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Small Cap Value Report (Mon 22 Feb 2021) - FNX, SLP, OTMP

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

It’s Mello Monday again tonight and Jack’s on the BASH. Lots of popular stocks being discussed, including Sylvania Platinum, Intercede, Tandem, Image Scan and Open Orphan. There’s an interview with IHT fund manager Stephen English and a great session on ‘How to get the most out of Twitter’.

As ever, Stockopedia readers get half price tickets if they use this code MMStocko21 and it will be just £10.15.

You can find more info from David here.

Jack’s section

Good morning all. Yesterday, PIs were blindsided by the news that IG is increasing margin requirements on more than 1,000 stocks. Clients have until this Friday to put up 100% margin on said stocks, at which point positions will either be forcibly closed or kept open for another 30 days. (Edit: Michael has written a very handy breakdown of events on his website, here)

It’s partly to do with this crazy GameStop story almost single handedly exposing structural weaknesses in a rather opaque financial trading system. RobinHood scrambled to raise funds a week or two ago. Now it seems IG’s prime brokers are also demanding more capital.

It’s remarkable that a barely coordinated campaign by WallStreetBets redditors provokes this reaction from key players in the financial ecosystem. These are not all sophisticated professional investors. Many of them are investing for the very first time. It does make you wonder about the robustness of the markets.

What’s more, I reckon this era of coordinated retail campaigns is only just getting started. So how will the industry and regulators react to these rapidly evolving habits? If you do go on these subreddits, it’s almost like a millions of people have discovered a new toy: the stock market.

As for IG in particular – its handling of this situation leaves a lot to be desired. I hope those that use the platform haven’t been too badly caught out.

There are a couple of updates out today. First on the list is Fonix Mobile (LON:FNX) – a recent IPO that appears to be highly cash generative.

Fonix Mobile (LON:FNX)

Share price: 160p (+2.24%)

Shares in issue: 100,000,000

Market cap: £160m

Fonix Mobile (LON:FNX) is a UK-focused provider of mobile payments and messaging services for clients across media, telecoms, entertainment, enterprise and commerce. It was founded in 2006 and floated in October 2020.

The group’s considerable recent growth has been driven by blue chip clients such as ITV, Bauer Media, BT, Global Radio, Comic Relief and Children in Need.


The core business is a mobile payments service that enables merchants to charge their customers’ mobile phone bills for products or services. This accounts for 85% of gross profit (as of today’s interim results).

The other two operating segments are mobile messaging, which allows customers to communicate, notify and market to consumers, and managed services which represent fees charged and non-transactional revenue.

When consumers make payments, they are charged to their mobile phone bill. Fonix’s service charges digital payments to the mobile phone bill, either via Carrier Billing or SMS Billing. Fonix also offers messaging solutions.

Today’s update shows ‘continued strong revenue and profit growth across all business segments.

Interim results

Financial highlights

  • Revenue of £24.6m up by 25% (H1 2019: £19.7m).
  • Gross profit of £5.8m up by 22% (H1 2019: £4.8m).
  • Adjusted EBITDA of £4.6m up by 28% (H1 2019: £3.6m).
  • Profit after tax of £2.7m (H1 2019: £2.8m).
  • Adjusted basic and diluted earnings per share for the period of 3.6p (H1 2019: 2.9p).
  • Underlying operating cash inflow for the period of £3.6m (H1 2019: £3.1m).
  • Underlying cash and cash equivalents at the period end of £3.6m (30 June 2020: £2.3m).
  • Maiden interim dividend of 1.7p per share, amounting to £1.7m, to be paid in March 2021.

Adjusted EBITDA and EPS exclude share based payment charges and AIM admission costs.

Operationally, things are steady across Fonix’s three business segments of payments, messaging and managed services. All have grown in line with expectations and are attracting new customers. The group has a ‘robust pipeline of prospects’, with over 20 customers added and no customers lost in the period.

It looks like Fonix is able to operate and grow remotely through the pandemic. What’s more, the good cash generation enables the group to continue developing new features, which should drive further revenue growth.

Rupert Horner is stepping down as CFO, having assisted with the IPO. He ‘will remain a very supportive shareholder.’ Michael Foulkes will succeed him as CFO on 29 March.

Foulkes joins from Black Swan Data where he was CFO, and previously worked with Fonix’s CEO Rob Weisz at Mobile Interactive Group (MIG), which was one of Europe’s largest mobile payments businesses.


Two questions here.

One: what is the risk of technological obsolescence? Texting in to send money to TV shows already sounds quite quaint. But there’s no denying Fonix’s trading figures and it says it has a strong pipeline of future opportunities.

Total payments volume (TPV) was up 18% to £123m (H1 2019: £104 million), including a record TPV month in December. There are signs of adoption from some of the largest brands in the world, including Apple, Google, Netflix and Spotify, so perhaps this is a technology that has legs.

Two: how big is the market? Fonix already occupies quite a dominant position. Is this the type of technology that can translate well into overseas markets? Because at some point, you might assume that is what it will have to do.

Fonix does explicitly address this and says:

Whilst Fonix is currently predominantly UK focused, we have started our planned expansion into new jurisdictions and regions and expect to be operating in at least one mainland European market in 2021.

And it looks like the core UK market is very big anyway, delivering $6.3bn in pay TV revenues in 2020. Meanwhile the UK charity sector received over £5.4bn in donations in the first half of 2020.

Calnex is the other recent IPO I’ve been impressed with, but Fonix trumps it in terms of price to forecast earnings (21.7x vs 29.2x). Worth a closer look, particularly given the combination of scalable technology platform and apparently substantial addressable market.

Paul covered it a few weeks ago here, while gwilli68 has also posted about it here.

Sylvania Platinum (LON:SLP)

Share price: 117p

Shares in issue: 272,533,615

Market cap: £318.9m

(I hold)

The market continues to be sceptical of Sylvania Platinum (LON:SLP) despite encouraging results. There are sound concerns, namely:

  • Management’s conservative tone and flagging of operational disruption amp; risks,
  • Business model dependency on host mines,
  • Resulting life of operations concerns (although the company continues to work on ways to extend this), and
  • Dependence on PGM commodity prices – in particular, Rhodium.

All fair points. I personally think the shares still look cheap, but so much of that is predicated on commodity prices. The picture there can change rapidly.

There are sound fundamental drivers supporting demand for SLP’s basket of platinum group metals (PGMs), but even so, it is worth actively monitoring your position here.


Over the longer term, I much prefer management teams that sound habitually cautious as opposed to those of the Monty Python ‘Always Look on the Bright Side of Life’ variety. Unfortunately the latter are far more common.

Half year report

  • Sylvania Dump Operations (SDO) delivered 36,335 4E PGM ounces (HY1 FY2020: 40,003 4E PGM ounces). Lower volumes of fresh arisings and lower PGM feed grades associated with the scale-down at some host mine operations,
  • Strong basket price (up year-on-year from $1,830/oz to $3,184/oz) means revenue is still up 44% to $85.2m,
  • Net profit increased 70% to $40.5m,
  • Cash balance at 31 December 2020 of $67.1m,
  • Bought back 375,652 shares under the Share Buyback Programme, as well as 1,448,075 shares from employees, all transferred to Treasury; 690,000 ordinary shares held in Treasury to be cancelled,
  • Windfall Dividend of 3.75p to be paid in April 2021.

That windfall dividend is a useful 3.2% of today’s share price and amounts to £8.9m to be returned to shareholders. SLP has also quite consistently re-purchased shares over the past year or so.

The group flags Covid as an ongoing concern, although operations have been maintained. Host mines have scaled down some operations, affecting SDO production at the Western operations. This has been mitigated by improved plant feed rates and stable production.

Intermittent power outages associated with breakdowns and vandalism remain a nuisance.

Regarding Covid, the group says:

After not having any infections during August to November 2020, the Company reported 4 positive cases during December 2020 and 21 new cases during January 2021. Thankfully, at the time of this report, most employees who recorded active cases of the virus had recovered and returned to work, with the total number of reported cases within the Company since March 2020 to date standing at 39.

And on host mines:

Although there have been some signs of a recovery in the chrome market during recent months, the scaled-down operations at selected host mines are expected to continue to impact on PGM production for the next 6 to 12 months and operations will continue to focus on plant throughput stability and efficiencies to mitigate this impact.

The SDO experienced one lost-time injury (LTI) at Millsell. Safety records at Tweefontein and Doornbosch both remain LTI-free for eight-and-a-half years whilst Lesedi achieved one-year LTI-free during Q2.

Barring the sad news regarding an LTI, these are all persistent dynamics that have been flagged by management before.

On the plus side, there’s plenty of self-funded development going on at SLP and the financial results are very strong, as expected.

The Lannex mill and spiral upgrade is in operation and circuit optimisation will continue as run-of-mine (ROM) feeds stabilise during Q3 to improve processing efficiencies and profitability.

The Mooinooi chrome proprietary processing modifications and optimisation project to improve fines classification and fine chrome recovery efficiency is on track and expected to be commissioned during HY2 FY2021.

The MF2 expansion project at Lesedi to improve PGM recovery efficiency and ounce production has commenced and is anticipated to commission during the first half of FY22

Ramp;D efforts to enable re-treatment of low PGM grade tailings resources that would otherwise have been sterilised could extend operating life. Following promising results, a circuit configuration and technology has been identified to enable the economic recovery of previously uneconomical fine chrome.


Ultimately, it’s all about the basket price and extending life of operations.

The increase of Palladium and Rhodium had the largest impact on the basket price in the period. SLP is generating some c$155m of FCF at spot prices (35% FCF yield).

Costs have increased due to a ratcheting up in mineral royalty tax from 0.5% to 7%. The rate is capped at 7% and is set to remain at this rate going forward. That’s a small price to pay given the scale up profit though.

There’s also additional potential. The Grasvally Chrome Project remains an asset for sale with a valid Option Agreement already negotiated and reported. The final test work report for the Volspruit Platinum Project is expected in the next quarter.

Specialist consultants are evaluating the Northern Limb Projects and studies have identified specific higher-grade portions along the ore body that could potentially be attractive for shallow, low-risk open cast extraction and PGM processing. A concept level mining study to confirm initial findings has begun and will continue until late 2022.

Yes, there are risks, but I also think the discount applied to SLP is just too steep. If SLP can replicate half-year net profit of $40.5m, that would give full year EPS of around 21.1p and a forecast PE ratio of 4.7x. This ratio does not factor in life of operation issues, so it’s probably more appropriate to perform a DCF analysis.

There are operational issues, but these are transparently and consistently flagged by management. Meanwhile the group is deploying its substantial cash reserves into extending operations and developing some promising exploration assets.

BSV posted some interesting thoughts on this PGM producer over the weekend.

As ever, the investment case lives or dies by PGM spot prices. These have spiked up and could always fall just as swiftly. Everything I’ve seen recently points to a fairly buoyant picture in this regard, at least over the next 1-2 years, but DYOR.

And if you do hold, it’s one that needs active managing and monitoring due to its commodity exposure in my view.


Paul’s Section Onthemarket (LON:OTMP)

(Paul holds)

110p (unchanged, at 09:35) – mkt cap £80m

Trading Update

This is a challenger portal in residential property, a long way behind Rightmove (LON:RMV) and Zoopla.

OTMP issued a positive update, which I covered here on 14 Dec 2020.

Today we get another update.

OnTheMarket plc (AIM: OTMP), the majority agent-owned company which operates the property portal, is pleased to announce an update on trading for the year to 31 January 2021.

Revenues – new guidance is £23.0m (old: £22.5m)

Adj operating profit – new guidance is £2.3m (old: £1.5m)

That’s a useful improvement in profitability, but not earth shattering.

Revenue growth is up 22% on LY, and a substantial loss of £(9.2)m LY has become a small profit this year, so definite signs of progress here.

Net cash – was £10.9m at 30 Nov 2020, down slightly to £10.7m at year end of 31 Jan 2021. Deferred creditors are £0.4m – good to see this reported, which all companies should be doing, but only some are.

Cost-cutting (especially marketing) allowed the move into profits. This demonstrates the flexibility of an online business, which is one of the reasons I like to invest in internet growth companies.

Outlook – marketing spending likely to rise again this year.

Also increased spending on the website.

My opinion – this update seems reassuring. I very much like the fact that massive cash burn is a thing of the past (hopefully). Generally speaking, I think heavy marketing spend is often largely wasted money. Hence I prefer a leaner spending approach.

There’s something potentially interesting here, in my view. I’ve topped up my position size a little in recent months, but it’s usually very illiquid – difficult to buy more than 5k shares at a time, and with a wide spread.






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