Small Cap Value Report (Fri 17 Feb 2023) - PURP, CML, WAND

Good morning from Paul!

Explanatory notes -

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9.9p (pre market open)

Market cap £30m

Trading Update amp; Launch of Strategic Review

Purplebricks Group plc (AIM: PURP), the UK’s leading tech-led estate agency business, provides an update on trading in respect of the financial year ending 30 April 2023 (“FY23”), and announces the commencement of a strategic review.

Key points -

Turnaround plan to focus on best-performing regions underway, but has incurred £1.2m more (one-off) costs than planned.

Q3 (Nov-Jan) sales instructions lower than expected.

Additional cost savings of £4m identified.

Fees to customers increased from 1 Feb 2023.

FY 4/2023 guidance reduced: revenue £60-65m, EBITDA loss of £15-20m.

Still expects to become cashflow positive in early FY 4/2024.

No update provided on the current cash position – a glaring omission. There was £31.3m at end Oct 2022, but that was after hefty cash burn of £12m in H1. So I think we can assume that cash is now likely to be considerably less, maybe somewhere between £20-25m? How much of that will be left once the strategic review process has concluded later this year?

Strategic review – is putting itself up for sale, so a Formal Sales Process under the Takeover Panel rules now starts.

My opinion – we discuss de-listing risk here a lot in the SCVRs, which can come about in a good way, if someone launches a premium-priced takeover bid. Or it can happen in a bad way, with companies returning to being a private company, usually at a bombed out price as forced sellers exit before the shares de-list.

PURP has cash in the bank, so it’s not under any immediate cash pressure.

The shares now are just a punt that someone will come along and buy it, presumably for the brand name (with a lot of advertising pounds having been spent/wasted), together with a loss-making, failed business model. It’s difficult to see that attracting much buying interest, but you never know.

I did have this one my watchlist, but will remove it now, because I don’t want to gamble on the outcome of a formal sale process, for a business that has effectively failed to prove it has a viable business model, after a considerable time of turnaround attempts by various CEOs. Some businesses just can’t be turned around, and I suspect this might be one of those.

I can remember this one being a very good trade that we caught from 100-500p a few years ago. Although the trick was to sell into the spike, rather than hold on for grim death once the newsflow turned negative. With hindsight, it’s interesting how so many “disrupters” have turned into expensive failures, with conventional businesses fighting back. We’ve seen that in both the estate agents, and car retailing sectors, for example.

582p (up 6% at 08:29)

Market cap £92m

Oval Park Planning Progress

Oval Park is the freehold campus that CML owns, where it has been trying to extract value from land development for many years. I covered it in some detail here in Aug 2022, which was quite fun – using google maps to identify the site, and trying to guess the potential upside value from local press reports of the plans.

This seems to be excellent news -

… pleased to announce that conditional planning approval has been granted at its current 29-acre site located at Oval Park, Maldon….

What are the conditions? I’m no expert on planning applications, but to my untrained eye, this doesn’t sound particularly onerous -

Final approval is subject to the completion of the necessary Section 106 Unilateral Undertakings relating to the payment of a financial contribution towards the County Council’s costs of monitoring a Travel Plan. The decision notices granting planning permission should be issued once the Unilateral Undertakings are complete which is expected shortly.

Works are expected to commence Autumn 2023.

My opinion – we’ve reported positively on CML here in the last year. It has several attractive elements to it -

• Core business performing well, and is a high margin niche business.
• Substantial cash pile.
• Further upside from the freehold property – now improved, as planning permission has at long last been granted (it’s been trying for over 10 years!)

I don’t have enough information yet to value the property element, so we need more guidance from brokers on that.

Shares have done very well in recent months, so it’s not such a bargain as last time we looked.

Shore Capital uses EV/EBITDA as a useful valuation measure in its note, and I think there’s a good argument for treating the freehold property like cash too, since it’s a separate asset. That method arrives at a valuation that’s still quite attractive, so I’ll remain green (broadly positive) in my opinion on this share.

1274p – market cap £883m

Call with CEO yesterday

I was pleased to be offered a call with the CEO (and founder, David Richards), as WAND came up repeatedly in the SCVRs from last summer onwards, with a remarkable flurry of big contract wins. This suggested to me that something game-changing appears to be happening. Although my enthusiasm is obviously tempered by the huge market cap, and a historical track record of heavy losses, and several false dawns for growth previously.

I didn’t take detailed notes, but this is the general gist of the Qamp;A I had with the CEO yesterday -

How come growth fizzled out previously, but you’re now seeing a surge in big contract wins?

It’s all down to 5G – which is just being turned on in USA now. Big companies are now looking for the ability to move data at huge scale. Eg. the automotive industry, each new EV is generating 25MB of data every hour. Monetising that data is what EV makers are looking at for the future. Same with telcos. Data sets at huge scale are arriving, which is what our software is built for. So 5G has created a tipping point for WAND.

Do big contract wins act as references for additional new business?

Absolutely. WAND is proven, and it’s now a question of grabbing market share, we already know who the big customers of the future are likely to be, especially automotive amp; telcos, but also mining companies.

There were big billings in 2022, but spread over x years? $110m backlog at year end. Can you explain?

Contracts are not set up for x years, they’re “commit to consume”, and half is paid in cash up-front typically.

Has year end receivables of $44m turned into cash? Yes.

Will you need to do another fundraise? No, fully funded, and cashflow positive, due to acceleration in contract wins.

Broker notes only show modest revenue growth in 2023, how come?

Given previous performance, the forecasts are deliberately set low, to be beaten.Don’t want to make the same mistake again of over-promising.

I note from your major shareholder list that there’s a lot of big holders based in USA. Will one of the big tech companies buy WAND?

WAND operates in Silicon Valley, and in the UK – unusual in that regard. Hardly any UK-based growth tech companies, it’s a big problem for the UK. If your gross margin is under 80%, then you’re not a software company. All sorts of companies got floated on AIM that were given a tech rating, but weren’t tech companies! They just have a website, and move stuff around, that’s not a tech company. The City got greedy for fees, and floated anything (I couldn’t agree more!)

WAND has 100% gross margins, have resisted the temptation to bolt on lower margin services. It’s a software licensing business, with very high operational gearing.

Not interested in selling the business, we’re building what should become a highly cash generative business, that could make operating margins over 50%. Difficult to think of any other UK company generating the rapid rate of big, 100% gross margin contract wins that WAND is now achieving. That’s what US investors see more than UK investors, but there’s growing interest from UK funds now too.

What about risk? Isn’t there a danger that someone else works out a way of doing this that’s better, and cheaper? 

Theoretically that is a risk, but what WAND does is not just desirable, it’s the only way to move around large scale data without problems. Protected by 37 patents, and lots of know-how. It was created by a polymath, so is not something that can be replicated.

My opinion - to say that WAND’s CEO is bullish, is an understatement! That makes it easy for me as an investor – the company has to deliver very strong growth in 2023, in revenues, and profitability, and if it doesn’t, then I’ll sell up and move on. So this is looking binary, with a market cap at almost £900m – which leaves no room for anything to go wrong.

For me, the key point is the long list of recent, big contract wins, with large companies. Are these one-offs? The company says mostly not, and that many of the (smaller) ones that are one-offs are likely to develop into ongoing sales.

Could WAND be a good way to play the explosion of data that is happening now in various sectors? Possibly, I don’t know. There do seem to be some exciting signs though, and the company has never before achieved anything like the latest order backlog contract value. So it does seem to be something game-changing underway here. How to value it? I’ve got no idea, it’s almost impossible to value at this stage.

Note that several large shareholders have recently been adding to their stakes.

I’m tempted to buy more, but whenever I feel excited after talking to a company, I always give myself a 2-3 day cooling off period, before buying any more shares.

As usual, do please post all your opinions below, especially bearish ones, as I probably need some balance after getting hyped up talking to the company!

Just to emphasise again that the above is my imperfect recollection of the broad gist of what was said, so apologies if I got the wrong end of the stick on anything.

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