Small Cap Value Report (Weds 14 July 2021) - ZOO, AGY, FIF, SHI, NUM, PMP

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

Timing – today’s report is now finished.

Disclaimer -

A friendly reminder that we don’t recommend any stocks. We aim to cover notable trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they pique your interest. We tend to stick to companies that have news out on the day, and market caps up to about £700m. We avoid the smallest, blue sky type companies, and a few specialist sectors (e.g. resources, pharma/biotech).

A central assumption is that readers then DYOR (do your own research) and discuss in the comments below. The comments, incidentally, sometimes add just as much value as the articles. We welcome all rational views, whether bull or bear!

It’s helpful if you include the company name or ticker within reader comments, otherwise some readers may not be aware of what company you are commenting on.

Agenda -

Paul’s Section:

I enjoyed watching this webinar from our friends at PIWorld last night, with stock picker Richard Lennard. He always comes up with some interesting stock ideas, and I’m following up on his positive mention of recent float Made.com (LON:MADE) . Entertaining delivery too, he’s quite a character! A lot of us did very well on Redde Northgate (LON:REDD) (I hold) at least partly thanks to his prompting last year.

Zoo Digital (LON:ZOO) – results from yesterday strike me as unimpressive. Very poor 21 year track record, of never really making any genuine free cashflow. Yet another placing done in April 2021. Why is this valued at £100m?

Finsbury Food (LON:FIF) (I hold) – this trading update sounds positive, but fails to explain the key point, whether the company is trading in line with expectations or not. I think in this case it’s safe to assume it’s doing OK, and by my calculations could be 7% ahead of market expectations for FY 06/2021. Looks good value on a PER of about 10.

Portmeirion (LON:PMP) (I hold) – H1 (quiet half) trading update doesn’t explicitly state performance vs expectations (how annoying) but does imply that everything is fine. Nice turnaround underway here, and the valuation still seems reasonable. All-important H2 trading yet to come, but the “strong global order book” augurs well. Thumbs up from me.

Jack’s Section:

Allergy Therapeutics (LON:AGY) – Revenue ahead of expectations and costs lower than expectations, so a good result. The allergy products pipeline looks intriguing but a market cap of £160m on little to no profits means that getting these products approved and commercialised is key.

Sig (LON:SHI) – full year profit outlook raised as turnaround takes root and the trading environment becomes more supportive. The shares have rerated from a low base and, while there is still potential upside providing management continues to execute, increased shares in issue limits some of that upside.

Numis (LON:NUM) – Trading remains strong at Numis, which is investing in its headcount and has a strong pipeline well into FY22. Business is cyclical, but the shares continue to trade on a modest PE and the near term outlook remains robust.

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Paul’s Section Zoo Digital (LON:ZOO)

122p (down 3% yesterday) – mkt cap £100m

Final Results – for FY 03/2021

Unimpressive figures, which I’ve skimmed through -

• Revenue up 33% to $39.5m
• EBITDA of $4.5m isn’t real profit in my view, and turns into only $962k operating profit.
• Loss before tax of $3.57m is mainly due to a $3.47m “fair value on embedded derivative” charge – no idea what that’s for, do any readers know?
• Weak balance sheet, with poor working capital position, and negative NTAV – however this was rectified post period end with a £7.4m placing in April 2021. Although this does reinforce that ZOO is not generating much, if any free cashflow.
• Accumulated losses of $59.3m stand out, in the reserves section of the balance sheet. Is that all down to ZOO itself, or did it reverse into a cash shell with previous losses perhaps?
• Development spending of $1.27m was capitalised in the year, plus $2.29m of physical capex.

My opinion – I’ve followed ZOO for years, and it went nowhere in near-insolvency from 2008 to 2017. Then it suddenly shot up, something like 15+ bagging in 2018, but fell back some of the way when the hype turned into little real-world commercial progress – i.e. it’s never really generated meaningful profits or cashflow.

More recently, the strong share price rise (in an uncritical bull market) looks like more of the same to me. Lots of positive commentary/hype with the latest results, but a failure to generate free cashflows again.

Why would I want to invest in something that listed 21 years ago, and is still having to raise equity to keep the business functioning? I cannot see any evidence of a strong business model here. Yet enough people believe in it, to attribute it a £100m market cap. Good luck with that, the story looks very stale to me.

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Finsbury Food (LON:FIF)

(I hold)

91p (yday’s close) – mkt cap £119m

Trading Update

Finsbury Food Group Plc (AIM: FIF), a leading UK speciality bakery manufacturer of cake, bread and morning goods for both the retail and foodservice channels, is today providing an update on trading for the full financial year, ending 26 June 2021, prior to entering its close period ahead of the preliminary announcement on 20 September 2021.

This is one of my core value shares – low forward PER, well managed, trading well, sound balance sheet, high StockRank.

On 26 May 2021 it told us that trading was strong, and ahead of market expectations, with at least £15m PBT expected for FY 06/2021.

This is what today’s update says -

• H2 trading continued to be strong
• H2 revenues up 9.1% vs LY H1
• FY revenues up 2.3% to £313.3m – almost back to pre-pandemic levels, despite continued disruption to some of its markets (e.g. foodservice – i.e. cafes)
• Overseas (small part of the business) doing very well, FY revenues up 13.4% on LY
• Net debt has fallen from £21.5m to £13.1m in the most recent 6 months – impressive
• Cost/efficiency improvements ongoing with Operating Brilliance Programme

Outlook comments – rather vague, but this suggests more upside to come once foodservice gets back to normal -

Our Retail business performed very well and while our foodservice business has continued to be impacted by Covid-related restrictions, the performance of the division has continued to improve on a quarter-by-quarter basis since the outset of the pandemic…

Looking ahead, while the current operating environment continues to experience near-term uncertainty amidst challenging economic conditions, assuming trading conditions continue to normalise, we are confident in our ability to make further progress in the current financial year and in being able to deliver on our longer-term growth ambitions.”

My opinion – a positive-sounding update, but conspicuous by its absence is any profit guidance! The whole point of trading updates is that companies are supposed to tell us how profitability is versus market expectations. FIF did that in its 26 May update, but ignores it completely today.

Given the 26 May profit guidance of gt;£15m PBT was quite recent, and today’s update talks about strong continued trading since then, I’m guessing that expectations would probably be at that level, or slightly better. We shouldn’t have to guess though, the company should have specifically confirmed guidance today.

It doesn’t help that there’s no broker coverage available to PIs either.

Using the StockReport consensus estimates, actual revenue of £313.3m is 1.1% ahead of £310m forecast. Net profit (after tax) of £11.2m forecast looks too low, as the company has previously indicated at least £15m PBT, take off say 20% Corporation Tax, and we’re at gt;£12.0m PAT, or 7% ahead of analyst consensus.

Looking at forecast EPS of 8.55p, if I add 7% onto that, then it comes out at 9.15p EPS for FY 06/2021.That’s a PER of 9.9, in a year that was curtailed somewhat by the pandemic.

This looks a modest valuation, and I think a PER of say 13-15 could be justified. Plus we might allow for (say) another 1p on EPS when foodservice fully recovers. Put that together, and my price target is 132-152p, or 45-67% upside on the current share price. That mainly hinges on my assumption that the earnings multiple should rise from c.10, to 13-15. The market might disagree, and leave it on a low PER, since it looks a fairly boring, ex-growth company. If the rating remains this low, then FIF could be a bid target possibly?

Dividend resumption should be on the cards too, and with a low PER, and modest net debt, the dividend paying capacity is quite high – e.g. it could pay out 5%, twice covered, a very attractive option for income seekers.

Inflation doesn’t worry me at this type of company, because it should be able to pass cost increases on to customers. We already know that the customers (supermarkets, etc) would switch to other suppliers if they could get the same quality at a lower price, so it’s safe to assume that FIF should be able to stand its ground if/when inflation feeds in, because the same cost inflation would impact its competitors too.

Overall then, a thumbs up from me, this share looks a good one for value investors.

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Incidentally, FIF qualifies for the Value Momentum Screen, so thought I’d take a look to find similar companies, and it comes up with some good stuff actually, see screenshots below, which I’ve sorted by StockRank (there are loads of other ways to display, and sort the qualifying shares using the “Table View” drop down menu, and clicking on column headings to sort by that variable). It’s quite fun playing around with these screens, as they can throw up interesting shares.

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I’ve highlighted below a few that I recognise from positive write-ups here in recent weeks -

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Portmeirion (LON:PMP)

(I hold)

655p (unchanged, at 10:59) – mkt cap £92m

Half Year Trading Update

Before looking at this, I should point out that H1 for PMP is not very important, as it’s a heavily seasonal business that makes most of the profit in H2.

Portmeirion Group PLC, the designer, manufacturer and worldwide distributor of high quality homewares under the Portmeirion, Spode, Royal Worcester, Pimpernel, Wax Lyrical and Nambé brands, updates on trading for the six months ended 30 June 2021.

Strong year-on-year sales growth

I would hope so, given that H1 LY caught the worst lockdown 1 period.

Sales here is the same as revenues (I checked the £32.0m H1 LY number to the previous accounts) -

Sales for the first half of the year will be approximately £43.0 million (2020: £32.0 million), representing an increase of 34% compared to the prior period. We were pleased to see sales growth across our three biggest geographical markets of the UK, USA and South Korea compared to H1 2020. We have also continued to see strong sales growth in online channels in our major markets.

Sales vs pre-pandemic level – this is much more meaningful, and is encouraging -

Against pre Covid-19 performance in H1 2019, our like-for-like sales at a constant currency are up by 6% (excluding the benefit of Nambé acquired in July 2019 and the remaining 50% of the issued share capital of Portmeirion Canada acquired in August 2020).

Divis/outlook – this bit is also encouraging I think -

Given the continued and sustained improvement in our trading, we re-confirm that we expect to resume dividend payments for FY21.

Current trading/outlook - I’m happy with this -

“We have continued to trade strongly in May and June and it is particularly pleasing to see that we are achieving like-for-like sales growth over pre Covid-19 trading levels, despite continuing disruption in our markets due to the UK’s lockdown in Q1 2021 and ongoing Covid-19 related global shipping and supply chain delays. This performance demonstrates the strategic progress we are making as a business, including our online and digital transformation and rest of world sales growth.

We have a strong global order book going into our important second half trading period. Whilst we remain cognisant of the ongoing supply chain-related challenges, we remain confident of the trading outlook for the rest of FY21.”

Diary date - 14 Sept 2021, for H1 results.

Dilution - unfortunately, the share count did rise in the pandemic from c.11m to 14m shares. Pity, as it probably wasn’t necessary as things turned out. Hence that means we need to take about 22% off previous EPS figures to lower them to the same level of profitability spread over the increased number of shares (assuming I worked that out correctly).

Peak previous earnings of about 75p would now be 58p for example. There could be upside on previous peak earnings, due to acquisitions, and efficiency improvements.

My opinion - unless I missed it, this update ducked the important point of specifying how PMP is trading versus market expectations. This should be explicitly stated in every trading update, from every company. With a footnote to give the figure for market expectations.

That said, there seems enough positive commentary in this to imply that it’s trading at least in line.

I like the turnaround here under the newish CEO, and the focus on online sales is important. Other problems seem to have been resolved too.

Overall, I think the valuation seems reasonable, possibly even cheap, if the full year numbers are hit – dependent on peak season in the run up to Christmas.

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Jack’s section Allergy Therapeutics (LON:AGY)

Share price: 25.59p (+2.36%)

Shares in issue: 641,772,718

Market cap: £164.2m

The Allergy Therapeutics CEO says it has grown revenue at a compound annual rate of 9% since its formation in 1999. This doesn’t quite come across in the revenue chart but clearly the trend since 2015 is encouraging.

Translating that revenue growth into profitability has not been so straightforward, although this too has started to tick up over the past couple of years.

This is a biotechnology company focussed on the treatment and diagnosis of allergic disorders, including aluminium free immunotherapy vaccines that have the potential to cure disease. It specialises in short course treatment technology platforms with promising potential in the US for its peanut, allergic rhinitis and immunotherapy treatments.

The group sells proprietary and third-party products in nine European countries and via distribution agreements in an additional ten countries. Its pipeline of products in clinical development includes vaccines for grass, tree and house dust mite, and peanut allergy vaccine.

Trading update

• FY revenue to be up 7.8% to c£84.3m (+6% on a constant currency basis), ahead of expectations, but helped by a strong euro rate,
• Restrictions to travel and a reduction in scientific conferences have driven cost savings,
• Consequently expenses are expected to be ‘significantly lower than market expectations’,
• Cash balance at the end of June 2021 was £40.3m (30 June 2020: £37.0m)

Performance in Germany has been solid although the group has experienced weaker sales in southern Europe owing to more Covid-related disruption.

It says the regulatory environment continues to be ‘challenging’ and therefore investing in further market access and regulatory expertise.

Pipeline – the group expects results from the VLP Peanut ex-vivo biomarker study in Q3 2021. The results here will form an important part of its submission to the US Food and Drug Administration (FDA) for the opening of the Investigational New Drug (IND) application and pre-IND meeting, scheduled for autumn this year.

Manufacturing batch scale up has been successfully achieved to maintain product supply through the development programme and the first in-human Phase I trial is expected to commence in Q1 2022. It’s potentially a big opportunity for the group but commercialisation looks a little way off yet.

The exploratory field study in the Grass MATA MPL clinical development programme, G309, is underway with all patients treated and read out is expected in H2 2021.

Conclusion

There are two big pipeline milestones approaching in the form of the VLP Peanut ex-vivo study and the Grass MATA MPL exploratory field trial.

It sounds like there’s potential, but Allergy has also steadily diluted its shareholder base over time, which makes me slightly cooler on the stock.

The group does say that due to the higher revenue and reduced costs, it expects to be able to fully fund the Grass MATA MPL pivotal Phase III field studies and the Phase I Peanut programme with existing cash resources and a small amount of additional debt. So it’s possible that the days of steady equity dilution are coming to a close.

Still, looking at the long term share price chart, it’s hard to escape the feeling that this stock has in the past seriously disappointed the market.

Companies evolve and make progress though, and the investment case can change. The more recent trend in share price is encouraging. Allergy is growing revenue, costs have been (temporarily?) reduced, and the company is doing what it can to progress a pipeline that could have a lot of potential. Incidentally, it qualifies for the Ramp;D Breakthroughs Screen.

And there’s been a swing in return on capital employed, up into positive territory. So it could well be that a lot of hard work and financial investment is beginning to pay off.

Meanwhile the balance sheet looks fine and the company is net cash. Tiny free float though – just 14.27% of shares in issue, with a spread of 400bps, and an EMS of 10k meaning only chunks of about £2,500 can be reliably bought or sold.

I can see things that make me wary here and also things of interest. FinnCap has a target price of 45p compared to today’s 25.6p. I tend not to attach too much weight to explicit price targets, but if they are materially above the current market price then that can indicate there’s something worth exploring in more detail.

At the current market cap of more than £160m and with little to no profits at present, the opportunity would have to be very compelling.

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Sig (LON:SHI)

Share price: 49.04p (+2.34%)

Shares in issue: 1,181,556,977

Market cap: £579.4m

SIG might be classed as a Neutral stock but the truth is it’s firmly in ‘turnaround’ mode, with a sharp 2020 fall meaning the shares now trade on just 0.3x trailing twelve month sales.

It has been loss-making for four of the past five years and, even when this distributor of building products was profitable, margins were very thin.

But directors of the company have been buying stock recently, and the share price momentum since the start of the year has been positive. The finances are flagged as weak but it’s worth mentioning that nearly half of the group’s total debt is actually capital lease obligations.

Trading update – first half of the year

Strategy of re-connecting with Customers, Suppliers and Employees is positioning the Group well, enabling it to take advantage of both strong near-term demand and healthy long-term fundamentals… Full year profit outlook raised.

Highlights:

• Strong revenue growth with like-for-like (LFL) growth of 33% against Covid-affected prior year and up 1% against the same period in 2019, to £1.11bn
• UK distribution 2021 vs. 2019 LFL -19% to £244m,
• UK Exteriors +14% to £194m,
• UK total -7% to £439m,
• EU total +7% to £669m,
• Underlying operating profit of c£13.5m,

The group’s ‘Return to Growth’ turnaround strategy is delivering improved organic sales performance, and has been supported by continuing robust demand in the repair, maintenance and improvement (“RMI”) segments in most markets.

Group profitability improved throughout the period as a result of the normal seasonality in the business and the improving trading across the group. SIG finished the period with net debt of £58m (pre IFRS 16) and with gross cash balances of £174m. Reported net debt on an IFRS 16 basis is expected to be £284m.

The cash outflow was driven by the seasonal increase in working capital, which was more pronounced than usual due to the strong trading. SIG has also built up modest increases in inventories ‘in light of likely supply challenges in the coming months’. The group comments:

We are continuing to see shortages of materials in certain areas, as reported previously, and input price inflation remains significant in some categories. We have navigated these challenges with minimal impact to date, despite some longer delivery times.

UK – Good progress here and SIG expects to be just over break-even at the underlying operating profit level for H1, ahead of plan.

The UK Distribution turnaround is focused on delivering distinctive expertise and superior local service. It’s ahead of plan with continued momentum. The business’s sales were on a declining trend throughout 2019 and most of 2020, and hence the 19% drop in UK distribution versus 2019 shown above. SIG expects positive growth figures in the second half.

The UK Exteriors business is trading well, benefiting from the strong demand environment.

EU – France is doing well, helped in particular by strong RMI demand in Exteriors, as well as the strong foundations built in the business in recent years. Germany also saw good growth throughout the half.

Benelux lags but the group has made changes in its commercial leadership and believes performance will pick up soon. Ireland was affected by the significant government restrictions and the group also expects to see improved growth in the second half here.

Conclusion

On the whole it looks like the return to profitability in H1 was faster and more significant than previously expected so there is momentum here. Material shortages and input price inflation are a concern – as they are right now with many other companies.

At the moment everybody is hoping this is a transient or at least containable trend, but there’s the possibility of it developing into something more sustained and problematic.

Regardless, SIG expects H2 to be both profitable and cash generative, with full year underlying operating profit expected to be ahead of previous forecasts. Worth keeping tabs on assuming societies continue to reopen – shares in issue have more or less doubled over the past couple of years but if it can recover to its old market cap, that would still be more than 80% upside.

That’s not a sure thing, of course. There’s always execution risk in turnarounds and SIG is low margin at the best of times, but currently the group is being helped by a more supportive trading environment.

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Numis (LON:NUM)

Share price: 372.90p

Shares in issue: 107,767,448

Market cap: £401.9m

With all the placings and IPOs that have kept the market busy over the past year or so, it’s no surprise to hear from the horse’s mouth that brokers and investment bankers like Numis are doing well. These are cyclical businesses but everything’s going well at the moment – is this as good as it gets for the share price, or is there further to run?

The share price has not spent long in the high 300s in the past.

But these are exceptional times and there’s a chance pent up demand could drive a further rerating given the group’s modest valuation.

Trading update

Following the very strong trading over the first nine months, we look forward to reporting a record performance for the full year.

An unsurprisingly strong Q3 performance with revenue in excess of £50m. This is slightly lower than the H1 run rate, but is still up on the same period a year ago which benefited from a lot of COVID related deal activity.

Investment Banking and Equities are doing well thanks to investment in clients, talent, and growth initiatives. Work is ongoing to diversify the business by product and geography. Overall, year to date deal volumes and average deal fees are materially ahead of the comparative period.

IPOs contributed in the quarter, but Mamp;A advisory and Growth Capital Solutions for private companies also continue to deliver strong momentum. These areas are where Numis sees scope to expand and improve the quality of its deal flow. It also sees a clear opportunity to expand its Equity Capital Markets offering outside the UK.

The Equities business delivered another strong revenue performance, consistent with recent quarters. Market volumes and activity levels declined slightly but Numis continued to gain market share.

Conclusion

Numis is investing in investment banking talent and will continue to add further headcount over the next few months to support its ambitions. It looks like an operator very much in a position to take market share amid strong trading conditions.

I don’t see why the supportive backdrop would change any time soon. The group itself says that its pipeline for the remainder of the year, and into next, ‘remains very strong’. Assuming it can continue its trailing twelve month performance then the shares trade at 7.9x earnings, which looks cheap given the positive commentary.

Conditions will inevitably turn at some point but there’s nothing on the horizon just yet. So for now this is a high QV stock earning excellent returns on capital with a strong pipeline stretching well into FY22.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-weds-14-july-2021-zoo-agy-fif-shi-num-pmp-836786/