Small Cap Value Report (Fri 17 May 2024) - PFD, FRP, FA., XLM, COST

17th May by Paul Scott

47 comments 7653 reads

Good morning, just Paul today!

I'll leave it there for the day and the week. Have a lovely weekend, and don't miss my next thrilling podcast instalment this Sat or Sun :-)

Last call for Mello Chiswick, which is next week! The schedule of excellent speakers has gone live now. It's great for meeting & socialising with other investors too, and you get to meet management at Warpaint London (LON:W7L) - I think they deserve a beer or two from happy shareholders!

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps (usually) between £10m and £1bn. We usually avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs…

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M48

17th May

Good analysis, and glad I wasn’t the only one whose ears were pricked! You have basically written what I’ve been thinking/hypothesising.

Had anyone on the board had the nous to recommend fixing the interest rate on their debt pile before the cycle turned, Marlowe (LON:MRL) would be close to the top of the share price performers on LSE over the last 10 years and still going strong. As it stands, it looks to me as if it will probably soon have completely disemboweled itself.

Paul Scott

Just an update on the above. On closer inspection, I'm much happier with Costain (LON:COST) and actually a good slug of their cash actually IS their own money! Main section is now up, in main article. So thank you for giving me a nudge to take a fresh look COST looks very good value I think. Although we previously liked it here before too, with GREENs and AMBER/GREEN. I'm back to fully fledged GREEN today :-)

BenHazz

Hochschild Mining (LON:HOC) CEO, Eduardo Landin, has just put his hand in his pocket and bought nearly 1/4 million quid worth of shares. The fact he has done this after a big recent run up is really promising indeed!

1James1n1

Thanks for looking Paul and the write-up. and its always good to see if someone else picks up a contrary point when reviewing what seems to be a good company and seemingly lowly valued.

Interesting to note that Costain (LON:COST) perform extremely well on supplier payments practices, which flies in the face of what you would expect in this sector - 19 days average payment per the latest bi-annual report:

Payment practice report for COSTAIN LIMITED (check-payment-practices.service.gov.uk)

See you next week for Mello and look forward to a beer in the bar at some point!

Elric Langton

XLMedia (LON: XLM) Ref "I dislike this sector (digital marketing for gambling companies) because profits can evaporate so easily when the advertising algorithms change, outside XLM's control."

It's a noteworthy flag, one that I had not considered. Perhaps blinded by my loathing of online gambling because of the insidious destruction behind the scenes, but not behind the family door, so to speak.

For the reader’s enlightenment, especially if you like online betting, be wary: A friend of mine once worked at Bet365, where his department developed a cunning algorithm to lure customers into gambling on alternative instruments. The strategy involved removing options that customers were notably skilled at, ensuring these choices were conspicuously absent from the table of contents on their subsequent visits. The playing field is anything but level.

One would think the house hedge would suffice, but no—greed drives the company to pick customers' pockets on behalf of stakeholders and investors while padding the Board of Directors' bonuses. It's a stark reminder that in the gambling world, the house doesn’t just win—it actively rigs the game to ensure it does.

turbo

On 12 March 2024 Paul looked at Synthomer (LON:SYNT) and concluded

"A big % riser today, but I'm far from convinced as to the attractions of this potential turnaround. Debt has halved, but is still massive, so no divis for now. Outlook seems quite lacklustre. Maybe brokers have increased forecasts, but that hasn't filtered down to pond life like us yet!"

It was up 30% on that day to 186p, and the price is now 333p. I'm thinking there's more upside, possibly up to 600p according to long term chart signals. What do others think? I'm not very well versed in working out fair value for the share.

I'm going to dip my toe in with a small purchase...

Hi turbo,

Indeed, it's been an amazing share price rebound at Synthomer (LON:SYNT)

To be fair there was nothing factually incorrect in my previous analysis at all, which you quoted. If there was, perhaps you could point it out?

Broker forecasts remain dismal, so they're obviously all missing the point too -

Buyers must be working on different assumptions, that a recovery will be much stronger than brokers are forecasting perhaps?

As mentioned in my podcasts, at the start of a new bull market, it can sometimes be the most highly geared shares which may multibag, because perceived upside suddenly all flows to equity, and debt is seen as less risky. I see SYNT recently refinanced a bond. Hence why I was suggesting last week that it might be time to take some more calculated risks, but on the fundamentals (facts figures & forecasts) we have available to us at this point in time, SYNT looks unattractive.

Looking at SYNT's update on 9/5/2024, it showed some signs of progress, but overall strikes me as a fairly lacklustre update.

Anyway, good luck with your momentum trade, it could work out, who knows? The market clearly sees something positive here, that is not reflected in the fundamentals as yet anyway.

I apologise for being unable to predict future share prices in every case, we just analyse the fundamentals only on any particular day, with the information available.

On average our stuff has beaten the market considerably in both 2023 and 2024, so we're not complete muppets!

Paul.

Revs8

Price of silver may also have just broken out of a long term resistance. If so then SP could hit 180p or higher.

planetx

David

Thanks for that , put a chunk of my g cap cash released into aviation .

Looks an interesting situation triggered by plane shortages

Reckon Simon Thompson will be harping on about this next week

Anyway 5% in first day holding a share is a good start

Blame game portfolio gets a boost , Used to own aviation so I know it quite well .

Rusty2

A lot of metals are up strongly today, especially Copper and Nickel. No idea why.

"To be fair, there was nothing factually incorrect in my previous analysis that you quoted. If there was, could you please point it out?"

Hello Paul,

I apologise if it seemed like I was criticising your analysis. That was not my intention at all. I quoted you to ensure others are aware of the bear case, not to come across as pumping the stock. I should have made that clearer—my mistake!

Honestly, I haven't found anything factually incorrect in your analyses (my fundamental analysis skills are still a work in progress).

Like so many others, I truly appreciate the extensive work you do in analysing companies based on their fundamentals. Your significant contributions to this board are incredibly valuable.

Hope you have a fantastic weekend!

davidjhill

yes - Avation (LON:AVAP) ended up with a nice lift planetx

I don't really understand why this hasn't moved significantly. It had a NAV of what around 275p? and I reckon given the profit they can make on undelivered ATRs this has to be higher than that now. So to be at a 60% discount to NAV in a market where air travel is clearly growing and fuel efficient planes are the rage the relationship Avation (LON:AVAP) with ATR to be able to negotiate these 10 year options has to be worth much much more than the market is crediting.

I guess some might point at the debt but in reality that has fallen by some $100m over the last year or so and all but about $300m of it is asset backed finance linked directly to the lease of the plane (no interest rate risk)

The refinancing of the bonds last time was done in some market distress so I expect when they come to refinance (if they don't just pay it down) they will get a better deal. But they have been buying that debt on the open market at 88c in the $ so making a 12% return on their own bonds :-) Wouldn't surprise me to see more of that.

so a fully leased fleet, profitable, paying down debt at (I think the CEO told me) $70m p/a with options on 30 planes that must be worth north of $150m given resale values and strong asset value in existing fleet vs debt and the valuation just looks odd to me.

NewInvestor1972

18th May

Bank of America holdings RNS for easyJet (LON:EZJ) yesterday, from 10% to 3% of the company, that's down from 12% so I guess it looks like they are selling the lot. Will certainly explain the weakness in share price lately.

Funnily enough they increased their target price to 750p in April, 50% upside... Very odd

Bouden54

Recent weakness seems to be a sector thing - Jet2 and Ryanair also down quite bit since start of April. Don't follow this area closely so not aware of what's driving this, but am keen to take a closer look at Jet2 (LON:JET2) when time permits as seems to be a quality company and very cheap.

TRADERWEEKS

Great podcast as always Paul, thanks! Sound track for a half marathon last weekend and a trip in Baku this week!
appreciate the comments the last few months (years!) on Future too. Sat waiting for an entry for 2 years - managed a good load 3 weeks ago for a lovely short term return.

rmillaree

19th May

Jet2 (LON:JET2)

Must admit i have finally taken the plunge here this week and come on board - i cant really think of anything to put me off here. Obviously with all these companies they do tend to look cheap when things are going well and it doesnt alwasy take much to ruin a year or period even if its stuff that may happen regularly eg excessive strikes by baggage staff or air traffic control blah. In the past i have held easyjet - i feel though that Jet2 seem to have done the better job ref growth in the last few years - whether this will be maintained or not going forward i know not. It seems like most of these airline companies are running reasonably sensibly at present in that they dont seem to be over competing on price. My only slight regret here is not picking up shares last year when they were 25% cheaper - think estimates have been upgraded since then though ref profits so n some respects although price has increased pe multiple still seems good value. Lets hope my turning up hasnt jinxed the party and lets hope this isnt top of the cycle either!

Plinkut

Keywords Studios (LON:KWS) congrats to anybody who persisted with KWS, I was early in the process of shuffling back in for my 3rd or 4th attempt so not sure whether it will make up for previous pain yet!

The shorters might be in full reverse ferret on Monday?

May 19 (Reuters) - European private equity group EQT EQTAB.ST is in advanced discussions to buy Dublin-based video game services company Keywords Studios KWS.L for 2.2 billion pounds ($2.79 billion), the companies said in a statement

That is good news, Keywords Studios (LON:KWS) l have held, for just over a year, still under water. This may let me out at a small profit.
Nice premium, unlike some other bids. It is already up 25% this month, even before this bid.

This is the 4th bid within about a month, in my folio, must be a record. Tyman (LON:TYMN), Anglo American (LON:AAL) and IQGeo (LON:IQG) are the others.

BnB

Keywords Studios (LON:KWS) I had a full switchback with this one - from doubling initially to then losing about two thirds to then selling a rip back at my original purchase price to buying back pretty much at the recent bottom. Hopefully Monday’s reaction gives me an opportunity to start taking some profits at last.

Well that's a nice start to the week! Keywords Studios (LON:KWS) I was close to selling last week and locking in 30% profit. Glad I dithered now.

https://keywords-offer.com/doc...

Small Cap Value Report (Fri 17 May 2024) - PFD, FRP, FA., XLM, COST

Explanatory notes -

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Paul Scott

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