[SharePad] Small-Cap Spotlight Report: SOFTWARE CIRCLE

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12 October 2024
By Maynard Paton

Mark Leonard has been described as the “best capital allocator you have never heard of“.

According to Forbes, Mr Leonard is now worth $5 billion after he established Constellation Software during 1995 and listed the group on the Toronto Stock Exchange during 2006. He then watched his shares soar more than 200-fold:

(Source: SharePad)

You may not have heard of Mr Leonard because he deliberately maintains an extremely low profile. He appears to have conducted only one public interview while pictures of him online are essentially variations of this particular image:

However, Constellation’s super stock price — currently supporting a £50 billion market cap — has gradually increased the number of investors who have heard of Mr Leonard…

…and the number of investors who have tried to replicate Constellation’s success. By 2018 Mr Leonard had seen enough copycats and decided to give up writing his annual Constellation letter. He lamented:

“For competitive reasons we are limiting the information that we disclose about our acquisition activity. We believe that sharing our tactics and best practices with a host of Constellation emulators is not in our best interest.”

Such has been the enthusiasm for how Mr Leonard created his immense wealth, a Constellation ’emulator’ has even emerged within the lower reaches of AIM.

Software Circle sports an £85 million market cap and is attempting its very own Constellation-like mega-bagger journey.

Let’s take a closer look.

Read my full SOFTWARE CIRCLE article for SharePad >>

Maynard Paton

Q3 2024: Running Multi-Baggers To 40% (Or More!) Of Your Portfolio

03 October 2024
By Maynard Paton

Happy Thursday! I trust your shares have been keeping up with this year’s rising FTSE.

A summary of my portfolio’s progress:

  • Q3 return: +7.9%*
  • Q3 trades: None.
  • YTD return: +29.4%*
  • YTD winners/losers: 3 winners vs. 7 losers.

(*Performance calculated using quoted bid prices and includes all dealing costs, withholding taxes, broker-account fees, paid dividends and cash interest)

Famous last words, but my portfolio seems on course for its best annual performance since I commenced this blog at the beginning of 2015.

As I predicted within my 2023 review, System1 has dominated my returns and what was a very large weighting has become even larger. July’s positive results from the ad-testing specialist helped push my portfolio to a record high and the question now is how far do I run this winner?

Away from System1, my portfolio’s Q3 newsflow was not perfect and some profit setbacks have started to influence my dividends.

In particular, Mincon published a terrible H1 that could not even confess its payout had been paused. As I noted in my last write-up, I can only hope the group’s family directors quickly take decisive action to revive the drill manufacturer now their €2.5m annual dividend income has ceased.

Elsewhere, S & U has admitted to further bad loans following new FCA ‘forbearance’ rules. I suspect the lender’s 17% final-dividend cut earlier this year will be followed by a similar reduction within its forthcoming H1.

Other shares not improving my income during 2024 are Andrews Sykes and City of London Investment, both of which held their latest payouts following unchanged earnings. I have also enjoyed 5%-or-less dividend increases from Mountview Estates, FW Thorpe and M Winkworth.

Only Bioventix (+10%), Tristel (+100%) and System1 (payout reintroduced) have supplied very positive dividend news during the first nine months of the year. My end-of-year returns could therefore reveal a disappointing total income.

Read more

TRISTEL: New Chief Exec’s Financial Targets Keenly Awaited After Record H1 2024 Announces 30% UK Growth, 100% Dividend Jump, Bumper 84% Gross Margin And ‘$100m Opportunity’ In North America

01 October 2024
By Maynard Paton

H1 2024 results summary for Tristel (TSTL):

  • A record H1, displaying revenue up 20%, profit up 28% and the dividend up 100% underpinned by remarkable 30% UK growth and notable price increases accepted by the NHS.
  • North America is now deemed a “$100m per annum opportunity” for TSTL’s initial FDA-approved foam, although competition now involves an FDA-approved UV-light machine that may strengthen the wider argument for automated disinfections. 
  • The new chief exec ticks a lot of boxes for marketing healthcare products in the US, but his stint at LiDCO was unspectacular and shareholders keenly await his strategic ambitions, financial targets and details of his LTIP package.
  • Although employee productivity has flat-lined, the financials remain in good shape with a bumper 84% gross margin and net cash approaching £12m that could lead to another special dividend.
  • A near-term 32x P/E is not an obvious bargain, but a premium rating could be justified by further meaningful growth within established markets, the prospect of lucrative US royalties, the ongoing ability to raise prices and the possibility of successful R&D. I continue to hold.

Read more

[SharePad] Screening For My Next Long-Term Winner: CASTINGS

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19 September 2024
By Maynard Paton

I always love a traditional ‘value bargain’. Hence this revisit to an old screen that pinpoints companies trading at less than book value.

Importantly, this screen attempts to avoid ‘value traps’ by demanding the shares carry net cash, pay a dividend and offer a history of trading above book value.

The exact filter criteria I redeployed were:

  • A price to net tangible assets of no more than 1;
  • A dividend being paid during the most recent year;
  • A 10-year average price to net tangible assets of at least 1;
  • Net borrowings less total leases of no more than 0 (i.e. a net cash position excluding IFRS 16 lease obligations), and;
  • A share price denominated in pounds sterling.

SharePad returned 10 companies, and I selected Castings because I used to own the shares and was surprised to discover the company was on the list:

(Source: SharePad)

Sure enough, Castings’ 303p shares trade (just) below the group’s 308p per share net asset value:

(Source: SharePad)

My filter results indicated the shares have traded at an average of 1.3x book value during the last ten years, while the SharePad chart above shows the rating stretching to 2x during 2014.

But there has been the odd occasion (such as now!) when the share price has fallen below book value.

Castings’ book value has advanced over time, and so has the dividend. The payout has in fact not been cut for at least 30 years:

(Source: SharePad)

Special payments were also declared for 2016, 2019, 2022, 2023 and 2024.

Given the illustrious dividend history, Castings does not seem the type of business that should be selling just below book value. Yet the shares have moved sideways for years; the 303p price was first achieved in 2007 and today supports a £132m market cap.

Let’s take a closer look.

Read my full CASTINGS article for SharePad >>

Maynard Paton

S & U: FY 2024 Confirms 41% H2 Profit Slump And 17% Final-Dividend Cut After Enhanced ‘Forbearance’ Regulations Prompt 74% Impairment Surge And Collections To Slide To A Pandemic-Like 69% 

19 September 2024
By Maynard Paton

FY 2024 results summary for S & U (SUS):

  • A very disappointing FY, with H2 profit slumping 41% and the final dividend cut by 17% as enhanced FCA “forbearance” regulations prompted the “temporary” modification of motor-finance collections and led to impairments surging 74%.
  • Various motor-finance ratios unsurprisingly deteriorated, including the first-payment proportion plunging to an alarming 94%, collections of due falling to a below-budget 90%, anticipated repayments hitting a fresh 127% low and up-to-date accounts sliding to 74%. 
  • At least the property-loan subsidiary continues to perform well, as minimal bad loans led to a new £5m profit high, an impressive 58% divisional return on equity and a company-blog ambition to double cumulative lending to £1 billion “in the next couple of years“.
  • Debt advancing to £224m and borrowing rates climbing to 8% caused net finance costs to absorb a significant 13% of revenue; extra post-FY debt could meanwhile take net finance costs from £15m to £19m and exacerbate the profit “headwinds“.
  • Post-FY references to “vigorous” FCA discussions, political intervention and up-to-date accounts running at a pandemic-like 69% now leave the £18 shares firmly below NAV, a valuation witnessed only very occasionally during the last 30 years. I continue to hold.

Read more

FW THORPE: 25% Dutch Profit Growth Supports Subdued H1 2024 As New Combined CEO/FD Role Plus Slimmed-Down Board Raise Concerns About Executive Power, Technical Expertise And Aggressive M&A

30 August 2024
By Maynard Paton

H1 2024 results summary for FW Thorpe (TFW):

  • A 5% dividend advance was the highlight of this rather subdued H1, as revenue gained 1% and profit fell 2% after customers apparently finished (very) early for Christmas.
  • Divisional performances were extremely mixed, with Dutch profit up a super 25%, Thorlux’s profit sinking a disappointing 8%, Zemper’s profit still to show its full potential and Ratio’s losses becoming even larger.
  • The accounts remain in good shape, showing an acceptable 15% group margin, healthy net cash of £29m and a very welcome stock reduction, although Ratio has (probably) required extra funding and the pension scheme may one day follow suit.
  • The roles of chief executive and finance director have been combined, which alongside a slimmed-down board raises concerns about executive technical expertise, a concentration of leadership power and future M&A that may not be adequately challenged.
  • A possible 20x P/E seemingly reflects TFW’s distinguished operating history, future “synergy initiatives” and continual demand for energy-saving lighting rather than the group’s modest near-term prospects, doubts about the re-jigged board and the risk of an aggressive acquisition strategy. I continue to hold.

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[SharePad] Small-Cap Spotlight Report: LINDSELL TRAIN INVESTMENT TRUST

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16 August 2024
By Maynard Paton

Could now be the time to back Nick Train?

The buy-and-hold fund manager was for years feted for selecting blue-chip multi-baggers such as Diageo, RELX and London Stock Exchange.

But recent times have witnessed a stark change to market conditions…

…and Mr Train admitting to a “mortifying” underperformance that even necessitated a public apology.

The shares of Lindsell Train Investment Trust, an investment trust managed by Mr Train, have for example lost 60% from their 2019 peak and are now back to a level first achieved eight years ago:

(Source: SharePad)

Yet Mr Train’s supporters may now want to consider this £154 million trust as a way of profiting from his potential comeback.

Importantly, this trust owns 24% of Mr Train’s fund-management firm, which last year paid a £39 million dividend split between Mr Train, his colleagues and this trust…

…and yet this 24% stake appears valued by the stock market at less than 2x earnings.

Let’s take a closer look.

Read my full LINDSELL TRAIN INVESTMENT TRUST article for SharePad >>

Maynard Paton

ANDREWS SYKES: ‘Robust’ FY 2023 Delivers Record £23m Profit After 13% Workforce Reduction Helps Lift Group Margin To 29% High

07 August 2024
By Maynard Paton

FY 2023 results summary for Andrews Sykes (ASY):

  • A “robust” FY performance, which delivered a record £23m profit through “careful cost management” and positive sales momentum within a number of European countries.
  • UK air-conditioning revenue declined 14% to £8m following lower summer temperatures, leaving the domestic market’s progress to again be dictated by pump hire — up 2% to register a sixth consecutive FY improvement.
  • Closing the French subsidiary, curtailing Middle Eastern losses and reducing the wider workforce by 13% were among the decisive actions that helped the group margin achieve a new 29% high.
  • The very respectable accounts showcased net cash at £20m, capex requirements of just £3m, a 34% return on equity and a “fully de-risked” pension scheme.
  • A possible 13-14x P/E does not appear outrageous, with the restricted free float, weather-sensitive operations and absence of obvious economies of scale counterbalanced perhaps by bid-target potential. I continue to hold.

Read more

M WINKWORTH: Non-Exec Appointments Invite Bid-Target Speculation After Suppressed Property Market Reduces FY 2023 Profit By 25% And ‘Top 3 Contender’ Ambition Prompts 9 Branch Closures 

29 July 2024
By Maynard Paton

FY 2023 results summary for M Winkworth (WINK):

  • Only the dividend advanced higher (+6%) as a suppressed property market alongside greater costs left franchise-network income 8% lower, revenue unchanged and profit down 25%.
  • Requiring every franchisee to be a “top three contender” prompted nine branch closures but underpinned industry-leading sales, lettings and conversion statistics versus (now anonymous) rival agents.
  • Company-owned offices now include Pimlico and collectively reported a £0.48m profit, although divisional progress remains dominated by Tooting — the exit strategy for which is unclear.
  • After reporting a lower margin, adverse cash conversion and weaker employee productivity, a post-FY update heralded a stronger FY 2024 that supports a possible 12-14x P/E and near-6% yield.
  • Celebrations marking the chairman’s 50-year tenure invite bid speculation, especially following the appointment of two non-execs with M&A backgrounds and sector merger activity involving Property Franchise and Belvoir. I continue to hold.

Read more

[SharePad] Screening For My Next Long-Term Winner: RWS

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27 July 2024
By Maynard Paton

An illustrious dividend history and a worthwhile yield have brought RWS to my attention. The language-translation group presently offers:

  • An unbroken record of dividend increases since its 2003 flotation;
  • A despondent share price that provides a 6.5% yield;
  • Forecasts for further growth, albeit tempered by significant profit adjustments and unnerving management changes, and;
  • A long-time board member with a £170 million investment who has never sold a share.

I pinpointed RWS after revisiting a SharePad filter that shortlisted companies where the last five years had shown their dividends going up but their share prices going down:

(Source: SharePad)

I selected RWS because its shares had fallen the furthest among the shortlist. I also noted the group’s forecast P/E was a modest 8x.

Not only has RWS’s dividend increased during the last five years, the payout has been lifted every year for a remarkable 19 years!

(Source: SharePad)

But the rising dividend has not stopped the shares plummeting to 189p, which supports a £696 million market cap:

(Source: SharePad)

Let’s take closer look.

Read my full RWS article for SharePad >>

Maynard Paton

CITY OF LONDON INVESTMENT: Subdued H1 2024 Shows Rising Staff Costs Cutting Profit By 5% Although Welcome ‘Engagement’ With George Karpus And Bumper $224m Q3 FuM Inflow Now Lend Greater Support To 9% Yield

10 July 2024
By Maynard Paton

H1 2024 results summary for City of London Investment (CLIG):

  • A subdued performance due to ongoing market “headwinds”, with funds under management (FuM) and revenue up 2%, profit down 5% and the dividend kept at 11p per share for the fourth consecutive H1. 
  • CLIG blamed further FuM withdrawals of $294m on higher deposit rates and appealing index trackers, although the follow-up Q3 statement reported a bumper $224m inflow as clients reappraised the group’s “compelling” portfolio valuations. 
  • A “strategy of engagement” with unhappy major shareholder George Karpus has led to welcome cost cuts, yet the staff profit-share continues to edge higher and doubts persist about whether CLIG is run for the benefit of employees instead of shareholders.
  • Other questions from this H1 concern the effectiveness of the salesforce, the reduced disclosure on fee rates, the necessity of a main-market listing, the revised testing for goodwill impairment and the failure to meet the group’s sole KPI.
  • While CLIG’s own projections point to earnings that just about support the 33p dividend and 9% yield, publishing USD accounts but declaring GBP dividends may confuse the 1.2x payout-cover policy. I recently bought more and continue to hold.

Read more

Q2 2024: ‘When It’s Drizzling Gold, Reach For A Bowl’

30 June 2024
By Maynard Paton

Happy Sunday! I trust the first half of 2024 has been positive for your shares.

A summary of my portfolio’s progress:

  • Q2 return: +10.8%*
  • Q2 trades: 3 top-ups (City of London Investment, Mountview Estates and S & U).
  • YTD return: +20.0%*
  • YTD winners/losers: 5 winners vs. 5 losers.

(*Performance calculated using quoted bid prices and includes all dealing costs, withholding taxes, broker-account fees, paid dividends and cash interest)

This year has witnessed my best-ever H1 since I commenced this blog at the beginning of 2015. As I predicted within my 2023 review, System1 has dominated my returns and what was a large weighting has become even larger. April’s positive statement from the advert-testing specialist helped push my portfolio to new a record high.

My portfolio’s Q2 newsflow has also included some intriguing boardroom changes. 

In particular, the odd management set-up at FW Thorpe has taken another twist: out go the roles of joint chief executives and in comes the combined role of chief executive and finance director! I hope to attend Thorpe’s AGM later this year to understand how this appointment was decided (in the meantime, more thoughts can be found here). 

Elsewhere, Tristel has recruited its forthcoming new chief executive who, on paper at least, seems as if he could make a real go of the group’s United States potential. The outgoing chief exec is married to the current finance director, which I suspect/hope means a new finance director will be hired in due course.

Finally, M Winkworth has recruited two non-execs from corporate-finance consultancies with M&A knowledge. Could the estate-agent franchisor be soon erecting its own ‘for sale’ sign? Sector rivals Property Franchise and Belvoir recently merged and maybe Winkworth now feels susceptible to a bid.

Read more

SYSTEM1: Positive H1 2024 Reveals Platform Revenue Up 44% And Leads To Encouraging Dividend Reappearance While £17.5m Illustrative CMD Ebitda Projection Supports Possible £15 Share Price And Reinforces Bid-Target Speculation

23 June 2024
By Maynard Paton

H1 2024 results and Capital Markets Day (CMD) summary for System1 (SYS1):

  • A positive H1, with platform revenue up 44%, greater workforce productivity and improved cash generation leading to better-than-expected Q3/Q4 statements and the upcoming reappearance of the dividend.
  • H1 progress was not perfect, and drawbacks included questionable adjustments, revenue per client seemingly stagnating and services beyond ad-testing — which offer much larger addressable markets — still losing sales and still requiring product revamps.
  • Despite the higher H1 revenue, direct costs declined a remarkable 17% to deliver a record 88% gross margin. But significant bonuses limited the Ebitda margin to 13% — somewhat below the “at scale” target of 30%.
  • The subsequent CMD disclosed founder/executive John Kearon is now evaluating “long-term strategic opportunities“, which raises questions about his “relentless execution” of his own platform plan.
  • The CMD also provided a £17.5m illustrative Ebitda projection, which supports a possible £15 share price and reinforces my speculation that SYS1 could/should become a bid target.

Read more

[SharePad] Small-Cap Spotlight Report: COLEFAX

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13 June 2024
By Maynard Paton

The email I received was intriguing:

“The numbers speak for themselves. The company has repurchased more than 75% of shares outstanding since 1999, has a decent return on equity (last financial year approximately 18%), and is trading at an EV/EBITDA of 3-4 due to £20m net cash on the balance sheet.

The market has either overlooked the stock entirely or is pricing in profits falling off a cliff, which I don’t see happening given the maximum decline of 40% after the GFC. I’d love to know what you think.”

The company in question is Colefax (CFX), a small-cap so obscure that even I — a keen investor for 30 years — had previously never heard of.

But any business that has bought back more than 75% of its shares must be worthy of further investigation. Sure enough, Colefax’s share count has reduced from a peak of 28.5 million during 1999 to 6.2 million today:

(Source: SharePad)

What is going on? Let’s take a closer look.

Read my full COLEFAX article for SharePad >>

Maynard Paton

[SharePad] Small-Cap Spotlight Report: VICTORIA

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17 May 2024
By Maynard Paton

Oh dear. Today I am writing about Victoria, a £228 million carpet manufacturer that last year attracted attention following an adverse audit:

(Source: SharePad)

When I last looked at an adverse audit for SharePad, a commotion erupted that debated whether I was simply reporting “transcription errors” or spotlighting something more sinister.

So to be clear:

  • What follows is just my interpretation from reading Victoria’s 2023 annual report and other company statements;
  • I have not inspected every part of Victoria’s accounts nor considered every aspect of the wider investment case, and;
  • Please do your own research and form your own conclusion.

And with that, let’s take a closer look.

Read my full VICTORIA article for SharePad >>

Maynard Paton

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