Daily Stock Market Report (Fri 20 Dec 2024) - SOM, HEAD, MOS

Good morning!

The flow of news has reduced to a trickle and this is likely to be a very brief report.

9.50am: as there is nothing else of interest, I'm hanging up my pen here for today. See you on Monday!

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Explanatory notes

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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. And/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 to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

Others: PINK = takeover approach, BLACK = profit warning, GREY = possible de-listing. Links:

Daily Stock Market Report: records from 5/11/2024 (format: Google Sheet). Updated to 19/12/2024.

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Companies Reporting

Name (Mkt Cap)	RNS	Summary	Our view (Author)
Somero Enterprises (LON:SOM) (£169m)	Directorate Changes	CEO/President retires in March 2025. He will consult for a further year. Search for new CEO begins.	AMBER (Graham)
Headlam (LON:HEAD) (£106m)	Property Disposals	£54m of sales at 64% premium to book. HEAD now has net cash plus a £95m property portfolio.	AMBER (Graham)
Mobile Streams (LON:MOS) (£35m)	Final Results	Building a new sports betting business in Mexico. Cash available is £1.4m.	RED (Graham)
Shearwater (LON:SWG) (£9m)	£2.3m contract wins	Momentum continues to build, supporting SWG’s ability to deliver results in line with expectations.

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Short Sections

Somero Enterprises (LON:SOM)

Up 2% to 312p (£173m) - Directorate Changes - Graham - AMBER

It’s a big day in Somero’s history as we learn that Jack Cooney is retiring as CEO in March 2025. He has been CEO since 1997 and is now 77 years old. The company did announce a succession plan last year which involved the promotion of Jesse Aho to COO, taking charge of new product development. Mr. Aho has now been appointed to President and I can only presume that he is a strong contender or the frontrunner for the CEO appointment. He has been with Somero since 2008.

In other news, the 89-year-old Chairman is also planning to step down whenever the new CEO is appointed. And we have a trading update: trading for FY Dec 2024 is in line with expectations.

Graham’s view: this one has gone off the boil in recent years as revenues and profits have been on the decline. I was neutral on it in August and was concerned that the company would fail to hit H2-weighted full-year forecasts for 2024. So I’m pleasantly surprised to learn that the company is on track (Cavendish forecasts: revenue £110m, adj. PBT £27.6m). However, I also note that no forecasts have been published for 2025; it was previously suggested that 2025 might be flat in terms of revenue.

Somero’s failure to achieve much traction outside the United States has been a disappointment, and I remain concerned that weak results within the US might be primarily due to cheaper alternatives from competitors, rather than cyclical construction demand and higher interest rates. According to the most recent official statistics, US construction spending year-to-date is up 7.2% compared to 2023 (Monthly Construction Spending, October 2024). So I am concerned that Somero could be facing fundamental challenges, and I would not want to pay more than the current PER of around 9x for it. Perhaps new management can bring some new ideas to the table.

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Headlam (LON:HEAD)

Up 11% to 146p (£118m) - Property Disposals - Graham - AMBER

Mark looked at this recently and noted a big discount to tangible book value, even before taking into account the undervaluation on the balance sheet of its freehold property. A big chunk of that value has now been realised with four property sales for almost £54m, where their book value was only £33m. Two of the properties will be leased back, one has been replaced, and one is apparently not being replaced at all. It’s all part of HEAD’s strategic changes and improved operational efficiency.

Following the transactions, HEAD says that it has a net cash position and a property portfolio with a January 2023 market valuation of £95m. HEAD’s net debt was last seen at £28m as of June 2024, and I expect that it increased further since then, due to operating losses suffered in H2.

Graham’s view: net assets were £200m as of June 2024. We could potentially write that up by c. £20m on the back of today’s news, minus the losses in H2. It would have been helpful if the company had confirmed the book value of its remaining properties, to easily understand the write-ups that might be possible from additional transactions.

It is tempting to upgrade our view on this to AMBER/GREEN on the basis of balance sheet strength, but the company is still forecast to make a large pre-tax loss (£20m+) in 2025. Flooring distribution is a low-margin, cyclical business and the balance sheet is the only obviously attractive feature of this share, in my view. I think you also need some conviction in the turnaround plan to be tempted here.

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Mobile Streams (LON:MOS)

Down 1% to 0.4p (£35m) - Final Results - Graham - RED

This was a basket case when I looked at it six years ago. Its current focus is a 23% interest it has in a Mexican casino and sports book business. Previous business activities have more or less dried up.

Today’s results to June 2024 (they are very late) disclose that cash was close to zero as of June 2024. The company has raised £1.6m in fresh equity since then, “mostly via the exercise of warrants”.

With its partners in the new Mexican venture, MOS is “in the final stages of preparations for the launch of online sports betting and online casino operations as well as sports podcast services…”

Graham’s view: according to an announcement in April, the Mexican business raised fresh equity at a pre-money valuation of $5m. Mobile Streams was happy to report a 5x increase in the value of its original investment. But remember that MOS only has a 23% interest here. Unless the value of this business has multiplied many, many times since April, I don’t see how it’s possible to justify this £35m market cap.