Stockopedia StockSlam - July 2018

After a very positive response to the very first StockSlam, in June, we decided to squeeze a second event in before everyone left for the summer. So last Thursday a predominantly new crowd assembled in Central London for ten short but interesting pitches. Personally I thought that all of the presenters did an excellent job getting their thoughts across in 5 minutes, or less, before the audience came up with some very sensible questions.

To give everyone who couldn't make it a flavour of the event Keelan Cooper, an intern at Stockopedia, transcribed an audio recording of the event. This is no easy task and I'd like to thank him for turning this around in less than 24 hours. For the sake of brevity I've edited this transcript to bring out the key points for each presentation. If this proves interesting, and perhaps encourages you to consider pitching at the next StockSlam, then I'll consider the effort worthwhile!

Medica (MGP)
  • IT services company in teleradiology where remote radiologists consult on CAT scans, MRI scans and X-rays
  • at night they can turn these around within an hour, typically within 25 minutes. This service, NightHawk, accounts for 50% of revenues
  • daytime service, 1 or 2-day turnaround, accounts for the other 50% of revenues
  • company has only been listed just over a year or so and IPO'd at around 180p
  • profit warning before the final results due to capacity constraints and lower demand
  • risks associated with the NHS, their main/only customer
  • recruiting radiologists is also difficult as you need good people who want to work remotely
  • despite low value and momentum ranks, the company has high quality metrics with ROCE more than 15%, PEG 0.5-0.6 and they are reducing debt using great cash flows
  • recent trading update cause huge spike in the share price as the company confirmed that it would be trading in-line with expectations
  • Q: Who are their competitors and how much market share does the company have? A: The company does reference the competitors in their annual report but do not specify their market share
  • Q: What is the company going to do about recent reviews which have said automated systems reading scans do it better than doctors can? A: The company has said in its reports that they are looking at AI and doing research on that front, to automate some of the scans and not put radiologists out of service but to at least make some of the process a bit easier
Frontier Developments (FDEV)
  • video games company based in Cambridge
  • produce triple-A video games which means that the amount invested to produce them is around £10m+
  • excellent company in a fast-growing sector; video games market is growing very quickly and has averaged more than 10% growth annually for the last 10 years
  • companies like Frontier Developments are connected to vast player bases, like Steam, which is an online platform where gamers can buy pc games and has 125 million users
  • to sell through the platform they give around 30% of the revenue that they generate to Steam
  • due to these platforms the quality of earnings and income streams have become more predictable because games continue to sell well 5-8 years after release
  • smaller developers are now connected to the same global market as the larger developers so it's more of a level playing field.
  • a few weeks ago they announced that they expect full-year revenue for 2019 to approach £88 million
  • cost base is very operationally geared so costs won't rise much above £40m
  • Tencent bought a 9% stake for £17.70 in July 2017 and this could potentially give Frontier Developments a way into the Chinese market
  • Q: Why should I buy Frontier Developments rather than Steam? A: You can't buy Steam as it is a private company
  • Q: Why shouldn't Frontier Developments buy a gaming platform? A: Buying a gaming platform would be an excellent idea. Steam is currently owned by Valve so you can't buy shares in it. If you want to buy shares in a gaming platform, you can buy Sony, Nintendo, Microsoft or Tencent
Volta Finance (VTA)
  • Volta Finance is an investment company run by Serge Demay who works for AXA in Paris
  • invests in all different kinds of debt: student loans, car loans, corporate debt, infrastructure projects, CLOs and asset backed security arrangements, so that you effectively have a leveraged or equity position in some debt
  • it pays around 8-9% dividend a year, with relatively modest capital growth, and is somewhat diversified from the rest of the market
  • recently running at a 30% discount to Net Asset Value, now at around 16% discount
  • managers are very transparent about what they are doing and how they are shifting the portfolio to take account of the market risk
  • negatives include exposure to debt with bond cycles at the end
  • based in London and Amsterdam, and European holders get very nervous about Euro debt and every time there's a threat of a Euro crisis there's a sell off
  • Q: So what was the reason for the steady price decline since September 2017? Is it that they were just returning cash to shareholders or is not a genuine market? A: I have been corresponding with the manager recently and he thinks that it may just be people selling shares because of fears about the Euro
RM (RM.)
  • technology company working in the education sector
  • although that's been pretty static recently the company did buy out the Consortium Group and this should generate synergies, and cost savings, which should help increase profits in the long run
  • very high ranking share, revenue has increased 33%, and operating profits 27% as announced in the last results on 31st May
  • low PE, giving a certain amount of safety; good cross between value and growth
  • high quality scores, and passes 5 screens including: Buffettology, Screen of Screens, Richard Driehaus, James O'Shaughnessy, and classic momentum screen
  • so the company does appeal to a lot of varied strategies
  • there is a nice trending support line giving it a good bit of support
  • however spread is 437 bps, hitting your purchase, and debt is higher than most people would like
  • last comments from the board said that the company would "at least be meeting expectations" meaning there could be a potential profit upgrade in the future
Hardide (HDD)
  • company is based around IP in patents and application knowledge
  • has a way of coating components with a uniform thin film of tungsten carbide
  • this is very hard-wearing and corrosion resistant with applications at the bottom of oil wells, in valves and some aerospace components
  • problem is that it takes time for people to become aware of it and to go through the development cycle to bring it into use
  • main area of business is the oil sector and when the oil price fell then volumes got hit very badly
  • in aerospace they've been trying to get Airbus to use the technology for 8 years
  • once you're in, you become part of the supply chain and they are reliant upon your technology - then you've got good recurrent revenues
  • board is from an engineering background and it holds shares
  • latest NEDs appointed in March have both bought around half a million shares in May and July so they obviously see the company as having good prospects
  • currently loss making but the growth in revenues in the last half year was 25% and this sort of growth has been continuing for sometime now
  • assuming that the current high gross margins, which are about 50%, continue its going to need around 60% growth in sales for the company to reach break-even
  • has been promising for a long time but it's likely that now is the time where things could change
Auto Trader (AUTO)
  • online marketplace for buyers and sellers of used and new cars where Auto Trader take a cut out of the transaction
  • really enjoys the benefits of network effects with net margins above 70% or so
  • profit generated per employee, about £275,000, makes it one of the top companies in the UK for this category
  • last few years of revenue growth has mainly come from price increases and the addition of new packages
  • where is the growth going to come from?
  • if you analyse the car buying and selling process there are a few steps
  • they are looking at the financing deals, and how they can break into that market, and maybe even creating another marketplace where businesses can exchange their auto parts
  • chairman, Ed Williams, is the founder of Rightmove which has a similar kind of business model, network effect and strong position with a moat
  • in terms of valuation it is yielding around 2.5% free cash flow
  • Q: The figures look lovely but the net debt looks astronomical even though it's come down a lot, do you know anything about that? A: The company IPO'd and the debt was part of some of the investment. So at the moment I think they have around £170 million in net cash
  • Q: I've heard people discuss that there isn't enough of a moat around Auto Trader, and there's quite an easy opportunity for a new entrant to come in and undercut them? A: I think they have a fairly strong moat. Although it can be easy to set up a platform, or a website but getting to the critical mass is quite difficult. You need enough producers and consumers and that's how the platforms work. If you compare Auto Trader with the second largest player, which is Gumtree Motors, their monthly business is 3 times as much. Carguru has the potential to displace them but they are very small and a company would need plenty of cash and patience to see it displace Auto Trader
EU Supply (EUSP)
  • has a Stockrank of 13 and a quality rank of 2!
  • lots of negative numbers but note annual revenue growth of 23.8% from 2012 to 2017
  • EU supply is an e-procurement software provider focusing on the public sector
  • operates through a platform on the internet and can set up a public body on that within a relatively short period
  • 2/3 of its revenue comes from subscriptions and on-going revenue so that's really high quality as opposed to one off sales
  • 5 years ago the company IPO'd at 20p, around 7.2x revenue, and today its valued at 1.6x revenue
  • company was profitable last year, before interest, this year they expect to be profitable after interest
  • revenue growth this year forecast at 15.3% but in the first 4 months of this year revenue grew by 28% which seems to be going well so far
  • next 2 years don't look very good in terms of profits but 2020 is when the company is expected to generate profits in a meaningful way
  • businesses like this have relatively fixed costs so as the revenue continues to increase it could become fairly profitable pretty quickly
  • valuation of EU Supply's revenue appears fairly low as they've invested £20 million in their platform and you could buy the whole business today for about £9 million
  • Q: What's the reason for such a high bankruptcy score? A: Well the company has a convertible loan note which converts at about 20p and the company paid £264,000 of interest in 2017. However, the company raised £600,000 to develop the business in terms of a micro procurement platform. But I do agree, the balance sheet is not as strong as it could be but the gearing is pretty low, they had cash of £700,000 at the end of last year. They do have this convertible loan note which the value is around £1.2 million, but as the company becomes more profitable and with the cash they've received this year from the EU grant and equity raise, it could be looking backwards perhaps.
Serica Energy (SQZ)
  • Serica Energy owns 17% of a field in the North Sea called Erskine. When operational it produces around 3000 barrels of oil equivalent although it's been problematic
  • spike in the chart was when the company announced that they were going to take over 3 fields from BP in the North Sea, 3 gas fields, Bruce, Keith and Rhum
  • Rhum is the jewel and BP are giving it away to Serica because it's 50% owned by the Iranians and BP does not want to jeopardise its US interests
  • BP owns 3% of Serica and the two companies have a deal where Serica is going to give BP 60%, falling to 40%, of the fields until 2022
  • big risk is that the deal doesn't go through so this is a real binary option
  • 12th Jan the price was 91p, and that was with the risk that the deal doesn't go through, while the share price is sitting around 70p today
  • PE ratio is 3 and brokers seem pretty convinced the deal will go through. If it does, the company could become a cash cow with the price doubling at least
  • management have a lot of stock options and bonuses that are linked to the deal
  • BP wants to get rid of the field, the company is still getting over Deepwater Horizon, and doesn't want to explain to the US government why they're partnering with the IOC
  • UK government wants the deal to go through because Rhum is 5% of UK gas production
  • Serica's other actions also demonstrate confidence as they've just leased new headquarters in Aberdeen
Gresham House (GHE)
  • used to be an investment trust back in 2014 but new management have made it into an asset manager with more than £1.5bn in assets
  • has 5 divisions under 2 top level categories which are Strategic Equity and Real Assets
  • Strategic Equity consists of Gresham House Strategic and LMS Capital. These are two small listed funds which are not really material to the company's valuation
  • Real Assets consists of Forestry, New Energy and Housing & Infrastructure
  • Forestry, which is the biggest part of the company is basically UK commercial forestry, operating mainly in England and Scotland.
  • has a number of funds that are alternative assets with a favourable tax treatment that avoids income, capital gains and inheritance tax
  • New Energy focuses on solar, wind, battery and storage. Last year they acquired Hazel Capital, which manages Hazel Renewable Energy VCT (one of the best performing VCTs since launch in 2010)
  • Housing & Infrastructure consists of a fund that the company launched in 2017 called British Strategic Investment Fund
  • May 2018, they made a massive acquisition of a company called Forestry Investment Management which focuses on renewables as well as forestry
  • very accretive to earnings as AUM went from £650m to £1.5bn
  • overall Forestry accounts for about 59%, Renewables 22%, Housing & Infrastructure 13%, and Strategic Equity makes up less than 10%
  • make their money through annual management fees ranging from 0.9-1.7% in addition to performance fees
  • loss making last year but profitable this year with 13.2p EPS as operational gearing is kicking in; forward PE for next year is about 20
  • hit a 52 week high recently and my mental stop if things go wrong is just under 400p
Micron (MU:NDQ)
  • one of the best ranking large cap US stocks it scores very highly across all Quality, Value, Momentum and Growth characteristics
  • operates in the semiconductor industry and manufactures chips for memory and storage solutions
  • industry is quite cyclical due to dependence on PC and phone sales
  • demand is now coming from AI servers, autonomous vehicles, smart homes, smart applications and much more
  • industry for DRAM is oligopolistic, as there are only 3 global manufacturers, so there should be fewer price swings as a result of shifts in demand and supply
  • company is a cash cow at the moment as it generates $2.2 billion in free cash flow every quarter
  • recently announced a $10bn share buy-back, which starts in September, and is larger than Apple's buy-back programme as a proportion of Market Cap
  • operating margins are excellent at over 40% while company is steadily reducing its cost of manufacturing all the time
  • internal factors are strong and the only real negative is the ongoing trade dispute between China and the US since China accounts for a large part of the company's revenues
  • despite this, due to the control of supply for DRAM, and the time and money it takes to build factories to manufacture these chips, South Korean competitors could increase their sales to China but leave a gap for Micron to sell to their customers elsewhere
  • Q: Would the South Korean competitors not also be affected by the China situation? A: As South Korea and China are not engaged in a trade dispute between themselves, it would not have a huge impact on the Samsung and SK Hynix. The trade dispute and the imposing of tariffs is an issue between the US and China. Essentially, as China does not currently have the technology for these chips, it would have to buy these from Samsung and SK Hynix if it no longer bought them from Micron.
  • Q: What percentage of these new drivers of growth contributing? A: Micron expects AI server annual growth of around 20-30% until 2021. It also currently has a 50% market share for autonomous vehicles, which should be a huge driver of growth by 2025. Micron did a fantastic investor presentation day on May 21st 2018, and if you would like to know a bit more about Micron and the industry fundamentals then I highly recommend watching the video. On a separate note, the average broker price target is around $85, so there is considerable scope for the share to run a bit further.

Disclaimer: All of the information presented here is purely for educational and entertainment purposes and is not a recommendation of any of the shares mentioned.

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