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

Monday, Oct 20 2014 by

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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McBride plc is a provider of private label household and personal care products. The Company is engaged in developing, producing and supplying its products to retailers across Europe. Its segments include Household and Corporate. The Household segment consists of UK; North, including France, Belgium, Holland and Scandinavia; South, including Italy and Spain, and East, including Germany, Poland, Luxembourg and other Eastern Europe. The Company's brands include Surcare, Clean and Fresh, McBride Direct, Limelite and Ovenpride. Its Surcare product range includes Surcare Sensitive Capsules, Surcare Sensitive Non-Bio Powder, Surcare Sensitive Non-Bio Powder and Surcare Sensitive Fabric Conditioner. The Company operates approximately 18 manufacturing sites in over 12 countries. more »

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GB Group plc (GBG) is a global specialist in identity data intelligence. Its segments include Identity Proofing division and Identity Solutions division. The Identity Proofing division provides Identification (ID) Verification, ID Employ and Comply services and ID Fraud and Risk Management Services. It also includes the operations of ID Scan Biometrics Ltd, a provider of software that automates on-boarding of customers and employees by simplifying the identity verification and data capture process. Its Identity Solutions Division provides ID Registration, ID Engage, and ID Trace and Investigate services. The Company helps organizations make decisions about the customers they serve and the people they employ. It provides various business solutions that are focused on informing decisions about customers or employees in areas, such as employing people, registering identities, verifying identities, fighting fraud and locating people. Its products include GBG ID3global and GBG Datacare. more »

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Quadrise Fuels International plc is a United Kingdom-based company, which is principally engaged in the manufacturing and marketing of emulsion fuel for use in power generation, industrial and marine diesel engines and steam generation applications. The Company offers emulsion fuel multiphase superfine atomized residue (MSAR) as a substitute for heavy fuel oil (HFO). MSAR is a low viscosity oil in water emulsified synthetic HFO. It is manufactured using technology to mix heavy residual oils with small amounts of specialist chemicals and water to a bespoke formulation. The Company focuses on two markets: Marine MSAR, which is a replacement bunker fuel, and MSAR, which is a replacement HFO for stationary applications. The Company is the licensor of MSAR technology and offers integrated solutions for oil refiners and end users. The Company's subsidiaries include Quadrise International Limited, Quadrise Limited and Quadrise KSA Limited. more »

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

13 Comments on this Article show/hide all

janebolacha 20th Oct '14 1 of 13

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.

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Paul Scott 20th Oct '14 2 of 13

In reply to post #87103

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.

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whitepjs 20th Oct '14 3 of 13

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. 


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ridavies 20th Oct '14 4 of 13

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.

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alterego 20th Oct '14 5 of 13

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.

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Paul Scott 20th Oct '14 6 of 13

In reply to post #87106

Hi ridavies,

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

Regards, Paul.

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Paul Scott 20th Oct '14 7 of 13

In reply to post #87107

Hi alterego,

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

Regards, Paul.

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ridavies 20th Oct '14 8 of 13

In reply to post #87108

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.

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purpleski 20th Oct '14 9 of 13

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.



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purpleski 20th Oct '14 10 of 13

Further to above on Pittards (LON:PTD) somebody just bought 60,000 shares in the company.

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DarwenLad 20th Oct '14 11 of 13

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

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Paul Scott 20th Oct '14 12 of 13

In reply to post #87117

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

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cyberbub 20th Oct '14 13 of 13


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.

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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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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