Small Cap Value Report (Fri 24 Sept 2021) - BUMP, SFE, ITS, JDG, TMG

Good morning, it’s Paul and Roland here, with the SCVR for Friday. Today’s report is now finished, have a lovely weekend!

Agenda -

Paul’s Section:

Seraphine (LON:BUMP) – (from y’day) – a profit warning just after 2 months of listing – is this a record? I have a rummage through its prospectus, and conclude this is actually quite an interesting business – supplying niche maternity clothing. Supply chain delays from China caused a shortage of stock in July amp; August. That’s since been fixed. A buying opportunity maybe?

Safestyle Uk (LON:SFE) – (from y’day) – excellent interim results from this double glazing company. Not a sector I would consider, but for people who do, then this share could be worth a closer look.

In Style (LON:ITS) – Trading update that starts well, and gradually turns into a profit warning! Supply chain problems (not a surprise) and much higher customer returns are given as reasons. Underlying demand looks strong though. Impossible to value, given the absence of proper guidance.

Roland’s Section:

Judges Scientific (LON:JDG) – Excellent results from this scientific instrument firm, showing a decent recovery. But the shares are trading at a historically strong valuation, suggesting to me that the shares may be up with events.

Mission (LON:TMG) – This marketing group has delivered a solid set of half-year results, suggesting the business is getting back on track. Although profits are normally weighted to the second half of the year, I think this stock could offer value at current levels.

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Explanatory notes -

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), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.

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Seraphine (LON:BUMP)

Share price: 204p (down c.25% y’day)
No. shares: 50.9m
Market cap: £103.8m

Well this is awkward. This digitally-led vendor of maternity amp; nursery products floated on the main market on 16 July 2021. It’s issued a profits warning today, just over 2 months later.

Trading Statement

The Group experienced a strong Q1 (13 weeks to 4th July 2021) with better than expected demand for higher priced categories and delivered year on year Group revenue growth of greater than 50%. However, trading in the second quarter has been more challenging than the Board anticipated…

Supply chain problems led to a shortage of stock in July amp; August, hence lower than expected sales. It says the supply problems (delayed shipping from China) have now been “fully resolved”.

Digital partnerships (e.g. Zalando) are doing well.

Retail stores (BUMP has 8 shops) are “challenging”

Guidance – I don’t know how this compares to previous expectations, as this is a recent float, and I’ve not looked at it before -

As a result the Group now expects H1 year on year revenue growth to be circa 35% on a constant currency basis (circa 30% on variable currency) and Adjusted EBITDA pre-IFRS16 to be circa £2.5m (circa 15% below previous year).

Looking ahead to the full year, should the recent trends continue, the Group would expect revenue growth to be at least in line with H1 and profit to be at least in line with FY21 (on an Adjusted EBITDA pre-IFRS16 basis).

Actions are being taken to improve performance.

My opinion – obviously an incredibly embarrassing, and infuriating (for institutions who bought into the recent float) profit warning, coming so soon after a new listing.

My view is that supply chain problems are temporary, and fixable, so really shouldn’t impact the long-term valuation of companies very much at all. However, that’s not how the market is actually behaving – shares are routinely slammed 20-30% on supply chain problems. That is creating, and no doubt will create many more buying opportunities. Hence why I think this is a really good time to build up a cash pile, to pounce on panic sell-offs when some companies inevitably report supply chain problems that we all know are coming. That’s an opportunity staring us in the face, and is my main investing theme for the rest of this year.

I don’t have an overall opinion on BUMP, and don’t feel inclined to plough through its prospectus, because most floats are over-priced, and I only tend to become interested if they drop in price by about half.

When the company reports its next results statement, then I’ll take a closer look.

How does it make sense to float something with such a small free float?

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Prospectus - OK, curiosity got the better of me, and I’ve just skimmed through some of the prospectus and this business does look quite appealing. It has a track record of decent growth, delivers high gross margins, and is profitable.

My opinion – this looks like the sort of niche online retail business that I tend to gravitate towards.

At some point in the future, I’ll have a proper dig through the numbers. For the moment a £104m (after today’s profit warning) doesn’t strike me as a bargain, so I’m not motivated to dig any deeper, but will keep it on my watch list, and report back to you when it publishes maiden results as a listed company.

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Safestyle Uk (LON:SFE)

55.8p (up c.8% y’day) – mkt cap £77m

Interim Results

Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and manufacturer of PVCu replacement windows and doors for the homeowner market, today announces its interim results for the six months ended 4 July 2021.

Strong first half driven by improved gross margins and continued progress made against our strategic priorities

The financial highlights look excellent – this is a decisive return to profitability, and is only for H1 remember -

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Order book – is strong -

Order book at the end of H1 was 9.6% ahead of H1 2020′s position and 65.7% ahead of the closing position at the end of H1 2019.

Operational challenges -

Customer service provision has remained a challenge due to the broad range of disruption experienced, most notably labour availability…

Continued operational challenges are anticipated for the remainder of the year, particularly potential supply chain disruption and resource shortages in critical skilled labour pools.

Full year trading is anticipated to be in line with expectations.

Balance sheet - is OK, with tangible NTAV c.£10m.

As with DFS above, double glazing companies benefit from favourable working capital – customers paying at least some up-front.

My opinion – these numbers look excellent. It’s not a sector that interests me, because the big flaw in the business model for double glazing companies, is that so much of the profit comes from a small group of star salespeople. Who can up sticks and join/create a competitor. We saw SFE’s profits wiped out a few years ago, when exactly that happened.

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In Style (LON:ITS)

196p (last night’s close) – market cap £103m

AGM Trading Update

In The Style, the fast-growing digital womenswear fashion brand with an innovative influencer collaboration model, announces a trading update for the period from April to August 2021 (the “Period”)…

This update starts strongly, then steadily deteriorates, such that by the end I think it’s become a profit warning!

The financial year ends 31 March 2022, so today we’re being told about trading in the first 5 months – most of H1.

This is not the easiest trading update to interpret, because ITS floated this year, on 15 March 2021, hence there are no interim results from last year to use as comparatives.

I’ve looked through the Admission Document, and that gives historic years results, plus 9 months to 31 Dec 2020 unaudited figures.

Summarising the figures in the admission document -

FY 03/2020 – revenues of £19.3m, Adj loss before tax £(2.16)m – this year and all previous years are when the business was sub-scale, and loss-making.

FY 03/2021 – the breakthrough year, with revenue shooting up 132% to £44.7m, and a move into adj profit of £2.47m.

It was on the back of this performance that ITS floated on AIM in March 2021 (the prospectus contained 9 month figures to 31 Dec 2020, which showed the very strong growth underway in calendar 2021). My concern was that maybe ITS was benefiting from both a boost to sales from lockdown (as physical competition was closed for much of 2020 and early 2021), and also that a fly-on-the-wall TV documentary gave the company a lot of free publicity. We’ve seen before how a virtually identical series for larger competitor Missguided helped to turn around its fortunes, when it had a period of disastrous performance, narrowly avoiding insolvency.

So there’s no doubt the exposure from documentaries, even though it shows the chaos which is normal for the fast fashion sector, does give them a significant boost.

In the ITS documentary, the team came across as personable underdogs, trying (and often failing) to compete with giants Boohoo (LON:BOO) (I hold) and Asos (LON:ASC) (I hold), and of course we Brits love to support the underdog! So I reckon that documentary probably did ITS much good.

FY 03/2022 – moving on to the current financial year, this is what we’re told today -

5 month (April-Aug 2021) revenues up a startling +45% against strong comparators (although no figures are given other than the % increase). Taking out wholesale revenues, eCommerce Gross Order Value (NB not the same as revenues!) were up an even more impressive +50%.

Keep reading though, and it turns out that there’s been a large increase in the returns rate, due to a shift in demand from casualwear last year, to occasionwear this year. Women customers don’t tend to return much product that is loose, and made in stretchy fabrics (casualwear). But they do return a much higher proportion of say dresses, which are a more complex fit. We’ve heard this from Sosandar (LON:SOS) (I hold), which is why SOS has broadened its product range into other categories with lower returns rates, such as stretch fabric jeans.

It turns out that the +50% Gross Order Value drops to only +25% net revenue growth for eCommerce, which means that customer returns (with the associated cost of postage, handling, and re-sale) have put a massive dent in the sales growth.

I imagine there’s likely to be some read-across to other eCommerce fashion businesses too, and indeed this issue has already been alluded to in commentary from Boohoo (LON:BOO) – the unusually low returns rate of last year was not expected to continue, so it’s a known factor.

ITS customers are buying from their mobile devices through the app – this has now reached 62% (prior year 53%) of total sales.

Wholesaling is up 200%+ due to the launch in 100 ASDA stores, but again no actual figures given.

New hires have been made, which means more central costs, again no figures provided.

Supply chain – the big issue for everyone who imports physical goods from the Far East – i.e. pretty much all companies that sell physical goods of any kind, whether retail, or B-2-B.

Supply chain difficulties should not be coming as a surprise to any investor. I think a lot of this has already been priced-in, with many shares selling off in recent months. The trouble is, the market often punishes shares twice – once in anticipation, then another sell-off on the actual news of supply chain difficulties. These could be our buying opportunities, as mentioned above, so I see this as more opportunity than threat.

The best managed, and larger companies should be able to navigate through these problems, and see strong demand offsetting the extra costs.

Unsurprisingly, ITS today says that it is seeing shipping delays, and extra costs. This is expected to continue until at least March 2022, and will impact profits. Again, no figures given. So this is a profit warning I think.

My opinion – I find trading updates like this very unsettling. We’re not given any specific guidance on profitability, just told that higher costs amp; customer returns will impact profitability. That’s not good enough, investors need numbers.

More detailed guidance is often slipped out by companies, via brokers research analysts, whose research notes are sometimes (depending on the broker) only accessible by a select few institutional amp; high net worth clients of the broker. This is so wrong. Everyone should be given proper guidance at the same time, as the Companies Act requires.

Liberum is generally very helpful, publishing excellent quality research notes via Research Tree. ITS is one of their stocks, so let’s hope they promptly update us through that channel. Nothing has come through so far, but sometimes there’s a short delay.

Supply chain problems are par for the course at the moment, and really shouldn’t be surprising any investors. The trouble is, that shares of this size (particularly recent floats) are largely owned by major holders, with a small free float. So the price moves a lot, on very little volume, because market makers want a neutral book. This means price movements can be greatly exaggerated.

I’m impressed with the sales growth at ITS, because it’s on top of what I suspected was a one-off good year in FY 03/2021. To be lapping those numbers, and seeing +50% higher eCommerce orders is very impressive.

Although the increase in customer returns seems huge, to take that growth down to +25%.

Supply problems don’t bother me, as that’s one-off for now, and I’m not buying this year’s earnings, I’m buying all the company’s earnings for the rest of time. So for long-term investors, a one-off bad year from factors outside the company’s control, should not logically be punished too much. The trouble is, illiquid markets dominated by short term traders, are not logical! Hence why I think it’s a good time to keep a cash pile on the sidelines, ready to pick up some bargains as supply chain problems cause a wave of profit warnings.

In the first hour of trading, ITS is down about 10% to 175p, valuing it at about £93m. That’s not an outrageous over-valuation.

This is a very competitive sector, and it’s difficult to make a profit at all, especially now there is such a focus on ESG. Chinese competitor Shein seems to be rapidly carving out a large market share in the USA, and I think fears about it doing the same in UK/Europe is behind the sector de-rating of online fashion businesses such as Boohoo (LON:BOO) (I hold) and Asos (LON:ASC) (I hold).

I’ll keep an eye on ITS, but am not ready to take the plunge at the current price. If it were to get down to say 100p, then I think it might be worth a punt. It’s incredibly difficult to scale up in this sector, due to the massive marketing spend of the larger companies.

Today’s update hasn’t helped, by warning on profits, but giving no actual numerical guidance. For that reason, it’s impossible to value this share, given incomplete information provided.

In my experience it’s usually a mistake to buy a share with a chart like the one below! Usually better to watch from the sidelines, and see where it settles. Or to only take the plunge when the valuation is so compellingly cheap that further falls don’t really matter, because the longer term upside is so great. ITS doesn’t tick either of those boxes at the moment for me, so I’ll sit on the sidelines for now.

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Roland’s section Judges Scientific (LON:JDG)

Share price: 7,000p (pre-open)

Shares in issue: 6.3m

Market cap: £442m

Half-year results

This highly-regarded manufacturer of scientific instruments is popular with investors – and for good reason.

Today’s half-year results for the period to 30 June 2021 suggest to me that this show is still on the road.

“The Board is confident that the Group will exceed existing market expectations for the current year.”

When Judge’s profits slumped last year, the company said it believed that orders had been deferred, not cancelled. I think today’s results support this claim. Let’s start with a look at the key points.

Financial highlights

• Revenue +14.7% to £43.0m
• Adjusted pre-tax profit +31.5% to £8.5m
• Cash generated from operations +56.5% to £8.0m
• Adjusted eps +31.8% to 111p
• Interim dividend +15.2% to 19p
• Net debt £1.7m (H1 2020: £5.7m)

These numbers are broadly comparable to Judge’s half-year results in 2019. I’ve not compared them explicitly above because the company’s regular acquisitions mean that a comparison of this kind would not be like-for-like.

Fortunately, the company has provided some metrics which show a like-for-like progression against 2020 and 2019.

• Organic revenue +5% against H1 2020
• Organic order intake +25% against H1 2020 and +3% against H1 2019
• Organic order book at 16.1 weeks (H1 2020: 10.8 weeks, H1 2019: 13.2 weeks)

Profitability: According to my sums, today’s numbers give Judges a trailing 12-month operating margin of 14.8% and a TTM return on capital employed of 21.0%.

These are both excellent figures, in my view, and are consistent with the company’s historic performance:

Balance sheet amp; cash flow: There’s not much to say here. Judges’ cash conversion is strong and fairly consistent, and the group’s balance sheet looks fine to me.

The group did not need to dilute shareholders last year and recently secured a new £60m bank facility (previously £35m) to support increased acquisition activity.

Naturally there’s a lot of goodwill on the balance sheet, reflecting past acquisitions. Today’s accounts show £18.7m of goodwill, out of a total equity (book) value of £38.2m. However, given the company’s consistent growth and profitability over many years, I don’t see this as a concern.

Outlook

Today’s commentary is short but fairly reassuring, in my view.

The business is still recovering from the impact of Covid-19 and some scientific markets are recovering more quickly than others. Supply chain issues are having a growing impact, but the company’s recovery is continuing.

The group’s total order book now stands at 20.1 weeks and organic orders (i.e. like-for-like) are 23% higher than at the end of August last year.

Judges’ board is confident that full-year results should be ahead of current market forecasts. No explicit guidance is provided, but broker WH Ireland has put out an updated note this morning upgrading its 2021 earnings forecast by 10% to 208.2p per share.

That puts Judges stock on 35 times 2021 forecast earnings, after this morning’s gain.

My view

Judges’ chief executive David Cicurel is popular with investors and is an entertaining speaker. But he’s also the company’s largest shareholder, with a 10% stake, and the main driver of its disciplined and consistent acquisition-led growth strategy.

I expect Judges to continue to make good progress while Mr Cicurel remains invested and in charge. But at the age of 71, I wonder if succession planning could soon become an issue.

My only real concern today is the stock’s valuation. While I subscribe to the idea of paying a premium for a high-quality company, Judges’ shares are looking a lot more expensive than they have done in the past.

Using Stockopedia’s own WaybackMachine (click on the arrowhead next to the print button at the top of the StockReport), I’ve compared today’s valuation of 35 times forecast earnings with the ratings seen over the last few years:

• September 2021: 35
• September 2020: 29.9
• September 2019: 18.9
• September 2018: 17.4

Judges Scientific has become more expensive, but I’m not sure it’s become a better or faster-growing business.

For me personally, the share price is up with events. Judges’ dividend yield has dropped below 1% and I estimate the trailing free cash flow yield at 2.9%, excluding acquisitions.

These metrics don’t suggest much value to me, given that consensus forecasts ahead of today were suggesting single-digit percentage growth this year and in 2023.

I wouldn’t sell Judges Scientific shares if I held them, but I would want to wait for a better buying opportunity.
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Mission (LON:TMG)

Share price: 76.3p (+1% at 9am)

Shares in issue: 91.0m

Market cap: £68.7m

Half-year results (announced 22/9)

As usual on Friday, it’s a relatively quiet day for news. So I’m going to scroll back to Wednesday and cover half-year results from Mission (LON:TMG)

Mission is a group of marketing agencies that’s appeared in my screening results from time to time and often looks attractively valued. Progress has been somewhat mixed in recent years though, and the company’s revenue was hit hard last year. Timing has been important for buyers:

Financial highlights

Profits are seasonal at Mission – in 2019, around 65% of profit was generated in the second half of the year. So we have to bear that in mind when looking at numbers for the first half of the year.

• Revenue +17% to £34.1m
• Pre-tax profit: £1.4m (H1 2020: -£2.3m)
• Earnings per share: 1.7p (H1 2020: -1.92p)
• Net bank debt £3.9m after settling £4.5m of deferred tax/dividend liabilities

Mission’s business has returned to profitability during the first half of the year and appears to have maintained a healthy liquidity position.

I should point out that the company’s use of revenue (as above) is an adjusted measure. It excludes pass-through costs, such as television advertising, to which Mission does not apply a margin.

Stockopedia’s data provider naturally reports statutory revenue. This is why forecast revenues are much lower than historic revenues:

Mission’s adjusted measure of revenue also impacts operating profit margins, which I’ve highlighted above. For example, the 2019 statutory operating margin of 5.2% shown above is considerably lower than the c.13% margin I calculate for 2019, using TMG’s adjusted revenue.

Excluding pass-through costs is not unusual in this sector. For example, FTSE 100 rival WPP does a similar thing. I think it’s probably fair to say that this adjustment does provide a more accurate view of underlying profitability, as long as it is done correctly and consistently.

Trading update: Eleven of the group’s 13 eligible agencies are said to have delivered year-on-year growth. New business wins included FTSE 250 housebuilder Redrow, Porsche GB, Mecca (bingo, I assume) and online used car retailer Cazoo.

Balance sheet: I’m comfortable with Mission’s debt and cash positions. But it’s worth noting that the balance sheet has negative tangible equity and carries £7.3m of acquisition obligations, which I would view as a form of hidden debt.

Most of these payments are due in cash. If I include these, then the group’s net financial debt rises from £3.9m to £10.9m.

That still looks manageable to me against forecast profits of £5.6m, but I think it’s worth remembering that these acquisition obligations are expected to result in a cash outflow of £6.4m over the coming 12 months. Arguably, the company’s liquidity position isn’t quite as strong as it appears at first glance.

Outlook

Fortunately, the outlook appears to be improving. Assuming that no further Covid-19 restrictions are put in place in the UK, Mission’s board expects

“the Group’s sequential recovery to continue in line with expectations” (my bold).

There’s an updated broker note this morning from commissioned research broker Edison which leaves forecasts for 2021 unchanged. Edison is forecasting earnings of 6p per share in 2021, rising to 8.6p in 2022. These numbers are in line with the consensus numbers shown in Stockopedia.

This gives Mission Group some potentially attractive valuation metrics:

My view

I’ve got mixed feelings about this business. On the face of it, Mission has similar underlying profit margins to larger rivals, but its shares trade at a lower valuation.

The group is also returning to growth and appears to have a positive outlook.

On the other hand, Mission’s practice of regular acquisitions isn’t without risk.

This is also a cyclical business that is dependent on client marketing spend. Last year was an extreme example of how this spending can be cut, but even in a more normal downturn, Mission could see a dip in client spend and a corresponding drop in profits..

Profitability has been somewhat inconsistent over the years, although pre-Covid, the trend was positive:

On balance, I can see potential value here. I could be interested in taking a closer look at Mission at current levels.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-fri-24-sept-2021-bump-sfe-its-jdg-tmg-873049/