Weekly Market Commentary | 7/11/23 | AML, ULTP, HEIQ | The bids keep coming

With two more bids coming in for small-cap stocks, Bruce looks at the average premiums being offered by buyers. Companies covered: AML, ULTP and HEIQ.

The FTSE 100 was up +1.3% to 7,426 last week. Meanwhile, there was a very strong rally in the US markets with Nasdaq100 +6.4% and the S&P500 up +5.9%. The US 10Y Government bond yield has fallen from 5% a couple of weeks ago to 4.59%, a huge move which suggests the previous narrative of “higher for longer” interest rates is being revised. Almost as an aside the Bank of England left interest rates unchanged at 5.25%, but that was widely expected. I think it is quite likely we see better AIM and FTSE market performance for the rest of the year, as so much negativity seems already priced into valuation. I continue to put money to work but am not yet fully invested.

Last week we saw a bid for software company Sopheon, at £10 per share a 104% premium to the undisturbed price. This values the business at £104m market cap. The bidder is Chicago-headquartered Wellspring, which is controlled by Private Equity firm Resurgens Technology Partners.

I’ve put together a table of all the bids we have seen in the last couple of months.

The average market cap is £151m but ranges from a low of £28m for FireAngel to a high of just over half a billion for The Restaurant Group. Interestingly, although stock market valuations are beaten up, the premiums being offered are still very attractive, averaging 82% to the undisturbed share price. Within that FireAngel’s premium was a whopping 252%, whereas the least generous premium was DX Group at 23%. AIM had a difficult October, down -6% last month however that hasn’t affected the premiums being offered – if anything the reverse is true with the most generous offers being made in more recent weeks.

There doesn’t seem to be much concentration in any particular sector, with companies as diverse as SCS, Kin and Carta, Sopheon and OnTheMarket all being targets. We’re also seeing sub £15m market cap companies like Tintra and Microsaic announce their intention to de-list, which will also shrink the number of listed companies.

The only bid target that I own (so far) is Smoove, which received an initial approach as long ago as the 24th of April, but it has taken to October for a firm offer to materialise. Equals, the FX and payment company also put out a statement last week saying that as part of a strategic review they had contacted possible buyers, including US-listed Fleetcor (market cap $17bn) and Chicago Private Equity firm Madison Dearborn Partners.

I’m off to Western Australia and Malaysia for the rest of November. I was planning to write the weekly there, however, Jamie Ward (previously AJ Bell and a fund manager at Crux AM) has kindly offered to step in. So, he’ll be analysing companies for the next three weeks.

This week I look at Aston Martin’s Q3 results and try to work out why the company hasn’t been able to replicate the success of Ferrari. Plus Ultimate Products (previously UPGS) and a brief comment on HeiQ’s readmission to trading, now that they have finally published FY 2022 results. The latter looks high risk, but I do think it is worth having a post-mortem on poorly performing companies so that we know what to avoid in future.

Aston Martin Lagonda Q3 Sept results

This luxury sportscar brand is another poorly performing IPO, this time from the 2018 vintage, however, the shares bounced strongly from October last year. Last week they reported Q3 revenue up +15% to £362m, though the company still reporting a Q3 loss before tax of £117m (down from £225m Q3 2022). Net debt stood at £749m.

History: Both Aston Martin and Lagonda brands go back over 100 years. Aston Martin was founded in London in 1913 and enjoyed success in the 24-Hour Le Mans race in the 1950s. In 1947 they acquired the Lagonda brand (founded in 1904). James Bond first drove the DB5 in the 1965 film Goldfinger. In more recent times in the 1980s, Ford owned a 75% stake, which it increased to 100% in 1994. Then in 2007, Ford sold to a consortium of investors from Kuwait including Investment Dar and Adeem Investment and Wealth Management Company. Daimler became a non-voting shareholder in 2013.

The shares listed in 2018 at £19 per share, with the Kuwaiti consortium of investors selling down their stake. There then followed a series of profit warnings and capital raisings, including in 2019 an accounting error that led to losses being understated by £15m. Since the 2018 IPO, the number of shares in issue has increased more than 8x to 823m. They raised £210m at 371p per share in July of this year, but have issued a further 28m shares to Lucid Group at the start of November.

Outlook: Last week’s statement says that production of the DB12 has been hit by supplier issues and they have cut sales guidance for the year from 7,000 to 6,700 models. Given the years of disappointing results and flawed execution, I remain sceptical of management’s targets, that they reiterated last week.

Shareholders: The largest shareholder is Lawrence Stroll, with 26% of the shares, whose son (Lance) competes in Formula One. The former hedge fund manager Russell Clark has suggested that Stroll should fire his son, to improve Aston Martin’s chances on the race track. I’m not sure if Sharepad is double counting Stroll’s holding because Yew Tree Overseas consortium (23%) is also a Lawrence Stroll group, then other large shareholders are Ernesto Bertarelli, Switzerland’s richest man (19%), Shufu Li, the Chinese billionaire (17%), Invesco (9%), Mercedes (8%).

Comparison with Ferrari: NY-listed Ferrari (ticker RACE) also reported results last week, with their Q3 revenues growing +23.5% to €1.54bn. PBT growth was even better, up +49% to €426m. The car company has two versions of net debt, with €1.5bn of net debt at the end of September. However, management’s preferred measure is net industrial debt which was €233m, and excludes financial services activity (the company securitises receivables in the USA). RACE has increased profit expectations every three months over the past year and management now expect adjusted EBIT for the year to be €1.57bn, implying a margin of 26.5%.

In October last year, Steve Clapham wrote up a detailed piece on Ferrari on substack, which also looked at the performance relative to AML. He notes changing consumer preferences, a lack of wealthy buyers and the shift to EVs are all risks to the investment case

Valuation: AML shares are trading on 23x PER 2025F, assuming that they do finally turn a profit after more than 5 years of consecutive losses. They are currently trading on 0.5x 2023F sales. For contrast, Ferrari has a market cap of $59bn and trades on 10x 2023F sales and a PER of 36x 2025F. LVMH trades on 19x PER the same year and is exposed to similar trends in luxury.

Opinion: In theory this company ought to make money, selling cars at an average price of £183K even excluding the special models like the £2.5m Valkyrie hypercar. At some point, if management can turn things around this could see significant upside. However, there have been numerous disappointments, so I would steer clear at least until the brand is profitable and net debt has come down.

Ultimate Products FY July 2023 Results

This owner of homeware brands including Salter and Beldray, has changed its name from UPGS to Ultimate Products. The group reported FY July 2023 revenues up +8% to £166m, within that online revenues grew very strongly +64% to £41m. The UK represents around 70% of sales. Statutory PBT was up +4% to £16m and net debt was £20m at the end of July, down from £27m July 2022.

History: The group was founded in 1997 by Simon Showman (Chief Exec) and Barry Franks (Non-Exec) who still own 20.75% and 8.14% of the shares respectively. Originally the business started of disposing of excess inventory acquired from third parties, before becoming a sourcing business, helping customers to buy competitively priced own-brand goods from China.

Lloyds Development Capital (LDC, Lloyd’s Bank Private Equity arm) took a 47% stake in 2005, which allowed them to acquire their own consumer brands and open a permanent office in China. In 2011 they entered into licencing agreements with Russell Hobbs and Salter brands, then in 2014, they bought back LDC’s stake. They later bought Salter, but don’t own the Russell Hobbs brand, instead having a four-year rolling licencing agreement.

This listed on the main market in March 2017, with selling shareholders receiving £50m at 128p per share. That gave the company a market cap of £105m on admission, with no new money raised. At the time of the IPO, they had 231 suppliers in China and a further 44 in other countries. Since the IPO in 2017 revenues have grown by CAGR of +7%. I’ve taken the chart below from Equity Development’s note, showing how Salter, Beldray and Russell Hobbs have become an increasingly important component of revenue, and now makeup 71% of revenue, compared to 48% five years ago (and 33% in FY 2014). Consequently “other brands” are now just 29% of the total (down from 67% a decade ago).

Valuation: Equity Development are forecasting adj EPS of 15.4p FY Jul 2024F and 16.8p FY July 2025F, which puts the business on a PER of 8x the next two years forecasts. The business has a 3-year average RoCE of 27% and good FCF conversion.

Opinion: There’s clearly some risk here from consumer disposable incomes under pressure. For instance, Beko which is one of Europe’s largest white goods companies has recently warned on the outlook for 2024. Add to that the sourcing of goods is mainly from China, all of which explains the mid-single-digit PER ratio. However, the low PER multiple means this could make sense as part of a diversified portfolio, though I don’t own any myself.

HeiQ readmission to AIM

A brief mention of this Nov 2020 IPO Swiss-headquartered textile company, that has been re-admitted to the main market. I pointed out various “red flag” concerns back in May 2021, about lack of free cashflow, late publishing of the Annual Report, plus the failure of management to explain why they didn’t qualify for a premium listing. Indeed, management couldn’t even explain why they had come to list in London, rather than their native Switzerland. There are plenty of investors and institutions in Switzerland, so it makes little sense why they couldn’t raise money there. UK institutions on the shareholder register include Amati and Premier Miton.

Management have now published their FY results for December and H1 June results. I couldn’t find a net debt figure in their RNS. However, the balance sheet in their Investor Presentation says that net debt was $10.3m. There is a comment about management discussions with financial institutions to replace the currently uncommitted credit (CHF 9m, of which CHF 6m is already used) by committed, long-term facilities.

Management divide the business into Venture Units and Growth Units. They are aiming for all of the latter (Growth Units) to be generating cash next year. That seems sensible but HeiQ does strike me as a business that is trying to do too many things, from textiles, floorings, industrial chemicals, life sciences (HeiQ Synbio is probiotic cleaners for hospitals) and Antimicrobials. That is just the Growth Units, the Venture Units are shown in the graphic below. I find the lack of numbers quantifying the size, revenue growth and profitability of each division an interesting aspect of their “voluntary disclosure” in their analyst presentation.

The outlook statement talks about challenging headwinds, but trading to stabilise in H2. Sharepad’s financial health indicators suggest caution.

Opinion: The shares are now down -82% from their 112p IPO price. This looks like there is a chance that it could fail if management can’t get the financing in place and there is a ‘material uncertainty in regards to the going concern assumption’ in the notes. I suppose there could be a significant upside if they do manage to rescue the situation, but from a risk-reward perspective, this doesn’t make sense to me.


Bruce co-hosts the Investors’ Roundtable Podcast with Roland Head, Mark Simpson and Maynard Paton. To listen you can sign up here: privateinvestors.supercast.com

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