Small Cap Value Report (5 Jul 2016) - STAF, CNCT, JSG, G4M

5th Jul '16 by Paul Scott

20 comments 16387 reads

Good morning!

It's a similar pattern to yesterday - the FTSE100 is down slightly, but small and mid caps are down a lot today - MCX is down 2.6% to 15.695 at the time of writing (mid-morning).

Housebuilders & property were hit yesterday by poor June construction figures. I'm no expert on this, but surely the mostly very poor weather in June would have contributed to this? Answers on a postcard please, from any statisticians out there. Would builders suddenly down tools and stop building a house, just because of the referendum? London still resembles a giant building site - with an extraordinary amount of construction underway. It doesn't make sense to me, that construction activity would suddenly stop, but maybe I'm missing something?

I note that Persimmon (LON:PSN) (in which I hold a long position) has released a positive-sounding trading update today. With an average selling price of £206k, combined with ultra-cheap mortgages, and strong demand, personally I really don't see a significant downturn in this type of housing as being at all likely. Mind you, as Persimmon says today, it's too early to tell what impact the current political turmoil is going to have.

IG asked me to pop into their office above Cannon Street last Friday, and waffle on about small caps in their in-house TV studio. The video is here, for anyone interested. As anyone who knows me will verify, I very much enjoy waffling on about small caps, without seemingly the need for drawing breath, for hours, given half the chance! One small error needs correcting - I meant to say that Somero Enterprises Inc (LON:SOM) has a share price in sterling, but I mis-spoke and said incorrectly that it reports in sterling.

I've got investor lunches every day this week, so am not going to be able to cover all the results statements, but will do my best. Also, sometimes I update the articles later in the day. So last night I added a new section on results from Plastics Capital (LON:PLA) to yesterday's report. Here is the link to review that report.

Staffline (LON:STAF)

Share price: 802p (up 0.3% today)
No. shares: 27.7m
Market cap: £222.2m

(at the time of writing, I hold…

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MrContrarian

5th Jul '16

The new £STAF f/c is a 6p cut from Feb's fig.
I've been buying up to 803p.
I decided not to buy at 191p in 2010, fearing increasing unemployment. Wrong!

rpmeurope

I see that Stanley Gibbons is now trading close to the placement price of 10p. There could still be some downward selling pressure on this, but does it start to get interesting to anyone at sub 10p?

simoan

Paul,

The only recruiter I hold is Empresaria (LON:EMR) which has announced the acquisition of a New Zealand based company called Rishworth who specialise in contracting of pilots to airlines. They seem well diversified across different sectors and approx. 2/3 of revenue is non-sterling. As such I'm not sure why it has sold off quite as badly as some others since the referendum. They say the acquisition will be earnings enhancing this year, so I'm seriously considering a top up.

All the best, Si

shanklin100

Interestingly STAF present their results with the following commentary:

"Underlying figures are stated before amortisation of acquired intangible assets, acquisition and exceptional re-organisation costs in A4e and the non-cash charge for share based payment costs ("SBPC")"

Most of this is fine but the last of the above seems to be extremely material on an ongoing basis and consumes the majority of the underlying profits/EPS.

You will see this reflected in the historic numbers presented on the Stockreport page for STAF. For example, in their last FY results, STAF state "Underlying diluted earnings per share up 55% to 92.4p (2014: 59.7p)", whereas Stockopedia shows EPS falling from 28.4p to 17.4p.

Having realised this general point re STAF some while ago, I sold my holding and have not revisited since. I certainly think its worth checking over the last few years, and obviously ignoring the genuine exceptionals, how much of the underlying earnings are going to shareholders as opposed to management & staff.

All IMHO.

Cheers, Martin

Beginner

Hi Paul
Just to let you know that modern techniques and materials mean wet weather has very limited impact on construction activity. June to August sometimes see reduced activity due to holidays, but this is marginal. I personally cannot see a direct reason for the slowdown.

I am hoping reduced interest rates will mean the market stays bouyant. The figures for all the builders look amazing.

Ramridge

simoan - I agree EMR looks better value than STAF and I have taken a long position. Share prices of both are distressed so to me it is a question of picking the one that offers better earnings quality. EMR 's revenues are well spread geographically with UK accounting for only 34%.

Today's acquisition looks good. I make it a EBITDA multiple of less than 5 with a debt ratio well within acceptable bounds.
The only bogey of course is that we are witnessing the start of a major market downturn that will affect not only the UK but the EU and US as well. In which case no equity holding is safe.

Rusty2

Interesting update from M J Gleeson (LON:GLE) today.

JohnEustace

I do think there has been an immediate and sharp slowdown in activity in the UK.
A couple of anecdotes.
1. I was talking to a project manager for a developer of flats yesterday who told me that his firm has already put two projects on indefinite hold.
2. I was in B&Q Reading this morning and it was almost deserted - more staff than customers. I asked the chap on the till if this was perhaps normal for mid-week holiday season and he said not, the store has been abnormally quiet for the last two weeks.

It feels like 2008 to me. I remember that hitting the business I was working in very sharply at Spring half term time. The BoE will have the same problem as then - it's all very well telling the banks they can lend but who will want to borrow?

Richard Cockbain

When I look at the construction market there are a number of concerns:
- developers are coming off recent highs following a long bull run and their values are still above the long term average
- high price of property which everyone keeps saying may not be sustainable (heard that before)
- difficulty in building up a deposit to purchase (which is meant to be reducing supply)
- availability of large rental sector

Added to which you have the potential for a bit of a recession which will put people off moving house.

This market is cyclical and if a recession does bite then it'll get messy very quickly.

Brexit will not have an immediate impact, so the sell off is due to the speculative longer term view of the market. I can see some further downside but if the bears keep selling then there will be some great opportunities here.

Currently I don't hold any construction stocks.

Roy Edwards

timarr

Brexit may have a fairly immediate impact if business confidence is hit. The BoE loosening today was a response to inwards fund flows stopping prior to the referendum, the result is hardly likely to get them moving again. As I noted earlier Forterra (LON:FORT), who basically make bricks, are moving into immediate cash preservation mode by mothballing plants.

http://www.investegate.co.uk/forterra-plc--fort-/r...

Of course those plants are slap bang in the middle of Leave voting Lancashire, but I don't suppose the impact will be constrained to Brexiteers if a downturn does hit.

This really feels like a phony war, everyone sitting around waiting for the first bomb to drop. Always better off building a bomb shelter even if it turns out you don't need it.

timarr

I agree the slowdown in construction was not down to the weather in June, its to do with the uncertainty leading upto the referendum and now the uncertainty after it. I heard builders being interviewed they all said projects have been postponed. Why build new houses if no one is going to buy them?

I disagree that Brexit will not have an impact, that is what is causing all this and a recession if it happens.

Hot Socks

From my own personal/professional knowledge there are a rash of commercial property deals on hold at the moment due to Brexit. A lot of those deals are driven by buyers who see an opportunity to add value via physical improvements to buildings ie. construction contracts for refurbishment and development.

With reference to the June figures I'd be interested to know when revenue is booked for the purpose of those figures. If the revenue is booked at the point when the order is put in or a contract signed for example that makes the figures very much leading indicators. You'd be unlikely to see any physical change in terms of the ongoing construction you can see because the investment already made in those projects means the developer is likely to finish them unless it actually runs out of cash. When the cranes actually disappear is six months later because no new projects have been started.

My impression is that in the past the stock market has been a good predictor of future problems in the property market. Buying into real estate or construction stocks now is a gamble that you're right and all those running for the exit have got it wrong - it may turn out to be the right bet but I think it's a mistake to think its anything other than a bet.

If anyone has a way of making the bet and hedging it such that there is a rock solid chance of making money then please do tell ...

jonny71

Historically supermarkets have risen in times of recession as we all have to eat, and we tend to eat more at home in recessions eg eat in at home rather than spend money eating out. If you assume we're heading in the direction of a recession then there are some great bargains to be had if you take a medium term view of the future.

Adding to the conversation about what is happing right now, the firm I work for has postponed 4 big projects (out of 30) till next year, this leaves some fat in this year accounts in case the back end of this year turns out to be challenging.

ap8889again

British Land (LON:BLND) looks interesting. P/E 8, 5%yield, blue chip company. Seems a possible one to tuck away.

ridavies

Interesting Paul that you have changed your tune on £STAFF, as everyone is entitled to do. I too have been re-looking at these shares again and may do some more extensive research this time before buying.

Remember this, and I quote. 'I've got nagging ethical concerns about companies which facilitate a large section of the population living on low wages. We need to get back to companies giving people proper jobs, full time, on decent wages, not an army of agency workers being subsidised by the taxpayer (through working tax credits & housing benefit).' On the back of that and the same feelings, I sold, doing the same thing that you had admitted to doing in the first part of your quote on that date: ' the shares have been a spectacular success, but my judgment on this share is completely tainted by the fact that I bought cheaply in 2012, but sold far too early. Hence I'm not interested in revisiting it after it's gone up so much. Probably fully valued for now, but still has impressive growth aspirations.'

Ah well, none of us is fallible, though I shared your comments about the ethics etc and one fo the reasons why I will never invest in tobacco companies no matter what great shares they are in times like these..

That was one of several I sold just before the unexpected Conservative majority soon after, and lost quite a lot on shares I thought would go down following a messy result.

C'est la vie, if we are allowed to say unpatriotic things like that now after such a HUGE victory for Brexit - what was it? About 36% of the electorate voting for such a truly massive change, with these currently bad economic consequences - though I am with you in that I had vacillated back and forth before coming down on the Remain side. the idea of self-control is so seductive, isnt it?

tads

Thought your broadcast from IG was very good.

Cheers.

1James1n1

I echo that comment - the IG video was very informative and interesting. Thanks.

I note that you are short of time today Paul and also that you have given short shrift in the past to Adept Telecom (LON:ADT) shares, but if you have time to comment on today's full year results, I for one would welcome it.

aflash

6th Jul '16

BLND's largest tenant is UBS, a swiss bank. With the threat of banks moving to Europe the recent fall is entirely justified. After UBS the major tenants are Tesco and Sainsbury.

ds1980

IMO property stocks have further to go. No one wants to buy a house if they think they can buy it cheaper next month just like any stock. You are already seeing an increase in price reductions on secondary market as well as new builds with for sale signs rather than all sold. Add in the fact Carney has said interest rates will rise due to inflationary pressures which will ultimately be the catalyst of a justified start of a price correction on property. With most people mortagged to the hilt i can see a long drawn out reduction of circa 20-30% in prices. Ive been bullish on property since 2000 but i think the envitable is possibly around the corner.

Small Cap Value Report (5 Jul 2016) - STAF, CNCT, JSG, G4M

Staffline (LON:STAF)

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Paul Scott

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