Small Cap Value Report (Thu 25 March 2021) - FNTL, MCLS, JDG, BOO, LTHM, TND, CMCX

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

Timing - who can say?

Agenda -

Paul -

Fintel (LON:FNTL) – the new name for SimplyBiz – resilient results from FY 12/2020. Balance sheet still weak, but improving. Looks quite good overall.

Mccoll’s Retail (LON:MCLS) – bumping along at breakeven, terrible balance sheet with tons of debt – I think the shares could be worthless on a conventional basis, but we’re in a crazy bull market, so anything could happen. Very high risk

Judges Scientific (LON:JDG) – brief mention of the results, but let’s start a discussion about 100-baggers, and how we can spot the next JDG? Please chuck your ideas into the pot, in the comments.

Boohoo (LON:BOO) – positive report from Sir Brian Leveson, and why I remain super-bullish on this share for the very long-term.

James Latham (LON:LTHM) – rather vague trading update, but I’ve crunched the numbers amp; like what I see, especially its fabulous balance sheet! A good one for value investors.

Jack -

Tandem (LON:TND) – strong trading from this cheap, off-the-radar bike and leisure goods company. Strong Covid tailwinds but building platform for longer term growth.

Cmc Markets (LON:CMCX) – not a small cap, but heightened trading conditions, increased guidance, and high returns on capital make it worth covering.

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Here are a few catch-up items to start off the day

Fintel (LON:FNTL)

207p – market cap £200m

When I saw that Jack had put Fintel on our google docs which we use each day to collaborate on the SCVRs, I thought it was a typo for Findel. Wrong! Turns out this is the new name for SimplyBiz – an acquisitive group of professional subscription services companies – e.g. outsourced compliance for financial advisers.

I’ve always liked the business model (it makes sense to pay a relatively modest fee to outsource very specific amp; complicated regulatory work), high margins, and recurring revenues at this group. Although its over-stretched balance sheet put me off in the past. Also, I didn’t fully trust the numbers, and wanted to see more of a track record established.

Fintel (AIM: FNTL), the leading provider of fintech and support services to the UK retail financial services sector, today announces its audited consolidated results for the twelve months ended 31 December 2020.

As you can see from the financial highlights below, this business is now battle proven, in that it has survived covid amp; lockdowns with barely a scratch. That’s impressive, and I think we should consider paying more for companies like this, which have proven they can cope with a serious economic and organisational dislocation.

In particular, I generally want to invest in companies that have proven they don’t need to dilute shareholders in a crisis, with an emergency placing. These are important risk factors that many investors forget about.

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Valuation – adj EPS of 11.3p and a share price of 207p gives a PER of 18.3 – not cheap, but for the reasons mentioned, I think that can be justified. Also earnings should improve in 2021, lowering the forward PER.

Outlook – there’s evidence of the PRs being let loose on this announcement maybe a little too much! E.g. the added descriptions above “Resilient, Stable, and Solid” before each bullet point – designed to mould our thinking – this reminds me of those Mamp;S food adverts in a Nigella-esque voice (“succulent” potatoes, “plump” plums, etc) – I’ve been reading this RNS in the same internal voice, which has amused me. This is what 3 months lockdown has done to me – reading RNSs in comedy voices.

Anyway, for Fintel’s outlook section, I’ve switched from Nigella, to a more aggressive, Wolf of Wall Street type male voice, in my head, as I read this -

The strong start to the current year is marginally ahead of the Board’s expectations. Our strategic plan is being implemented efficiently and at pace. We therefore remain confident that the company is in a robust position to achieve its full year ambitions, and is moving forward with real agility.

We are Fintel.

Whoop! Yeah! Awesome!!! I think they missed out some additional punctuation. I much prefer: We. Are. FINTEL!!!!

OK, back into serious mode.

Balance sheet - most of the lines on the balance sheet have remained very similar from end 2019 to end 2020. The stand-out mover, is non-current loans amp; borrowings, which has reduced substantially from £37.7m to £29.7m. That’s exactly what I was hoping to see – i.e. meaningful debt reduction to a more reasonable level.

Given the resilience of the business in 2020, and this debt reduction, I’m much more relaxed about the balance sheet. Deleting the huge £105.4m of intangibles, NTAV is still negative, at £(30.7)m, a £6m improvement in the year. However, given the capex-light nature of this (people) business, and reliable recurring revenues, with customers paying up-front, then this balance sheet structure looks OK to me. It’s not ideal, but neither is it a deal-breaker.

Dividends – a weak balance sheet usually means a modest dividend yield, and that’s indeed the case here. Shareholders are to receive 2.85p, yielding 1.4% – not much now, but a progressive dividend policy is to be adopted in future, so divis should rise over time. If they can combine that with further debt reduction, then it’s good.

My opinion – I’ve only covered the basics here, there’s lots more detail in the announcement.

Overall, I think it’s good – as you can see below the quality metrics are very good, dark green, i.e. towards the top end of the market overall.

Valuation metrics are mostly middling, amber. For colour-challenged people, please note that the length of each bar is also the measure, the larger the bar, the better. So you don’t need the colour coding to understand these graphics – i.e. the colour-coding is triggered by the length of the bar, which everyone can see.

My conclusion is that Fintel looks a good quality business, probably priced about right.

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As with many other shares recently, the share price has been strong. In this case though, I think it’s reasonable, although personally I wouldn’t chase it any higher than the current level, which looks a fair price. Charting/momentum traders might take a different view. Remember I’m not trying to predict short term share price movements here, I’m thinking more in terms of fundamental valuations.

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Mccoll’s Retail (LON:MCLS)

32p – mkt cap £37m

I last looked at this convenience stores business a year ago, reviewing its accounts here for FY 11/2019, concluding that the equity looks worth nothing, due to a very weak balance sheet, and the low likelihood of meaningful dividends ever being paid again.

This week it announced 53 week results to 29 Nov 2020.

Key points -

• Very impressive LFL sales growth of +12.0% (local convenience stores benefiting from lockdowns)
• However, a much lower gross margin (23.9% vs 25.9%) eradicated the benefit of higher LFL sales
• Adjusted profit is just above breakeven, at £1.1m
• Net debt of £89.6m remains a problem, and has only slightly fallen from £94.1m a year earlier.

Current trading amp; outlook -

• LFL sales still decently positive at +8.8% for the 15 weeks to 14 March 2021
• But, gross margin trends similar to last year, i.e. down, so again that would eliminate the benefit of higher sales. People are buying lower margin products in lockdown.
• Expecting margins to normalise after lockdown, but (not stated) presumably that also means sales growth would drop back?
• Cautious for the year ahead, with tougher LFL sales comparatives, and Govt support measures phasing out (a £9.4m benefit in FY 11/2020).

Bank facilities – £100 RCF and £67.5m term loan were revised to give more covenant headroom, and extended to Feb 2024.

Dividends – none. It wants to resume divis at an affordable level, but deleveraging is needed first – the bank facilities prohibit payment of divis until leverage is below 1.75x (EBITDA). Personally I can’t see that happening without a big placing to mend the balance sheet.

Balance sheet – looks very weak. NTAV is negative £(139.7)m. It’s going to need a big placing at some point, to prop things up. Or a CVA. Or both more likely.

My opinion – this looks ultra-high risk to me. I don’t see any value at all in the equity, because the business is not making a profit, and it’s difficult to see how it will do so in future. Particularly when business rates support is phased out.

That leaves the issue of how it will repay the hefty bank debt?

Hopefully McColls might be able to trade its way out of these financial difficulties, because convenience stores are very useful to the people they serve, and who work there, and of course they’re very good unpaid tax collectors – it’s probably better overall for HMRC to let them pay the VAT amp; PAYE/NICs late, than force it into administration and foot the bill for all those unemployed staff..

As things stand though, I think anyone holding this share should be prepared for the possibility of a 100% loss at some stage. Why take that risk?

There again, towards the top end of a bull market (arguably now – the signs are all around us, it feels just like 1998-99 to me, but with no constraints now on central bank/Govt behaviour, so this could run amp; run), crazy things happen. Tiny market cap companies that just might survive, can be speculative multi-baggers, if you catch a wave of muppet buying – look at what happened with Gamestop. Not my approach at all, but I’m just flagging the reality of a toppy market. Hence you would be insane to short anything right now, even if it does look bust. Anything could happen with the MCLS share price. It could go anywhere. Fundamental value of the equity, is zero, as things stand, in my opinion.

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Judges Scientific (LON:JDG)

6200p – mkt cap £393m

Final Results

Judges Scientific (AIM:JDG), a group focused on acquiring and developing companies in the scientific instrument sector, announces its final results for the year ended 31 December 2020.

Skimming over the numbers, as with many companies, it’s taken a bit of a hit from covid lockdowns.

Adj EPS is down 20% to 177.2p – a PER of 35.0

Outlook -

· Effects of pandemic still being felt but signs are positive, and our sector is adapting;
· Recovery in order intake still in progress.

Acquisitions – two more have been made – that’s the raison d’etre of this group, it’s made a long series of shrewd acquisitions, and funded them mainly from internal cashflows.

100-bagger – JDG has been a stunning success in the last decade or slightly more, which has been a major multibagger. In fact, skimming over the long-term chart, this has been approximately a 100-bagger from the lows after the financial crisis in 2009. Quite remarkable! I think this justifies some discussion, so we can look back, and see if the signs could have been identified? I’m angry with myself for being fully aware of the company all the way along, and doing nothing as it 100-bagged. How could I have been so stupid? So it’s time for some reflection on that.

I wonder how many investors have held continuously since then? If you have, then post a comment, and if we believe you, will be interested to hear why you bought amp; held that long to achieve a 100-bagger?!

I can remember Richard Crow (aka CockneyRebel) banging the table about this one, when it was about 100p, saying it had a lot of potential. It wasn’t obvious from the numbers at the time, at all, but looking back, this has been all about a clear strategy, and good execution. Looking back, it wasn’t a wild speculative stock, it had a sensible, quite conservative strategy, to buy cheap companies in niche products with good margins, often family owned.

I danced around the edges of this share for years, usually complaining that I liked it but it was too expensive! The usual thing.

Was there a way of spotting JDG might be a 100-bagger in advance? One reason I can think of, is not financial. We saw David Cicurel present at Mello, several times, many years ago. I remember he explained a crystal clear strategy to buy cheap, but high quality small businesses in the medical instruments sector, e.g. where the owners wanted to retire. There were no particular synergies, he explained (I can remember snippets from his presentation in my head, c.10 years later). The acquisitions would be funded by modest bank debt, which would be rapidly repaid from the earnings of the acquired companies. He went on to do just that, numerous times, and has created massive shareholder value. He richly deserves a comfortable retirement, having helped so many people.

My current favourite investment book, 100 Baggers, by Christopher Mayer has heavily drawn on many other investment books, which he does reference, so it’s not plagiarism as such. It’s a useful summary of lots of important investment books, which saves me a lot of time, so all good.

In it, he identifies the common traits of 100-bagger shares. JDG does fit that model very well – e.g.

• Owner/manager with a lot of skin in the game (big personal shareholding) – David Cicurel meets that criterion
• Great capital allocation – especially making shrewd, and sometimes transformative acquisitions, at the right price – that’s exactly what JDG has done – you want an owner doing this, risking their own money, not a hired hand
• High ROCE – yup, JDG has those high quality scores, all dark green:

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Then above all, the biggest component of a 100-bagger, according to the book, is patience – sitting back and letting compounding work its magic.

Ignoring drawdowns – i.e. taking no notice of market gyrations, and holding forever, regardless of short term losses from market price movements. OK, who can actually do that in practice?! It’s incredibly difficult.

For a start, you can’t be geared, and I don’t think it’s humanly possible to do that with a large shareholding, hence the 100-baggers are maybe small initial positions that you forget you even own? (the “coffee can” portfolio idea, of tucking away the share certificate under the bed, and checking it in 10 years’ time to see what happened, very much appeals to me).

All very interesting. Looking back then, there really were signs that JDG might become a 100-bagger. Above all, it seems to be all about backing the right management. So difficult to do though. So easy with hindsight! That’s very much what Warren Buffett says in his shareholder letters too – backing the best people, and just letting them get on with the job.

Thinking about all the above, I’m definitely interested in adapting amp; improving my own investment approach, to stop thinking about short term numbers amp; sentiment, and instead think longer term, and more about the key points above.

I hope that’s useful amp; interesting, just thinking out loud really, as I continue my fascinating learning journey in the investment world, every day.

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Boohoo (LON:BOO)

(I hold)

335p - Mkt cap £4.25bn

Leveson Report – March 2021

Sir Brian Leveson has published this report, in his role overseeing the Agenda For Change programme at BooHoo – cleaning up its supply chain.

It’s only 19 pages, and makes interesting reading. For now I’ve only read the Executive Summary, and find it very reassuring. It explains the oversight work that Leveson has done (lots of meetings online), which has left him impressed -

Suffice to say, I have no doubt about the determination of all those whom I have met to address the failings for which boohoo has been criticised and both to promote and to embed a new way of working.

Suppliers have been audited twice, and really extensive work has been undertaken to sort out these issues.

I think this is a very positive report for BooHoo, it’s clear that Leveson approves of what they are doing, concluding -

Having previously recognised that boohoo had implemented real change and accelerated that change following publication of the Review, it is clear that such enthusiasm has continued unabated and is evident in every group contacted. Very real progress continues although there is some way to go to ensure the changes put in place become business as usual.

My opinion – I’ve been amazed at how long this ESG issue has dragged on for, with the press in particular regurgitating the same story numerous times (about Leicester factories). Let’s hope the press might at long last acknowledge that BOO couldn’t be doing more to clean up its supply chain, and give the company some support.

No other retailer has had anything like this scrutiny, so it does feel wildly disproportionate to paint BOO as the villain, in an industry that is known for widespread supply issues, globally. Workers in Leicester are probably paid more, and work in better conditions, than garment manufacturers practically anywhere else on the planet! Where is the press scrutiny of the 4 million Bangladeshis paid 50p per hour, living in slums, who make the clothing for many High Street retailers? There is none, just silence.

The costs of this supply chain clean up must be considerable, and there’s no doubt that Leicester-sourced product will cost more. Of course, Leicester wasn’t used for low cost, it was used for speed to market. Overall then, I doubt whether margins are likely to reduce, because imported product is likely to replace some of the Leicester production, and of course imports are cheaper.

Let’s see what the numbers look like, that’s what matters – results for FY 02/2021 are due out in May. The press, and investors, might obsess about ESG, but BooHoo’s customers don’t. A recent broker note said there was no indication that any of this has affected the popularity of BooHoo products or brand.

I see explosive growth over the next few years, because so many more brands have recently been acquired, plus very strong organic growth. These new brands already had substantial online sales. Once they’re integrated, and the usual BooHoo group expertise on all fronts has been applied, then we could be looking at a group with £3bn+ sales, and EPS of 20p+. Put that on a PER of 50, which is not expensive compared with BOO’s international competitors, and my price target is 1000p (3 times the current level). That’s with a 2-3 year view. Why stop there? The growth is likely to continue, with in maybe 10 years’ time, this being one of the largest fashion businesses on the planet.

It was talking to management which made me realise how astonishingly ambitious, and hard-working, these people are. Plus of course they’re steeped in the rag trade, having prior to BooHoo been market traders amp; fashion wholesalers. They were the biggest supplier to my old employer, back in the 1990s, and were good people to deal with, that’s how I originally knew management. That permeates through the whole business, as I discovered when I visited its Manchester Head Office a few years ago – it’s a hive of activity, with everyone looking focused amp; working flat-out.

Circling back to the points above in the section on Judges Scientific (LON:JDG) about how to spot a 100-bagger, I think BOO ticks all the right boxes too. I think there’s every chance it could be a 100-bagger from the low point a few years ago of c.23p.

This time I’m determined not to miss out, hence am sitting tight on my BOO shares (my largest personal portfolio holding) for the duration, nothing will persuade me to sell. Look at the trajectory of performance so far, and the historic PER ratio – this ESG issue has de-rated the share very considerably, which presents a great buying opportunity in my eyes, for long term investors. It’s only a matter of time until it re-rates upwards, in my view.

The growth is open-ended too – there are 15 brands now, and they’ve only scratched the surface of international sales potential.

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James Latham (LON:LTHM)

901p (up 2.4%, at 11:38) – Market cap £179m

Trading Statement

This is a family-run timber products distributor.

It’s got a very good long-term track record, although as you can see below, profit growth slowed in the last 3 years. It looks like margins have come under pressure, maybe from competitors? (evidenced by revenues rising faster than profits)

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Today we get a trading update -

The Board of James Latham provides the following trading statement ahead of the Company’s results for the year ended 31 March 2021.

Not a particularly helpful update, it says -

Revenue for the year ended 31 March 2021 has continued its strong recovery, after the first quarter was significantly impacted by the first lockdown. Full year revenues are expected to be broadly similar to the revenue figure reported for the year ended 31 March 2020.

Gross margins have also continued to show improvement and are expected to be ahead of the figures reported in H1.

The Company’s balance sheet remains strong.

Why on earth would a company only mention revenues and gross margin, but not the most important number, which is profit before tax?! Who writes these things?!

My opinion - this sounds reassuring, but given that it provides no indication of profitability, then I have nothing to work on. I can’t see any broker forecasts either.

Let’s see if I can work it out manually. Looking back at LTHM’s last interims (6m to 30 Sept 2020), they weren’t bad at all, given the period was impacted by the worst lockdown 1. It managed 25.6p diluted EPS, down 24% on H1 LY. That’s a respectable outcome.

H2 must have been very good, which I calculate c.£140m revenues, up c.30% on H1. It looks as if FY 03/2021 might turn out about 60p EPS? I’ve based that on it recouping some, but not all of the lost EPS in H1. Also it sounds about right, based on 63.1p achieved in FY 03/2020.

Going with my 60p EPS guess, then the PER is 15 – fairly good value in a pricey stock market generally.

Balance sheet – looking at the most recent one, as at 30 Sept 2020, it looks glorious in my eyes! For a start, there’s £25.9m freehold property which seems to be in the books at cost, so could be worth more than book value – this type of conservative, family business, often has loads of hidden value in property bought many years ago.

Current assets (i.e. working capital) is £112.3m, including £26.2m in cash.

Current liabilities (i.e. bills to be paid) is only £31.4m.

Hence a surplus of £80.9m there, or 45% of the market cap. That’s surplus capital which could be extracted by a bidder for the company, e.g. private equity, which could remove the cash amp; load it up with bank debt. It’s in for free basically, even though it’s unlikely shareholders will ever see that surplus capital, because the company is so conservatively run.

Note the pension deficit of £8.8m. This doesn’t bother me, because it’s more than offset by freehold property, which I tend to lump together.

Dividends – LTHM sailed through covid, and has continued paying divis. How about this for a great long-term track record on divis?! -

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Note the special divis a long time ago now.

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My opinion – every time I dig into the numbers at LTHM, it reminds me what a good value share it is. The PER is undemanding, there’s a bulletproof balance sheet stuffed with surplus capital, and a modest, but reliable dividend yield of about 1.8%

It’s cropped up on this neglected firms screen, so I’m going to click on that and check out what other companies have similar characteristics. This is such a good feature on Stocko, and I often use it to find new ideas. The graphic below should be a clickable link:

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Here are the results of that screen, sorted in descending StockRank order.

I recognise several of these names, as being good businesses, and nice value shares.

Do have a play around with the stock screens, there’s loads of useful stuff in there.

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Jack’s section Tandem (LON:TND)

Share price: 631.5p (+9.83%)

Shares in issue: 5,054,091

Market cap: £31.9m

(I hold)

Tandem (LON:TND) is a small, profitable, and cash generative maker of garden leisure products and bikes.

For years it had frustrated shareholders and the market with minimal engagement, and in February of 2020 there were some senior management changes. The hope is that this signals a reset in relations and the share price has rallied strongly since then. This is a ten year share price chart.

It’s a useful reminder that, while trading and the outlook right now are probably positive, this stock had previously been characterized by a frustrating lack of share price appreciation.

In fairness, there are some external drivers behind that share price action: Tandem finds itself with a product mix almost ideally suited to lockdown life – think gazebos for sunny afternoons in the garden, and bike ranges that allow people to skip public transport.

We always knew the FY20 figures were going to be good by historical standards. The question is can Tandem management leverage this temporary tailwind into more sustainable long term profitable growth?

Final Results

Highlights:

• Revenue -4.6% to £37.056m,
• Gross profit +3.4% to £12.192m,
• Operating profit before exceptionals +35% to £4.095m,
• Profit before tax after non-underlying items +59.7% to £4m,
• Net profit +70% to £3.458m,
• Basic earnings per share +69.1% to 68.5p,
• Dividend per share +30.6% to 8.62p,
• Net assets +16.1% to £16.608m; net cash +104% to £3.779m (the fifth consecutive year of increased net cash).

So it has been a year of significantly increased profitability despite a reduction in revenue, and there have been some important operational developments as well.

The figures value Tandem shares at just over 9.2x FY20 earnings and less than that once you factor in the net cash position. And that’s taking into account today’s c10% share price increase as well.

Walking through the revenue figure, the first half of the year saw sales grow by c6% due to growth in cycling and sales of outdoor products. This was partially offset by cautious national retailer FOB (‘freight on board’ – where product is purchased in full containers and shipped direct from the country of origin) wheeled toy buying. FOB is lower margin for Tandem.

In the second half of the year, revenue in the summer period and through to the end of Q3 was behind the prior year due to cautious retailer FOB buying and stock availability.

However, Q4 revenue was back to c6% up year-on-year, which recovered some of the reduction in Q3. All of this has been discussed in previous updates.

In terms of products:

• In Tandem’s character licensed wheeled toy business Peppa Pig, Batman, Frozen, Paw Patrol and Spiderman all made a significant contribution to revenue.
• In its own branded ranges Hedstrom, Wired, Kickmaster and Stunted made solid contributions.
• The group’s Ben Sayers golf brand saw revenue more than double.
• The impact of COVID-19 led to a material change in the bicycle market. From Q2 onwards, ‘revenues were at exceptional levels with significant growth with both independent bicycle dealers (IBD) and national retailer customers.’

Stock availability had been an issue at the peak of Covid disruption but this improved towards the end of the year and enabled a strong finish to 2020 for all parts of the cycling businesses.

Meanwhile, Tandem’s Expressco Direct group of online businesses (which is seen as the longer term source of growth) ‘significantly increased turnover and profitability, with growth from many of our outdoor and indoor product ranges’.

The net result is a slight reduction in revenue that has been more than offset by an uptick in margins as demand grew for Tandem’s higher-margin products.

Tandem spent just £72k on capex, compared to £63k in FY19. Meanwhile, net cash inflow from operating activities before movements in working capital was £3.986m compared to £2.843m in the prior year. This cash generation is a strength of the group and will help fund growth initiatives.

The group does have two defined benefit pension schemes. Both are closed to new members. The deficit increased to £4.157m compared to £2.48m at 31 December 2019 due to lower bond yields.

Tandem paid £477k into the schemes in FY20 and deficit repair contributions are expected to increase by 5% per annum for the Tandem scheme going forward.

Freehold acquisition

The group’s recent freehold acquisition is significant, and could prove to be an important piece of the puzzle moving forwards. The site is right next to Tandem’s existing HQ in Birmingham and will bring much more of the business under one roof. This will reduce operating costs and enhance fulfilment at its growing online division.

The construction of the new warehousing and distribution facility should be completed by June 2022 and will more than double existing warehouse capacity in Birmingham to approximately 160,000 square feet. The company says:

Aside from the financial returns of undertaking the project, there are significant commercial and strategic benefits which we believe will enhance the Group and help to maximise long term shareholder value.

Operational progress

The Tandem management team is busy signing new licences for 2021 and beyond, and initial feedback from retailers is encouraging.

The 2021 range of bicycles has been well received by customers ‘and the demand for bicycles is showing no sign of abatement.’ Tandem has now presold nearly all Squish bicycles for 2021 with an order book well into 2022. Demand for ebikes is also strong.

The group is investing into the cycling business this year with additional recruitment in the digital marketing area and the full redesign of all bicycle websites underway. This redesign will enable ‘click and collect’ functionality for bicycle purchases which will be fulfilled by participating independent bicycle retailers.

The Ben Sayers golf range has been expanded to cater for a wider range of golfers in light of the increased popularity in golf over the last year.

Furthermore, the group is in the process of implementing a new Enterprise Resource Planning and finance system ‘which is expected to considerably improve operational and distribution efficiency.’ This should be live on or before 1 January 2022.

Importantly, the full redesign of its online websites towards the end of 2020 is bearing fruit ‘with revenues from Garden Comforts by Garden amp; Camping (www.garden-camping.com) and At Home Comforts by Jack Stonehouse (www.jackstonehouse.com) in particular delivering double digit revenue growth in 2021 year to date and website visitors well ahead of the prior year.’

Conclusion

Tandem is optimistic about the outlook for 2021 and with good reason. The group notes:

As we reported in February, we are pleased with the encouraging start to 2021 with year to date revenue in the 11 weeks to 21 March 2021 approximately 90% ahead of the same period last year, despite a number of pressures facing the Group.

There are issues, too. COVID-19 continues to have an impact on the supply chain and the group’s ability to identify and source new products has been compromised. So far though, management has clearly done quite a good job of navigating this tricky situation.

The freight issues which it reported on in February are showing signs of improvement, although Tandem is still paying much higher shipping rates than it was paying last year. These should settle in the coming months but for now margins will be taking a hit due to this.

Lead times are an increasingly prevalent issue, particularly with regard to bicycles due to global demand for components. Tandem is committing to purchases much further into the future.

Ultimately though, the forward order book is substantially greater than it was at the same time last year. Management consequently expects to achieve turnover growth.

The group is in a good spot right now and the signs are that this should continue for at least another six months to a year. It would be prudent to forecast some degree of reversion in trade as leisure businesses and transport networks reopen, but there is also evidence of longer term, company-specific catalysts that are being progressed by management.

On that note the freehold acquisition is particularly significant and the group is investing in its online Expressco group of businesses.

Yes, the company has a small market cap and its shares are horribly illiquid, but the price is just wrong here in my opinion, even after what has been quite a dramatic rerate so far.

It’s an unloved stock that doesn’t go out of its way to ‘play the game’ and engage with the market, but this could change and, ultimately, the share price is correlated to a company’s earnings progression.

CMC Markets (LON:CMCX)

Share price: 463p (+4.28%)

Shares in issue: 290,717,473

Market cap: £1.35bn

Here’s another company with an extremely strong recent share price: Cmc Markets (LON:CMCX) . This is a leading global provider of online trading.

With a market cap of more than £1bn it’s now beyond the normal range of the SCVR but it’s a high quality company that generates some fantastic returns on capital and is experiencing heightened trading conditions. Given that, it’s worth touching on.

The past year has been a fascinating time for these platforms. Lockdowns have led to people sitting at home, while furlough and the rest has put spare cash right into their pockets. Meanwhile, we have the rise of RobinHood-style free trading apps and Reddit-based retail investor uprisings against the institutional establishment. And ‘meme stocks’ are now a thing.

Interesting times. We hold IG Group in the Stockopedia Investment Club – but I wonder if CMC has more potential for capital appreciation? Also it hasn’t just made a massive acquisition in a frothy market…

I’m interested to hear views on CMC versus IG, as I’m not much of a spread better myself and have little customer experience of the two.

Trading update

Strong Q4 performance and increased confidence in the FY22 outlook

The entire business has performed ‘very strongly’, with ongoing strength in the acquisition and retention of CFD and stockbroking active clients, and ‘higher levels of client trading activity versus regular trading periods’.

Client income retention remained well in excess of 80%, but below the levels reported for H1 2021.

Net operating income for FY21 is expected to be slightly ahead of the upper end of the current range of consensus of £399.61m, which, combined with continued cost control, is expected to provide positive operating leverage.

CMC continues to see ongoing high monthly active client numbers, which for the full year will be over 75,000. Client acquisition levels have remained high thanks to increased marketing expenditure. These new clients continue to show similarly high value and longevity qualities to prior cohorts.

The above means the board expects FY22 to deliver net operating income in excess of £330m.

Conclusion

Over the last 12 months, market volatility has driven up client activity across the industry, but what’s eye-catching is that these new customers appear to be similar to previous cohorts. This suggests that they might be able to generate a similar level of revenue for the group rather than just fading away after lockdown.

And that’s the big question here: what happens after lockdown?

For now, client acquisition rates continue to be encouraging and CMC is investing in technology and people to support this expanding client base.

The platform looks to be accommodating the increased trading activity, with very high uptime. The group says this reliability ‘has built trust with clients and embedded CMC as a key partner in fulfilling their trading ambitions.’

The group adds:

Robust risk management continues to be fundamental to the ongoing success of the business and, together with ongoing refinement of our analytics and learnings from client behaviour, is a key competitive advantage.

As noted above, CMC has been able to generate attractive returns on capital over time.

CMC expects to report its results for the year ended 31 March 2021 on 10 June 2021. The consensus for profit before tax is £210.6m, ranging from £206.3m to £217.7m. That looks like a lot when compared to the market cap of £1.34bn.

There is always regulatory risk with these businesses, and there is the possibility (or probability?) that trading will moderate somewhat once lockdowns end – but the returns, profitability, and cash generation here are all very attractive so on balance I would expect a higher multiple.

The StockRanks are great, so one to ponder.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-thu-25-march-2021-fntl-mcls-jdg-boo-lthm-tnd-cmcx-786069/