminis tower over her! Gorgeous to drive too, it's a KWE-modified one, with a £35k restoration (paid for by the previous owner, I'm pleased to say), so it has modern mechanicals underneath a 30-year old body). 4.0 litre straight 6, so not especially quick, but great on the open road, and does about 22 mpg overall, whereas the V12s are much more thirsty & complex to maintain.

Threepeat

We use Fuelio to log and monitor consumption on our two cars. This app also gives prices for all local petrol stations. Quick and easy to use

Equity Development

5th Jul '23

Strix (LON:KETL) - "Encouraging AGM update & Investor Day insights" (new report here: https://www.equitydevelopment....)

The AGM update was encouraging and indicated that ‘green shoots’ continued to emerge, with momentum building during Q2 as the frequency of orders increased. Volumes, however, have yet to pick up, suggesting OEM customers are maintaining inventories and conserving cash. Significantly, the Group is seasonally H2 weighted with September to November critical months ahead of Christmas and Chinese New Year. Strix continues to trade in-line with market consensus (PAT of £25.8m) and as such, we see no reason to adjust estimates. The integration of the Q4 acquisition of Billi is on track, with a degree of excitement of the launch of the new one-tap system in Australia. We are particularly encouraged by the new product pipeline and the opportunity to gain a firmer foothold in North America.

We visited the facilities on the Isle of Man during an Investor Day ahead of the Group’s AGM. Meetings included an introduction to the Company, greater detail on the Chinese factory opened in Q3 2021, presentation of forthcoming product launches, and a factory & tool room tour (see main body of note for more).

We think the shares have been largely overlooked, sitting on a single digit FY23 PER and at a marked discount to its peers. Our fair value / share of 216p, based on several valuation models, is more than double the current share price.

abtan

5th Oct '23

Naked Wines (LON:WINE)

Hi Joshua

I'm a little late, but I wanted to comment that I completely agree with your thoughts here.

I recently took a small position after some deliberation and I am marginally reassured by Director Purchases today.

As you pointed out the current issue is that too much cash was poured into inventory.

But that inventory balance should start coming down now and I believe that the company - through effective working capital management and OPEX reductions - will have enough cash to buy the inventory it has on order for the next year or 2.

After that the underlying business, as far as I can tell, is actually cash positive, so there should be a lot of upside if it all goes to plan.

Fingers crossed.

Small Cap Value Report (Tue 4 July 2023) - HARL, CBOX, KOO, DUKE, KITW, KETL, RST, WINE

Summaries of main sections

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Paul Scott

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