Small Cap Value Report (Mon 14 Mar 2022) - MORE, CBOX, FNX

Good morning, it’s just Paul here today, as Jack’s taking some well deserved time off!

Agenda - 

Paul’s Section:

Hostmore (LON:MORE) (I hold) – my review of the in line figures. Everything looks fine to me, apart from a slightly soft current trading update (LFLs down 3% in first 8 weeks). Forecasts have already factored in increased costs, and there should be good profits coming from new site openings on very attractive rental deals. Looks fully funded to expand with 3 different formats. Very cheap in my opinion. But households might rein in discretionary spending as inflation bites.

Cake Box Holdings (LON:CBOX) – an in line trading update, and sensible management changes are announced. Will shareholders put the accounting/audit problems behind them now, or could the new CFO want to kitchen sink the next numbers? How will institutions (selling) react? Is this going to reassure them, or do they just want out?

Fonix Mobile (LON:FNX) – excellent interim results, with simple, clean numbers, that I can’t find any fault in. This looks a decent GARP share, so gets a thumbs up from me. Cash generative, paying decent divis, and growing nicely, with a solid outlook. Also has very sticky, repeating business from established clients. There’s lots to like here, as a long-term hold. 

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review 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.

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83p (down 10% at 09:10) – market cap £105m

Preliminary Results

Hostmore plc (the “Company” and, together with its subsidiaries, being the “Group”), the hospitality business focused on American-themed casual dining brand, ‘Fridays’, and the cocktail-led bar and restaurant brand, ’63rd+1st’, is pleased to announce its unaudited results for the 53 weeks ended 2 January 2022 (“FY21″).

We’ve followed this share closely here at the SCVR, after it demerged from Electra Private Equity. So far, the demerger has been a complete flop. Not because anything is wrong with the company, but because the broker seems to have completely failed to drum up any buying interest in the shares. The £8.1m cost of listing fees look outrageous to me, given the poor result.

Also to be fair, recent inflation shocks, events in Ukraine, and tightening household budgets/sentiment have hit the sector hard – see comparison chart below with Restaurant (LON:RTN) , Fulham Shore (LON:FUL) , and Various Eateries (LON:VARE) – it’s a little difficult to distinguish the lines, as they cross over, but MORE is the worst, down 31% year-to-date, followed by RTN down 26% YTD, and FUL down 22% YTD.

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I can see why investors would cool on restaurants at the moment, because it’s discretionary spending for customers. However, we’re not just buying this year’s earnings. We’re buying all future earnings, and consumer discretionary spending goes up amp; down, but over the long term should rise. So this sell-off could be presenting us with a longer term buying opportunity. I certainly think so, MORE looks very attractively priced to me. Particularly as there’s a lot less competition now, and a lot more look set to close down later this year, as Govt support measures end.

I’m trying to type this at the same time as listening to the analyst webinar, which is a struggle!

FY 12/2021 was a highly disrupted year, due to the pandemic – little to no trading in the 4-5 months up to May 2021, partially offset with Govt support measures, e.g. furlough, reduced VAT, business rates relief, and negotiated landlord support.

Some numbers -

Revenues £159m (similar to Edison forecast of £160m). Important to note that revenue is forecast to rise to £242m in FY 12/2022, assuming restaurants can trade normally.

Adj EBITDA (pre IFRS 16) is £21.5m, which seems to be £1m ahead of the Edison forecast I’m looking at of £20.5m

Adj EPS is 6.4p. Edison doesn’t seem to have worked out an adj EPS forecast, so I’m not sure how that compares.

Net debt of £12.2m is much lower than I was expecting, and has risen a bit to £13.2m by 27 Feb 2022.

Like-for-like revenues were up 4% on pre-pandemic (2019) trading, from re-opening in May 2021

Current trading – a bit disappointing, down 3% on pre-pandemic, for first 8 weeks of 2022

New sites – 4 opened in 2021, 6 targeted in 2022. Lots of opportunities, especially when rent moratorium ends shortly (total sites currently 88 operating)

Substantial bank facility of £65m agreed in July 2021 through to Oct 2023 – loads of headroom, with net debt at only £12.2m

Free cashflow strikingly high at £31m

Growth to come from new sites, and potentially small acquisitions (small disrupter brands, which don’t have capital to expand on their own – seeing opportunities here)

Positive outlook despite cost headwinds

Energy costs hedged, and food/beverage largely contracted for 2022 – so should cope better with cost increases than competition. Not planning to raise prices much when VAT returns to 20% – good, because I think the prices are too high already.

Edison forecast is 10.7p for FY 12/2022 – giving a PER of only 7.8 - seems abnormally low, maybe the market doesn’t believe the current forecast? Mgt confirmed in analyst call today that the increased costs are already factored into forecasts

InvestorMeetCompany webinar is at noon today

Fridays amp; Go – a new concept being trialled (small site, takeaway, a bit like a posh MacDonalds) – first site opens this week in Dundee – one to watch

Intention to pay divis in future

One-off stock market listing fees of £8.1m, main reason for a statutory loss of £1.6m in FY 12/2021

Balance sheet - management keep saying how strong it is, but I would say it’s OK, rather than strong. NAV £125m, less goodwill of £146m, gives negative NTAV of £(21)m. This deficit is caused by the lease entries, which are net £(34.6)m. It’s the usual IFRS 16 nonsense, to I tend to remove these entries, which moves NTAV positive, to £13.6m – not much, but adequate.

A couple of useful points from the analyst call -

£5m of the RCF paid off today from the substantial cash pile

New sites – deals have to be good. Expecting lots more new sites from end March when multiple negatives hit the sector: rent moratorium ends, VAT amp; Business Rates return to normal, Living Wage increases. All factored into existing forecasts.

New site deals agreed for FY22 so far have rents of 4.9% of expected revenues. Compares very well with gt;10% pre-pandemic. Not paying lease premiums either, and expect a significant landlord contribution towards fit-out, plus a rent-free. Landlords favour TGIs as a new tenant because of the collaborative way they handled the pandemic. So in a very strong position, and have loads of liquidity available for expansion.

Net debt has reduced due to strong cashflows. Expect it to come down modestly, but main focus now on capex/expansion, and also some remaining stretched creditors re rents will be paid.

My opinion – the fundamentals look excellent to me. This is a good business, generating strong cashflows, and has very good expansion opportunities ahead, and the funding in place to do it.

Hence if we look beyond the poor sentiment around this share, and the very modest valuation, I remain of the opinion that it’s an excellent buying opportunity.

We all have our views on the brand, etc, but the fact is that the business is strongly cash generative, so our views don’t really matter. It’s money in the till that matters.

Who knows how long it will take for the stock market to digest the overhang of shares? As long as the fundamentals remain strong, it’s just a question of waiting.

The downside risks are obviously sector-wide macro risks of consumers reining in discretionary spending as higher heating bills, and general price inflation take a chunk out of household real incomes, in the short term.

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225p (up c.13%, at 10:45) – market cap £90m

Management Changes amp; Trading Update

Cake Box, the specialist retailer of fresh cream cakes, today announces various Board and executive management changes, alongside a short trading update ahead of the end of its financial year to 31 March 2022.

Trading update - this sounds reassuring -

Trading has continued strongly throughout the second half of the financial year to date, and the Board expects performance for the full year to be in line with expectations.

It sounds like the company is taking positive steps to repair its reputation, after some pretty disastrous negatives last year – leading to the auditor resigning, and departing with a scathing resignation letter. Amazingly, the market didn’t seem to notice, until Maynard Paton wrote an excellent article flagging this and other issues.

There was also the matter of the co-founder/CFO disposing of a large personal shareholding just before the auditor resigned.

Anyway, he’s (Pardip Dass) gone now, and not before time.

David Firth becomes Interim CFO – I’ve not come across him before, but his potted CV looks impressive. Have any readers come across him?

A new COO is also appointed.

Previously announced, BDO was appointed internal auditor to improve processes, in Aug 2021 (that won’t be cheap).

My opinion - these steps look very good, and should start to improve the company’s shattered reputation.

I’ve got 2 worries – firstly that the institutional shareholders, most of whom seem to be sellers, might use the share price recovery to accelerate their exit. Or they might be reassured, and stop selling. We don’t know.

Secondly, that the new finance head might discover a can of worms, and want to do a kitchen sink job on the next set of numbers.

Or it might all blow over, and the shares recover. Who knows?

Prior to the accounting issues emerging, I did like this business, but thought it got too expensive.

Now it looks cheap, but I’m scared off by the accounting problems!

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155p (up 4% at 14:13) – market cap £154m

Interim Results

Fonix, the UK focused mobile payments and messaging company, is pleased to announce its unaudited interim results for the six months to 31 December 2021 (the “Period”).

Strong gross profit and earnings growth, in line with recently upgraded expectations

I’m impressed with these numbers. Fonix floated on AIM in Oct 2020, and amazingly for a fairly recent float, it has not collapsed after a profit warning, nor run out of money!

I remember having a video call with the CEO around the time it floated, and thinking what an impressive business this is – dominating a niche of payments/votes for reality and charity TV shows (e.g. X-Factor, Children In Need), Fonix has the infrastructure for taking those payments/votes, and the customers tend to be very sticky, coming back year after year – on the basis of if it ain’t broke, don’t fix it.

That results in a cash generative business, with high margins, which is able to pay out decent divis, with a yield of c.4%.

I was a bit worried about the longevity of its services, but the commentary today talks about good new contract wins. The figures show a strongly convincing growth track record too.

EPS has progressed as follows (June year ends) -

H1 2020: 2.9p
H1 2021: 3.6p
H1 2022: 4.4p

Can’t argue with that.

Revenues in H1 2022 are up 16.2% to £28.6m

Adj Profit Before Tax is up 20.3% to £5.2m. Very nice numbers.

Amazingly it says over 99% of income is of a repeating nature.

100% platform uptime is claimed, absolutely vital for a business of this kind – if its systems fall over at peak times, then it wouldn’t be long before customers leave.

Divis – there’s a 2p interim divi, with a policy to pay out 75% of adjusted earnings, with a forecast yield of about 4.4%

Outlook comments sound confident -

We have continued to make great progress on our strategic goals in the period, with growth ahead of management’s initial expectations and the business is showing strong momentum going into the second half of the year. As was the case last year, we’re expecting the first half of the financial year to be slightly larger due to some seasonality in the trade of our customers, however the underlying run-rate remains strong.  

In line with our growth strategy, we continue to invest more in future growth, with increased spend on sales and marketing, along with further investment in both product and international reach, as we look to deliver sustainable, highly profitable growth for our shareholders.  

The company’s new business pipeline continues to grow strongly, including several significant enterprise deals in the UK and internationally, which provide the Board with confidence in the ongoing success of the business.

Ukraine – no specific risks for Fonix, other than impact on the UK economy generally.

Balance sheet - capital-light with only £5.2m NTAV, and hardly any fixed assets.

An unusual feature is very high receivables, and offsetting high trade payables. From memory, I queried this with management a while ago, and it’s something to do with being owed large amounts from payment processors, which are then passed on to customers by settling the payables. It might be worth someone querying that with the company again, just to be sure I remembered correctly.

There’s a very healthy net cash float of £23.6m, and no debt. The cash is mostly customers’ cash, which is passing through.

My opinion – what a smashing set of numbers, I’ve enjoyed reviewing this, so thank you to the readers who gave me a prompt to look at it.

I’d classify this as a GARP share (growth at reasonable price).

The talk about international growth is encouraging too, giving much larger total addressable market size.

Overall, Fonix gets a thumbs up from me, delivering decent interims, with a solid outlook, and at a price that I think can be justified.

It seems to me that the StockRank system is being a bit stingy with a rating of 57 -

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Very high quality scores on the growth amp; value section, as you can see -

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