Small Cap Value Report (Weds 10 Nov 2021) - TRCS, GYG, RNO, ZOO

10th Nov '21 by Paul Scott

45 comments 9436 reads

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

Agenda -

Paul's Section:

Gyg (LON:GYG) - profit warning yesterday, but not enough information is provided to properly assess the situation, now a large customer seems to have gone bust.

Renold (LON:RNO) (I hold) - strong interim results, and Finncap reinstates full year forecasts. Looks cheap, but remember to adjust for the large pension deficit. I'm very pleased with progress here, the turnaround seems to have worked well.

Jack's Section:

Tracsis (LON:TRCS) - growing software company focused on Rail and Traffic data. Notes from call with management now included. Worth investigating.

Zoo Digital (LON:ZOO) - strong revenue growth and the group continues to invest for the future, although there's a loss after tax, and cash burn is a consideration. Progressive ups its FY22 and FY23 forecasts, but the valuation looks high given that Zoo still has to prove the profitability of its business model.

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 £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.

Paul’s Section

Gyg (LON:GYG)

50p (down 14%) - mkt cap £23m

Trading Update (profit warning)

We already knew that there were uncertainties over contracts at this superyacht painting company. Major shareholder, Harwood Capital, pulled out of a takeover bid recently, over contract uncertainties, which we reported about here on 29 Oct 2021.

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Tortoise investor

10th Nov '21

I think the Marks And Spencer (LON:MKS) update is fantastic given this period is still impacted by COVID and it is looking very decent value in my opinion (I hold). Food is a growth driver here (+10% on 19/20), plus Ocado income, plus the dark horse might be international online which is starting from a lower base but is +142% up on 19/20 pre-COVID. Clothing and home is flat with 19/20 which I think is very good and remember that before COVID clothing and home was declining year-on-year so that has now been halted (AND during a period when there were store closures at the start of the period and when some sites will have been affected by lower footfall).

Re net debt, the headline figure includes lease liabilities which I personally wouldn't use. Excluding lease liabilities it's £0.8bn - still high compared to market cap but that's come down quite a lot and the company is continuing to repair its balance sheet.

I think the market has not been recognising how Marks And Spencer (LON:MKS) is transforming and is ignoring some of the growth drivers in the business. In the next financial year or the one after I think this can return to EPS figures in the 30s because food is higher, now you have Ocado, a much better UK online presence, and stronger online international clothing and home, and clothing and home may start to grow. I am therefore targeting 300-400p in 12 months having bought at 90p and topped up today at 230p.

And don't forget there was no dilution during the pandemic.

EDIT: Also don't forget Marks And Spencer (LON:MKS) is H2 weighted. So I think Shore Capital's projected EPS for this financial year of 21p looks pessimistic and I would expect closer to 25p EPS maybe?

joshwood976

How much read across in Marks And Spencer (LON:MKS) results is there for Joules (LON:JOUL) and Boohoo (LON:BOO) ?

MiserableJacktPotato

I thought the Wetherspoons one had more read across for Boohoo. Whenever I go to my local ‘Spoons at the weekend it’s rammed with yoof drinking cheap drinks and wearing cheap clothes.

MKS one reads well for Joules and SOS imo. Definitely starting to align with Paul in thinking SOS might have a decent beat on forecast, been here before though!

Phuntt

It wasn't just the product mix that chimes well - the J D Wetherspoon (LON:JDW) update seems to say:

younger consumers are going out, older consumers aren't - great for Revolution Bars (LON:RBG)

pubs with music trading better than those who don't have - ok for Revolution Bars (LON:RBG)

trade positive in center of larger cities and towns, poor in suburbs - great for Revolution Bars (LON:RBG)

breakfasts and coffee down due to WFH - no effect on Revolution Bars (LON:RBG)

Also says any stocking issues have been manageable with replacement products - if this is true for J D Wetherspoon (LON:JDW) which has a wide range and customers who know their alcohol, it must be doubly true for Revolution Bars (LON:RBG) - do their customers really care which rum is used in their cocktails?

Most surprisingly, says staffing issues aren't a major problem. This doesn't match with either Tim Martin's recent complaining to government on the issue or my experience trying to recruit front of house staff over past few months - might just be a reflection on the quality of staff required in a typical 'spoons.

£RGB are due with preliminary results and an update on 16th Nov (next Tuesday) - briefly considered a trade this morning but with a 10% bump today it's too small and illiquid for a short term play I think - might regret it.

abtan

Tracsis (LON:TRCS) (I hold)

Thanks for the write-up Jack and for the extra comments from your call with management - greatly appreciated and very insightful.

Geographical Opportunity

To add to your notes on the market opportunity in the US, note the jump in North America revenues in H2 FY21:
*(I would ignore the H2 FY20 negative number - it's correct, but immaterial, and it was from the Jan-June 2020 period, so I'm happy to take no notice of it given the extreme volatility around that time.)

It's still tiny of course, but it's a start and hopefully they can build on the remote condition monitoring contract won last year, especially in light of the Biden infrastructure plans.

Valuation

By my estimates underlying cash generation was closer to £10m in FY21 (this is after capex and leases) and I expect this to jump to £13m in the current ahead, and £14/£15m next year as normality returns and the full year impact of many acquisitions feeds through.

Also, as you pointed out, a lot of revenues are highly recurring, so combined with the above comment on cash generation, I think a high multiple is warranted.

I personally apply a minimum x20 multiple of cash generation, which I would increase if I see more progress in North America.

So by own personal metrics this is valued quite fairly right now.

Cash

Given the:

high level of cash on the balance sheet, even assuming 100% of the £9m of contingent acquisition payments are paid out;
my expectations of cash generation over the next 18 months, and;
the so far relatively small acquisitions by the CEO,

I can't help but think that the company will return something to shareholders at some point. Does it really need so much cash sitting on its balance sheet?

My preference is that they buy back shares (and cancel them) if they have too much cash sitting around. It seems like a nice position for the company, and shareholders, to be in.

---

There's really very little to like here and I remain a happy holder.

Cheers

Chris Brown

I think ProCook is quite an attractive proposition and have placed an order to participate in the IPO.

Rubix Group pulled its float recently (link here), referencing poor IPO conditions. There have been so many listings that I think an element of fatigue is setting in.

gus 1065

Hi abtan.

Well thought through comments on Tracsis (LON:TRCS) (as always). I think there is a “not” missing in your final sentence. Hopefully after the “little”.

Gus.

Boon

I have to give my thanks to abtan who picked up on my developing interest in Itv (LON:ITV) back in July and left me a very encouraging comment on the merits of it, on my BBB Fund post.

This led me to doing a deeper research into ITV. I never bought since July, but last week saw some encouraging Q4 industry outlook, which caused me to take a medium sized stake yesterday (at 109.5p) just before the Q3 results came out today.

I think 140p is definitely achievable based on revised broker forecasts that will drip in over the next few days.

The key threat was advertisers pulling spend in Q4 because of stock issues. This doesn't seem to be the case, not flagged in today's outlook.

(I hold)

Haha

Yes, a minor omission there :)

Dieselhead2

DFS -Gatemore Capital Management stakebuilding.

Sorry for being off-topic, but I have just seen that it's been reported recently on Sky News that the above activist group are stakebuilding in DFS, (although not publicly disclosed yet)believing their share price to be significantly under-valued and susceptible to a Private Equity bid. Surely this must also read across to SCS, baring in mind their cash situation at the last update? Trading update for SCS at end of November probably. Any thoughts Paul/anyone?

Bouden54

Perhaps but Scs (LON:SCS) possibly a bit small to get any private equity interest?

WDWombat

Thanks I had missed that. My biggest small cap position. Asleep at the wheel but happy.

JimMcLad

£AGL Also my biggest position – by a very long way. Hoping for a merry xmas courtesy of the FDA.

davidjhill

£TPG

anyone else thinking that at these prices might be worth a contrarian / turnaround play? Am tempted to buy some on the basis that I could see a 2nd bid around the 6.5p mark within 12 months or that the new board starts the turnaround.

Downsides - do we think a fundraise is likely to top up balance sheet? or continuing management disruption.....anything else?

timarr

Itv (LON:ITV)

I bought in the depths of the pandemic induced panic. ITV is clearly a takeover candidate, but a lot may rest on the outcome of the Public Service Broadcasting review. ITV has threatened to wak away from its PSB committments if the new arrangements aren't fairer - i.e. don't address the rise of the streaming platforms and spread the PSB requirements.

Once that's sorted - which could take until 2024 - then I'd expect an offer sooner rather than later. Whether the government would allow it through is another matter.

Late in the day RNS from Angling Direct (LON:ANG) giving an update on the recent cyber hack. Restating that it’s now under control and the various websites and social media platforms are coming back on stream. Reconfirms that they don’t expect any material impact on the business (hope or expectation?). Must confess to having had a small nibble at just over 60p.

https://www.investegate.co.uk/...

Good that they’ve tackled it head on and got on top of things so quickly. Hopefully won’t get caught with their pants down again in delicto flagrante ….. etc., etc.

Gus.

jonno

Hi Timarr

If there were to be an offer for Itv (LON:ITV) it would at least provide a benchmark for the share price. Also I would expect that an initial offer would 'flush out' other potential suitors.

Whether the Government would allow it through is as you say another matter. Having said that if a bid were to create a conundrum for the Government so be it as it previously spurned the opportunity to level the playing field with the likes of Amazon, Netflix et al.

Like you I added significantly in the early days of the pandemic.

All the best

RE: Tp (LON:TPG)

Personally I wouldn't but my record in these things isn't great. For someone more comfortable with risk than me there may be an opportunity here.

However, Science (LON:SAG) have previous in not overpaying and with effective management control of TPG they have a number of ways of making things difficult for existing shareholders - a massive profit warning and/or a rights issue at a price above the market value, for instance. A lot may depend on what M&G decide to do - with their near 19% stake it will be difficult for Science to get above the 75% control mark.

But I think it's stretching credibility to believe that Science sees TPG as having an independent future. The real value will come from taking them over and merging the business.

RE: Itv (LON:ITV)

Hi jonno

The price was - and is - way out of kilter with global valuations for media content and production. Everyone focuses on advertising revenue - which I get - but that misses the enormous underlying value. I know intangibles are ... well ... intangible, but some of this is obvious.

In a bidding war even double the current price is too cheap. I do wonder whether the government would intervene - but if they extend PSB requirements to streaming platforms then the issue becomes moot, I suspect.

11th Nov '21

That's also why I bought, the content value and the value of the production studio. When you look at the valuations paid for studios in the USA...

I wonder if Itv (LON:ITV) were to spin off their studios into a separate listing. Whether that would unlock some of the hidden value.

Small Cap Value Report (Weds 10 Nov 2021) - TRCS, GYG, RNO, ZOO

Paul’s Section

Gyg (LON:GYG)

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Paul Scott

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