Small Cap Value Report (Mon 21 June 2021) - SNSW, SOS, AMO, SYS, IKA

Good morning! It’s Paul amp; Jack here with the SCVR for Monday.

Timing – I’ll be finished by noon today. Today’s report is now finished.

Reminder – it’s Mello Monday this evening. I’ve (Paul) been roped into doing the BASH panel session, so see you later! More details of tonight’s agenda amp; running order can be found here.

Agenda -

Paul’s section:

• Resumption of divis at £SNSW (I hold)
• New share options for management at Sosandar (LON:SOS) (I hold)
• Pointless name change announced for Amino Technologies (LON:AMO)
• Sysgroup (LON:SYS) – quick skim of the results for FY 03/2021. Too small amp; illiquid, but results look quite decent. Consolidator in a fragmented sector (managed IT services)
  
• Ilika (LON:IKA) – in line (i.e. poor) results confirmed in a trading update. Valuation still looks nuts to me, even after recent falls
  

Jack’s section:

I’ve released Jack to be re-deployed for other duties today!

It’s very light for news today, so here are some brief comments on other things of interest.

Smiths News (LON:SNWS)

(I hold) – the UK’s largest newspaper/magazine distributor, with a rapid, overnight distribution network. Still a reliable cash generator, despite structural decline of its products. Announces a resumption of dividends. An interim divi of 0.5p, payable on 30 July 2021 (shares will go ex-divi 1 July). It doesn’t sound much, but that ‘s a 1.2% payout, and the final divi should be larger. Stockopedia is showing 1.6p divis forecast for this year FY 08/2021, a yield of 3.9%, covered a remarkable 5.75 times.

The stated plan here is to reduce debt to 1x EBITDA (which should happen quickly, due to two exceptional receipts due later this year – a deferred payment from the disposal of Tuffnells, and a rebate from the over-funded pension scheme). Once that has been achieved, then the company has told investors that it will focus on paying out cashflow as divis, and even special divis if cash piles up beyond what is needed.

On a forward PER of just 4.2, this means with a bit of patience, investors should see a nice re-rating here, and be in line for potentially very generous divis in future years.

There obviously is a question mark over what happens to the business longer-term though.

Logically it would make sense for SNWS to be taken over by some other group, which could utilise its distribution network for other products, and buy in a load of cashflow dirt cheap.

Note the high StockRank below.

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(I hold)

A generous re-jigging of the share options for management is announced. Existing share options for 13.89m new shares are cancelled. These had an exercise price of 15.1p (being the original IPO price).

New share options of 21.43m shares are issued at nil cost. This certainly raised an eyebrow. Although reading the terms, it’s not as bad as it initially looks.

Some require the company to achieve breakeven profitability – although at an online business with variable costs, that could be achieved by dialling down the marketing spend on a temporary basis. So it could create unintended consequences.

The balance (about 41%) of the options vest if the share price hits 60p for 60 days. That’s a good stretch target, and I’m sure shareholders would be delighted to see the share price at that level (it’s 23p currently).

It says this new options package was agreed in consultation with “certain of the Company’s major institutional shareholders”. That’s the usual process – they call it market soundings, where the company or its broker will sound out the big shareholders, who usually agree things.

My opinion – this package does look generous, but the thing is with a very small company, in a creative field, the key people really are the business. So if you want to keep them, they need a long-term package, otherwise their incentive is to leave and set up a direct competitor from scratch. So I think this share options package is probably necessary to keep the founders long-term. Nil cost options are not great, but what alternative is there when Directors are not personally wealthy, and are on low salaries? So I think we’ll just have to tolerate this.

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Name Change

Why? Is the only question I have. Amino Technologies is a nice name I think, and is being retained for one of the two divisions, Amino Communications.

The new name is… {drum roll} … Aferian.

Or as Google has just asked me, “Did you mean African?”

What the hell does “Aferian” mean? Have the Rastas been consulted about this apparent partial cultural appropriation?!

As momentum continues to build, it is the Board’s view that a new name would better reflect the true scale, breadth and potential of the Group’s operations and market positioning. As a result, Amino Technologies plc will be renamed “Aferian plc”. The Group’s two go-to-market brands, 24i and Amino Communications, will continue to operate under their respective names.

I fail to understand how Aferian is better in any way than Amino Technologies.

The Non-Exec Chairman, Karen Bach, is stepping down. Maybe she doesn’t like the new name too?

I’m really not keen on name changes, unless you end up with an unfortunate name by accident, like ISIS, where global events outside your control render it undesirable, and could lead to misunderstandings leading to unannounced visits from Special Branch happening all the time.

How much money is going to be wasted on new signage, PR, etc to promote the new name, when people already knew the existing name and there was nothing wrong with it? AMO was an easy ticker for me to remember. The new one is AFRN, which sounds just like that dodgy oil company which multi-bagged, then went bust in 2015, Afren.

Overall, this seems a poor decision to me, and makes me question at least the common sense of management.

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44p (down 5% at 08:45) – mkt cap £21.5m

Very small, and with only a 23% free float, so I’ll keep this brief.

It’s a small managed IT services business, which is not something I would be interested in as an investment. I can’t see any reason why it’s listed. Other than as a vehicle to enrich management, through share-based payments, which are generous, versus dividends which are non-existent. It’s clear whose benefit the company is run for, and it’s not shareholders!

Results for FY 03/2021 out today look reasonably good to me.

Revenue £18.1m (down 7%)

Adj profit before tax £2.1m (up 18%)

Statutory profit before tax only £0.2m – this is the key point, why is statutory profit negligible, when adjusted profit is £2.1m? A lot of the difference is amortisation of customer relationships (which is effectively goodwill), so I think it’s actually fine to adjust this out. I’ve checked the cashflow statement, and it’s not capitalising much in the way of internal payroll costs.

Balance sheet – is OK, but not strong.

Making small acquisitions – sees itself as a consolidator in a fragmented market.

My opinion – it’s not of any interest to me. Too small, illiquid, and not a sector that I find appealing. It seems to me that the technology giants, and cloud software providers, seem to be dominating this space. So will smaller companies need so much managed IT services in future?

SYS is worth keeping half an eye on, because if it makes good acquisitions, then perhaps could begin to scale up a bit?

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146p (down 6% at 11:01) – mkt cap £204m

Trading Update

Ilika (AIM: IKA), a pioneer in solid-state battery technology, provides the following update on trading for the year ended 30 April 2021 and notice of its full year results announcement.

Today’s update is self-explanatory -

Trading for the year ended 30 April 2021 has been in line with management expectations.

The Company expects to announce revenues of approximately £2.3m (2020: £2.8m), share based payment adjusted EBITDA loss of £2.3m (2020: £2.1m) and cash and cash equivalents at the period end were £9.8m (30 April 2019: £14.8m).

Yet another year of no commercial progress.

Ilika floated in May 2010, and has been making the same jam tomorrow claims for its technology all that time – 11 years!

The trouble is, when companies do have apparently impressive technology, you can’t bring yourself to sell, just in case they suddenly announce a massive commercial breakthrough!

The 3-year chart below shows a speculative frenzy, as we’ve seen with many blue sky shares in this bull market. Personally I see the valuation in 2019 (c.20p) as being generous, given the company’s track record.

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At least this frenzy has given an opportunity to exit for a bonanza price.

The market cap is still over £200m. Why?!

There’s always a chance that it might achieve a breakthrough. Is that investing, or just gambling?

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Stockopedia