Small Cap Value Report (Mon 19 July 2021) - BOOM, SUMO, INS, BOOT, MEAL, ACC, EYE

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

Timing – TBC

Disclaimer -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) – don’t blame us if you buy something that doesn’t work out. Reader comments are welcomed – please be civil, rational, and include the company name/ticker.

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Agenda -

Paul’s Section:

Two takeover bids today – a not very credible one for Audioboom (LON:BOOM) and what looks like a done deal for Sumo (LON:SUMO) at a lovely 43% premium – well done to shareholders of SUMO, it’s time to put out your bunting!

Parsley Box (LON:MEAL) – H1 trading update seems OK, but the slowdown in new customer acquisition, and confusing outlook comments might have spooked a few people? Better outlook for H2, the company says. Difficult to value, as pre-profitability.

Eagle Eye Solutions (LON:EYE) – a positive-sounding year end update. Looks very expensive on conventional valuation measures.

Jack’s Section:

Instem (LON:INS) – two ‘transformational’ acquisitions bedding in at this life sciences software provider. Premium valuation but organic and acquisitive growth prospects, recurring revenue, and predictable cash generation do suggest potential.

Henry Boot (LON:BOOT) – ahead of expectations update with good pipeline of opportunities.

Access Intelligence (LON:ACC) – momentum in recurring annual contract value but continues to be loss making, with a large potential acquisition suggesting further dilution for existing holders.

Two more are announced this morning. We’re seeing a tremendous flurry of takeover bids for UK companies this year. Private equity is said to be awash with cash, and overseas investors amp; companies seem to see the UK as cheap, with a lot of bids coming from America. This factor, and the strong V-shaped economic recovery (driving mostly positive trading updates from companies we’re reporting on here), is why I’m personally staying 100% invested, despite the recent market correction in lots of shares.

Today we have -

Audioboom (LON:BOOM)

885p (Friday’s close) – mkt cap £139m

An announcement issued by All Active Asset Capital Ltd.

This one doesn’t look a done deal yet, as it’s still at the discussions stage, and apparently not agreed by Audioboom.

Also it’s mostly in shares, with a cash element – not a very good structure in my view. All cash deals are much better.

Any offer, were it to be made, would consist of 12.5 new AAA shares and 200p in cash per Audioboom Share (the ‘Offer’).

This creates a theoretical bid premium of 36%, valuing AAA shares at 80p.

AAA shares are currently suspended. This is ringing a bell in my head, I think we looked at AAA recently, with one reader thinking it looked cheap. I had a look and there was something wrong with AAA, but I can’t remember what. If you can remember the discussion we had about it, please post a comment below.

My opinion – this doesn’t look very good. Takeovers funded with shares are only of interest if the shares being issued are in something large, liquid, and high quality. AAA shares don’t meet any of those 3 criteria.

Audioboom has improved significantly (my notes from 23 June 2021 trading update are here). It reported strong revenue growth, although still no real profits, so it’s very difficult to value.

Before deciding what to do, I think Audioboom shareholders would need to research AAA, in particular find out what other investments it holds, and whether you would be happy to hold those investments too?

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Sumo (LON:SUMO)

358p (Friday’s close) – mkt cap £614m

This is a much more credible bid, from a huge Chinese group Tencent, listed in Hong Kong.

It’s a cash bid at 513p, a premium of 43%

Recommended by Sumo’s Directors.

Valuation is a multiple of 55.4x adjusted EBITDA – that’s a seriously punchy price! Stockopedia shows SUMO is priced at 40 times FY 12/2021 forecast earnings. Add the 43% bid premium, and that’s a 2021 PER of 57 times – I don’t think anyone can complain about being paid that sort of price! (although investors usually publicly complain that bids are too low, whilst gleefully snapping up the cash on offer!)

27% irrevocable undertakings to accept the offer, plus Tencent already owns 8.75%, therefore 33.4% is currently in favour of the offer, and that’s likely to rise.

My opinion - this is a very credible bid, in a different league to the one above for Audioboom.

What will be interesting, is whether US competitors might join the fray with a better offer? We previously saw something along those lines with another takeover in this video games sector.

It’s a pity to see decent UK growth companies getting snapped up by overseas bidders in a way, but a premium’s a premium. Investors can then use the money to buy up other interesting shares, and you can buy 43% more of them with the bid premium.

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139.5p (down c.17% at 08:58) – mkt cap £59m

Trading Update

Parsley Box Group plc (AIM: MEAL), the rapidly growing direct to consumer provider of ready meals focused on the Baby Boomer + demographic, today provides an update on trading for the interim period ending 30 June 2021 (“HY21″). The Group’s half-yearly report will be notified on 7 September 2021.

Strong H1 2021 growth driven by repeat purchase rates and average order value

H1 revenues – over £14m, up 26% on H1 2020, and up 411% on H1 2019

Net cash – £6.5m cash (and no debt) at 30 June 2021, mainly from £5m raised at IPO in March 2021

New customers – growth rate slowing down (128.7k growth H1 TY, down from 154.3k growth H1 last year – probably to be expected, since H1 LY included boost from lockdown 1)

Repeat customer orders – rose 38% to 256k – that’s quite good, because the company’s stated business model is to acquire new customers, who then have a good lifetime value as repeat customers, and order in larger amounts (average order value is £22.98 for new customers, but rises to £43.30 for repeat customers)

Current trading/outlook – I think this is what might have spooked a few people into selling this morning, and in the strangely wobbly market we have right now, it doesn’t take much to slam a share price down a lot -

As Covid-19 restrictions ease, shopping behaviours are beginning to normalise and this has had some impact on sales growth. However, the Board anticipates that this effect will be short term and is confident that the accelerated shift in consumer behaviour towards our direct-to-consumer model is permanent and that the underlying growth drivers of the business and the favourable demographic trends, remain in place. The Board expects H2 revenue growth to be substantially ahead of H1, driven by product innovation and continuing progress in repeat AOV…. We look forward to delivering the first phase of our product innovation pipeline in H2 2021.

That doesn’t seem very well explained to me, it comes across as contradictory. As an aside, who decided to start putting an “s” on the end of behaviour? It’s funny how language can change – herd behaviour. If shopping behaviour is “beginning to normalise” then why would this effect be short term? That just doesn’t make sense to me.

Maybe H2 could see faster growth because the marketing spend could rise, using the IPO proceeds?

My opinion - I’m undecided on MEAL, and need to see a longer term track record of growth amp; a move into profits. Even then, it might be a bit too niche. I’m generally sceptical about companies that have clearly benefited from lockdowns, telling us that it’s permanent structural growth, and floating their shares on a toppy multiple of pre-lockdown profits (or losses in this case). Remember that’s what Best Of The Best (LON:BOTB) told us about growth, and then promptly warned on profits (just weeks after a large placing of Director shares) when the last lockdown was eased somewhat.

Hence my feeling is that, if a company has clearly benefited from lockdowns, then I’ll completely ignore everything the Directors say about it!

Also, I’m not keen on business models where the valuation rests entirely on splitting the customer base into supposedly highly profitable existing customers, and the losses all coming from marketing spend to recruit new customers. Similar to what Naked Wines (LON:WINE) does. Whilst there is some logic to that, the numbers are not audited, as far as I’m aware, and there’s considerable scope to define KPIs any way you want to, as there aren’t any binding accounting standards on KPIs – businesses can make up any definitions they want.

My other reservation with MEAL is that the product really isn’t very good, based on two orders I’ve placed with the company. The pieces of meat were almost microscopic, and nothing like the pictures in the brochure. Would customers be surprised amp; delighted on receipt of the product? Not if they ordered the fish pie, that’s for sure. Although the half bottles of red wine were fantastic quality.

Why would anyone need ready meals that can be kept in a cupboard for months? Surely people have fridge/freezers?

The lifetime value of someone who is too old to go to the shops, and is struggling to look after themselves, is probably not going to be long is it? Although not all customers are near end of life. People can buy normal groceries online, so why buy these products, when there is so much choice at supermarkets?

Overall then, I remain a bit sceptical about MEAL, but am happy to change my mind if it continues growing, and moves into profit. So one to watch for a while, I think.

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David Stredder has just been on WhatsApp asking me to remind readers here that it’s Mello Monday again today, the last one until September. I’m looking forward to Ed’s section on the Stockopedia share picking competition. Although the way the market has been in the last few weeks, those end June numbers are probably already considerably wilted.

547p (up c.1%, at 11:41) – mkt cap £140m

Trading Update

Eagle Eye, a leading SaaS technology company that creates digital connections enabling personalised, real-time marketing through coupons, loyalty, apps, subscriptions and gift services, is pleased to provide an update on the Group’s trading for the year ended 30 June 2021 (“the Year”).

Exiting the year with positive momentum

The financial highlights show the arguably misleading EBITDA profit. I say misleading, because this ignores heavy development spending (which is capitalised onto the balance sheet) and also ignores amortisation of previous development spending, so it’s a bogus measure of profitability in this case, in my opinion.

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Looking back at the interims, here is the split -

Revenue – H1 £10.8m, H2 £12.0m, so a decent uplift there

Adj EBITDA – H1 £2.1m, H2 £2.1m – no change

Net cash – £0.1m at 31 Dec 2020, £0.8m at 30 June 2021

At the interims stage, the highlights section also included a line for operating profit, which was a paltry £0.2m (from adj EBITDA of £2.1m). I see that row has mysteriously disappeared from the highlights section in today’s update, clearly because they only want us to see the nice numbers!

Commentary/outlook reads positively, it needs to, to justify the market cap, e.g.

· Multiple new customer wins, including Pret a Manger in the UK, Woolworths in Australia, and Staples US Retail, providing a strong platform for further growth in FY 2022 and beyond

· New business pipeline continues to grow at record levels in all regions

With a growing customer base and record sales pipeline the Board looks to the future with increased confidence.

My opinion - I can’t make sense of the valuation of this share. However, the market seems to like it, and the share price has been resilient in a really tough market at the moment.

People must like the gradually building flow of recurring revenues, sticky big name customers, global reach, and positive outlook comments.

It’s a nice company, but how on earth do you value it?
I think it’s far too expensive, but it doesn’t matter what I think, the price keeps going up!

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Share price: 750p (+1.35%)

Shares in issue: 21,780,699

Market cap: £163.4m

Instem is a provider of IT solutions to the global life sciences market. The group came to market in 2010 with strong recurring revenue, a good market position, and solid cash generation. It has continued to grow sales since listing.

Market conditions have been tough at times in Clinical but, following a slide in 2017 and 2018, the group’s shares have rerated aggressively, from a low of 145p in 2018 to some 740p today three years later.

The strong performance means that Instem shares are not obviously cheap but as is often the case with software companies, the question is whether today’s ‘full’ price actually disguises a well run scalable company with the potential to be much larger in five years’ time.

Instem’s solutions allow clients to collect, analyze, report and submit data to regulatory agencies and help them discover new insights from public and proprietary data. It enables these companies to create safer and more effective drugs and chemical products. The group is focused on the early development stages, from late discovery and lead optimisation through to Phase III clinical evaluation, and regulatory submission management.

It has grown organically but also by acquisition – seven in the eleven years since listing – so could be able to expand steadily in future assuming a sufficiently large market.

Half year update

Instem performed well across all areas of the business despite the ongoing backdrop of COVID-19 and continued to execute its acquisition strategy

• Additions of The Edge Software Consultancy ‘The Edge’) and d-Wise Technologies (‘d-wise’),
• H1 2021 revenues increased by approximately 45%, including a four-month contribution from The Edge and a three-month contribution from d-wise,
• Like-for-like revenue growth (excluding contribution from the acquisitions) was approximately 8% which translated to 15% growth on a constant currency basis,
• Strong operational cash generation and closing cash balance of £17.9m

A Progressive Equity note helpfully points out that the cash balance is up to £17.9m after the initial acquisition costs for The Edge and d-wise, growing by c£3.9m on the £14m balance disclosed in the wake of those purchases.

Instem says the d-wise and The Edge acquisitions have ‘transformed the scale of the business and further broadened the Company’s offering across the drug discovery and development lifecycle, increasing recurring revenues and strengthening relationships with clients’.

Like-for-like growth of c8% is encouraging over the Covid period and goes some way to justifying a premium rating; in fact Instem notes ‘favourable market conditions’. That and the cash from recent placings paint a confident picture.

The company must continue to grow though – and on that point it notes increased visibility of revenue and ongoing opportunities within new and existing client bases.

Outlook – Trading continues to be in line with the Board’s expectations and the company is well placed to grow organically and via acquisition.

Conclusion

Growing recurring revenue, strong cash generation, scope for margin expansion, and ongoing organic and acquisitive growth opportunities. There is a lot to like on the face of it here.

As above, the main stumbling block is valuation after a multibagging performance over the past 24-36 months or so.

Instem does operate in a space that provides the potential for strong shareholder returns over time, so I’m not writing it off as too expensive, but it does need to justify its rating with attractive growth prospects.

Some of that depends on the ambition of the management team. The Director Dealings page shows only director sales so far (made during placings as part of retirement plans) but then on the Major Shareholders page we can see institutions increasing their holdings.

They would presumably not be doing that unless they sense a substantial opportunity from here. The group has a small pension deficit which looks to be under control. Very little in the way of debt.

All in all, Instem continues to flag itself as a company of interest.

Share price: 276.98p (+6.12%)

Shares in issue: 133,293,982

Market cap: £369.2m

Henry Boot has been successfully operating in land, property and development for over 130 years, which suggests at least that the company can continue to operate as a going concern for the foreseeable future.

It looks like a frustrating hold for longer term investors however, with no real capital appreciation for five years or more. This was the central concern flagged in the last SCVR write up – perhaps today’s positive update will address that.

There are three segments:

Land promotion

• Hallam Land Management – strategic land and planning promotion, well into its third decade of acquiring, promoting, developing and trading in land,

Construction

• Henry Boot Construction – construction contractor to public and private clients,
• Road Link (A69) – which has a 30 year contract to operate and maintain the A69 trunk road between Carlisle and Newcastle.

Development

• Henry Boot Development (HBD) – dealing with more ambitious developments,
• Stonebridge Homes – builds and sells family homes in Yorkshire,

The group also has Banner Plant, which offers a range of products and services for sale and hire.

Trading update

Henry Boot PLC announces ahead of its interim results that, as a result of strong trading across the Group, performance for the full year is now anticipated to be ahead of the Board’s expectations.

Trading has been strong across the group, with HBD performing particularly well. Here, growth in both occupier and investment demand within the industrial and logistics market, has led to an investment portfolio valuation in excess of half-year forecasts. Further improvement is expected in H2 due to the planned retention of several assets that are currently under construction.

Boot has made acquisitions in both the industrial and logistics market and urban residential market continues to have a ‘significant development pipeline’ moving forward. The company has returned to a small net debt position of c.£13m as it gets to work on these new development opportunities.

Henry Boot Construction continues to trade ahead of expectations on an already full orderbook for 2021. Banner Plant‘s trading levels are back to those experienced in 2019 and are now trading ahead of budget for the year. Road Link (A69) continues to benefit from an increase in traffic levels which are exceeding initial expectations.

Hallam Land Management and Stonebridge Homes are trading in line and continue to benefit from a buoyant housing market.

Conclusion

Perhaps soon Henry Boot’s shares will comprehensively break through that all-time high c300p barrier. It’s a prudently run company that is currently benefiting from a supportive market and its own initiatives, with a healthy looking pipeline of future opportunities.

The group’s mix of businesses is unspectacular but in demand and has provided ongoing opportunities for more than a century. There is value in its solid mix of property development, land promotion, construction, plant hire, housing and Road Link.

A disrupted 2020 should ultimately prove to be a bump in the road for such a company and at present the PE ratio is set to fall from 17.6x in FY21 to 12.2x in FY22. Pre-pandemic, normalised EPS hit 32p back in FY17. Given the strong outlook for construction and surrounding industries, perhaps Boot is looking to recover to that type of level, in which case there could be further upside from here over the next couple of years.

It’s certainly worth considering that scenario at least, because here we have a prudent, modestly valued company, with a solid balance sheet, that relentlessly pays dividends while keeping a lid on shares in issue.

As such it could be a good long term hold candidate for patient investors – but the share price has lacked momentum in the past.

Share price: 119.5p (unchanged)

Shares in issue: 85,891,053

Market cap: £102.6m

Another software company here but, unlike Instem, Access Intelligence is not profitable.

Despite that, it is valued at an even higher premium on a price-to-book basis and at a similar multiple of trailing twelve month sales (5.38x vs 5.71x). Perhaps this is partly due to eye-catching forecast revenue growth, with FY22 revenue expected to be multiples of those seen in FY20.

The group provides software to the global marketing and communications industry.

Interim results

• Annual Contract Value (‘ACV’) base increased by £2.7m (25% annualised) to £24.7m (H1 2020: growth of £1.1m to £19.1m) and H1 revenue increased by approximately 17% to £11.0m (H1 2020: £9.4m).
• Adjusted EBITDA loss of £135,000 (H1 2020: loss of £147,000), reflecting additional investment in sales and marketing to drive global expansion.
• Blue chip customer contracts won in North America, with this region contributing 23% of total ACV growth in the period.
• At 31 May 2021, cash balance was £8.8m (helped by placing of 12.5m shares raising £9.6m in net proceeds).

Adjusted EBITDA is adjusted for share based payments, share of losses of an associate and non-recurring expenses relating to the proposed Isentia transaction, in addition to the acquisition and integration of Pulsar in the prior period.

Post period end, in June 2021, the group announced the terms of a recommended acquisition of Isentia for an equity valuation of approximately AUD$35.6m (£19.4m).

This will be funded by an oversubscribed conditional placing of 39,847,658 ordinary shares and a conditional subscription for 1,819,009 ordinary shares to raise aggregate gross proceeds of £50.0m. The proceeds will also be used to repay Isentia’s gross debt of approximately AUD$45 million (£24.6m).

So the dilution continues apace. Such a large acquisition on the back of sustained net losses strikes me as risky. Why not focus on proving the profitability of the core business first? Unless proving profitability is a tough ask and management hopes a large acquisition or two will be the boost it needs.

Conclusion

After however many years as a listed company, continuing to make losses at the adjusted EBITDA level is not particularly promising. Admittedly, this comes after investment in sales and marketing. Momentum looks to be picking up in terms of annual contract revenue.

There’s a poor track record here though from a shareholder’s perspective, so Access needs to convince us of why the future will not resemble the past. It’s racked up a lot of net losses, and that makes me slightly skeptical about the shoot-the-lights-out revenue forecasts.

Meanwhile shares in issue have been steadily marching upwards as investors fund the company and slowly get diluted. Shares in issue are even higher than the below chart suggests – now up to 85.8m rather than the 72m reported in FY20. This should end the year higher still after the Insentia placing.

High profile partnerships with Twitter and Amazon do show product quality and industry awareness, with some high profile clients including Google, Spotify, Verizon and Twitch.

It’s certainly possible that a company of real, enduring value is being assembled here, and the addressable market is probably large. Some extra research might be rewarded if there does prove to be a promising company approaching some kind of inflection point behind all the losses. It’s my first look here, so I can’t comment on that.

But with so many profitable growing software companies out there – Instem being one – I’d much rather start my search there.

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