Small Cap Value Report (Wed 20 Oct 2021) - SRC, SYS1, AOM

20th Oct '21 by Jack Brumby

32 comments 8018 reads

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

Agenda -

Jack's section:

Sigmaroc (LON:SRC) - rising costs are being managed at the local level and SigmaRoc's assets have a degree of pricing power, so inflation is being reported but the group is well placed to pass on costs. Demand is strong, and the recent Nordkalk acquisition could continue to drive revenue and earnings growth.

System1 (LON:SYS1) - interesting situation here from the company formerly known as BrainJuicer. It's transitioning away from large advertising consulting contracts towards a more scalable digital product suite that should allow it to build up its proprietary data. Digital is now around 45% of revenue. There's a real lack of liquidity though, and the share price can be volatile.

Activeops (LON:AOM) - a newer SaaS software listing focusing on Management Process Automation. It helps large organisations manage complex back office functions. There are some classic SaaS characteristics here: recurring revenue, strong cash generation, high margins, a net cash position, and a large addressable market - but you would need to get comfortable with the valuation.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover 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 £700m. 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.

Jack’s section

Sigmaroc (LON:SRC)

Share price: 103.9p (+2.36%)

Shares in issue: 637,915,750

Market cap: £662.8m

SigmaRoc is a fast-growing, acquisitive construction materials company that buys and integrates quarry sites around Europe. The market is innately fragmented with…

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gtrdave

20th Oct '21

Hi gus, yes potash companies do seem to struggle to get off the ground. I'm watching Emmerson (LON:EML) with interest, as I think the project looks interesting, but far too high risk for me until the funding has been resolved and the environmental permits are in place.

Another potash company that got into financial difficulty was Sunkar Resources PLC. They spent over $80mln getting to the stage of producing a DFS for a suitable potash processing plant. The killer was that the DFS said that the plant and required working capital amounted to almost $2bln. The company failed to source funding, and was bought out by its largest shareholder at a valuation of around £6.5mln. There's a summary of the company's history in the offer announcement here:
https://www.investegate.co.uk/...

Here's the key bit IMO (My bolding):

"The Company has a 100 per cent. interest in Temir, which holds the Subsoil Use Contract for the Chilisai Deposit. The Chilisai Deposit is one of the most significant phosphorite deposits in the former Soviet Union, with a resource of approximately 800 million tonnes of ore at 10 per cent. P₂O₅.

The Company commenced mining operations at the Chilisai Deposit in 2008 and, in February 2011, Sunkar published the preliminary results of the DFS, conducted by SNC - Lavalin, one of the leading engineering and construction groups in the world, which was subsequently completed and the results of the DFS were published in February 2013.

The DFS concluded that a large scale mono-ammonium phosphate ("MAP"), di-ammonium phosphate ("DAP") chemical processing plant would require approximately US$1.94 billion (+/- 15 per cent.) to fund construction and working capital. The DFS includes, inter alia, the economic model for the plant and a comprehensive marketing study for future sales of the MAP, DAP and phosphoric acid products.

Metatron

Think you will find the large or midcap North American potash companies are doing well.The German Kali n Satz shares have gone up 200% over the last 15months

JohnEustace

Bhp (LON:BHP) announced in August that they will spend US$5.7 billion in capex for their Jansen Stage 1 potash project in Saskatchewan.

gus 1065

And Sirius Minerals (LON:SXX) ended up at a bargain basement price with Anglo American (LON:AAL) with pockets deep enough to fund the completion of the North York’s Woodsmith mine and the necessary infrastructure to get the output to the port facility. At some point I still feel this project will be of great financial benefit to someone - shame it won’t be the original shareholders (sour grapes!).

Gus.

BnB

Regarding Activeops (LON:AOM) - After the positive coverage from Jack I took a closer look since it is right up my investing alley. Note this is a first glance at the accounts and webpage - without the benefit of any third party research.

Firstly, shareholders have to get comfortable with the suggestion of surveillanceware in the company's products - I have mixed feelings. And then look at competing offerings from two different corners of the software world. It seems to me that the product is threatened from above by the proliferation of cooperation tools like Asana, Trello and Smartsuite and from below by the rapid growth of business process automation tools from the likes of UiPath or Automation Anywhere.

My hunch is that ActiveOps is small enough and in a tightly defined niche of its own that it can continue to grow, not least because of the current breakneck growth of the TAM. However, mention of the above names has me looking at growth rates and I was honestly expecting to see forecasts of 25%-30% well off into the future. To be clear, this is a run-rate that all those named above are meeting or exceeding. Instead Sharepad promises me an average of 7% growth over the next 2 years - notably worse than in previous 3 years. This has been one of the hottest segments of the Nasdaq in 2021 with unprofitable, high margin businesses valued at outset on a double digit multiple of revenues (not earnings) multi-bagging from that starting point. Why is growth so insipid?

I guess you can take from the above that there is a lot of opportunity in a rapidly expanding TAM and that ActiveOps doesn't have to do much to exceed expectations - the strong balance sheet with M&A optionality speaks of a prudently run business which would tend to make conservative forecasts. But there still doesn't seem to be the return, in terms of forecast revenue growth, that you would expect to counter today's lack of profitability and FCF to derisk the valuation.

I like the niche but I'd be looking for a bit more bullishness from management before taking a bite. You can get 25% better value on an EV/revenue basis at £INS. And that comes with a track record of profitability rated at only 22x FY23 - seriously cheap for a niche SAAS provider, albeit with lower gross margins.

thirty fifty twenty

Norish (LON:NSH) - i think from a quick read of today RNS they have approved the sale of a business which will leave them with net CASH > 50m compared to MV of 52m. they plan to return £50m to shareholders ad focus on the development of the protein business. very back of the envelope but i reckon that will leave a protein development business at £1m. seems like a good place to park CASH now and get an almost free ride on the start up which is just about to reach commercialisation. the directors have a very good l.term track record.

disc i hold

Tommy H

Thought I would share the following

https://www.gazettelive.co.uk/...

Anglo American (LON:AAL) have booked £535 million right down (aka hit) on Sirius or rather the Woodsmith mine project.

I don't hold

Tommy

turbo

Arena Events (LON:ARE) has accepted a takeover offer from the Theta consortium. Shareholders will receive 21p per share, a 48% premium to Tuesday’s closing price. Arena recommends shareholders approve the deal. Currently shareholders are able to sell at just above 20p.

As a shareholder I would be grateful for any pointers as to the best course of action - sell up today, or is there scope for a counter offer?

Arena Events accepts £71mln takeover offer from Middle Eastern consortium

davidjhill

Investor call was interesting. A question was raised about connected parties and chairman was happy to answer.

What kind of interested me was 3 things

1) That the Attorneys and Accountants decided what was "connected" and not management

2) The long term subscription contracts are irrevocable orders. They can't be cancelled - so the VeriSilicon $54m multi-year reseller isn't wishy washy it's firm.

3) In this quarter alone VeriSilicon sold $3.9m worth of contracts to 2 Chinese customers. This isn't counted in their current order update since it is part of the $54m already announced but is the first of the sales under that agreement.

Whilst they didn't specifically address the shorter attack all in all I came away feeling as though it was highly opportunistic in nature and designed to create "uncertainty" for obvious reasons.

I'm long now though I feel patience may be required on my part.

Hi turbo.

Not a holder of Arena Events (LON:ARE) but just had a trot through this morning’s announcement. Looks like the bidder already holds about 24% of the company and has rounded up irrevocables from other shareholders to get it past the 50% shareholding first hurdle to get effective control. The bid is in cash and recommended by the Board. Given the nature of the business can’t see any reason why there should be any regulatory impediment to the deal going through. Taken together, this suggests there’s a pretty good chance a deal will happen.

Will it be this deal? At a 48% premium to yesterday’s close this is a decent bid that should be attractive to many of the other holders. This said, in 2018 the share price was above 70p and although the share count has more or less doubled since then the price being offered isn’t at a knock out level in its historic context. Given the Arena Events (LON:ARE) price is hovering just above 20p, however, this would suggest there isn’t a strong sense in the market that there is a competing bid in the background and that the bid looks like going through at this level.

Your decision whether to sell now at a slight discount to the bid price or hold out for the extra penny and the hope of a higher offer. Market is suggesting there isn’t much in it either way IMO.

Thanks gus, appreciate you taking the time to reply. In the end I decided to sell, so will be looking to invest the proceeds in pastures new.

Lord Gnome

I doubt that a counter offer would be forthcoming. The Saudi's already hold a large stake in the company. Equally I doubt that the deal will fall through although it is sometimes a consideration.

If you have another investment opportunity where you could usefully apply the sale proceeds then why wait a long time for the deal to conclude?

Depends on how big your holding is, I suppose, and how much the penny a share extra from the bid means to you. On 10,000 shares it is 'only' £100, on 100,000 shares it is a £1,000. Trades have been going through at 20.2p so the differential is slightly less.

I always sell in the market whenever a bid is announced for one of my holdings.

Like your reasoning Lord Gnome. Maybe I should have sold earlier and bought System1 (LON:SYS1)

I missed the call by Alphawave Ip (LON:AWE) (I hold since the summer) today so I’m waiting for the recording. Your comment about advisors defining “connected parties” takes me back to my own experience of preparing for an IPO. Always make sure you’ve got an advisor to blame! As for the “connected parties” - family relationships aside, they seem to be exactly the calibre of counter parties you’d hope they were engaged with. The founder of Marvell Semiconductor is an impressive entrepreneur.

I’m wary but I did top up a little after the short attack. The opportunity in this segment is immense.

haha - agree BnB : also slightly wary but I think they have impressive IP and as you say the opportunity is immense. I've sized accordingly.

Be interested to hear your take once you've listened to the recording

rmillaree

Alphawave Ip (LON:AWE)

I am firmly on the fence ref this company at present - must admit today’s update doesn’t really get me off the fence much.

1) That the Attorneys and Accountants decided what was "connected" and not management

I am not sure what the context was here but this sounds like a full on cop out to me - when the recent news article was published by the ft the market reaction was brutal - this suggests the prior transparency from the company was poor in that the market didn’t like the news that was presented that day - whatever the accounting standards are its fully up to directors to provide sufficient and reasonable info to shareholders to give them a reasonable picture of what’s up - but sorry to blame advisors for their poor presentation of murky stuff ain’t good.

2 the reseller agreements here are only of use if the cashflow turns up - facts are until you have the cash there are still many things that can go wrong. Note this is a China based entity and this specific entity is at the heart of the allegations of non transparency - per linked article it’s summed up as follows

As a result, Alphawave has a $ 54 million multi-year deal with a company run by its major shareholder and director’s co-brother-in-law, which is just under half of its IPO backlog.

nope ref the other large orders from cop alphawave have agreed to invest huge sums in that ja

https://californianewstimes.co...

3 I see nothing positive in this news - I would be worried if they weren’t starting to pull through some of the $220 million of the order book as sales - for a company expecting $150 mill revenue next year these amounts are small beer.

What really is a shame is that if this company is completely legit the opaque way all this incestuous stuff has been presented doesn’t help.

BNB

As for the “connected parties” - family relationships aside, they seem to be exactly the calibre of counter parties you’d hope they were engaged with. The founder of Marvell Semiconductor is an impressive entrepreneur.

But who are they looking after themselves or shareholders interests ? According to the linked article these impressive bods were removed from that company over revenue recognition issues and the company ended up getting chunky fine from the sec - the day they left the shares increased in value by over 10% so the market was happy they were shown the door.

https://californianewstimes.co...
https://eu.usatoday.com/story/...

Per linked article
It has long been one of Silicon Valley’s great success stories. But the fairy tale ended unfortunately in 2016 with Dai and Starja. Removed from management At the company after the audit committee discovered a revenue recognition issue. Later SEC Charged Marvel has fined $ 5.5 million for misleading disclosures in its accounting. The company did not approve or deny the findings of the regulatory agency.

And for these same parties we have to take on faith that the irrevocable orders will turn up.

I should have clarified my comment. In using the adjective “impressive” I should have been clear I was referring to their technical prowess not their accounting ”skills”. I’m more accomplished at sniffing the technology trail than the audit one. Here the possibilities are very attractive although we are taking a lot on trust, as you say. It is however progress that Samsung and TSMC are now acknowledged as customers and that AwE’s technology is gaining traction at 4nm - the only one to do so. Chiplets could be very big for something so small. But it remains a story, not a slam dunk.

22nd Oct '21

The recording has now appeared on the webpage and I had a quick listen this morning while scanning other financial headlines. I’m going to have another listen while clearing the leaves from the garden and then I’ll add a comment to the Alphawave specific page that has been created.

Now updated on the other thread - I hope it is as useful to others as it was to me to process the transcript.

Small Cap Value Report (Wed 20 Oct 2021) - SRC, SYS1, AOM

Jack’s section

Sigmaroc (LON:SRC)

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Jack Brumby

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