Small Cap Value Report (Mon 2 Nov 2020) - lockdown, PURP, HMSO, SEE

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

We could have a bit of volatility to deal with this week, with a new lockdown for England having been announced, and of course the US Presidential election taking place on Tuesday.

Share price: 62.5p (+8.9%)

Shares in issue: 306,806,039

Market cap: £191.8m

(Jack)

I wonder if there’s a post-Woodford bounce coming for certain stocks? Take Purplebricks (LON:PURP) for example – that’s a heck of a fall in share price since 2018:

The group continues to burn through cash and makes some punchy, double-digit net losses though:

• FY18 -£30.1m
• FY19 -54.9m
• FY20 -19.2m

Looking at the falling net cash balance, another equity fundraising isn’t out of the question. But see below – today the group reports an improved cash figure, which is encouraging.

Stockopedia rates Purplebricks as a Momentum Trap but shares are up 8.9% on today’s Half year trading update so let’s see if the tide is turning. If it is, then let’s not forget the share price was approaching 500p in 2017…

It’s actually a very brief update, with much more detail to come on 15 December 2020. Some highlights for now:

• Strong levels of new instructions during the last five months,
• An 8% increase in instructions for the six month period to 35,387 (H1 FY20: 32,850), and a 20% increase for the 5 months since June,
• First half adjusted EBITDA to be comfortably ahead of company consensus of £3.5m,
• Improved cash position since 30 April, with cash at the end of October in excess of £75m compared to £66m on 15 July 2020.

Vic Darvey, CEO, commented:

We expect to deliver a pleasing profit performance in the first half, but it is too early to extrapolate this out to the second half of the year given the expected end to the stamp duty holiday and the potential impact of increased COVID-19 restrictions on the housing market. As a result, we are planning cautiously around the outlook for the full year.

Conclusion

There could be something here, but I’d need to take a much closer look before committing to a view. I’m open to a turnaround though and the tone here is better than feared.

In fact I already have Purplebricks in a ‘Turnaround’ watchlist, so this update probably shunts it further to the front of the queue.

The Property Franchise Group recently noted floundering competition in the hybrid space, but it seems as though Purplebricks is rebounding from lockdown in decent shape. Reported activity, on balance, is stronger than I would have expected and appears to have positively surprised the market.

No doubt there has been a lot of operational activity, right-sizing, and cost-cutting going on here in recent years after its overly ambitious expansion into overseas markets.

What is hard to get over is the colossal operating losses and cash burn Purplebricks has achieved to date. But this latest update shows an impressive increase in cash position and a company well placed to outperform existing market forecasts.

Last year Purplebricks reduced its marketing cost as a % of revenue from 29.6% to 25.6%. There must be quite strong brand recognition there, so perhaps costs could be cut a little further in the short term.

Certainly the next month and beyond could be bumpy for a host of companies, with lockdown making its return. How will the UK housing market fare on a two year view? That’s a big question. On the whole though, this update bumps Purplebricks much higher up the watchlist.

Hammerson (LON:HMSO)

Share price: 15.8p (-3.13%)

Shares in issue: 3,831,468,050

Market cap: £605m

It’s a bit too big for the SCVR strictly speaking, but there is interesting readacross we can all take from this brief RNS from Hammerson (LON:HMSO) .

Fulham Shore’s chairman recently sounded an ominous warning sign for retail landlords:

Landlords prior to COVID-19 were facing falling retail and restaurant demand for their sites, due to the continued shift to online shopping, the contraction of some large restaurant chains, and the challenging economic backdrop over the past three years. The bottom has now truly fallen out of their world.

And looking at the Hammerson share price chart is truly sobering. It’s a stunning collapse in equity value. There are winners and losers in this market, and here we have a reminder of the risks we face if we get it wrong IMO.

The heavy selling continues even at these levels. The latest update (here) is the disposal of its 50% interest in VIA Outlets for £277m, representing an 18.3% discount to gross asset value as at 30 June 2020.

Perhaps there are some super contrarians out there that see value here. Institutions and directors have been buying. But I view this latest news as a timely reminder of where not to be investing right now.

Seeing Machines (LON:SEE)

Share price: 4.4p (-5.45%)

Shares in issue: 3,737,214,374

Market cap: £164.4m

Year end results FY2020

Seeing Machines (LON:SEE) designs AI-powered operator monitoring systems to improve transport safety. It has been heavily loss making for a long time and it’s more of the same for this year.

Highlights:

• Revenue up 25% to AUD40m,
• OEM revenue up 32% to AUD27m despite COVID disruption
• Annual recurring revenue up 17% to AUD14m
• Cash down from AUD54.8m in 2019 to AUD 38.1m, currently at AUD35m
• Loss after tax of AUD46m (note this is buried way down in the statement).

Current trading looks reasonably positive, with Q1 21 revenue ahead of budget and 20% up year-on-year to AUD9.5m

Paul McGlone, CEO of Seeing Machines, commented:

I am pleased that our solid progress in FY2020 has continued into the first quarter of FY2021, with both revenue and cash ahead of budget. I am confident that we are on track for a successful year ahead with a strong strategic focus, foundational partnerships and a well established team to deliver.

Conclusion

The tone sounds positive but the historic trading figures are awful and the FY20 loss is similarly huge at AUD46m.

It’s the type of Financial Summary that wants to make me run for the hills as an investor.

Those are some pretty substantial and consistent losses for a £174m company. There’s been some extreme shareholder dilution as a result:

Cash is falling – from $54.8m in 2019 to $38.1m at 30 June 2020 and to $35m at 30 September 2020. Seeing Machines generated $40m in revenue in 2020, but it also spent $36m in research amp; development in FY19 and a further $31m in FY20.

At some point SEE’s technology might reach that all-important inflection point and see mass market adoption. But how much cash does it have to burn through to get to that point? Without knowing this company in detail, the track record suggests a cash raise might come before reaching sustainable profitability.

The most recent broker note is forecasting profitability by FY23. Given the macro environment facing us, it’s more likely this forecast will be extended rather than brought forward in my opinion.

The company’s loss after tax is buried way down in the update: a loss after tax of AUD46m. This is up from the FY19 loss after tax of AUD42m.

I’ll leave it to others to fund this heavily loss-making venture for now, but good luck to holders.

Stockopedia