3 microcaps for 2024

There is no doubt to my mind that the UK small caps are a generational buying opp, never have I seen such depressed valuations without even a recession. We went from one extreme ( post covid money printing frenzy) to the other. The cycle always turns, it’s just a matter of time. These are my top 3 small cap opportunities that I found and recently bought shares in all them. I intend to hold them for the mid-long term and only sell if the story changes. Will try and update more regularly on their progress, good or bad. There is a higher risk with micro caps, things can go wrong a lot quicker but then equally, the rewards can be a lot higher as well.

SONDREL (SND) MC £7mil

This is an exciting play in the semis market with AI exposure. Wasn’t easy to understand what they do so I’ll put it in layman’s terms: say a mobile phone manufacturer (OEM) wants a more sophisticated camera with specific functions that competitors don’t have. SND would provide a turnkey ( from A to Z) service for this in 3 main stages: 1 Concept design 2 Prototype 3 Components supply. Stage 1 is the most human capital intensive as requires lots of engineers but also the most profitable one lasting an average of 15 months with the stage 3 being the opposite: lower margin repeat revenue but for longer, ave is c 7 years( from supplying the OEM with components during the commercial life of that specific phone). The main issue is that the business is cash hungry, esp in Stage 1, but as they move more customers into stage 3 , this issue should reverse. SND made a move recently into US, where the CHIPS ACT introduced in Aug 2022 encourages and helps via grants manufactures of semiconductors in the USA as a counter to China’s threat. The big white elephant in the room is the probability of a fundraise. I put the chances at 50-50, I think if the right deal came along, the ceo would not hesitate to raise fresh capital but I also don’t think he’s willing to do a heavily discounted placing, not at these levels. In his last presentation he said they’re used to managing working capital in tough times. The uncertainty is holding back the sp but once we get clarity on that - placing or not , the shares should recover.

MADE TECH GROUP (MTEC) MC £16 mil

This is a mini KNOS, software co which specializes in digitisation projects for central and local UK government. The sp has been an absolute disaster since ipo. Again, this is another human capital intensive business which hired too many expensive employees at the top of the market and coupled with normalizing demand after covid, meant a tough, loss making period in which the ceo decided to shift focus on profitable growth by cutting costs, etc. The main positive with MTEC is the net cash position. It has c £8 mil net cash and this should be more than enough to support the transition to profitability without dilution. The main weakness is that these gov contracts are on a “call off basis” ie there are no defined time schedules so the timing of contract delivery it’s entirely at the client’s discretion. A few delays in timing caused poor staff utilisation rates which in turn impacted profitability but MTEC never lost a client and has a contracted backlog of c £67mil so it’s a matter of when, not if. Once these contracts start, the operational gearing will have the opposite effect: super profits.

Croma Security Solutions Group (CSSG) MC £9 mil

Buy and build strategy in the security sector. Croma has been around for a long time with its main operations providing low margin security guards to various organisations but only in June this year it finally demerged from Vigilant and it will solely focus on a buy and build strategy targeting a leading national network of locksmiths. Yep, locksmiths. Some great buy and build businesses came from the most boring, unexciting ideas. CEO will target 5-6 bolt on acquisitions per year, integrate them within their proprietary software systems to optimize admin and rename them security centres. They will add extra services like alarm systems and the national scale will help them win bigger business accounts which are more lucrative and repeat in nature. The locksmith market is fragmented, made up of small, family owned high street businesses and it’s that boring, that no one’s even competing with Croma in this space. One of the most important thing - and the most successful buy and build strategies have one denominator in common: they avoided dilution. Ie constantly issuing shares for acquisitions. Croma has £2 mil in cash but is scheduled to receive divestment money from Vigilant totaling £4.1 mil via 10 quarterly payments starting from March 2024 as well as £1.3 mil as redeemable shares in July 24 ( but I don’t really understand this one). It’s how the break-up was structured. So it already has at least £6 mil cash for future acquisitions vs a MC of £9 mil and with only 13.7 mil shares in issue , the EPS trajectory should force a massive re-rate in time. The ceo promised to introduce market forecasts via broker WH Ireland next year. This one is probably my favourite.