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Small Cap Value Report (Weds 17 Feb 2021) - GATC, MRL, TRT

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Good morning, it’s Jack amp; Paul here with the SCVR for Wednesday.

Jack’s section:

Gattaca (LON:GATC) – mixed update from cheaply valued STEM recruiter

Marlowe (LON:MRL) – ambitious growth targets laid out by this provider of regulatory compliance and risk management services

Paul’s Section:

Transense Technologies (LON:TRT) – Review of interim results


Jack’s section Gattaca (LON:GATC)

Share price: 96p (-3%)

Shares in issue: 32,290,422

Market cap: £31m

Gattaca (LON:GATC) provides recruitment solutions within engineering and technology. Matchtech is one of the UK’s leading recruitment specialists, with market share estimated at around 5%.

This is a tricky, cyclical sector where it can be hard to build a durable competitive advantage. As such, operating volatility and low relative valuation multiples might be expected.

Gattaca’s international footprint provides some resilience but there have been problem acquisitions and questionable uses of capital in the past, so ongoing value-added capital deployment is a concern.

That said, trading at just 0.6x free cash flow, Gattaca’s valuation really is striking.

No surprise to see that of the two Guru Screens it qualifies for, one is called Free Cash Flow Cows! Incidentally, both of the screens are Bargain strategies.

Trading update for the six months ended 31 January 2021

Net Fee Income (“NFI”) to come in at £21.1m (H1 20 restated: £31.8m), primarily reflecting the market impact of the COVID-19 pandemic. Net cash before IFRS16 adjustments of £22.9m (July 2020: £27.3m).

Against a market cap of £32m, these are considerable numbers.

Improving activity levels through Q1 and UK NFI in Q2 was 2% higher than Q1, despite the return of tiered COVID-19 restrictions and extended national lockdowns.

NFI recovery for FY21 is likely to be at a slower rate than previously forecast. However, cost cutting and underlying improvements in the business should neutralise this and Gattaca expects full year underlying PBT to be in line with market expectations.

The ‘slower than expected’ line might be the market’s takeaway, given that sentiment on recruitment stocks has been quite poor.

Gattaca will announce its interim results for the six months ended 31 January 2021 on 31 March 2021.

Conclusion

This isn’t the type of company I tend to look at, but everything has its price and Gattaca does at first glance look cheap. As noted above, there have been some questionable acquisitions in the past so any further due diligence should incorporate a look at that.

That extremely low free cash flow multiple quoted above comes as a result of a jump in FCF in 2020:

Understanding why this happened, and if it is sustainable, is an important question to answer. What’s particularly interesting is this jump in cash flows came at a time in which the group reported a net loss per share of -1.73p. So that’s a huge difference between cash flows and profits.

The cash flow statement shows that the bulk of this difference comes from £47.5m decrease in accounts receivable. But even if we treat the 2020 FCF figure as an outlier and take the preceding 5Y average of 35.8p, that would still put GATC on just 2.8x 5Y avg free cash flow.

And now it looks like receivables are at the lower end of their historic range.

The valuation provides an attractive margin of safety, enough to really warrant a closer look. The enterprise value is around £10m – and this is an enterprise generating some half a billion pounds in annualised revenue. Margins are miniscule, but that also means small top line growth and slight tweaks to the cost base can translate into big changes at the profit level.

There is of course the (perhaps not so) tail risk of an economic crash. That would be bad for business, but GATC does have that significant net cash position.

Plenty of other risks to consider as well: credit risk (the group increased its loss allowance by £1.8m to £4m in FY20), Covid-related delays, a more general downturn, business model risk (might online platforms take share?) to name a few.

We are at the riskier end of the investment spectrum here, but the valuation is compelling and there could be good upside if the macro picture plays out in GATC’s favour.

Marlowe (LON:MRL)

Share price: 660p (+3.77%)

Shares in issue: 62,477,095

Market cap: £412.3m

Drifting outside of the usual scope of the SCVR with this market cap, but it’s a slow news day and Marlowe (LON:MRL) has been tipped by a few investors to do well. It already has done well on a two-year view at least.

Capital Markets Day and Trading Update

The group is using today’s CMD to set out its medium-term growth strategy including new financial targets. Running through them, we have:

  • Three-Year Growth Target: Both organic and acquisition-led growth with the target of achieving revenue of c.£500m and adjusted EBITDA of c.£100m over the next three years. Run-rate revenue is currently £245m and run rate adjusted EBITDA is currently £37m.

That’s quite ambitious actually and the company’s track record of top line growth so far suggests this is something to take heed of.

Marlowe’s three-year sales and earnings CAGRs also indicate substantial recent growth:

  • Updated Adjusted EBITDA Margin Target: New medium-term adjusted divisional EBITDA margin target of 20% (updated from previous 15% target) which it aims to achieve in the next three years. Run rate adjusted divisional EBITDA margin is currently c.16%.
  • New Divisional Structure: ‘Reflecting the transformation in scope, scale and quality of earnings of the Group,’ Marlowe will now report as the following two divisions: Governance, Risk and Compliance (GRC – Health amp; Safety, Employment Law/HR amp; Occupational Health assurance services; EHS, Compliance amp; eLearning software solutions) and Testing, Inspection and Certification (TIC – recurring testing and inspection regimes across Fire Safety amp; Security, Water Treatment amp; Air Hygiene and Contractor Compliance)

As for current trading, the group notes:

The Group has continued to demonstrate its resilience in spite of the ongoing COVID-19 related lockdown restrictions. Trading in the second half remains strong and results for the year ending 31 March 2021 are expected to be at the top end of current market expectations.

Conclusion

Business looks good right now and Marlowe is proving the defensive qualities of its services and business model.

The stock is valued for growth, but that is exactly what the management team is delivering. MRL is becoming tricky to ignore given the growth track record and ambitious, explicit targets set out today. One to put on the watchlist and investigate further.

The capital markets presentation is happening right now but I’m going to have to hop off. Hopefully there is a recording later. Here’s the link for anyone interested: https://www.investis-live.com/marloweplc/60080f942fb49a0a00420899/hwrt

.


Paul’s Section Transense Technologies (LON:TRT)

63.4p (up 16%, at 12:37) – mkt cap £10.3m

This share seems to have been around forever, it floated near the top of the tech boom, in Dec 1999, and has achieved very little since, apart from 2016 when it had a spike in revenues, and made a one-off profit. Still, sometimes shares like this come alive again, and a new generation of punters get excited about a story that seems stale to those of us who’ve been in the market for over 20 years.

Interim results today reinforce what a tiny company it is, only £895k revenues for H1, but that is more than the whole of last year’s £603k, and a 230% rise in H1 LY.

Gross profit is high, at 78%

EBITDA is a small profit of £56k

There’s a negative tax charge (probably Ramp;D credits) delivering an overall profit after tax of £48k.

Whilst these numbers are paltry, the ingredients are there for a much better future performance – i.e. high gross margins (so lots of operational gearing), and low overheads. Double or triple sales, and this would become a decently profitable little company.

Balance sheet – small, but looks solvent. There’s £1.05m in net cash. Hopefully it might be able to grow, without needing to dilute holders with a placing. Note that inventories have reduced to negligible amounts, due to a switch to a licensing model.

Cashflow statement is boosted by £1.24m proceeds from a disposal, which was used to pay off debt.

Outlook -

“These results reflect the transformational change in the business since the transactions completed last June, moving iTrack from an operational business into a licence model last June. We have every confidence that iTrack will continue to achieve increased market penetration, and deliver royalty income at or above our current expectations.

“The commercial prospects for our SAW technology have been revitalised after strengthening the management team, and enlisting the support of key opinion leaders through the SAWCAP initiative. Whilst it may take some time to determine the true value potential of this technology, we are encouraged by the early progress that is being made. In addition, the Translogik range of tyre probes continues to gain traction and is showing further potential for healthy revenue growth.

“Accordingly, we consider that the outlook for the Company is positive, and prospects for the Company and its shareholders are more favourable than at any time in the Company’s history.”

Investor presentation is today at 4pm on InvestorMeetCompany, I’ll tune in to that amp; report back if there’s anything interesting.

Director buying – not life-changing amounts of money, but 2 Directors have bought 45k shares at 67p today.

My opinion - I think this looks potentially interesting. My job is just to review the numbers, and flag up any issues. I’m reasonably satisfied with the figures, so the next step would be for potential investors to research the companies products amp; IP, the competitive landscape, and how likely it is to be able to generate the strong sales growth that would be needed to propel the share price higher.

We’re in a roaring market for speculative stuff right now, so this looks exactly the type of share that could catch the attention of the stampeding herd of bulletin board punters! It’s quite tempting to pick up a small position in this, as a punt, for a quick profit, if market conditions remain frothy.

.

Stockopedia


Source: https://www.stockopedia.com/content/small-cap-value-report-weds-17-feb-2021-gatc-mrl-trt-764134/


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