Small Cap Value Report (14 Jul 2016) - EMR, WJG, LVD

Good morning!

The biggest laugh of yesterday definitely came from Jeremy Clarkson's twitter account. I can't repeat it here, due to it containing a rude word, but the gist of it was to express his exasperation at the country now being run by May & Hammond!

Empresaria (LON:EMR)

I enjoyed interviewing the CEO & FD of this international staffing group, yesterday afternoon. Here is the audio link. Thank you for the questions submitted by readers, which I managed to ask in a round about way.

This is a good example of a group which has benefited from having a diverse spread of business in multiple countries. This has insulated it well from the chaos caused by Brexit & resultant sharp forex movements.

Watkin Jones (LON:WJG)

Share price: 103.25p (unchanged today)
No. shares: 255.3m
Market cap: £263.6m

Mello presentation last night - I think it was Nancy Reagan who described Ronnie's demise as "the long goodbye". Well, we had an even longer goodbye last night, after the 3 Directors of Watkin Jones had given a detailed presentation + Q&A to a group of investors in Beckenham. We all shook hands, and bid them goodbye in the restaurant, only to bump into them again over the road Beckenham Junction station. We then shared the same carriage into London, and bid them goodbye again, with handshakes all round again, on the platform at Victoria station. Moments later, we bumped into them again on the station concourse, triggering another round of cheery smiles & waves.

So when I spotted them again, 10 minutes later, on the tube platform, at Oxford Circus, I did what any self-respecting Brit would do, when uncertain of how to behave when constantly bumping into the same people - I dived for cover, and hid at the end of the platform, pretending to be engrossed in something riveting on my smartphone, to avoid further embarrassment! The Directors stood out markedly, due to all 3 wearing immaculately tailored suits. They seem good guys though, definitely a backable management team.

Their 2-hour presentation was excellent. We bombarded them with more questions over dinner, so it must have been exhausting for them. The issue arises again, of how companies are launched on the stock market in a very inappropriate way - by brokers who are keen to do as little work as possible for the maximum fee. Therefore the initial shareholder register is all wrong - with large, lumpy institutional holdings, and no private investors involved. So there's an immediate problem with lack of liquidity in the shares, unless & until some institutions start selling down their holdings.

I think the presentation went well, and certainly the PER and divi yield at WJB look very attractive. It's a developer of purpose-built student accommodation. The business model seems really well thought-through, with little commercial risk - the projects are forward-sold to yield-hungry institutional investors. There's a long pipeline of projects, and some recurring revenues too, from managing existing sites. The balance sheet looks solid. Further upside could come from purpose-built rental properties

Aside from student accommodation, so many younger people are now effectively shut out from the property market, in the S.East, due to exorbitant prices, that build to rent type arrangements must surely be the answer to increase the supply of rental properties?

It was interesting to hear that local authorities apparently favour planning applications for purpose-built student accommodation, because so much existing housing stock is freed up once they open - thus helping solve wider housing problems.

As a specialist in this area, I think WJG looks very interesting. Although having been stung on several recent IPOs that turned out to be complete crocks (e.g. Lakehouse (LON:LAKE) ), I'm very cautious about buying shares in any more recent IPOs.

Lavendon (LON:LVD)

Share price: 122.4p (up 6% today)
No. shares: 169.9m
Market cap: £208.0m

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

H1 trading update - as mentioned the other day, this is currently my favourite stock in the equipment rental sector - because the valuation seems modest, and it seems to operate in a good niche (powered access equipment), and has a sound balance sheet.

Although as a friend reminded me yesterday, in a long phone call, the operational gearing for hire companies is devastating in an economic slowdown - so he's very bearish on this type of company right now. The seemingly inexorable decline in share price also suggests that there's something wrong.

Despite this, Lavendon keeps churning out positive trading updates, as indeed it has done again today. H1 revenue is up 15%, driven by fleet expansion - although this has impacted margins in the short term.

A fair bit of detail is given, but the upshot seems to be that they're trading in line with expectations;

Given the encouraging trading performance in the first half, together with the degree of resilience provided by our international operations, the Board remains confident of making further progress during the year and delivering on its expectations for 2016."

The international spread of business has clearly helped, although it does mean that debt in foreign currencies translates into a higher sterling figure.

Outlook/Brexit comments;

While it is too early to fully assess the wider economic implications of the UK's decision to leave the EU, we recognise the increased uncertainty in the macroeconomic outlook. We do however believe the Group remains well positioned, with over 50% of its revenues, profits and cash flows being derived from outside the UK.

Should there be a pro-longed period of Sterling weakness, the Group's reported results would benefit from the translational impact on its overseas earnings which offers some mitigation should there be any adverse economic consequences on the Group arising from the UK's decision.

Too early to assess, blah blah, increased uncertainty, blah blah. Who writes these things?!

The geographic spread of activities seems to be a very positive thing - and that's certainly a factor which is much higher on my investment criteria these days.

My opinion - the valuation looks strikingly cheap to me. I really cannot understand why this share price has been so beaten up, despite continued decent updates from the company. The market seems to be pricing in bad news, which just isn't happening, so far anyway.