Small Cap Value Report (Tue 2 Jan 2024) - HVO, POS

Good morning, and happy new year, from Paul amp; Graham! Did I get the date right above, yes! That’s the first hurdle cleared.

Today’s report is now finished.

Some links to start us off -

1. Ed’s 10th year of running the automated NAPS system, which has out-performed all relevant fund managers over the long term. Check out this article to see which stocks it has selected for 2024.

2. Megan reviewed how the StockRanks system performed in 2023, with some interesting data and conclusions.

3. Graham’s review of 2023, where his top 10 share ideas delivered a stunning 25% return!

4. My review of 2023, where I delivered a more pedestrian 17% return for my top 20 share ideas here, but a rather better performance from taking on more risk, and concentration, in my real life portfolio.

Remember these are just ideas to research, never recommendations. We cannot predict the future, so some shares ideas will work, and others won’t.

I see it as my “best of the SCVRs”, so you’ll be aware of all of these shares already. The spreadsheet is now finished, it’s here. I’ll do a proper article when time permits, probably tomorrow.

I’m expecting some pushback on the 3 smallest items! The other 17 are all pretty conventional value/GARP shares that you’ll recognise.

I have a list of 42 more companies that were good contenders for my favourite value/GARP shares, but didn’t quite make it, for various reasons. So I’ll do another post at some stage listing those, so masses of good stock ideas for you to have a look at are in the pipeline!

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 (usually) between £10m and £1bn. We usually 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.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we’re not making any predictions about what share prices will do.

Green (thumbs up) – means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it’s such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber – means we don’t have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) – means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we’re not saying the share price will necessarily under-perform, we’re just flagging the high risk.

Very quiet for news today, so once I’ve looked at the above, both Graham and I will focus on preparing our 2024 stock ideas articles, which is probably a better use of our time.

Up 7% to 25.5p (£173m) – £6.3m contract signed – Paul – GREEN

hVIVO plc (AIM amp; Euronext: HVO), the world leader in testing infectious and respiratory disease products using human challenge clinical trials…

Checking our previous notes, we steadily became more enthusiastic about HVO as 2023 progressed, moving in stages from amber up to green by 13/12/2023 (ahead expectations update), and 12/9/2023 (good interims, and forecasts raised).

Well done to patient holders, as it’s had a smashing move up recently, in the almost everything rally we’ve seen in Nov-Dec 2023.

The positive newsflow continues today -

…signed a £6.3m contract with a biotechnology client to test its antiviral candidate using the hVIVO Human Rhinovirus (HRV – common cold virus) Human Challenge Study Model…

Revenue will be recognised in both FY 12/2024 and FY 12/2025.

HVO’s new state-of-the-art quarantine facilities in Canary Wharf will be used.

Broker update – Cavendish helps us with an update. It leaves forecasts unchanged, but they’re looking quite modest, given the strong newsflow. So I suspect beats against forecasts are likely for both 2023 and 2024.

As you can see below, there’s already been an impressive upward trend in forecasts, and I’m pretty sure this is all organic growth too.

Paul’s opinion – HVO really seems to be on a roll, and is producing very impressive newsflow. It’s increasingly looking like one of the UK market’s best growth companies.

Valuation doesn’t seem particularly stretched, once you factor in likely beats against forecast.

I also like that cash is received up-front from clients.

Despite a strong surge in share price, I remain positive on HVO shares, so it’s GREEN again.

Shares have been volatile in the past, but this current bull run looks much more firmly based on excellent company fundamentals -

Down 18% to 17.25p (£18m) – $5.2m licence with SLB (Schlumberger) – Paul – GREEN

A new licence agreement with SLB has brought in a very useful $5.2m in cash. This effectively resolves the question mark over cash, and the going concern worry (material uncertainty in recent results statement).

A new update note from Cavendish (many thanks) today ups forecast revenue for FY 6/2024 by 30% to £14.0m (a remarkable 833% increase on FY 6/2023 actual revenue), and adj PBT moves from just above breakeven, to a much more interesting £3.5m. This also moves Plexus into a reasonably healthy forecast net cash position of £3.8m at 6/2024. Although Cavendish rightly stresses that this $5.2m licensing deal is a one-off.

The way I see it, is that today’s deal takes the pressure off management, who can now get out there and sell their specialist products/services more readily than when scratching around for day-to-day cash.

I’ve had a long chat with the company, and have to say it’s all complicated, and well above my pay grade in terms of understanding the detail. In a nutshell though, they made a decision that it was better to bank much-needed cash in return for limited rights over a specific product set that Plexus had no intention of competing with – i.e. high volume, relatively low cost wellheads. Licensing this out to SLB (the world leader) means that over time, SLB products using Plexus tech could become the industry standard of completely leak-free wellheads.  The idea is that SLB would take the volume business (and yes, they drove a hard bargain), whilst Plexus then picks up all the specialised and bespoke wellhead work (much higher value per job, like the £8m major contract win announced in mid 2023). They made a commercial decision that this was the best route to take.

Yes it means forgoing a future royalty stream, but to date there has been nothing received in royalties, and it could have potentially taken SLB years to switch over from selling 33k pa existing tech wellheads, to the new ones with Plexus IP in them. A bird in the hand, I guess.

Q1. I asked if the upside case had been diminished by this deal. A1. Upside has not been diminished at all.

Q2. i asked why the RNS today gave a negative impression to investors? A2. Because confidentiality agreements meant that a lot of the original announcement, which explained the deal fully, had to be cut. They’re thinking of ways to clarify things to the market.

Paul’s opinion – I don’t fully understand the detail here, and of course as I have a big position size here, I may well be seeing things through rose-tinted spectacles. However, now the cash position is sorted out, I can sleep much better at night. This deal proves up that the world’s largest oil engineering group wants to use this proven tech. Plexus reckon there should be rich pickings, from more specialised (rather than high volume) projects. Although they have foregone (uncertain – they’ve never published any forecasts) royalty income at an uncertain time in future.

I do think this deal needs explaining better to the market. In the meantime, it’s net cash, and profitable for the time being. As always, the shares are likely to react to ongoing newsflow, so it’s difficult to predict what happens next.

A remarkable chart in the last year, 8-bagging – because a year ago it looked bust, and today it’s funded up with net cash, and is (at least for now) profitable. So a very dramatic improvement in fundamentals has caused this share price movement -

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