Secular Trends

Small Caps Earnings Review 09/09/2022

Delta Plus - 679m€

Delta Plus is another one of those niche rollup plays that tends to work pretty well.

They operate in the work safety apparel industry (gloves, boots etc..). Their strategy is primarily inorganic, though this is still a growth industry overall (3-5%).

The increase in scale has created a lot of cost savings at the group level, something you don’t always see in these types of companies.

Operating margin was 8.3% 10 years ago and now stands >12% as of H1 2022.

Amidst a weak macro & an uncertain environment, the group continues to grow with 3 acquisitions in 2022. Sales were up 22% in H1.

Delta plus trades at an EV/2022 EBIT of 12x.

Boiron SA - 804m€

Boiron is a leading laboratory and manufacturer of homeopathic products in France, but also sells into the EU (~20% of sales) and the US (~12% of sales).

There has always been a debate on whether or not homeopathic methods have an actual medical value. 2 years ago, the French government decided that the evidence wasn’t strong enough to keep these products eligible for partial refund under the social security program.

That’s very telling, as the French government will literally give you a cash-back on anything, including ADHD pills & cosmetic dental operations before the age of 16.

The rate of reimbursement had already been dropped from 30% to 15%, and as of January 2021, stands at 0%.

On top of the de facto price hike, this represents a strong blow to the image of homeopathic medicine. For Boiron, it is especially damaging as their packaging mimic “real” pharmaceutical products.

As a result of the two reimbursement cancellations over the past two years, revenue has declined 25% in France and operating margins are down from 15% in 2019 to somewhere around 8-9% in 2022E.

Their clientèle is essentially composed of middle-aged women, not younger generations, which casts doubts on the future of homeopathic medicine in France as a business.

That’s why even though results were great at first glance with revenues up 35%, its very unlikely that momentum can continue:

• Q1 was an easy comp & revenue growth is already decelerating in Q2 (12% vs 60%).

• The core homeopathic business was flat in Q1 and down 9% in Q2.

• Other businesses benefited from a one time up-tick in spending on non-covid related medicine.

Wandisco - £248m

I always get curious when micro-caps trade at 20x Sales. Generally, it’s either a Fraud, some weird asset heavy valuation or a VC type investment. Wandisco goes into the third category.

It sells a product enabling automated data migration from on premise to cloud, and boasts an impressive customer list for such a small company including AMD, Daimler & GoDaddy.

Though they have a rocky history, its seems that after having strategically re-organized their sales team in 2021, growth momentum is starting to pick up.

Bookings were $27.1m in H1 2022 vs $2.1m in H1 2021.

Their product has small scale, but already has an impressive customer list. That could make it a really attractive acquisition target for a larger adjacent business with cross-selling synergies. This probably explains a lot of the valuation.

Probably a good idea to keep an eye on it.