Small Cap Value Report (Thu 8 April 2021) - COG, ASC, ALT, MOTR, PMI, EQLS, WINK

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

Timing - we’re rattling through things this morning, so should be done by official finish time of 1pm.

Agenda -

Paul’s section -

Early snapshots – quick fire comments on stand out news items between 7-8am. Readers seem to like this innovation, so we’ll keep doing it. Paul gives a quick view on:

• Cambridge Cognition Holdings (LON:COG) (I hold) – another contract win. Looks a very good, and reasonably-priced turnaround share.
• Asos (LON:ASC) – Not a small cap but …. strong interim results, could be worth a look.
• Altitude (LON:ALT) (I hold) – in line trading update. Seems to have enough cash to keep going. Recovery potential? I’m not sure on this one, it could go either way.

Motorpoint (LON:MOTR) – review of FY 03/2021 trading update. Interesting business model. Uncertain outlook. No guidance, so I can’t form a view overall.

Tracsis (LON:TRCS) – Interim results are in line with the last trading update. A good quality group, I think.

Jack’s section -

• Premier Miton (LON:PMI) – UK equity fund inflows but multi-asset outflows worth monitoring
• Equals (LON:EQLS) – cash break even and improving momentum into 2021 for this turnaround fintech company
• M Winkworth (LON:WINK) – resilient results from this high quality but illiquid real estate franchisor micro cap

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(I hold) – another contract win, £0.5m, mostly for delivery in 2021 – with a new client, which has a pipeline of new drugs (implying there could be more contract wins in future). Gross margin last year was 80%, so each new contract layers on useful extra gross profit, onto a largely fixed cost base – that’s the perfect business model to me, and very much what I look for.

Given the large growth in order book previously reported, I think a recent flurry of new contract wins (e.g. £1.3m announced 9 days ago) makes it increasingly likely that forecasts could be raised again – current forecasts look too low to me. I covered all the main points here on 23 March 2021, when it issued much improved 2020 results.

My opinion – COG is clearly on a roll, and I think the shares still look cheap - only £31m market cap, for a now-profitable company, with enough cash, that has seen its order book more than double. I’m very keen on this share – it’s a proper turnaround, that the market is slowly waking up to. Its cloud-based software is ideally placed for the emerging trend towards cognitive testing at home, driven by covid restrictions, but unlikely to reverse as it works just as well, and is cheaper amp; more convenient.

Asos (LON:ASC)

Not a small cap but… worth a look, with very strong H1 results out today. It has always disappointed on profitability in the past (very little of it!), but that seems to have changed. The adj EBITDA margin has gone up from 6.0% to 9.2%. Full year expectations raised. For the first time ever, the valuation actually looks reasonable now! I think this sector (online fashion) is very simple – the best ones are Boohoo (LON:BOO) (I hold) Asos (LON:ASC) Next (LON:NXT) and Joules (LON:JOUL) (I hold). I can’t see any point in wasting time looking at other fashion retailers and hoping for a turnaround. I’m very tempted to open a new position in Asos. Although I still chuckle about selling my initial Asos stake of 500k shares when I had an 80% profit – at the princely price of 9p per share! Everyone of my age and above has an Asos story. Better to laugh about it, than cry over spilt milk.

Altitude (LON:ALT)

(I hold) – in line with expectations update for FY 03/2021, but doesn’t say what those expectations are. Seems to be OK for cash for now, with £2.1m (up from £1.3m when last reported on 22 Jan 2021). Talks about being well positioned to benefit from unlocking.

My opinion – I think the jury is still out, on whether this company does have a workable business model, or if it’s all just hot air? Time will tell. I had a little punt on it, a small position size, because this story has attracted a lot of private investor excitement in the past, so there could be buying interest from a legion of previous fans coming back to it, possibly? Just a punt at this stage.

261p (up 1%, at 08:34) – mkt cap £236m

This car supermarket chain came up on a stock screen I did over the weekend, so I’m happy to look at it today

Full Year Trading Update

Motorpoint Group PLC, the UK’s leading independent omni-channel vehicle retailer, provides the following update on its trading performance for the year ended 31 March 2021 (“FY21″).

Accelerated digital investment drives strong online revenue growth through lockdown

I’m quite taken aback by how much business MOTR is doing online – e.g.

E-commerce investment prioritised, and results exceeded the Board’s expectations

· 52% of retail sales were sold online, over 22,000 units, with 3,300 sold in March alone

Does this mean people are buying the cars without even seeing them? I can see why that might work though, as looking at a Motorpoint website (not for too long though, or I’ll end up buying something, I’m terrible for collecting cars!), the cars are nearly-new, and seem to be low mileage. You can reserve one for a £99 deposit online, and there’s a 14-day money back guarantee. It’s a good business model I think – with large plots of land, hundreds of cars, out of town, with low overheads. Volume prioritised over margins.

There’s plenty of competition though – not just from traditional car dealers, but also from new entrants – we’ve probably all seen the TV ads for online only car dealers, who deliver to your door, and if you don’t like the car you just send it back.

MOTR also has an auction site, Auction4Cars.com targeted at trade buyers.

All in all then, I think this looks an interesting company.

Its historical track record looks quite good, although margins are wafer thin, on a lot of revenues, and EPS seems to have stalled at around 15p in recent years:

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Impact of lockdowns – quite severe at the revenues level – down 29% on LY. That’s not the company’s fault, all that matters is what damage has it done to the company’s finances? Very little it seems, with H2 said to be “broadly” breakeven at operating profit level – i.e. a small loss.

Re-opening – is on 12 April in England, and 26 April in Scotland.

Outlook – a mixed bag here -

… the Board anticipates pent-up consumer demand upon re-opening. The Board also expects growing momentum for its E-commerce, Home Delivery and Reserve and Collect services as consumer buying habits evolve. The accelerated expansion of our E-commerce offering, coupled with new sales and collection branches provides the Board with a high level of confidence in the Group’s potential to gain further market share.

Nevertheless, the Board expects that the impact of COVID-19 will continue to influence events in the new financial year, and given this uncertainty, believes it prudent to refrain from offering future guidance at this time. The position is under constant review, and an update will be provided when appropriate to do so.

Surely they could have given a range of possible outcomes? Plenty of other companies have done so. I would argue that in times of uncertainty, investors need guidance more than ever. We need a change of mindset in the city, from the current attitude of just clamming up in times of uncertainty, to instead giving a broader range of guidance in times of uncertainty.

Guidance shouldn’t be a single number, it should be a base case, with upper, and lower alternatives, thereby giving a range of possible outcomes. Isn’t that just common sense? Most companies already have those scenarios in their internal forecasts. More openness is needed here, at all companies.

The gold standard is Next (LON:NXT) – all companies and advisers should be locked in a room, and forced to read NXT guidance, and then asked “Why aren’t you doing the same?!”. Clear, and detailed guidance is what builds investor confidence, and a higher rating for the shares in the long run.

Diary date - 16 June 2021 for FY 03/2021 preliminary results.

My opinion - I like this business model, and would consider buying MOTR shares if there was clearer guidance about future profitability amp; growth.

It’s all too vague, and therefore I can’t get comfortable with the valuation at this stage.

A Director sold a remarkable £50m of shares in 2018-19 at 200-225p, which makes me wonder why I would pay more now?

I’ve got a little exposure to this sector with a small position in Vertu Motors (LON:VTU) which I’m happy with, so will probably sit on the sidelines with MOTR for the time being. VTU is on a much lower PER, and has vastly better asset backing. It is also busy online, so on balance I think it’s probably a safer bet than MOTR.

There are plenty of other similar listed car dealers to chose from. I see that Lookers (LON:LOOK) has been the star performer of late (also reporting today), seemingly recovering from a problematic past.

Over the last 3 years, MOTR shares have oscillated sideways, and divis have been nothing to write home about.
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720p (unchanged, at 11:28) – mkt cap £211m

Interim Results

There shouldn’t be any surprises here, as Tracsis issued an in line with expectations H1 (6 months to 31 Jan 2021) trading update in late February, which I commented on here.

Tracsys guided us to £22m revenues in H1, and EBITDA slightly down on last year’s £5.6m. Cash was guided at £21m, with no creditor stretch.

Actual H1 results today are as guided – revenue of £22.2m, and adj EBITDA of £5.4m. Cash is reported at £20.8m. That’s fine, it’s in line, near enough anyway. Covid had a big negative impact, but thankfully on the lower margin subsidiaries, so has barely affected profits. Good stuff. Not impacted by reduced passenger numbers on railways, because TRCS is part of key infrastructure, not dependent on passenger numbers – hence a resilient business model.

Current trading -

Encouraging start to Q3 trading with high activity levels across large parts of the Group

Outlook -

We have a significant pipeline of large multi-year opportunities across our Rail Technology and Services Division in both UK and international markets, and in our Data Analytics/GIS business unit. In addition, we are now starting to see an increase in new business enquiries across those businesses that have been hardest hit by the Covid pandemic and this is driving increased confidence around future growth prospects….

Results video – a summary from management is here, and an easily digestible 13 mins, I’ve just watched it – I do like these – video is a much easier way to absorb the key points, rather than ploughing through endless text documents.

Management sound upbeat about the order book amp; multi-year contract opportunities in the pipeline.

Share based charges – look a tad on the warm side, e.g. £665k in H1, which for context is 14.3% of adjusted profit (of £4.65m). In FY 07/2020 share based payments (i.e. free shares for management) was £1.05m, or 12.2% of adjusted profit – again that seems a tad warm, given that the share price has basically gone sideways for the last 3 years. Perhaps more challenging targets should be set in future?

Balance sheet – NAV is £54.4m, but that includes £52.3m intangibles, so NTAV only £2.1m.

There is a £7.8m long term creditor for deferred tax, which might be connected to the intangible assets, it sometimes is. So if I eliminate that too, then adjusted NTAV goes up to a more respectable £9.9m – not very much for a group capitalised at £211m.

The cash pile of £20.8m looks good, but bear in mind there’s a total of £7.9m contingent consideration creditors to take into account – this relates to acquisitions made, and is the expected payout related to performance targets for the acquired companies. I would treat this as debt, hence deduct it from the cash pile, to reduce cash to £12.9m.

Note 11 explains these creditors, and note there is scope for deferred consideration to increase further. Although from memory, I think the acquisitions were set up in such a way that if higher deferred consideration becomes due, it’s self-funding from the out-performance achieved.

Overall then, the balance sheet is OK, and does have some scope to fund some (small) further acquisitions. Anything over about £10m, and I think they would need to think about an equity raise, and/or debt. In the past Tracsis has been prudent about its balance sheet, avoiding debt. Given the proven resilience of the business through covid, maybe management could push the boat out a little, into shallow waters, and take on a small amount of debt for more acquisitions, if they’re decent, cash generative businesses?

My opinion – I do like Tracsis, it’s a nice group of businesses, well managed, conservatively financed, and management sounds positive about the outlook.

A slight annoyance is that it has just spiked up in price after a recent magazine tip.

In terms of valuation, it looks priced about right to me, at 720p. But we’re in a bull market, so share prices can go anywhere, I have no idea what level the share price might rise or fall to, that’s entirely down to market sentiment. It sounds like there’s a good chance of positive newsflow on new contract wins in the pipeline – which tends to trigger strong share price rises in a bull market like this. So it could be a good one to sit tight on, in expectation of contract wins. Maybe, who knows?!

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It has a respectable StockRank of 75, and is classified positively as a “High Flyer”.

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Share price: 152p (+1.33%)

Shares in issue: 157,913,035

Market cap: £240m

Although many asset managers such as Premier Miton (LON:PMI) are genuinely active and seek to provide added value, scale is still the name of the game here in many ways. That’s because the whole industry faces margin pressure from low cost passive funds.

This dynamic likely explains the merger between Premier and Miton (two mid-tier UK funds) back in 2019 that resulted in the £12.6bn fund we see today.

Asset management can still be a fantastically profitable business as long as assets are flowing the right way and investment performance is encouraging. In that sense, they can act almost as a geared play on the direction of the market and for that reason, some of the higher quality picks are probably worth considering in this environment.

Q2 AuM update

This is a short Q2 update but, given the change in market conditions over the past six months or so, I’m curious to see how the professional managers are getting on.

Premier Miton announces its second consecutive quarter of positive net inflows, with AuM up to £12.6bn and net inflows of £193m for the quarter. That makes for £359m of net inflows year-to-date.

• Closing AuM of £12.6bn at 31 March 2021 (31 December 2020: £12.0bn)
• Net inflows of £193m during the Quarter
• Financial year to date net inflows of £359m

Mike O’Shea, Chief Executive Officer, commented:

For the first time in many months, and as we had expected at the time of our last update to shareholders, we saw increasing demand for our UK equity-focused strategies. This sector has been out of favour with investors for some time and it is one where we have a broad and strongly performing range of funds. Should this recent improvement in investor sentiment be maintained, we believe that the Group is well placed to benefit from increasing fund flows given our excellent track record in the area.

So that’s perhaps as we might have expected – it’s a bull market at the moment, and Premier Miton should be making hay while the sun shines.

There are some company-specific developments to note as well:

• A new Premier Miton Global Smaller Companies Fund was launched on 22 March 2021 and Premier Miton ‘continue[s] to believe that smaller companies represent an area where investors will be able to find value over the coming years.’
• Upcoming launch of the Premier Miton European Sustainable Leaders Fund on 10 May 2021, will focus on strong environmental, social and governance (‘ESG’) profiles.
• Cost reductions: of the £3.9bn multi-asset funds, some £2.2bn is managed on a multi-manager basis and £1.7bn is managed through direct investment in underlying securities.

In terms of year-to-date performance, the group’s Equity funds saw strong inflows and market performance, with AuM up 30% to £7.048bn (56% of total); Multi asset fund AuM down 4.4% to £3.937bn (31% of total); Fixed income up 7% to £520m (4.1% of total); Investment trusts up 22% to £731m (5.8% of total); and Segregated mandates up from nothing to £366m (2.9% of total AuM).

Conclusion

It looks like there’s decent value here with a c6% forecast yield and a forecast PE of 10.3.

Margins are the things to watch out for in this part of the market longer term. PMI’s operating margin of 12.33% does appear to lag its peers so perhaps we can expect more cost cutting initiatives moving forward.

There is good momentum in net fund flows, although the multi-asset strategy is currently going the wrong way and, as the second largest segment in terms of AuM, that could probably do with more of an explanation in the update.

There are a couple of high ranking fund managers on the market right now so there are a few alternatives worth checking out as well if you believe equity markets are in for a good year or two.

Equals (LON:EQLS)

Share price: 37.55p

Shares in issue: 178,602,918

Market cap: £67m

Equals (LON:EQLS) is a technology-led international payments group focused on the SME marketplace.

The group used to be called FairFX. Name changes often signify a break from the past and some sort of change in strategy. A quick look at the share price chart shows that shares began their fall before Covid and the price has yet to recover, so it does look like there are company-specific considerations here.

The group operates under an e-money licence, providing products including international payments, expense management, current accounts, credit facilities, multi-currency cards and travel cash.

Its subsidiary, Spectrum Payment Services (SPS), has access to real-time settlement accounts with the Bank of England and is a member of the UK Faster Payments Scheme, meaning customers can transfer and receive funds with immediate effect. SPS is also approved by the FCA to provide credit facilities acting as a broker.

But Equals does have a history of losses, cash outflows, and shareholder dilution. These are all flags I specifically watch out for, although it can mean you miss out on some of the higher risk, higher reward opportunities.

Companies do change and turnarounds can be very rewarding, but the risk is that everything just takes a little longer than expected – which often ends up being costly for shareholders.

Final results

Highlights:

• Group revenue -1.9% to £29m,
• Business-to-business (B2B) revenue +1.8% to £20.3m and business-to-consumer (B2C) revenue -3.7% to £8.7m,
• Gross profit -2.3% to £18.3m,
• Loss after tax -1.5% to £6.9m.

Equals is pivoting towards B2B and flags a further bolt-on acquisition of Effective FX in October 2020.

We’ve got Covid disruption to consider in these results and also the demise of Wirecard AG and its subsidiaries (the largest prepaid card issuer in the UK), whose cards Equals used for all its B2C and some of its B2B programmes.

So the fact the group achieved cash break even in Q4 2020 and says that the first quarter of 2021 has exceeded management expectations, with revenue of £8m and a free cash position of around £9m (5p per share), is creditable.

At these levels Equals is cheap in terms of revenue multiples compared to others in the fin-tech space but the track record of cash burn, shareholder dilution, and net losses do continue to weigh on my mind.

Commenting on the Final Results, Ian Strafford-Taylor, CEO of Equals Group plc, said:

As the UK payments sector becomes increasingly crowded with specialist operators, our unique proposition spanning banking services, international payments and card-based solutions is proving to be a major differentiator for our customers, driving loyalty and new customer acquisition. This, coupled with the benefits of our accelerated planned restructuring and right-sizing of operations, places us in a really strong position as we move past the challenges of 2020 and continue to focus on driving further B2B-led growth.

Conclusion

Top line growth has grown at an impressive CAGR of 41.4% over the past six years, but Equals is struggling to generate profits and cash flow.

Shares in issue have also increased considerably, diluting the upside for shareholders:

But the payments market overall is significant and Equals looks to be carving out a useful position spanning UK banking services and payments, international payments and card-based payments solutions. There could be a big prize at the end of the road.

The key question for me is how much it costs to get there and whether the company is at that inflection point where it can begin self-funding expansion, rather than coming to shareholders.

If cash breakeven in Q4 2020 really is that point then this could develop into a good growth company, but my concern is that Equals could continue to generate revenue growth and talk about big market opportunities while struggling to reach sustained profitability and cash generation.

I can see both sides of the argument here but caution keeps me on the sidelines for now. I’ll look out for future updates to see if the group can sustain this trading momentum.

M Winkworth (LON:WINK)

Share price: 160p (+4.92%)

Shares in issue: 12,733,238

Market cap: £20.4m

M Winkworth (LON:WINK) is one of three listed real estate franchisors that share similarly compelling quality, profitability, and cash flow metrics (the other two being TPFG and Belvoir). Winkworth is the smallest by some distance, with a market cap of £20.4m and an enterprise value of just £17.5m.

The updates from these companies have been surprisingly robust following the shock of initial lockdowns back in 2020, which I take to be the sign of a fundamentally strong business model.

There are two drawbacks to this stock though: its micro cap status and lack of meaningful liquidity, and the lack of real revenue and net income growth over time.

Final results

Highlights:

• Franchised office network revenue of £47.7m (2019: £48.3m)
• Revenues of £6.41m (2019: £6.42m)
• Profit before taxation £1.53m (2019: £1.63m)
• Year-end cash balance of £4.66m (2019: £3.57m)
• Rental income 50% of total revenues (2019: 51%)
• Two new franchises opened
• Dividends of 6.68p declared (2019: 7.8p)

Dominic Agace, CEO of the Company, commented:

Our business model was tested by extreme conditions in 2020 and proven to be very robust. The benefits of local expertise, highly motivated managers and a state-of-the-art digital platform meant that we were quick to emerge from lockdown and improve our market share. While challenges remain, we expect to see an increase in activity in 2021 and we are well positioned to further grow our network and respond to the evolving needs of our customers.

Given the events of 2020, broadly stable revenues and profits is a good result.

Management and lettings activity held up well although recent months have seen a reduction in interest in lettings. On the other hand, a stronger sales market is being driven by families seeking extra room for workspace and gardens, while still maintaining access to central London.

Winkworth expects this trend to continue, and is also experiencing an influx of new buyers at its country offices.

The group will be adding new franchises in 2021 and will continue to use its resources to attract and back entrepreneurial estate agents in key growth areas of Southern England and, after a rebound in sales activity in the second half, the group is experiencing strong momentum going into the first quarter of this year.

Conclusion

This is a small company and liquidity is an issue so it will be tricky to buy at scale.

But the commentary is useful as it shows that the property market is holding up perhaps better than many had feared. This is being helped by stamp duty, true – the government has extended the existing stamp duty holiday until June and on purchases up to £250,000 until September.

While the central London rental market is seeing some weakness, the overall demand picture looks surprisingly robust. Last year saw a resurgence of merger and acquisition activity in the sector and this environment could serve up growth opportunities for a niche, well-funded operator like Winkworth.

Affordability constraints in London will limit price growth but ultimately the capital should bounce back.

The only two things getting in the way with Winkworth are the combination of the group’s small size and liquidity constraints, and it’s lack of historical growth. If it can demonstrate revenue and earnings expansion, then it will become well worth considering.

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