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New small cap ideas


#1

The market has recently returned a lot of value to cheap dividend stocks, so my attention has turned to where the next small cap growth stocks are emerging. An eye on serial revenue, profit and dividend increases, real assets or low debt, and operating in interesting markets where venture capitalists or investment managers with concentrated portfolios have placed their bets. Yesterday I selected three to track … particularly interested in home grown or home based companies exporting around the world.

SDI an imaging and optics engineer which is growing through clever acquisition in a variety of markets, but what is the killer technology?

FAN the good old Vent-Axia brand doing rather well, just boring hot weather sales or a strong future trend?

GBG who provide verification services, checking id for people like banks, HR departments, helping fight fraud. Seems an obvious growth area and ahead of the competition?

Any thoughts on these or any other compelling suggestions (except please don’t rant on about your pet oil or mineral prospectors please and thank you)


#2

To which list I would add

JDG a conglomeration of mini technology businesses across a wide range of engineering and scientific disciplines, a similar acquisition model to SDI but even more diverse. Currently growing fast organically, strongly positive cash flow, revenue and profits enjoying a boost from the weak pound, and sitting on £20M of cash.


#3

Punted today having sloughed off some Plus. I went for

SDI at 61p, preferring it to JDG because its portfolio seems more obviously synergistic and I could imagine it being a target itself oneday, and I wondered if JDG has all the good news more fully priced in

A bid out for GBG. It is a great market to be in and highly scalable and the margin and yield should soar, reducing its debt at phenomenal pace, recent trading performance and potential not fully priced in


#4

GBG picked up at 608p. A bit harsh to call this a small cap since it is now market valued over £1B, it is scaling up so fast maybe it should be considered a mid-cap in waiting.

Most recently thanks to the Feb 2019 acquisition of IDology in the US for $300M. That is adding immediate revenue growth eg +£30M from the previous year, but the board trading update last week said total expected revenues in H1 were running 64% ahead which translates to +£80-90M pro rata for the year to Mar 2020. The whole of the business is booming.

That signals phenomenal organic growth to go with the acquired step up in operations. And adding directly to earnings. Operating profit is expected to be signficantly more in H1 than for the whole of the year to Mar 2019. More than doubling up net earnings is just wow.

And yet the sp since Oct 2018 is “only” up from 500p or so. Progress to 750p would be a better reflection of what appears to be happening in practice. The market waiting for harder evidence of performance or not yet ready to price in the momentum. I need to re-read the annual report to understand what may be putting the brakes on in some investors minds.

Hard H1 numbers will be released c. 17 Dec so that, along with fresh broker / analyst comment, might be when the sp responds.

ps pleased to see SDI sp is also kicking on today, my adventurous portfolio with two new blue lines in it, how lucky am I, plum duff all round.


#5

Correction GBG will report its Interims eg H1 on 26 Nov.

It is the newly named SDI Group reporting in mid Dec.

Well spotted everyone, sorry for the confusion.


#6

Three more smaller companies which have been on my watch list for a while.

ABD AB Dynamics is a mature family business providing testing systems and services to car makers around the world. The traditional auto sector has been struggling but regulatory pressures and changing technology are still boosting demand for ABD. Pre-close update in October said revenues and profit would again be ahead, we will hear by how much on 27 Nov. The last full year saw about a 50% annual gain. The sp has bubbled up from about 2400p to 2650p in anticipation, so are the good prospects priced in already?

AMO Amino Technologies delivers multi media video to home consumers using 't internet … no I don’t really understand it, set top boxes and the like. Steady progress in recent years stalled in 2018 due to “macro” factors, and H1 2019 numbers were affected while a transformation programme takes effect. But cash flow and net balance is strong, outlook sounds promising if you believe the exec. A turnaround rather than a growth stock perhaps, the sp sank from 120p to 80p and has recovered most of that in the hope things have turned around in H2 2019. If successful this looks a cheap high yield play, and may yet regain growth momentum subject to that “macro” excuse.

HDD Hardide is an industrial engineer with operations in the UK and USA. It has patented clever cold vapour deposition processes which render very hard very thin very precise surface coatings like tungsten carbide onto mission critical components like valves and actuators. And provides the mining, oil and gas industries with diamond coatings for drills. Until a share consolidation in March this was a penny stock but has progressed from 50p to 70p since, with news of orders from Airbus and the F-35 supersonic jump jet programme. Final results are due on 9 Dec, the update in September quoted strong demand, expanding capacity and maybe a breakthrough to profitability in H2. Potential for growth and profitability remain to be seen but HDD seems to have a winning technology.


#7

Marvellous GBG hard numbers for H1 this morning and the sp up over 700p as a result. So now Peel Hunt agrees this is a 750+p share as they up their target to 768p, but they and all the other analyst brokers seem to be trailing the actual performance rather than successfully plotting the future.

I wonder if the rest of this year will capitalise on synergy and consolidate recent acquisitions rather than make news ones, the outlook statement was a conservative “as expected” with no remarks about further expanding services and markets. The emphasis was on organic. So I expect net debt to tumble further.

On the other hand this is such an impressive company and market they can borrow cash at base + 1.5% which is almost nothing when considering the gross operating margin is +60%. Or if a strategic opportunity came along they could tap the market with a share issue, it would be an easy sell.

That is my prayer actually, to go for aggressive strategic growth, noting that they seem to be good at integrating new businesses into the group. There are one or two obvious targets in North America. Or going for someone with a neat digitial solution to online bank transfer indentity fraud would be a winner, since the banks seemingly cannot agree how to compensate victims nor do they appear willing/able to cooperate and implement a push-payment verification fix among themselves.

Anyway. GBG definitely now a mid-cap.


#8

ABDP slump to 2600p, topline results today slightly better than consensus, delivering a 50+% growth in revenues to £58M. But with an eps of 43p or so the anticipatory buying has overegged this cake, P/E way over 50 still. The company is making promising progress and is in the market for further acquisitive growth, about £30M in the kitty, but it acknowledges its success comes down to regulatory demands and the advent of autonomous driving systems as much as it product innovation or market heat, its customer base everywhere is in difficulty. Not confident with that backdrop how it will double up twice over and justify house broker Liberum’s sp target of 3100 in two years. But it might, still watching for a cooler entry point.

JDG frothing up to 5300p today. A 200p special divi announced on 21 Nov goes ex-div tomorrow explains it rather than underlying performance news. The special was an afterthought to positive interims in Sep, there was a lot of spare cash around not immediately required for further acquisitions nor for the internal investment in facilities. A defensive move against a predator eyeing its cash pot, or shareholder unrest … superficially the latter. Anyway, not tempted by the special and not obvious there is more than momentum growth ahead. Watching for a much cheaper entry point.

HDD is suffering from a lack of coverage, sp in the doldrums at around 62p not far ahead of its 60p consolidation/fundraising point in Feb 2019. The benefits of investment in new capacity should be showing through pretty soon.


#9

TRX a starter slice taken this morning at 1.05p, no strong feeling which way this will go but I reckoned on the even chance of ramping to 3p or crumbling to 0.5p it was worth a small punt. All depends on a rescue of their financing and management situation, or strong news about a sale or third party interest would do it.

ABDP house broker Liberum admits this morning its former price target of 3100p+ was too hot and has cut to 2800p. Which still feels way too bullish, the sp responded sharply down below 2300p, approaching an entry point now.

SDI boosted over 70p this morning by another acquisition, buying out the Mitchell family to acquire Chell Instruments another East Anglia technical specialist this time in pressure and gas flow measurement. For £4.3M + a consideration of up to £1.7M for assets, on a cash/debt basis thanks to an extended facility from HSBC. Chell have had a good three year run, a bargain if they can contrbute another £2.5M gross profit like last year. SDI’s H1 update on 17 Dec should be splendid, the announcement about Chell included the snippet that Group net debt has been trimmed by about £900K in current year trading since April.

Still watching AFC and HDD for an entry point, not far away.


#10

Ouch we are a tough crowd sometimes.

JDG had bubbled up even after going ex-div on a 200p special last week, but today plunged 7% back to 4920p. Despite announcing the £2.5M acquisition of Moorfield Nanotech, a thin film coatings instrument maker offering synergies with existing healthcare business, despite saying it would immediately add £600K pa to the Group bottom line. Was the market expecting something more significant, has JDG been marked down by someone, or have people decided to take profits … the sp was over-cooked a little, but why back off on what was good sounding news? Could JDG have run out of ideas?

Meanwhle ABDP has found support around 2200p, AFC is attracting a few buyers at 19p ahead of its product launch day, HDD still stuck at 61p with little interest.

A new random interest in PIP historically a maker of ground penetrating radar tools used to trace utilities now more about QM Systems putting together automated production lines and test systems … 40% growth in the year ending June 2019 thanks mostly to one big order was followed by two modest contract wins and the speculative acquisition of Wessex Precision Instruments who make slip resistance testers for roads, pavements, shop floors (“have you had an accident that wasn’t your fault …”). While the sp still hovers around 5.5p PIP looks cheap, but for the fact that around £4M of historic losses are covered personally by the founder Gordon Watt. A plaything hiding a real business. This is a spikey tiddler low volumes wide spread and hitherto not used to making profits but could all that be changing?


#11

Probably my last small cap punt of the year and I have decided on a stake in HDD at just under 61p. Fingers crossed for good results due on Monday 9th, in terms of hard financials progress and strong outlook.

Even for a frothy penny stock TRX has traded with tremendous volumes today sp up to 1.15p but no obvious pattern of stake building, just small speculators like you and me weighing the odds and having a gamble. This could rocket with a hint of good news.


#12

Hmmm. HDD results contain many positives, not least 10% revenue growth to a record £5.1M at a splendid gross margin. But gross profit of £2.4M was more than wiped out by £3M central admin overhead costs. Strategy is clearly with a focus on growth rather than profitability. Assets good with £4.8M net cash thanks to the stock issue early in 2019.

"OUTLOOK

The start to the new financial year has been strong and the Board is confident of continued revenue growth and business diversification in the coming year. The Board expects gross profit margins to remain at levels comparable to the second half of FY2019.

The project to relocate the business to a new site is on-track and we are looking forward to operating from the facility in autumn 2020 and to the increase in capacity this will provide. This move will enhance efficiency and open up new business opportunities, as well as presenting a modern facility to our blue-chip customer base and investors. The costs of the project are being monitored closely and are expected to be borne in the current financial year."

I think that means HDD will be using up the cash raised in 2019 to pay for investment in capacity expansion and new UK facilities in 2020. But the Chairman says …

We have made a very positive start to the new financial year and the Board is confident of continued growth.

Well growth had better be good, no excuses, at least another 20% revenue needed to cover the eyewatering £3M of central admin overhead costs. I had been expecting a better bottom line than this so a little disappointed, the market so far unmoved.


#13

The trading update from AMO rather more bullish, ahead of final results for the year to Nov 2019 due next February.

Karen Bach, Chair of Amino, said:

"Amino continues to deliver excellent operating cash flows and expects to report a strong performance, in line with market expectations, supported by a net cash position. With the integration of 24i into the Group now complete, we look forward to accelerating our evolution to higher margin software and recurring revenues. It is particularly exciting to announce our first joint customer deployment since the Amino and 24i companies came together earlier this year."

When a company with a progressive dividend makes such positive remarks about cash flow you can bet on further progress. This does indeed look like a cheap dividend play, which should fuel sp momentum up 2.5p so far today.


#14

Appetite for AMO on the increase sp up to 113p, a major stake taken by someone in anticipation of yield, was it VIN? May have missed the entry point.

Same feeling about PIP, which announced another significant order for QM Systems yesterday, adding to expectation of 2020 results at least as good as last year. The jump in sp to 6.5p did not hold for long though, watching closely in the hope of a return to a bargain entry price.

Meanwhile market faith in ABDP, AFC and JDG all appear to be in decline. ABDP was just over priced, JDG also and then blew its cash on a special divi so it is not clear where another growth spurt might come from, these two just need to settle into a new price range.

AFC has failed to follow its product launch and marketing day with announcement of a major order, speculation drove this up to 25p but remorse and no-news will see a reverse all the way back to 5p. Competitors such as CWR and PPS seem to be making better commercial progress. Firmly on the sidelines here.


#15

For some reason BILN which was on my radar a year ago slipped from view. A Yorkshire structural steel supplier and erector which has grown for 5 consecutive years somewhere between steadily and strongly, despite an economic backdrop where other companies have been using words like headwinds and uncertainty. Today a pre-close trading update for 2019 confirms it will again beat expectations for revenue, profit, cash flow.

How much by we will not discover until March or April, but this early announcement hints at how pleased management are with progress. My guess is another 10-15% improvement in eps and dividend, a 4% forward yield covered x 2.5 or so. Does that make this a value stock … cheap, well managed, momentum, real net assets … rather than growth or income?

Not sure, but it is appealing. Even after today’s 5% jump to 340p the shares are available for a backward p/e under 10. Despite maybe having estimated net cash of up to £10M while growing and while making 7-8% margin on turnover around £80M.

Tempting. The BILN stock is 47% owned by the Schmil family trust, whose other construction and engineering services businesses became part of the £340M Yorkshire conglomerate Renew Holdings plc RNWH also doing fairly well in these supposedly difficult trading conditions, and acquisitive.


#16

SDI interim results this morning confirm terrific progress. £11.45M revenues for H1 is 42% ahead. Impossible to give the profit (operating/before tax) figure because they quote 4 different ones between £1.5M and £2.1M; similarly eps at 1.32p or 1.70p is ahead either 20% or 28% depending on what figure you believe! What we can agree is that net debt was down to £0.57M by 31 Oct as twigged above. And then at the start of H2 they bought Chell which may add £4-5M revenue and £2-2.5M profit to full year results if it trades on form.

The Chairman says “the Board is confident that our diversified portfolio of businesses is on course to deliver a full year financial performance in line with market expectations”. Which is always annoying when you can’t be sure what those expectations are, in my mind another year of 50% revenue growth and adjusted eps up to 3.5-4.0p. The Chairman also says “the Board has again been actively seeking to acquire further companies to add to its portfolio.” Well they added Chell already and used up free cash so we might not get another addition in H2, but it is good to hear they are keen to keep growing.

Elsewhere AMO sp has run up to 128p since last week, may have missed the boat, I won’t be adding it to my long term income portfolio without understanding the new look business and the reliability of its financials. BILN advanced into the 360’s but progress has been checked by the family trust off loading a small stake, watching closely for an entry point and a first slice of this dividend growth pick. HDD treading water in the low 60’s remains a double-up target, it would be highly profitable with a winning technology if someone came along and swept away the cost overhead problems.

PIP spiked from 5.5p to 7p on news of the further QM System order before settling around 6.4p, kicking myself for passing this at 4.9p last month, and will take a tiny punt if it gets back in the 5’s when I expect a buyer will come along.

So instead I took a tiny slice of VAL, a biopharm development company which yesterday announced good unofficial results for its patented prostate cancer drug. Not a solid bet, a real gamble that for once they might be telling the truth, at 0.13p a share. Definitely not a recommendation, just a response to what to do with all the cash having sold off some blue chip gains since the weekend.


#17

Extraordinary movements in JDG which I do not understand, have I underestimated them and missed a winner? Having settled back to a more realistic 4600p two weeks ago the sp has suddenly rocketed to 6000p, on no news, no comment, no rumour, and very thin volumes.

I wonder why.

Bets on HDD and TPG refuse to pay off, market not interested in their solid steady prospects. SDI and GBG on the other hand are rewarding with strong gains to sp levels which better reflect their value and potential. Renewed appetite for some undervalued small caps then but not all.


#18

Some good news, TPG share price finally taking off up to 7.2p and plenty of volume. Partly thanks to some positive analyst comment on 2020 prospects, and TPG have announced a couple of contract wins E2.2M to renew Eclipse licences for ESA over three years and a £1M in-year contract to supply a CO2 scrubber for a Korean (?) submarine expected to be one of a series of orders. These are expected wins, and not much of a dent into the reported £250M active pipeline, but it is still good to hear the business plan is working and it makes for a pretty good first week of the year.

JDG has settled back from £60 to £50, also on no news or comment and little volume. It might as easily slip back to £40, so still waiting in the wings for real news or a more obviously cheap price.

AFC has strengthened back to 19p having threatened to dive from 15p but no news of commercial progress to follow the marketing fanfare in early December. Hydrogen as a fuel or EV energy source still mostly hot air it seems. Not tempted.

ABDP has settled around 2100p as the market tries to decide if its own good performance prospects will outweigh that it is squeezing it out of a declining struggling automotive sector. Still not tempted. Is BILN similarly held up by performing well in the market for structural steel which is otherwise struggling, hit a plateau at around 370p which is still cheap but might get a boost as the prospect of a 4% Summer dividend comes along.

GBG has settled back to 740p having soared to 800p, on low volumes so this might be an entry/add point before it will take off again. SDI on the other hand has ridden steadily to 80p and held the gains, it is delivering its business plan and has been tipped. HDD however remains stuck on 60p with no interest, and looks cheap at that price.

Not sure where to look next, maybe among the picks of the UK Microcap ITs … missed the boat on AMO, but KAPE has surged to the top of Miton’s holdings thanks to its ambitious acquisitive growth strategy to corner the global secure VPN / private internet access market for end consumers. On the watch list and worth a bit of reasearch into things like how is it going to pay to acquire US company PIA with a similar market cap.


#19

Well well. SDI overcooked to 90p yesterday and slipped back sharply to 85p this morning, at which point I was stopped out. Strong demand has stabilised things. Oh well, can’t complain, a 40% return in under 3 months very welcome. Watching for a re-entry point.

Reinvested the stake in GBG at 720p, where I am happy to hold for long term.

And gambled some of the profit on another bite of TRX at 1.5p, fully aware this could double or bust overnight, high daily volumes speculating on a recovery.

Still puzzling over KAPE, don’t really understand the business.

TPG has stepped on to around 7.6p which is reward for patience. HDD on the other hand still stuck at 60p where I am tempted to add.

Or I might redouble my interest in DX’s recovery perhaps, sharp uptick today as punters anticipate a trading update in a couple of weeks which I am sure will be positive.

Or I may back a quick recovery from NAHL which dropped 20% since mid-December on a 5% profit warning, and might still be on course to announce in mid-March a 4-5p final dividend.