This is not a market to spring bad news on investors in my small-cap hunting ground. In the past five months, the FTSE All-Share Total Return (TR) index is down 6.5 per cent, but the FTSE Aim All-Share TR index has plunged 14.5 per cent in value.
Investor money flow data and surveys indicate ongoing reductions to UK equities. Although it is difficult to pinpoint the rationale behind the pessimism, fund managers at Rockwood Strategic (RKW), a top-performing small-cap fund, believe there are several potential factors at play. These include the desire to allocate to global equities rather than UK equities, concerns about the post-Brexit economy and even the lack of flag-waving UK fund managers with attractive performance to highlight.
Rockwood also highlights the political shambles that has seen the departure of Boris Johnson, the disastrous short tenure of his replacement, Liz Truss, and the fact that the UK's political leaders now have wafer-thin room to manoeuvre with fiscal policy. The UK debt to gross domestic product (GDP) ratio is the highest since the second world war, and the tax burden is at generational highs.
Moreover, the Bank of England risks causing a recession by overtightening monetary conditions during a cost of living crisis to bring inflation under control. The spike in UK government yields and base rate expectations have accentuated the de-rating of many small-cap companies exposed to the domestic economy.
Challenging markets hit Totally
- Annual underlying cash profit up 11 per cent to £6.9mn on 6.5 per cent higher revenue of £135.7mn
- Profit guidance cut materially for new financial year
- Forward price/earnings (PE) ratio of 11 and dividend yield of 4.7 per cent
- Share price down 22 per cent post results
Derby-based Totally (TLY:13.25p), a private provider of high-quality care and workplace wellbeing services, has reined in profit guidance for the 2023-24 financial year.
At the start of the year, the board terminated urgent treatment centre (UTC) contracts at four hospitals in north-west London for unspecified legal reasons, days before they were due to end on 31 January 2023. The UTC business is a major revenue generator, accounting for 73 per cent of group revenue of £135mn in the year just ended.
Unfortunately, inertia in the urgent care healthcare sector has led to a slowdown in tender activity, so much so that Totally’s board doesn’t expect to make good the shortfall in the new financial year, despite a strong performance from its higher-margin elective care division. That business unit reported 21 per cent organic revenue growth to account for £35.2mn of group revenue, and house broker Canaccord Genuity expects a similar growth rate this year.
However, the £24.7mn shortfall in revenue from the urgent care segment is such that Canaccord has been forced to slash its group revenue forecast from £144mn to £118mn for the 12 months to 31 March 2024. The downgrade has an accentuated impact on profits, hence why analysts expect underlying cash profit (excluding exceptional charges) to drop from £6.9mn to £6.3mn. When I last advised buying the shares, at 21p, at the pre-close trading update in early May 2023, they were forecasting cash profit of £8.8mn. The impact on pre-tax profit is even greater as Canaccord halved its estimate from £6.3mn to £3.2mn, implying a 16 per cent year-on-year decline.
On this basis, adjusted earnings per share (EPS) forecasts have been reduced from 3.5p to 1.2p, down from 2p in the 2022-23 financial year. The dividend has been cut, too, down 37 per cent to 0.625p per share, albeit analysts expect the payout to be maintained at this level. Although the rating is modest and the shares trade on less than half Canaccord’s 30p target price (down from 40p), Totally continues to disappoint. Sell.
