Small Cap Value Report (22 June 2021) - CGS, G4M, SAGA, CRPR, MCL, TRI

22nd Jun '21 by Paul Scott

55 comments 10191 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Timing - TBC

Agenda -

Paul's section:

Castings (LON:CGS) - brief comments from yesterday's results webinar.

Gear4music Holdings (LON:G4M) (I hold) - so far so good! Sparkling results, boosted by lockdown, as expected. Current trading better than expected, and brokers upgrade forecasts by c.50% for the current year. A coffee can, hold forever stock, in my opinion. Still reasonably priced too.

Saga (LON:SAGA) (I hold) - financing changes proposed. I see this positively in principle, moving riskier bank debt onto safer, longer-term (and covenant-free) bonds. This would also provide another £80m of cash headroom, which is already ample, per trading update last week. I remain firmly bullish on this share, with a personal price target of 1000p in due course, I explain my workings & rationale below.

James Cropper (LON:CRPR) - I quickly review the FY 03/2021 results & commentary. Not madly exciting.

Jack's section:

Morses Club (LON:MCL) - Q1 performance is ahead of budget and impairments are within the expected range. Covid investment in tech could drive further growth down the line.

Trifast (LON:TRI) - full year results impacted by Covid but conditions are improving and the group is investing for future growth.

Paul's Section

Castings (LON:CGS)

Results webinar yesterday

Many thanks to Alex at Yellowstone Advisory, who organised a results webinar (and provided a link for us to join here, in yesterday's reader comments)from this interesting iron foundry/machining group based in the UK Midlands. It certainly increased my understanding of the business, and it's always good to get a feel for what management of any company are like. Castings management struck me as down-to-earth, hands-on managers, which is what I like.

A few key points I jotted down -

Potential for M&A (acquisitions) - looking especially at the electric vehicles sector suppliers.

Customers disagree on which technology will become prevalent for trucks - electric batteries, or hydrogen.

Considered a special dividend for surplus cash, but decided against it due to macro uncertainty (have done special divis in the past, something I hadn't spotted)

Pension scheme should be de-leveraged (?) this year - I didn't quite follow this point, but it sounds like they're gradually eliminating the pension deficit. Can anyone clarify this…

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22nd Jun '21

Paul, further to you comments regarding share issuance for Saga (LON:SAGA) , is there a way to overly market cap and share price on one chart? This would be an easy graphic to visualise when viewing where a share price has moved from (typically fallen) and where it might get back to.

Many thanks

Trident

Maybe we should differentiate coffee cans?

I am going with instant coffee can for this one

Decaf

Ground

etc.

Maybe a new classification system for Stocko to ponder on :-)

UK_Investor_8888

A question, my fellow investors:

WHY have resource stocks across the board, seem to have pulled back 10 to 20% in the last 2 months?

Is it the "Sell in May" (little Summer news activity) effect?

Is it China and US economic policies?

Is it because generally resource stocks across the board hit a relative peak mid April propelled by lockdown Euphoria?

Camtab

Always good to check the coffee inside hasn't gone off!

CamRaid

Ridavies - thanks. I was wondering what the take away points were?

OldSchool05

It's 50% of load capacity until 19th July, at the earliest. They put out a statement yesterday:

https://travel.saga.co.uk/trav...

Being the lower of government guidance of 1,000 guests or 50% capacity until at least 19th July.

MichaelFBS

my penny worth on coffee can investing is while I try to think long term and try to hold for the long term (5 + years) I do think one has to be careful about the buy and hold forever to maximise returns maxim.

Running a quick screen on LSE stocks yields just seven still listed companies on one particular day (of course there could be companies that have been taken over that met this criteria) that have a CAGR total return greater than 20% (31 companies greater than 15% and 107 companies greater than 10%).

Bringing the holding period down yields the following (number in brackets number of companies with total return CAGR of 15% and 10%)

15 years - 21 companies (60 & 148)

10 years - 78 companies (158 & 310)

5 years - 220 companies (323 & 484)

For every Dominos (22.7%) or JD Sports (21.5%) there 205 companies that have shown a negative CARG over 20 years.

Holding forever may work/be necessary if managing at the scale of Warren Buffett but the stats would, to me, indicate picking the right company and holding for between 5 and 10 years.

I hasten to add that at the moment I seem to be struggling with the first bit!!

Kind regards
Michael

Tell me about it! I hold Best Of The Best (LON:BOTB) and £TRMR.

Wilbraham

Possibly a bit of all three. Cathie Wood last week presented some stats suggesting the US consumer has ended her spending splurge on durables (CW mentioned copper and lumber specifically) and has moved to spending on services/ experiences now lockups have ended. So maybe commodities stockpilers have caught a cold? Hard to gauge how long this will last. Thing is, few individuals know where to access the sort of figures the professional money managers can summon up. John Authers often amazes me with his stats.

For my part, I'm always late to board trains and late to jump off. By which time the smart money has moved to the next platform......

The Phoenix

A combination of the dollar strengthening, China threatening to release some reserve resources and a possible interest rate hike being brought forward from 2023 to end 2022.

Phuntt

I've been looking at the same thing 8888 over the last few weeks. Firstly, I have to say while commodity prices have an obvious effect on the companies day to day, they do not determine the value of these businesses. It's how the market perceives future direction of travel for resources rather than current price levels so macro forces seem to have a much greater effect here than elsewhere.

I can see several major possible causes:

1) They were generally overvalued at the beginning of the year (miners generally trade at much lower PEs than other businesses due to perceived risk)

2) The "reflation trade" that powered that overvaluation has become somewhat muddied - even as data continues to mount that we are heading for significantly higher inflation sooner that expected, many investors have either accepted central bank arguments that it is transitory or believe that no matter what they say central banks will step in to control it if not.

3) The strength of the dollar directly determines the price of commodities as they are all priced in dollars. The BOE this week (and others to follow) will be fascinating to see how they respond to the US last week - if they keep their current rhetoric, their currency will weaken against the dollar effectively importing that inflation. If they start to sound more hawkish (as I suspect), I think the dollar may weaken in response causing the direction in travel of gold and other commodities to perform an abrupt U-turn.

4) I have read several stories of China specifically selling strategic reserves of key metals to control pricing over the past few weeks. I have no doubt that this is a contributing factor although I've no idea as to the extent.

5) Last, John Authers had a fascinating section in his e-mail this morning detailing the problems Biden is running into with his infrastructure package. As so much of the future strength of many of these commodities is tied to this green revolution, these issues must have major effect on future commodity pricing.

I'm sure we can all think of others but honestly, it's impossible to know what causes market moves. I think it is fair to say that it had become an extremely crowded trade and my own guess is this is a minor period of adjustment before the onward climb starts again...

steviedee

re Novacyt SA (NCYT) i've read and re-read the results announcement and cant find the word "dividend" used at all, not even once. That scares the life out of me - are they going to spend the cash pile - £91m and growing on acquisitions so they have a business post Covid - we all know the empirical evidence on how succesful that as a strategy is... i thought shareholders deserved something.

hawkipa

Paul,
Re Saga (LON:SAGA)
The new bond will have covenants as does the existing one. They have been announced to bond investors and could be described as in-keeping with that of a B issuer - ie designed to keep the company from doing anything stupid.
Price talk isn't out yet but it will almost certainly be a coupon over 4%. The reason for a tender in this case could well be tax related or possibly to extend the maturity profile.
The reason that more companies don't issue bonds is the cost and the fact that the company needs to be big enough to issue a bond of enough size to gain investor interest. If you consider that a £100m deal is a small size and £1bn is not uncommon in GBP. So there is simply a point below which a company's EV can't justify it and in that case bank debt is the best option.
Best,
Paul

GN100

My thoughts are that most of the LTBH stocks have their day in the sun but in the majority of cases they fade in the end. Obviously we all like a good long run-up but nice to get off before the warm glow fades and your original research effort is wasted. I like to see reviews to either reassure myself or get a heads up if things are starting to look a bit flat.

Paul Scott

Thanks Paul, useful additional info.

I think we touched on covenants last time we discussed the existing SAGA bond. My point was that the SAGA bonds don't seem to have covenants like the existing bank covenants - e.g. breaching a net debt:EBITDA covenant is something that could happen with the bank borrowings, but not the bonds.

I think you said there might be some other more obscure covenants, but not the main ones that banks impose. Is that correct?

Funnily enough, I recommended your PIWorld podcast to someone today, as it's superb, who asked me for more info about bonds, as I obviously said I'm a generalist, not a specialist in bonds.

Regards, Paul.

extrader

Does no harm to open the coffee can every once in a while, if only to savour the aroma.

Harry Hindsight

I got 'free' Thungela Resources (LON:TGA) shares from £AAH spin off. Topped up as feel despite Greta billions of people still need heating, power and steel - and lets not forget the barby. Downside will be decommissioning but down the line.

23rd Jun '21

Hi Paul,
Well remembered! I only had a brief look at the new bond covenants but they won't be dissimilar to the bank covenants. For a single B rated entity the bond market isn't more forgiving than the bank market. The bank will generally ask them to refi the debt in the bond market and the bond mkt guys will want parity in risk mitigation generally, knowing that they are giving the issuer certainty on the term of the debt. It's like a win win for both.
There is definitely a leverage covenant and interest cover covenant along with negative pledge, restrictions on m&a and consolidation. Also a change of control, which won't necessarily stop M&A but just protect bondholders from them selling parts of the business.

That's very kind of you to say. Always happy to chat bonds with anyone! Tamzin made me appear far more considered than I actually am!
Thanks also for all your ongoing insightful comment. Has kept me a Stocko subscriber for years!
Best,
Paul

Thank you Mr Phuntt. Most useful and helpful.

Zipmanpeter

Funny enough I put in as a query/request for graphical visualisation of market capitalisation this morning (using the green thingamyjig in the corner). Recent dilutions make shareprice alone harder work to interpret.

Small Cap Value Report (22 June 2021) - CGS, G4M, SAGA, CRPR, MCL, TRI

Paul's Section

Castings (LON:CGS)

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Paul Scott

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