Small Cap Value Report (Mon 9 Dec 2019) - FA., ANG, AMO, HDD, TRAK

Hi, it’s Paul here, I’m on duty this week.

Estimated timings – I intend starting fairly early, and finish time will depend on how much news there is to report on.  Update at 11:21 – OK that didn’t work out as planned. I’m on the case now, please see the list of shares I’ll be reporting on in the title above. Estimated completion time: 3pm. Apologies for any inconvenience.

Share price:  9.75p (down 24% today, at 11:26)
No. shares:  75.9m
Market cap: £7.4m

Trading update (profit warning)

FireAngel (AIM: FA.), one of Europe’s leading developers and suppliers of home safety products, announces an update on trading for the year ending 31 December 2019.

This company makes smoke alarms. It has been incredibly accident-prone in recent years, with multiple seemingly self-inflicted wounds.

Revised guidance for 2019 is given today by the company;

Revenue for the year ending 31 December 2019 is now expected to be below previous market expectations in the range £44.5 million to £45.0 million and the Company’s underlying operating result, before the impact of the change to straight line amortisation previously described in the Company’s interim results announcement released on 24 September 2019, is expected to be a loss in the range £2.6 million to £2.9 million.  This is based on exchange rates as at the date of this announcement.

I can’t find any recent broker notes. However the consensus forecast shown on Stockopedia is negative, at -£2.74m (this is after tax). Not dissimilar from the revised figure quoted by the company today.

What’s gone wrong? – rather lame excuses in some cases, but at least plenty of detail is given;

• Sales growth of c.20% has “stressed the company’s processes from production right through to customer fulfilment” – does that sound like a well-managed company? No.
• Repeatedly losing small amounts of revenue amp; margin
• Sales mix in Q4 worse than expected
• Additional costs to re-work some stock lines
• Costly air freight charges to meet deliveries
• Strengthening sterling

Outlook – significant opportunity to increase its gross margin higher.

2020 profit guidance reduced to £0.5m, or £4.4m EBITDA (a meaningless figure, due to capitalised development spend).

Ramp;D strategy being focused on higher margin products.

Directorspeak – can be safely ignored, given the historic inability to provide accurate forward guidance.

Balance sheet – nothing is said about this today, but looking back to the most recent figures, its balance sheet was actually not too bad at 30 June 2019.  HSBC very cleverly must have encouraged/forced the company to do a fundraising in early 2019, which paid off the revolving credit facility. Instead the company now uses an invoice discounting facility. That probably saved the day, given how performance has undershot forecasts.

I think the company could survive, if it is able to operate around breakeven in future. If there are any further significant losses in future, then going concern could become a major issue here.

My opinion – I feel management has zero credibility, after a catalogue of failure, and having burned through a previously large cash pile.

However, with the market cap now down to only £7.4m, then if they do get things even halfway back on track, punters could see a profit from the current bombed out level. Looking at the two-year chart below, that’s probably what people thought all the way down from 200p+ to now sub-10p.

Are the chances of recovery any more realistic now, than they were? There might be a chance of a takeover bid too, maybe?

Buying at this level could result in a 100% loss, so this share is purely for punters prepared to take that risk, at this stage.  It feels like a binary outcome is likely – either a multibagger if they get the business back on track, possibly a takeover bid, but the most likely outcome seems to be a gradual grinding down to eventual insolvency. Let’s hope that for shareholders, and employees sake, management pull their fingers out, and improve performance.

Stockopedia’s computers also deliver a negative view: “Value Trap” classification, and a very poor StockRank;

Share price:  69p (up c.5% today, at 12:09)
No. shares:  64.6m
Market cap:  £44.6m

Trading update

Angling Direct plc (AIM: ANG.L), the UK’s largest and fastest growing fishing tackle and equipment retailer…

This company operates a mix of online sales, and from physical stores – the total now having just increased to 33 sites.

Black Friday trading has been good, with profit up 49.5% vs last year, due to limiting discounts to 10% on core product ranges. Presumably that means larger discounts were offered for non-core products?

Overall trading is in line, so this RNS shouldn’t really have moved the share price;

The Company continues to trade in line with market expectations and management is confident that it will continue to deliver growth through the second half of the year.

Note that the financial year end is 31 January.

Valuation – this type of share is difficult to value, because it’s not yet making any profit – hence PER doesn’t work.

It’s really all about whether you think, several years in future, this would be likely to be a larger amp; more profitable business? Plus, whether you’re prepared to tie up your money for several years, to wait and see, with no dividend income whilst you wait (hence an opportunity cost).

Balance sheet – is excellent, with £13.2m net cash, almost a third of the market cap.

My opinion – given the very strong balance sheet, ANG looks fully funded to expand further. It seems to have a “roll up” strategy to buy up small angling businesses. Providing its paying modest prices for them, then that could work.

Note that competitor Fishing Republic went under, and was I believe bought by JD Sports. Looking at its website, Fishing Republic seems to be becoming a more serious competitor now that it has the financial backing of JD Sports. Note that new stores have been opened by FR in Milton Keynes, Central Manchester, Doncaster amp; Rotherham. One of the pictures shows Fishing Republic within an existing milletts store (outdoor clothing amp; equipment), which seems an ideal fit for fishing paraphernalia.

Fishing Republic’s website says that it is not currently taking online orders, due to a website upgrade. Perhaps that might have helped ANG do well over Black Friday, if FR’s website was not taking orders then?

The competitive threat from JD Sports looks to be very serious, which puts me off investing in ANG.

Stockopedia throws a bucket of cold, slimy, live maggots over us, with a low StockRank for Angling Direct;

Stockopedia