Mello 2022 Preview

Physical Mello is by far the leading conference for serious private investors. As well as keynote speakers and panel discussions, around 40 companies present at each event.

The last time it ran in November 2019 I briefly summarised every company attending in this article. This proved very useful to help me prepare and I hope it was useful for others also. It also helped me trade the “Mello Effect” sometimes seen when investors buy after a good presentation.

Companies are presented in alphabetical order, but the summaries were written in the order that I became aware they were presenting. So although depth may vary, Zoo Digital gets as detailed a writeup as Atome Energy. On the funds side, only quoted ones that were announced early on are included. Presentation times are as at information available on 23/5/2022 mid-day and will not be updated for changes. AM/PM refers to before/after scheduled lunch, approximately 1pm, however the mini-guide will be updated right up to the wire. “No stand” means the company are not exhibiting – they may visit the hot stand after presentations, but details are not yet available. All references to “Mello” refer to physical Mello conferences events unless explicitly mentioned. All opinions are my own and are based on brief, mostly primary, research and therefore may miss key factors.

Stockopedia have kindly agreed for a StockReport for each company to be included – to access live versions of these for all UK and optionally other stocks sign up here.

This article is now complete. I have also made a mini-guide here.

1Spatial (SPA)

Presenter: Claire Milverton (CEO), Thursday AM/PM

The company started life in its current form in 2011 providing solutions to manage spatial data for the likes of Ordnance Survey and utilities. The company lacked focus until non-core businesses were fully disposed of in 2019 and the 12-months to 31st January were the first to show a profit for a decade.

The company appears to have a strong position in its market and the outlook is now for strong growth. However they have a poor long-term track record, including under current management, have a fairly weak balance sheet and are highly rated on a forward PE of 20x. Their latest Annual Report has just been published here.

I am not aware of them having appeared at Mello before.

Aquis Exchange (AQX)

Alasdair Haynes (CEO), Wednesday AM

Aquis look to be presenting as an investment proposition in their own right, but their AQSE exchange is also a service that Mello attendees should be aware of and might wish to use, or rather pressurise their broker to use.

Pricing for dual-listed AIM / AQSE companies is frequently better on Aquis, but companies that are listed only on Aquis are generally very small and illiquid with no trading volume on most days. Still, it is early days for AQSE and the vast majority of revenue comes from their EU operations which have continued to grow without material interruption from Brexit. Their high-margin exchange technology and services business has historically provided the majority of profits.

Clearly the prospect of further companies coming to market is exceptionally poor right now, resulting in considerable share price weakness amongst the quoted brokers, but Aquis is far more driven by trading volumes. Here there is some concern over market trends towards dark pools, but volumes have been holding up well due to continued high volatility.

I don’t believe Aquis have attended a physical Mello before so it will be interesting to talk to them. If they can continue to scale then the earnings multiple of 28x could prove cheaper than it looks at first sight.

ATOME Energy (ATOM)

Olivier Mussat (CEO), Wednesday AM/PM, No Stand

The reputation of the AIM market has improved massively in the last few years, but the idea of an Atomic Energy company trading there had me hunting for the iodine tablets. So fortunately this is a green hydrogen / ammonia company. And the ammonia is at a safe distance.

For me, green ammonia is the more attractive side as it has a lot of embedded energy, generally replacing natural gas inputs, is much easier to store / transport in bulk than hydrogen and is a precursor for fertilisers and other chemicals as well as a potential energy carrier in itself, especially to fuel shipping.

Atome have projects in Paraguay where there is actually an excess of electricity generated from renewables, but which has to import fossil fuels for transport and other uses. So if the hydrogen economy can work anywhere then it is Paraguay. There are also clear opportunities for ammonia. However, although the such projects may be intrinsically economic, there are various linkages with grand government strategies, involvement with not-for-profits and grant funding that make it intrinsically more risky than a straightforward commercial operation.

Closer to home they have projects in Iceland, famed for its geothermal power. There is a similar pattern: a reliance on road / sea transport and importation of fertilisers. To spice things up a little they plan to use a Solid Oxide electrolyser, a technology that has never been commercialised, but which Wikipedia tells me can operate in “endothermic mode”, which seems handy if you have a free heat source / need a heat sink.

I think two things are important to note here:

  1. This is not a technology company, merely a user of technology. Their model appears to be to construct, fit out and operate plant, but the electrolysers etc. will be bought in. They have no IP, although over time they should gain valuable experience.
  2. They are not yet producing any hydrogen. Projects are at a planning stage with permissions, customers, suppliers and/or funding not in place.

As one of the last companies to get their IPO away in December, the company has never presented at Mello before. Be sure to catch the CEO after the presentation if you want a more detailed chat as they are not hosting a stand.

Avation (AVAP)

Richard Wolanski (CFO), Wednesday AM/PM

Avation is an aircraft leasing company specialising ATR 72 turboprop aircraft. As you would imagine it was hit during covid, but was particularly badly affected by the collapse of Virgin Australia, one of their largest customers, into administration. They were unable to refinance a $340m bond, but were able to negotiate a maturity extension with an accounting gain of $50m as the bonds were trading at a significant discount to par.

The situation with the remaining business is complex. In the last audited results to 30th June 2021 NAV was $157m, but this included $27m of aircraft purchase rights which were not materially written down over the year despite covid lasting far longer than anyone previously expected. This doesn’t pass the smell test from my simplistic non-expert viewpoint and casts doubt on the rest of the asset valuations.

As at December 2021 NAV was claimed at $154m with losses mainly from aircraft value impairments offset by gains on interest rate hedges. The current ratio is below one and current liabilities of $248m compare to cash of $121m, annualised pre-financing cashflow of $104m and (my estimate of) $10m in aircraft sales, leaving a potential deficit of $13m.

Since then the outlook for the industry has surely been on an upward trend, as has the US dollar, putting NAV at £123m. With the market capitalisation of Avation now at £46m then surely there is some value to be had? The two issues seem to be a) whether you trust the accounts and b) whether other potential investors or lenders who may be called on to help with liquidity trust them.

Who better to help with these questions than Richard Wolanski who will once more be at Mello, live and in person.

Belvoir Group (BLV)

Dorian Gonsalves (CEO), Wednesday AM/PM

Belvoir are primarily a lettings agency franchise that has “branched out” into sales and financial services. They also own some of their own offices.

This looks like classic “Growth at a Reasonable Price” (GARP) territory although clearly headwinds are likely to build over the next year or so. The core residential lettings business should provide some resilience.

Belvoir have appeared on several online Mello Monday’s and also at the last physical event in November 2019 but I can’t see any obvious share price reaction from past appearances.

Brave Bison (BBSN)

Oliver Green (Exec Chair) and Theo Green (“Chief Growth Officer”), Thursday AMx2

The company is a digital media owner and a digital advertising agency. On the media side they operate a handful of social media channels, both on their own account and for third parties. Here they seem to be achieving considerable success, although it is difficult to judge as I am not the target market. They also offer services in search engine optimisation, social advertising and e-commerce websites.

This was one of the companies that Woodford had to dump which did not look like an obvious dud (e.g. it does not break the known laws of physics). I like that it has some IP in the form of the digital media channels and is less reliant on individual staff than a pure digital agency, but the recent acquisition seems to detract from this and complicates analysis. The acquisition was funded with a highly dilutive placing at a discount of 22% which small investors were entirely excluded from.

Checkit (CKT)

Kit Kyte (CEO), Will Maunder-Taylor (Global VP of Sales) & Ade Risidore (Global Director of Marketing & Customer Success), Wednesday AM/PM

Checkit used to be known as Elektron Technology when it was home to a number of mostly unrelated businesses. These were gradually disposed of culminating in the sale of Bulgin in 2019, a return of excess cash, and a change of name to match the remaining business, namely Checkit. Management changes were completed in H1 2020. Only the continuing operations figures for FY 2021 and the FY 2022 (to 31st January) figures are relevant to current operations.

The Checkit product appears to be similar to Crimson Tide (TIDE)’s mpro5 product, aimed at optimising workers activities, but also extending into asset and building monitoring. It is an area where I can see a genuine need – only though increasing productivity can we raise living standards.

This is a SaaS company and so their main metric is Annualised Recurring Revenue (ARR) which in this case was up 44% with strong momentum in 2022 H2. The value of £8.2m forms a baseline for revenue next year. As usual with these businesses gross margins are very high, but client retention relies on some costs that are treated as administration expenses and this is difficult to quantify. Again, as is common, some non-recurring revenues from legacy sales models are converting to recurring and some being lost, distorting the picture.

With a Wednesday AM presentation this could be the opportunity to get up to speed on the SaaS business model, ready for GetBusy and SmartSpace, with no shortage of staff to talk to.

Civitas Social Housing (CSH)

Paul Bridge (CEO), Tuesday AM/PM

A REIT leasing residential property to care providers on long-term leases with CPI indexing. Their sensitivity analysis suggests a considerable uplift in valuations implied by real interest rates falling from -2% to -8% over the last few months, perhaps to the tune of 50% if sustained with discount rates only increasing with nominal base rates.

On the other hand, if real interest rates were to normalise at a positive value as seen prior to the financial crisis then falls of 25% in NAV are implied. Any falls in weakness in the residential property market would also eventually feed through to rents at renewal. In the interim I would question the ability of housing association tenants to fund annual rental increases of 9% or more per annum for any sustained period, and the stability of the care sector. Upon googling their largest customer Falcon I immediately came across this rather interesting article.

So, lots to ask management there then, but be nice to Paul!

Dillistone (DSG)

Jason Starr (CEO) & Joanne Curd (CFO), Wednesday PM and Thursday AM

Dillistone’s traditional business is providing software to recruitment agencies.

In 2017/18 they developed an alternative to recruiters own private databases and to public LinkedIn profiles called GatedTalent. The idea was that recruiters were going to email all their contacts to seek GDPR authorisation to remain on their database, but as well would invite them to sign up to GatedTalent, saying 1m executives would be invited by May 2018. In January 2020 they reached 100k registrations and “above 100k” remains the claimed number to this day.

The cost of development and a downturn in their traditional business led the company to be reliant on financial support from the directors in the form of convertible loan notes. Covid led to them being reliant on a CBIL loan.

The company has continued investing in its various products, including moving them to the cloud, and in January 2021 they announced a new executive search solution, Talentis TalentGraph.

In April they reported strong momentum in the last quarter of 2021 accelerating into Q1 2022 with a record month in March. This was probably as well because they are down to £0.8m of cash and are now having to repay the CBIL, albeit slowly. Cashflow is not guided to be positive until FY 2023 and the current valuation doesn’t appear to make sense unless you see significant potential to beat forecasts.

I think I recall Dillistone presenting at an earlier Mello, but they have not been seen recently.

Downing Strategic Micro-cap Investment Trust (DSM)

I was sure this fund was listed in the original logo montage, but I now see it is only Small & Mid-Cap Income and Listed Infrastructure funds that are presenting. Still perhaps Downing Strategic fund managers Judith MacKenzie and/or Nick Hawthorn will be floating about and I’d already written this, so here goes…

This fund is different because it invests in small/microcaps. Therefore even if you are not sure about investing in the fund it may be worth going along to hear about their opinions in the investee companies.

Current holdings are understood to include, in approximate order of position size:

  • Real Good Food (RGD) (Mostly loan notes)
  • Hargreaves Services (HSP)
  • Ramsdens (RFX)
  • Flowtech (FLO)
  • Volex (VLX)
  • DigitalBox (DBOX)
  • FireAngel (FA.)
  • Centaur Media (CAU)
  • AdEPT Technology (ADT)
  • Synectics Business Services (SNX)
  • Tactus Holdings (private)
  • Venture Life Group (VLG)
  • Norman Broadbent (NBB)
  • National World (NWOR)

Fact Sheets, Investor Letters and Annual Reports for DSM can be found here.

DSW Capital (DSW)

Nicole Burstow (CFO) & James Dow (CEO) Wednesday AM/PM

DSW provide support including the licensing of the Dow Schofield Watts brand and membership of a network to professionals wishing to build their own Corporate Finance / Accounting businesses. In some ways the model is like a franchiser, but instead of an up-front fee they lend start-up money like a bank, but they mostly make money on a percentage of turnover like a royalty financing company.

The company only came to the market in December, and the purpose was mainly in order to raise its profile, although they also raised a little working capital for expansion. Recruitment was indeed aided by the publicity around the IPO and in May they reported revenues significantly ahead of expectations for the full year to end March 2022.

The company grows revenues through existing licensees becoming more successful and new ones being recruited at ever higher licence rates as the Dow Schofield Watt network grows in size and brand value. They are also looking at repeating the same model with other professional services. As the founders and management control a majority of the shares, most profit is likely to accrue to shareholders rather than being paid in salaries and bonuses, meaning that minority shareholders stand to benefit more that with some other people businesses.

So this looks an interesting proposition, although personally I would need to see post-IPO results with post-IPO costs before considering an investment.

Franchise Brands (FRAN)

Stephen Hemsley (Exec Chair), Thursday AM, No Stand

As the name suggests, this company manages a portfolio of franchise brands, most famously(!) “Metro Rod”. It is growing organically and by acquisition.

Acquisition is always a risky growth strategy, but the purchase of Filta operating in the US and Europe is particularly dicey for a company that has been UK-focused until now. On the positive side, this was at all-share offer at reasonable valuations and is expected to be earnings enhancing this year.

Provided Franchise Brands can maintain a strong share price then further such earnings enhancing acquisitions may be possible creating a virtuous circle. One element of maintaining a strong share price is of course good investor relations, and that is why they are appearing and have appeared in previous Mello shows, but be careful not to miss them as there’s only one presentation and no stand.

GetBusy (GETB)

Paul Haworth (CFO), Wednesday AM, No Stand

This is another SaaS company that doesn’t immediately appear able to scale into a viable business – as you can see from Stockopedia forecasts are for ongoing losses. They provide document management and productivity software to a claimed 30% of the “top UK accounting and professional services firms”.

From my experience I would say these are the sorts of products which are sold rather than bought and therefore high client retention is essential to keep marketing costs down.

I notice they list four brands: Virtual Cabinet, SmartVault, CertifiedVault and WORKIRO. Virtual Cabinet seems to have positive reviews, but not on any review sites I recognised. SmartVault seemed to be better still, and included reviews on Trustpilot. We’re all aware Trustpilot reviews are “managed”, but at least it is the devil I know, and there I found one 5* review from 2020 which (at the very least) was from a very friendly client, with the only others being three balanced reviews, all written in the last few minutes. I found this timing to be a bit of a coincidence so I have included a screenshot just in case they somehow get “lost” later. Edit: However, 7 days later the reviews have not been deleted. On the review front, CertifiedVault was nowhere to be found, whereas WORKIRO was on the Apple App Store with a review of 4.1, but none of them are recent.

Gross margin is fantastic at 93%, so why isn’t the company making money? The reason appears to be uncapitalised developer costs, customer acquisition costs and so-called “customer success” costs. Given there is no shortage of capitalised developer costs, those that are not could refer to customisation costs which may even be ongoing and which you might argue should form part of the cost of sales. I’d not heard of “customer success” spend before so I googled it, quickly finding this article which I think is well worth a read.

There’s a long-running discussion in the world of customer success over whether funding should come from the Costs of Goods Sold (COGS) bucket or Sales and Marketing. One of the reasons this dilemma exists is because the job duties of a CSM fall into both the COGS and Sales and Marketing categories. Some of a CSM’s daily tasks fall into the COGS category, such as training and support. But activities like renewals and upsells make more sense labeled as Sales and Marketing.

So again, there may well be an argument that some of these costs should come from cost of sales. The above article suggests that retention costs should be 20% of marketing, but potentially they could be much higher to obtain that 1% monthly revenue churn. It seems particularly strange that this cost is excluded from the lifetime customer value and therefore CAC ratios.

Anyway, in summary, looking at recent figures it looks like they aren’t making any money because admin costs have been pretty much scaling with revenue, despite some one off savings in 2021. Some of this is customer acquisition costs which could be switched off at any point, but the amount is uncertain.

The company was at Mello in November 2019. If you missed that then now you know what to ask this time, but be sure to catch Paul on his single presentation or immediately afterwards as there is no stand.

Getech (GTC)

Dr Jonathan Copus (CEO), Wednesday AM, No stand

Getech is a mining services company that has been transitioning its geoscience offering to geothermal as well as the storage of hydrogen and CO2. With a recent acquisition they have expanded into the provision of “hydrogen hubs” for production, storage and dispensing of hydrogen for long-distance transport use.

As with Atome and Invinity, this has been an area where institutional and individual investors have been willing to invest large amounts of money at very low risk-adjusted returns until recently. Investors are now being more realistic just as renewables are potentially about to enjoy a step-change acceleration in deployment.

Still, I was not able to identify any material revenues from anything other than their legacy business in their H1 results and I have not been able to identify any evidence that their renewables business has the potential to be viable. This of course may change with time and likely more funding.

The Annual Report with more detail may be issued prior to the event.

Godolphin Exploration (ASX:GRL)

Steve Reece (CEO), Wednesday AMx2

I understand GoDolphin Resources is an Australia-based mineral exploration company.

My speciality is UK listed trading companies so I have not looked into this further.

HarbourVest Global Private Equity (HVPE)

Richard Hickman (MD), Tuesday PMx3, Wednesday AM/PM

HarbourVest is, in my opinion, the best vehicle for UK individuals to invest in Private Equity. Whether that’s something you would want to do at this point in the cycle is highly debatable of course. And inherent issues include opacity, high fees, the delays and estimation inherent in NAV calculations, wild swings in the discount to nominal NAV and the drag of having to hold cash to meet investment commitments.

HVPE have presented at previous physical Mello events, but most importantly have always been willing to take the time to talk to investors individually in person, potentially making them sufficient reason to come along to the Trust and Funds day on Tuesday alone.

Inspiration Healthcare (IHC)

Neil Campbell (CEO), Wednesday PM / John Ballard (CFO), Thursday PM

Our mission is to provide high quality innovative products to patients and caregivers around the world that help to improve patient outcomes and efficiencies of healthcare organisations with patient focused customer service and technical support.

This is an acquisitive medical devices company. This presents two challenges to investors – understanding the demand for their products and unpicking the performance of the businesses bought at various different times.

Although they issued an RNS on 4th May entitled Final Results, this actually contains unaudited Preliminary Results and the Annual Report with many of the notes is not yet available. Therefore I am unable to do a full analysis at this stage. I note they previously presented in November 2019.

International Biotechnology Trust (IBT)

Marek Poszepczynsk (Investment Manager), Tuesday AMx3

I am including this fund for completeness as this is not a sector I follow and I haven’t heard of any of their major holdings. In general I would recommend Investment Trust presentations to anybody who has an interest in the sector, and you might get to speak to a fund manager afterwards about their opinions on particular stocks, although this is probably not the place to push your favourite UK pre-revenue microcap.

A comprehensive investor relations section can be found here.

Invinity Energy Systems (IES)

Larry Zulch (CEO), Wednesday AM/PM

Invinity make “flow batteries” which potentially scale to greater capacities at lower costs for longer-duration energy storage. Their product appears to be fully developed and in active use, however sales at the last available results to 30th June were negligible, deferred revenue failed to convert, and yet significant onerous contract & warranty provisions were generated.

They have an unusual share structure of ordinary shares and warrants, the latter split into short- and long-term. The ordinary shares are dual quoted on Aquis and AIM, whereas the warrants are only available on Aquis, a junior alternative to AIM. The most recent fundraise included an open offer of adequate capacity which is the gold standard for allowing existing private investors to participate and avoid dilution, including those invested via SIPPs and ISAs.

Clearly the current energy crisis and further delays to the UK’s floundering nuclear programme mean that the demand for grid-scale storage to back up renewables is higher than ever. However I was not able to detect any evidence of a viable business from the financial results published to date.

This will be their first time at Mello, and although no date has been given, the assumption must be that their full year results will be published ahead of their appearance. The relatively high market capitalisation of £80m will limit the effect of any excitement their presentation might generate amongst those that like a good story.

JLEN Environmental Assets (JLEN)

Chris Holmes (Investment Advisor), Tuesday AMx2, PMx2

An investment trust operating in the fashionable area of what used to be called “alternative energy” before solar, wind and hydroelectric routinely supplied the majority of UK electricity.

As is usual in this sector, valuations use a model based on future income and discount rate. Much of their generation is on long-term fixed rates linked to RPI, although some newer schemes will be CPI-linked. The discount rate is influenced both by base rates and the perceived risk. With RPI real interest rates having fallen from -3% to -10% in the last few months and the risk premium falling there is massive scope for asset revaluations.

In addition to this, generation under development or on shorter or floating contracts have or will benefit significantly from rising prices, and these also make it very unlikely that the fixed-rate contracts would be broken. As a green energy supplier a windfall tax is also exceptionally unlikely.

In the last NAV statement they say: “RPI inflation…is then assumed to be 5% for the remainder of 2022, before reverting to JLEN’s established assumption of 3% until 2030”. Using these entirely false assumptions NAV was last calculated at 115.3p suggesting a significant discount to true NAV. Who said investment trusts couldn’t be exciting?

But maybe I’ve got it all wrong. The best place to find out will be Chiswick on Tuesday.

John Lewis of Hungerford (JLH)

Kiran Noonan (CEO), Thursday AM. No stand

This John Lewis is an upmarket kitchen fitter that has nothing to do with John Lewis & Partners.

The company was founded in 1977 and came to the market in 1997 with a valuation of just £4m. While sales have grown to record levels, profitability and valuation have gone nowhere, with the market capitalisation now under £2.7m.

Most investors won’t touch companies this small due to their sensitivity to external shocks, extreme illiquidity and the requirement to disclose even modest shareholdings.

JLH last appeared in May 2019, with a buy literally during the presentation causing the price to rise on the day. Coincidence? Maybe, but at the time most days passed without any trades and this is a nice demonstration of what £2000 can do to an illiquid share.

This also exemplifies why Mello is the best private investor show and the model of splitting the costs between companies and investors works. Firstly, many companies are persuaded to come by their investors – in this case show organiser David Stredder’s 8.9% holding probably helped, and secondly a company this size would literally have needed an exceptional item in their 2019 accounts to cover the attendance fees of other shows.

Kape Technologies (KAPE)

Ido Ehrlichman (CEO), Wednesday AM, No stand

Kape have worked hard to shake off their past as creators of the Crossrider adware platform, closing down old operations, changing the name and replacing the CEO. Their revenues now mostly come from offering VPN services and security software. They have made a few acquisitions and more seem possible.

The use of mobile-only Primary Bid rather than an open offer alongside their last fund raise may put off investors who prefer to invest at their laptop / PC rather than sitting on the toilet, or don’t want to be diluted / scaled back by new holders, or who invest via a SIPP or ISA, or whose broker doesn’t allow arbitrarily large amounts of cash to be instantly withdrawn, or whose bank doesn’t allow them to make arbitrarily large purchases on a debt card.

Although much of the upcoming growth is from the acquisition of ExpressVPN, organic growth was also strong. Their rating suggests potential shareholders may remain uneasy, so for those who fancy themselves a good judge of character, meeting management at Mello could be invaluable.

National Milk Records (NMRP)

Andy Warne (MD) & Mark Frankcom (FD), Wednesday AM

National Milk Records provide services testing / recording cows milk and adjacencies around testing, surveillance and genomics. Their key KPI is the number of cows on their database and these are now recovering from service issues caused by a cyber attack in September 2019 and covid, particularly at the start of the pandemic. I would imagine the long term outlook for total cows in the UK is negative, especially with increasing feed costs, but this can be mitigated by increasing share and diversification.

The “P” on the end of the ticker stands for “Plus Markets” an exchange which is now known as Aquis Stock Exchange (AQSE) and effectively junior to AIM with limited liquidity.

The company has appeared at Mello on a number of occasions, although they missed November 2019, perhaps due to the cyber attack.

One Media IP (OMIP)

Michael Infante (CEO) & Steve Gunning (CFO), Wednesday AM/PM

OMIP offers a potential alternative way of gaining exposure to digital music rights. Unlike Hipgnosis Songs Fund (SONG), there is no separate management company owned by the directors, and therefore less incentive to pay high prices just to increase assets under management.

There are a few red flags: In December 2017 two new high-profile non-executive directors participated in a deeply discounted share subscription. Both left two years later. In August 2018 OMIP had a share placing and director subscription at a 42% discount resulting in 55% dilution of existing shareholders. In both cases private shareholders were excluded. Results to 31st October 2021 were not issued until 22nd April.

On the positive side, a subsequent fund raise was carried out on better terms. And company-employed valuers claim a £21m valuation uplift over book on their music rights, potentially putting them at a significant discount to book value. Plus, in FY 2021 89% of earnings were in US Dollars, which have appreciated significantly above sterling over the last few months.

OMIP last appeared at Mello in November 2018. The share price history suggests their presentation did not excite attendees.

Orcadian Energy (ORCA)

Steve Brown (CEO), Thursday AM/PM

Orcadian’s strategy is to secure discovered resources at low cost and to transform those resources into reserves and onto production

This is a development rather than an exploration company and with resources in the North Sea is lower risk than many natural resources companies. However upon reflection the UK political risk for this kind of project is too extreme for me to research further.

Phoenix Copper (PXC)

Paul de Gruchy (Head of IR), Thursday AM. No stand

Phoenix Copper Limited is an AIM listed and OTCQX traded USA focused
base and precious metals emerging producer, with significant exploration
upside within a prolific mineralised district

I do not invest in exploration companies due to the specialist knowledge required to assess their value and I avoid overseas companies that I cannot visit in person. I also note a confused website which prevented me from accessing the FY 2022 Annual Report.

Pittards (PTD)

Reg Hankey (CEO) & Alan Burgess (FD), Thursday PMx2

Pittards manufacture high quality and performance leather. As you would expect, this is a long-term declining market with revenues in 2012 of £37.0m falling to £22.3m in 2019. A post-covid recovery to 2019 levels has been guided for 2023.

Despite the backdrop they have sometimes made profits over the period and (as is usually the case) are forecast to do so in the future. Gross margins of 28% (19% after distribution costs) seem very poor for a speciality manufacturer. Therefore it is probably their net assets that will catch the eye of most investors. These include exceptionally high inventories which may be benefitting from inflation, and significant amounts of land and buildings.

In my view this is certainly worth a closer look. Perhaps they could cut out the lower margin work and free up some capital? Doing some research ahead of time and chatting to management on the day would be a great way to find out, but be nice to them because it looks like it is their first time at Mello!

RBG Holdings (RBGP)

Nicola Foulston (CEO) & Robert Parker (CFO), Thursday AMx2. No stand

Litigation Finance is a sector that was made famous by Burford and infamous by Muddy Waters, or perhaps the reverse depending on your perspective. Burford shares have never recovered their levels in 2019 before the short report, but RBG made new highs in July with falls since apparently more to do with general investor confidence than outlook.

React Group (REAT)

Mark Braund (Chairman), Thursday AM/PM. No stand

Companies with shares prices under 10p should always be a red flag as the serious ones tend to consolidate their shares to avoid being associated with the “can’t go much lower / much higher to rise” brigade of rampers and patsies. Of course there are exceptions, like JLH, but I was a little surprised to note that React actually made some money last year.

However this is a cleaning company and on further investigation profits were driven by covid-related sales. In May they diluted existing shareholders by 47% with an issue of shares at a 32% discount in a placing that small investors were entirely excluded from. The cash was then used to buy an ex-growth window cleaning business on nearly 3x sales.

There’s not much evidence here of a serious attempt at a business rather than a “get big quick” scheme and the placing suggests whatever happens it will be a case of “heads I win, tails you lose” for private investors. Still, you can probably learn something about institutions that have chosen to be involved. Forecasts were produced prior to the latest acquisition and so cannot be relied upon.

Sanderson Design Group (SDG)

Lisa Montague CEO) & Mike Woodcock (CFO), Thursday AM. No stand

As Walker Greenbank they suffered fire, flood and plague, but after changing their name to Sanderson things have been going far better, much to the relief of investors and insurance companies. Their maximalist designs seem to be firmly back on-trend and their direct-to-consumer, indirect and licensing models all seem to be working well.

A strong order book was reported at year end, but like many companies the outlook in the full year results was more circumspect, citing cost, supply chain and geo-political risks.

Were they overvalued in October? Are they undervalued now? Or has the outlook really deteriorated that much in the middle despite broker upgrades overall? A bit of detailed research and some well judged questions at the presentation are your best chance of answering these questions, but you only have one shot to catch them!

Sigmaroc (SRC)

Max Vermorken (CEO / Co-founder), Wednesday AMx2. No stand

Sigmaroc are a self-declared buy-and-build rollup of construction materials companies. This model can work incredibly well on the way up as a virtuous circle of a higher rating leads to cheaper “currency” for share-based acquisitions, which means it is easier for them to enhance EPS, which in turn leads to a higher rating. Unfortunately this dynamic reverses on the way down with the acquisition pipeline either stalling, the company resorting to debt, or earnings dilution.

With a PE of under 10, this one certainly appears to be on the way down. In this situation it is all the more important to check that the balance sheet and underlying performance (excluding recent acquisitions) is strong.

At 31st December 2021 SigmaRoc had intangible assets of £306m, debt of £212m and total net assets of £411m. One way of looking at this is that tangible assets are £317m of which 67% are debt funded, which for me is high. Of the debt, £200m is described as a “term loan”, but the term is not disclosed in the annual report. Net margins are just under 10% which suggests to be those intangible assets could be overvalued. At the full year like-for-like figures are given for the revenue of individual units, but not (that I can see) for overall trading. In the recent trading update like-for-like figures appeared to include revenues from acquisitions but exclude “bad stuff”.

On the positive side I see is there is the potential to benefit from an inflationary uplift of the value of materials in their quarries while their interest rate on debt is around SONIA+2.35%, or -5.65% in real terms.

SigmaRoc last presented at Mello in November 2018. In advance of this year’s presentation I should warn you that the word “relentless” appeared in the last Annual Report.

SmartSpace (SMRT)

Frank Beechinor (CEO), Wednesday AM, Thursday AM

This is another SaaS software provider, providing “workspace solutions including desk, meeting room, and visitor management products”. ARPU grew 64% over the twelve months to 31st January 2022. Covid has affected them in the short term, but should be positive in the long run, with benefits of hot-desking starting to come through now.

I have written at length in the past about my concerns over lack of location / customer growth and the reliance on average revenue per user growth. I have also raised concerns about their cash runway, something that has newly been identified as a “key audit matter” in their FY 2022 Annual Report. However, I think it is clear that this company has some value and some smart investors remain keen on it.

Tandem Group (TND)

Peter Kimberley (CEO), stand only, both days.

On Thursday 19th May they announced Peter Kimberley replacing Steve Grant as CEO. Time pressures do not allow me to investigate with this was planned or not, but the news seems to have been taken positively by the market. Here is the write-up I prepared earlier.

From a forward PE of 4 pre-covid, forecasts were originally hit hard in March 2020 before it was realised that covid would be boom time for bicycles and other mostly outdoor leisure items. A trading update at the end of May 2020 was the first concrete evidence of strong covid trading. Sustained shareholder action over poor corporate governance forced board changes as announced on 3rd August 2020. This helped with a re-rating at the some time as exceptional covid earnings kicked in, making this a 6-bagger in just over a year.

A weaker outlook with the ultimately communicated in the FY 2021 results issued at the end of March has led to share price weakness. Revenue in the 11 weeks to 20th March is was 43% down YoY, but 7% up versus 2020. The order book is similarly well down but ahead of 2020 even factoring in likely further cancellations. Net assets have increased significantly over the past few years and especially if inventory levels fall it may have significant free cash.

New shareholders may feel they are at a disadvantage to long-standing holders in regular contact with management, but visiting Mello is the best way to meet on equal terms.

TClarke (CTO)

Mark Lawrence (CEO) & Trevor Mitchell (FD), Wednesday AM/PM

TClarke are a building contractor who mainly work in interior fit-out of commercial buildings. The sector is a graveyard of failed companies, underbidding, overrunning contracts and difficulties in getting paid. Yet TClarke has not just survived, but made slow but steady progress since 2012.

Many investors won’t touch this sector, and this is reflected in the forward PE of under 7. Expansion currently underway to become a £500m turnover company presents both opportunities and risks, with a step change in EPS growth currently forecast.

TClarke missed Mello in November 2019 which took place immediately before a trading update, but are a regular when things align such as in November 2018 and May 2019. A strong update in May 2019 appeared to be followed by another wave of buying after their Mello presentation, but that proved to be a high point not surpassed until two years later.

There is a useful, albeit partisan, summary from the company here.

Thruvision (THRU)

Colin Evans (CEO), Wednesday AM/PM

Thruvision make people scanners that operate using passive 1.2mm wave technology. Like airport scanners this allows items hidden under clothing to be detected. Unlike airport scanners, which operate at 120mm, there is no need to direct microwaves or other radiation at the subject which avoids any possible safety concerns and helps make it practical to operate at a distance. Body parts are also far less visible, reducing the need to process the images before showing them to the operator.

I have not been able to identify any other commercial offering that operates at a similar wavelength, with most competition from alternative scanning methods. The company is currently enjoying significant success in theft prevention in warehouses and at customs borders, but has not yet made a profit. Progressive Equity Research are currently forecasting breakeven in 2023.

I first came across this company when researching the previous Mello in November 2019 where I wrote:

…not only do they appear to have potential on fundamentals, they also have precisely the kind of story which could capture investors imagination.

Indeed, the share price did seem to rise both in the days ahead of Mello as people researched it and in the days after the presentation. Recent initial sales at Tesco, CEVA Logistics and RNDC give them the potential to significantly beat current forecasts if those customers roll out their equipment widely as others have. I think ThruVision’s appearance at Mello has the potential to raise their profile amongst investors further.

Velocity Composites (VEL)

Andy Beaden (Non-exec Chair), Jon Bridges (Exec Dir / Founder), Chris Williams (FD), Thursday AM/PM

I really struggled to understand what this company did at first. The only comprehensive description I could find is in the Admission Document, but it is hardly concise.

Basically they take the various components that are required to make small composite (mostly aero) parts, cut them up into the right shapes and stick them in bags, each one containing everything required to make a single item. By doing this really well and consolidating orders they are able to reduce total labour costs, make more efficient use of capital, reduce wastage from offcuts / material going out of date and save on storage costs.

Unfortunately this just doesn’t seem to be a very good business to be in. Revenue growth had stalled even before covid and consistent past losses were expected to extend into the future when factoring in depreciation. Revenues are now not forecast to recover post-covid and losses continue to stretch as far as the eye can see.

On the positive side, margins have been improving and the balance sheet is reasonably strong, especially when excluding medium term debt, some of which carries an interest rate of under 4%.

It would be great to talk to them at Mello to get some idea of what their path to profitability looks like, as this is not clear from the data I have looked at.

Vietnam Holding Limited (VNH)

Craig Robert Martin, Wednesday AM/PM

This is another investment company which will presumably be presenting on the Tuesday. I’ve seen one of their presentations before and if you have any curiosity about Vietnam then I would recommend attending and chatting to them afterwards.

But here’s a quick summary: The good news is Vietnam is not China. The bad news is that it isn’t far off.

Warpaint London (W7L)

Sam Bazini (CEO), Wednesday PM / Thursday AM

At last, something easy to explain!

Warpaint’s mission is to provide access to an extensive range of high quality cosmetics at an affordable price.

Annual Report 2020

I’d imagine the drivers here are a massive reduction in makeup use during the lockdowns to a lesser extent during mask use. What now I don’t know: Structural reduction? Rebellious bounce-back?

H1 results were back to pre-covid levels, so perhaps Warpaint are outperforming? With male overrepresentation amongst investors little diminished, perhaps this is an under researched opportunity – I can feel a tangible psychological resistance to spending time on something I can little identify with. Or is it because the 30-somethingth company I’ve looked at in 3 days?

One thing is for sure: Time spent researching ahead of their Mello presentation will pay off.

Zoo Digital (ZOO)

Dr Stuart Green (CEO), Thursday AM/PM

Zoo provide subtitling and dubbing services to several streaming operators, including Netflix, Amazon and Disney+.

In theory their in-house developed platform on which they invested $1.6m in FY 2021 as well as the size of their freelance network should give them a competitive advantage, although the larger media companies use a multi-vendor approach and so the best Zoo can typically hope for is to be one of three or four preferred vendors. On the other hand this means the total loss of an account is less likely, which is fortunate given 72% of their sales came from a single customer in 2021.

While falls in customer subscribers and show cancellations at Netflix have been well publicised, the trend for dubbing diverse (and often cheaper) “foreign” productions into English appears to be intact and Zoo is particularly well positioned here. In any case, revenue somewhat lags customer production activity and strong momentum at the end of FY 2022 suggests that stale FY 2023 forecasts may be too low.

Zoo Digital last appeared at Mello in May 2019 and there is some evidence the presentation may have struck a chord as the price was strong both in the days and months that followed, albeit from a lower price and PE ratio than today.

One thought on “Mello 2022 Preview

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