Small Cap Value Report (Thurs 20 May 2021) - BEG, NEXS, MMH, BWNG

Good morning, it’s Paul and Roland here, with the SCVR for Thursday.

Timing - I’ve got 2 company zooms coming up from 12-1, and 1-2, so am going to be quite busy today. Am struggling to get my head around the complexity of BWNG too, so think I’m going to need to spend the whole day on this – hence estimated finish time 5pm.

Agenda –

Paul’s section:

Begbies Traynor (LON:BEG) (I hold) – year end trading update for FY 04/2021 – comfortably ahead of expectations. Also strong cashflow, ending the year with net cash of £3.0m. 4 acquisitions in the last year have gone well. There’s lots to like here – I see BEG as cheap, and executing well on acquisitive growth.

N Brown (LON:BWNG) – work in progress. This may take a while, as I’m joining the conference call at 9am, and then need to digest all the numbers, and read an analyst note. This section won’t be up until mid to late afternoon I’m afraid, due to 2 hours of company Zooms coming up, so please bear with me.

Roland’s section:

Nexus Infrastructure (LON:NEXS) – half-year results from this infrastructure group, which has its roots in civil engineering and utility services, but has a growing focus on electric car charging. Can this former AIM growth story get back on track?

Marshall Motor Holdings (LON:MMH) – A solid trading update from this car dealership group. Management expects to match 2019’s pre-pandemic profits in 2021, despite the spring lockdown. Is there still value here?

(I hold)

121p (pre market open) – mkt cap £182m

Year end trading update

Begbies Traynor Group plc (the ‘company’ or the ‘group’), the business recovery, financial advisory and property services consultancy, announces an update on trading for its financial year ended 30 April 2021.

Begbies has been putting out decent trading updates for a while now, plus making a flurry of acquisitions. It now seems that it finished the year with a strong Q4 -

Results expected to be comfortably ahead of market expectations

As you can see below, forecasts (in particular for FY 04/2022) have been rising a lot, due to some quite decent sized acquisitions -

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Key points in today’s update -

• Comfortably ahead of expectations
• There’s a footnote (many thanks, very helpful) – analysts range of forecasts is £10.5 to £11.1m adj PBT
• Strong Q4 (Feb, Mar, Apr 2021)
• 4 acquisitions in the last year – significant increase in scale amp; scope of the group – I don’t think this has been properly grasped by the market yet
• All parts of the business are doing well, including acquisitions
• Strong cashflow
• Net cash of £3.0m at end April 2021 year end – better than expected
• Outlook – well positioned for material earnings growth

Valuation – broker consensus for FY 04/2022 is 9.0p (the lighter coloured, higher line on the graph above). The company is tending to out-perform forecasts, so I reckon 10p might be a better bet. That puts the shares on a PER of around 12, which strikes me as cracking good value for an acquisitive group that doesn’t seem to have put a foot wrong.

Insolvency work is highly specialised, and very high margin (about 30% I think). Begbies (and Frp Advisory (LON:FRP) which I also hold) are both out-performing the sector (which is quiet due to Govt support measures for so many companies averting insolvencies for now).

I can’t see any reason why BEG shares are under 150p, so I’ll be sitting tight on my shares, and am very pleased with progress. Also as mentioned before, I see scope for BEG to be re-rated as a successful acquisitive group, rather than a vanilla insolvency firm.

Plus in any case, earnings are on a strongly rising trajectory, from well executed acquisitions, which usually contain a big earn-out element, hence are partially self-funding. This is the advantage of having an owner-manager in charge (Ric Traynor) – equity is only issued for very good reasons.

Note that the Stockopedia algorithms don’t like acquisitive groups, because I have a feeling the figures don’t strip out goodwill amortisation, which pushes down the quality metrics. Whereas generally accepted practice is to adjust out goodwill amortisation.

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173p (pre-open) – market cap £78m

Half-year results

Nexus Infrastructure (LON:NEXS) has published its half-year results today. This infrastructure group operates in three main areas:

• TriConnex (38% of H1 revenue): this business builds utility infrastructure for new housing developments
• Tamdown (57% of H1 revenue): Civil engineering for housebuilding and commercial sectors. Services include groundworks, roadbuilding, etc
• eSmart Networks (4% of H1 revenue): Launched in 2017. This business covers electric car charging infrastructure, renewable energy connections and on-site high voltage electrical infrastructure

Nexus has a September year end, so today’s interim results cover the six months to 31 March 2021 and appear to be in line with expectations:

• Revenue of £63.7m (H1 2020: 84.2m)
• Operating profit: £1.5m (H1 2020: £3.5m)
• Order book: £301.6m (H1 2020: £299.5m, FY 2020: £282m)
• Net assets up 22.4% to £30.1m
• Net cash £10.7m (H1 2020: £4.6m)
• Dividend restarted with interim payout of 0.6p

To understand the performance, I think it’s worth splitting out these numbers across the group’s three operating businesses:

TriConnex: Revenue rose by 5% to £24.4m during the half year, while operating profit was down 4% to £2.4m. TriConnex’s order book grew by 4.7% to £190.9m – that’s 63% of the group’s total order book.

This business builds the multi-utility infrastructure needed on new housing developments. Trading appears to be stable – indeed, I’d say that TriConnex is supporting the wider group at the moment.

eSmart Networks: Still early stage, but growing fast as electric car charging infrastructure becomes a high priority across the UK. Revenue rose by 156% to £2.8m, while eSmart’s operating loss was cut from £0.7m to £0.4m.

Importantly, the order book is growing fast – up 455% to £12.2m versus H1 2020. As Jack has commented previously, this business could potentially standalone in the future and certainly seems likely to become a bigger part of the group.

Tamdown: the oldest part of Nexus and currently the most problematic. Tamdown is essentially a construction contractor performing work for housebuilders and commercial property developers.

Nexus says that Tamdown’s client list includes “the majority of the top ten largest UK housebuilders”. According to management, uncertainty relating to Brexit and Covid-19 put new contract awards on hold during the first half of 2020.

Order momentum is now said to be improving, but the numbers aren’t great. Half-year revenue at Tamdown fell by 40% to £36.8m (vs H1 2020) and the unit generated an operating profit of just £0.3m.

Tamdown’s order book of £98.5m is still lower than at the end of H1 2020 (£114.9m) but has increased since the end of September 2020 (£92.8m).

I think it’s fair to say there are early signs of improvement at Tamdown, but this business still has a way to go to return to its previous run rate of revenue and profit.

Balance sheet: This is a sector where solvency and liquidity can become a problem, thanks to sizable working capital requirements and slim margins. Given this, I’m pleased to see the group’s net cash position improved last year. Gross borrowings and lease liabilities look manageable to me, too.

I don’t have any serious concerns about the balance sheet here. I’m also reassured to see that CEO Mike Morris remains Nexus’ largest shareholder, with a 22% holding.

If I was going to invest in this sector, I’d prefer to go with owner management, to (hopefully) reduce the risk of dilution or worse.

Cash generation: Nexus reported an operating cash outflow the half year, due to large working capital movements:

Given the group’s net cash position and lack of significant dilution since its flotation, I don’t see anything to be alarmed about here. But before investing I’d want to look at the longer-term pattern of cash generation and understand more about these inflows and outflows.

Outlook: The company says that eSmart and TriConnex are expected to continue trading well, supported by government programmes to encourage new housing and electric transport. Tamdown is expected to show improved profitability “over the medium term”.

The outlook is said to be confident, hence the decision to reintroduce the dividend.

My view

Nexus floated on AIM in 2017, but after a strong start progress has been somewhat mixed since then:

Oddly enough, profits appeared to peak in 2016 (the year before IPO) and have not yet returned to those levels. Another example of private owners knowing the right time to sell?

The Stockopedia stats show revenue was flat from 2015 through 2019, while profitability varied:

In fairness, this isn’t a terrible performance for this sector. But today’s half-year results show a further decline in operating margin, to 2.4% (H1 only). The direction of travel needs to reverse soon, in my view.

Looking ahead, consensus forecasts suggest that after the setbacks of last year, earnings are expected to improve over the next 18 months.

However, a fair amount of growth does seem to be priced into the stock already:

I reckon that this valuation could be supported over the medium term by the growth of the eSmart Networks business. But for now, my view is that Nexus is probably close to fair value.

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175p (+1.5% at 0845) – £137m market cap

AGM Trading Statement

Car dealership groups such as Marshall Motor Holdings (LON:MMH) have been a good recovery play over the last year. In Marshall’s case, the stock is now trading ahead of pre-Covid levels.

Profits have recovered strongly, too. In today’s AGM trading statement, the company says that underlying pre-tax profit for 2021 is expected to be “not less than 2019’s result of £22.1m”. This will be achieved “after repayment of CJRS and non-essential retail sector grants” totalling £4m.

I’m pleased to see Marshall’s repaying these government monies. Although the business was entitled to them, my personal view is that companies should not retain these payouts unless they’re needed to support employment or the operation of the business. That’s clearly not the case here.

Moving on, what can we learn from today’s update?

Trading summary: Trading during the first four months of 2021 was hit by the lockdown closure of showrooms. However, like many of its peers, Marshall was able to continue operating on a click and collect basis.

According to the company, both new retail and used car sales outperformed the wider market during this period:

Used car sales have also been strong:

One comment I’d make on these numbers is that the comparison period (the first 3/4 months of 2020) is not necessarily very meaningful, given the situation in the early stages of the pandemic. Even so, I think Marshall’s performance looks very respectable.

Indeed, I’ve been impressed by how quickly car dealers have made the shift to online retail during the pandemic. In my view, this is a trend that aligns well with the reduction in outright car ownership (versus contract plans). I think online car buying will stay with us.

Financial position: No detail is provided, but the group says its financial position “remains strong”, with good cash generation so far this year.

Although I’d like to see some numbers, I’m inclined to accept this claim based on the group’s historical performance and its 2020 year-end net cash position (ex-leases).

Growth opportunities: Marshall’s describes itself as a consolidator in this sector and says it is reviewing a pipeline of potential acquisition opportunities. However, management promises to focus on deals which add shareholder value and complement brand partners’ objectives.

Again, based on past performance I don’t have too many concerns about this.

Outlook: Management are pleased with performance so far, but flag up significant uncertainty for the remainder of the year. In addition to Covid-19 risks, the company warns that the market could see supply shortages of new and used vehicles, as a result of global semiconductor shortages.

This is an issue for a number of sectors at the moment. But one account I read recently suggested that car manufacturers have ended up at the back of the queue for chips, after cancelling orders early last year and then being forced to reinstate them more recently.

However, despite “a range of possible outcomes” for 2021, the board remains confident of matching 2019’s pre-pandemic profit.

My view

I’ve admired this business for a while. My perception (as an investor and a customer) is that the company is well run and disciplined. I don’t see anything to change that view in today’s statement.

Are the shares attractively valued after such a strong run? Rather like housebuilders, a lot depends on your view on the outlook for the economy. I try not to take a strong stance on this as I view it as beyond my paygrade and competence.

What I can see is that Marshall’s underlying trading seems likely to remain at the upper end of the group’s recent historic range:

This business also seems to be emerging from the pandemic in good financial shape, with its historic competitive advantages intact.

However, we need to remember that this is a famously low-margin sector which depends heavily on aftersales for profitability. Gross margins on new and used car sales were just 0.66% last year – the equivalent figure for aftersales was 45%.

There’s also some cyclical risk to this business, which is hard to quantify right now..

On balance, I think Marshall’s stock’s forecast P/E of 9 and prospective yield of 3.7% could be attractive, if not obviously cheap

Stockopedia