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Small Cap Value Report (27 Mar 2017 – Part 1) – BVXP, DPP, SAL
Good morning!
I’m reporting on 3 companies today – Bioventix, DP Poland, and SpaceAndPeople. Then this afternoon I’ll be interviewing the CEO amp; CFO of Tracsis (will publish the audio of that tonight).
Graham is also working today, and is reporting on results from: Elecosoft, K3 Business Tech, and YouGov.
For logistics reasons, Graham’s work is in a separate article today – which is here.
Bioventix (LON:BVXP)
Share price: 1840p (up 4.2% today)
No. shares: 5.1m
Market cap: £93.8m
Interim results – for the 6 months to 31 Dec 2016.
These are sparkling interim figures.
The company says it doesn’t hedge forex, therefore that has given a 15-20% uplift in reported sterling values for sales denominated in foreign currencies. Looking back to last year’s results, 5.7% of turnover was UK, and the rest was overseas. So there’s no doubt that unhedged forex will have had a major boost to these results.
Amazingly high profit margins will have further helped, profit before tax of £2,484k is an astonishing 79.5% of revenues – I don’t recall ever seeing such a high net profit margin.
Profit growth is 49% against H1 last year, which is terrific. Although, I reckon forex movements will have been a major driver of that.
Balance sheet – looks terrific. Net cash has risen to £5.1m, and the company is paying out decent divis now. Debtors look high, but I flagged that last time, and there was some reasonable explanation for it, but I can’t remember the detail, but it’s not a worry anyway. There are hardly any creditors.
New products / outlook – there’s some interesting stuff in the narrative about new products. It’s outside my remit to try to work out the future prospects of the company, but it sounds interesting.
My opinion - this is a unique company. It’s absolutely tiny, with only about a dozen staff, but clearly has some remarkable IP. That’s delivering spectacularly high profits, and good growth as well, so I can certainly see the appeal.
Forex gains are layering on further gains too. So it looks an attractive share, providing nothing goes wrong. Apparently there are very long lead times for these products, which restricts competition. So it looks as if Bioventix has a strong position in a highly lucrative niche. Let’s hope that continues. As it’s highly leveraged to forex movements, shareholders here need to be comfortable that sterling weakness is likely to continue.
DP Poland (LON:DPP)
Share price: 50p (down 2.9% today)
No. shares: 137.2m
Market cap: £68.6m
Final results – for the year ended 31 Dec 2016.
Results day for DPP shareholders is usually akin to having a bucket of cold water thrown over them. This is because, to date, the upbeat commentary amp; strong LFL sales growth have dismally failed to turn into any profit.
This company has been a serial loss-maker for years now. It’s been listed since 2010, has never made a profit, and has done multiple fundraisings, to fund the losses and new stores (although some are franchised – which reduces the up-front cash cost of expansion). Investors have been hoping that the company could replicate the success of Dominos Pizza in other countries, in Poland.
Are today’s numbers any better, I wonder?
There are currently 39 Dominos stores in Poland, of 16 operated by DPP, and the remaining 23 operated by franchisees. Expansion seems to be ramping up, with the company expecting to expand to 50+ stores during 2017.
LFL sales were up a very impressive +27% in 2016, so clearly the product is gaining traction.
LFL sales growth has slowed somewhat in 2017, to +16% in Jan amp; Feb, and 20%+ in Mar. To my mind this is inevitable, as stellar growth rates inevitably moderate once a company is up against strong comparatives.
Trouble is, none of this progress has translated into improved profitability. Here’s a flavour;
Revenues up 111% to £7.6m
EBITDA unchanged at a £1.6m loss
Overall loss before tax increased from £2.2m in 2015, to £2.5m in 2016
Note that the loss of £2.5m is after charging £353k in share based payments. It infuriates me when loss-making companies dish out free, or cheap shares to management. They should get nothing until the company turns a decent profit, in my view. Otherwise it just looks like they’re taking the proverbial.
Outlook – more, albeit reduced, losses are expected for 2017;
“Our accelerated store roll-out plan and strong like-for-like performance drove sales volume and improved contributions from corporate stores and commissary. We will continue to drive sales volume growth through 2017 and anticipate Group EBITDA losses further reduced for YE 2017.
I’m not sure why they say further reduced, as EBITDA losses in 2016 remained pretty much the same as in 2015.
Expansion – the bull case is set out by the company here;
While expansion requires resource, with strengthened real estate and store opening teams and extended commissary capacity, the growing store contribution to marketing and the economies of scale in procurement will further strengthen the positive feedback cycle inherent to revenue growth.
As we progress through this growth phase, to establish a national presence, we expect the reduction in Group EBITDA losses, compared to the growth in revenues, to rebalance as we approach critical mass in stores numbers and System Sales.
With that rebalancing there will come an inflection point when the relative costs of running a high growth business steadily reduce in proportion to the growth in revenues and improvements in Group EBITDA.
That’s all very well in theory, but to date DPP seems to just rack up more central costs as it expands. Therefore, there’s little to no evidence of that inflection point being in sight, in my view.
Balance sheet – there’s adequate cash in the bank, courtesy of the latest fundraising in Oct 2016. Will it be the last fundraising? I suspect not. Bear in mind that the share count has risen from 14.6m in 2010 to 137.2m now – so a colossal level of dilution, with not much to show for it, so far.
There are no immediate funding worries though.
My opinion – I love roll outs. The best ones are self-funding, where shareholders don’t need to worry about any new shares being issued to fund the expansion. Good examples currently are Patisserie Holdings (LON:CAKE) and Revolution Bars (LON:RBG) , both of which I hold long positions in. The investment proposition in both cases is really simple – the businesses generate loads of cashflow, which is used to finance new stores, and pay divis. Neither company has any net debt either.
DPP on the other hand, has spent almost 7 years as a listed company, constantly losing money, and having to tap shareholders for funds, repeatedly. It has stubbornly continued opening new stores, despite the contribution from those new stores being inadequate to cover the (rising) central costs. Thus profits have been elusive.
On the plus side, the LFL sales growth has been impressive in the last few years, and there is a likelihood that profits may be attained in 2019. Big deal! Why on earth would anyone pay up-front, the considerable market cap of £68.6m, for a business that will have taken about 10 years just to reach breakeven?!
It seems to me that this is a weak roll out, that is taking far too long. In the past it looked a complete basket case. These days, it looks like a viable business may eventually emerge, but not for a couple of years. Even then, the future profits don’t look exciting.
I feel there are much better, and more sensibly-priced roll outs available for investors. There again, other roll outs are not achieving the very strong growth rate that DPP is achieving. If that very strong growth continues, then there could come a tipping point where it transmogrifies into a decent business. So I wouldn’t totally rule it out, but bulls need to be very confident that the LFL growth can continue at high levels.
Spaceandpeople (LON:SAL)
Share price: 25.5p (up 45% today, at 11:24)
No. shares: 19.5m
Market cap: £5.0m
(for the avoidance of doubt, I no longer hold a long position in this share)
Preliminary results – it says for the year ended 31 Dec 2015, but they obviously mean 31 Dec 2016, that’s just a typo. Not a great start.
The 2016 figures are, as expected, a bit of a wash out. I reported here on 9 Jan 2017 on the last profit warning, which indicated that 2016 would be around breakeven at the underlying level. The total loss (including one-offs) was expected to be c.£650k.
Figures out today look to be in that ballpark, although the accounting is complicated by the closure of Samp;P+, which was a joint venture, so the minority interest has to be allowed for. I don’t think there’s much merit in ploughing through all the detail. 2016 was a poor year, the more important question is whether 2017 an beyond are likely to be any better?
Outlook – more detail is given, but the main part says;
Overall, with a clearer focus, a better integrated venues and sales teams, a lower cost base and good quality business opportunities, we expect to be able to return the Group to a sustainable level of profitability in 2017, and trading for the first two months of the year has been ahead of management expectations. We look forward to the future with greater confidence.
Dividends – none for now, but the hope is to reintroduce divis in 2018.
The company has a track record of paying out good divis when it trades well.
Balance sheet - a tad on the weak side, but not disastrously so. I’d be comfortable with the balance sheet if the company was profitable. However, bumping along around breakeven makes me more nervous.
Banking covenants – I don’t like the sound of this, although it doesn’t sound terminal;
As a consequence of these 2016 results, the Group is in technical breach of its cumulative net asset growth covenants in relation to its banking facilities.
Lloyds has informed the Group that, whilst reserving its rights, it does not intend to exercise its rights in relation to these covenant breaches although no further drawdown of the facilities is permitted until the covenant breaches have been resolved.
This is expected to happen when the covenants are tested again at 31 July 2017. This does not have an impact upon the Group’s ability to conduct its business in a normal fashion as the current level of drawdown provides a significant level of headroom.
Personally I wouldn’t normally hold shares in any company which is in breach of its banking covenants, whatever assurances management give. It’s just too much of a risk.
My opinion - the business has been simplified, with the closure of Samp;P+, and the unsuccessful trial in France. Germany hasn’t really worked out very well, either. This all reinforces my view that SAL is a small, niche, UK business, and likely to stay that way.
As such, it doesn’t pass my stricter criteria for buying/holding shares – one of which is that a business has to be scaleable – I’m looking for companies that are likely to double, triple, quadruple in size in the coming years. I don’t see that being likely for SAL.
Also, this share has been a very disappointing one for me personally. I’ve held it for quite a few years, and seen it repeatedly disappoint, and collapse in value. For me, there just came a point where I’d had enough of it, so i chucked them out.
It’s not about the money, it’s more the amount of mental energy that is sucked out of me by holding on to shares which have disappointed. These days, I’m more inclined to just chuck them out, thus freeing up time amp; mental energy to focus on more lucrative opportunities.
So I’ve waved a tearful goodbye to my SAL shares, and won’t be revisiting them. Also, the company’s too small now, its £5m market cap is well below the level where I would consider getting involved. Things this size are just hopelessly illiquid. There are enough liquidity problems with some £100m market cap companies, so it’s a complete nightmare when you get down to this level. Often when you want to sell, it’s impossible.
I wish the company amp; its shareholders well. I was worried about the company de-listing, but management indicated that the listing brings considerable benefits when negotiating contracts – having a stock market listing seems to elevate the company in the eyes of clients. That’s an interesting point which is worth bearing in mind for other smaller companies.
It will be interesting to see if today’s share price rise sticks, as I think there are a lot of stale bulls in this share.
Source: http://www.stockopedia.com/content/small-cap-value-report-27-mar-2017-part-1-bvxp-dpp-sal-177816/
