Here we are at the start of December and it’s time to take a look at the top of the MIA Ratings table. November has been a pretty turbulent month for several of the shares and so far that seems to be continuing into December. In more volatile market conditions, the ratings can change very quickly, and a snapshot such as the one below may only remain relevant for a short period of time.
The aim of the MIA Ratings is to find high quality shares at reasonable valuations, with wide margins of safety, and positive long term outlooks. The MIA Ratings system is a work in progress and currently only stocks in the MIA investment universe of roughly 70 companies are rated. These companies are all UK listed from across the FTSE indexes, but there is a bias towards small cap growth stocks, so the list may not be representative of the wider market.
Finally, a reminder to always do your own research. The MIA Ratings are provided for general interest only and shouldn’t be used to make any investment decisions.
These are the five companies with the highest MIA Ratings scores on December 3rd 2021:
Shares in D4T4 are down by around 20% in the last month. A steady decline from near all time highs accelerated after the half year results on December 1st revealed a lack of progress in growing Annual Recurring Revenue (ARR). Like many software companies, D4T4 is transitioning to a Software as a Service (SaaS) model which should result in an increasing level of ARR. The results indicated that ARR was, however, slightly down since the full year results, which the company says is due to:
the loss of an airline industry customer affected by the Coronavirus impact on their business
There may have been an element of D4T4 shares getting caught up in the general market turbulence of the last week. The high price to earnings valuation (~50x at the start of the November, and still over 40x after the fall in share price) makes it vulnerable to market jitters. Indeed, after a sharp sell off in the last couple of days the shares are currently recovering strongly up about 10% at the time of writing on Dec 3rd.
Lots of changes have been taking place at D4T4 with Bill Bruno taking over as CEO and a restructured Board. The company has also recently launched its new Fraud Data Platform product which represents “two years' design and development work and significant R&D investment by the Group”.
The Board remain confident “in achieving expectations for the full year” and new CEO Bill Bruno was bullish on Twitter, tweeting this:
Both Bill Bruno and the (also new) CFO, Ash Mehta, bought a modest amount of shares at ~285p after they had sold off. According to the RNS, this appears to be Bill Bruno’s first purchase of D4T4 shares. Bill is new to the CEO role, but was an internal appointment so it is rather odd that he didn’t already own shares in D4T4. After his share purchase he now owns 0.03% of the issued share capital. Not exactly skin in the game…..
Frontier Developments, and Rio Tinto, have retained their places near the top of the MIA Ratings table after appearing in the MIA Ratings November Top 3. Rio Tinto’s shares hit a 52 week low on November 18th but have since rallied by around 5%. It’s too early to say if Rio’s shares have further to fall. Sentiment towards Frontier Developments and Arcontech deteriorated significantly after both companies released disappointing trading updates and I look at these two in more detail below.
Shares in AJ Bell had been bumping along the bottom of their longer term trading range of 370p to 460p in the run up to the release of their final results on December 2nd. The company reported another year of double digit revenue and profit growth and announced the launch of a new commission free trading app designed to compete with the likes of Freetrade. Investment in this and another app for the advised market contributed to increased costs and consequently lower profit growth than in previous years. Shares fell by almost 10% on the day of the results closing at a 52 week low of 352p and dropping out of their trading range. That didn’t last long and today (Dec 3rd) the shares have obediently snapped back into the range, currently trading at ~370p.
Frontier Developments
Frontier Developments was already near the top of the MIA Ratings, before this month’s trading update triggered a spectacular 35% crash in the share price.
Elite Dangerous: Odyssey
When Frontier appeared in the MIA Ratings November Top 3, I noted the negative sentiment caused by the problematic release of Elite Dangerous: Odyssey. This month’s trading update confirmed that sales of this extension to the Elite Dangerous base game have been muted.
If we go back to the September Annual Results, the company acknowledged that the release of Odyssey had suffered from connectivity issues stating that
“The overall reception to this major content update has been disappointing”
It’s now more than 6 months since Odyssey’s release on PC, and sentiment remains mixed at best. The level of negative sentiment that Odyssey has received can be seen by looking at the review statistics on the gaming website Steam. Only 32% of all reviews of Odyssey are positive. More recent reviews however show some improvement with 52% of reviews in the last 30 days being positive. Perhaps the tide is turning…
Negative reviews cite continuing technical issues, but some also question whether Odyssey is a move in the right direction for Elite Dangerous. The Odyssey expansion represents a shift in gameplay style from space flight, to first-person on foot action. There is the possibility that this is just not appealing to Elite’s core base of players.
Jurassic World Evolution 2
Frontier’s trading update also contained disappointing news on the initial sales of its biggest game release in the current financial year, Jurassic World Evolution 2. The update said that while console sales had been largely as expected:
“sales of the game over the initial period following its release have been lower than expected on the PC platform.”
The company believes that the lower than expected PC sales are transitory due to competition from other games being released around the same time, and expects strong sales over the Christmas holiday period.
However, Jurassic World Evolution 2 is expected to be Frontier’s biggest contributor to revenue in the current financial year and the disappointing initial PC sales, combined with the low sales of Elite Dangerous: Odyssey, prompted the company to lower its full year revenue guidance from £130m - £150m to £100m - £130m. Cue share price crash.
Questions, Questions…
There was plenty in the trading update to cause concern. The company has previously stated that:
Odyssey represents a huge investment in the future of Elite Dangerous
It might now be reasonable to wonder whether sentiment towards Odyssey can ever be turned around sufficiently to rescue its lacklustre sales to date.
Then there is the question of whether the lower than expected sales of Jurassic World Evolution 2 are indeed transitory? Could it be an indication of slowing sales growth across the wider gaming industry?
Frontier’s share price is now down by ~45% year to date, but there is still plenty of room to fall further if sales over the crucial Christmas holiday period disappoint. We should get an indication of those sales in a trading update due early in the new year. In the meantime negative sentiment is likely to persist towards the Frontier’s shares.
On a more positive note, Frontier’s pipeline of future releases continues to look strong, with some big names including F1 Manager and Warhammer: Age Of Sigmar. As I noted last month, Frontier’s earnings can be significantly impacted by the performance of individual game releases, but this should become smoother over time as it adds to its portfolio, increases the frequency of new releases, and scales up Frontier Foundry, its 3rd party publishing label. For the time being Frontier retains a positive MIA Rating Outlook score
Arcontech
Arcontech, a provider of software for financial markets data, released a trading update at the end of November that sent its already struggling share price down a further 20% on the day and the shares have continued their decline in the days since. The update announced that the company had lost business from 2 clients amounting to approximately 10% of the previous year’s revenue.
Arcontech is a company that looks good on paper. Notwithstanding the recent loss of business, it has a sticky product. Take a look at the accounts and you’ll find some very attractive financial metrics, with operating margins of ~30%, extremely high levels of recurring revenue, a growing cash pile, and significant operational gearing.
The problem for Arcontech is that sales to new customers have always been few and far between, and that issue has been compounded by the pandemic, with many of its prospective clients shelving plans for new projects.
The company had already indicated in it’s final results in September that it doesn’t expect to see any increase in revenue in the current financial year. If that turns out to be the case, and the lost revenue is not recovered, then the aforementioned operational gearing is likely to magnify the impact on profits. The phasing of the revenue loss, with only half of it impacting the current financial year, will buy the company some time to make up the shortfall in following year’s revenue before that reverse operational gearing kicks in again.
The trading update attempted to end on a positive note:
the Company senses an overall improvement in the business outlook which until now has seen growth affected by Covid
but given the previous indications on revenue, growth looks unlikely to return anytime soon. Arcontech’s market cap is now around £13m, and company has £5m of cash on its balance sheet.
It’s difficult to assess the scalability of Arcontech’s business model, or even how big the market opportunity really is (or isn’t), but management are now actively looking to use those cash reserves on an acquisition, which may say something about the longer term prospects for organic growth.
This article is intended for informational purposes only. It is not a recommendation to buy or sell shares or other investments. Always do your own research before buying or selling any investment or seek professional financial advice.
Disclosure: At the time of writing the author owns shares in AJ Bell, Frontier Developments, Rio Tinto, and D4T4.