Bottom Feeding - XPF.AIM, CTA.AIM, and CKN.LSE

Apologies for the delayed release this week; due to a shortage of tilers in my area, I undertook the task of re-grouting my bathroom wall myself, and it proved quite a bit more time consuming than I had anticipated!

Anyway, this week we've got a couple of micro-cap companies recommended by a reader, and a shipping broker - all of course trading around 52 week lows.

XP Factory (XPF.AIM)

XPF is a UK experiential leisure business, operating escape rooms and activity bars under the Escape Hunt and Boom Battle Bar brands. In addition to the UK, the company has a number of international venues across Europe, Australia, the Middle-East and North America - largely operated as franchises.

The company changed its year-end from 31 Dec to 31 Mar in 2024, so the figures below include a mix of 15 month and 12 month periods, making comparison a little messy.

In the 15 months ended 31 Mar 2024, it generated total revenues of £57.399m (FY22: £22.834m), gross profit of £37.048m (FY22: £14.712m), operating profit of £2.097m (FY22: £1.272m), and a net loss of £(0.420)m (FY22: £(0.994)m).

Total equity at 31 Mar 2024 was £25.004m (FY22: £21.597m), of which £23.639m was intangible (FY22: £22.696m). At this date, the company had net debt excluding lease liabilities of £(0.077)m (FY22: £(1.709)m), and £29.741m including lease liabilities (FY22: £22.329m).

XPF generated net cash flows from operations of £11.082m (FY22: £3.321m), and invested a net £6.133m into predominantly PP&E purchases (FY22: £6.587m). Free cash flow was £6.489m (FY22: £1.271m - Note: I pulled a £0.8m maintenance capex figure out of thin air for this calculation since management didn't provide one), and it didn't pay a dividend.

Market capitalisation: £19.27m

Valuation: Doing a rough adjustment to bring the 15 month figures down to 12 months, the shares currently offer a (1.7%) earnings yield, and 26.9% free cash flow yield.

Reason: Negative sentiment towards UK economy in general, and hospitality/entertainment sectors in particular. The headline losses may also contribute.

Interest level: Moderate - If you look deeper, the unit level economics seem pretty strong and the company is evidently aggressively investing for growth. The valuation on a free cash flow basis is also undoubtedly attractive.

CT Automotive (CTA.AIM)

CTA is a designer, developer and supplier of interior components to the global automotive industry.

In the year ended 31 Dec 2023, the company generated total revenue of $142.974m (FY22: $124.269m), gross profit of $30.856m (FY22: $14.862m), operating profit of $8.472m (FY22: $(16.834)m), and net profit of $6.315m (FY22: $(24.664)m).

Total equity at 31 Dec 2023 was $16.967m (FY22: $2.577m), of which $15.394m was tangible (FY22: $0.790m). At this date, net debt excluding lease liabilities was $3.758m (FY22: $12.229m), and $12.708m including lease liabilities (FY22: $24.151m).

CTA generated net cash flows from operations of $8.037m (FY22: $5.542m), and invested a net $3.210m in purchases of primarily PP&E (FY22: $3.487m). Free cash flow was $(2.453)m (FY22: $(5.500)m), and it didn't pay a dividend. Note: I've conservatively used depreciation in the free cash flow calculation, since it appears likely the company is underinvesting in maintenance capex.

Market capitalisation: £17.30m ($22.96m)

Valuation: Using the FY23 figures, the shares currently offer a 27.5% earnings yield, (10.7)% free cash flow yield, and trade at 1.5x tangible book value.

Reason: Tariffs and other headwinds facing the automotive industry, alongside a fairly tenuous financial position.

Interest level: Low - Despite a capital raise in 2023 and further operating improvements in 2024, it seems the company is still vulnerable to an industry/wider economic downturn. I don't think the shares are cheap enough to compensate for this risk personally.

Clarkson (CKN.LSE)

CKN is a provider of integrated services and investment banking capabilities to the shipping and offshore markets (it's a shipping broker).

In the year ended 31 Dec 2024, the company generated total revenue of £661.4m (FY23: £639.4m), gross profit of £627.7m (FY23: £609.0m), operating profit of £98.5m (FY23: £99.8m), and net profit of £86.3m (FY23: £85.8m).

Total equity at 31 Dec 2024 was £495.7m (FY23: £456.6m), of which £323.1m was tangible (FY23: £273.7m), and net cash including lease liabilities was £393.2m (FY23: £355.7m).

CKN generated net cash flows from operations of £114.7m (FY23: £155.3m), and invested a net £9.6m into PP&E and various other assets (FY23: £12.2m). Free cash flow was £96.6m (FY23: £133.6m), which it used to pay dividends totalling £31.5m (FY23: £28.3m), alongside £26.4m of share repurchases (FY23: £49.5m). Note: I've conservatively used depreciation and amortisation in the calculation of free cash flow as they significantly exceeded capex.

Market capitalisation: £921.84m

Valuation: Using the FY24 figures, the shares currently offer a 9.4% earnings yield, 10.5% free cash flow yield, 3.4% dividend yield, 6.3% shareholder yield (dividends + share repurchases), and trade at 2.9x tangible book value.

Reason: Tariff impact on international shipping industry, and consequent downward FY25 profit guidance from management.

Interest level: High - Valuation is attractive given the company's track record and reputation, and its very sound balance sheet leaves it well placed to get through any market downturn.

I once read a biography of Jay Gould, a business and finance mogul of the U.S. gilded age, whose first major venture was a leather tannery. Looking at the performance of CKN relative to the shipping companies it serves, I'm reminded of Jay Gould's realisation that the broking of deals was a much better business than that of directly producing/selling the leather.

Well that concludes this week's newsletter. If you own, or have studied any of the companies profiled, please share any additional insights you might have in the comments. I only spend an hour or so looking at each company, so it's quite possible there's something I've missed.

Things should be back on schedule next week, so you'll receive the next edition on Wednesday morning as usual.