Small Cap Value Report (20 Oct 2014) - MCB, GBG, QFI, SVCA, AVAP

20th Oct '14 by Paul Scott

13 comments 18377 reads

Good morning! The panic market sell-off seems to have abated. Thinking back to the sequence of events over the last three weeks, it seems to me that the following were the main causes: sharp fall in the price of oil, pulling down oil-related stocks. More negative economic data. Nervousness about Ebola impacted transport stocks such as airlines, cruise ships, etc. The Shire deal falling through apparently triggered big margin calls with merger arbitrage hedge funds, which clearly snowballed into a bigger sell-off as leveraged positions were shaken out of the market. Confidence then returned as buyers decided the worst was over. That all relates mainly to the US market, which always seems to drive what happens here too.

As for small caps, it was just a worsening of a bear market that we've been suffering from since about Mar 2014. To my mind, we must be getting near to the stage where anyone who was likely to sell their small caps, would have done so by now, surely? That combined with some decent value that is starting to appear, makes me feel considerably more optimistic than I was before this sell-off. The market was overheated, and needed to correct, and it has done.

The other thing is that markets are meant to go up & down, especially in small caps. Illiquidity in many small caps means that we have to endure stomach-churning volatility sometimes - that's just the price we have to pay for being in the asset class that usually performs best in the long run. Gearing is the killer. Providing you don't have any gearing, then you can ride out any market volatility. Good stocks with sound finances will always come back up again eventually, and if they pay a good divi too, then waiting is no hardship.

McBride (LON:MCB)

Share price: 83.6p
No. shares: 182.2m
Market Cap: £152.3m

Trading update - when this maker of household & personal care products puts out an update, it's usually a profit warning. However, today the company sounds more upbeat, saying;

The trading performance of the Group has been in line with the Board's expectations. The Group has made a solid start to the year, with Group revenue at constant currency returning to modest growth.

Cost-cutting seems to be underway, which makes sense given that its margins are being squeezed by customers;

The UK business restructuring project, announced in…

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janebolacha

20th Oct '14

McBride's main business is, I believe, in supplying "private label" or "own brand" products, such as washing-up liquid, bath and shower foam, etc to large retailers. I'd imagine that with the supermarket sector being squeezed (no pun intended), then McBride's margins will be under pressure. On the other hand, they ought to benefit from reduced input raw material prices as lower oil prices feed through. The market outlook is still quite opaque for this company, imo.

Paul Scott

Hi Jane,

Yes, good points. I tend to avoid any company that supplies supermarkets, as they will be permanently up against aggressive tactics to erode their profit margin. It's probably getting a lot worse, as Tesco, Morrisons & Co-Op will surely have no choice but to fight to the death based on price discounting? So they won't be taking any prisoners from their supplier base.

Regards, Paul.

davids_h

I wasn't keen on GB when I looked at their accounts from March y/e. There were 93 uses of the word 'adjusted' . It made it difficult to see how the business was actually performing. I can see,though, why they did it - their movement in op profit was +29% restated against +13% without.

The reason for the adjustments was:

"During the previous financial year, GBG restructured its commercial relationship with BT which meant that ID Verification margins under the revised agreement are higher in absolute terms but revenues are reduced in the current financial year."

This then made me wonder how much of their business depended on one customer.

I'm open to being convinced that it is investable, but it put me off what is, on the face of it, an interesting business.

David

ridavies

Hi Paul
You make no mention of the leasing agreement with Thomas Cook. Admittedly it is some time out, 2016 start, but presumably it is an indicator that AVAP is being taken more seriously by a wider group of customers and that should not only provide growth but also reduce risk associated with the company. I note that the FD is over here with quite a string of appearances. I heard him talking on a newsreel recently - I think it was at a business exhibition; he is with you next week; and I think he is at Mello which I will be at the first week in Nov in Derby. Drumming up a lot of business hopefully by putting the business out there.

Point taken about depreciation but just as there are lots of even Dakotas still out there doing great work for smaller airlines, then the smaller middle distance jets will also have quite a long working life with various operators though how much value we can put on that is debatable.

alterego

Re QFI, if it were not for the quality of Quadrise partners, I would agree with Paul. However, Maersk and Akzo Nobel have been working on this for a very long time time (years) and full scale sea trails have confirmed this fuel works as expected. The two biggest ship engine manufacturers, Man and Wartsila, have also carried out rigorous tests which will lead to months long sea trials intended to give full approval for use in their engines. If any of these major players had the slightest doubt about the fuel they would not still be actively involved so I think this is well beyond the concept stock phase and is now closing in on significant commercial operations.

The market is huge and the economics are undeniable since the expected profits will come from the difference between the price of heavy fuel oil and the cost of MSAR which doesn't require the expensive refined fuel used to make heavy fuel oil. Progress is inevitably slow since this is a game changing switch for users of fuel. They want to be 100% sure before signing on the dotted line. However, whilst risk does remain, if no flaw has yet been found, it's difficult to think what could now derail the project.

Hi ridavies,

Actually I did mention the Avation deal with Thomas Cook today, and provided a link. You must have missed that!

Regards, Paul.

Hi alterego,

Many thanks for the additional colour on Quadrise Fuels International (LON:QFI)

Regards, Paul.

Thanks for your quick response. Yes, I did notice your link and I had read the full RNS. I was more inrterested in how YOU regarded it and valued it relating to AVAP and its valuation and SP progression going forward.

MichaelFBS

Hi Paul

Have signed the petition.

Off post today but have you any thoughts on Pittards (LON:PTD). I have watched it steadky decline since I bought in June.

Thanks

Michael

Further to above on Pittards (LON:PTD) somebody just bought 60,000 shares in the company. http://www.investegate.co.uk/pittards-plc--ptd-/rns/holding-s--in-company/201410201330267700U/

DarwenLad

Paul, really missed your weekly webinar. The previous week's chat with Leon was well worth listening to and much appreciated.

Hi Darwenlad,

Sorry I didn't do an audio interview last night - am away from home, so usual IT wasn't available.
Usual service will resume this coming Sunday with a new & very interesting interviewee!

Regards, Paul

cyberbub

Paul,

I have previously mentioned Quadrise Fuels International (LON:QFI) on the SCVReport as a good investment, albeit medium/long term rather than a quick buck.

As 'alterego' says above, some of literally the world's biggest companies have signed agreements and collaborations with QFI, which pave the way towards genuinely enormous revenue streams (all at very high profit margins).

* Saudi Aramco (world's biggest company)
* Maersk (world's biggest shipping co)
* Akzo Nobel (global chemicals and surfactants manufacturer)
* One of the half-dozen 'Global Oil Majors' - we haven't been told which yet, possibly Shell.

* Plus early-medium-stage discussions with Ecopetrol, PowerSeraya, and apparently enquiries from a host of other major energy companies worldwide.

Unfortunately these same companies tend to move slower than everyone would like in terms of technological/culture change. So the modest delays to some programmes mentioned in today's annual report are a little disappointing, but not unexpected.

As you state in your report, the company is fully funded for some considerable time to come, and should enter full commercial revenue in mid-2015 or so from the shipping fuel market, with the refineries market following not too long after. So little or no need likely to raise equity funding.

As alterego says, the fuel technology is essentially fully proven (and implicitly endorsed by the partner agreements and imminent contracts), with just the i's and t's to complete in the next 6-12 months.

Brokers have estimated £300M in revenues (potentially at 75-80%+ margins) by 2018. And that is only a fraction of the potential market. And they have large tax losses to carry forward.

The management are also very experienced and extremely credible, and are further strengthening their team at present to manage the roll-out to commerciality.

Yes £250M market cap does seem high, but compare it to some of the heavily loss-making social media startups that get bought out by Microsoft or Facebook for hundreds of millions (if not billions) of dollars, and it starts to look not excessively valued.

Doesn't mean it won't go down in the short-term of course, who knows...

Disclosure (in case you hadn't guessed :-) ) I hold QFI shares.

Small Cap Value Report (20 Oct 2014) - MCB, GBG, QFI, SVCA, AVAP

McBride (LON:MCB)

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Paul Scott

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