Small Cap Value Report (1 Jul 2016) - SAL, QTX

Good morning!

Mark Carney, Governor of the Bank of England, gave a speech yesterday (video link) which triggered a further fall in sterling. The key points I jotted down were;

• Economic outlook for UK has deteriorated
• More monetary easing may be needed over summer, have tools at their disposal
• Limits to what the BoE can do

Therefore, it's looking like sterling may remain low for some time. This further reinforces my current strategy of trying to buy bombed out shares where there are considerable overseas (esp. dollar) earnings. Also companies which are UK exporters. So for example I bought some Portmeirion (LON:PMP) yesterday, as it should benefit from the weaker pound.

I think this is also quite bullish for the domestic property market. Anecdotally, I've heard that some buyers are pulling out of house purchases. Although I'm also hearing that overseas buyers are steaming into the London market, seeing cheaper sterling as a buying opportunity.

Ultimately, house prices are driven by demand & supply, and the cost & availability of mortgages. The bottom line is that, with interest rates this low (and likely to stay low), then buying a house is more affordable than renting (if you can come up with a deposit). For this reason, I'm looking closely at housing-related shares which have been sold off heavily. I currently hold Persimmon (LON:PSN) . Rightly or wrongly, my current view is that any downturn in the housing market is likely to be temporary. In my lifetime, house price crashes have only happened when interest rates are so high that mortgage repayments become onerous. We couldn't be further away from that scenario now if we tried.

Indices

A lot of people expected a massive sell-off after the Brexit vote, and are now confused to see the FTSE 100 hitting a 9-month high. As mentioned before, that is mainly because the index is dominated by companies which generate earnings in dollars. 

I thought it would be interesting to see how the various indices have performed over the period since Brexit. Here are the figures as of last night;

(table corrupted, so here are figures manually)

FTSE 100 +2.6%

Mid Caps (MCX) -6.1%

Small caps (SMXX) -5.9%

Aim (AXX) -2.6%

(from CoB June 23 to CoB June 30 2016)

As you can see, whilst large caps are up, mid and smaller caps are down about 6% in the last week.

AIM is a bit of an anomaly, because 5 out of its 6 largest constituents have all out-performed for company-specific reasons (Asos, GW Pharma, Abcam, James Halstead, and Fever Tree)

Furthermore, a lot of losses have been concentrated into a few sectors - e.g. retailers, recruitment, housebuilding & related. So cyclical stocks have been hammered, whilst defensive and/or dollar earnings, have done well.

This process has been extremely rapid, because a single event triggered it. Whereas normally sector moves happen gradually.

Overall though, even a 6% move down is not really a lot, considering the economic outlook has markedly deteriorated in the last week. I was discussing this with a friend, who reckons it's not surprising at all.

His argument is that there's nowhere else to put money. Cash earns nothing. Bonds are too expensive. Property is now much more uncertain than it was, and buy-to-let is endless hassle with tenants, for not very good yields. Gold, etc, are just punts. So equities have considerable attractions, despite the uncertain economic outlook.

The other consideration is that, whilst we may well have an economic downturn, it may not last long. 2008 was an aberration, and personally I don't see any reason to believe that the next downturn will be anything like that bad. There could be some external shock which triggers another crisis though - e.g. the next Eurozone crisis. Or a major bank failure - Deutsche Bank seems to be the big worry, with its gargantuan derivatives exposure.

Overall then, I think it's vital to closely monitor what's going on in the world, and to approach this market with caution. That said, there are some lovely bargains around at the moment, which I am finding irresistible.

Anchoring is a real danger though. If something has dropped say 30%, that doesn't automatically mean that it's cheap. The market is pricing in future falls in earnings. So I think it's essential to only buy things that are cheap on a revised, prudent view of future earnings.

Spaceandpeople (LON:SAL)

Share price: 39p (down 13.3% today)
No. shares: 19.5m
Market cap: £7.6m

(at the time of writing, I hold a long position in this share)

Trading update & closure of S&P+ - this is certainly a share which polarises opinions!

Today's update is in 2 distinct sections. The first section is a trading update, which is fine - in line, and all parts of the core business performing well;

The Group's UK and German retail operations are performing in line with expectations.  The UK has seen an increase in venues and we have a strong pipeline of UK venues with whom we are in varying stages of discussion.

The reinvigorated retail offer "POP Retail" has seen excellent traction so far and we are again currently hitting our internal budgets for this product.  In addition, the MPK (Mobile Promotions Kiosk) has achieved its 75^th installation and is on track to achieve the budgeted 80-100 installed units in the UK by the end of the year.

The Group's core UK and German promotion businesses are also trading in line with expectations and the Board is pleased with revenues being generated under the new Network Rail and British Land contracts.

That all sounds pretty good. If the announcement had stopped at this point, then the shares would probably have gone up today.

There's a however. A 51% subsidiary, called S&P+ has not worked out, and is being shut down. That means a one-off £275k hit to the balance sheet, as the inter-company debt is written off, and also an anticipated £180k profit for 2016 from S&P+ will now not happen - it will instead be a £200k loss.

So disappointing, but it's a one-off, ring-fenced issue.

The core business should generate a profit "broadly comparable" to last year.

Directorspeak - self-explanatory;

Matthew Bending, CEO of SpaceandPeople commented: "Obviously, we are very disappointed about this outcome and understand the impact this will have on the employees of S&P+, however, the core UK and German promotions and retail businesses are trading in line with our internal expectations and we are very happy with the development of the MPK programme, the rejuvenation of "POP Retail" and the strong pipeline of UK venues with whom we are in discussion about joining our service. We do not see the decision on closing S&P+ as having any negative effect on the core business."

My opinion - it's the type of profit warning that I like - i.e. a ring-fenced, one-off problem.

It sounds like the rest of the business is trading well, and with the market cap now peanuts, I like it at this level. Whilst obviously recognising that the share price performance has been very poor. That's the past, which we can't change. It's the future which matters to me.

So personally, I'm glass half full on this one, at the current valuation. Plenty of people are glass half empty on it, mind you.

I had a catch up call with the CEO this morning, and will publish that this evening on my website.

Quartix Holdings (LON:QTX)

Share price: 320p (up 3.2% today)
No. shares: 47.3m
Market cap: £151.4m

Trading update - an in line update today from this telematics company;

...The Company is pleased to report that trading to date has been good and consistent with achieving market expectations for the year as a whole.

Andy Walters, Managing Director, commented: "We continued to make progress in all markets, ending the period with 8,200 fleet customers and 79,000 vehicles under subscription. Insurance installations showed strong growth compared to the same period in 2015. We continue to invest in marketing and development initiatives to drive further growth in our core fleet markets, and remain on track to meet profit expectations for 2016."

That sounds good. Although this share is priced pretty aggressively.

My opinion - it's not a company I know well. However, with recurring, subscription revenues, and growth, it should be fairly robust in the face of a slowing economy.