Small Cap Value Report (Mon 15 June 2020) - covid/macro, BOTB, IDOX, CBOX

Good morning, it’s Paul here, with Monday’s SCVR.

I’ve pre-written a few general thoughts over the weekend, so am posting this first bit early, on Sunday evening, to get you started nice and promptly on Monday morning.

Estimated timings – I should be able to get things wrapped up by 1pm official finish time.

Personal stuff – I decided to get a covid-19 antibodies test last week, at a private GP, which was the Abbott Labs approved test. It cost £95, and involved a nurse taking a vial of blood from my inner elbow. The result came back 2 days later – confirming that I have indeed had the virus, evidenced by my blood containing antibodies. There was never really any significant doubt, for the heart-breaking reasons I’ve explained before, but it’s good to have it confirmed.

Experts don’t seem to know, or agree on, how long the antibodies last, but it should at least give short term immunity apparently (some suggest maybe 6-12 months? Who knows?).

Incidentally, the nurse told me that the DIY testing kits, that use a finger-prick blood sample, are not reliable, and can be difficult to use. She said that getting enough blood from a finger-prick is difficult, and some people have had to prick their finger multiple times, to get enough blood out. Also, she told me that the blood in your finger tip may not necessarily contain antibodies, when blood from a vein might do. Hence there’s a greater risk of false results. It seems best to get a test done properly at the doctors, rather than buying what might be a useless kit off the internet.

I did gently query the nurse’s experience, and she replied that she had being doing blood tests for 28 years. “So you’re getting the hang of it then?!”, I quipped with a twinkle in my eye amp; broad smile, and we shared a laugh. “You were very brave, you didn’t even flinch”, she complimented me. I hate needles, but just close my eyes and talk incessantly, which does the job of making it bearable.

Knowing that I’ve got antibodies in my blood has given me a sense of freedom. I had Mum round and cooked her Sunday lunch, more comfortable in the knowledge that I could hug her without fear of killing her inadvertently. But I still wash my hands frequently, and especially on arriving home from any trip out, just in case. Anyway.

Key issues – moving on from that, we’re getting a deluge of information daily about covid, and it’s difficult to know what’s next. The key issues to me seem to be these;

Treatment/vaccine – absolutely key. If scientists are able to find a way to treat, or completely stop covid-19, then that would be wonderful for humanity above all, but also mean that sectors such as travel, hospitality, retail, would immediately soar, as normality would be priced-in. To a certain extent that’s already happening. Then after a while, those shares would probably be likely to fall back somewhat, once investors re-focus on the crippling financial disaster which has befallen them, and how long it’s going to take to repay all that debt, and not be able to pay dividends for x years. Why buy the equity, surely the bonds would make more sense? In this crazy, artificial financial world, anything could happen.

CNBC reports increasingly positive noises from large pharmas, that a solution could be in the pipeline. I don’t know what to think on this, so have to just mark it down as a major uncertainty.

Number of cases/ second wave – this scares me witless, and there’s been some very worrying recent data showing that cases are significant, and rising, following lockdown easing, in some US states – e.g. California, Texas, Florida, and Illinois. US stock markets set the tone for global markets, so (as we saw last week) when US investors get the jitters, then it spills across to shares in the UK. It’s increasingly looking as if this virus could be around for some time, and hence damage the chances of economic recovery. Another full lockdown couldn’t possibly happen, as the financial amp; human cost is too high. However, what if people are too frightened to go out again and hospitals fill up again with more cases? That scenario would mean more economic damage. For this reason, my growing optimism in recent weeks has taken a knock back, and I’m probably leaning more towards caution now, than I was last time I reported here last week. It’s a very fluid situation, so being willing amp; able to change our minds, is utterly crucial, if the facts change, or seem to change.

Insolvencies – the pre-pack administration of Quiz (LON:QUIZ) (I’m long) and the CVA of the leisure division of Restaurant (LON:RTN) – closing a large number of its restaurants permanently, has given me a jolt too. This brought home the reality that many retailers and hospitality companies have no option other than to undertake some form of insolvency. Expect more to come. This is extremely bad news for owners of shopping centres, and employment. For that reason, I decided to sell half my positions in Hammerson (LON:HMSO) and Newriver Reit (LON:NRR) late last week. Better to lock in a decent profit, and play it safe, I think.

Re-opening of retailers amp; pubs – the scuttlebutt I’m hearing here is more positive. Apparently where shops are re-opening, they are doing busy trade. Footfall is down, but basket size is up, I’m told. This is both in Europe, USA, and UK. Therefore, I’m hoping for a boost to my portfolio this week, from shops reporting decent opening trade, and in July when restaurants re-open too. Let’s hope we get some decent weather, to draw in customers. I see it as our patriotic duty to spend freely, to help these businesses get back on their feet, which is what I’ll be doing. There’s pent-up demand, and many households have spare cash, since they’ve not been able to take holidays, eat out, or go shopping.

Awful Q2 amp; H1 figures – are in the pipeline. With little in the way of broker forecasts, I remain of the view that the UK and US markets could get a big shock from the full extent of how bad company results are being hit through the shutdown, and increased costs of re-opening. Hence I’m nervous about this. UK markets in particular could panic sell, especially in small caps, once we actually see how bad the figures are, especially if that coincides with a second wave of covid cases. Therefore I’m looking to top slice holdings if they do well on the re-opening of the economy, and move more into cash.

In conclusion – I haven’t got a clue what markets are going to do, and nor does anyone else. On balance though, I’m nervous, and looking to sell more than buy in the coming days. But let’s see how the news pans out, and be willing to change our minds if the facts change.

We don’t give advice here, just opinions. Therefore everyone needs to make up your own minds about your strategy amp; how you handle all of this chaos. My number one strategic thought at the moment, is to keep flexible, and if I’m in doubt, then I’ll back off and move more into cash. I’d rather miss out on upside, than end up crashing out again, like I did in 2008, through over-confidence and gearing. It takes so long to recover from a wipe-out, that experience has taught me it’s better to play it a bit more safely, and walk away bruised, but still in the game, than to go down with the ship.

Remember that those trading algorithms which were so bullish, chasing the market ever higher on momentum, are not even slightly committed to that view. As soon as the trend changes, they could not only close long positions, but reverse into short positions. And back again. It all feels very volatile.

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Share price: 925p (up 15% today, at 08:23)
No. shares: 9.38m
Market cap: £86.8m

Final Results

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We’ve had a series of forecast upgrades over the past year, about 4, from memory. Despite that, the figures released today for FY 04/2020 have beaten even the revised forecasts.

EPS: actual results: 37.44p adj diluted EPS (LY: 17.61p) – up a remarkable 113%!

The numbers look very clean, I don’t see any funnies. There are no adjustments to the latest figures, only to LY, to strip out the effect of a one-off change in VAT status.

We’re getting another special dividend! 20p this time, since the company once again has accumulated surplus cash. Plus a normal divi of 3.0p.

Outlook - is confident, and mentions several times that the new financial year (from 1 May 2020) has started well, e.g.

We are pleased that BOTB has delivered increased revenue and profit ahead of our expectations. The cash generative model and robust balance sheet presents an excellent platform for continued future growth. The initiatives taken to reorientate our marketing strategy toward an online-only model have proven successful, giving us confidence for the new financial year which has started very encouragingly.

We are confident that our streamlined, digital business is well positioned to take advantage of future growth opportunities, and I look forward to updating shareholders on our progress in due course.

Broker update – this is really striking. The house broker has greatly increased forecast EPS of FY 04/2021. The old figures I’ve got show it was unrealistically low at 28.1p, but has today been raised to 69.8p! The latest note raves about the operational gearing being achieved, and its successful digital marketing strategy.

My opinion – regulars here will know that I’ve been keen on this company for some time. Even so, it is performing well above what I expected, so am absolutely delighted with progress.

It’s impossible to buy any shares in it today unfortunately. My broker lamented that, “The market’s crashing, but I can’t get filled on the one share clients actually want to buy!”

Take the new forecast of 69.8p, and put it on a PER of 30, which is easily justified by the growth rate (it probably should be higher than that), and we’re at a share price of nearly £21. That looks realistic to me, providing nothing goes wrong. Hence loads more upside potential from the current level is possible. It’s important not to “anchor” to the old share price of £3-4, as that’s been blown away by much higher earnings, and rapid growth still to come.

Note the high StockRank, especially quality and momentum scores. The low value score is actually not relevant, because the existing broker forecasts are way too low. Hence that should reset to a higher value score once the revised forecasts feed in.

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Share price: 41.2p (down 5% today, at 09:29)
No. shares: 443.1m
Market cap: £182.6m

Half Year Report

Idox plc (AIM: IDOX, “Idox”, “the Company” or “the Group”), a leading supplier of specialist information management software and solutions to the public and asset intensive sectors, is pleased to announce its unaudited half year results for the six months ended 30 April 2020 (“H1 2020″).

I’m really not interested in this company, so am just going through the motions briefly reviewing its interim results today.

Key points;

• Organic revenue growth of 10% looks good
• Recurring revenues are 53% of total – again pretty good
• Revenue visibility for FY 10/2020 is good, at 90% – in line with expectations
• Net debt reduced significantly, to £14.3m
• New bank facilities of £35m, have been fully drawn down
• EBITDA – meaningless, as there are so many adjustments amp; costs excluded, including capitalised development spend. Impressive EBITDA profits disappear into losses at the statutory post-tax level.

Balance sheet - awful. NTAV is negative, at £(39.2m)

Dividends – none for now, but the company does say it intends to reintroduce a divi for the full year. I doubt it will be very much though, given the weak balance sheet.

Outlook – this sounds good;

The assessments performed and disclosed in our FY2019 reporting in early April remain valid and the current year financial performance is expected to be in line with existing expectations.

Cash collection during the pandemic has exceeded our expectations, and operationally the Group continues to win new work and deliver services largely as anticipated.

We have seen a greater slow-down in new EIM business than anticipated due to the recent pressures in the oil and gas sector. However, the benefit of its high levels of existing recurring revenue means it is not reliant on winning new work in this area.

All other parts of the Group remain robust as expected despite the impact of the Covid-19 pandemic on the global economy.

Net debt at 31 May 2020 was £14.0m, including £32.2m of available cash following the full draw-down of banking facilities.

My opinion – I wouldn’t buy this share, due to its weak balance sheet, and over-reliance on bank debt.

However, that may not bother you. There’s a fair argument for being more relaxed about balance sheets for software companies, which typically receive money up-front from customers, and have a lot of recurring revenues.

I’ve not ploughed through all the narrative, but the key sections seem to be showing that Idox is performing well in these turbulent times. Therefore, it could be worth a closer look perhaps?

I also have concerns over its poor cash generation. Note from the cashflow statement that most of its operational cashflow came from increased payables.

The 5-year chart is not good at all;

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Share price: 163.0p (c. flat on the day, at 11:32)
No. shares: 40.0m
Market cap: £65.2m

Final Results

Cake Box Holdings plc, the specialist retailer of fresh cream cakes, today announces its full year results for the twelve months ended 31 March 2020.

This is quite interesting for what it says about current trading, with the franchised shops having re-opened on 1 June 2020;

Current trading

· As at 1 June 2020, 131 of the 133 of all stores had reopened, offering a limited menu of products

· Improving trend since stores reopened. Week commencing 1 June 2020 showed positive like-for-like growth

· 75% of stores currently trading² at pre COVID-19 levels³

· Started delivery of cakes with Uber Eats and Just Eat in May and most recently Deliveroo.

· Online sales since the period-end were up c.60% compared to the previous year period

That’s really encouraging. This very much reinforces my view that people are keen to return to shopping on the High Street, having been deprived of it for nearly 3 months.

Results for FY 03/2020 – unremarkable. Revenues up 10%, but adj PBT down 5% to £3.8m.

My opinion – I’ve long suspected that much of its profit probably comes from selling new franchises, but the figures are not split out. It doesn’t interest me as a potential investment, but today’s update on current trading looks strong. So it could be worth a closer look, possibly?

I’ll leave it there for today, thanks for tuning in amp; leaving your comments.

I’m going to head into Bournemouth town centre after lunch, to see what non-essential retailing re-starting looks like!

Best wishes, Paul.

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