Small Cap Value Report (1 Sep 2016) - REDD, VTU, LAKE, SDY, AVS

1st Sep '16 by Paul Scott

23 comments 29379 reads

Good morning!

So far, so good with my AirBnB accommodation in Corfu. I'm staying in a lovely, spotlessly clean & well appointed 2 bedroom townhouse, in a perfect location, just a few hundred yards from the old town centre, down a quiet side street (see picture below).

It's costing about £85 per night for the whole house, which would comfortably sleep 4 people. The facilities are vastly better than a hotel, as it's someone's house, therefore has everything one needs when away from home. Having tried AirBnB (admittedly for the first time), for me it's a total no-brainer - vastly better value than a hotel. For this reason, I won't be investing in any hotel shares in the future (not that it's a sector I normally consider anyway - too much capex & debt usually, so very vulnerable to economic downturns).

I see that Redde (LON:REDD) has yet again put out excellent results today. It's now risen out of the top end of market caps that I cover (I start to phase out small caps once they reach c.£300m, and REDD is about double that now.). You can't argue with the figures put out today - they're excellent.

Although I have nagging doubts about the risks inherent in REDD's business model - particularly its vulnerability to changes in Govt policy, legislation, etc. That type of business could potentially be severely damaged, or even snuffed out overnight, if the Govt announced dramatic changes to the rules governing insurance companies.

I don't like any business which is fundamentally an unnecessary intermediary. Other people may see things differently, which is fine - that's what makes a market. Personally, if I'm uneasy with any business model, then I don't invest. There are plenty more fish in the sea. Although REDD shareholders will be rightly feeling smug, as it's been an excellent investment in recent years, including a superb flow of increasing dividends - so the profits are undoubtedly real - but sustainable long-term? Who knows?

Brighton ShareSoc - 13 Sept

ShareSoc are determined to get a monthly meeting going in Brighton, and I'm also very keen. The main attraction is a company presentation by Palace Capital (LON:PCA) . Also, I'll be giving a presentation on small caps - basically a…

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rmillaree

1st Sep '16

Ref VTU

I am probably going out a bit on a limb here (being a non car driver), but i am a little bit worried that there may be big structural change in the way cars are sold and the amount of repairs needed in 10 years time compared to now.

Looking at Tesla and how they are trying to sell cars direct to the public and maintain them internally - this cuts out the dealers totally.

I am guessing the money these places make is on the repairs and servicing and from what bods say there are a lot less moving parts on an electric car (albeit being newer not as reliable)

So my worry would be that if Tesla or other sells electric cars by the Bucketload they may cut out the dealerships and get the nice ongoing profit that can be generated from "maintaining" the car that needs to be maintained. Looks like Tesla do lots of tweaks via operating system updates so could a car morph into a mobile phone type situation.

So if Nissan and Ford are competing head to head with Tesla and Apple (doing cars?) or Faraday perhaps they will be forced to ditch the current outsourcing bit to dealers that works.

I am probably looking way to far into the future but the number of reservations (nearly 350k?? some silly high number ) for the Model 3 Tesla and its decent range (215-250 miles) and reasonableish price suggest that there may be a fundamental shift cars wise over the next 10 years - if thats the start of things to come.

At least VTU and whatever have decent asset backing so hopefully 10 years in the future with decent profits now and stable asset backing mean that even a scenario like this may not mean a bad result for shareholders.

yamaha865

I am massively overweight on Avesco (about 25% of my total portfolio)- great news on the update. But why are they issuing it market trading hours- so inconsiderate!

FREng

Avesco (LON:AVS) says "comfortably ahead" of expectations. A new term for the lexicon. What's that as a percentage?

gus 1065

Looking at the share price on an otherwise flat day, I'd say it's worth about 17%!

Sounds like the beers are on Yamaha865.

Gus

rhomboid1

My best shout for comfortably is 15 to 20% but I'm guessing and so is everyone else.

Avesco is a major holding for me and hadn't really moved much since I first started buying last November in spite of it being a bumper "Olympic" year for their major sub CT. it's a good illustration of an anomalously low valuation persisting for a lengthy period of time , 9 mths or more in this case , I bought a top up yesterday as most of my other conviction plays had already risen substantially whereas AVS was a relative laggard. Happy day for holders!

PJ0077

"Materially better" than expectations : +10% to +15% beat
"Comfortably ahead" of expectations : +2% to +10% beat
"In line" with expectations : 0 to +2% beat
"Broadly in line" with expectations : 0 to -5% miss

Anything worse than this and a Boardroom shuffle is pending.

Hope this helps!

jpsc01

The PMI figures are not a reflection of actual delivery but of Purchasing Managers confidence. Last months fall was overdone but this months figures are simply a realisation that the world has not ended yet.

As nobody knows what Brexit means, Mrs May's Brexit means Brexit is not a useful definition. It is still all too play for.

With regard to UK manufacturing the fall in the £ does mean that sales overseas should be slightly more profitable. I say slightly as most of the material used in manufacturing are sourced overseas, primarily in $$. The equipment used and the spare parts and consumables are largely from overseas. For many manufacturers it is only labour that on a world basis has become cheaper. But for years we have been told to get productivity up and labour down, even more so with the minimum wage coming in.

So labour is not as relatively high as it might have been, but in many cases it is only a small part of the cost base. Say it is 30% of your cost base. On a 10% drop you get perhaps 3% extra margin. How many customers rush from their current supplier to a new one for a 3% saving? If people really did BMW would not exist.

From a manufacturing standpoint a weaker £ is nothing to object to. But as it translates into higher food prices it will translate into higher wage demands and either erode the gains it provides or require further productivity gains via automation, so less labour and less of a saving.

Just saying.

Flackwell

Rmillaree - Aren't you effectively discussing the very essence of a franchised dealer?

JohnEustace

There was a recent article in the Telegraph about the wave of consolidation that is taking place among the car dealerships being driven by the manufacturers demanding higher standards.

A couple of quotes:
"Buying a car is an emotive purchase - it’s not like buying a freezer. People may know what they want before they walk in but no matter how good your website is, with 360-degree views and videos, they want to sit in a car before they make what is probably their second biggest purchase."

But currently “People prefer going to the dentist than a car showroom.”

http://www.telegraph.co.uk/business/2016/08/28/wave-of-deals-means-the-days-of-arthur-daley-style-car-salesman/

bobo

You could ask Palace why they feel the need to hide on Guernsey rather than pay tax like the rest of us. But I suspect a lost cause.

alb0728

Hi Paul,

There's a lot of hype around new tech incumbents disrupting traditional businesses. I think AirBnB is probably one of the few where the hype is being realised now.

That said, hotels aren't going to disappear and Sébastien Bazin at Accor (Euronext: AC) is making some interesting moves -> digital acquisitions, moving up the food chain to luxury, selling independant hotels via the Accor website. You might find a recent interview he did for Skift (a travel tech news website) on how he sees the industry changing interesting, article can be fond here:
https://skift.com/2016/08/05/accorhotels-ceo-to-the-hotel-industry-you-have-an-obligation-to-be-bold/

Alex

hayashi22

Re Tosca I find it interesting as to why this fund attracts so much attention as most of what it does it seems to get wrong.( I have no views on Speedy/HSS).One has to assume that the funds perform well to bring in new money. Another is Odey which also seems to get it mostly wrong -big macro bets and the like. Got Brexit right but most shorts linked to that would now not be looking too clever given the market rise. Owners pay themselves tens of £m's a year as well. Am I jealous?-of course.

"Rmillaree - Aren't you effectively discussing the very essence of a franchised dealer?"

Long term yes - although it may be more subtle than that in that it might be X % of cars sold and maintained move to direct via manufacturer - in which case Franchises could stay around way into the future but be less of a favoured route that is used. The simple questions is - is the Franchisee necessary element of the process of selling and maintaining cars and the answer is no as evidenced by Tesla managing without.

narp

Re tesla

An old article, warning it's long:

http://waitbutwhy.com/2015/06/how-tesla-will-change-your-life.html

Lion Tamer

@ rmillaree

I watched this ages ago, but thanks to DuckDuckGo managed to find the link again.

https://www.youtube.com/watch?v=Kxryv2XrnqM

The part that stuck a chord with me was that locally produced electricity will soon be cheaper than the cost of transmitting centrally produced electricity via the grid. This with increases in battery technology (and other arguments) open the potential for electric cars to be a lot more commonplace relatively soon.

ap8889again

Electric cars can't make up more than a minority of the total vehicle fleet, despite the dreams of the Greens.

There are limiting factors in terms of batteries and raw materials that tend to mean a mixed fleet will be the long term outcome.

Petrol is just so handy.

-1

underscored

The stone age did not end due to a shortage of stones.

Rob McBride

Why not just read Paul's very useful daily analysis and make your decisions on what to research further from that?

This is a man that's already willing to write wonderful reports whilst on his holidays, I see no need to ask for any more from him.

jonno

2nd Sep '16

Hi Paul
In terms of hotels and value you may want to look at Elegant Hotels, ticker 'ehg'. It trades at a significant discount to NAV and yields around 8%. The management have undertaken to maintain the divi and appear to have the balance sheet to do so. Trading has been challenging of late hence the share price fall, but looks overdone by a long way. I was fortunate enough to buy at 63p, it now trades at about 77p, but as always it is a matter for the individual investor. Looks like a potential takeover target at the current price.

Good luck to all.

I travel regularly to Barbados and considered Elegant Hotels but 2 things put me off, some of their properties look "underinvested" in in terms of their physical structure, secondly some major developments on the so called "Gold Coast" where EH operate have been mothballed eg Ritz Carlton since the GFC , at some point these or others will revive and create some serious competition. In the meantime visitor numbers are constrained by the number of flights that GA airport can handle at peak times , 2 hr plus security queues do not make for a happy holiday maker.

So it looks cheap but I'm sitting this one out

Small Cap Value Report (1 Sep 2016) - REDD, VTU, LAKE, SDY, AVS

Brighton ShareSoc - 13 Sept

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Paul Scott

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