Small Cap Value Report (12 Jul) - TMMG, QED, FBT, PMP, ALU, LRM

Friday, Jul 12 2013 by
19

Good morning! Markets in the US and Asia have been fairly well behaved overnight, so we're looking at an open here about level, with the FTSE around 6,551.

On Weds (10 Jul) I mentioned that Mission Marketing (LON:TMMG) looked potentially interesting. It dipped 12% on that day to 23p per share after a mild profits warning, although I still quite liked the look of it on valuation grounds. The price bounced back yesterday to just over 24p, and it is announced this morning that their Executive Chairman has bought 120,000 shares at 24p each, so that's a outlay of £28,800, which is enough to be meaningful in my view.

Generally speaking, any Director purchases under £10k, especially orchestrated ones where several Directors buy at the same time, are counter-productive, since it just looks like they want to push the share price up, but are not prepared to back it with any meaningful amount of money. But £29k is a decent enough slug of dosh to lay out in a small cap, so this one gets a thumbs up from me.

 

 

Quintain Estates And Development (LON:QED) announce that their JV to redevelop Greenwich peninsula in London, has secured three positive planning decisions. I gave up on Quintain shares a while back, as it became clear that their projects were so long term (20 years in the case of Greenwich), that it was difficult to see how shareholders would benefit.

Furthermore, I am more convinced than ever that UK house prices are a huge bubble that will inevitably burst when interest rates rise. If you look at mortgage payments relative to incomes, they are currently affordable. However, if you recalculate mortgage repayments at a more normal interest rate, then they become completely unaffordable.

This will inevitably lead to a deluge of sellers, especially "accidental" landlords who thought they were onto a good thing by letting out their old house rather than selling it, and making a big profit on the rent, and assuming that prices would keep going up forever. When interest rates go up, they will begin to feel real pain for the first time, and after a time lag, many of those properties will come on the market. As supply builds, and sellers become more desperate, prices will have…

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The Mission Marketing Group plc (the mission) is a United Kingdom-based marketing communications and advertising company. The Company's portfolio comprises integrated, multi-discipline, multi-sector agencies, specialists in specific marketing/communications activities and specialists in particular market sectors. The Company's segments include Branding, Advertising and Digital; Media; Events and Learning, and Public Relations. The mission includes a network of entrepreneurial marketing communications agencies in approximately 20 offices in the United Kingdom, as well as offices in Asia and San Francisco. Its subsidiaries include April Six Ltd, which is engaged in marketing communications and specializes in the technology sector; Big Dog Agency Ltd, which is engaged in Marketing communications, Speed Communications Agency Ltd, which is engaged in public relations, and Bray Leino Ltd, which is engaged in advertising, media buying, digital marketing, events and training, among others. more »

LSE Price
78.1p
Change
-1.1%
Mkt Cap (£m)
67.4
P/E (fwd)
8.0
Yield (fwd)
3.0


Blackbird Plc, formerly Forbidden Technologies Plc, is a United Kingdom-based company engaged in the development and commercial exploitation of cloud-based video technology. The Company is engaged in developing cloud video platform used for its Forscene professional editing suite, its video social network, eva, and its online video editor, Captevate. The Company's products are delivered through an integrated Web-based platform. The Company's cloud-based technology and products enable news and sports broadcasters to get their Web and mobile highlights to markets; help post-production and broadcast clients; allow brands, influencers and celebrities to access audiences and their authentic content, and allow consumers to edit and share video in a new way. Forbidden Technologies Inc is the subsidiary of the Company. more »

LSE Price
10.9p
Change
-0.5%
Mkt Cap (£m)
32.4
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:TMMG fundamentally strong or weak? Find out More »


13 Comments on this Article show/hide all

mathewawood 12th Jul '13 1 of 13
2

Something else to consider about TMMG is that the board have now all but guaranteed a dividend this year, thought to be 1p. That gives a 4.3% yield 5x covered!

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deucetoace 12th Jul '13 2 of 13
2

Something else to consider about TMMG is that after announcing that a recent acquisition was going to mean £1.5 million in "restructuring" costs the next day they awarded themselves 2% of the company in LTIP shares.

I wonder who the company is being run for.

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ericb 12th Jul '13 3 of 13
1

In reply to post #75136

good point duece - i noticed that too.

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bsharman 12th Jul '13 4 of 13
1

Hi Paul. I know that like me you don't go in for mining companies, especially gold miners. However I would be interested to hear your thoughts on Anglo Asian Mining AAZ. I do have a small holding and believe that it is a reliable (to date) well run and managed business with low production costs. It looks extremely undervalued at the current price, especially considering recent newsflow. There is also talk of a small dividend in 2014. I first discovered this company at a proactive investors presentation.

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intuitive6191 12th Jul '13 5 of 13
2

It's always interesting to hear a discussion about the "housing market" south of Watford. Perhaps I might give a more Northern perspective?

There have been huge regional variations in the UK housing market for some time and it is no longer helpful or relevant to discuss the UK housing market as a single entity. For instance, here in the the North West prices in some areas have fallen significantly from their peak and are not showing much sign of  life as yet.

There are many parts of the region where perfectly reasonable property can be purchased for 50 - 100k.  In some places even lower prices exist. Does this sound expensive? If these prices have to fall further, then by how much?

If property prices were to fall further in depressed regions and mortgage interest rates rose then a huge number of decent people would be in severe financial distress. These people are mainly low income and would have to cut spending in other areas in order to fund mortgage payments. If their homes were to be repossessed they would become homeless and then have to find rented accomodation funded to some degree by housing benefit.

Needless to say the economy would suffer by the lack of spending, banks would have to make further write downs on their property loan books and the FTSE could well head down to 4000 or worse. I suspect that avoiding house builders and residential property companies as investments would offer no protection whatsoever against the forthcoming financial storm.

I dont know London that well. It seems a bloated and excessive sort of place and I can imagine that it could well have bloated and excessive house prices to match. That doesn't mean that the rest of country has the same problem. The ideal situation for depressed regions is that house prices stabilise and then rise gently and predictably so that lenders are encouraged to take a more balanced view of risk and lower the amount needed for the initial deposit.

In my view calling for the housing market to fall is extremely dangerous. I can't see that it would benefit anyone and has the capacity to completely reverse the UK economy. Its very much a case of be careful for what you wish for.

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laurie89 12th Jul '13 6 of 13
2

On housing, people seem to fall into 2 camps. Those that live in London and cant believe the increases, and those who live outside and wonder what all the fuss is about.

You need a long memory. In times gone by, London would lead the way and after a while the rest of the country would follow. I am sure this will happen again. And it takes many years to work through the process. The government has (quite rightly) decided to stimulate the economy by a cheap lending scheme; its a pity it wasn't done a lot earlier. Houses tend to work in chains - a new purchase sets of a trail of earlier buys and sells and many tradesmen benefit, not to mention carpet companies, B&Q etc. Some people make a windfall, and they spend that in the economy. I would be looking for regional housebuilders right now

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rhomboid1 12th Jul '13 7 of 13
3

I'm an active buyer of property at the moment as in many areas in the midlands and north it generates very good yields. My hurdle for investment is a 10% gross yield , this is readily achievable and is then magnified further by portfolio finance at c. 65 % LTV. Voids are low as stricter lending criteria mean many prospective tenants are happy to let good quality well refurbished properties long term whilst they repair their credit rating and or save for a deposit. Many people are also happy to rent in perpetuity as they have lost faith in the "ladder" and now have a clearer sense that property is not a get rich quick asset class.

Those yields underpin prices very strongly in my areas of investment. Elsewhere in prime areas prices seem steady and talking to Agents they are seeing a healthy market with a higher number of cash buyers than in years gone by.

London and Home Counties property seems to be in a world of its own where different rules apply and I'd imagine it feeling overheated to those living there but recent unrest in the Middle East and Euro related issues have given it Global "safe haven" status for wealthy folk from all over the world.

I have 2 overseas friends buying homes for cash in London who view it as insurance against upheaval in their own countries, one is moving his family here whilst he continues to manage his business in the ME, the other will rent it out at a piffling 3% yield but will retire here in years to come.

So who knows where value will go?

Cheers

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SevenPillars 12th Jul '13 8 of 13
4

In reply to post #75144

The Government are playing a dangerous game with their latest intervention in the UK housing market with Help to Buy. Every scheme Government tends to come up with under the disguise of helping those priced out to get on the ladder only assist in keeping prices at what have become artificial levels. Prices then have a tendency to go up higher and the ladder is further out of reach.

The problem now is that UK house prices have become so central to the working of the UK economy that no Government is likely to sit back when it looks like the free market might be intervening and sending prices down. We have a housing market where it is free as long as prices are going up, but intervention is called for when it goes down. It's a farce.

What many have really failed to grasp is that the true driver of prices for many years prior to the 2008 financial crash were not just the banks loose lending practices, but also the fact that as prices went up ever higher people could only get in by going for the most dodgy mortgage products like self cert and fast track. Banks didn't check income claims, mortgage brokers turned a blind eye and encouraged people to lie. Self cert mortgage products were the fastest growing part of the mortgage market prior to 2008. We can all guess why. It was criminal fraud on a massive scale, but most got away with it. Unfortunately, we suffer the consequence of it today as most FTB's cannot afford to buy without help from the Government.

The froth in prices wasn't blown off by the financial collapse of 2008. Banks withdraw the dodgy products, people couldn't get the mortgage loans they could before or claim an income they didn't have, so now the Government steps in and offers to pay 20-25% of the deposit because the market was stagnant. The only reason why house prices didn't crash in 2008 was because it benefited from the Government intervention to rescue the UK's bankrupt banking system and BoE money printing. No recession/depression, no mass unemployment, negative equity, etc, no reason for people to sell houses at lower prices.

This financial "rescue" might be welcomed by some, but it means house prices remain artificially too high and in a permanent bubble state. The real problem is this inflationary money "printing" system that we seem to have become slaves to. By default it endangers the whole economic system if asset prices look like declining, hence policies and central banker action to prop them up.

By the way, I'm bullish on housing stocks because I can't see how they cannot fail to make money with Help to Buy in place. It's an off balance sheet scheme that could pump £billions into the UK housing market. I also believe that this scheme or something else like it is here to stay - a prop to prices forever. That and IR's will probably stay in a permanent low level state just like Japan. Eventually the Government will probably buy the whole house for people. They will do that before letting prices fall. Ironic, but this is the new housing benefit that politicians actually love giving to people.

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Monty9 12th Jul '13 9 of 13
1

In reply to post #75140

I think the issue is that sterling interest rates will, at some point, increase. Governments will do everything possible to delay this as voters will be angry and blame them, with some justification. It will also make the interest rates payable on the national debt unsustainable. They will probably print more money and even try to raise taxes further. Interest rates will increase, but perhaps after inflation returns with a vengeance. My best guess is those that can afford to pay the increased interest will find the mortgage debt will inflate more than the interest cost increase, and the real price of their house will reduce a bit but increase in nominal terms. Unfortunately it is those at the bottom end of the market that are likely to suffer, whether in overpriced London or the good value north. They will find it hard to maintain their payments and their tenure will be at risk. I do not wish for this, but fear the failure by government and citizen alike to acknowledge the true state of the economy makes it inevitable at some point. The longer it is put off ("kicking the can down the road") the more miserable the readjustment. In the UK it is housing in which people invest most of their wealth and thus what will hurt them most. All we can do is try to plan for increased interest charges.

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Edward John Canham 12th Jul '13 10 of 13
1

It is with great sorrow that I wholeheartedly agree with the comments expressed by SevenPillars & Monty9. Why oh why cant the housing market in this country be run in a sensible economic way?

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Beginner 14th Jul '13 11 of 13
1

In reply to post #75146


Greetings all
The property market in the UK is highly fragmented. London and the south are booming, elsewhere there is stagnation, and in some areas falls continue. However the relative value of the rising area (geographically small as it is) outweighs the rest, and skews the entire market. There are indeed plenty of bargains in some areas of the north, but you need to be very selective. Property up here where I live is still being dumped, and there is uncertainty and instability in the market. ( Newriver Retail (LON:NRR) really seem to know what they are at!) I cannot afford to get into this market anyway, but love to watch what is happening. Another crash may well happen, but I think that will have to wait until the recovery in prices is more complete and more widespread.

On Lombard Risk Management (LON:LRM), I bought in here a while back after looking at the fundamentals. I thought a rise to c12.5p might be possible. This would be driven partly by the fact the company is marginally profitable and pays a small dividend, but also by the perception that its products are essential, non-discretionary spending for the banking sector. However the recent rise seems to have been driven by speculation, posted on boards with no supporting evidence, that a takeover is possible or even probable. I am hoping there is little down side from here, but don't expect to be able to retire off this one!!

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Beginner 14th Jul '13 12 of 13
1

In reply to post #75171

Sorry, forgot to say Mission Marketing (LON:TMMG) seem to have lost a couple of big contracts (inc. B&Q?) and this has not been reflected in the share price yet. This will take some replacing!

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cig 15th Jul '13 13 of 13

The December 2015 futures show short rates at 1.25% if I'm not misreading the prices. This is probably stll low enough to not cause a disaster. The market might get that wrong but then people have a way to put their money where their mouth is (and if they don't, why?), and in theory shrewd people with big floating rate mortgages can hedge away their exposure cheaply.

Personally I think the scenario Paul outlines might well happen, especially if rates overseas do move, but 2015 may be too soon. Two headwinds: central banks can sell the QE stock, while it lasts, instead of changing rates to implement monetary policy, and politics want banks to be run as solvent entities which pushes regulation, capital ratios, etc which pretty much substitutes for a rate increase too. I don't find it likely that we get healthy banks and have exhausted the entire QE stock by 2015.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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