TM CRUX UK smaller Companies Select XI / If CRUX Smaller Companies did Football…
With the start of the World Cup we thought it would be a bit of fun to showcase some of our recent picks from our newly launched TM CRUX UK Smaller Companies Fund. There are some holdings here which also cross-over into our TM CRUX UK Special Situations Fund. We make no apologies for clichés and bad puns but on a serious note we think there are great opportunities in the UK market as a whole, and for the more patient, the small-cap market offers brilliant risk reward profiles after a big sell-off.
A football team format is a good way of demonstrating that some companies are good in defence, having limited downside but offering reasonable upside whilst others offer significant upside potential but have more downside risk. The Team Manager obviously needs to combine these asymmetric risks in a way that gives a favourable outcome in the majority of circumstances whilst recognising that a team is more than 11 individuals on a pitch together.
Goalkeeper
Cash: A goal not conceded is as good as a goal scored
It’s difficult conditions out there and having 5-10% cash on the fund gives us the power to invest opportunistically from forced sellers. These may be institutions with redemptions, quality companies wanting to buy a complementary asset in a downturn or a refinancing at a bargain price.
Defensive
Advanced ADVT: Great in defence under rated going forward
This acquisition vehicle of hugely successful public market software entrepreneur Vin Murria, trades below cash. The market uncertainty should mean that the capital when deployed creates more upside.
H&T: Solid under pressure
A pawnbroker that unfortunately will benefit from depressed consumer conditions. The worst it gets the better they will play. H&T’s competition has exited the market leaving long term structural growth as well as short term cyclical ones.
City Pub Group: Recent injuries less serious than thought
A quality pub operator where cost pressures have injured divisional profits by c.10-15%, The collapse in the share price to less than half asset value does not reflect the longer term appeal of City Pub Group’s ungeared cathedral city boozers.
Midfield
IQE: World class talent set to deliver under new management
A world leader in compound semiconductor wafer manufacture IQE has promised much from a technological perspective but disappointed. New, more commercial management have delivered new business wins and a recent strategy presentation set long term goals of triple revenues and 30% margins all of which could mean IQE goes from messy to Messi!
FD Technologies: Hidden talent vulnerable to transfer
Within FD Tech is a US software operation KX Systems that is growing at 30-40% and has recently signed a transformational dual deal with Microsoft. The metrics and scale of KX are not too dissimilar to some of the most highly valuable US software comparators meaning that FD Tech is significantly undervalued. We believe that in the medium term KX will be taken over or be playing in the NASDAQ league.
CML Microsystems: Master of the chip
Roughly two thirds of the purchase price is supported by property and cash. CML Microsystems has been developing new radio frequency chips for 5G, low orbit satellites and other communications applications and these could be hugely beneficial to profits.
Heiq: Swiss international scaling new heights
Swiss speciality materials company has a track record of deploying new materials for novel indications. After playing a blinder during COVID-19 with its anti-viral products, Heiq has had couple of poor games. On its website it lists “game changers “ including Aeoniq a green yarn to replace polyester and nylon. This has attracted attention from the likes of Boss and Lycra and management are looking for more progress soon.
XP Factory: Delivering on the pitch
XP Factory has taken a bar concept Boom Battle Bars from 6 outlets to 21 over the last year and is soon to open an Oxford Street site that could further transform profitability. Demand has held up as the client base is 18-35 and does not have huge financial commitments whilst typically being full-time employed. Despite strong performance on the pitch the share price performance has not mirrored the improvement in prospects falling from 30p to below 20p over the last year.
Attackers
Sondrel: Emerging talent moving up to the World stage
Sondrel has historically designed clever chips for the likes of Cisco, Apple and Tesla. A recent IPO has given the company money to develop prototypes, and supply chips transforming the commercial opportunity. It might take time, but this youth star should be the real deal as more of its designs to come to market over the next few years.
Wandisco: Ronaldo-esque, divides opinion, not great in defence but a consistent scorer
2022 has seen Wandisco produce progressively bigger record contract wins as it helps auto manufacturers, smart meter operators and wind farm companies migrate huge quantities of data into the cloud. A recent market teach-in suggests the ‘run of form’ is continuing and ‘Rondisco’ may well continue to outperform expectations.