Small Cap Value Report (29 Jun 2016) - IGR, BRAM, ZZZ | Paul Scott

29th Jun '16 by Paul Scott

52 comments 23206 reads

Good morning!

Thanks for all the positive feedback about yesterday's report - it's good to know that people find these reports useful.

Brexit

There has been far too much partisan nonsense about this issue, which I largely ignore, because it's at best a waste of time, or worse still, misleading. So for me, it's now all about listening to experts, and trying to work out what is most likely to happen next.

There was a fantastic programme on Radio 4 yesterday, where 3 professors in law discussed how Brexit might work out in practice. It also clarifies some of the complex issues, which I found extremely helpful. Highly recommended - the iplayer link is here.

A consensus seems to be developing that the most likely outcome is for the UK to go down the Norway route - i.e. full access to the single market, for a fee. I'm not interested in discussing the rights or wrongs of this. The only issue for our purposes here, is how it might affect our shares.

Going down that route would undoubtedly be positive for shares, and I think this is what's driving the current rally - i.e. a realisation that the world is not going to end, and business will probably continue pretty much as normal.

Set against that, as I mentioned yesterday, the economy is likely to slow down in H2 of this year. So plenty of profit warnings to come, for UK-focused companies I think. If the market thinks that a prolonged recession is likely, then the price drops will be brutal. However, if the market thinks a slowdown might be short-lived, then it will start to look through poor current performance, and factor in a recovery next year. We'll have to keep monitoring events closely to determine which is happening.

IG Design (LON:IGR)

Share price: 163.5p
No. shares: 59.3m
Market cap: £97.0m

(at the time of writing, I hold a long position in this share)

Results, y/e 31 Mar 2016 - I read these numbers on my iPad in bed earlier, and was impressed - a good solid set of figures, and reasonable outlook comments too.

Adjusted fully diluted EPS is up 15% to 13.2p.

The PER is 12.4 which seems reasonable to me.

We have to be very careful with PERs at the moment. Since there is considerable economic uncertainty, we cannot just assume that earnings will continue rising…

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mammyoko

29th Jun '16

Yes, great article on Radio 4.

If I was the new Prime Minister I would deliver the Norway option and tell the electorate take it or leave it. Politics is the art of the possible and it sinply won't be possible to leave the EU AND remain in the single market unless we allow free movement of labour and contribute financially. Any other theoretical solution simply isn't going to be approved by the remianing 27 members of the EU and politicans on both sides will be doing their economies great damage if they spend ages debating other options.

As one of the legal contributors on the programme said, we live in a parliamentary democracy. The key will be explaining to the electorate that what parliamentary democracy means is that they delegate decision-making to politicians through the ballot box. The leave-voters simply cannot have their cake and eat it. The Greeks learned that the hard way last year and their economy was incrementally damaged by pointless negotiations when it was clear to all that the troika couldn't and wouldn't cave. Nowhere in our referendum did it allow leave-voters to dictate the terms of leaving. That's up to the politicians to decide and the electorate will have to live with that (as the Greeks did) or vote the Tories out at the next election.

Mick Harkins

Paul, I confirm that it is correct that companies should exclude stock options from the adjusted diluted EPS figure. If they don't they will double count the negative impact, as the increased shares are already accounted for in the denominator.

Cheers,

Mick

Edward Croft

very good advice about looking at geographies of a company's markets

There is a Reuters database I'm going to buy for the site that will help everyone screen on this data. Frankly it's needed now more than ever, but won't be live for some time.

I'm always banging on about the importance to internationally diversify, but you don't have to own international stocks... you can buy local listed exporters (foreign earners)... but you have to know how to find them. We need a way to screen for them in a few clicks.

simoan

Hi Paul,

Thanks for your thoughts on IG Design (LON:IGR). Indeed, thanks for highlighting it here in the past which put it on my investment radar. It was nice to see the section describing the sensitivity to exchange rates... I had to try and work this out from reading the Annual Report for myself before I first bought and so was happy to buy more last week. Although I could have timed the purchase of my last buy better (last Thursday) at least it's looking a lot better than Ed's bet on the referendum result :-)

The only thing of interest you didn't mention is the 150% increase in the dividend which is still well covered so there could be more big rises (albeit from a low level) to come. And of course, something which is not on the balance sheet - quality of management - which I believe is really important. The management here seem to be really switched on.

All the best, Si

Flackwell

Listening to experts ????

Surely you've learnt your lesson by now?

Contrariwise

Hi Paul,

I attended the Brammer AGM just 6 weeks ago, where I was reassured that trading in the UK business was improving and sales were now growing. I was therefore very shocked by the horrendous profits warning this morning. I find it difficult to believe that the deterioration in trading has occurred so quickly. To me management have a huge credibility problem. The shares may well be value at these levels, but I have taken my punishment and sold all my shares at a whopping loss this morning. To buy them again I would need to see new management.

Best

Keith

dmjram

The markets seem to be assuming a Norway EEA style outcome at the moment, just as they assumed a remain vote until about 2am on Friday.

Really not sure how wise that is given the Tory leader election is going to be fought by candidates setting out their position on the leave negotiations with the risk of each outbidding the other - we got into this position in a large part because Cameron had to placate his own party. The first to declare has already made immigration a red line. That isn't compatible with Norway's deal.

If there is anything we should have learnt from the past 5 years of the euro crisis, is that Merkel, Schauble and co don't blink first. It could well be well be tin foil hat time once the summer is over and the new PM is in place if we end up going into negotiations with red lines set out which aren't compatible with what the markets and business want and need. Risks still on the downside I think for small caps.

andrewdb

Ed,
Paul mentioned coming up with a screen for cash-poor companies that may be good for shorting

Is there a way on stocko to screen for the reverse - I do not generally go short but might want to cull less secure companies

That leads on to asking what 'secure' is as the buffer a small cap needs will be a log bigger (proportionately) than a big cap with large reliable earnings

00mrmark00

Hi Paul, any broker updates on BRAM you might have seen today you can share?

Thanks, Mark

We have to hope that the winner of the Tory leader election is either an unfeasibly gifted negotiator or that the members of the party choose a candidate who sets out realistically achieveable (and not mutually exclusive) objectives. Otherwise, as you say, we are in for more politcial posturing that, like Tsipras's, succeeds only in delaying the inevitable.

Frankly, I can't see any of the candidates achieving a better outcome trhan Cameron who, for all his faults, is regarded as a decent and (for a politician) honourable person. I do not think BoJo could back up any claims to be a gifted negotiator or possessed of reasonable objectives.

I'm sorry, Edward, for continuing the discussion about the wider political (and, therefore, macro-economic) landscape. However, I may not be the only one on this board who is sitting on his hands at the moment. This is not really a traders' board but an investors' so I suspect there may be others like myself who are considering some significant losses, who think the trend is still down and, therefore, have time on their hands to consider how events will unfold.

tads

Just out of Crawshaws AGM.

Happy holder.

Prior to this going live on Stockopedia, if people want to dig deeper into the geographic profile of a company they are interested in, the accounts include some information on this. You can download them for a pound from the companies house website.

Joeydisco

Norway option plus fee with some break on migration.

Norway option involves accepting 9% of the laws we currently do.

Repatriation of powers including agriculture, fishing, energy, human rights and a whole lot more.

Because of the small mandate this is probably the most acceptable option.

http://www.aecr.eu/less-than-10-of-norways-laws-emanate-from-brussels/

http://www.hannan.co.uk/how-norway-beats-the-eu/

Laughton

Happy to be corrected but I think accounts are now free from Companies House - https://beta.companieshouse.gov.uk

shanklin100

tads,

An update on anything you learnt at today's CRAW AGM would be much appreciated.

Thank you, Martin

Rusty2

I thought Cameron said yesterday it would not happen until the new leader is elected?

hayashi22

I must say that the experience of the Brammer investor above who attended the AGM is truly shocking.
It might suggest the FD is not on top of events in a timely manner. It might also suggest a reluctance to dish out bad news at what is a showpiece occasion with lots of bonhomie and mutual self regard.
Management credibility in tatters I would concur.

You mean you are holding a sausage in both hands?

These people:

1Know what they are doing.
2 Know how to do it.
3 They are highly focused.

Every shop is profitable from day one. The roll out continues at at least 15 per year....with no obvious limit on the eventual total number.

No sausages....but we did get sandwiches and sausage rolls.

Small Cap Value Report (29 Jun 2016) - IGR, BRAM, ZZZ

Brexit

IG Design (LON:IGR)

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Paul Scott

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