Paul’s weekly SCVR summary - episode 23 (week-ended 2 Dec 2022)

Audio is here, and on podcasts.

Apologies for being late this week (Monday, instead of weekend) - it felt like a chore, and I needed a rest over the weekend.

Monday 28 Nov

Superdry (LON:SDRY) - aired my worries here over bank refinancing. S.Times article suggested existing lenders don’t want to renew, so they are looking at alternative lenders. Potentially an existential crisis, as SDRY relies on these facilities for peak seasonal stock financing. Close to striking a deal apparently. Really worrying - fallout from collapse of Joules, lenders might not want sector exposure. Same conversations probably at trade credit insurers, who often have more exposure than the main banks. I’m worried. Could turn out to be fine, might seal a deal, but cutting it fine, for end Jan 2023 expiry of bank facilities. In normal circumstances, SDRY would have no trouble renewing, but banks worried about macro picture. SDRY looks too risky at the moment. Also revelations in SDRY’s Annual Reports over several years, over serious accounting failures, sloppy controls. This could be why the banks don’t want to renew facilities. So elevated risk, and every now and then you get hit with a nasty loss. If SDRY does lose bank facilities, it might have to do a desperate, last minute discounted placing, or even end up in administration (as happened with Joules). Trade creditors, and equity holders get wiped out. It’s possible SDRY could be a wipeout for equity. Maybe 20-30% risk, at a guess? I’ll avoid SDRY until it’s refinanced.

ASOS (LON:ASC) - also a question mark over survival? Starting to look wobbly, lost another CFO. I’m wondering could it end up going bust? Also has accounting problems - used accounting sleight of hand to avoid making a big stock provision, using a technicality in last accounts. Looking increasingly precarious. These struggling mid-market brands are best avoided. Retailers doing well are value-focused.

Nick Searle’s podcast series, A Different Perspective (excellent) - a recent guest said his no.1 tip to investors is to read the Annual Report - full of “inside information” - key disclosures that investors need to know, and are not in the preliminary results put out on RNS. But hardly anyone actually reads annual reports! So my key theme this week is that we all need to download & read the annual reports. You can skim through a lot of it.

Cerillion (LON:CER) - I reviewed accounts. Doing fantastically well. Strong organic growth, lovely profits & cashflows. CER shares are not cheap, but it looks an exceptional company. An institution is trimming their position in the market (Canaccord, from memory?) - so maybe price is up with events? But newsflow from CER is still fantastic, and it’s in a real sweet spot - telecos are switching to cloud products, which CER specialises in. Winning bigger contracts, with very sticky recurring revenues, which act as reference sites for the next big contract. Global, not just UK. Seems to be really on a roll. My recent interview with CEO got to the bottom of what’s driving performance. No evidence things should slow down any time soon.

Graham - Inspiration Healthcare (LON:IHC) - severe profit warning. Induction Healthcare (LON:INHC) - I also started looking at this today, dropped 20% on an update. I might take a closer look. But cash pile growing from up-front customer payments. Does remote meetings for Doctors. Not sure how it competes with Zoom or Teams. Tiny market cap, £25m.

Pollen Street (LON:POLN) - another fund manager share that Graham looked at. Whole sector seems cheap, and maybe the right time in the cycle to be buying them, when they’re bombed out? Collect in nice divis & watch them double or more in the next cycle, possibly? Brokers & fund managers look a good value sector right now.

Tuesday 29 Nov

I had an off day. Graham stepped up, and covered for me, thanks Graham, a superb report. Looked at -

Safestyle UK (LON:SFE) - profit warning

Altitude (LON:ALT) - interim results - something potentially interesting there?

Record (LON:REC) - interim results

Supreme (LON:SUP) - vaping, etc.

GB (LON:GBG) - fallen a lot, paying us a fleeting visit in the small caps space, disappointing performance.

VP (LON:VP.)

Wednesday 30 Nov

IG Design (LON:IGR) - interesting potential turnaround. 50% is Xmas related. Low margin business. Multiple cost increases, and not able to pass them on fully to customers - a theme many companies are reporting. H1 results look fantastic. BUT broker update shows only just above breakeven for the full year. H1 results were good mainly because of pulled forward demand from customers, who didn’t want a repeat of last year’s supply chain problems, so ordered earlier this year. Obviously Xmas products become worthless on 26 December each year! Big problem with IGR’s business model. Despite this, the market has taken the shares up strongly. We need to be careful - as it also needs a full refinancing in H2. Might it need to raise equity? Heavily reliant on big seasonal bank lending, so elevated risk. Big H1 profits look a red herring, as most will be given back in H2 according to guidance.

Strix (LON:KETL) - I don’t like this share. Dropped a third on a profit warning. We had interesting debate in the reader comments. Acquired £38m Billi (£10m from a placing, balance from term loan). Taking on too much debt. Paying divis out of increased debt, if you check the cashflow statement, so big divis not necessarily sustainable. The China connection makes me nervous. Profit margins are too high, apparently due to valuable IP, but the Chinese don’t respect IP. I’ve got concerns, and wouldn’t touch it personally. It’s lowered profit guidance again. Doesn’t pay corporation tax, apparently because it’s Isle of Man based. Surely everyone would domicile themselves in the Isle of Man if corporation tax is just optional? I’m not a tax expert, but it looks peculiar. I don’t like the weak balance sheet, nor cashflow statement. If in doubt, I stay away, so a thumbs down from me for Strix, sorry.

Thursday 1 Dec

Hotel Chocolat (LON:HOTC) - FY 6/2022 results out - late. Shares have de-rated heavily as international operations have almost failed. But Japenese JV is still trading, might transition to licensing model. Scaled back US operations. No surprises in the results. Outlook seemed a mild profit warning. Balance sheet is OK, although has high inventories - risk of a write-down? I struggle to see value in HOTC shares. Are people anchoring to the old, excessive valuation? The story is less exciting now, just a UK story now, not international. Old valuation was nuts.

I mystery shopped HOTC branch in Islington. Put a video on Youtube, wasn’t intended to be silly. The hot chocolate was ordinary - tasted like a mug of Cadburys hot chocolate powder. But charged me £4.50 for it. Whole thing was really disappointing, and expensive for what it is. Fancy branding & packaging, but expensive, and ordinary products. Confirmed my view that there’s nothing special here, hence wouldn’t touch the shares.

Creightons (LON:CRL) - H1 results, profit warning, sorry for friends who hold this. Looking so good a year ago, but has been smashed with high cost inflation, difficulty passing it on, so profits disappeared in H1. Expecting a better H2. Balance sheet looks just about OK. On balance, I think it should probably recover, at least partially. We never give buy/sell advice, that’s for you to decide, but if I held, I’d probably tuck them away & forget about them. Longer term it should recover, maybe not to previous highs. Insolvency/dilution risks seem quite low, but we don’t know, just educated guesswork as always.

Tribal (LON:TRB) - what a disaster. Awful announcement, dropped 30%, on a big contract that has gone disastrously wrong, making a lifetime £12m loss. How could this happen? Wipes out most of this year’s profit. For me, this is now uninvestable, and I don’t rate the company or management. However, software companies which dominate a niche like this, can be attractive to a bidder. Balance sheet weak, but software companies don’t need much capital. Could be a nice speculation for a potential takeover bid.

Graham - looked at Peel Hunt (LON:PEEL) (poor H1 results) - but looks cheap, and end markets should recover eventually. Also Mortgage Advice Bureau (Holdings) (LON:MAB1) - another profit warning, which seems to have had a knock-on impact on Belvoir (LON:BLV)

Friday 2 Dec

Hardly any news, and I was feeling groggy from my covid/flu jabs the previous day. So I worked from bed on this day!

Premier Miton (LON:PMI)   - not my sector, but accounts are very simple to understand. Results seem robust in the circumstances. Superb yield of almost 10%. Adequate balance sheet. I like it, good value share. Probably a good point in the cycle to be buying cheap shares in this sector. Tuck away and forget for a couple of years?

Macro news & comments

Continuing strong recovery in the major shares indices. Even filtering through to some small caps. Evidence of short-covering. Is it another bear market rally, or a turnaround? I don’t know, can be argued either way.

BUT we’re still getting a lot of profit warnings, and really clobbering share prices. So my main worry is that if we all get bullish again, we’re seeing many companies disappointing on earnings, wobbly outlook comments for 2023, lots of macro uncertainty, UK & European economies going into recession, energy crisis far from solved, inflation looks like it may have peaked, crazy gyrations in forex markets (US:UK almost a 20% rebound from recent spike down). I don’t know what the hell’s going on, and very difficult to focus on what the bigger picture actually is. Hence why I focus mainly on the company fundamentals.

Difficult for me to be bullish on lots of sectors.

Lots of profit warnings this week, e.g. Hotel Chocolate, Tribal, Pelatro, Triad, Creightons, Mortgage Advice Bureau, and others.

Forecasts for 2023 still look too high for many companies.

Therefore I don’t want to get too excited by this current market rally, and get sucked into shares that have risen a lot. Unless they’ve put out strong trading updates & outlook statements, sticky revenues, etc. In some companies, a recovery is justified, but in others, we really don’t know how they are trading at all - e.g. Boohoo (LON:BOO) has bounced a lot recently, but as I mentioned at Mello, we don’t know how it’s trading. They always say if you haven’t heard anything, then it must be trading in line, but I’ve found that is often not the case! Companies can often be slow to reveal bad news, maybe they hoped to recoup a shortfall, I don’t know?

Over-stocking of retailers, a continuing theme - lots are saying they have excess inventories - deliberate over-stocking due to supply chain problems, which has now combined with demand tailing off, as mentioned last week.

China disruption - civil unrest over zero covid policy. Govt on wrong course, but nothing the people can do, as it’s a totalitarian dictatorship. Several companies have mentioned disruption in China (e.g. Strix), but is that just an excuse for reduced demand? Keep an eye on China supply chain issues, not out of the woods.

Overall - it feels like we may be over the worst for market sentiment, buyers coming back in for smaller caps. But, lots of poor results & weak outlook statements, triggering sharp sell-offs. So do I want to chase shares up on momentum, and then get clobbered by a profit warning? In a word, no! So I’m still concerned generally. For smaller caps, I think there’s still more pain yet to come in many sectors, as recession takes hold, but we’ll see, time will tell!