Small Cap Value Report (Tue 19 Oct 2021) - D4T4, MCB, OMG, GETB

Good morning, it’s Paul amp; Jack here with the SCVR for Tuesday. Today’s report is now finished.

Agenda -

Paul’s Section:

D4t4 Solutions (LON:D4T4) (I hold) – H1 trading update, which is in line with expectations, and also expected to meet FY 03/2022 expectations, with a strong pipeline. Like a lot of software companies, D4T4 looks expensive, but has healthy net cash, and interesting products with large addressable markets.

Mcbride (LON:MCB) – profit warning from this maker of householder amp; personal hygiene products. It’s being squeezed by higher that expected cost increase, and now expects a £10m H1 loss. This is a wake-up call, that investors need to steer clear of low margin businesses with little pricing power.

Getbusy (LON:GETB) – a couple of tiny bolt-on acquisitions are announced, with deferred/performance-linked consideration. Trading update avoids mentioning whether the company is trading in line with expectations or not, but sounds reasonably OK.

Jack’s Section:

Oxford Metrics (LON:OMG) – good quality scores for this motion software company. FY revenue and adjusted profit better than expected and an upcoming capital markets event will set its stall out for growth over the next five years. The shares look fully valued right now, so the group’s CMD presentation will be useful in assessing how much of an opportunity remains.

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.

355p (pre market open) – mkt cap £143m

Trading Update

D4t4 Solutions Plc (AIM: D4t4, “the Group”, “D4t4″), the AIM-listed data solutions provider, provides the following trading update for the six months to 30 September 2021.

Trading Update, CEO succession, and Notice of half-year results

It’s in line with expectations, so this update shouldn’t move the share price much, if at all -

.

“High levels of interest” in new Fraud Data Platform software

Acquisition of Prickly Cactus going well

Further enhancements made to CDP software

Continued sales amp; marketing push (extra costs) which has been flagged before

New contract wins mentioned briefly

Planned CEO changeover is effective from today

Diary date – 1 Dec 2021, for interims to 9/2021

Outlook – sounds fine to me -

The board remains confident in delivering a solid full year FY22, in line with management expectations. Prospects for H2 are strongly underpinned by a significant pipeline of new business from existing clients wishing either to increase the footprint of the Celebrus CDP software or to extend the use of the Celebrus hybrid CDM platform solution, as well as from new customer opportunities for both CDP and FDP products…

“We remain confident about our prospects for the full year. We have strong visibility for H2, with several new contracts in the final stages of negotiation and are building a strong pipeline for our newly launched FDP as well.”

My opinion – no surprises here, it all sounds OK.

It certainly isn’t a value share, with Stockopedia showing the forward PER as 43.8 times. Hence investors are clearly assuming the company has scope to beat forecasts. Software companies often attract premium ratings at the moment.

The reason I hold D4T4 shares is because of the growth potential in very interesting markets, which could scale up considerably if they execute well.

The long-term chart below is interesting, as something happened in 2015 to put a rocket under it. As you can see, D4T4 has been a serious multibagger over the last 20 years. It used to be called IS Solutions, but changed its name to D4T4 in July 2016, presumably to prevent any confusion with terrorist groups?

.

69.4p (pre market open) – mkt cap £122m

Trading Update (profit warning)

McBride plc (the “Group”), the leading European manufacturer and supplier of private label and contract manufactured products for the domestic household and professional cleaning and hygiene markets, provides the following trading update ahead of its 2021 Annual General Meeting later today.

Input cost inflation continues to rise

Global supply chain issues worsen

Shareholders in McBride will have already assumed the brace position – the only question is how much will the shares fall today?

Here’s the update in full, as it’s all relevant -

Since providing the Company’s outlook for the current financial year on 9 September 2021, global supply chains have continued to tighten. Raw material and packaging costs have moved faster and to a higher level than previously expected. In addition, the shortage of haulage capacity and higher fuel costs has continued to substantially inflate distribution costs – again ahead of the Board’s expectations – which show no sign of abating in the near term.

As a result, the Group has begun to seek a second round of substantial price increases from all its customers across all divisions, which, dependent upon specific mix, could result in a minimum of mid to high teen percentage increases.

The Group’s manufacturing facilities and logistics activities have operated well in the period and have shown strong resilience despite all these uncertainties and supply chain disruptions and have worked tirelessly to maintain the best possible customer service. It is pleasing to report that coronavirus restrictions at our Asia operations have recently been lifted and our new facility in Malaysia is ramping up production.

As previously indicated, earnings for FY22 are expected to be weighted to the second half of the financial year, but now with the first half expected to deliver a loss of up to £10m at the EBITA level. Given the unpredictability of current global supply chain and ongoing uncertainty over input costs, the Board is unable to update the full year outlook it provided in its preliminary results on 9 September 2021.

That’s clearly a bad situation. Last year’s H1 results showed £363m revenues, and adj profit before tax of £16.9m. That’s all been wiped out, and a £10m loss this year (at EBITA, i.e. operating profit level) is a serious deterioration.

It’s a pity, because McBride had previously been through restructuring, cost-cutting, and was showing promising signs.

My opinion – this is a stark reminder of how low margin companies which lack pricing power, are probably the worst place to be invested right now, with costs rising sharply, and a time lag in passing those on.

We probably all need to review our portfolios for similar things which might also be facing the same cost pressures.

It all hinges on how much, and how quickly, McBride can pass on the price rises to customers – many of which are supermarkets, and hence notoriously difficult to force through price rises.

That said, McBride’s competitors will be facing all the same cost increases, so I doubt whether customers could switch to other suppliers for cheaper product.

Investors should also think about the potential risk from breaching bank covenants, as MCB had a fair bit of bank debt, when last reporting numbers.

EDIT – I’m very surprised the share price has only fallen 6% today, to 65p. I was expecting a very much larger drop (to c.50p) on what is a grim trading update. Maybe investors had already taken into account supply chain problems amp; inflation, to some extent?

.

67p (up 1% at 10:04) – mkt cap £34m

To recap, here are my notes from the last interim results, published on 30 July 2021. There wasn’t anything particularly exciting in those numbers – GETB has a profitable established software business, which is part-funding startups, which have so far not really gained much commercial traction. The share price has continued falling, and is now a long way off the everything rally peak in the spring of this year.

Trading Update amp; Bolt-on Acquisitions

Trading Update -

Trading has remained robust since the half-year, with progress made in all elements of the Group’s strategy. The recurring revenue growth rate from H1 (12% at constant currency) has been sustained in Q3, and net cash at 30 September 2021 was up £0.3m at £2.3m. The Board looks forward to the final quarter of 2021 and into 2022 with increasing confidence.

Trading updates are supposed to tell investors how the company is performing versus market expectations. That question is dodged by today’s update, so we’re left to assume that it must be trading in line with expectations. Not directly saying so, just leads to investors asking questions, and wondering if maybe the company isn’t confident enough to say it’s meeting market expectations? So a bit of an own goal here.

Acquisitions -

GetBusy plc (AIM: GETB), a leader in productivity software for professionals and financial services, is pleased to provide an update on trading and announce the completion of two bolt-on technology acquisitions within SmartVault, DocDown and Quoters.

This is what the acquired companies do, which seems a good fit with GETB’s existing operations -

Quoters (www.quoters.io) automates proposals and quotes, simplifying a core part of the client workflow for accountants and financial services professionals. DocDown (www.docdown.io) uses online web forms, web hooks and APIs to automate the population of forms and templates, removing the need for error-prone manual transfer of information.

GETB says the terms are attractive, being weighted to future performance (good job, as GETB doesn’t have the balance sheet strength to be making significant acquisitions from existing resources).

Financial details – these are such small deals, there’s not much point in spending any more time on it -

GetBusy is paying a non-material amount of upfront cash for each asset, with a cash earn-out payment in early 2023 of 1x annualised recurring revenue (“ARR”) from the acquired products as at 31 December 2022. The respective earn-out payments are capped at US$0.5m each, with the total potential consideration being funded from the Company’s existing cash resources and such that neither acquisition constitutes a substantial transaction pursuant to AIM Rule 12.

My opinion – I like this share a lot more, now its market cap has reduced to a more realistic £34m. At that level, there could be speculative upside, if growth were to accelerate. I’ll keep it on my watchlist, but can’t see any burning need to buy any yet.

.

.

Share price: 111.71p (+1.1%)

Shares in issue: 126,937,668

Market cap: £141.8m

Oxford Metrics provides software for infrastructure asset management and motion measurement. It does this through two divisions.

Yotta has been operating in infrastructure asset management since 2006, enabling clients to make better, more informed decisions about the way they manage their assets. Clients include central and local government and other infrastructure owners working in highways, street lighting, street works, waste and utilities.

For over 35 years’ Vicon has been the world leader in high precision movement analysis, supplying motion measurement systems ‘for an astonishing range of applications from analysing the gait of a child with cerebral palsy, examining an athlete’s performance, to creating visual effects in Hollywood blockbusters’.

Clients are diverse and include highways authorities, hospitals and clinicians, and Hollywood studios.

It’s a software company that has been around for a while, boasting a Quality Rank of 84, strong cash generation characteristics, and a net cash position – so you’d hope we are on safer ground here.

One of the first things that jumps out is a lack of real revenue growth over time, although Covid may have temporarily obscured a more positive recent trend here.

The forecast PEG is just 0.8x, although this reflects a return to historical levels of earnings per share after Covid disruption, rather than new highs.

Trading update

The group expects to report revenues of approximately £35.7m and an adjusted profit before tax (after adding back non-cash items like share based payments, amortisation and impairment of intangibles and one-off exceptional costs) of approximately £4.6m for the financial year.

This is better than the consensus noted on Stockopedia of FY21 revenue of £32.7m, due to a good performance across both divisions. Vicon experienced growing demand during the second half and has had ‘a very profitable year’ with a solid order-book. Yotta achieved its ARR year-end goal and is also expected to deliver a full year of profitability.

As in many industries, Vicon is currently experiencing some short-term supply chain challenges arising from the well-publicised global semiconductor shortage. This may impact revenues in the first half of the next financial year but, longer term, Vicon ‘is very well placed to capitalise on the substantial market opportunity’.

Yotta is expected to achieve continued growth in ARR and improve profitability further.

The net cash position has increased to £23.0m, with no debt. The group as a whole, remains in a robust financial position which enables the business to pursue its internal investment and Mamp;A objectives in the year ahead.

Oxford Metrics will announce preliminary results for the financial year on Thursday, 2 December 2021.

The group is also holding a Capital Markets Day and five-year growth strategy update today:

It is the Group’s view that the strength of its current platform, combined with the strong financial footing it has achieved over the past five years of organic and inorganic revenue growth, provide it with routes to capitalise on latent opportunities for growth.

Conclusion

Circling back to that cash generation, note how the trailing twelve month price to free cash flow of 20.2x is much better than the forecast PER of 36.2x. FY20 did seem to be a particularly cash generative year, however, so it’s uncertain how sustainable that level is going forwards.

Oxford Metrics believes it can significantly increase its Total Addressable Market (TAM) over the next five years. The materials from its capital markets day will be published on its website.

The group has been solidly cash generative for a long time now, with increasing payments to shareholders and a few special dividends. It also has deep experience in its markets, so there’s a good foundation for future growth.

But there does need to be growth at the current levels. The valuation is quite high and the shares have rerated from the Covid lows.

It’s certainly worth revisiting once the capital markets day presentations are up, to assess the group’s prospects in more detail, as there are signs of quality here. It just needs to be coupled with a suitable, sustainable growth opportunity.

Stockopedia