Small Cap Value Report (Wed 4 Oct 2017) - FUTR, TPT, IGE

4th Oct '17 by Paul Scott

15 comments 10869 reads

Good morning, it's Paul here!

I don't have a lot of time available today, so apologies but won't be able to do any reader requests today.

3 companies have caught my eye, so here goes;

Future (LON:FUTR)

Share price: 346.3p (up 8.9% today)
No. shares: 45.4m
Market cap: £157.2m

Trading update - for the year ended 30 Sep 2017.

I'm not terribly familiar with this company, not having looked at it personally for over 3 years. Graham did a nice review of the latest interim results here on 19 May 2017, flagging potential value if growth continues. Well growth has continued, and the share price has risen by 68% in less than 5 months - so well done to shareholders here!

The activities of this group are publication of special interest consumer magazines, Apps, and websites. That sounds a little bit like what XLMedia (LON:XLM) do - although XLM seems focused mainly on feeding new customers to gambling websites, in return for a revenue share. I know XLM are diversifying into other areas too.

Anyway, things seem to be going well;

Overall trading for the year has been positive and it is anticipated that results for the full year will be ahead of the Board's expectations.

The Group has achieved good growth in operating profitability and has benefitted from strong cash conversion in the period, with year-end leverage less than 1x adjusted EBITDA.

The Group's Media division is performing well with fast revenue growth, particularly in eCommerce and events.

I like the sound of that - particularly the strong eCommerce revenue growth, which could drive the PE ratio higher - as we're in a market which loves online growth companies. Although I note from the last interim results that eCommerce was only 10.5% of total revenues.

Various other details are given.

Note that some growth has come from acquisitions.

Forecasts - I haven't seen any new broker updates today yet. So working on the existing Stockopedia broker consensus EPS figures, which are 15.2p for 09/2017 (which we now know will be exceeded). For 09/2018 the existing consensus is 20.5p.

Valuation - at 346p per share currently, I make the forward PER 16.9, which sounds reasonable for a growing company.

Balance sheet…

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MrContrarian

4th Oct '17

My morning smallcap tweet:

Lightwaverf (LON:LWRF), Image Scan Holdings (LON:IGE), Redhall (LON:RHL), Future (LON:FUTR), Adept Telecom (LON:ADT), Topps Tiles (LON:TPT), Learning Technologies (LON:LTG)

Lightwaverf (LWRF) FY trading. Rev over 2x, pretax loss broadly in line with prior year (£0.84m).
Image Scan Holdings (IGE) FY trading. Extra order boosts rev to £5.0m, 11% up on prev guidance. Pretax £450k up £200k on guidance.
Redhall Group (RHL) FY trading materially below expectations due to contract delays. The H2 weighting curse. "The Directors do not expect these delays to continue and remain confident of a strong performance from Jordan Manufacturing in 2018." Well, you didn't expect the delays at all! Exp next year profit in line.
Future (FUTR) FY will be ahead of the Board's expectations.
Adept Telecom (ADT) AGM stmt. Sets H1 div at 4.25p up 13% even though interims not for a month. XD 16 March. Why announce it now?
Topps Tiles (TPT) FY adj pretax will be at the lower end of market expectations.
Learning Technologies Group (LTG) Financial impact of a major contract will be accelerated in 2017. FY boosted but 2018 negated.

I may have a position in any or all of the shares covered

Effortless Cool

"I may have a position in any or all of the shares covered".

Don't you know?

Or is it secret?

"I may have a position in any or all of the shares covered" is a boilerplate my report system adds in case I forget to disclose a position. I do have a tiny amount of Adept Telecom (LON:ADT) shares to qualify for a rental-free land line. I thought it might be misleading to say I was long in this case so I left the blanket disclaimer in.

LOL. Only kidding - just seemed unnecessarily enigmatic.

I'm very impressed that you have a "report system", however.

andrea34

I am of the view at the moment that the market has become very frothy - IGE has mushroomed 22% (with about half of that rise occurring only in the last 30 minutes), FUTR is also up 15%... and I did think of buying more FUTR when the buy price was at 349p but with it soon rising to 370 then I am loathed to be chased ever higher by the market makers. I don't know what others think...?

Cleeve

Any thoughts on the announcement from via net Paul thanks steve

simoan

The quality ranking is very good, and I'm impressed with the decent operating profit margin, and strong ROCE and ROE.

Value is also ranking fairly strongly, which makes sense, given a low PER and decent dividend yield.

The big missing link at the moment is momentum - remember this score includes earnings forecast momentum, not just share price momentum (although the two often move in tandem, for obvious reasons).

This is a great summary Paul. It's at times such as these that I need to suppress my highly contrarian nature because it attracts me to situations like Topps Tiles (LON:TPT) like a moth to a flame. And with retailers, this years poor LFL numbers are next years much easier comparatives. When you take into account the stockmarket has a memory like a sieve this could make a decent investment on a one year timescale. I'm seriously tempted to start building a position here, because the management seem to be sound and there's a 5% divi for comfort to boot. As Jim Carrey once said "Somebody stop me!"

All the best, Si

Paul Scott

Hi Cleeve,

Yes. I didn't think the Vianet (LON:VNET) (in which I hold a long position) acquisition today seemed significant enough to include it in the main report.

From what I can make out though, it seems a sensible deal - a profitable, complementary company, with a decent-sized earn-out, to help adjust the acquisition price to match performance post-acquisition. So it looks good to me, based on very limited information.

Another aspect of this deal that I like, is that they already know the company & work with it. It's far better to buy something you know - less likely for the deal to go sour at a later date.

VNET has an interesting set of skills - it's an internet of things company, with 250k devices already reporting to its servers. If they can find new sectors to expand into, then who knows what could be done with their existing expertise in managing & reporting on customer data?

Regards, Paul.

daveinthelakes

Si,

Tiling often forms part of a big ticket item, namely a house move or a complete kitchen or bathroom refit. As such, like the rest of the building materials sector, it is very cyclical. I think we would need to be very confident on the outlook for the UK economy/housing market over the next 12/18 months before investing in Topps Tiles (LON:TPT)

Dave

Thanks Paul very interesting, I had wrongly assumed that you had sold out and got bored with it as I nearly have done on several occassions. The chairman from memory has a lot of skin in the game which I guess is a good thing

Many thanks
Steve

Hi Steve,

I held Vianet (LON:VNET) a few years back, and did indeed sell out as it didn't seem to be going anywhere.

However, I had a fresh look at it earlier this year, and decided to give it another go - as the group has made slow, but steady progress, has sold its fuel division, has net cash, and has paid generous (albeit static) divis for years now.

Plus there's always the possibility that they might develop something new & exciting with their internet of things expertise. Although I'm not holding my breath on that! It's basically a value share, with some potential growth stuff thrown in for free. Mgt has tons of skin in the game, so not likely to go badly wrong IMO.

cig

What went wrong with Future (LON:FUTR) is very simple: it was a publisher or paper tech and lifestyle magazines. The internet happened. They're trying to adapt by becoming primarily an online publisher.

Monty9

I thought the trading update from IGE was excellent. Take the point about small and illiquid but that can support eye-watering returns as insti's come onboard and operational gearing improves. Not tradeable in any serious way but well worth a small investment with a 2 to 3 year view. Feels a bit like a young Judges Scientific. I did buy a small stake the day after the recent Mello presentation.

Gromley

Vianet (LON:VNET)

I had to check back, but I find I have held a small position in VNET for over 4 years, bought at a shade under £1 after costs.

I was thinking that this was one of those shares that had done nothing during the time I held, but looking back I recall that it fell to around 70p shortly after I bought (due if I remember correctly to concerns over the relationship with tied pubs - it was essentially just a beerflow company then)

So whilst it has not exactly set the world on fire it has made decent progress from that low point.
By August this year I was pretty much break even after 4 1/2 years holding, which is not exactly impressive! (although 29 p/% in dividends over the period somewhat compensates.)

Since then I've made a 25% gain - half of that seemingly being due to the acquisition announced today. This investing game is strange sometimes, this "nothing" stock has now returned me >10% over nearly 5 years which while not overly exciting is not to be sniffed at.

I'm surprised though by today's reaction to the acquisition, like you I thought it was small beer (hoho) and possibly a little expensive. It will increase turnover by about 6% and they have paid a minimum of 7 x operating profit. I think though with the bank loan funding the £2m initial consideration costing on 3% it is instantly earning accretive (and still is I believe if the full earn-out kicks in raising the overall price to £4.25m)

Strategically though it does look a good fit being a complementary business rather than just buying for scale. Vendman, "develops, manages, and supports integrated software and mobile applications for the unattended retailing industry." I presume this means vending machines and that being the case I can certainly think there are some good cross selling opportunities.

Maybe this does begin to give the opportunity for transformational growth, that I recall thinking was possible when I first invested.

Tiling often forms part of a big ticket item, namely a house move or a complete kitchen or bathroom refit. As such, like the rest of the building materials sector, it is very cyclical. I think we would need to be very confident on the outlook for the UK economy/housing market over the next 12/18 months before investing in Topps Tiles (LON:TPT)

Dave,

Thanks for helping out on the counselling front in my time of need, it's greatly appreciated! Of course, I understand what the downsides of investing in Topps Tiles (LON:TPT) are i.e. a consumer cyclical share dependent on home improvements which are largely driven by housing transactions. You could add to your list that interest rates are on their way up (it was only last week the Governor of the BoE announced as much) to make matters worse and that you should only buy cyclical companies when they are on high PE's because their earnings have collapsed by the time they hit the bottom.

However, I don't feel things will necessarily get that bad. And there's always the counter argument that people will improve their existing house rather than move if the housing market slows down. I know we did this... we were looking to move last year but instead decided to redo all the bathrooms, put down new wooden flooring etc. A new boiler is coming next week and then we'll replace all the windows but I'm waiting for the replacement window companies to be on their knees before I get any quotes. I'm not sure things will get so bad in terms of unemployment that people will stop doing home improvements, although things will slow and the LFL numbers are likely to keep deteriorating.

I'm still considering it. Like Paul it's an interesting situation and a sound company, so it's on my watchlist but with more cash than I would like on the sidelines earning nothing it's all too easy to be trigger happy.. .

Small Cap Value Report (Wed 4 Oct 2017) - FUTR, TPT, IGE

Future (LON:FUTR)

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Paul Scott

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