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Small Cap Value Report (Mon 28 Nov 2022) - IHC, SDRY, CER, INHC, POLN

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Good morning from Paul amp; Graham!


Paul’s Section:

Superdry (LON:SDRY) – I ponder the S.Times article about its bank facilities, and the response from SDRY this morning. I’m worried about this, it is starting to look like a financially distressed situation, so I’m inclined to give it a wide berth until the necessary borrowing facilities have been secured. More detail below.

Cerillion (LON:CER) – excellent results, as expected. I rummage through the figures, and see nothing of concern, just strong organic growth, lovely profits amp; cashflows. Shares aren’t cheap, but this looks an exceptionally good company. Thumbs up from me. 

Graham’s Section:

Inspiration Healthcare (LON:IHC) (£41m) – this medical technology company has issued a severe profit warning. The current year’s profit forecast is reduced by 85%, and next year’s profit forecast is reduced by 45% (per the latest broker note). The timing of orders is blamed, and this in turn is blamed on economic uncertainty and on lockdowns in China. These are diplomatic ways of saying that demand for the company’s products is weaker than anticipated, but we have seen many other companies referring to recent difficulties in China. While I’m not in a position to say this with any certainty, I’m inclined to think that these shares are getting into value territory at a P/S ratio below 1x.

Induction Healthcare (LON:INHC) (£30m) – I take an initial look at another small healthcare company. This is a software business providing a range of products used by patients and healthcare professionals. It competes with the likes of Microsoft Teams but attempts to differentiate itself with a healthcare-focused product. While it lacks a financial track record worth mentioning, it does report £13.5m of ARR as of April 2022, which is interesting to me given the modest market cap. It’s not clear when this company might generate a profit but at least it is aiming for results that are close to breakeven (on an adjusted basis) in the short-term. Anchored by a good net cash position of £7m – £10m, I think it could be worth a second look.

Pollen Street (LON:POLN) (664p) (-1%) (£403m) [no section below] – this was formerly the investment manager for Honeycomb Investment Trust (HONY). It merged with Honeycomb this year and the deal was completed at the end of September. It is now both an investment manager (earning fund management fees on private equity and credit funds) and an investor of its own capital.

Today it reports that committed AUM has grown “in line with guidance previously issued” to £3.3 billion (September 2022). Balance sheet assets are performing “in line with historic trends”, and are positioned to benefit from interest rate rises. I think this is another fund manager share that could be worth keeping on the watchlist, as returns on credit funds and on its own balance sheet assets could become much more attractive in a high-rate environment. Note also that Honeycomb had net assets of £354m as of June 2022, so underlying book value here should be very strong. The yield on these shares is approaching 10%, according to Stockopedia.

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.

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.

Paul’s Section: Superdry (LON:SDRY)


Market cap £103m

Statement re Press Comment

I mentioned this in my weekend podcast, purely because I happened to buy the Sunday Times, and spotted an article claiming that SuperDry is “finalising an agreement on a new credit facility” with an “alternative lender”, at higher cost than its existing £70m facility with HSBC/BNP Paribas, which expires at end Jan 2023.

We already knew that the existing facility was close to expiry, and I’m beginning to get worried, as they’re cutting it fine. If banks do pull the plug with retailers, it’s often in January, after peak Christmas trading, when cash is at a seasonal high, and debt low or nothing as inventories have been run down.

In normal circumstances, the figures suggest to me that SuperDry would have been able to renew existing facilities, but we’re not in normal circumstances. Mid-market brands are being squeezed, and although SDRY seems to have been trading OK (its last trading update was OK), it could be that banks don’t want exposure to this sector, after the recent debacle with Joules? If so, that means risk for equity holders just got a lot worse, in this sector generally, not just for SDRY. It strikes me that the existing lenders probably don’t want to renew the facility, otherwise it would have been done by now, and SDRY wouldn’t be exploring alternatives. 

This morning SDRY responded -

Superdry plc acknowledges recent press speculation about its previously announced refinancing process and confirms that it is in negotiations with Bantry Bay Capital Limited, the specialist lending provider, to replace the existing up to £70m asset-backed lending facility. There can be no certainty that an agreement will be reached, nor as to the terms of any such agreement and we remain in discussions with other lenders. A further announcement will be made as and when appropriate.

Reading between the lines, this confirms to me that the existing lenders probably don’t want to renew, so this could now be a financially distressed situation.

For that reason, if I held, personally I would sell now, and ask questions later. Better to buy back in at a higher price once it has secured the essential funding it needs, than to risk an emergency placing, or a complete equity wipe-out. I’m not saying that’s likely, but it now looks a significant risk.

If the Sunday Times is right, then an announcement could come out in 2 weeks. Why gamble on that though? Holding is definitely a gamble right now. There might only be a, say, 10-20% downside risk of things going wrong, but you only need a handful of situations like that at those odds, and you’re likely to get hit by one 100% wipeout. Is there enough short term upside to justify taking that risk? I don’t see it personally.

This is another reminder that bank lending is now much higher risk, and there’s no guarantee any lender will renew facilities, especially in problematic sectors. We need to be a lot more careful than we’ve become accustomed to, in the zero interest rate environment, when lenders were happy to rollover debt, and give companies time to restructure and pay it down at a later date. It seems to me that we’re now entering a much harsher environment, where we cannot necessarily rely on lenders playing ball, in sectors they want to avoid.

The share price doesn’t seem to have factored in insolvency risk, so this could turn ugly if bank facilities are not organised soon. It could all turn out fine. I’m not making predictions, just flagging potential risk.



Cerillion (LON:CER)


Market cap £345m

Final Results

Cerillion plc, the billing, charging and customer relationship management software solutions provider, presents its annual results for the 12 months ended 30 September 2022.

Record financial performance  

Group is well-placed for continued growth

A superb highlights table, as expected -


The share price of 1172p already factors in strong performance amp; outlook, being a PER of 33x – which looks justified I reckon, given the company’s fantastic track record, but of course a high valuation means the market is expecting strong performance amp; growth to continue.

As you can see from the Stockopedia graphs below, something game-changing happened in 2020, when growth really took off. I tried to get to the bottom of this, in my recent interview with the CEO audio (here) or text (here). CER seems to have been in the right place, at the right time (a telecoms industry swing towards cloud software), with the right products – proven, resilient software, and gaining increasingly large clients with sticky recurring revenues. So the company seems to be in a really sweet spot.


We don’t need to dwell on the historic numbers, because we already knew the company is trading very well, from previous trading updates.

Outlook is more important, and there are some nice nuggets in here – e.g.

New customer sales pipeline up 43% to a record £209m (30 September 2021: £146m) 

Back-order book3 reached a new high of £45.4m at the year-end (30 September 2021: £42.1m)

The Company continues to grow strongly, and the Cerillion brand is gaining visibility in what is a huge marketplace.

Looking ahead, we are well-placed to deliver another strong performance in the new financial year, supported by a record order book. The new customer sales pipeline is also at a record high and contains large deal opportunities

Cerillion’s financial position is very robust. The Company continues to generate strong cash flows, maintains significant net cash, and recurring income is rising. We are therefore well-placed to support ongoing growth, including taking advantage of any suitable acquisitions opportunities as they arise.

The long-term trend of telecoms companies increasing investment in their networks and in digital transformation remains entrenched. This should continue to benefit Cerillion’s own long-term growth prospects.

Balance sheet - is strong, with a £20.2m cash pile. No concerns at all here.

Cashflow statement - is straightforward, and shows a genuinely, and strongly cash generative business. Only modest capitalisation of development spending, of around £1m p.a.

My opinion – shareholders seem to have found a winner here. All the evidence seems to be pointing towards continued success, in a large international market. This seems to me a case of running your winner, even though the valuation looks pricey, there are strong reasons to view that as justified, based on the information we currently have.

Graham’s Section: Inspiration Healthcare (LON:IHC)

Share price: 61p (-28%)

Market cap: £41m

This stock has not received very frequent coverage in the SCVR. It is “a global supplier of medical technology for critical care, operating theatre and home healthcare applications”.

Here is a more specific description of what they do:

Our own brand of critical care solutions span non-invasive respiratory management, thermoregulation and patient warming for newborns through to adults in intensive care and the operating theatre, whilst our distribution business in the UK and Ireland supplies solutions to support specialised surgical procedures and infusion therapies.

Unfortunately, today’s update is a profit warning:

Since our last statement in early October this year, we have continued to win substantial orders for our innovative products, in particular in the Ukraine and Thailand. However, the timing of receiving and shipping these larger orders has proved hard to predict due to the continuing economic uncertainty, which has affected all the markets in which we operate.

Additionally, sales to China are said to be affected by Chinese anti-Covid measures (we’ve read similar warnings from other companies in recent months).

The result is that it’s “unlikely that our sales will significantly exceed those of the last financial year and we believe the knock-on impact on EBITDA in the second half means that it will be below that of the first half.”

Estimates – it looks like operational leverage is going to work in reverse, and wipe out most of the profits for the company this year (FY 2023).

Forecasts for next year (FY 2024) have been hard hit, too. Indeed, FY 2024’s new forecasts are below what the company was supposed to achieve already in FY 2023. So it feels like the company’s plans have been delayed by more than a whole year.

  • Current year: revenue forecast down 9% to £41.1m, net profit forecast down 85% to £0.5m.
  • Next year: revenue forecast down 15% to £45m, net profit forecast down 45% to £2.5m.

My view

This is a frustrating situation. What sounds like it should be a minor issue – the “timing” of some orders – has translated into the loss of nearly 100% of the company’s profits for the current year, and nearly 50% of next year’s profits.

And this is another situation where investors don’t get the full picture without the broker note. The broker note contains the really bad news, while the RNS is just the lite version of the news.

The broker note explains that profit forecasts are being reduced as the lost revenue relates to “lower sales of high margin products”.

Checking back to the interim results, I see that the company earned a gross margin of 45%.

That seems fine for the industry (e.g. here’s a source claiming that the medical equipment and supplies industry earns a gross margin of 42% to 47% on average). It’s not in the same league as Smith amp; Nephew (LON:SN.) who earn an excellent 70%, but it’s ok.

According to the 2022 Annual Report, no single customer was responsible for more than 10% of revenues. So extreme customer concentration is not a factor here, either.

But as a small, order-driven company, there are some risks it can’t avoid. The timing of orders is one of them – although it doesn’t help that the company said it was “confident” that it would hit this year’s forecasts at the interim results last month, and then followed that up with a positive RNS about an order earlier this month.

Operational leverage is also more keenly felt by smaller companies than it is by larger companies: see how a small reduction in high-margin sales has wiped out most of the company’s expected profits in the short-term.

Looking forward, do I see an opportunity here? This isn’t an industry I specialise in, but my instincts are that the company could be getting into value territory at a price/sales ratio of less than 1x. It isn’t carrying any debt. With a market cap of only £40m, it could be interesting on a 3-5 year view. But I’d need better insights into the company’s products and competitive positioning to say this with conviction.

The CEO is a founding partner of the company and a 6% shareholder, so his alignment with investors should be strong:

Induction Healthcare (LON:INHC)

Share price: 33p (-9.6%)

Market cap: £30m

Let’s take a look at another small healthcare company. This stock has never been discussed in the SCVR before.

The company’s homepage describes four products:

  • Induction Attend Anywhere – remote video consultations for patients and healthcare teams.
  • Induction Switch – “the number one healthcare collaboration app in the UK”.
  • Induction Zesty – “leading provider of patient portals to NHS hospitals”.
  • Induction Guidance – “most used guidance and advice platform for NHS Trust”.

The group in its current form has been created by two acquisitions: Zesty for £12.7m in 2020, and then Attend Anywhere for £25m in 2021 (a combination of cash and shares)..

Today the company announces delayed, late results for FY March 2022. The reasons for the delay (auditor staff shortages and a director’s bereavement) appear reasonable.

The results include a thumping big loss of £8m for last year but I’m more interested in forward-looking statements, to see if this stock could be worth following in future.

  • Total annually recurring revenue (ARR) was £13.5m as of March 2022, including acquired ARR.
  • Organic ARR doubled from £2m to £4m.
  • Attend Anywhere has successful contract renewals with 94% of existing English NHS customers.

Net cash was £7.5m as of March 2022 and I’m greatly encouraged to read the following statement from the Chair:

Following strong renewals of NHS England contracts for Induction Attend Anywhere in March 2022, and some of these contracts renewing and paying more than 1 year in advance, the Group’s cash position has further improved post-period end.

Additionally, the CEO tells us:

The majority of FY23 NHS England contracts for Induction Attend Anywhere were renewed on either a two or three year term, de-risking group recurring revenues moving forwards.

Forward planning

The CEO is looking for opportunities in “secondary acute, specialist tertiary, community and mental health care settings”. He is looking for ARR of £30m to £35m in the UK/Ireland over the next three years from the company’s current products.

He also admits that Attend Anywhere competes with Microsoft Teams and with Zoom, and that they need to keep working on differentiating themselves from generalist conferencing software.


Interim results are due next week. FY March 2023 forecasts remain unchanged: they suggest revenues of £17m and a profit result that is close to breakeven on an adjusted basis.

My view

This is not the type of thing I usually look at. However, I’ve been pleasantly surprised by what I’ve found: a specialist software business, with net cash, trading at a P/S of less than two.

Strip out £10m of net cash (broker’s estimate for March 2023) to get an enterprise value of £20m, and the company is valued at only around 1.5x the ARR it had as of March 2022.

While there’s no getting away from the speculative nature of this stock, that valuation multiple says a lot about the current state of the small-cap market.

Finding a software business trading at 1.5x ARR would have been a challenge, prior to the current bust in micro-caps.

So the long-term risk/reward prospects here could be favourable, for those who don’t mind taking a gamble. It’s unclear when profitability might materialise, and the technicals do look ugly, as they do with many micro-caps:



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