Small Cap Value Report (Fri 22 Oct 2021) - SMRT, NEXS, SHI, ZYT

Good morning, it’s just Paul here today, because Jack is busy with other things today.

Today’s report is now finished. I’m about to check out of the Melia Mare Hotel (in Madeira) and relocate to a little Airbnb apartment further to the west of the island, for another week. Pictures to follow on Monday! Have a lovely weekend.

Agenda -

Paul’s Section:

Smartspace Software (LON:SMRT) – profit warning, with guidance for FY 01/2022 lowered considerably. Not a very convincing growth story now, with growth having slowed. Difficult conditions re return to office delays are blamed.

Nexus Infrastructure (LON:NEXS) – FY 9/2021 trading update says its in line with expectations, but no figures on profitability are provided. Lack of broker notes available, leaves me in semi-darkness. Large order book, of over 2 years revenues. I don’t have enough information to form a proper view on this, but based on broker consensus numbers, it doesn’t look cheap.

Sig (LON:SHI) – this building products distribution group sounds positive, beating expectations, but that means it’s barely above breakeven. Looks a poor quality business, with erratic performance, and little to nothing to attract me to the shares. Harsh, but true.

Zytronic (LON:ZYT) – an encouraging improvement in H2, back to profitability. Cash pile is almost half market cap.

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 are analysing the company fundamentals, not trying to predict market sentiment.

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.

95p (pre market open) – mkt cap £30m

Trading Update

Interim results for H1 7/2021 are due out next week (26 Oct), quite late for such a small company, I’m not sure why it takes the company almost 3 months to produce interim numbers.

I commented here on the company’s last trading update, being unconvinced by the story so far, and finding the valuation challenging.

There’s been a hefty sell-off recently, along with lots of smaller caps that arguably got over-stretched in the everything rally -

Profit warning today -

As we emerge from the pandemic, the Group has experienced continued global uncertainty surrounding when and how businesses will require staff to return to the office on a more permanent basis. The various geographic markets in which we operate have all been affected at different times, leading to lower growth than anticipated, as a result of companies delaying investment decisions.

In particular, the Board had expected sales of Naso to accelerate in the autumn, however this has not been reflected in September sales or initial indications for October. Whilst Evoko remains optimistic regarding the future sales trajectory of Naso, the Board has decided to adopt a more cautious stance surrounding the Company’s own forecasts, in light of a more gradual return to the office, as a result of the ongoing challenges of Covid-19.

The Board remains convinced by the medium-term growth opportunity for Naso and expects once business environments return to normal, that stronger growth rates will resume. However, based on current trading, the Board has made the decision to lower growth assumptions for the current and subsequent financial year.

As a result, Group revenues for the year ended 31 January 2022 are now expected to be not less than £5.2m, and EBITDA losses not more than £2.7m.

There’s more information in the update today, but the key message is that growth has slowed down. Blaming delays in people returning to offices doesn’t cut the mustard with me, as that doesn’t justify growth in Q3 slowing down from H1.

Guidance for full year revenue growth is from £4.6m last year, to £5.2m this year FY 1/2022, which seems lacklustre.

Broker notes – I can’t find anything recent, but two notes from Aug 2021 show expected revenue of £6.9m and adj EBITDA of £(0.7)m. Therefore today’s new guidance of £5.2m revenues and c.£(2.7)m adj EBITDA loss, looks a fairly large miss.

My opinion – unfortunately for holders, this update does seem to put a question mark over the whole growth story here. Conditions may still be difficult, but they’re surely improving? Last time I was in London ( a couple of weeks ago), it seemed busy, with plenty of people back in their offices amp; commuting again.

Hefty continuing EBITDA losses could put the cash resources under pressure, although it reports today that it has £3.25m cash at 20 Oct 2021.

Overall then, a disappointing update. The market cap has already dropped to £30m, and is likely to take another tumble today, I imagine. But it depends how enthusiastic holders are, and whether they’re prepared to support the share price by buying more?

Still too speculative amp; early stage for me, and now with a much less convincing growth story.

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237p (pre market open) – mkt cap £108m

Nexus Infrastructure plc, a leading provider of essential infrastructure services, utilities connections, electrical vehicle charging and smart energy infrastructure, announces a trading update ahead of its results for the financial year ended 30 September 2021, which will be announced on 10 December 2021.

The PR headline misses the mark, by not telling us the key question – are results in line with expectations or not? This has aroused my suspicion with its vagueness -

Results underpinned by strong balance sheet and order book, leaving the business well placed for growth in FY22

We can relax, because it then goes on to say (with a small typo) that results are in line (but doesn’t provide a footnote to say what those expectations are) -

The Board expects the Group’s operating profit for the full year ended 30 September 2021 to be in line its expectations…

Revenues for FY 9/2021: £138.0m (up 9.8% on LY)

Order book £286.4m (up 1.6% on LY) – and a large number, at just over 2 years revenues in the order book.

TriConnex – “performed very well”

eSmart Networks (installing electric vehicle chargers) – small, but growing fast, reached (small) profitability

Tamdown (civil engineering) struggling a bit.

Strong balance sheet maintained (I’ve checked, and the last reported balance sheet was reasonably strong)

Outlook -

Looking forward, we expect profits to grow in the year ahead and the business is in a strong position to meet the anticipated increased level of activity driven by a fundamental undersupply of housing and infrastructure in the UK. This is coupled with the growing opportunities to support the UK’s energy transition.”

Valuation - is tricky, due to a lack of published research available.

Using the Stockopedia broker consensus figures (see graph below), the PER looks too high at 22.9 – so investors must be assuming these forecasts can be beaten.

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My opinion – without more analyst research, it’s difficult for me to form a view on this. The share price has held up very well in recent market turmoil. Maybe people like the EV charging part of the business, which is a trendy area?

Historic performance of the company has been a bit erratic, so it’s not something I’m particularly drawn to.

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48.2p (up 4%, at 11:25) – mkt cap £569m

This is a high revenues, low margin distributor of building products, mainly in the UK, France and Germany. It has 6,500 employees, and trades from 425 sites, selling a huge range of products for insulation, interior fit-outs, and roofing.

Roland reviewed its interim results here, when it was already complaining about higher input costs, shortages, freight, etc.

Trading Statement

SIG plc (“SIG” or “the Group”) today issues a trading update for the third quarter of its financial year ending 31 December 2021 (“Q3″ or the “period”).

SIG plc: Strong Q3 and positive outlook for full year

This sounds good, with an acceleration of growth in Q3, against the more relevant pre-covid numbers -

… the solid trading performance seen in July and August continued through September.

As a result, like for like (“LFL”)1 sales growth in Q3 was 17% vs the prior year. This follows the 33% reported in H1, a number distorted by the material Covid impact in 2020. Against pre-Covid 2019 comparatives, Q3 growth was 9%, up from the 1% growth seen in H1.

Inflation is driving up revenues, “with the Group continuing to pass through cost increases. “ – although when Roland last looked, he questioned whether the full cost rises were being passed on, as the profit margin in H1 was negligible (only £9m operating profit, on £1.1bn revenues.

Outlook - this sounds positive, but no figures are provided -

Whilst supply issues persist across many product groups, order books continue to build and the outlook for materials shortages has become clearer. We are mindful of the potential impact of these shortages should the situation persist for an extended period, but remain highly confident in the effectiveness of our supply chain management and commercial agility. As a result of the continued strong sales momentum and operating performance, we are now more confident in our near term outlook and expect full year underlying2 operating profit to be ahead of current market forecasts.

I can’t find any broker research, but the consensus shown on Stockopedia is £2.2bn revenues, and only £4.8m profit after tax – so breakeven, really.

To say they’re ahead of that, but not saying by how much, doesn’t excite me at all.

My opinion – I’m struggling to see anything positive about this share.

What’s the point of this business existing, if it shifts £2.2bn of gear, and can only just get above breakeven?

The historical track record is poor, and erratic. Also note divis fizzled out, and the share count has almost doubled from the pre-2019 number in issue.

With over a thousand shares available in the UK market, why on earth would anyone chose this? I don’t see any attraction at all.

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Remember that, because the share count has almost doubled, then 50p now is the same market cap as 100p used to be.
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Zytronic (LON:ZYT)

181p (up 10% today at 12:23) – mkt cap £21m

Trading Update

This is all self-explanatory, so I’m going to be lazy and cut/paste it.

Zytronic is a small UK manufacturer of bespoke touch screens, with lumpy orders amp; product lifecycles.

…we are pleased to announce a considerable turnaround and a return to profitability since the half year ended 31 March 2021. Over the second half there has been an improvement in sales and gross margins, and strong cash generation.

The improvement in trading in the second half of the financial year compared to the first half was significant, with sales increasing by 44% to £6.9m from £4.8m and gross margins increasing by six percentage points to 33.2%.

EBITDA¹ for the second half is expected to be around £1.3m and operating profit around £0.8m, enabling the elimination of the reported first half operating loss of £0.3m. For the year to 30 September 2021, we expect to report EBITDA of around £1.5m with an operating profit around £0.5m.

The improvement in trading since 31 March 2021 has also contributed positively to the net cash position which has increased by £1.4m since that date to £9.2m at 30 September 2021.

We expect to announce the results for the year ended 30 September 2021 in the week commencing 6 December 2021.

My opinion - it’s good to see performance improve, but this share is too small, and performance too errative, to interest me.

With cash once again building up, maybe there’s a chance of another tender offer?

It’s difficult to see much potential for this company, long-term. It’s not a growth company, and it’s not clear why its shares are listed on the stock market?

Upside might come from winning more orders in future, but as things stand right now, it’s difficult to see much excitement ahead.

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Stockopedia