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Small Cap Value Report (Weds 23 Nov 2022) - KGH, IGP, CML, FNX, BOTB, DPEU, DIA, ABDP, ACSO

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Good morning from Paul amp; Graham. We’re off to a flying start today, with some comments left over from yesterday’s news.  Today’s report is now finished. I’m halfway through DLAR, so will finish that in tomorrow’s report.


Paul’s Section:

Knights group (LON:KGH) [quick comment] – an honourable mention for TheFloatingInvestor who flagged up here in yesterday’s reader comments that the CEO of KGH just spent £1m buying shares at 83.9p. (Although context is that he banked £61m in Jan 2021 selling at 390p!). He’s already got 20.7% before this transaction, so seems well-aligned. Yesterday’s TU looks pretty good to me – H1 in line, and outlook sounds upbeat. I won’t have time to dig deeper, but want to flag this as something readers might want to assess more carefully. The forecast PER looks super-low, and the CEO splashing the cash in a meaningful way, makes me think this could be a buying opportunity perhaps? DYOR as usual though please. [no section below]

Intercede (LON:IGP) [quick comment] – Interim numbers look good to me. Note there’s a big benefit from the negative tax charge (Ramp;D credits possibly?), so it made £1.2m PAT for H1- good profit growth. IGP should have benefited from the strong dollar, as its customers are mainly in the USA. £10m net cash is more than healthy. £32m mkt cap doesn’t strike me as excessive. H2 outlook is in line with expectations. I’d like to see faster organic growth, which is the main reason my interest has waned a little recently. It’s fundamentally a very sound company in my view. The jury’s out on whether it can accelerate growth into something more exciting. [no section below]

CML Microsystems (LON:CML) – more detail below. Good interim numbers, and a substantial increase in broker forecasts. Management tantalise us with vague outlook comments, but conclude that they see a “very positive outcome” for FY 3/2023. There’s also the matter of a net cash pile about a third of the market cap, and surplus freehold property. All in all, this looks very interesting now I think, hence will include it as a mystery share (i.e. one of the best shares of the week) in this week’s podcast.

Fonix Mobile (LON:FNX) [quick comment] – a rare thing this one – a fairly recent float (Oct 2020) that hasn’t collapsed in price! Yesterday’s AGM trading update said it has started FY 6/2023 positively, in line with expectations. It’s planning growth from new products, and internationally, and mentions a “growing pipeline of client prospects”, and is “confident in the growth potential”. This looks an impressive company, and has very sticky clients. Paying decent divis too. Thumbs up from me. [no section below].

Best Of The Best (LON:BOTB) [quick comment] – says today that H1 trading (May-Oct 2022) is in line with market expectations for FY 4/2023. Negotiations with Teddy Sagi’s investment company (Globe Invest Ltd) seem to be dragging on. Putting aside the disappointments of the past, I think the valuation is looking potentially attractive again. A fwd PER of only 7.2 could provide good upside, especially now that online advertising is probably getting cheaper again. There’s also the potential for international growth via Globe Invest’s involvement (29.9% shareholder). Worth revisiting perhaps? Disclosure – I have a tiny holding in this, but not of any significance. [no section below].

accesso Technology (LON:ACSO) [quick comment] – a positive trading update has just come through: strong trading ahead of expectations. Revenues now expected to be $138m+ for FY 12/2022 (the StockReport shows consensus at $135m, so a slight rev beat). Favourable margin mix, and cost savings. Cash EBITDA margin now 17%+. I’m not sure how that translates into actual profit, they don’t say. Looks like this could be worth closer inspection, I don’t have enough information to draw a firm conclusion, but this update is clearly good news.

Graham’s Section:

DP Eurasia NV (LON:DPEU) (£58.5 million) – another mixed update for its investors from DPEU. Guidance is unchanged and the company did make an operating profit in H1 of this year, so things could be worse. But this ten-month update shows unimpressive like-for-like sales trends, and it’s impossible not to be nervous about this stock given the economic conditions in Turkey and the political conditions in Russia. It also needs to deleverage its balance sheet quickly, as a Russian bank recently needed to give it a covenant waiver. This stock remains extremely high-risk though it is still showing some signs of life.

Dialight (LON:DIA) (£96m) (-5%) [no section below] – the “global leader in LED lighting for heavy industrial applications” confirms that expectations for 2022 are unchanged. Revenues are up 23% at constant currency (up 30% in pounds). The Lighting division has outperformed Signals and Components, where Q4 orders reflect “the softer worldwide demand in the opto-electronic market”. Input cost inflation is mitigated by sales price increases and operating leverage.

The main trading currency (around 80% of revenues, I believe) is USD; this explains why the reported sales increase (30%) is so much higher than gains at constant currency (23%). Dialight has now converted its RCF from pounds to dollars. This appears to be a smart move – it means better alignment with their underlying business, and they are effectively cashing in their gains from borrowing in a weaker currency. Net debt remains around £20m and this should not be onerous if they hit targets. I’m neutral on this stock as I don’t know how to assess their competitive advantages, and profit margins (gross, operating) don’t stand out. The stock gets a QualityRank of 76 which feels generous.

Ab Dynamics (LON:ABDP) (£365m) (-0.5%) [no section below] – It was a record year at this transport testing and simulation company. FY August 2022 results show revenues of £80m (+23%, mostly organic growth), and there’s a small improvement in gross margin. Adjusted operating profit grows at a quieter pace (+18%) to £12.7m, due to investment spending at ABD Solutions, and the statutory operating profit is much lower at just £5.2m. The company acknowledges that 2021 was impacted by Covid, making the prior-year results much easier to beat.

I continue to maintain a positive view on this business while remaining unsure about how to justify the 32x earnings multiple it carries. Expectations for FY August 2023 are unchanged, the full-year dividend has increased, cash conversion is good, the balance sheet is strong, acquisitions are going well (with more to come), and 41% of revenues are now recurring in nature. Fans of this business are likely to remain involved and remain interested.

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: CML Microsystems (LON:CML)

436p (up 6% at y’day’s close)

Market cap £69m

We last looked at CML here on 28 Sept 2022, when it issued an ahead of expectations update for H1 (to Sept 2022). It’s an unusual share, where a good part of the valuation rests on its surplus cash amp; property assets, which I covered here in Aug 2022.

Today we have -

Half Year Results

CML Microsystems Plc which develops mixed-signal, RF and microwave semiconductors for global communications markets, today announces its unaudited results for the six months ended 30 September 2022.

Headline H1 numbers show a good improvement on last year –

Revenue up 22% to £10.1m

Strong gross margin of 76%

Overheads well contained, with dist amp; admin costs only up 3% to £5.77m

PBT up 81% to £1.8m (note that the LY comp benefited from other income of £437k, which disappeared in H1 this year – maybe pandemic Govt support, at a guess?)

Outlook - a bit waffly, but the last sentence sounds quite exciting, particularly because this is a conservatively run company, not some blue sky rampy thing. Also it’s clear that acquisitions are on the cards, to make use of the surplus cash –

The financial year commenced with the business positioned nicely to grow well, despite the various macroeconomic headwinds that have been a feature of the last two years. The results achieved for the opening six months have been strong in absolute terms, delivered through a clear strategy for growth and backed by a disciplined and determined workforce.

The effort being expended towards capturing the organic growth opportunities in front of us is delivering tangible results, both operationally and financially. Opportunities exist to accelerate delivery of our objectives via complementary acquisitions and management continue to devote an appropriate amount of time towards exploring them.

The good progress being made is built upon strong foundations laid during previous years. This, coupled with the energy and enthusiasm to succeed and a clear strategy for growth, enables the Board to have confidence that continuing progress will be made through the second half year period, delivering a very positive outcome for the year as a whole.

Broker upgrades – it’s often difficult to interpret updates, but brokers are given a closer steer (most of the time), so that’s why I look closely at what they say.

In this case, Shore Capital (many thanks) make a substantial increase to forecasts, moving up 43% to 22.2p for FY 3/2023, and 27.4p for next year.

That makes the 436p share price much more palatable on a PER basis, plus of course there’s also the surplus cash amp; freehold property assets to take into account.

Balance sheet - very healthy indeed, with plenty of surplus cash (equivalent to about a third of the market cap, so this is a key point).

There could be long-term upside on the property assets too, but planning permission has been a long-term wrangle, so I would treat that as a bonus if it ever happens.

And if not, at least the staff have a lovely spacious, leafy campus to work at, which would probably enhance employee satisfaction amp; retention, I am guessing.

My opinion - CML is looking a lot more interesting after this update. I don’t know anything about the products, or their potential, but the numbers are starting to look good, together with strong outlook comments. This suggests to me that readers might want to do some more detailed work on this yourselves. Plus of course there’s all that downside protection from a lovely strong balance sheet with surplus cash – which could turn into upside if acquisitions are made at the right price. Let us know what you think, I think there could be potential here. I think this might have to be a “mystery share” for this week’s end of week podcast – i.e. one of the most interesting shares I’ve seen during the week.

It’s been a safe haven in recent years, whilst carnage has been going on around it with many other small caps.

Note the high StockRank, which could improve further as increased broker forecasts feed through (likely to improve the value score).

EDIT: thirty fifty twenty helpfully points out in the reader comments below that CML has been buying back its own shares, so shareholders benefit from increased EPS, due to there being fewer in issue.

Graham’s Section: DP Eurasia NV (LON:DPEU)

Share price: 40.15p

Market cap: £58.5m

This stock represents the one and only time I decided to try investing in a newly-listed company. It didn’t work out, and I lost most of the funds I invested in it.

DP Eurasia is the exclusive franchisee of Domino’s Pizza in Turkey, Russia Azerbaijan and Georgia.

The long-standing business in Turkey is its primary asset, and the stock also came to the market with an exciting growth proposition in Russia.

Unfortunately, Turkey has been a difficult place to do business. Russia also, as you might be aware, has a few issues currently.

Take Turkey for starters. Inflation there is currently running at 85.5%.

Even leaving the recent rise in inflation to one side, the currency markets have been predicting and responding to problems in Turkey for some time.

Here is the 5-year chart of the pound against the Turkish Lira::


Therefore, while the recent surge in inflation has been painful for all concerned, the truth is that the Lira has been collapsing for years (as measured against other currencies).

The effects of this on the value of a consumer business operating in Turkey are Not Good.

DPEU share price:


In the end, I decided that I could no longer hold these shares as the risks were clearly much bigger than I had initially realised, and it was no longer an investment but a speculation.

Let’s check out today’s trading update, and see if the situation might have improved for long-suffering DPEU shareholders:

  • Number of stores 845 (last year: 806)
  • System sales in Turkey for the first ten months of the financial year: TRY 2.3 billion.

This sales number represents a gain of 66.8% nominally, but is a reduction of 3.3% after applying the accounting rules as they relate to hyperinflation.

When looking at the sales figures for Russia and the other countries, it’s far more useful to see how they performed in their own currencies, not in Turkish Lira.

This table is key: like-for-like growth in each country’s own currency:


“IAS 29” is the accounting rule for hyperinflation. The key points therefore are:

  • Turkey’s inflation-adjusted like-for-like sales are down 8.2%. There was a major change in VAT which I think is responsible for c. 7% of this.
  • The other countries don’t currently require hyperinflation adjustments.
  • Russian like-for-like sales are down 7.1%. The other countries are too small to move the needle.

The company considers this is a “good performance”, on the basis that there was “a very strong prior comparative” in 2021, and on the basis of the inflationary environment.

They are still making progress in converting customers to online ordering: delivery orders are now 82.3% online (up from 76.6% last year).

Outlook – no change to guidance for 2022:.


A snippet from the CEO comment:

“We retain a fundamental commitment to ensuring franchisees remain profitable. As a result, franchisee demand is very strong and our Domino’s Pizza store count in Turkey has increased by 31 year-to-date. Given our strong pipeline and sustained franchisee interest, we remain confident that 2022 will be another solid year for Domino’s Pizza network expansion.

Balance sheet

Today’s update informs us that the company has cash plus an undrawn facility that add up to total liquidity of TRY 289 million (£13 million).

The interim results disclosed that net debt was TRY 1085 million (£49 million).

It’s not overly comfortable. The company needed and obtained a covenant waiver from its Russian bank for 2022.

My view

As usual, I come away from a DPEU update thinking that the numbers still don’t conclusively prove that the investment thesis is wrong, but I remain unsure about how close we are to seeing the company make a meaningful profit.

In H1, the company made an operating profit of TRY 28 million (just over £1 million), on sales of TRY 1.3 billion (£57 million). So there are signs that it could be turning the corner.

Russia: after so many years waiting for the Russian operation to bear fruit, I’m glad to see that net store openings there have finally reduced to zero.

The company’s current strategy in Russia is to stop investing in its growth there and simply to optimise the existing store network. That sounds good to me: it doesn’t make sense to keep investing heavily in Russia until we have proof that DPEU can make meaningful profits, which it should be able to do with its existing stores. DPEU needs to deleverage, which means letting its existing stores mature and hopefully start generating some cash.

There are also the political risks in Russia of course, which are probably very significant and are beyond my ability to assess.

Turkey: my one comfort here is that DPEU is in the food sector, though it’s not cheap food. In a hyperinflation, I expect food producers to be able to pass on their cost increases to consumers more easily than almost any other sector.

And given the collapsing Turkish economy, I would say that (inflation-adjusted) like-for-like sales growth of minus 8% is not too bad!

Conclusion: I guess it goes without saying that this share remains extremely high risk.

We have a net debt pile that’s about the same as the market cap. We have poor like-for-like sales growth. We have geographic exposures to a hyperinflationary country on the one hand, and on the other hand a country that’s in a physical and economic conflict with the West.

But it is a Domino’s master franchisee, and there are only a few of them. As measured by price/sales, it is less than half the price of DP Poland (LON:DPP) and cheaper again compared to Domino’s Pizza (LON:DOM) (but I suppose that is to be expected).

We also have a cornerstone shareholder (49%) in the form of Jubilant Foodworks, who own the Domino’s franchise for India, Sri Lanka, Nepal and Bangladesh. I think we can safely assume that they would not mind owning 100% of DPEU. But would they have to pay much to get the other 51% that they don’t own yet? If DPEU ends up in need of a bailout refinancing, then the answer is clearly no.

Unfortunately, I think this stock remains far too risky for almost all investors, for now. But I stubbornly still think it’s possible that this stock could eventually turn good.



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