Small Cap Value Report (Fri 13 March 2020) - TRB, and 25 other shares mentioned

Good morning, it's Paul here, with Friday's SCVR.

As usual, this post is initially a placeholder, so that readers can add your comments from 7am, whilst I start writing the main report section by section throughout the morning.

Estimated timings - I have to finish early today, so will be done by noon.
Update at 12:29 - today's report is now finished.

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Coronavirus

I think it's quite important to keep a record of what's going on, and how it affects the markets, given that it looks like we could be about to experience potentially the biggest crisis of our lives in the next few months this year. That's if coronavirus does sweep through the population, as experts are now predicting. Boris Johnson gave a stark warning last night, that families must prepare to lose loved ones (sick, and elderly people) before their time. What a dreadful thought.

In my family, my main concern is for Mum, who is 83 and badly asthmatic. She nearly died from heart attack & pneumonia a couple of years ago. The NHS came up trumps in this instance, and sorted her out. The miracle of stents now means that she's enjoying a new lease on life. I rang her last night, and had a long talk, emphasising that I wasn't being alarmist trying to put her in lock-down about a week ago, that it was really necessary. She reluctantly agreed to cancel forthcoming social events, and is already doing food shopping online.

We've got another more distant relative in a care home, suffering from dementia. The care home have now banned visitors, so my family are asking to get Skype set up, so that we can stay in touch. I dread to think what would happen, if a member of staff accidentally brought the virus into any care home - it would kill off many of the residents, for sure.

Personally, I split my time between London (in a household of 4, including 1 elderly person who is house-bound), and my own place in Bournemouth. Therefore, I have decided to self-isolate today, and travel back to Bou'mth. Once there, and living alone, I actually want to get the virus, so I can get it out of the way & build up some immune system response to it. Living alone in Bou'mth, I won't be at any risk of passing it on to anyone else, especially an older person, which is my main worry at the moment being here in London.

If/when I do get it, then I'm hoping to be well enough to post about it here, in addition to (maybe scaled back) articles about shares.

Above all, I wish everyone well in my network of friends & contacts, including all readers here.

The futures bounced overnight, so we should hopefully get some respite today. The extent of the market falls seems so extreme, that in my view we must be near the bottom. But it depends on Govt policy. They have to make decisions that I wouldn't want to make - i.e. tighter controls on day-to-day life, which would slow down the spread of the virus, but would do irreparable economic damage. E.g. try modelling how restaurant/cafe/bar/retailer would fare if revenues ceased altogether, even for 1-3 months. It would bankrupt many, or even most companies in those sectors. That's my main worry with Revolution Bars (LON:RBG) and why the share price has fallen so much. I calculate that it would need additional funding from shareholders within just a month of being forced to close all venues all of the time. I don't see such an extreme action as being likely, hence why I continue to hold (and have been buying more) RBG shares. But it's undoubtedly a risk. The same is true for many other companies in the retail/hospitality sectors. The costs are largely fixed, so the next few months will be a question of survival.

Companies with strong balance sheets (net cash) should survive, and of course will probably have less competition, once people recover from the virus (which is mild for most people) and start travelling, eating/drinking out, and shopping again.

Banks are crucial right now. Many companies will need extended bank facilities to get through this period. To take on that risk, then it's not unreasonable for the banks to require a Govt guarantee. There was such a scheme mentioned in the budget, but I can't remember the details. Something similar was done in 2008-9 I seem to recall. At least policymakers & civil service have experience of dealing with a crisis - they can re-use the policies that worked in 2008-9, and invent similar things this time around.

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FCA shorting restrictions - there are 2 announcements from the FCA, banning shorting of particular shares today. It looks like Italian & Spanish stocks only, judging from some of the names that I recognise. I wonder if this will widen into other stocks/sectors/countries?

Thinking back to 2008, I remember some shorting restrictions being put in place at the time on UK stocks - maybe it was banks? It brought some temporary respite, because I remember that the spread betting companies forced short sellers to buy back existing short positions. Although it was really just tinkering around the edges. What the banks needed above all was re-capitalisation, which Gordon Brown forced through.

Wider financial crisis? - Italy was already in really bad shape financially before it shut down lots of its economy over coronavirus. Therefore, the biggest risk right now looks to me like a collapse of European banks, and another sovereign debt crisis as Govt deficits rocket as tax receipts dry up & Govt spending soars. So we could be back to 2010-12, with the European financial system teetering on the brink, and firm action only being taken by the EU at the last minute, thus prolonging the crisis. Ultimately, the Germans don't like having to backstop other European countries. But too bad, that's what they signed up for (by implication) when they created the Euro.

This health crisis is almost certain to mutate into another, serious, financial crisis, in my view. Share prices are anticipating that.

The mountain of debt built up by corporates, and Govts, could well come home to roost now. I think risk has been mis-priced for a couple of years, with some bonds not reflecting the considerable underlying risk of default, and equities having been over-priced for the last couple of years. The equities side of things has corrected now, with valuations generally looking more sensible now.

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Recent purchases

Just FYI, these are not recommendations, I've been buying this week, including;

Dart (LON:DTG) - I picked up some yesterday. Its strong balance sheet means that this airline is going to survive, as competitors potentially go bust en masse. It was trading its socks off before the crisis. Once the crisis has run its course, then this group looks to be in a great position - less competition (I think many airlines likely to go bust this year), and a restricted public eager to take holidays again.

Newriver Reit (LON:NRR) - the profile of its tenants means that it should carry on receiving rental income largely as normal. Buying now, locks in a 14% yield. Sure that might come down a bit, but this is no Intu, it's much safer than that.

Topping up both Sosandar (LON:SOS) and Revolution Bars (LON:RBG) - I think SOS should produce superb performance in the first half of calendar 2020, because its spending much more on marketing, which proved highly effective in H2 of calendar 2019. Therefore it's up against really soft comparatives. Plus it raised a lot more cash, and people will be buying more online instead of going to shops. Bored people self-isolating at home, are likely to be doing a lot more internet shopping than before. RBG is a risk, but would be over 100p without coronavirus, as trading was recovering, driven by refurbs and other initiatives. Therefore, I feel risk:reward is good, providing they're not shut down by Govt.

Bigdish (LON:DISH) - also an existing holding, I bought lots more at 1.5p. Conditions right now are perfect for signing up more struggling restaurants for its dining app. Therefore this company should be one beneficiary of the crisis. Needs to raise cash later this year, which should be fine I think, due to rapid growth.

Eddie Stobart Logistics (LON:ESL) - covered recently in SCVR. Business has been saved by new financial backer. Looks cheap now.

Gear4Music (G4M) - I've tentatively dipped my toe back in here, with a very small opening position. I'm not worried about China supply issues any more, that seems to be working itself out. The bigger problem now is demand. Although again, being an online company, it should be fine.

Joules (LON:JOUL) - half of its sales are online. An affluent customer base may well buy online during this crisis, thus helping offset retail losses to some extent, I hope. I paid just over 100p, which I think should be an attractive long-term entry price.

Scs (LON:SCS) - similar thing. A bombed out share price, for a good, cash-rich company. Its stores are out-of-town, where people are not in such close proximity. I think it can ride out a few slow months. Again, weaker competition could go bust. People in secure jobs likely to have more money, if they don't take a summer holiday.

Somero Enterprises Inc (LON:SOM) - just a small position. I see c.200p as an attractive entry price. Pots of cash, so no solvency worries, even if business does turn down this year.

Spectra Systems (LON:SPSY) - bank note cleaning company, which is bound to be topical. Was doing well before the crisis, now much cheaper, so I bought average 120p.

Tekmar (LON:TGP) - very small opening position. Covered here a few weeks ago. China disruption should pass.

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Watchlist

Others on the watchlist which I haven't yet bought;

Dunelm (LON:DNLM) - lovely business, excellent recent results, now looking cheaper (although obviously at risk of forced store closures)

Zytronic (LON:ZYT) - now not much above the value of its own cash. But I imagine its likely to warn on profits at some stage.

Car dealers - some are now looking really good value.

Restaurant (LON:RTN) - looks cheap, but I'm worried about debt, and whether it can survive this crisis?

Boohoo (LON:BOO) - best in class eCommerce fashion business. Not clear to me why the shares have fallen so much. Has gone from very expensive, to just expensive. But long-term, this could be a good entry point c.220p

Norcros (LON:NXR) - down a lot, but pension schemes worry me a lot, as facing a double whammy of lower asset values, and higher liabilities (due to bond yields being so low - although as mentioned above, maybe that could change?)

OnTheBeach (OTB) & Hostelworld (LON:HSW) - travel platforms have much better cost structures, as little fixed costs. Their main costs are marketing & staff, both of which can be quickly reduced if needed. Hence both companies should survive the crisis, and share prices might then recover once business returns to normal. Hence could be an attractive entry point now, since they've roughly halved in price.

Loopup (LON:LOOP) - should be benefiting from businesses doing more remote meetings. But I am worried about debt, and management incompetence. Hence probably won't buy any.

Greggs (LON:GRG) - lovely business, now coming down to a more reasonable valuation. Obviously likely to suffer badly in the short term.

De La Rue (LON:DLAR) - I'm tempted, as recent turnaround performance looks impressive. But debt & poor balance sheet have made me too scared to buy any.

PPHE - looks very cheap now. Balance sheet looks good, if you substitute in open market value of freeholds. I need to do more work on the terms of bank facilities though - risk of covenant breach possibly? I tried to buy some yesterday at 960p, but couldn't get any.

Up Global Sourcing Holdings (LON:UPGS) - I was impressed with my recent audio interview with the company. It sounds like UPGS should be able to fix its China supply chain. However, I think they could now be facing a demand issue. With retail footfall likely to be much lower in the coming months, that could trigger a profit warning. Let's hope they've located a supplier of hand sanitiser & toilet rolls. Forget Bitcoin, in a few weeks we could all be using hand sanitiser & loo rolls as a makeshift currency!

NB. Please remember that I have a much higher risk tolerance than most investors, so these shares will not suit more conservative investors. Also, I'm not a tipster, but am a professional investor sharing my journey with you here. Some of my share ideas go up, and some of them go down. I buy with a time horizon of 2 years+, and am not trying to perfectly time the market. Always do your own research please!

The problem is that, we know we're facing an imminent health & economic tsunami. Therefore, I completely understand why some investors will want to sit on the sidelines, in cash, and may feel it's too early to be buying. They could well turn out to be correct, we don't know yet. Anyone buying now is taking a longer-term view. Once the dust has settled, and we know how things are panning out, then share prices would in all likelihood be more expensive. You have to pay up for certainty. That said, we should obviously be expecting profit warnings to come thick & fast from many sectors as this grim-looking year progresses. Also expect emergency fundraisings, if the worst case scenario does pan out, for companies with stretched balance sheets & too much debt.

Above all, balance sheet strength is paramount. Well-financed companies should sail through this crisis. Companies with stretched balance sheets at the start, could go under, or at least be at the mercy of the bank manager. Why would anyone want to hold any share where the difference between the share price now, and zero, is at the whim of the bank manager being prepared to give a waiver to breached covenants, and to extend the overdraft to enable the company to trade through the crisis? There's huge risk there.

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Tribal (LON:TRB)

Share price: 64p (down 5% today, at 09:14)
No. shares: 204.2m
Market cap: £130.7m

Resolution of dispute

Tribal (AIM: TRB), a leading provider of software and services to the international education management market...

I initially assumed this was going to be good news, but the share price being down 5% suggests that it's not.

There was an announcement on 20 Jan 2020, which I hadn't spotted at the time, saying;

Platform dispute

The Group has now reached a non-binding, in principle agreement to settle the dispute with a platform provider for past royalties and a new 10 year agreement for royalties due on future sales and renewals. The Group expects to pay in the order of £9m to settle all historic liabilities, including related legal fees, and will fully provide for these costs in 2019.

[source: RNS dated 20 Jan 2020]

Today's update just confirms the previous announcement, so really shouldn't move the share price at all. Today it says;

...the Group announces that it has signed a settlement agreement for payment of the agreed amount of £8.9m for full and final settlement of past royalty disagreements, which will be paid from our existing cash resources. We have also entered into a new 10 year VAR agreement, with effect from 1 January 2020. This provides a platform from which we can develop new modules and enhanced functionality.

I do wish companies wouldn't use abbreviations that they are familiar with, but some readers of announcements may not be. I've just googled it, and VAR means value added re-seller. There should always be a footnote to define every abbreviation used, in every announcement.

As you can see below, the share price reacted positively to the original announcement in Jan 2020 saying that this legal dispute has been settled;

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Note that I'm using the new Stockopedia site now. One of the spangly new features is that the historic movement in StockRank is shown below the share price chart. As you can see here, Tribal has been meandering around in the middle, but showing a gradual improvement in StockRank since Sept 2019.

I'm guessing that Tribal's share price has held up relatively well in recent market carnage, because it has recurring revenues, with educational establishments. Hence not likely to be too badly affected by the current crisis.

I've looked back through Tribal's previous announcements, to check what they said in the past;

24 Jan 2019 - dispute with platform provider, potential material claim, will vigorously defend it

19 Mar 2019 - legal claim of £15-30m

Therefore, I suppose a settlement of £8.9m isn't too bad.

I've commented before on Tribal's balance sheet being thin (negative NTAV), so paying out this £8.9m, on top of recent outflows for an acquisition, sounds like the balance sheet would need careful checking when the company next reports. It reassured on 28 Jan 2020, saying this;

The Group has a strong balance sheet with net cash at 31 December 2019 ahead of the Board's expectations at £16.5m (2018: £20.0m) following a positive collection performance in the final quarter. During the period Tribal invested £6m in the acquisition of Crimson Consultants and a further £6m in the development of the Tribal Edge platform.

That's probably a seasonal high for cash. Software companies are fortunate, in usually receiving cash up-front from customers, hence they can operate normally, even with weak balance sheets.

My opinion - it doesn't interest me. Too accident-prone. Also, how did it amass these large arrears from the provider of its software platform? This also makes me wonder how much value Tribal adds, given that it's using third party software as its base?

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In case you missed it - Jack has recently written an excellent article here about one of my favourite shares, Best Of The Best (LON:BOTB) - well worth a read. Note that being 100% online now, it is not in any way affected by lower airport footfall (it's gradually closed all airport sites).

People self-isolating may be more inclined to have a punt on winning a supercar, I reckon. Therefore I suspect the current crisis could benefit BOTB.

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I'm leaving it there for today. Thanks for all your interesting comments, which are really useful - at times like this in particular, I'm interested in hearing the perspectives of other investors. There are not any results statements or trading updates of interest today.

Best wishes, Paul.