Small Cap Value Report (24 Oct 2016) - BEG, G4S, CML, MCB

24th Oct '16 by Paul Scott

9 comments 13542 reads

Good afternoon!

Today's report will be updated throughout the afternoon, as I've got a few other things on today - including my latest CEO interview - of Ric Traynor, CEO of Begbies Traynor (LON:BEG) - actually to be 100% accurate, he's their Executive Chairman, not CEO. I'll be recording that interview at 2pm, so am preparing for it now. Will be published later this afternoon.

Note that Begbies Traynor (LON:BEG) issued its regular Red Flags Report this morning, which is surprisingly upbeat. It reports that financial distress amongst UK companies was down 6% in Q3. Listening to the daily television news, they seem to be constantly telling us how everything is going to hell in a handcart. So it's refreshing to get some proper data which actually says the opposite.

Mind you, we've not felt the impact of weaker sterling yet. Once prices rise significantly in the shops next year, then that could cast a dark shadow over the UK economy. Also, nothing has actually changed yet. We've only had the referendum vote, but nothing has changed as yet. Who knows what the future holds? Nobody does, it's all educated guesswork. Although we always seem to find a way of muddling through - individuals and companies are inherently adaptable.

Although a very interesting point was made by the CEO of Gear4Music (G4M) in a meeting I attended last week. They import a lot of product from China, either directly, or via UK distributors. He said that UK prices would not have to rise as much as some people feared. This is because the Chinese Yuan has depreciated about 7% against the dollar in the last year. This partly mitigates the weakness of sterling against the dollar. Also they can secure lower unit prices by placing a larger order - so they might increase inventories to secure cheaper pricing.

I've just checked the figures, to quantify this, and this is how much currencies have moved in the last year:

Sterling now buys 8.287 Chinese Yuan, compared with 9.73 a year ago = sterling depreciation of 17.4%

Sterling now buys 1.223 US dollars, compared with 1.535 a year ago = sterling depreciation of 25.5%

So based on those figures, the Chinese currency has absorbed about a third of the US dollar impact on sterling. These are still huge moves though, over just…

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JohnEustace

24th Oct '16

Hi Paul,
I missed your Saturday report until I saw your mention of it on Twitter because it doesn't show up in the listing at
http://www.stockopedia.com/columns/paul-scotts-uk-small-cap-value-report-1/

Paul Scott

Hi John,

Sorry about that. I've just checked, and it was my fault - I didn't set the article's tags correctly.
Have now fixed it. Thanks for flagging up.

Regards, Paul.

stockandy

Paul
Thanks for your mention G4M. I see another small sell by Chairman But is that half his holding?Maybe £4 is the high for now.

Hi Stockandy,

Yes indeed, I saw that the Chairman of £G4M has sold some shares. He's cashed in about 44% of his fairly small shareholding:

On 24 October 2016, the board of Gear4music (Holdings) plc ("Gear4music" or "the Company") was informed that Ken Ford, Chairman, sold 15,971 shares. The beneficial holdings of Mr Ford now stand at 20,000 shares, representing 0.1% of the Company's issued share capital. The above transaction took place on 24 October 2016 at 408 pence per share.

I think 400p is about the right price for this share at the moment. That's also the (roughly) price target of both brokers who cover it - Panmures, and Edisons.

Having said that, personally I'm not selling any of my shares in it - as I think it's exactly the type of share that is likely to run to an over-valuation. Also, the growth is so spectacular (73% in H1, all organic), and with much more to come I think, that this is one share to just sit tight on - almost a question of ignoring the share price for a while, as I think long term holders here are likely to do very well.

Obviously, as always, if rapid growth stalled, then it could fall.

Regards, Paul.

AnonymousUser252054

Interesting point about the yuan-pound ratio.

Here's a question for economists out there: if prior to June 24th the country owed a trillion pounds, what's the impact of sterling devaluation on that debt?

dmjram

There is no direct devaluation effect on the stock of debt of the UK state as it's all denominated in sterling. The capital value is constant in sterling terms.

Indirectly the increased inflation tends to drive up the interest rate on the debt as its rolled over and on index linked gilts. Unless the BoE follows Japan's example and holds the interest rate on gilts constant via QE for non indexed debt.

narp

Brexit

Companies across the EU would suffer more than double the hit from trade tariffs than their UK counterparts if Britain leaves Europe without a free trade deal, research from the right-of-centre thinktank Civitas says. It would cost EU businesses in the 27 remaining member states a total of some £12.9bn every year to export their goods into the UK if a deal is not reached with Europe and trade is conducted under World Trade Organisation rules, Civitas found. - Telegraph

http://www.digitallook.com/news/press-round-up-short-premium/monday-newspaper-round-up-barclays-deutsche-bank-bae-ppi-provisions--1778930.html

Tariffs on goods aren't the key issue for the UK.

It's the lack of any provisions for the continuation of service exports (where the UK has a huge trade surplus). There are no additional costs resulting from tariffs, the exports simply end without a deal. Along with a fair chunk of the tax base.

fred6060

At a constant that would be £470million per country although I accept the more industrial nations would suffer more. We as one country export £5.7 billion to the eu.
Who would suffer the most. I voted brexit by the way.

Small Cap Value Report (24 Oct 2016) - BEG, G4S, CML, MCB

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Paul Scott

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