Small Cap Value Report (Mon 30 March 2020) - Covid-19, EZJ, PURP, NMRP, AFX, BOOM, FIN, TENG, NUM | Graham Neary

30th Mar '20 by Graham Neary

96 comments 13090 reads

Good morning!

The Covid-19 outlook has not improved over the weekend - expectations for the duration of the 'lockdown' period are lengthening.

This report won't be locked down, however. Business as usual here.

At 7.30am, FTSE futures are trading almost unchanged at c. 5500.

Cheers

Graham

Agenda for today (COVID-19)

There are a vast number of RNS updates, again, as companies scramble to update investors in light of the Coronavirus situation.

I can't help the feeling that we are in some type of a "doomsday" scenario for many businesses. Even during wars and recessions, many businesses were still open and operational.

This virus (or the government's response to it, depending on your point of view) has completely shut down huge parts of the economy. It's an unthinkable scenario - who could ever have imagined it?

It's a punishing situation for people who are leveraged, in their portfolios or their personal lives.

I thought that I was sufficiently careful, only buying shares in financially strong corporates and using only a very modest degree of leverage in my trading account.

It turns out that I might not have been careful enough: even financially strong companies such as Next (LON:NXT) (in which I have long position) may struggle, if they are forced to stay shut for six months. And while I wasn't forced to close any positions (e.g. due to margin calls), March has been an uncomfortable month.

But again, who could have predicted a scenario in which vast swathes of the economy would be forced to shut down?

I am loath to get involved in a political debate on a financial blog, but I do feel compelled to share this article by Professor John Lee (retired).

While demonstrating some important ways to understand the statistics you see in the media, the article also strengthens my suspicion that government policies are being driven by fear, not by a calm understanding of the facts and the alternatives.

However, there is nothing that I can do to influence policy. The only thing I can do is manage my portfolio as best as I can, and try to share a few nuggets of wisdom with you.

Discussed today:

Easyjet (LON:EZJ)
Purplebricks (LON:PURP)
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Berksbee

30th Mar '20

Agree your Trump comment may ring true - the cure being deadlier than the disease. If he's proved right, and there's a chance he might be - then his ego will know no bounds!

timarr

One piece of good news in all this is that evidence so far suggests that Covid 19 does not mutate fast (at least in flu and virus terms). So any treatments and vaccines that are developed are likely to remain effective for at least a while.

And, of course, in general when viruses mutate they become less lethal, as killing your host is not an optimal survival strategy for a species.

timarr

Wol

Many thanks as always for the insightful analysis.

And just one disagreement. You say of the Covid-19 pandemic and the various governments' responses to it that "It's an unthinkable scenario - who could ever have imagined it?"

And yet health professionals have been warning about the possible devastating effect of the next big flu epidemic for years and highlighting the preparations needed to mitigate the health and economic effects of the epidemic. For those who have not seen it already, Bill Gates's 2015 TED talk (maybe already highlighted in these discussions a few days ago) gave a very clear warning of the risks and a clear prescription of how to prepare for it. He even put up a big picture of a Corona virus.

Sadly human beings (and especially politicians and leaders) have an inbuilt bias towards dealing with immediate problems and ignoring longer term (though potentially more damaging) issues. We can see this in the huge efforts now being taken to deal with Covid-19 (now that it is an immediate threat) as compared to the preparations we failed to make over recent years and the lack of willingness to deal with climate change.

This is Bill Gates's 2015 TED talk on the biggest dangers facing humanity

Bonitabeach

"health professionals have been warning about the possible devastating effect of the next big flu epidemic for years"

That is the problem with prophecy and the broken clock - every so often it turns out to be accurate. My grandfather told me the secret to giving successful share and horse tips was to do it exceedingly often.

slowandsteady

AFX - there are two more things to think of. First, the client was closed out at the bottom, lost his hedge, and the FX rebounded - so he's lost money on the other side. This may push him into administration, meaning he won't be able to make payments to AFX.
Second, if just one client of 232 can do this much damage, what happens if some more clients run into problems?

peterg

I think the Ferguson paper was poor in not representing the range of uncertainty. One of the papers I read today (sorry - can't remember which) said that rushed science is usually bad science.

Well, the Ferguson, and all other, studies are clearly limited by the lack of full evidence, until this is well over. But a responsible society cannot respond by saying we don't know, lets not do too much, or anything. You have to act on the best infromation and analysis that's available.

It was quite clear sometime ago from Wuhan that this virus is more contageous and more lethal than "normal" winter flu. There had to be a reponse, and it was also clear that the sort of shut down imposed on Wuhan shut down new infections, at least while it lasted.

Some have argued in effect that the virus is much more contageous, but much less lethal, so that a far greater proportion of the population have it than is realised, and many of them showing no symptoms, but already having immunity. Perhaps there is some truth in that, but acting on that possiblity with out any clear evidence it's true would seem to be staggeringly irresponsible. This may prove to be an overreaction, but it may also prove to be an under reaction, we won't know for sure for some time. In the meantime there are very good reasons for the cautious approach taken - in the absence of the ability to do mass testing, which would open up other options. That may come.

Arturo82

John54. That is quite simply the most insensitive and in the current climate, outrageous post that I have ever read on this website. State sanctioned euthanasia of many thousands of elderly people to bolster the economy and benefit younger citizens. You may not have noticed that an alarming proportion of deaths now include those below 35 years of age and with no underlying health issues. You (and those liking your comment) represent the unattractive face of capitalism and greed. Don't bother replying, because I will not enter into a pointless and protracted discussion.

IncredibleMosesLeroy

Speaking as an actual health economist, I have to say your reasoning is sound, though the final number likely too low for the following reasons:

If treatment for COVID-19 was considered an end-of-life treatment, i.e. if life expectancy was 2 years or less (without treatment) and said treatment extended survival by 3 months or more, then the willingness to pay threshold creeps up closer to £50k per QALY.

Also the variability in the standard ICER from £20-30k is driven by uncertainty around benefit and unmet need in the treatment space, not the fact that older people have lower quality of life. NICE would not adjust the WTP threshold down. it would simply take into account lower utility saved.

It's also not reasonable to assume everyone who dies is 80. Case fatality rates are estimated at:

80-89 = 14.8%
70-79 = 8.0%
60-69 = 3.6%

Let's assume there are no physical/social distancing rules and everyone in each age group gets the disease (pop based on England & Wales mid-2019 figures as that's all I had to hand):

80-89 = 1,837,874 *14.8% = 272,005
70-79 = 3,771,455 * 8% = 301,716
60-69 = 4,939,537 * 3.6% = 177,823

That gives us a total dead for over 60s of 691,544

Now for average QALYs (assuming no sequalae and return to full health, and 89 is life expectancy)

80-89 = 4.66
70-79 = 14
60-69 = 23

So the calculation is more like:

272,005 * 50k * 4.66 QALYs +
301,716 * 50k * 14 QALYS +
177,823 *50k * 23 QALYs

= £479.08 Billion

My numbers are likely low too, as no Scottish population and no deaths of anyone below 60. Add in the people who were just regular sick who couldn't receive treatment due to COVID-19 and you could well be pushing north of £500-600 billion.

That was fun, thanks for the prompt!

"Lies, damn lies and statistics"

Apparently a later derivative of: "Simple liars, damned liars and experts".

Also this is only willingness to pay for those who get sick and die, there will be more costs associated with 'get sick and live', which would have to be considered as quality of life is severely albeit temporarily affected for millions.

mevans6890

Totally agree - the assumption that ending the selective and partial lockdown would be beneficial to the economy is not necessarily true for the reasons you give

Steve L

Since we're into quotes today, here's one from Lord Rutherford, one of the greatest scientists of the last century:

"If you need statistics to prove an experiment, you need to redesign your experiment"

Michael C

Slowdown? This isn't a slowdown, it's a depression the likes of which has never been seen before in the history of the world. Think Tennesee and British coal mining areas in the 1930s, but not isolated pockets, it will be everywhere, all at once. It is going to destroy capital beyond all imagination, which governments will try to replace with funny money that eventually nobody will have any confidence in. I find it extraordinary that nobody seems to be able to connect the dots and work out how bad this is going to be if it carries on. Apart from anything else it won't be possible to maintain social order with people running out of money to buy food and going mental because of being cooped up day after day with nothing to do. The novelty and the need for urgent adjustments made the first week OK, a bit like a holiday for some. We are in the second week which will be taken up with further adjustments. By the end of the third or fourth week people will be getting bored and restless. By the 6th week there will be localised disturbances as people start pushing to see where the boundaries lie. By the 12th week there will be burned-out supermarkets and French mayors hanging from lamp posts. The insurance industry will fail, en masse. Pensions will become worthless and any company with outstanding pension liabilities will go bust. You cannot shut the whole world down and expect our society to survive.

https://www.gulf-times.com/sto...

Itcantbetrue

NERVTAG ( SPI-M (SPI-M) advise Government, they don’t formulate policy on the basis of one model or one modeller (Eg : Neil Ferguson/Imperial)

jrochest

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." (the madness of crowds)

I never thought I would see this behaviour in governments...

GrahamF

I am a bit concerned about the idea that this was predicted.

I don’t know anyone who predicted that this pandemic would occur this year. Many have predicted It will come sometime but whether that would be in 2 years, 10 years, 50 years or 100 years time no one could say. So, if you’re the government those predictions are not very helpful for deciding to build huge numbers of ICU beds or stockpiles of PPE (which goes out of date).

A little nostalgia....

Does anyone remember the TV series “Survivors” broadcast around 1975? Virus escaped from a Chinese lab in that case I think.

Apologies to those who don’t like posts that aren’t about shares.

Michael C - I’m worried you may be right. The rational part of me says your scenario needs to be factored in. The emotional part of me is in denial about it however. I just don’t want to believe it!

ken mitchell

Arturo.

Have you wondered whether your post is the outrageous one? It is the sort of intemperate post allowed too frequently on some other bbs but this bb is for quality comment. If you are not willing to have your opinion challenged, the answer is simple. Don't post!

Every single death from coronavirus is to be regretted. BUT as John54 was trying to point out (but your rant reply suggests you didn't understand) there are times when very difficult decisions have to be made as to who should die and who shouldn't. AND a similar point applies to shutting everything down. It's NOT about the "unattractive face of capitalism and greed."

There could well be many more non coronavirus deaths than those from it, if total lockdowns last for many weeks, e.g IF deciding to prioritise saving very elderly critically ill coronavirus sufferers with other serious medical condition, over, say, young cancer patients whose vital life saving operations have to be postponed. Did that sort of thing never occur to you before you posted?

Same applies from economic angle too. Thinks of all the small and previously successful businesses built up over many years that will be ruined if total lockdowns continue. That will drive some heartbroken people to suicide.

And in poorer Countries like India and Bangladesh the economic effects are catastrophic for the poor. Many more are likely to die as a result from the extreme poverty caused. There's a big risk many of them will starve.

A rule I have which you might like to consider is never to post while in a temper. If a post makes us angry then post a reasoned reply when we have calmed down. And if not prepared to have our posts challenged then don't post at all.

Laughton

One company managed a positive RNS today - Chesnara (LON:CSN) says it is well capitalised and is so confident that it is actually increasing its dividend.

abtan

Hi Jonno

I no longer hold Bioventix (LON:BVXP) but I like to keep an eye on it.

Agreed, today's numbers look good as per usual. However, I can't bring myself to buy again as I just can't fathom why a company that makes c £6-7m a year could be worth £200m.

Even assuming Troponin revenues increase (and there is competition from other providers and I have no idea which one provides the best product or if increased competition could reduce royalty pricing power) the significant NT proBNP revenues currently received by the company are due to drop to zero from 2022.

For reference revenues for NT proBNP were £1.25m in FY19.

By my rough calculations, which assumes an increase in Troponin revenue from £0.6m this year to £2.0m in 2023, the annual PBT will therefore not be greater than £6-7m for the next 3-4 years.

Again, that's a hefty premium to pay for a company that has a big chance of not materially growing for at least 4 years.

I do hold Belvoir (LON:BLV) , and the only reason I didn't sell in the recent months is because:

my holding is relatively small,
a large proportion of revenues derive from rents, and even with bad debts increasing and/or franchises closing, I believe enough cash will be generated from this alone to keep the lights on,
I believe the business will get through the next 6-12 months and bounce back in the long term

After today's update I saw no reason to change my thinking.

I plan to top up, but expect a further fall given the sector that it operates in and I am happy to wait on the sidelines until then. If the situation improves sooner rather than later, then I am similarly happy to top up at a higher valuation.

greenhat2

I am sick of all the opinions espoused on Covid 19 and the government's response to it.

If anyone has a comment to make on this or a suggestion, please write to your MP and let this board be about investing.

Small Cap Value Report (Mon 30 March 2020) - Covid-19, EZJ, PURP, NMRP, AFX, BOOM, FIN, TENG, NUM

Agenda for today (COVID-19)

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Graham Neary

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