Small Cap Value Report (Thu 12 March 2020)- MOSB, CINE, CARR

Good morning. Here is the usual placeholder article.

You don't need me to tell you that markets are absolutely in freefall at the moment. as they re-price shares to allow for a coronavirus pandemic.

I'm not really seeing any particular bargains at the moment, given that 2020 earnings for many companies could be dire. That could change today, as I expect we'll see panic selling today. Online businesses are looking particularly attractive at the moment, as a lot of people look set to be self-isolating at home, with nothing to do. Therefore online shopping, gambling, etc, are likely to be winners from the current upheaval.

When looking at things to buy, it's essential look closely at balance sheets and cashflow. Can companies survive with considerably curtailed sales, for the next few months perhaps? I avoid highly geared companies at the best of times, but this is a particularly crucial point right now. Also, I think forward PERs have gone out of the window now, as 2020 earnings forecasts are likely to be way too high for many, maybe even most, companies.

Estimated timings today - I hardly got any sleep again, as all this market chaos is certainly taking its toll. Therefore please bear with me today, I may not be able to meet the 1pm deadline. Let's work on the basis that it will be done by 4pm, to give me time to crash out intermittently. Sorry about that.
Update at 12:54 - today's report is now finished.

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Moss Bros (LON:MOSB)

Takeover bid, cash, at 22p (a 60% premium).

I have to say, I think the bidder is crazy, and would be tempted to sell in the market at close to 22p, if possible, in case they change their mind!

This is a very lucky escape for MOSB shareholders.

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Cineworld (LON:CINE)

Outside my normal remit, due to its size, although that could be about to change.

Management has undertaken a reckless, debt-fuelled acquisition spree, and they're even talking about pressing ahead with another big acquisition.

It has net debt of $3.4bn (excluding an additional $4.2bn of lease liabilities).

The balance sheet is absolutely horrendous. Once goodwill and other intangibles are removed, NTAV is negative $-3.1bn!

Of course, with coronavirus now turning into a pandemic, cinemas are likely to be largely empty for a while. Let's hope the bank is accommodating.

I definitely wouldn't want to be long of this share right now. Shareholders should be very worried. Not as worried as the bank though.

If it can survive the next few months without the bank foreclosing, then it should be OK. There's a Going Concern note, which contains this stark warning;

In the downside scenario analysis performed, the Board has considered the potential impact of the COVID-19 outbreak on the Group's results. In preparing this analysis the following key assumptions were used: the impact of a total loss of revenue across the enlarged estate for between one and three months, no fixed costs reductions should sites be closed, run-rate combination benefits of c.$133m expected to be achieved as part of the Cineplex acquisition, forecast capital expenditure reduced in 2020 by 90%, and cessation of dividend payments from 1 July 2020. This analysis does not take account of the fact that in the case of widespread site closures the films scheduled to be released during this period of closure could be moved to later in 2020. These downside scenarios are currently considered unlikely, however it is difficult to predict the overall outcome and impact of COVID-19 at this stage. Under the specific downside scenario, however, of the Group losing the equivalent of between two and three months' total revenue across the entire estate there is a risk of breaching the Group's financial covenants, unless a waiver agreement is reached with the required majority of lenders within the going concern period.

Only the specific downside scenario detailed above would indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. The Consolidated Financial Statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

The downside scenario set out looks the most likely outcome I would say, Therefore, there's a very real risk this ridiculously over-indebted group could go bust in the next few months. Who knows whether the banks will support it or not? If they put it into administration, then the banks own the company, and shares go to zero.

If it can get through this period, then the business would recover, and it is highly cash generative. However, coronavirus is the ultimate nightmare for cinema operators. But once people recover, I imagine cinema audiences would be bursting at the seams, because when people are denied something they enjoy, the urge to return becomes quite strong.

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Carr's (LON:CARR)

Share price: 90p (down c.35% today, at 11:02)
No. shares: 92.4m
Market cap: £83.2m

Trading update (profit warning)

Carr's (CARR.L), the Agriculture and Engineering Group, today announces the following trading update ahead of announcing its Interim Results for the 26-week period ended 29 February 2020.

Agriculture division - it blames tough market conditions, and mild weather, for volume & margins on animal feed being weak. Cost-cutting has only partly mitigated.

Engineering division - orders from China & Japan have been delayed.

Overall - not good, and they haven't given us any idea of what the profit shortfall is likely to be;

... the Board anticipates the Group's performance for the current financial year to be significantly below its expectations.

More cost-cutting is being done.

My opinion - in normal circumstances, I would find 90p an attractive entry point for this share. Its agricultural business shouldn't be affected by coronavirus, I imagine. However, the potential problem is the engineering division. Who knows what might happen to the order book, in current circumstances? Customers tend to cut costs, and pause capex in times of trouble. There's nothing new on Research Tree, so we can't take this one any further for now.

The balance sheet looks reasonable - with a strong surplus of working capital, although there is some long term debt, but not an excessive amount.

Overall, I can't get excited about this, because there's not any earnings visibility at the moment.

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I'm going to leave it there for today.

Best wishes, Paul.