Hybridan Small Cap News – Feb 25

Hybridan Monthly

Market Comment

The view from a Broker’s desk

2025: The year of the Phoenix, NOT the Unicorn

The pursuit of Unicorn companies valued at $1bn+ will always be newsworthy and exciting.  VCs, Private Equity, Governments and Global Stock Exchanges will continue to fight and clamber over one another for the chance of courting them.  Our collective attention should therefore not be where support is needed least. 

Our attention needs to be diverted back to the exciting and unloved. The majestic Phoenix company; known for its ability to be reborn from the ashes and a beacon of revival.  Looking back across 2024, there was no shortage of ashes strewn across our small cap market, left by the wildfires of the General Election, inflationary pressures and interest rates, to name but a few. 2025 could be the year of the Phoenix with a host of exciting growth companies bouncing back and rising from the ashes. It is these unloved companies that need our support more than ever.

2024 was an unprecedented year in our markets, where companies across the spectrum faced unmitigated pressures from all angles – challenges with raising money from investors, whilst experiencing significant setbacks in their core markets.  EY’s Parthenon Report made for painful reading.  They cited one in five UK-listed companies issued a profit warning in 2024; the third highest in a quarter of a century, behind only the 2020 pandemic (35%) and the impact of the dot-com bust and 9/11 in 2001 (23%).  Contract and order cancellations or delays were cited by a third (34%) of listed companies as a key driver behind profit warnings.

Looking ahead to the 2025 IPO landscape, we can expect the usual suspects such as Shein, Monzo, BrewDog, and Starling, amongst others. will continue to tease with a potential UK IPO.  In our daily “Small Cap Feast” where we track upcoming IPOs and daily news of small cap issuers, we have reported on one such candidate which may buck the trend and deliver a positive shift in sentiment.  RC Fornax, the UK-based engineering consultancy for critical military platforms, announced that it has raised £5.15m through a placing and £1m to be raised for selling shareholders (vendor placings are a rarity in small cap land so this bodes well).  The anticipated market capitalisation will be £18.15m.  The Company was founded in 2020 by Paul Reeves and Daniel Clark, two Royal Air Force veterans with a combined service of over 24 years. The Company generated revenue of £6.5m in 2024, resulting in £0.9m of EBITDA.  The IPO received institutional support from the likes of Octopus Investments, Unicorn Asset Management, Rathbones Investment Management and Canaccord Genuity Asset Management, which is great to see. 

Ultimately, what needs to happen to create a domino effect is not only a successful first day of dealings RNS, but a plethora of TR1s coming out shortly after, showing the bastions of small cap institutions corner stoning the fundraise.  We need to show UK SMEs contemplating an IPO that the UK public markets are very much open for business. The “UK small cap market is cheap” rhetoric is not enough; it needs to be followed up with tangible financial support to exciting growth companies – both at IPO and in secondary placings. 

The various proposals out there to reignite the UK’s capital markets are currently billed as “one size fits all.”  Some are more realistic than others. It will be a long time before Pension money returns to the sub £100m market cap domain, maybe starting first in a few secondary market positions in FTSE250/350 companies, as opposed to primary capital into growth companies. 

The National Wealth Fund recently announced a £28.6m direct equity investment into Cornish Metals Inc (£45m market cap), to help finance the re-opening of Cornwall’s South Crofty tin mine, creating more than 300 direct local jobs.  This is exactly the type of capital we need in UK small caps. 

Small cap fund managers are losing some of their discretion. Authorised Corporate Directors (ACDs), who are responsible for the running of an investment fund, are pressuring fund managers into larger, more liquid positions in a bid to fend off and service redemptions. 

More and more open-ended investment trusts are abandoning UK small caps in droves and that is precisely why we need more investment vehicles that prioritise fundamentals over near term liquidity – traditional British patient capital at its finest without all the negative connotations of the recent past. 

VCTs and EIS fund managers remain our last line of defence for providing institutional support to exciting UK small caps, but an increasing amount of companies no longer qualify for tax efficient money or indeed want to scale by acquisition which VCT/EIS funds are prohibited from supporting. 

Let’s make 2025 the year of the Phoenix company.  Directing support and capital to those who need it most.

By Niall Pearson

Company Newsflow

Our deeper reflections on recent corporate news

HDD  Working Harder

NEXS Firm Foundations

Hardide 6.75p £4.65m (HDD.L)

Price	Results	Top 3 Shareholders	Value
5.5-6.3p	Y/E  September, report January	Andrew Boyce & Associates 12.8%	New Products
Spread:  14.5%	Interims March, report May	Hargreave Hale VCT 7.5%	Long-term Contract
52 week High/Low: 10.25p /4.35p		A Badenoch & Associates 7.1%	Funded to Profits

Source: Alpha Terminal, Company website https://hardide.com/securities-and-significant-shareholders/

Hardide provides  advanced surface treatment solutions to industries and reported finals to September 2024. As anticipated, H2  trading was stronger with revenues at £2.6m, compared with H1’s £2.1m, so  year-end revenue recovered to £4.7m, but that is still 14.5% lower than in 2023. The profitable H2, however, turned the year to EBITDA break-even against a loss of £0.1m. 

Matt Hamblin is the  recently appointed  CEO, who had been a non-executive on the Board and previously ran a similar coatings business. The focus is on  business development to  increase revenue growth and it launched the first in a new range of ready coated (ie higher-margin)  enhanced components with a copper nozzle used in High-Velocity Oxy Fuel thermal spray coating.  It  more recently signed a ten-year supply agreement with an aerospace business to coat cargo door components and to be completed by March 2025. The initial production volumes  are expected to generate  at least £500,000 in YE2025, while the contract’s total revenues should be worth more than £6-8m over ten years.

The reorganisation has reduced overheads and improved margins, so  that the  cashflow breakeven point  is lower at  c. £5m of revenue. The new CEO’s strategy is to be more entrepreneurial in identifying and assessing market opportunities. The tone seems more confident of a strong recovery in revenues. The year-end net cash was unchanged at  £0.7m, but is improving so no further funding is likely to be sought. The Board is expecting to deliver profitable growth for this year and beyond.

Hybridan Comment:  The  market cap does little to reflect the new focus and the  potential for a  profitable  2025.

Nexus Infrastructure 121p £10.93m (NEXS.L)

Price	Results	Top 3 Shareholders	Value
117-132p	Y/E  September, report January	Peter Gyllenhammar 28.5%	Market Cap near  Net Cash
Spread:  12.8%	Interims March, report May	Otus Capital Management 13.0%	Dividend Paying
52 week High/Low: 155p /67p		Michael Morris 9.7%	Leveraged to  recovery

Source: Alpha Terminal, Company website https://www.nexus-infrastructure.com/investors/shareholder-information/

Last year, the Company was restructured after selling off its two  energy transition subsidiaries and returning £60m to shareholders.  The ongoing business Tamdown,  provides  civil engineering infrastructure services to the UK housebuilding sector and is being renovated and reenergised.  These services are an early indicator of  house building growth.  Its recently reported finals to September 2024 showed a decrease in revenue to £56.7m from £88.7m, but a sharp reduction in losses to £2.2m from £8.4m, reflecting  both cost control and  a subdued house building market.

A key forward looking factor is  the 12% growth in the order book to £51.6m, with clients such as Taylor Wimpey, Vistry, Persimmon, Bellway, and Dandara. Contributing also to  improved  prospects for September 2025-year end will be the acquisition of Coleman Construction & Utilities Ltd, for up to £5.38m which is  expected to be immediately earnings enhancing. Its  expertise includes water, rail, highways, and rivers and marine which is a  complementary strategic fit, including  the benefit of longer-term contracts, so the combined businesses are less vulnerable to short-term fluctuations and delays.

There is a strong balance sheet and after the Coleman acquisition, cash and cash equivalents are c. £9.8m and it’s paying a final dividend of 3p for a 2.3% yield.  The NAV is 332p a share which probably attracted its major shareholder Peter Gyllenhammar, who is a long-term value investor.

Diversification is a principal element of Nexus’ strategy, and acquisition opportunities in key national infrastructure sectors remain a target. Management is confident there will be a housing sector recovery, which is supported by political intent, but the pace of recovery is impacted by increasing building costs and  interest rate uncertainty. This may produce attractively priced acquisition opportunities.

Hybridan Comment: NEXS is an early beneficiary of  a building recovery and organic growth is being accelerated with acquisitions.

House Report

News from a house stock 

DXS International * 3.25p  £2.08m  (AQSE: DXSP)

The  digital clinical decision support Company reported steady revenue for its Interims to October 2024, with £1.7m generated by its established DXS SMART Referrals services. It operated slightly better than break-even, but that included a £170k grant and £60k tax credit against at £121,567 loss. After prolonged investment in ExpertCare, the Hypertension medicine review service made a commercial sale in October 2024, and it is hoped it can be adapted for wider adoption. Along with continued R&D expenditure, management will focus on cash flow and growing both the SMART Referral and ExpertCare revenue streams.

Sales conversion, however, remains unpredictable. Government policy sets a priority on digitisation as part of the broader longer-term focus on improving NHS services. DSX seems committed to solving its customers’ digital problems and on managing R&D within its available cashflow. For the Y/E April 2025, we estimate turnover of £3.4m, including a benefit of a modest price increase. We anticipate a loss of circa £133k which is assuming no further tax credits or grants. Available cash at the Interims was £96,431 (£386,122), with unutilised debtor drawdowns of £256,670 (£386,122).

Hybridan Comment: In the short-term,  it seems difficult to justify the R&D costs, although several milestones could be passed in H1 2025  which would make it easier.

Updates/Events

What we consider to be notable updates and anticipated events

Trading Statements are dominating the RNS headlines

H&T Group 331p £151.321m (HAT.L)

The Pawnbroker, H&T, reports 2024 trading was in line with expectations. The pledge book increased 26% to £127m, with more loans of over £5,000. There was strong demand for lower price jewellery, which boosted retail sales. National Insurance changes will increase costs by £2m per year. Octopus Investments has cut its stake from 10.9% to 9.98%. Despite the higher costs, profits should grow again this year. H&T is on course to improve pre-tax profits from £26.4m to £29m and the shares are trading 7x estimated 2024 earnings and yield 5.2%. The year end is being changed to September this year and the 2024 results will be published on Tuesday 18th March.

Hybridan Comment: There were no great surprises in the trading statement and that increasing living costs has boosted the demand for small loans.

RUA Life Sciences  12.75p  £7.76m  (RUA.L)

The holding Company of a group of medical device businesses focused on the exploitation of long-term implantable biostable polymer (Elast-Eon™), reported  a multi-year supply agreement with an existing global customer. The agreement is for a 6x increase in business with the customer and covers two product lines. The initial £0.5m revenue is expected during the current year to March 2025, and  is anticipated to grow to a potential value of £3.3m over the five-year contact.

Hybridan Comment:  As we  reported last  month the net cash is £3.8m which should be sufficient  to  achieve sustainable profitability with room for further selective acquisitions  which could undervalued the shares.

CT Automotive Group 31.5p £25.76m  (CTA.L)

The developer and supplier of interior components and finishing kits to the global automotive industry made a trading update for Y/E December 2024, which caused a 24% share price increase on the day of the trading update.  The Company expects to  deliver a highly resilient performance for 2024, with revenues of no less than $117m, adjusted PBT no less than $8.6m compared to  $6.32m last year, which would give a prospective  P/E of less than 5x, broadly in line with market expectations. 

Net debt was slightly better than expected at $7.5m, with a new debt agreement recently negotiated. Q4 was however reported to be challenging with major vehicles OEMs seeking to destock, responding to higher interest rates and concerns over government set EV quotas. The Group’s products are agnostic between ICE (Internal Combustion Engine) and electric vehicles, and several significant new contracts have been announced with multiple OEMs. It includes a program valued at approximately $12m per annum, with production commencing later this year in its Mexico facility.

The CEO  recognises the challenging times  for the industry and prospects of increased costs and reduced volumes,  but considers that the Group can leverage AI, digitisation, and automation to lower product costs and so maintain profitability.

Hybridan Comment:  A relatively niche market, with a low-cost operating model  and the low valuation  may be overcompensating for the uncertain market.

Events

From November 2024’s Monthly Report where we covered Pressure Technologies plc, there has since been a strategically significant  contract news win and finals are due to be reported.

Pressure Technologies  38.5p  £14.89m (PRES.L)

The specialist engineering Company reported its subsidiary, Chesterfield Special Cylinders (CSC),  won a strategically significant contract for delivery in Q1 2026. It’s  the first contract to supply safety-critical pressure vessels to the US defence prime contractor, General Dynamics Electric Boat, which is responsible for the design, construction and lifecycle support of submarines for the US Navy. The program could run through to 2043 which underpins  CSC’s order book.

Its  Finals to September 2024 are to be reported on Wednesday 5^th of February and the Trading statement sets expectations for a reduced EBITDA  from continuing actives to c. £0.9m, giving an EBITDA /EV c. 12x.  Net cash is c. £2.9m which should be sufficient to pursue  hydrogen energy and other defence contract opportunities.

Hybridan Comment:  The share price was 34p in November’s report and it’s good to see the share price continues  to build.

* A corporate client of Hybridan LLP

By Jon Levinson

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