Small Cap Value Report (Thu 9 July 2020) - Mini Budget, IGP, CRW, NRR, DISH

Good morning, it's Paul here with the SCVR for Thursday.

Yesterday was so busy that I ran out of juice, so apologies for not updating the section about the Budget. In the end I decided to have an early night, and write up something first thing this morning.

Estimated timing - TBC, but I started at 6am today, so there should be plenty up by official finish time of 1pm. Today's report is now finished.

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Here are my notes from watching the Chancellor's speech. NB this is not comprehensive, I just noted down what seemed to me the main points, together with my comments below in square brackets. I urge you to look at the many sources online (newspapers, etc) which I am sure will have more complete & accurate summaries, so my stuff below should be read in conjunction with other sources. I've tried to focus on how the mini budget might affect shares in particular.

Mini Budget Summary

[Paul: Rishi Sunak sounds so much like a young Tony Blair!]

Recaps on what the Govt has done to date. Mainly political preamble, so I won't dwell on this.

GDP fell by 25%, and significant unemployment is predicted

Initial emergency response was phase 1. This is now phase 2, focused on jobs. Phase 3 will be in the autumn, focused on repairing the economy

Public finances - will be put on a sustainable basis in the medium term [Paul: i.e. not sustainable at current extreme level of deficit]

Plan for jobs - furlough was a lifeline, but cannot go on forever, that would be irresponsible [Paul: it's also a perverse incentive for people to be economically idle, thus is now harming recovery]. Furlough will be flexibly wound-down by end Oct. Skills fade if people languish at home [Paul: very good point, I lost my confidence completely when unemployed for 5 months in 1993]

Jobs Retention Bonus - new policy to reward employers that take staff back from furlough. £1,000 bonus paid to employers for each employee. Conditions - must be employed until end Jan 2021 minimum, paid at least £520 per month from Nov '20 tp Jan '21. Bonus is available for all furloughed employees, so 9m people = maximum cost of £9bn (£1k per person). [Paul: good idea, could prevent many redundancies. But, is this just deferring redundancies until Feb 2021? Should be a significant boost for companies that have a lot of furloughed staff. Best staff likely to be taken back, and the rest made redundant probably. Then second wave of redundancies at end Jan 2021?]

Young people - 2.5x more likely to work in sectors that closed [e.g. retail, hospitality]. 700k young people will join workforce this year after leaving education, hence new scheme to help young people;

Kickstart Scheme - as mentioned in yesterday's report, the press was briefed about this in advance, so no surprises here. Aimed at 16-24 year olds claiming Universal Credit. Govt will pay wages for new jobs, for first 6 months. Min 25 hours per week, at min wage or above. Govt will pay c.£6.5k per person on this scheme, plus admin fee. Employers can apply to join scheme in August, and it will start "in the autumn". Initial £2bn allocated,

[Paul: but with no cap on numbers, the cost of this could be enormous]. [This seems a good idea, but as mentioned yesterday, surely this scheme provides an incentive for employers to make low paid staff redundant, then re-employ them on this scheme? Again, it could end up simply deferring permanent unemployment until the spring of 2021. Still, I suppose the Govt's thinking is that the economy should have recovered by then, and no longer need the support of schemes like this. I think it makes a lot more sense for the Govt to pay people to work, temporarily, than paying them to stay at home. This will be a major help for many businesses, so I can see this scheme ending up with potentially millions of people on it]. [Companies likely to benefit from this - those that employ lots of low paid workers - e.g. hospitality sector. This scheme will probably also help phoenix companies, e.g. pre-pack admins, that spring up from the ashes of companies that go bust, since those would presumably count as new jobs under this scheme? Not sure how that would interact with the TUPE laws on employment? Probably needs an employment expert to analyse & report on the fine print on exactly how this scheme will would in practice].

Training - £1k bonus for employers. Triple number of places. £100m more for training courses. More career advisers. £2k for new apprenticeships Doubling work coaches at Job Centres, expanding other schemes, £1bn extra for DWP.

Infrastructure & Green Jobs - key themes. £2bn more for home energy improvement grants. 2/3 of cost up to £5k vouchers (for energy efficiency work in homes), up to £10k funding 100% for poor households. To make 650k houses more efficient. Extra money for other buildings. £3bn total.

[Paul: could be good for double glazing companies, etc? Like all free money schemes, likely to be plundered by fraudsters]

Stamp Duty Holiday - again, media already briefed on this. Rationale - housebuilding employs 0.75m people. Property transactions fell by half in May. How prices now falling. Stamp Duty threshold lifted immediately from £125k to £500k. Temporary, to March 2021. 9/10 house buyers won't pay any Stamp Duty at all.

[Paul: very good idea, as people moving house stimulates the economy overall as they also spend on adviser/agent fees, and home improvements. So cost could even be partially recouped with increased VAT & indirect payroll taxes. Long overdue. George Osborne's foolish increases in Stamp Duty killed off the high end property market, hence was counter-productive. Why have this tax at all? Plundering people for tax when they are moving house, seems wrong to me. Re shares: this is an obvious boost to estate agents, housebuilders, and anything property or DIY related. ]

VAT cut on hospitality & tourism - focus on this sector, as hard hit, employs over 2m people, and 80% of businesses closed in April. Need to protect jobs. 1.4m furloughed in this sector. Need to get it "bustling again". [Paul: he might regret this, if it triggers a second wave of covid]

VAT cut from 20% to 5% for next 6 months (from 15 July 2020 until 12 Jan 2021) , on food, accommodation & attractions (e,g, cinemas, zoos, hotels, theme parks). NB. not drinks, so doesn't help pubs much. Est £4bn cost.

[Paul: seems a good idea to me, helping restaurants, hotels, etc, resume trading with a boost to profit margins from keeping 15% of the usual 20% VAT. Or could be used to lower prices to attract more business? Helps pubs that focus on food, but not wet-led pubs]

Eat out to help out - Govt vouchers [Paul: for August 2020, but could be extended if successful, maybe?] to give 50% off (Mon-Weds) capped at £10 per person (incl children) to eat out. Simple registration website will open n next week. Businesses can claim back voucher funding from Govt each week, paid in 5 days.

[Paul: top marks for creative thinking, but seems a bit of a gimmick to me. Again, probably another pot of money for fraudsters? If this scheme works, I wonder if it could be rolled out to other sectors? Will be interesting to see how it works, as something new]

Statement from the Shadow Chancellor, Annelliese Dodds - very poor indeed. She read from a pre-prepared script, which attacked the Govt on its poor record on public health re covid (clearly not the subject under discussion, although she made some fair points, had that been the topic, which it wasn't). To increasing laughter from the Tory side, she kept chastising the Chancellor for the need for action on jobs - despite that having been precisely what he had just focused on! Clearly inexperienced & nervous. Lacked gravitas. Delivery poor - spoke too fast & too high-pitched (women in politics & all public speaking roles need to consider having vocal training to lower their register and speak with authority, e.g. no coincidence that Thatcher & Theresa May reached the top, as they grasped this point. Same with newsreaders - e.g. Fiona Bruce's silky smooth voice is a pleasure to listen to). All in all, a pointless, nit-picking response. She presents no threat whatsoever to the highly competent Rishi Sunak. [no attempt at political neutrality here, I am very obviously biased! If the BBC can't do neutrality any more, then why should I?!]

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Intercede (LON:IGP)

74.5p - mkt cap £38m

(I'm long)

No announcement today from this cyber-security software company. I'm mentioning it because there was a broker Zoom presentation yesterday. I was invited because I've taken a close interest in the company for several years, and meet management every 6 months.

It was a great success, with the focus being on explaining what the company does (which is quite complex & techy), with simple presentation slides. I learned a lot about it, including the various technical standards for encryption, the new MyID mid-market product (much larger addressable market than what IGP has done in the past at the top end (called PKI), for military, Govts, banks, aerospace etc)

No new info was given - they just reiterated the info in previous RNS, saying that sales pipeline is up 40% in both value & number.

Anyway, this Zoom was such a success, that I've just emailed the CEO to suggest he repeats it for a wider audience of investors, e.g. through a platform like InvestorMeetCompany. If people request the company on IMC, then it gives them more leverage to invite the company to do a presentation. Likewise with other companies you like & want to see doing results presentations online.

I'm absolutely loving all these Zooms online, with various companies. I've got 2 more this afternoon. It makes working so much more efficient, instead of having to traipse into London, taking up the whole day for sometimes just 1 meeting. Although I do miss the social aspect of meeting mgt, and having a lengthy de-brief in the Lord Aberconway with anyone from the meeting who's up for it.

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Craneware (LON:CRW)

1662p - mkt cap £446m

Clarification - I looked at this software company in yesterday's report. I was a bit confused by the wording of the update. It seemed perplexing to me that 85% of revenues are recurring, yet Q4 sales seemed to have fallen almost to zero.

A company adviser has kindly emailed me this morning, with an explanation. I don't have time to revisit it today, so asked if it was OK for me to publish the adviser's email here, which they agreed. Here goes, see if you can make sense of this;

Morning Paul, hope you are keeping well.

I just had a read through of the CRW write up from yesterday and just wanted to remind you that for them ‘Sales’ is not the same as revenue (because of their Annuity SaaS model. You could think of Sales as interchangeable with Bookings perhaps).

Total sales were overall up in the year, but not by the 30% they had been tracking up at, only $65m versus $63.1m - so only 3% up in the end.

Several $$m of professional service Q4 Sales, which would then have been recognised as revenue in Q4 couldn’t take place, as the hospitals went into lock down and were not letting anyone on site, so pushed out to the right.

If that had been recognisable, they would have been in line to deliver the roughly $76m of forecast revenue for the year, and Total Sales would have been higher, due to the PS sales, but also due to other Sales that have now all been pushed to the right.

85% of Revenues are recurring, and while Sales dropped in that quarter, there was still revenue to be recognised, from their underlying recurring revenue model (they typically sign 4-5 year contracts).

Hope that helps!

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Newriver Reit (LON:NRR)

63.7p (unchanged)- mkt cap £195m

Preamble - we've discussed this property REIT here a lot over the years. I'm currently neutral on this share (having previously bought it for recovery hopes) because I'm not sure how much we need to reduce its published NAV by. Retail & pub freeholds are in a downward spiral in valuation terms, although NRR points out that its assets have strong alternative use value a key positive. It also has no short term funding issues.

So there's a good upside case here, if retailing/pubs get back to normal - which they probably would, if an effective treatment/vaccine were to be developed. Hence big upside, if an effective vaccine is found - I imagine NRR could maybe rise 50%+ in that scenario.

However, there are still underlying structural problems with retail & pubs - rents need to come down a lot, and lease structures need to become more flexible & less onerous. So its freehold values are likely to decline more, even if we beat covid. Nobody knows for sure, as always it's educated guesswork. But the way to value this type of share, is to run through various scenarios, and then work out what is most probable, and go from there.

Operational update - this is what the company says today (my summary);

Retail portfolio - 81% of occupiers by gross income are now open - sounds positive to me. Should improve further as phased re-openings continue.

I like the clarity provided with this table below. Remember this is for the 24 June quarter day, i.e. this is rents due for July, Aug & Sept occupancy. It's important to bear that in mind, as I've seen at least one property company refer to Q2 rents as meaning the March rent quarter day, rather than the rents due on 24 June. It's important to check the detail.

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There's a really useful broker update note available on Research Tree today, which points out that NRR's rent collection for June qtr day are much better than LandSec (36% collection) and particularly Hammerson (at only 16%). Although both those are likely to have improved in recent days.

NRR has benefited from having a lot of value-focused retailer tenants, which continued trading (e.g. convenience stores & supermarkets).

March quarter rents collected are still only 57%, but that's up from the 52% previously reported. This is the problematic quarter, as many tenants would have been shut completely. Hence it's understandable that many are probably asking for this Apr, May, June quarter's rent should be written off - not an unreasonable position, given that many couldn't trade in most of that period, by Govt edict. Maybe the Govt should be paying rents for the lockdown period? After all, they've already paid wages, and written off business rates, so why not rents too?

Key point - landlords cannot evict tenants at the moment. But when the moratorium on forfeiture of commercial leases ends on 30 Sept 2020, then landlords will probably be able to crack the whip much harder on rent arrears. Therefore expect big cash outflows from retail/hospitality companies in October onwards, as the solvent ones are forced by landlords to cough up their rent arrears. Good for landlords, bad for tenants.

Footfall - down 41% on last year, for last week (week commencing 29 June 2020) - not too bad in my view, as it's still early days of the re-opening.

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Pubs estate (Hawthorn Leisure) - over 90% have now re-opened, which strikes me as positive (but I don't know what the market was expecting). Scotland & Wales to follow.

Trading in our pubs has been encouraging so far, with our operator managed pubs delivering like-for-like sales growth of +4% over the reopening weekend, compared to the equivalent weekend last year. This performance reflects our focus on wet-led community pubs, and the fact that over 70% of our sites have outside space.

That sounds quite encouraging to me, but haven't seen any other data on re-opening from competitors, so let's compare them when figures are available.

My opinion - I do like this company, and can see the positives (as set out at the top of this section).

However, I'm not sure what adjustments I need to make to its balance sheet, and there is a risk that it could sail close to the wind next year re bank covenants, if a really deep cut to NAV is required.

Hence I can only conclude - don't know. I'm on the fence here. Probably leaning slightly towards a positive view, on the basis that it's fine for funding, hence it could pay to sit & wait for a recovery in share price once vaccine/treatment comes along.

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Bigdish (LON:DISH)

(I'm long) - Update re Govt initiatives for hospitality sector. Says;

... potentially interesting scenario for the Company where there is a unique window of opportunity to onboard restaurants to BigDish in order to market the government funded discounted restaurant tables. If successful, this would provide the opportunity for BigDish to develop the relationship further with any newly acquired restaurants beyond the month of August to use its flexible reservation platform and to introduce BIgDish-to-GO....

Would be good if they can adapt the App to include Govt scheme, and roll it out to restaurants fast enough to take advantage.

Highly speculative share, but it's got a lot of opportunity in current circumstances, hence why I like it.

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That's it.

Paul.