Small Cap Value Report (Weds 11 Nov 2020) - ZOO, MKS, WATR

Good evening/morning, it’s Paul here with the SCVR for Wednesday.

I’m starting this report early, on Tuesday evening, with some catch up sections from my backlog.

Agenda –

Zoo Digital (LON:ZOO) – Interim results from yesterday (Paul, done)

Marks And Spencer (LON:MKS) – interesting interim results webinar (Paul holds a long position)

Water Intelligence (LON:WATR) – interesting news on a new product

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Timing – TBC

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Share price: 53.5p (down 3.6%, at market close)
No. shares: 74.6m
Market cap: £39.9m

Interim Results

ZOO Digital Group plc (LON: ZOO), a world-leading provider of cloud-based localisation and digital media services to the global entertainment industry, today announces its unaudited financial results for the six months ended 30 September 2020 (“H1 FY21“).

I’ve been following this company for several years now, and it never seems to manage to live up to the expectations created. As you can see from the graphs below, at times it’s been valued at a high PER, despite lumpy and overall rather unimpressive profits, and it doesn’t pay any divis;

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I covered the trading update from ZOO here on 23 Sept 2020 where it indicated H1 (to 30 Sept 2020) should deliver double digit revenue growth. Nothing was said about profitability.

Interim results today;

• H1 revenue growth of 15%, to $16.4m, consistent with the last trading update
• Lower gross profit though, due to increased costs
• Loss before tax of $(710)k vs. $374k profit in H1 LY – not very impressive
• Balance sheet – quite weak, with NTAV negative, at $(2.0)m. Receivables look rather high at $9.2m

Outlook comments seem quite positive, especially the bits I’ve applied the wonky highlighter to below;

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My opinion – I‘ve not seen anything in these interim results to make me want to buy this share.

To be fair to ZOO, the TV/film sector has been struggling this year, due to social distancing, which has led to a marked slowdown in production of new programmes. Therefore the figures for H1 from ZOO are not representative of what it might be able to achieve in future.

I’ll keep an open mind about the future, but there’s not enough in this announcement to get me interested at the moment.

The StockRank algorithms don’t rate it either;
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Share price: 120p
No. shares: 1,953.4m
Market cap: £2,344m

(I hold)

Just a quick mention, but I’ve just enjoyed watching a very interesting interim results webinar here. Highly recommended, it’s really thorough.

MKS has been trying to turn itself around for a long time, with repeated restructuring programmes. It feels to me, as if this time it could be the real deal – Chairman Archie Norman is well respected, and a few things jump out at me from this webinar, so here are the key points from my notes;

• High performing food business, with LFL sales up 6.6% in H1, once things likes cafes are stripped out (as they were forced to close)
• Full Mamp;S food range now available on Ocado, doing well apparently, profitable
• Plenty of liquidity: £1.4bn cash amp; undrawn facilities – “far better” than anticipated
• Costs cut amp; layers of management removed
• Supply chain being “radically reshaped” amp; costs removed
• Mamp;S is now the UK’s #2 clothing retailer online – surprising
• Relaunch of Sparks loyalty scheme, with 1.5m app downloads
• Targeting gt;40% of total sales online, within 3 years
• Digital transformation, lots of credible stuff to back this up

My opinion – I think Mamp;S could be beginning a genuine resurgence. As mentioned last week, I’ve dipped my toe in with a starter size position at something like 96p. Lucky timing, because then the positive Pfizer covid news came out. So it’s important not to delude oneself that lucky timing was anything more than just luck. It’s now about 118p, due to that indiscriminate vaccine bounce.

The mkt cap of MKS is about £2.3bn now, yet I reckon it’s by far the best brand on the High Street. How many other food retailers make you feel special, and warm/fuzzy, even privileged, as you walk in? Maybe just Waitrose, but none of the others do. I think the MKS brand is incredibly valuable, potentially multiples of the £2.3bn market cap.

Debt is fine, at £1.4bn (excluding leases), with loads of headroom.

The challenge is obviously how they turn around the clothing/home part of the business, which lost its way many years ago, and has never really recovered?

I’ll keep monitoring MKS, and for the time being am only dipping my toe in the water, with a small position (about 1% of my portfolio). I really do think it could be a recovery story, not a terminal decline story. Time will tell!

Pretty awful chart, so there’s a lot to do.

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Share price: 490p (up 2% yesterday)
No. shares: 17.6m
Market cap: £86.2m

Initiation of Sales of Sewer Diagnostic Product

Water Intelligence plc (AIM: WATR.L) (“Water Intelligence” or “Group”), a leading multinational provider of precision, minimally-invasive leak detection and remediation solutions for both potable and non-potable water is pleased to announce the initiation of sales from Orca^TM, its proprietary sewer diagnostic product. Such initiation of sales has been delivered on schedule, as guided by the 3Q Trading Update previously released…

This sounds rather interesting -

Orca has been in development at the Group’s UK-based, Water Intelligence International subsidiary (WII). The proprietary product uses acoustic technology to identify sewer blockages in municipal pipes more effectively than any competitive solution.

WII has paid engagements starting with 4 large municipal customers in the UK. The Group expects that such engagements will lead to a broader rollout in 2021 in the United States, Canada and Australia within a subset of the Group’s 140+ locations.

It would be good to get some third party confirmation of what this product is like, and what potential it might have. No financial details are provided today.

Directorspeak –

Commenting on the Group’s performance, Executive Chairman, Dr. Patrick DeSouza remarked: “We are pleased with the initiation of commercial sales of Orca. The product is timely and will add to the growth of our Water Intelligence International subsidiary. Such sales, combined with our recent insurance customer wins, will reinforce our growth trajectory for the remainder of 2020 and 2021.

My opinion - every time I report on this company, I moan about the high valuation. However, the company keeps throwing more red meat to shareholders, with a succession of positive-sounding announcements.

It’s looking quite interesting. If this Orca product takes off, then the addressable market must be very large, globally. What other competitive products are there, I wonder? If WATR has something genuinely ground-breaking, then things could be good. Its not for me to say, I’m just flagging up the share as something that readers might want to look into in more detail.

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