Small-cap round-up: featuring K3 Capital, Tremor International and STM

In this weekly summary, Mark Watson-Mitchell updates his readers on previous company profiles and other news of interest from the exciting world of small cap stocks…

K3 Capital Group (LON:K3C) – I liked it so much I bought the company

I think it was way back in the late 1980s that the famous US entrepreneur Victor Kiam fronted an ongoing series of adverts for Remington Razors.

Boldly on screen he would declare that, “I liked the shaver so much that I bought the company”. He also later went on to buy the New England Patriots professional football team. But enough of his biography.

I raised the catchy title because it occurred to me that is exactly how the management team at the UK’s top small-cap mergers and acquisitions group must have felt when they discovered the services of Stephen Crossley.

He was the man that identified a number of the group’s recent acquisitions for K3C.

Crossley and K3C have just set up a new company called Market Mapping. Its purpose is to find appropriate M&A targets. The group has taken 40% of the equity, together with an option to take out the balance 60% in 2024, depending upon certain criteria having been met. 

They liked Crossley’s services so much that they then took him out. Great business for both sides.

The shares of this group have been in very fine form of late, closing up 16p on Monday, the day that the new deal was announced.

Brokers estimate that the group in the year to end-May 2021 will see revenues boosted by £20m to £35m, with pre-tax profits jacking up 150% to £9.6m, worth 11.4p per share in earnings and covering 8.4p per share in dividends.

Estimates are for prospective 2022 and 2023 revenue of £47.5m then £58m, with profits of £13.5m then £17.6m respectively.

Earnings for 2022 and 2023 could well be 16p and 21p per share respectively, easily covering dividends of 12p then 15.6p per share.

I am really delighted with the swift progress of this £147m group and I do see its shares, now 220p, hitting 250p and then trading up to the 300p level in due course.

(Profile 21.10.20 @ 147.5p set a Target Price of 200p*)

Tremor International (LON:TRMR) – causing much more than a tremor, this was a seismic shift

Last Monday saw this global advanced video advertising technology group storming upwards in price following its trading statement.

Substantial customer momentum has built up in the second half of this current year to the end of this month. And that is despite the dreaded Covid-19.

Record revenues were generated in both October and November, prompting the group to predict that it will achieve between 37% to 43% sales increase in its H2.

Estimates for the full year are now upgraded to around $395m, some $50m better than predictions made in October.

Brokers to the £451m capitalised company, finnCap, are now looking for pre-tax profits for this year of $24.4m ($40m) and then $37.2m next year, worth 14.7c and 21.4c per share in earnings.

They upped their price objective from 500p to 700p on the back of the statement from the company.

Tremor operates a programmatic advertising platform that is focussed on digital video and CTV advertising.

The group will demonstrate the capabilities of its cloud-based platform on a finnCap Tech Virtual Demo for institutional investors on Wednesday, 9 December at 3.00 p.m. UK time. 

That demo will be recorded and subsequently available to all investors at Tremor’s Investor Relations website and https://www.finncap.com/sector-expertise/technology.

Way back in January the shares were trading at 150p, and they fell to a low of 51p in late March. By early August they had recovered to 126p, then crept slowly up to 223p before Monday’s statement.

In reaction to the good trading news, higher revenue and profit estimates, the shares leapt to 305p at one stage, before slight profit-taking clipped them back to 293p by Monday night.

The shares closed much higher again yesterday at 337p.

That really is a very satisfactory performance, more than doubling in less than a year. 

Investors would probably do well to only buy the shares on the dips.

(Profile 16.01.20 @ 156p set a Target Price of 235p*)

STM Group (LON:STM) – prudent approach is very sensible

Well done Alan Kentish and Therese Neish, the CEO and CFO respectively of this cross-border financial services provider.

Earlier this week the company issued a trading update which defined the new conservatism within the group’s accounting.

They have assumed that the Gibraltar life companies will no longer have passport rights into the EU after Brexit. 

The group’s management has also now concluded that it would not be prudent to include any growth in the new business run rate for its expatriate SIPP revenue. 

What is more, Covid-19 has had its impact on overall business.

So, the group has adjusted its expectations going forward. At the same time, it has stringently cut back on expectations in its budget planning cycle.

Alan Kentish commented that, “The prolonged nature of the Covid-19 pandemic has had a more significant impact than we previously anticipated. This is frustrating but does not greatly affect the strong core existing business which gives us reliable revenue visibility and a stable long-term platform to operate from.” 

He went on to state that, “ Notwithstanding the more prudent approach taken, we are confident in a step-change in profit growth for 2021, albeit from the lower rebased profit position for 2020. STM has a stable business model and a strong balance sheet so these short-term challenges, while unwelcome, require that we adjust our timescale not our ambition.”

That is good enough for me. The group’s brokers reassessed their estimates accordingly.

For the year to the end of this month they go for £23.7m of revenues, £2.4m of adjusted pre-tax profits, earnings of 3.5p and a dividend of 1.7p per share.

Next year some £25.4m of revenue could produce £3.2m profit, 4p of earnings and a 1.8p dividend.

For 2022 a lift to £27.0m in turnover is seen, producing £4.2m pre-tax, earnings of 5.9p and a healthy 2p per share of dividend.

The finals should be reported in March next year.

On the more prudent approach I will ease back my price objective to 45p.

Last night the £17.6m valued group’s shares closed at 30.8p. That still offers very good upside potential.

(Profile 27.05.20 @ 33.7p set a Target Price of 50p, now regraded to 45p)