Small Cap Value Report (Tues 26 Sept 2023) - IQG, PCIP, BAG, VID, REDD, TBLD, ASC

26th Sep '23 by Paul Scott

97 comments 9825 reads

Good morning from Graham and Paul!

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 (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).

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. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

There's far too much for us to cover everything today, but this is what we'll attempt to review - I've parked some of these for tomorrow -

Summaries

IQGeo (LON:IQG) - down 8% y’day to 267p (£164m) - Interims - Paul - AMBER/RED

Very rapid growth from this interesting software company. Looks set to have a breakthrough year…

Unlock with Email

Unlock with Google

Already have an account?
Login here

eParo

26th Sep '23

Wonder if Saga (LON:SAGA) is a bit leaky ahead of update tomorrow? SP up over 7% this afternoon!

sharw

Supreme (LON:SUP)

More comments about ethical shares here today. Each to their own - for some it is gambling, others weapons etc.

Regarding SUP and under age purchases it is worth repeating this slide from the last presentation that I posted here a few weeks ago:

You can listen to the CEO discuss this from 22 mins 25 secs in here:

tony akram

Yet Progressive Equity Research remain positive on the stock . I think it would be a good idea if would could make a list of all the research companies who have floated duds and print a list on Stockopedia would make interesting reading I'm sure !!

Michael C

Planetx - lease take your personal opinions about human behaviour elsewhere. This forum is for discussion about investments. It's an expensive subscription and I do not want to have to wade through stuff which should be on Facebook or Twitter. There are numerous business listed on the stock exchange who deal in substances or hardware which are morally dubious, from alcohol and dubious pharmaceuticals to weaponry and (the current "evil") carbon emissions. We must each make up our own minds about whether to delete any particular business from our portfolios or watchlists. Please do not use this space to impose your ideas about business morality on others.

In the past I produced a report on an investor presentation by Supreme, for which Paul Scott was kind enough to thank me. I won't do that again because I don't want to suffer invective from moralisers.

sevenccc

Redde Northgate (LON:REDD) Why are they carrying on with £60m of buybacks planned, on top of £53m last year, when they are paying 6% on £202m of bank debt? With interest rates of 1 or 2% this might be slightly more acceptable but currently this, IMO, is mismanagement of the financials.

The trend to buybacks is a complete gamble for most Boards as they have no greater knowledge of what is going to happen to the share price than we do. It is NOT a return to shareholders, it is an invitation to STOP being a shareholder. A return to shareholders rewards someone who CONTINUES TO HOLD - give me a dividend any day but not paid out by increasing debt.

If we want a higher EPS Consolidate. The marginal increase achieved through buybacks is by and large irrelevant most years. There are of course examples where this has made a huge difference over time and perhaps there are tax advantages for some organisations here or in the US that add value to them. Perhaps Boards should be made to publish the average price at which buybacks have been made each year before asking for permission to do more in the AGM resolutions? And for balance they could add the impact on EPS achieved by the exercise too.

Appreciate there are different views and Graham is keen on buybacks, for example. I think they should be banned, but don't really feel strongly about it!!

chris2021

I’ve come to the, probably mistaken, view that the Boards of companies who authorise share buy-backs, when there is o/s debt, do so because they believe the return for shareholders is greater than paying down the debt.

Bouden54

The overall cost of their debt is 3.1% - it's also mainly fixed for a long period, while the overall level of debt looks comfortable too. Remember the debt is all asset backed agaisnt their vehicles.

They should be able to achieve a much higher return than 3.1% through buying back their own shares at current prices (at least 15% based on earnings yield) , so I'm personally more than happy for buybacks to continue.

djack

The challenge here is that just because they don't target younger audiences, it doesn't mean that younger audiences are not buying.

Paul Scott

Stunning move up from Oxford Biodynamics (LON:OBD) today, well done to holders. We briefly discussed it here a while back, but I didn't pick up on the news early enough today to make it worth commenting. More a jam tomorrow thing, so not much we could say in a value report anyway. But always a pleasure to see something shooting up over 100% and people making a bob or two! :-)

davidjhill

No it doesn’t. Just like they don’t buy alcohol nor tobacco nor go to over 18 nightclubs with fake IDs …. And and and……

The key is that Vaping is far better than smoking - it should be better regulated at point of sale to stop under 16s buying it (as far as poss) and disposables need replacing in this day and age. Supreme (LON:SUP) are probably the most vocal about regulation in the entire industry. Their model is not designed around vaping (tho clearly benefitting) it is around fast moving goods through a highly reputable supply network. Ultimately they will benefit from better regulation and their own products packaging etc are clearly designed for adults. The new distribution of 3rd party brands are not necessarily though which is a bit of a negative.

rogerh

So is contributing £350000 to a political party

AstonGirl

Pendragon (LON:PDG) And then there were three:

“The Board of Directors of Pendragon (the "Board") confirms that it has received an unsolicited proposal from AutoNation, Inc. ("AutoNation") to acquire the entire issued and to be issued share capital of Pendragon for 32 pence per share, in cash (the "AutoNation Proposal"). The AutoNation Proposal remains subject to a number of pre-conditions, including the completion of due diligence”

I do like a potential bidding war when I’m a shareholder

Monty Carlo

I think the buyback decision is usually a little more complex - companies will identify an optimum level of debt for the business that balances the risks of leverage with the tax benefits of debt funding.

Interest is paid above the line (i.e. reduces earnings and therefore corporation tax), and the cost of debt is usually well below the implied cost of equity. Boards will seek to achieve the optimum balance to minimise their overall cost of capital and the tax bill.

If this indicates that the optimum position is higher leverage then they can take on more debt - the choice is then whether to use those funds to invest in the business or to retire equity. If deploying the funds as capex is difficult at that juncture then buying back shares may be the sensible alternative.

Of course the ehancement to EPS is highly favourable to management who probably have share awards where EPS growth is one of the key measures....

BenHazz

Any chance one of them could turn their attention to Vertu Motors (LON:VTU) ? Sharing is caring after all!

Which was done personally and not by the company.

No CEO should be allowed to donate to a political party irrespective of office or opposition.

There you go that solves that.

It does of course mean that both parties go bankrupt but hey ho.

Vaping might have started out as a smoking cessation product.

But it has now become a nicotine addiction product.

It's evil.

mammyoko

Supreme (LON:SUP) -statistically, less likely to contribute to early deaths than purveyors of sugar-laden drinks - but I don’t hear this objection being raised to A G Barr (LON:BAG) , Nichols (LON:NICL) Britvic (LON:BVIC) . We all have personal feelings about the ethics of companies we invest in - I, for instance wouldn’t invest in Record (LON:REC) because of its founder’s man-made climate change denial. However, I think that these personal preferences should only be advertised here where there is a chance that the objection has a reasonable possibility of impacting company and, therefore, share price performance. In this case - as it was with Boohoo (LON:BOO) and its environmental impact - there is a valid reason to mention it. However, as with Boohoo (LON:BOO) all sides of the argument need to be weighed up and I believe with both this board needs to take a balanced approach. Vaping has a valid role to play in reducing smoking and that worthwhile role shouldn’t be obscured by the unintended consequence of making vaping more widespread among young people than smoking might have been previously. Supreme (LON:SUP) have clearly stated that they agree with banning vaping for young people. Now do you think the sugary drinks manufacturers would be quite so enthusiastic about a similar ban?

mojomogoz

27th Sep '23

Oxford Biodynamics (LON:OBD) -> nice news and been supported by very magnanimous shareholders over time…but there’s still a lot of expensive sales work to do with their prostrate screen and other EpiSwitch products…so jump deserved but I’ll guess that it’ll give back at least half in next two weeks

Huwster

If the PSE test performs as indicated this will be a game changer for prostate cancer screening and current share price will look dirt cheap in time even taking into account sharp rise

FeatheredCapital

IQGeo (LON:IQG) - I hold

Hi Paul,

I was surprised when I saw that you had marked IQGeo as Amber/Red - particularly after such an incredible year of growth - however, I can understand your reasoning when there is little explanation in the results.

The trade receivables are high; however, so are the trade payables (extract below). Both have grown in proportion to each other and also match the incredible rate of revenue growth and therefore I feel less concerned.

I believe that two of their largest customers (American giants) are on 90 day payment terms and one of them pays on the first day of the quarter - which doesn't help the receivable figures!

I feel that it is also worth mentioning that IQGeo has grown so quickly that it is actually growing substantially within the period and therefore your "(60 days sales/ days in period) x period revenue (£20.5m) + VAT. So c.£8.2m" calculation may be undercooking it a little. The last 60 days (or 90 days for some sales) will have higher sales than the average 60 days of the period.

In addition, regarding the debtors only around £20K remains outstanding from 2022 or prior. Almost all of that £7m has been paid. There was a significant number of deals that were invoiced late in 2022 and these were settled early in 2023. This was mentioned by the FD.

In regards to profitability, the company has scaled up in preparation for further growth which I feel is justified considering what they achieved in the last 12 months and the incredibly long runway. I personally have a feeling that they are only just getting started.

The subscription and maintenance & support revenue have far higher margins and as the company matures these will become a much larger proportion of sales. This should lead to far higher profitability, which is in the current forecasts.

I suspect that the management team are once again underplaying the growth to analysts as they want to stop us all from getting too carried away. There have been numerous upgrades over the last 12 months and I would suspect that we will get another one closer to year end - they did £20.2 rev in H1 and Cavendish have them at £41.7m rev for the full year.

Fingers crossed and many thanks!

Small Cap Value Report (Tues 26 Sept 2023) - IQG, PCIP, BAG, VID, REDD, TBLD, ASC

Summaries

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

97 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...