Small Cap Value Report (Mon 18 July 2022) - FEVR, TSTL, NTBR, MEX, IQE, CRDL, CRC, RNO

Good morning! It's Paul & Graham here. Sorry about Friday's report not getting off the ground. I took the Govt's heatwave advice, to do as little as possible, rather too literally.

Today's report is now finished. I'm off to mystery shop the Bournemouth branch of Tortilla Mexican Grill (LON:MEX) - will report back.

I have been busy with podcasts though - do please share these on social media, as it might help drum up some new subscribers - although that's probably optimistic, given how gloomy everyone seems at the moment. These conditions won't last forever though, and bear markets lay the foundations for the next bull market.

My weekend podcast, episode 3 - a roundup of last week’s key points from the SCVR (22 mins), with standout shares for the week being, MJ GLEESON (LON:GLE) and Sosandar (LON:SOS) .  Lots more covered briefly too. To listen on a mobile device, just click the 3  dots, which brings up a menu with "download" option, over wifi. So dead easy.

Vox Markets Video - Every now and then, renowned investor & analyst Paul Hill likes to chat to me about small caps, in a longer format. Here's our latest discussion  (recorded last Thurs, 15 July 2022), including lots of share ideas that we think look good value right now. Plus it might make you feel a bit better, to hear how badly the two Pauls are doing this year!

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Agenda -

Paul's Section:

Fevertree Drinks (LON:FEVR) - not quite in our £700m and below bracket yet, but it seems to be putting in a good attempt at reaching it! A profit warning on Friday was heavily punished. Although the factors behind it (logistics, supply chain problems & costs) look fixable. Demand remain strong. This could be an opportunity, although the price is still expensive, and earnings forecasts have been relentlessly falling for over a year now.  So for me, it's not cheap enough yet.  

Tristel (LON:TSTL) - an in line trading update for FY 6/2022. Small special divi announced. Soundly financed. Valuation looks very high, because I think it includes a big premium for expectations for FDA approval, and entry into the large US healthcare market. Personally I'm not interested in paying up-front for this potential growth.

Tortilla Mexican Grill (LON:MEX) - an interesting trading update from this expanding chain of burrito casual restaurants/takeaways. I like the potential for this roll-out, but haven't yet got enough information to go on. Remember that Govt support schemes have been a big boost to profits. Many sector cost headwinds too. So I'm on the fence at the moment, but think it could have good longer term potential maybe. 

Renold (LON:RNO) - FY 3/2022 results from last week. Look very good to me, it's doubled profits, and seems to have shrugged off supply chain problems that have harmed many other companies. Bank debt is now modest, and the pension deficit is large, but manageable. Overall, a thumbs up from me.

Graham's Section:

Northern Bear (LON:NTBR) (£10m) - this building services group reports an excellent result for FY March 2022, as expected. However, it also offers caution for the current year, as it faces the twin challenges of supply chain issues and price inflation of raw materials. I remain intrigued by the prospects of this “Super Stock” with a perfect StockRank. Most value shares are boring, and can drift for years in the absence of a catalyst. The NTBR Chairman, however, has overseen the company’s (temporary?) abolition of dividends, as it considers its acquisition strategy and other ways it might drive shareholder value.

Iqe (LON:IQE) (£316m) (-2%) [no section below] - While there is no editorial line at the SCVR, it’s fair to say that we have produced plenty of sceptical commentary when it comes to IQE. I’ve argued that it’s a capital-intensive manufacturer, and does not deserve to be valued as more than that.

Today, the company announces it is filing a lawsuit in California to protect its IP. The other party is an Israeli company that trades on the NASDAQ: Tower Semiconductor (TSEM). TSEM is roughly ten times the size of IQE, and is in the process of being bought out by Intel.

IQE shares are lower on the news, for obvious reasons: if IQE loses this case, it will be clear that Intel/TSEM controls important IP (to be used for 5G and other applications) that IQE previously assumed that it owned. That would likely be a heavy blow for the bull case at IQE.

Cordel (LON:CRDL) (£11m) (+2%) [no section below] - this previously traded under the name “Maestrano” (ticker: MNO). It’s a startup providing data systems (images/LiDAR) for railways. The idea is “to automate inspections and surveys of assets across entire networks in near real-time”.

This full-year update shows the company’s revenues rising by 35% to £2.3m. Costs also increase, so that the pre-tax loss is about the same as last year (loss of £1.4m, versus a loss £1.2m in the prior year). The news around new customers and contract wins is positive, however the current combined balance of cash and receivables (as of end-June) is just shy of £1m, i.e. not enough to cover a year of losses at this rate. In common with many “Sucker Stocks” (per Stockopedia), I assume that shareholders will experience further dilution here.

Circle Property (LON:CRC) (£70m) (+0.6%) [no section below] - this is an investor in UK offices. In February 2022, due to “limited liquidity in its shares” and a “structural discount to NAV”, it made the decision to gradually sell the rest of its portfolio.

The March 2022 NAV per share is £2.81 (net assets £79.6m) and the company has eliminated its borrowings (net cash £5.8m). The CRC share price has been very strong over the past year but might still offer shareholders decent prospects from the current level, depending on the success of the disposal programme.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

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Paul's Section:

Fevertree Drinks (LON:FEVR)

867p (down 28% last Friday)
Market cap £1.01bn

FY 22 Interim Trading Update

At the rate things are going, Fever-Tree looks as if it’s heading towards being a small cap again. Is this an opportunity for a second bite of the cake, or is Stockopedia’s assessment of Falling Star more accurate?

As you can see below, the chart has collapsed in the last 6 months down to the same level as when the pandemic originally hit. Are things really that bad again? Note the big & rapid rebound which brave investors enjoyed after that previous low -

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Here’s the latest update for H1 -

Fever-Tree, the world's leading supplier of premium carbonated mixers, announces a trading update for the first six months of FY22 ending 30th June 2022, ahead of reporting its Interim Results on 13th September 2022.

Revenue guidance maintained at £355-365m for FY 12/2022.

H1 revenue growth was 14%, with Europe being the best growth region at +27%.

UK & US growth don’t look great, at +6% and +11%.

Gross margin guidance is lower, at 33-35%.

Cost headwinds have hurt the business -

The impact of logistics and cost headwinds prevalent across the industry have significantly worsened in recent months, and we now anticipate gross margins of c.37% and an EBITDA margin of c.14% for the first half. We expect this to continue to impact the business during the second half, resulting in a revised EBITDA guidance of between £37.5 million and £45 million for the full year.

Specific problems mentioned, e.g. -

• US production hampered by labour shortages.
• More expensive sea freight, to supply US from UK production.
• Glass availability “severely restricted”, and “double digit” cost increase expected for H2.
• “Continued logistics cost increases & disruption”.
• Expecting that some cost impacts “will be transitory in nature”.

Demand - is described as “strong” 9 times in this update, so I think they’re keen to get that point across. I think logistical and temporary (if they are) cost pressures can be forgiven, because they should be fixable. Demand remaining strong is more important, as it means the company’s performance should recover in time.

Broker forecasts - annoyingly, I can’t get hold of any research notes, so it looks like the company isn’t interested in having private investors buy any shares.

The Stockopedia consensus data has picked up recent reductions in forecast EPS, which has dropped from 39.2p to 33.9p over the weekend. As you can see, this is a further reduction in forecast EPS in a downward trend that has been expectations almost halve from 60p. No wonder the share price has been under pressure for a while -

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Valuation - as you can see below, somebody seems to have knocked over a bottle of Fever-Tree blood orange soda all over the Stock Report - nearly 2 quid for a 500 ml bottle, from Waitrose, which strikes me as too pricey.

It’s difficult to get excited about this valuation, unless you think the company can recover, and beat the current depressed forecasts -

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My opinion - perhaps FEVR is suffering supply disruption because it outsourced everything? That looked clever when everything was functioning well pre-covid, but with supply chains still disrupted, it sounds as if FEVR is struggling to supply customers at a reasonable cost.

That said, strong demand is more important to me than temporary supply problems which can be fixed over time. So providing strong demand remains the case, a recovery in earnings in 2023 or 2024 looks fairly likely, which is a good bull case.

The growth trajectory in revenues looks intact, and it should be able to rebuild margins as supply chain issues are fixed.

On balance, I can see a good case for buying for a recovery in supply chain. Although the valuation doesn’t really appeal against existing forecasts - it’s arguably gone from extremely expensive, to just expensive now.

Stockopedia is yet to be convinced too, with a low StockRank -

Overall then, I can’t see any particular rush to buy this share., until there are clear signs of supply chain easing.

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Tristel (LON:TSTL)

343p (Friday’s close)

Market cap £162m

The share price for Tristel has almost gone back to where it was 3 years ago. Is this just a general market move down, or company-specific? (or a mixture of both). Is it a bargain?

Trading update & special dividend

Tristel plc (AIM: TSTL), the manufacturer of infection prevention products, provides a trading update for the year ended 30 June 2022 and declares a special dividend.

Special dividend - is only 3p, so barely worth mentioning.

Final dividend - flat vs last year, at 3.93p.

As you can see below, TSTL has paid small special divis before (Aug 2015 & Aug 2016). The standard divis have grown nicely, but bottom line is that the dividend yield doesn’t excite, at only about 6.55p (interim + final) yielding 1.9%, or 9.55p yielding 2.9% if we include the special divi (which we probably shouldn’t, as they’re one-offs).

Nice to have, but the divis are not a strong reason to buy this share.

Trading Update -

H2 activity in hospitals increased, so revenues rose as expected.

Non-core activities wound down in H1.

FY 6/2022 results in line with market expectations: £28.4m revenues, and £4.5m adj PBT - doesn’t seem a lot, for a company valued at £162m.

Net cash of £9m at end June 2022.

Balance sheet check - last reported at end Dec 2021, and it’s very good - £18.5m NTAV, and a very healthy working capital position. No worries here at all, Tristel is securely financed, and has no bank debt, and plenty of surplus cash. Hence no risk of dilution or insolvency.

Director commentary - this excerpt struck me as a strong statement -

During the year 15.7 million disinfection events took place with a Tristel medical device disinfectant, which is 31% higher than in the year ended 30 June 2019, before the pandemic struck.

FDA Approval - this is an absolutely key issue for Tristel, because I reckon probably about half (or more) of the current market cap rests on expansion into the US. If that works, then great. If FDA approval is not forthcoming, then the share price would take a very big dive, I reckon.

So investors need to be fully aware of this risk. Is risk:reward favourable? IS the 5-year timeframe to develop the US market exciting enough for investors?

Regulatory approvals are not always as straightforward as people expect - a good recent example being Polarean Imaging (LON:POLX)

Today Tristel says -

"The Company achieved a major milestone event at the end of June by making its De Novo submission to the United States Food and Drug Administration for its Duo ULT product. A decision from the agency is anticipated within the coming year.
Within the next five years we have high hopes that America will be a significant revenue and profit contributor to the Group.

"We are emerging from the disruption caused by Brexit and the pandemic with a highly focussed business, the prospect of entering the largest single healthcare market in the world, with an exciting pipeline of new product innovations, and a strong balance sheet. The outlook for Tristel is positive.

My opinion - Tristel still looks far too expensive to me. I wouldn’t want to pay up-front for US expansion which is not guaranteed. It can take a long time, and cost a lot of money, to persuade US organisations to switch to an unknown foreign supplier.

The way I look at this share is a hybrid. It has a small, niche business, with high gross margins, selling small amounts in lots of countries. That’s a decent, cash generative business. It’s also seeing a recovery, driven by hospitals doing more procedures now that covid has receded somewhat.

What would I value it at? Maybe £50-60m might be reasonable? Therefore the current market cap of £162m contains a premium of c.£100m (the way I look at it), for hopes for US expansion. That seems a lot, but it is a big market.

Obviously you can amend those figures to suit your own assessment of things, you might think the existing business is worth more or less than my estimate.

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Tortilla Mexican Grill (LON:MEX)

125p (up 3% at 08:58)

Market cap £48m

H1 2022 Trading Update

Tortilla Mexican Grill plc ("Tortilla"), the largest and most successful fast-casual Mexican restaurant group in the UK, provides a Trading Update for the half year ended 3 July 2022 ("H1 2022", the "Period").

PR headline -

Further strong sales growth and continued strategic progress

I’m keeping an eye on this share, but have yet to be convinced. As Jack mentioned back in January, MEX was still benefiting considerably from Govt support measures (e.g. reduced VAT & business rates), so it’s not yet clear what the performance of the business will be like when all the support measures have ended, plus of course multiple cost headwinds face the sector too (e.g. wages, utilities, and food/drink inflation).

On the plus side, city centres seem to be returning largely to normal now (as indicated by J D Wetherspoon (LON:JDW) recently, as work from home wanes).

Plus MEX seems to be doing well from the increased interest in delivery. Although looking at the weak update from Deliveroo (LON:ROO) today, I am utterly perplexed as to how they got ROO's IPO away at such an insane valuation, for a business model that is still not making a profit (and seeing slower growth).

Tortilla made an acquisition recently of 8 Chilango sites (in London), which in my experience produce the best burritos, and could teach Tortilla things about speedier service, and product quality. I’ve mystery shopped Tortilla twice, 2 different sites and both times the service was slow/chaotic, with far too many options making the whole line grind to a halt & backed up due to the weakest link in the chain of people. Plus the meat is soggy & stringy. Chilango is far better, which is why I go there almost every day for lunch when in London.

Back to Tortilla.

Its like-for-like (LFL) revenue growth of +19% compared with pre-pandemic is excellent, and well ahead of the industry average. That sort of growth is necessary though, to absorb higher costs. We saw the same thing last week, with J D Wetherspoon (LON:JDW) unable so far to beat pre-pandemic sales, hence moving into a loss. Whereas Loungers (LON:LGRS) is strongly up on pre-pandemic sales, and is profitable. None of this is rocket science!

Rapid growth means MEX now has 84 sites - becoming a decent-sized business, if management can stay in control - not easy when expanding fast. This is a good time to be expanding, with good sites available on favourable terms. Hence why I think the hospitality sector is quite interesting, if we can identify the future winners.

Net cash of £3.1m, so the hope is that expansion can be self-funding.

New sites - quite a rapid roll-out, and I like that MEX is trying different approaches -

During the Period the Group opened a further six sites: Bath, Cheshire Oaks, Bournemouth, Portsmouth, Birmingham New Street, and a delivery kitchen in Maida Vale. SSP Group also opened a Tortilla site in Bristol Airport and the Group commenced a franchise partnership with Compass Group with four sites trading.

All new sites are performing well and in line with expectations since opening.

This is giving me increased confidence that MEX (a) know what they’re doing, (b) seem to be good at site selection (vital, as just one mess up can wipe out the profits from lots of decent sites), and (c ) have a good mass market format that is suitable for a nationwide roll-out.

On the downside, there are loads of competitors, with not a lot to choose between them in terms of product. So this space could get quite crowded, and that might erode MEX’s margins. Also they tend to see big spikes in demand at mealtimes, then little going on in between. Staff turnover tends to be very high in this sector.

Outlook - mentions increasing cost pressures. Also expects an H2 weighting.

Steps taken to mitigate cost increases.

Concluding -

Notwithstanding the macro-economic backdrop, the Board remains highly confident that Tortilla is well positioned in the competitive landscape, underpinned by its reputation for great value, strong delivery proposition, and successful roll-out strategy.

Broker forecasts - many thanks to Liberum, for providing an update today on Research Tree.

They’ve pencilled in £62 revenues for FY 12/2022, and a PBT of £3.9m.

That’s 8.1p EPS, with a slight decrease to 8.0p in 2023. That looks sensible to me, the last thing we want right now is aggressive forecasts, and then a profit warning.

At 125p per share, that’s a PER of just under 16 - which looks about right to me, given the growth potential from the store roll out.

My opinion - I haven’t got enough financial information to make a proper judgement, and the numbers are still skewed by Govt support schemes phasing out. There are so many moving parts at the moment with hospitality - especially big wages cost increases, and other cost headwinds.

Therefore it’s very difficult to anticipate who the winners will be. You have to sell a large number of burritos, to cover the fixed costs. Let alone the small army of staff needed to make them quickly at peak times. I’m not convinced MEX is slick enough operationally, from mystery shopping. Think I’ve talked myself into wandering into Bournemouth to sample another one for lunch. Last time it wasn’t a patch on Chilangos. So I hope the acquisition of Chilangos results in its better quality product lifting up MEX, rather than MEX pulling it down.

Overall, I’d say MEX shares are coming into view of a potential buy for me, but I’d be much happier paying under a quid a share, to skew risk:reward more in my direction.

It looks a fairly good format, and a potentially interesting self-funding roll-out, so it’s on my watch list. There’s no rush to get involved here yet, in my opinion.

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Renold (LON:RNO)

25p

Market cap £53m

Final Results

Renold (AIM: RNO), a leading international supplier of industrial chains and related power transmission products, announces its results for the year ended 31 March 2022.

PR headline -

Significant revenue and earnings rebound…Record order book…Continued net debt reduction

We like Renold here at the SCVR - it’s a decent (albeit slow) turnaround, and I think the business is higher quality than a lot of investors realise - e.g. premium products, with good pricing power, and repeat purchases due to customers’ maintenance schedules.

The main downside issue is the pension deficit. Despite that, Renold managed to get through the pandemic, maintain deficit recovery payments, and reduce debt, without needing to dilute shareholders.

Some key numbers for FY 3/2022 -

Revenues - a decent bounce here, at £195m (up 21%)

Profit before tax is healthy, at £12.4m (double last year’s £6.1m)

Adj EPS 4.3p, almost double last year’s 2.3p

PER very low, at 5.8 - but remember this is due to the pension deficit, and the cash outflows to finance it.

Order intake is very good, up 32% on last year, and the closing order book of £84m is up 57% on a year ago - that should mean decent performance continuing.

Outlook - seems encouraging to me -

Throughout the reported period the business performance has been on an improving trend and our order books have continued to grow in the early part of the new financial year.  
We are cognisant that there remain considerable Covid-19-related challenges in some parts of the world; supply chain issues are still prevalent and inflation is high.

However, we have entered the new financial year with good momentum and a belief in the excellent fundamentals of the Renold business upon which we are building.

Balance sheet - is OK, quite good actually, until you get to the pension line, an £87.1m deficit, although it is down by £15.3m in the last year, helped by bond yields rising.

Working capital is healthy, with a current ratio of 1.7.

Long-term bank debt is £22.8m, and the overall net bank debt position is quite modest, at £13.3m. The going concern note is fine, with no issues.

So overall, Renold’s finances look fine, apart from the fact that it has a large, long-term liability to keep funding the pension scheme - that’s why the PER is so low. It’s a cash drain that could otherwise fund dividends, so it does make the shares worth a good bit less than if there were no pension deficit.

Renold has clearly demonstrated that it is capable of funding the pension deficit from operational cashflows.

Cashflow statement - looks pretty good. Note that a substantial £4.9m was spent on buying its own shares. Bank debt was reduced a lot this year, and last year.

Capex is not excessive, and I seem to remember from a previous call with management that it has modernised its factories, so future capex shouldn’t be as high as in recent years.

A notable absence is dividend payments, which haven’t been paid for years, due to other more pressing requirements for cashflow.

Today’s commentary says there are better uses of the cash to invest & acquire other companies, than paying divis.

Pension scheme - remains a major issue, but everyone knows it’s there.

I’m not happy with the way Renold discloses its all-important actuarial deficit, because it (bizarrely I think) includes agreed future deficit recovery payments as an asset, offsetting most of the actuarial deficit. That reduces the actuarial deficit to only £9.1m. But this figure includes £49.1m of future deficit recovery payments, payable over the next 16 years! I’ve never seen any other companies report their pension schemes like this, and it doesn’t look even remotely realistic to me.

The only thing that matters, is how much cash the pension schemes are consuming. This was £4.8m in FY 3/2022, and £2.1m prior year (when I think the trustees allowed some leeway due to covid).

Hence I’m working on the basis that c.£4m cash is needed each year in future, to put into the pension schemes. That’s a considerable drag on cashflow, but it looks manageable to me.

My hope is that Renold should continue growing, and hence dilute the pension scheme to a smaller problem as time goes on. If it can bolt on some decent acquisitions too, which don’t have pension deficits, then that would also be positive.

My opinion - this looks good to me. It’s a lovely, cash generative business actually, that is now emerging well from years of restructuring, then covid. I think management here are good, with a solid strategy, that is clearly now working.

Bank debt has been paid down to a relatively modest level, and the pension scheme looks comfortably manageable now.

What’s just as impressive, is that whilst everyone else is moaning about supply chains & inflation, Renold seems to have steered its way through with barely a scratch.

Overall then I think this looks very good, and it gets a thumbs up from me.

I’m not currently holding, but I like this share. It’s a good business.

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Graham’s Section:

Northern Bear (LON:NTBR)

Share price: 55.5p (-3.5%)

Market cap: £10m

I covered this building services group for last month’s trading update.

As noted then, Northern Bear was on track to release better adjusted earnings than it had earned both in the previous year and in the “pre-pandemic” year which came before that.

The company guided for adjusted operating profit of £2.5 - £2.6m, and today announces that the result was indeed £2.6m. Cash generated from operations wasn’t too far behind at £2.2m.

In the context of a company with a sub-£12m market cap, you can see why this is considered a “value” share by some!

Many value shares drift for years, unnoticed by investors. Northern Bear, however, has a potential catalyst in the form of an enterprising Toronto-based investor, who owns over 25% of the shares and is non-Executive Chairman of the company since 2021. I’m curious to see what plans he might have, to unlock shareholder value here.

Let’s get back to the results for FY March 2022. I’ll compare them to FY March 2020, the most recent comparable year:

• Revenue £61.1m (FY 2020: £54.4m)
• Adjusted EBITDA £3.6m (FY 2020: £3.2m)
• Adjusted Operating Profit £2.6m (FY 2020: £2.2m)
• Operating Loss £0.7m (FY 2020: operating profit £2.1m)

You can see that there is a wide gap between the adjusted operating profit and the actual operating loss.

Northern Bear is a group of building services companies, with many acquisitions under its belt.

Over the last two years, it has had to write down goodwill associated with these acquisitions, and these charges were material: £2.8m last year (FY 2021), and then £2.6m this year (FY 2022), plus some costs associated with a legal claim.

The impairment charge this year is blamed on supply disruptions and a “challenging industry outlook” at its materials handling business.

Companies tend to argue that goodwill impairment is a “one-off” and “non-cash” expense, but goodwill impairments do represent a loss of value relating to cash that was paid out for an acquisition. And for some companies, they tend to happen on a semi-regular basis!

However, Northern Bear argues that its remaining goodwill might not need to be impaired any time soon:

The large majority of goodwill relates to acquisitions made in the Group's early years between 2006 and 2008. These acquisitions were completed at a time when different accounting standards were in place… resulting in a higher goodwill balance than would be likely under current standards. Notwithstanding this… the remaining carrying value of goodwill is comfortably supported by current trading levels.

Northern Bear’s balance sheet shows £15.4m of remaining intangible assets. In general, because of the difficulty of converting intangibles back into cash, I ignore them completely when it comes to valuing balance sheets. Balance sheet values for Northern Bear are:

• Net assets £21m
• Net tangible assets £5.6m
• Net cash £2.2m (this is a seasonal high - cash movements are lumpy and “can move by up to £1.5m in a matter of days”.)

On the balance sheet I also note very high receivables of £12.1m, larger than the company’s market capitalisation. This looks like an all-time high for receivables.

But I’ve double-checked the 2021 report, and no single customer is responsible for more than 10% of NTBR’s revenue. Sales are said to be “high volume, low value”, and revenues are attributable to “a large number of customers”. So the receivables balance should hopefully be low-risk.

Outlook

This company like many others, is facing supply chain issues and price inflation of construction materials. This outlook section sounds like a mini profit warning:

…we have seen some impact on our results and expect this situation could provide a short-term headwind to operations until industry supply and demand revert to more typical levels.

The company also warns about short-term visibility: despite a strong order book, it remains true that “the timing of Group turnover and profitability is difficult to predict”.

Strategy & Dividend

The new Chairman has been leading a strategy review, and as a consequence the company has not declared a dividend for FY 2022 (previously Northern Bear paid a dividend every year from 2014 to 2019). Instead, the company studied some potential acquisitions “of a more substantial size than those we have made previously”.

A simple conclusion is that the new Chairman wants to turn NTBR into a more ambitious growth vehicle, instead of merely a stable dividend payer.

My view

As I’ve said before, NTBR operates in a highly competitive, accident-prone sector. Things can and do go wrong, and valuations should be cheap.

The good news is that NTBR is cheap, by most quantitative estimates.

Stockopedia computers also find lots of quality, and momentum, and give the shares a perfect StockRank of 99. It is classified as a Super Stock, and these metrics have even improved slightly since the last time I checked them:

A perfect StockRank is no guarantee of success, of course. Companies with excellent StockRanks can still do poorly. But I genuinely do think that NTBR is worth a second look. As I said last time:

So whether as part of a diversified StockRank-based portfolio, or as a speculation on what the new Chairman might achieve, or simply as an investment in a company that is cheap relative to potential earnings, there is a lot to be said for this one.

The only point I would add today is a word of short-term caution: we should not be surprised if NTBR suffers another mishap this year. This might not be goodwill impairment but it could be a contract going wrong (e.g. because the raw materials can’t be sourced) or it could be a customer failing to pay them.

While the receivables balance as a whole might be low risk, NTBR operates on low-ish margins (the adjusted operating margin is 4%), and one customer who doesn’t pay could take out a large percentage of the company’s profits for the year.

Arguably, this is all priced in at current levels. A long-term owner of this company would expect a few mishaps over a ten-year period. What matters is the overall result.