Small Cap Value Report (Fri 30 Dec 2022) - BARK, IES, NEXS

This week's podcast is now up here (recorded on 31 Dec). The mystery share is Rotala (LON:ROL)

Good morning from Paul. 

Welcome to the last SCVR for 2022. This has been a dreadful year for small caps. However, things are now so cheap that I foresee tremendous investment profits in the future, once the economy and earnings start returning to normal. The only question is timing of the next multi-year bull market. 

In the meantime I think we've got to be very careful, trying to avoid profit warnings, and heavy dilution or even insolvency for companies with problem levels of debt, and/or cash burn. So we certainly can't start getting complacent, there remain major obstacles ahead. I'll write in more detail over the next few days, about my reflections on 2022, and the things I'm focusing on for 2023. Depending on time, I'm also planning on listing everything on my watchlist, plucking out the most interesting share ideas that we've covered in 2022.

Today sees shortened hours on the UK stock market, which closes at 12:30 - it usually takes me until about 13:00 before I realise that the prices have stopped moving, and I can turn off the computer!  I'll be working here until a similar time, and will both review today's news (if there is any), and do a few more backlog items from the reader requests earlier this week.

I should add that, despite it being one of the worst investment years ever for me, it's been a great pleasure (most of the time!) writing these reports here on Stockopedia, and interacting with the terrific community we have here. 

The glass is always half full for me, so I'm confident that those of us with thumping great losses recorded for 2022 will learn from our mistakes, and we'll make the money back in the next bull market. In the meantime life goes on, and there's plenty of enjoyment to be had in many other ways, so try not to dwell too much on a disappointing investment year. We have to take the rough with the smooth with investing, and bad years are a good opportunity to refresh strategy, and sharpen our skills for the next bull market. 

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Agenda 

Barkby (LON:BARK) - (8.5p - mkt cap £14m) [quick comment] -

Publishes audited accounts for y/e 2 July 2022 just in the nick of time (AIM companies have 6 months to publish audited full year accounts), so avoids its shares being suspended. This is a peculiar group, doing small-scale property development, operating, 9 pubs, and a bunch of loss-making non-core businesses that it’s trying to sell. We’ve not looked at Barkby before, so I’m only writing this to get something into the archive, and save you spending time researching something that is very unlikely to be a good investment. Barkby is not of interest at all. The balance sheet is shot, with negative NTAV of £(7.7)m, and it’s dependent on an increased loan facility. This is essentially a private company with a listing, and I cannot see why the major shareholders (individuals) would be interested in continuing with the costs & hassle of a stock market listing, so de-listing risk looks very high. It also says today that it’s consulting with supportive major shareholders about raising fresh equity, so dilution risk is also high. I would avoid this with vigour, to borrow a marvellous phrase Graham coined here recently!  (no section below)

Invinity Energy Systems (LON:IES) - see this thread in the reader comments below, where welwichia sees the glass half full, and I reply with a glass half empty view, on this heavily loss-making, cash-burning energy storage company that looks to have run out of cash again, and is now drawing down on a loan facility, implying massive cash burn in H2 of 2022. Be careful, I think this seems very high risk.

Nexus Infrastructure (LON:NEXS) Nexus (up 23% to 188p at 09:01 - mkt cap £85m) [quick comment] - a highly significant announcement, that it’s disposing of its TriConnex and eSmart Networks businesses for £78m cash - which is more than last night’s £69m market cap! A tender offer of £65m will be done in early 2023, to give most of the cash to shareholders (at what price, is the key question?). Tamdown will be the principal remaining business within Nexus (key question 2 - how much profit will the smaller group make in future? Is it viable as a listed company?). CEO (22% shareholder) & CFO will leave with the sold companies (but the CEO will become a NED at Nexus). Internal candidates at Nexus promoted to become new CEO & CFO. Trading update says in line with expectations for FY 9/2022. Q1 trading also in line (Oct-Dec 2022).

My opinion - a very unusual transaction, which raises the point that private buyers, in some cases, seem to be prepared to pay more for businesses than the public market values them at. Hence we might see more takeovers, which is good news if a decent premium is paid. NEXS is now a special situation, which could be interesting for experienced investors to research more thoroughly, as there might be additional value in the share, if you work out the sum-of-the-parts valuation. A lot of it hinges on what level the tender offer is priced at, which we don't currently know. It sounds like the CEO and 22% shareholder intends taking up the tender offer, which I imagine would motivate him to price it generously! For that reason, if I held this share, I'd be inclined to sit tight for now (because this deal means the share should be almost entirely cash-backed), or maybe top slice a few in the open market to hedge my bets? Any holders here? If so, I'd be interested to hear your take on it.

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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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