Paul's weekly SCVR summary - episode 24 (week-ended 9 Dec 2022)

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Podcast Summary - w/e 9 Dec 2022

Not winding down for Xmas at the SCVR, we covered 42 companies this week! (a new record).

Our reports are driven by the daily newsflow - trading updates & results statements. Not tips or recommendations, it’s just a review of the day’s news, with our opinions. We chuck a whole load of share ideas at you, for you to research further if you like the sound of anything.

Monday 5 Dec

Fulcrum Utility Services (LON:FCRM) - equity now more-or-less worthless. We flagged in October that it announced need for more funding from its major shareholders. It was an immediate sell on that announcement. I sld mine at 3.8p. Whenever companies say they need more cash, and particularly if one of their major shareholders is Christopher Mills at Harwood Capital, it’s pretty likely you’re going to get stuffed, which is exactly what happened here. Convertible loan of up to £6m announced, with conversion price being a maximum of 0.5p per new share. Market price was 3.4p, so as I said in Monday’s report, this was an obvious sell on the opening bell. The turnaround hasn’t worked, so time to move on.

The worst place to be investing now, is micro/small caps, that have run out of money, or need to renew bank facilities, and are missing forecast earnings. Most risky situations you can get horribly diluted, as is likely at FCRM - share count could quadruple of bond converts at 0.5p. Complete waste of time, and probably only a matter of time until it de-lists. We need to avoid similar things. I would avoid anything that needs to raise cash in the next year - odds are so stacked against you.

Equals (LON:EQLS) - very interesting company, shares have done tremendously well. Another positive trading update issued. Forex services. Forecasts for FY 12/2022 now likely to be beaten by about 10%, which could drop through nicely to profits. I do have some caveats - large capitalised development spending which by-passes the P&L, rendering EBITDA meaningless. Also large profit adjustments - £10m adj profit turns into only about £3m statutory profit. Need to be sure you’re happy with those adjs. Not cheap now, £174m market cap. Lots of readers are interested in EQLS, it’s been in an impressive 3-year bull run. Make sure you’re happy with the accounting adjustments. I’d also like to have a clearer grasp of what the company actually does! What is it’s key point of difference? On a superficial level though, the newsflow has been very good.

RBG Holdings (LON:RBGP) - profit warning. Legal services business. Core division (Rosenblatt, Memory Crystal, and Convex) are trading fine - marginally ahead. LionFish (litigation financing) is the problem area. It’s lost 2 big cases, will hit profits by about £4m, mostly non-cash. Looks like a £1.7m loss for FY 12/2022 overall by LionFish. Depends how you look at it - I quite like profit warnings that are a specific problem, ring-fenced in one division, as this is. Problems should be resolvable. Sounds as if they might wind-down LionFish, I’m not keen on litigation finance anyway, too unpredictable. Maybe RBGP doesn’t know what it’s doing in that area? Valuation of the shares looks about right to me at 67p. It tried to bounce, but fell back again. Current year PER of 11.5, difficult to see why it would be worth more than that? CEO Nicola ??? has bought a decent number of shares in the market after the PW, looks good, she has about 11-12% of the company in total. Could be an interesting recovery, but doesn’t seem compelling to me.

Graham looked at - drinks company AG Barr, and Lindsell Train Investment Trust (LON:LTI) - unusual business model, potentially interesting.

Tuesday 6 Dec

Vianet (LON:VNET) old Brulines business, plus a vending division that always seems to promise great things, never really gets very far. Interim figures look OK in the highlights, but digging a little shows negative cashflows, and capitalising £2m pa in development spend, an awful lot for the size of company. Quite a big question mark over the adjusted numbers. Also I don’t like the balance sheet: both inventories and receivables look too high, and cash position has worsened. So I’m not interested in this, not worth pursuing.

Victorian Plumbing (LON:VIC) - pleased with this one. In Sept or Oct I reviewed it at 38p, gave it a thumbs up saying it’s very cheap. It’s since risen about 80% from recent lows. I reviewed FY 9/2022 results. Considerably beat reduced expectations. Excessive share options charge. Great balance sheet with big cash pile. Starting to pay divis. I still like it, but now the shares are up 80%, I’m not as keen, as we like bargains at the SCVR. So I suggested in Tuesday’s SCVR that it might be time to top-slice, and lock in some of the profit? It’s not such an obvious bargain any more.

Mystery share no.1 - Hargreaves Services (LON:HSP) - this is Mystery Share (for Stockopedia subscribers only), so not named in the podcast.

Versarien (LON:VRS) - I’ve never liked this, seemed a big ramp. Down 34% - needs to raise more money. This is not the time for perpetually loss-making, jam tomorrow companies, to be trying to raise more cash. It’s only managed to raise £1.85m, and at a deep discount, at 10p. Prime example of something you need to sell before it tries to raise cash - it’s always obvious when these companies need to raise. I think this share is absolute rubbish.

Graham looked at - Mercia Asset Management (LON:MERC) , Solid State (LON:SOLI) - which has done very well in last couple of years, not an obvious candidate, but it’s traded well, and shares have done well, and it’s made some nice acquisitions. Saietta (LON:SED) also looked at.

Wednesday 7 Dec

Mystery Share no.2 - is Oxford Metrics (LON:OMG)

Musicmagpie (LON:MMAG) - no chance of this becoming a mystery share any time soon! Looks hopeless to me. Running up debt to fund hire contracts on secondhand mobile phones. Says trading in line with exps for FY 11/2022 - but that’s only breakeven, as expectations have been slashed. Net debt of £8.2m, with £30m facility. Record Black Friday sales. I don’t see a viable business model here - could be wrong, which is fine, we’re right on some, wrong on others. But why would you want to take the risk that a business model might work in future?

Moonpig (LON:MOON) - we warned readers in Sept that this looked wobbly, as it had overpaid for a debt-fuelled acquisition. The accounts confirm this. Balance sheet is terrible - negative NTAV. Seems obvious it’s made a disastrous mistake with recent acquisition. Now having to prioritise debt reduction. I think risk:reward looks very poor, and it seems vulnerable to a consumer downturn. Potentially ruined the company, with a ridiculous acquisition as we go into a recession. So I wouldn’t go near this share. Why take the risk?

Naked Wines (LON:WINE) - this is interesting. All sorts of problems. Is this a turnaround? Interim results show some progress. But it has wildly excessive inventories, which have gone up hugely again! It has over £200m in wine inventories, which is at cost prices, remember. It tried to bury the news, but it took an £8m writedown against inventories, which was adjusted out, to make it look as if the company is profitable, when it’s not. My main worry is that especially with wine, you don’t know if the wine is good until the bottle is opened. So how do the auditors check the stock valuation? There could be a nightmare in that inventories pile. Whenever you have excessive inventories or receivables, there’s a high risk of big writedowns being needed. Could contain a multitude of sins. I’m just saying there is elevated risk. WINE is also spending the customers’ cash. It now has less cash on its balance sheet than the related deferred income creditor. That customer cash should have been ring-fenced. Virgin Wines does ring-fence customer cash, but WINE doesn’t. Overall, this looks finely balanced. If WINE hits its targets, then it could be on the road to recovery, and shares could go usefully higher. But there are considerable risks as well. This share could go either way, so I’m neutral on it.

Redde Northgate (LON:REDD) - slightly above our usual market cap limit. We’ve done well on it in the past, both me and the readers. Interim results look fine. It also presents more conservative underlying profits, which strips out the one-off benefit from higher residual values on used vehicles. It does accident car hire for insurance companies, and a white van hire business in UK & Spain. I think it’s a really nice business actually. Forecasts for next year are lower, reflecting accounting adjustments. Very good balance sheet. Don’t worry about the debt, as it owns £1.1bn of vehicles, much more than the debt. Price to tangible book is very good, at only 1.26. Forward PER of 7.9. Divi yield of about 6%. This type of business tends not to command a high valuation. But it gets a thumbs up from me, looks good.

Quiz (LON:QUIZ) - very small, good interim results, moved into profit of £1.8m on almost £50m revenues. Nice turnaround in a tough sector. Scottish-based, did a restructuring a couple of years ago, on cheap turnover rents now, for remaining shops. Strong gross margins, excellent balance sheet with £9.2m net cash. Current trading weak in Oct, improved in Nov. Full year (FY 3/2023) outlook - at least in line with mkt exps. I think QUIZ looks very good, still cheap.

Graham looked at SDI (LON:SDI) - seems to have lost its lustre. CEO ditching his shares has really put me off. If the company was going to perform really well, then there’s no way a CEO would sell out. Unless it’s due to a divorce. It’s a huge red flag to me.

Mystery Share no.3 - is actually MS International (LON:MSI) from Weds’ report, but I mis-spoke in the podcast and said it was in Thursday’s report (I’m not very good with dates, as you know LOL!)

Thursday 8 Dec

Graham looked at S&U (LON:SUS) - an interesting family-controlled specialist lender which we’ve always quite liked at the SCVR. Also, Numis (LON:NUM) - weak full year numbers, as expected. Also Redcentric (LON:RCN)

On Beach group (LON:OTB) - shares dropped 10-12% on this results announcement. But I thought figures/outlook seemed alright, so I gave it a thumbs up, looks quite good. Shares then bounced quite strongly on Friday.

There seems a trend at the moment, where shares seem to drop on publication of results, but then recover quite well. An opportunity for traders maybe? For decent quality companies, and initial sell-off quite often then seems to reverse. Something to bear in mind.

Focusrite (LON:TUNE) - reported numbers. I do like this business, good quality, niche/innovative products. Very good track record. Results for FY 8/2022 looked good to me. Held onto most of the pandemic growth, unlike many other companies. Balance sheet OK. Outlook OK. A couple of accounting points to bear in mind (not deal-breakers though) - very heavy capitalisation of development costs, doubled. Profit was also boosted by a one-off forex boost which went through the finance income line. I think this should have been adjusted out for valuing the company, so I would adjust earnings down by about 10% for valuation purposes. Overall, I think it’s a good quality business, shares probably priced about right on a PER of about 15-16. But in the past it’s achieved a more premium rating, which could return? I can’t get madly excited, but as a long-term quality hold, I think you’ll probably do alright.

Vertu Motors (LON:VTU) - we’ve been very positive on this value share for a long time, with amazing asset backing from freehold property. Made a big acquisition of Helston Garages - at £117m. VTU’s own market cap is £169m. Really turbocharges the earnings. Taking out commercial mortgages on some freeholds. CEO Robert Forrester seems very good, switched on, and previously indicated they might borrow against freeholds. Also said previously that VTU would be gobbled up by a competitor, or would buy smaller competitors. Or both might possible happen. Boom in secondhand car prices seems to be easing, but still new car supply constraints due to semiconductor shortages. I just hope VTU hasn’t overpaid for this acquisition, it doesn’t look an obvious bargain. But Helston is also heavily asset backed, with lots of freeholds. If the founders want to sell out now, they know the business best. VTU talks about synergies, which could make this deal make sense. The stock market seemed to like the acquisition.

A couple of crappos -

In Style group (LON:ITS) - poor H1 results, loss-making. Over-stocked like so many retailers. Absolute waste of time. A me-too fast fashion business. CEO has gone. Still solvent. Doing a strategic review, which pretty much said that a stock market listing is a waste of time & money, which it is. There’s no liquidity, because of the way brokers float them. I’ve been moaning about this for years. Smaller caps - the brokers place large blocks of shares with institutions that are flush with cash. So things float with hardly and free float, hence no liquidity. Then, when financial performance disappoints, there are only sellers in the market. Instis are trying to get out, but there are no buyers. It’s a terrible system. I think the brokers have killed the new listing market, because they’ve done things so badly. UK IPO market now looks dead. No sympathy for the brokers, as they’ve killed it by floating a lot of overpriced junk, and handling those floats so badly that there’s no liquidity in the aftermarket. No point in having a listing, if there’s no liquidity! A big structural problem, that brokers need to give some serious thought to. In the next boom, I hope they float shares in a more intelligent way. Rather than just grabbing the big fees for their bonuses.

Purplebricks (LON:PURP) - H1 results, really awful. Yet another CEO, with another turnaround plan. FY guidance is a very wide range, from 4m-11m loss. Cutting costs. Cash pile depleting fast, but has plenty for now. Possible turnaround? Brand has to be worth something, so well known. Maybe a bigger agent might buy it for the brand? I’m sceptical, but will keep an eye on it.

Mears (LON:MER) - samscvb - shout out to this reader who flagged this.

Moan about reader comments saying we’re not covering the right companies. Really winds me up - demotivates the writers if you basically say “You’re work’s shit and you’re covering all the wrong companies”, it’s not nice to be on the receiving end of that. Really irritates me. Graham is more stoical!

Samscvb flagged a good update from Mears, said why he liked it, and asked us to take a look. That’s the way to do it! Thank you.

I did take a look at Mears, and think it looks very good. Mears is on a high single digit PER, decent dividend yield, good balance sheet. Positive trading update - looks very good.

Friday 9 Dec

I wrote most of this report the night before, as I had to travel from Bou’mth to London, for an investor Christmas lunch that my friend William throws each year at Brooks’s Club. Quite a hot ticket! It was great seeing lots of old friends again, and drank lots of vintage wines. Lots of shares chat.

I covered 12 companies in this report, short sections.

Also published last week’s written podcast summary.

CT Automotive (LON:CTA) - down 16% on a profit warning. Doesn’t look any good. Big loss of $11m. Cutting costs, has some net debt. Steer clear, looks problematic.

Crestchic (LON:LOAD) - we were a bit late to the party on this one, but we did pick up on the positive newsflow earlier this year. Some other commentators & Stockopedia readers spotted it before we did. Bid from Aggreko at 401p. Only 12% premium. Good discussion in reader comments - view seems to be bid is too low. But if mgt & biggest shareholders (incl. Harwood on c.25%) have agreed it, then it’s probably a fair exit price. Maybe it’s not as cheap as the private investors imagine? As timarr (one of our regulars) said, the last time many of us thought an offer was too low, was Revolution Bars (LON:RBG) and when that bid was rejected, the share price subsequently fell by over 95%. Bids also give you a liquidity event, take your cash and can make some fresh investments that are cheap. I can see both points of view on Crestchic.

Treatt (LON:TET) - results came out about 10 days ago. FY 9/2022 results. Very interesting company, but at 33x the valuation looks toppy. Key question - how much will new factory boost production? Capacity is doubling, so could be transformational potentially. Forecasts don’t look at all exciting, with almost no growth, so why build a new factory? Maybe we should ignore forecasts, and assume it could grow strongly, and profits rise on higher margins. Shareholders must be hoping it will smash the forecasts. Potentially interesting.

D4t4 Solutions (LON:D4T4) - interim results out on 30 Nov. I talked to a big private investor, and we agreed D4T4 seems to have great potential, but never quite achieves escape velocity. Year end date is problem, as it has soft H1 each year, and big contract wins happen near year end. Why not reverse year end, so that the bumper profits happen in H1? Would make sense. Trading in line with FY, £4.2m PBT. £95m market cap. Not a bargain, but has great potential I think, and balance sheet v good, with £26m cash. Very tricky to value, but potentially interesting.

K3 Capital (LON:K3C) - another takeover bid situation. Popular amongst readers. Modest premium of 17%. I am worried that decent companies are being bid for, and we’ll get left with the dross!

Loungers (LON:LGRS) - results for 24 weeks (why? A half year is 26 weeks!). Figures looked disappointing, only £2.8m profit on revenues of £122m. Prior year comp was boosted by reduced VAT, and business rates relief. Balance sheet not much asset backing, only £25m NTAV. Probably best in class operator, but a hideous sector (bars/cafe) is bearing the brunt of ever higher costs, esp wages. I reviewed LGRS in October, but concluded the valuation is too high for such a horrible sector.

Robinson (LON:RBN) - very interesting, buy-in of pension deficit, with L&G - same as TT electronics (LON:TTG) recently announced. So pension deficits in surplus do seem to be hived off, very interesting. I don’t think this would apply to pension schemes with big deficits though. An interesting development though.

Aferian (LON:AFRN) - in line update. Nothing exciting. Forecasts already halved in the last year, so trading in line is not a particularly good outcome. PER about 13x. I don’t really understand the business model or sector.

Pendragon (LON:PDG) - biggest faller on Friday. Potential bidder called Hedin Mobility has pulled out, due to macro uncertainty & challenging market conditions. Shares dropped from 28p to 21p, helluva drop, surprised me, given that the bid was not a firm bid. Trading update said backdrop challenging, but delivering trading in line with expectations.

Berkeley group (LON:BKG) - robust results, flat vs last year. FY guidance for 4/2023 unchanged at £600m profit. But next 2 years profit guidance (combined) reduced from £1.25bn to £1.05bn. Nobody should be expecting huge profits to continue at housebuilders. Share price has been very resilient for Berkeley compared with sector peers. Good order book visibility. Net cash. Strong balance sheet. Large householders are being hit with an additional 4% tax, called RPDT kicking in quite soon. Plus cladding remediation costs. And a Building Safety Levy - Govt using housebuilders as a cash cow for tax raising, bit of worry. Share buybacks have been done.

Porvair (LON:PRV) - very nice update. Always looked overpriced, but for the first time in years I’ve concluded this is now looking reasonably valued. Ahead of expectations. Boost from forex. £18m net cash. Buying opportunity maybe? Products driven by regulation. Specialist filtration products, so repeat purchases. Nice business, looks good value at 570p.

PROCOOK (LON:PROC) - profit warning. Profits have collapsed, now only breakeven. I can’t see anything attractive, unless they’re able to rebuild profits. Might be worth a look next year? Bal sheet OK, not going bust.

Associated British Foods (LON:ABF) - large cap, owns Primark, which is trading well, as many value retailers are. Mid market fashion struggling, but value end doing well, as you’d expect in a consumer downturn, customers trade down to cheaper items. Significant input cost inflation.

Macro news & views

Main indices seem to have peaked, coming down a bit. Massive recovery in Oct/Nov has perplexed me a bit, given that earnings are now under pressure & lots of profit warnings, so I’m not confident these big rallies will hold, but we’ll see. Feels like we’re still going through a minefield (terrible analogy). So many shares have bounced, but they’re vulnerable if no recent good trading update. Moonpig (LON:MOON) is a good example of a share that bounced strongly, but then put out a poor trading update/outlook & went back down again.

If I’m going to buy something, I need a bang up-to-date positive trading update. We can’t assume bounces are down to good fundamentals. Could just be momentum trading. The fundamentals also need to be improving. I want to see a positive trading update, and a recovering share price. You need both. Less likely to get blown up by a profit warning.

Thank you for the positive feedback.